MNG301A Study Notes 2012 Semester 2€¦ · Web viewcorporate entrepreneurship (Scheepers &...

MNG301A Strategic Management

Contents

Topic 1 | The strategic management process p1...........................................................................5

Introduction p1 [read].....................................................................................................................6

Study unit 1.1 | What is strategic management? p3 [study]......................................................6

Defining strategic management p3 [study]..............................................................................6

Views on strategy p4 [study]......................................................................................................8

The people involved in the strategic management process p4 [study]................................8

Qualitative and quantitative decisions p6 [study]....................................................................8

Study unit 1.2 | The strategic management process p7 [study]................................................8

Strategic visualisation p7 [study].............................................................................................11

Organisational direction and environmental analysis p8 [study].........................................11

Strategy formulation (strategy planning) p10 [study]............................................................12

Strategy implementation p10 [study]......................................................................................12

Contemporary applications of strategic management p11 [study].....................................13

Study unit 1.3 | Benefits and risks of strategic management p12..........................................13

Functional aspects (benefits) of strategic management p12 [study]..................................13

Dysfunctional aspects (risks) of strategic management p13 [study]..................................14

Strategic issues and concepts leading us into the future p15 [study]....................................15

Ethics and strategy p15 [study]...............................................................................................15

Stakeholder management p15 [study]...................................................................................15

Innovation economy and knowledge management p16 [study]..........................................16

Change Management p20 [study]...........................................................................................18

Strategic leadership p20..........................................................................................................18

Assessment...................................................................................................................................19

Text Book...................................................................................................................................19

Study Guide SG49/206............................................................................................................22

Study Guide SG55/206............................................................................................................22

Topic 2 | Strategic direction p58.....................................................................................................23

Study unit 2.1 | Strategic direction SG45.........................................................................................23

Strategic leadership p59 [study]..................................................................................................23

Strategic intelligence (SQ) p64 [read]....................................................................................27

Setting strategic direction: vision, strategic intent and mission p65 [study]......................28

Assessment...................................................................................................................................33

Study Guide SG87/206............................................................................................................33

Topic 3 | Corporate governance and strategy p87.......................................................................34

Study unit 3.1 | Corporate governance SG77...........................................................................34

Responsible leadership p88 [study]........................................................................................34

What is corporate governance p91 [study]............................................................................35

Corporate governance in South Africa p95...........................................................................37

Assessment...................................................................................................................................39

Study Guide SG106/206..........................................................................................................39

Topic 4 | Internal Environmental Analysis p109 [study]...............................................................41

Introduction p109 [study]..............................................................................................................44

Study unit 4.1 | The importance and challenge of internal analysis p110 [study]...............44

SWOT analysis p11 [study].....................................................................................................45

Internal analysis for effective strategy development p114 [study]......................................47

Study unit 4.2 | Resource-based view (RBV) p114 [study]....................................................48

Resources p115 [study]...........................................................................................................48

Capabilities p116 [study]..........................................................................................................50

Study unit 4.3 | Value chain analysis (VCA) p120 [study]......................................................51

Primary activities p122 [study]................................................................................................52

Support activities p123 [study]................................................................................................53

Study unit 4.4 | Functional approach p124 [study]..................................................................53

Assessment...................................................................................................................................54

The importance and challenge of internal analysis SG116/206.........................................54

Assessment | Resource-Based View SG123/206................................................................55

Assessment | Value chain analysis SG127/206...................................................................55

Assessment | Functional approach SG131/206:..................................................................55

Topic 5 | External environmental analysis SG121...............................................................................56

Study unit 5.1 | The macroenvironment SG121..............................................................................56

Learning outcome SG121.............................................................................................................56

The importance of an external environmental assessment SG122..............................................56

Composition of the macroenvironment SG125...........................................................................59

The five dimensions of the macroenvironment:..........................................................................59

Forecasting techniques and scenario planning SG134.................................................................63

Assessment SG137.......................................................................................................................64

Study unit 5.2 | The industry or market environment SG139..........................................................64

Learning outcomes SG139...........................................................................................................65

The industry environment (also known as the market or task environment) SG140...................65

Competitor analysis SG145..........................................................................................................72

Limitations of Porter’s Five Forces model SG146.........................................................................73

Assessment SG146.......................................................................................................................73

Topic 6 | Formulating long-term goals SG149.....................................................................................75

Study unit 6.1 | Formulating long-term goals SG149.......................................................................75


Translating the mission statement into measurable long-term goals SG150..............................75

Study unit 6.2 | Generic strategies SG155.......................................................................................78


Strategy selection SG156.............................................................................................................78

Factors that impact on strategic choice SG157............................................................................79

Generic strategies (sometimes referred to as competitive strategies) SG158.............................79

Comparison between the generic strategies...............................................................................83

Criticisms of generic strategy framework SG160.........................................................................88

Assessment SG160.......................................................................................................................88

Topic 7 | Grand strategies SG163........................................................................................................89

Study unit 7.1 | Grand strategies SG163.........................................................................................89


Grand strategies SG164...............................................................................................................89

Combination of grand strategies p213........................................................................................97

Functional strategies SG167........................................................................................................97

Assessment SG168.......................................................................................................................98

Table of Tables.....................................................................................................................................99

Table of Figures...................................................................................................................................99

Topic 1 | The strategic management process p1

Figure 1 Learning Outcomes | Study Unit 1.1



Introduction p1 [read] Prahalad [2000:76] identified 4 transformations that influenced and continue to

influence the business models and work of strategists’ p2:

1. Expansion of available strategic space p2

2. Business will be global p2

3. Speed will be critical p2

4. Innovation as a new source of competitive advantage p2

Study unit 1.1 | What is strategic management? p3 [study]

Defining strategic management p3 [study] Definition: strategic management p3

Competitive advantage p3

Definition: strategy p3

Leap-frog effect p4

Views on strategy p4 [study] The new view of strategy contrasts with the traditional view p4 [Table 1.1: New view

of strategy]

Definition: Montgomery (2008) on strategy p4

The people involved in the strategic management process p4 [study] Employees (human resources) as drivers of strategy implementation p4

The 3 stages of the strategic management process p4:

1. Environmental analysis – responsibility of every manager at every level p4

2. Strategy formulation - top management, input from all levels management

p5

3. Strategy implementation – most challenging, needs buy-in from employees

p5

The 3 stages of the strategic management process SG45/206:

1. Strategic planning2. Strategy implementation3. Strategic control

Definition: strategic planning champions (Nordqvist & Melin, 2008) p5:

o Social craftsperson p6

o Artful interpreter p6

o Known stranger p6

Qualitative and quantitative decisions p6 [study] Qualitative decisions – intuition, gut feeling p6

Quantitative decisions – built on proper strategic analysis and choice p7

Levels of strategy SG24/206:

1. Corporate strategy (not in scope) - Carpenter & Sanders (2009) SG24/206

2. Business strategy3. Functional strategy

Study unit 1.2 | The strategic management process p7 [study] Figure 1.1: The strategic management process p9

The strategic management process is a continuous activity that focuses on the long-

term sustainability of the organisation SG46/206

It is a sequential set of analyses and choices that enables organisations to achieve

above-average returns and add value to its stakeholders SG46/206

Strategic management consists of three distinct phases/stages SG46/206:

1. Strategy formulation2. Strategy implementation3. Strategy evaluation and control

Figure 4 The Strategic Management Process SG46/206

The strategic management phases consist of the following SG47/206:

Strategy planning SG47/206 - this stage is largely the responsibility of top

management. It is the first stage in the strategic management process and focuses

on the organisation’s strategic direction. This is also called a thinking stage:

o It involves the formulation or review of a company’s vision, mission and long-

term goals

o It also evaluates the environments in which the organisation operates to

identify the strengths, weaknesses, opportunities and threats

o The components of the strategic planning process are SG48/206:

1. Strategic direction2. Long-term objectives3. Environmental analysis4. Generic strategies5. Grand strategies

Figure 5 The Strategic Planning Process SG48/206

Strategy implementation SG47/206 - once an organisation has decided on the

destination and the strategy (route) it will take to get there, it needs to move towards

that specific destination. This is where the strategy implementation process comes

into play. This is also called an action stage:

o Strategy implementation is the action stage of the strategic management

process and requires input and participation from everyone in the

organisation

o There are different drivers and instruments that can be used to implement the

chosen strategy to eventually reach the desired destination/outcome

Strategic control SG47/206 - the last stage in the strategic management process is

the evaluation stage. Strategic control is, in effect, a checking stage:

o Strategic control aims to assess the progress made towards achieving the

desired outcome

o It gives feedback and alerts top management to problems or potential

problems before a situation becomes critical

Strategic visualisation p7 [study] Visualisation, the graphic representation of strategic content, can improve the quality

of the strategic management process p7

Table 1: Strengths of visualisation p8

Organisational direction and environmental analysis p8 [study] Figure 1.1: The strategic management process p9

Environment analysis consists in evaluating and analysing (SWOT analysis) p8:

1. The external environment for possible opportunities and threats

2. The internal environment for possible strengths and weaknesses

The internal environment is also known as the company profile p9

Environmental analysis is essential for the next phase, strategy formulation p10

The use of visualisation methods to structure vast amounts of information p10:

o Quantitative data (sales and marketing data) – structured by means of

standard techniques such as bar charts, line charts, pie charts

o Qualitative data – structured by means of standard structures (2x2 matrixes)

customised by the user or for specific tasks (SWOT matrix)

o Porter’s five forces p10: http://alturl.com/z9bx9

1. Threat of new competition

2. Threat of substitute products or services

3. Bargaining power of customers (buyers)

4. Bargaining power of suppliers

http://alturl.com/z9bx9

5. Intensity of competitive rivalryo S-curve diagram p10: http://alturl.com/reyy2

Strategy formulation (strategy planning) p10 [study] Given the strategic direction and environmental analysis, the organisation is now in a

position to develop long-term goals, derived from the mission statement p10

The organisation decides what is the appropriate way forward by means of p10:

1. Corporate strategies

2. Generic strategies – the organisation can formulate specific strategies known

as grand strategies, these can be divided into three major groups p10:

Growth strategies

Decline strategies

Corporate combinations

Visualisation helps with generic options for the following actions and techniques p10:

o Actions - strategic goals, milestones, activities, resource deployment

o Techniques – knowledge mapping, concept mapping, mind mapping,

decision-trees, morphological boxes

Strategy implementation p10 [study] The drivers (driving forces) available for successfully achieving the goals and mission

(to be able to implement the formulated strategies) are as follows p10:

1. Leadership2. Culture3. Reward systems4. Organisational structures5. Allocation of resources

The drivers are supplemented by strategic instruments such as: short-term goals and

policies p10

Strategic control is the last step in the strategic management process and includes

tools P10:

1. Total-quality management p11

2. Balanced scorecard p11

Aspects typical of this stage: actions, relationships, results p11

http://alturl.com/reyy2

Contemporary applications of strategic management p11 [study] Not-for-profit organisations and international (global) organisations p11

Strategic management for long-term sustainability and even survival p11

Strategic management in not-for-profit organisations p11 [study] Maximising stakeholders’ wealth vs. maximising profits p11

Strategic management in not-for-profit organisations vs. profit-making organisations

p12

Strategic management in organisations doing global business p12 [study] Doing business globally as an opportunity or a threat p12

The basic process of strategic management remains the same p12

Study unit 1.3 | Benefits and risks of strategic management p12

Functional aspects (benefits) of strategic management p12 [study]The benefits of strategic management differ according to what is being influenced by the

process p12:

Higher profitability – greater improvements in turnover and profits p12

Higher productivity – deliver more and better outputs through better planning and

utilisation of resources and materials (inputs), improving productivity

Improved communication across the different functions in the organisation –

employees tend to understand the goals of the organisation better; an understanding

of why the organisation does things in a certain way and where the organisation is

heading will make stakeholders more committed to the cause p13

Empowerment – employees have to take direct control and ownership of certain

strategies, so if they are involved they will be more committed p13

Discipline and a sense of responsibility to the management of the organisation – this develops because the management team takes full responsibility for its

strategic plans and implementation p13

More effective time management – strategic plans must be implemented by certain

due dates; breakdown into more specific time frames gives employees a better idea

of their own time management p13

More effective resource management – resources are more carefully managed

through controlled resource allocation p13

Strategic management – provides a framework or process in which employees can

see and understand through which phase the strategic process is currently moving; it

encourages employees to think proactively and breaks down resistance to change

p13

Dysfunctional aspects (risks) of strategic management p13 [study]Risks associated with strategic management that should be avoided p13:

Time p13

Unrealistic expectations from managers and employees – several ideas and

strategic suggestions will not be accepted, this could lead to demotivation among

staff p14

The uncertain chain of implementation – there should be a clear chain of

implementation down to lower levels, and clear responsibility areas and outcomes

p14

Negative perception of strategic management – requires support from top-level

management p14

No specific goals and measurable outcomes – measurement tool should be in

place; well-formulated long-term goals and a balanced scorecard approach can help

overcome this risk p14

Culture of change - flexibility and creativity p14

Success groove – overconfidence p15

Figure 6 The Hierarchy of Strategy Implementation p15

Strategic issues and concepts leading us into the future p15 [study]

Ethics and strategy p15 [study] The link between ethics and strategy p15

Appropriate locus for ethical reflection within the organisation p15

Strategy formulations representing ethical reflection on a corporate level p15

Stakeholder management p15 [study] Stakeholders play an important part in the creation of organisational wealth p15

The challenge of strategic management is to create a balance between the interests

of diverse stakeholders who are voluntary or involuntary involved in the operation of

the business p15

Relationships rather than transactions responsible for organisational wealth p15

Definition: stakeholders (Post, Preston and Sachs, 2002)

Voluntary stakeholders contribute directly to the operations of the organisation p16:

o Investors

o Employees

o Customers

TopMana

gement

Strategy

formulationMiddle Management

Strategy formulation

Lower Management/Supervisory LevelStrategy implementation

Employee ForceStrategy implementation

o Market partners

Involuntary stakeholders p16

Innovation economy and knowledge management p16 [study] Shift from industrial economy to innovation economy p16

Companies that will be successful - Davenport, Leibold & Voelpel, 2006 p16

Creative thinking and visionary companies p16

Mantra for the 21st century – innovate or be damned p16

Innovation is much more than just invention – it is about thinking differently p16

Definition: innovation (OECD, Strategic Direction, 2008)

Knowledge management p16 [study] Definition: knowledge management (Goh, 2005) p16

The difference between knowledge and information – information can be transformed

into knowledge p17

Knowledge can be tacit or explicit p17:

1. Tacit knowledge – knowledge that cannot be explained properly p17

2. Explicit knowledge – easy to communicate and easily transferred p17

Knowledge can lead to competitive advantage p17

Knowledge management is about people and the processes they use to share

information and build knowledge (Chyi Lee & Yang, 2000)

Innovation management p17 [study] Efficient use of knowledge – better, faster, more cost-effective innovations p17

Definition: innovation management (Goh, 2005) p17

Knowledge innovation p17 Definition: knowledge innovation (Goh, 2005) p17, p18

Knowledge innovation recognises 2 key elements p17:

1. Knowledge, not finance or technology, as one of the core components of

innovation p18

2. Actions associated with managing the flow and use of knowledge in an

innovation process p18

The real benefit for companies lies in the ability to utilise knowledge for innovation

p18

Figure 1.3: Knowledge innovation p18

Multiculturalism of South African organisations and knowledge management p18 [study]

Knowledge as a process that is personal and subjective p18

Culture plays an essential role in knowledge sharing p18

Advantages of multiculturalism p18

The knowledge manager as a change agent and facilitator for new ideas p19

Causes for the breakdown of multicultural knowledge sharing p19

Trust as an integral part of the knowledge sharing process p19

Definition: multiculturalism (Finestone & Snyman, 2005) p19

Corporate entrepreneurship p19 [study] Intangibles as assets that help companies gain a competitive advantage and keep it

p19:

1. Knowledge p19

2. Innovation p19

3. Entrepreneurial leadership p19

Technology push and market pull in turbulent opportunity-rich environments p19

Definition: corporate entrepreneurship (Scheepers & Hough, 2008)

Corporate entrepreneurship – entrepreneurial activities and entrepreneurship in

companies p19

The 3 dimensions of an entrepreneurial orientation in companies (Scheepers &

Hough, 2008) p19:

1. Innovativeness p20

2. Risk taking p20

3. Proactiveness - initiative, competitive aggressiveness and boldness in

pursuing opportunities p20

Change Management p20 [study] Change with the times or fail p20

Common success factors for managing change (Oakland & Tanner, 2006) p20

The 5 themes of an Organisational Change Framework p20:

1. Leadership2. Project management3. Processes4. People5. Learning

Table 1.4: Themes of change p21

Strategic leadership p20 Leadership’s task includes the full circle – vision, mission and profile, strategy, action,

results

Hussey (1998) states that technological change has at least two dimensions:

1. The first is the change implemented for marketing reasons

2. The second is change in the organisation’s processes, production methods

and other technology, all of which alter the way a product is manufactured

Handy (in Hesselbein et al 1997) states that organisations no longer have to own all

the resources needed to get the work done. Partnerships, outsourcing, flexible

labour, work-around-the-clock and interim managers are different ways of creating a

competitive advantage and, ultimately, surviving in a hostile environment

Assessment

Figure 7 Mindmap of Topic 1

Text Book1. Discuss strategic management in the context of existing management principles

2. Define what is meant by “strategic management

3. Explain the different views of strategic management

4. Discuss who is involved in the strategic management process

5. Differentiate between the different levels of strategy

Read the following article in the textbox and then answer the questions that follow:

How does the inflation rate affect economic growth?

How will an increase in the inflation rate impact on organisations that export

products?

What is the impact of a high inflation rate on business organisations

in South Africa?

What is the effect of inflation on consumers’ buying power?

Study Guide SG49/2061. Diagrammatically depict with the aid of a diagram

2. Differentiate between and strategic control

Tips: The first question requires us to draw a picture of the strategic planning process –it is

important that the diagram indicate the sequential steps in the strategic planning process in

the correct sequence. Remember to use arrows to indicate the continuous nature of this

process. The last question requires you to differentiate between the three phases of the

strategic management process.

Study Guide SG55/2061. Discuss the benefits and risks of strategic management in the contemporary

business environment

Topic 2 | Strategic direction p58

Figure 8 Learning Outcomes | Study Unit 2.1 SG57/206

Study unit 2.1 | Strategic direction SG45

Strategic leadership p59 [study] Definition: strategic leadership – a person’s ability to anticipate, envision, maintain

flexibility, think strategically, and work with others to initiate change that will create a

viable future for the organisation (Ireland & Hitt, 1999) p59

The main elements that set this definition apart from general leadership are p59:

1. Flexibility2. Strategic thinking

3. Initiation of change Leadership evolved from the “great leader view of strategic leadership” orientation to

the “great groups view of strategic leadership” orientation in the 21st century

Viewpoints on strategic leadership p59 [study]

The great leader view of strategic leadership p59 [study] This was acceptable before the new competitive landscape lead to p59:

o Shorter product lifecycles

o Accelerated rates and types of change

o The explosion of data

o The need to convert the data into usable information

Single individuals no longer had all the insights p59

The great groups view of strategic leadership p60 [study] Many “citizens” will serve the “community” as leaders p60

The combinations or collaborations of these organisational citizens are known as

“great groups”

Members of these great groups have different talents and work together to create an

environment in which knowledge is constantly produced and shared and innovation

occurs regularly p60

The most important “great group” in the organisation is the top management team

p60

Twenty-first century strategic leadership is implemented by means of interactions in

which knowledge, insights and responsibilities for achieved outcomes are shared p60

These “interactions: should occur between top managers and the “citizens” of the

organisation p60

The six components of strategic leadership p60:

1. Determining the company’s purpose or vision p60

2. Exploiting and maintaining core competencies p61

3. Developing human capital p61

4. Sustaining an effective organisational culture p61

5. Emphasising ethical practices p61

6. Establishing balanced organisational control p62

Components of strategic leadership p60 [study]

Determining the company’s purpose or vision p60 [study] Most important of the 21 competencies held to be crucial skills that global leaders

need to possess in the future – to articulate a tangible vision, values and strategy p61

Exploiting and maintaining core competencies p61 [study] Definition: core competencies – the resources and capabilities that ensure a

competitive advantage over the rivals of the organisation p61

In the new competitive landscape, organisations build their long-term strategies on

their core competencies p61

Developing human capital p61 [study] Definition: human capital – entails the knowledge and skills of an organisation’s

entire workforce p61

Companies should be willing to invest significantly in their human capital in order to

derive the full competitive benefit p61

Sustaining an effective organisational culture p61 [study] Definition: organisational culture – refers to the complex set of ideologies,

symbols and core values that are shared throughout the organisation p61

The context within which strategies are formulated and implemented is provided by

the culture p61

Culture reflects what the organisation has learned over time p61

Culture can become a competitive advantage p61

Emphasizing ethical practices p61 [study] Definition: ethical practices – the moral filter that evaluates potential courses of

action p61

Establishing balanced organisational control p62 [study] New leadership tasks have emerged p62:

1. Recognise the dual nature of strategy (short-term as well as long-term) p62

2. Start with vision, mission and distinctive profile p62

3. Replace “resource-based” strategy with a new basis of strategy formulation

p63

4. Focus on strategy as being the alignment between the external and the

internal worlds of the company p63

5. Competing through business systems, not through businesses p63

6. Recognise that there is a growing decentralisation of strategy-making and

leadership p63

Leadership tasks p62 [study]Abell (2006) identified six leadership tasks that are emerging as priorities p62:

Recognise the dual nature of strategy (short-term as well as long-term) p62 [study] Balance today-for-today strategies with today-for-tomorrow strategies p62

Start with vision, mission and distinctive profile p62 [study] Companies and leaders that will create a clear-cut framework for strategy definition

and action use the following skills p62:

1. Clear vision of the company they are trying to create

2. Clear sense of mission

3. Clear sense of their distinctive profile in terms of the competition

Replace “resource-based” strategy with a new basis of strategy formulation p63 [study] Competencies and resources (the “can”) have to be closely aligned with future

opportunities (the “could”)

It is not sufficient to simply define opportunities; the “can” and “could” are toned down

by the “want” and “should”

Focus on strategy as being the alignment between the external and the internal worlds of the company p63 [study]

Leaders have to work on two types of strategic alignment p63:

1. Upstream alignment – alignment of the core strategy with the outside world

i.e. the competitive environment of the industry p63

2. Downstream alignment – the alignment of the internal organisation with the

changing core strategy p63

Competing through business systems, not through businesses p63 [study] Creating value for the customer happens by means of the vertical business chain as

a whole p63

Supply chain management should not be regarded as a primarily logistics concept in

which the leader’s task is to reduce time delays p63

An important part of the leader’s tasks is to develop partnership relationships

between key actors in the supply chain p63

Coordination between all the elements in the value-creating process will lead to the

creation of higher value and lower costs p63

Recognise that there is a growing decentralisation of strategy-making and leadership p63 [study]

The leadership task is two-fold p63:

1. Entrepreneurial initiative from below should be encouraged p64

2. Create the leadership culture, systems and approaches from above which will

help decentralised leadership to do well p64

Strategic intelligence (SQ) p64 [read] The progression should be from:

Definition: strategic intelligence (SQ) – the “ability” to interpret cues and develop

appropriate strategies for addressing the future impact of these “cues”; this includes

p64:

o Timing

o Instinct

o Political savvy

o Curiosity

o Flexibility

Strategic planning Strategic thinking Strategic leadership

o Expertise to simplify

o Fitability

o Imagination

o The “ability” to interpret circumstances as they unfold

SQ is about using your realistic situational understanding to develop a strategy that is

appropriate and that works p64

The SQ “commandments” include the following p64:

1. An organisation has to have a clear understanding of the reason for its

existence – the “why” of the organisation

2. When possible, test the situation before pledging full commitment

3. The situation should always be used to develop strategic leaders

4. Timing should be kept in mind whenever you are addressing a situation and

its strategic solution

5. Theories should not hamper you, but they should not be disregarded

6. Rather discuss a situation than reach a decision without a proper discussion

7. Each new situation should be approached by way of the truth, not what you

hope to find

8. Become a strategic thinker, not just a strategic planner

9. Remember that strategy does not deal with future decisions, it deals with

decisions for the future

Table 2.1: Traits associated with strategic intelligence (SQ) p65

Setting strategic direction: vision, strategic intent and mission p65 [study] Setting strategic direction is the first step in the strategic management process p66

Two widely used tools to set strategic direction p66:

1. Vision2. Mission statements3. Strategic intent

The King II report states that the vision, mission and core values of an organisation

should form the basis not only for its strategic goals, but also for its stakeholder

relationships p67

The vision statement p68 [study] The vision statement is considered to be the first step in the strategy formulation and

strategic management processes p68

The vision statement answers the question: “what do we want to become?” and

serves as the roadmap of the organisation p68

A vision statement is a dream that focuses on a desirable future and is often referred

to as being an enduring promise p68

When formulating a vision statement, there are four matters that should be taken into

consideration p69:

1. As many managers as possible should contribute to the creation of a vision

statement

2. A vision statement should be achievable in the long term

3. Developing a vision statement is an exercise in thinking creatively about the

future direction of the organisation

4. Once a vision statement has been achieved, it loses its power and has to be

redeveloped to ensure continual focus on a desirable future

A vision statement has four purposes or functions p69:

1. It provides a way for managers to integrate a wide variety of goals, dreams,

challenges and ideas into one theme

2. It provides focus and direction

3. A vision statement forms the foundation for a mission statement, long-term

goals and strategy-selection decisions

4. An inspiring vision can serve as a powerful motivation tool

The vision should be communicated in such a way that it clarifies the purpose of the

organisation to all its stakeholders p70

Strategic intent p70 [study] Remember: strategic intent forms part of the strategic direction. However, strategic

intent is generally more detailed than the vision statement. In some cases, strategic

intent is used to describe the organisation’s vision and mission statements

Developed by Hamel and Prahalad p70

Definition: strategic intent – envisions a desired leadership position and

establishes the criterion the organisation will use to chart its progress (Hamel and

Prahalad, 1989) p70

Strategic intent is about creating a sense of urgency through the setting of an

overarching, ambitious goal that stretches the organisation and focuses on winning in

the long run p70

Strategic intent requires the entire organisation’s commitment to the goal and their

personal efforts p71

Strategic intent has an internal focus and can be used as the basis for setting the

mission statement p71

The three attributes of strategic intent are as follows p71:

1. Sense of direction – implies a view of the future; the long-term market and

competitive position the company hopes to build p71

2. Sense of discovery – differentiated and unique point of view about the future

p71

3. Sense of destiny – the perception that the goal is worthwhile p71

The mission statement p71 [study] Vision and strategic intent answer the question: “what do we want to become?”

p71

A mission statement askes the question: “what is our business?” p71

The role of the mission statement in the strategic management process p71 [study] Definition: mission statement – the mission statement is an enduring statement of

purpose that distinguishes an organisation from other similar ones p71

It identifies the scope of an organisation’s operations in terms of p71:

o Product (what)

o Market (who)

o Technology (how)

It identifies an organisation’s reason for being and serves as the foundation for the

development of long-term goals and the selection of strategies p71, p72

A mission statement is not about measurable targets but rather is a statement of intent, attitude, outlook and orientation p71

A mission statement has four focus areas p71:

1. Purpose – the reason for the organisation’s existence p72

2. Strategy p72:

Its strategy in terms of the nature of the business

Its competitive position in terms of other organisations

The source of its competitive advantage

3. Behaviour standards and culture in terms of the way it does business

4. Values, beliefs and moral principles that support the behavioural standards

A mission statement should address and include the interests of all stakeholders p72

A mission statement is also called a purpose statement, because it also deals with

the role of stakeholders in the strategic planning process SG76/206

Krattenmaker (2002) makes the point that mission statements should be long enough

to describe a company’s objectives in adequate detail and short enough to

encourage employees to read, understand and use it SG82/206

The components of a mission statement p75 [study]A mission statement has eleven components p75:

1. Product/service – the core components of the mission statement; describe the

business activities of the organisation p75

2. Market3. Technology

4. Survival – deal with the economic goals of the organisation p76

5. Growth6. Profitability7. Philosophy of the organisation – reflects beliefs, values, aspirations, priorities and

commitment in terms of how the organisation will be managed; organisations often

use a creed as a statement of their philosophy p76

8. Public image p76

9. Self-concept of the organisation - an organisation’s ability to know itself p76

10. Customers – imply three dimensions p76:

a. Identification of customer groups p77

b. Customer needs p77

c. Skills or competencies required to satisfy these p77

11. Quality

Stakeholders and the mission statement p77 [study] Definition: stakeholder - A stakeholder can be defined as anyone who, directly or

indirectly, is influenced by what the organisation does SG83/206

The inclusive approach – as applied by the King III Report, recognises that the

interests of stakeholders should be considered when formulating a strategy p77

The inclusive approach also requires an organisation to communicate its purpose

and values to all stakeholders p77

There are nine groups of stakeholders SG84/206:

1. Shareholders

2. Employees

3. Customers

4. Competitors

5. Financial institutions

6. General community

7. Media and press

8. Government

9. Suppliers

Formulating a mission statement p77 [study] As many managers as possible should be involved in the formulation of a mission

statement – this ensures a variety of views and a sense of ownership p77

The process of developing a mission statement should create an emotional bond and

a sense of mission between the organisation and its employees p77

The mission should be communicated to all internal and external stakeholders p77

Assessment

Figure 9 Mindmap of Topic 2 - Setting Strategic Direction SG88/206

Study Guide SG87/2061. Explain the various viewpoints of strategic leadership

2. Discuss the components of strategic leadership

3. Identify and explain various strategic leadership tasks

4. Explain the importance of strategic direction in strategic planning

5. Diagrammatically depict the position of strategic direction in the strategic planning

process

6. Differentiate between the vision statement, the mission statement and strategic intent

7. Discuss the components of a mission statement

8. How do stakeholders’ different interests influence the formulation of a mission

statement?

9. Discuss the claims and expectations of an organisation’s stakeholders and explain

why these are important in setting an organisation’s strategic direction

Topic 3 | Corporate governance and strategy p87

Figure 10 Learning Outcomes | Study Unit 3.1 SG 89/206

Study unit 3.1 | Corporate governance SG77

Responsible leadership p88 [study] Definition: responsible leadership – the exercise of ethical, values-based

leadership in the pursuit of economic and societal progress and sustainable

development p88

Organisations are required to take ownership of the consequences of their business

activities on three levels p88:

1. Economic2. Social3. Environmental level

There are two main business responsibility movements p88:

1. Definition: corporate social responsibility (CSR) – is associated with

ethical issues; doing what is right and fair, and avoiding harm p88

Corporate citizenship – emphasizes the contribution a company

makes to society through its core business activities, its social

investment and its engagement in good causes p89

Social accountability – the management of the quantitative and the

qualitative aspects of social, ethical and environmental performance

and reporting on these to both internal and external stakeholders p89

2. Definition: corporate sustainability – is associated with support for

sustainable development and the long-term performance, stability and

survival of the organisation p89

Corporate sustainability performance is measured by the triple bottom

line p89:

I. Economic impact – human rights, labour, health, engagement

in sustainable wealth-creation processes at the global, national

and local levels p89

II. Social impact – the impact of products or operations on

human rights, labour, health, safety, regional development and

other community concerns p89

III. Environmental impact – the impact of products or operations

on environmental degradation, including the company’s related

emissions and waste p89

What is corporate governance p91 [study] Corporate governance is about control, not about constraints SG104/206

Performance, accountability, transparency and disclosure are central to the notion of

corporate governance, which is the responsibility of the board of directors SG104/206

Corporate governance provides the foundation for responsible leadership and good

corporate citizenship p90

It also provides the structures and processes for managing a responsible

organisation that strives to perform well on an economic, social and environmental

level, and strives to achieve a sound triple bottom line p90

Definition: corporate governance (King II Report on Corporate Governance, 2002)

– corporate governance is concerned with holding the balance between economic

and social goals and between individual and communal goals; the aim is to align as

nearly as possible the interests of individuals, corporations and society p90

The major parties in corporate governance p90 [study] Definition: the agency problem – the agency problem arises because there is a

separation between ownership of the capital needed to fund the organisational

operations and the management thereof; in other words, the separation between

ownership and control p90

More on agency – managers act as agents on behalf of principals, shareholders; the

assumption of the agency problem is that owners want to make money and

managers tend to act in their best interests, which does not always translate into

higher profits p90

Figure 3.1: Major parties in corporate governance p91

Figure 11 Major Parties in Corporate Governance p91

Corporate governance and strategy p90 [study]Corporate governance is critical in the strategic management process with regard to the

following areas p91:

Formulation p91:

o Setting direction in terms of the broader principles of economic, social and

environmental performance

Early corporate governanceThe agency problemPrincipals <> Agents

Corporate governance todayAligned with corprate citizenship/CSR/sustainabilityGovernments, business associations, shareholders,

management, other employees, trade unions, suppliers, competitors, supply chain partners,

enviornmentalists, consumers, consumer associations, NGOs, political parties

o Reflecting the vision and mission in the strategy and setting the scene for

responsible business aims, practices and general conduct

o Considering organisational risks when determining strategic goals

o Setting clear, transparent, attainable and measurable goals

o Determining strategies that benefit all stakeholders

o Clarifying the role of the board of directors in strategy formulation

Implementation p91:

o Clarifying the role of the board of directors and management in overseeing

strategy implementation

o Developing specific, measurable action plans

o Measuring the triple bottom line

Control and evaluation p92:

o Clarifying the role of the audit committee in managing and overseeing

strategy implementation

o Determining checks and balances for strategy control

o Ensuring that executives are appropriately penalised or rewarded for failure or

success (responsibility of the board of directors)

Corporate governance and ethics p92 [study]The signs of ethical collapse are said to be the following (Jennings, 2006) p93:

1. Pressure to meet the numbers p93

2. Far away and silent

3. Sycophantic executives and an iconic CEO

4. A weak board

5. Conflicts of interest

6. Overconfidence

7. Social responsibility being the only measure of goodness

Corporate governance in South Africa p95

Governance codes p95 [study] Governance can be on a statutory basis, as a code of principles and practices, or a

combination of the two p95

The definitive authority on corporate governance in South Africa is the King Report

on Corporate Governance p95

The King I Report on Corporate Governance p96 [read] Published in 1994, it addressed fundamental principles of good financial, social,

ethical and environmental practices p96

Two components of corporate governance were specifically addressed p96:

1. Financial aspects – responsibility towards shareholders

2. Ethical aspects – standards of ethics in organisations

The King II Report on Corporate Governance p96 [study] Published in 2002, the King Committee identified seven primary characteristics of

good corporate governance p96:

1. Discipline p96

2. Transparency p96

3. Independence p97

4. Accountability p97

5. Responsibility p97

6. Fairness p97

7. Social responsibility p97

The King III Report on Corporate Governance p97 [study]The King III Report philosophy p98

Good governance is essentially about effective leadership p98

Sustainability is the primary moral and economic imperative for the 21st century, and

it is one of the most important sources of both opportunities and risks for businesses

– current incremental changes towards sustainability are not sufficient p98

Innovation, fairness, and collaboration are key aspects of any transition to

sustainability p98

The legacy of apartheid is fundamentally unsustainable – social transformation and

redress needs to be integrated within the broader transition to sustainability p98

Sustainability reporting is in need of renewal to respond to p98:

o The lingering distrust among civil society of the intentions and practices of big

business

o Concerns among business decision makers that sustainability reporting is not

fulfilling their expectations in a cost-effective manner

Table 3.2: The responsibilities of the board of directors p99

Key aspects adopted in King III SG106/206:

o Integrated reporting

o Risk-based internal audit

o Shareholder approval

o Remuneration policies

o Performance evaluation of directors

Assessment

Figure 12 Mindmap of Study Unit 3.1 | Corporate Governance in Strategic Management sg106/206

Study Guide SG106/2061. Explain how success is measured in strategic management terms

2. Explain the concept of responsible leadership. Discuss the concept of corporate

governance. Discuss, specifically, the major parties in corporate governance,

corporate governance and strategy, and what is involved in corporate governance

and ethics

3. Explain the importance of corporate governance in strategic management

4. Describe the impact of the King reports on corporate governance. Specifically refer to

the key points/differences adopted in the King III Report

Topic 4 | Internal Environmental Analysis p109 [study] The environment in which an organisation operates consists of the SG109/206:

1. Internal environment2. Macroenvironment3. Industry environment4. Operating environment

There is an element of subjectivity in all of the methods of internal environment

analysis. To remain objective, strategic planners can use financial ratio analysis:

these ratios are expressed in numbers that can be meaningfully compared with:

o The organisation’s own past results

o The competitors’ results

o The results of industry leaders

o The industry average

Financial ratio analysis does have some weaknesses SG129/206:

o The analysis is based on past data - it can only be used to spot past trends,

so it cannot be automatically regarded as applying to the future

o The analysis is only as good as the accounting procedures that have provided

the information

The four basic groups of financial ratios are SG130/206:

o Liquidity

o Leverage

o Activity

o Profitability

The strategic manager will find it difficult to classify strengths and weaknesses if he

or she does not have something by which to measure the results of the internal

environmental analysis – the following standards or yardsticks can be used to make

meaningful comparisons SG130/206:

o The organisation or business unit’s past performance

o Results of a previous internal environmental analysis

o Industry ratios or norms

o Benchmarks (e.g. industry best practices)

o Performance of the organisation’s competitors

Table 1 Organisational Profile | RBV Framework SG131/206

Critical success factors

Results of 2007 internal

environmental analysis



Strengths Weaknesses Strengths Weaknesses

Tangible

assets:

Land

Equipment

Capital

Intangible

assets:

Brand

name

Reputation

Capabilities:

Expertise

Knowledge

Table 2 Organisational Profile | Value Chain Framework SG131/206







Primary activities:

Input logistics

Operations

Output

logistics

Marketing

Customer

service

Secondary:

Procurement

Technology

HR

Administratio






n

Finance

Table 3 Organisational Profile | Functional Areas Framework SG131/206







Functional areas:

Finance

Marketing

Production

Purchasing

Public

relations

HR

Administratio

n

Research and

development

Figure 13 Internal Environmental Analysis | Learning Outcomes

Introduction p109 [study] The stronger an organisation’s overall performance, the less need there will be for

radical changes in strategy p109

Methods of internal analysis p110:

o Resource-based view – tangible and intangible resources

o Organisational capabilities

o Value chain analysis

o Functional approach

o Internal Factor Evaluation Matrix

Study unit 4.1 | The importance and challenge of internal analysis p110 [study]

The outcome resulting from internal analysis will determine what an organisation can

do p110

The outcome of external environmental analysis will identify what the organisation

may choose to do p110

It is critical for manager s to view the organisation as a bundle of resources,

capabilities and core competencies that can be used to create an exclusive position

in the market p110

This implies that the organisation has some resources and management capabilities

that other organisations do not have - the presence of these resources and

capabilities leads to strategic competitiveness when an organisation is able to use

them to satisfy the demands of the external environment p110

Figure 14 The relationship between the components of internal analysis and strategic competitiveness p111

SWOT analysis p11 [study] Definition: SWOT – SWOT provides a framework for analysing the strengths,

weaknesses, opportunities, and threats in the organisation’s external and internal

environment p111

SWOT analysis highlights the specific conditions in the organisation’s environment

for environmental analysis p111

Environmental analysis is about the internal and external assessment of the

organisation – what the organisation does and does not have in terms of resources

and capabilities, and what is happening in the external environment p111

Definition: strength – a strength is a resource or a capability that the organisation

has which is an advantage relative to what competitors have, for example p111:

Organisational resources

Establishing the core competencies Competitive advantage Strategic

competitiveness

Management capabilities

Value chain analysis

Determining the strengths and

weaknesses in the SWOT analysis

o Skilful employees p112

o Large financial reserves p112

o Quality product or service p112

o Strong reputation p112

o Economies of scale p112

Definition: weakness – the lack or deficiency of a resource that represents a

relative disadvantage to an organisation in comparison to what competitors have, for

example p112:

o Limited financial resources

o Poor marketing skills

o Poor after-sales service

o Negative organisational culture

Figure 15 The relationship between SWOT and the environment analysis p112

Definition: opportunity – an opportunity is a favourable situation in the

organisation’s external environment (market and macro environment), for example

p112:

o A decrease in the interest rate (if an organisation has a loan)

o The closing down of a major competitor

SWOT analysis

Internal analysis

Strenths

Weaknesses

External analysis

Opportunities

Threats

Definition: threat – a threat is an unfavourable situation in the organisation’s

external environment, for example p113:

o An increase in the interest rate if the organisation has a big loan

The other side of SWOT analysis p113:

o SWOT analysis is a static approach – sometimes focused only on a single

dimension

o SWOT analysis cannot show the organisation how to achieve

competitive advantage – more in-depth analysis is needed

o SWOT analysis is not an end in itself – it stimulates self-perception and the

discussion about important issues

Limitations of SWOT analysis p113:

o The focus on the external environment may be too narrow

o It is perhaps a static assessment – a one-shot view of a moving target

o The strengths that are identified may not necessarily lead to a competitive

advantage

o It may lead to overemphasis of a single feature or strength and disregard

other important factors that may lead to competitive success

Internal analysis for effective strategy development p114 [study]

Figure 16 Resource-Based View | Learning Outcome SG117/206

Method’s used to analyse the organisation’s internal environment SG117/206:

o Resource-based view

o Value chain analysis

o Functional analysis

Internal analysis includes – looking more closely at the organisation’s:

o Resources

o Capabilities

o Core competencies

Study unit 4.2 | Resource-based view (RBV) p114 [study] The RBV holds that an organisation’s resources are more important than the industry

structure in gaining and keeping its competitive advantage p114

RBV argues that it is the resources and capabilities that will determine and efficiently

and effectively the organisation is functioning p115

The main concerns for competitive advantage, according to the RBV, are

organisational resources and capabilities p115

According to the RBV, resources and capabilities must be difficult to create, buy,

replace or imitate; they must have the quality of inimitability p119

Resources p115 [study]Resource Examples Indicator

Tangible resources –

financial, physical,

technological

Financial – cash reserves

Physical – excellent

location, technically

advanced equipment,

reserves of raw material

Technological –

trademarks and

copyrights

Cash flow

Profitability

Solvency

Liquidity

Market value of assets

Capital equipment

Intangible resources –

human, innovation and

reputation resources

Intellectual property,

knowledge and skills of

employees, reputation with

customers, brand names,

perception of product/service

quality and delivery

Patents and copyrights

Brand recognition

Corporate reputation

Brand equity

Figure 17 Examples of different resources p115

The three broad category of resources p115:

1. Tangible assets – financial, physical, human

2. Intangible assets3. Organisational capabilities

Tangible assets – are the easiest to identify because they are visible p115:

o Value can be determined by looking at the financial statements, especially the

balance sheet p116

o The above values do not reflect market values (real values) as they do not

show how the asset is being utilised e.g. an airplane that is always fully

booked p116

Intangible assets – are the assets that one cannot touch p116:

o Intangible assets are often the critical assets that create the real competitive

advantage

o Intangible resources are a superior and more potent source of core

competencies

Characters and guidelines that make a resource valuable (give it a competitive

advantage) p119:

o Value – help the organisation to exploit external opportunities or neutralise

negative external threats, for example: skilled employees

o Superior resources – fulfils a customer’s needs better e.g. two shops but

one has a better location in the neighbourhood

o Scarcity – as long as it is valuable

o Inimitability – hard to imitate, for example: reputation (goodwill), a good

location, a patented product, and organisational culture. Imitation happens in

two ways:

1. Duplication – same kind of resource is built

2. Substitution – replacing it with an alternative resource that achieves

the same results

o Capacity to exploit the resource

Resource-based analysis should be considered an on-going activity SG122/206:

Figure 18 The Resource-based Analysis Process

Capabilities p116 [study] Definition: capabilities – capabilities are the glue that emerges over time and binds

the organisation together p116

Organisational strategic capabilities – are the complex network of processes and

skills that determine how efficiently and effectively the inputs in the organisation will

be transformed into outputs p116

The foundation of many organisation’s capabilities lies in the skills and knowledge of

the employees and often in their functional expertise p116

The essence of capabilities is the human capital of the organisation – as employees

do their work, combining the tangible and intangible resources of the structure of the

organisational processes, they accumulate knowledge and experience about how to

create value from the resources for the organisation and turn them into possible core

competencies or distinctive organisational capabilities p116

The majority of capabilities are developed in specific functional areas p117

Definition: dynamic capabilities – the organisation’s ability to build, integrate and

restructure capabilities to address the rapidly changing environment p117

To be a successful organisation requires p117:

o Demonstrating timely responsiveness

o Rapid and flexible product innovation

o Management expertise in coordinating and deploying organisational

resources and capabilities

Definition: competitive advantage – resources and capabilities must be truly

distinctive and also contribute to the development of an organisation’s core

competencies p118

Definition: core competencies – only possessed by those organisations whose

performance is superior to the industry average p118

Core competencies are based on superior organisational skills and knowledge p118

Study unit 4.3 | Value chain analysis (VCA) p120 [study]

Figure 19 Value chain analysis | Learning outcome SG124/206

Every organisation has a chain of activities through which the inputs are transformed

into outputs p120

The chain of activity is looked at to determine where value is really added to the

product or service p120

There are three aspects of resources that create value for customers p121:

1. The product is unique and/or different

2. The product is cheaper than that of competitors

3. The organisation has the ability to respond to the customer’s needs very

quickly

Definition: value chain analysis – a systematic method of determining how the

organisation’s various activities contribute to creating value for the customer p121

VCA views the organisation as a sequential process which includes all the value-

creating activities in the organisation p121

Definition: value in VCA – the amount of money that customers are willing to pay

for what the organisation is providing them p122

The activities in VCA are the building blocks of competitive advantage; they can be

grouped into two categories p122:

1. Primary activities – those that create the product or service and customer

value

2. Support activities – add support; add value throughout the process

Remember that we are discussing a method used in internal environment analysis,

that is, we are trying to identify the organisation’s strengths and weaknesses. In its

most basic form, the value-chain analysis attempts to identify the strengths and

weaknesses in the organisation’s activities SG125/206

Steps in the value chain analysis SG126/206:

1. Identify and classify activities - the first step in performing a value chain

analysis is to identify the various primary and secondary activities

2. Allocate costs - the next step in performing a value-chain analysis is to try

and allocate costs to every activity, as each activity occurs

3. Identify the activities that differentiate the organisation from its competitors - using a value-chain analysis will help an organisation to

determine the activities that differentiate it from its competitors and that serve

as sources of competitive advantage

4. Examine the value chain - the last step in the value-chain analysis is to

scrutinise the results of the value-chain analysis and to classify the various

activities as strengths or weaknesses of the organisation

Primary activities p122 [study]Some of the different items regarding the primary activities in an organisation p122-123:

Input logistics (inbound) p122

Operations – transformation of inputs into the final product p122

Output logistics (outbound) p123

Marketing – method used to persuade customers to buy the product p123

Customer service p123

Support activities p123 [study]The performance of the primary activities depends on the support activities p123:

Procurement – purchasing inputs p123

Technological development p123

Human resources management – recruitment, selection, training, remuneration

p124

General administration and infrastructure – effective and efficient planning

systems p124

Financial management – effective financial recording p124

Study unit 4.4 | Functional approach p124 [study] In this study unit, we focus on the following learning outcome SG128/206:

o Analyse and interpret the results of an assessment of the organisation’s

internal environment approach

To achieve this learning outcome, you must be able to SG128/206:

o Explain what the functional approach entails

o Briefly comment on how meaningful comparisons can be made when

conducting an internal assessment

The usual business functions in most organisations are p124:

o Finance (and accounting)

o Marketing

o Production

o Purchasing

o Corporate communications (public relations)

o Human resources

o Administration

o Research and development

Every organisation has specific functions that it must perform; therefore an internal

audit can be regarded as an assessment of the various functional areas p125

The objective of the internal audit is to p125:

o Determine how well or poorly these functions are being performed

o What resources these functional areas need to perform effectively

The disadvantage – attention is focused entirely on the functional areas, while there

is no determination of whether a specific functional area makes an important

contribution to the organisation’s competitive advantage p125

Assessment

Equation 1 Topic 4 | Internal environmental analysis | Mindmap SG132/206

The importance and challenge of internal analysis SG116/2061. Discuss the importance of an internal environment assessment

2. Explain the use of the SWOT analysis in assessing the environment

3. Comment on the limitations of the SWOT analysis

4. Explain what a SWOT analysis entails

5. Diagrammatically depict and explain where internal assessment fits into the strategic

planning process

Assessment | Resource-Based View SG123/2061. Explain what the resource-based view of an organisation encompasses

2. Identify and differentiate between an organisation’s main resources

3. Explain what makes a resource valuable

Assessment | Value chain analysis SG127/206

Figure 20 Value chain analysis | Mindmap SG 127/206

1. Explain what a value-chain analysis entails

2. Discuss the steps in conducting a value-chain analysis

3. Diagrammatically depict and explain the value-chain method of assessing the

organisation’s internal environment

4. Differentiate between primary and secondary activities

Assessment | Functional approach SG131/206:1. Explain what the functional approach entails

2. Briefly comment on how meaningful comparisons can be made when conducting an

internal assessment

Topic 5 | External environmental analysis SG121

Study unit 5.1 | The macroenvironment SG121

Learning outcome SG121

In this study unit, we focus on the following outcome:

Analyse and interpret the results of an external environmental assessment.

To achieve this learning outcome, you must be able to:

Explain what external assessment means in strategic planning terms;

Describe the components of, and process involved in, conducting a macroenvironmental

analysis;

Diagrammatically depict and explain the position of external environmental assessment in

the strategic planning process;

Explain the interrelatedness of the macro-, industry and operating environments;

Identify and explain the macroenvironment variables that impact on an organisation;

Discuss the use of forecasting techniques.

The importance of an external environmental assessment SG122

Key points for explaining the reasons for assessing the external environment:

The aim of strategic management is an organisation’s long-term survival or sustainability;

The organisation operates in an environment which it cannot control;

The organisation needs to use its resources, capabilities and skills to build and gain a

competitive advantage;

The organisation’s competitive advantage, and survival, are threatened by factors in the

external environment;

Other organisations are competing for market share and the same customer base;

The organisation’s survival is influenced by the changing needs of its customers;

Both the organisation’s operations and survival are factors in the macroenvironment (which

the organisation cannot control), which impact on the operations of the organisation.

This means that the strategic manager needs to know what tools, resources, capabilities and

competitive edge the organisation possesses so that this information can be used to respond to

challenges in the external environment.

After an organisation has identified and evaluated opportunities and threats in the

macroenvironment and matched these to the organisation’s internal strengths and weaknesses, the

organisation is in a better position to design strategies that will achieve its long-term objectives.

Introduction p135

The organisation cannot be successful if it is not in step with its environment. The fact that an

organisation interacts with its environment means that it is acting as an open system and will both

affect and be affected by the environment. This means that the organisation draws its inputs, such

as: human, physical, financial and informational resources, from the environment and distributes

its products and services back to the environment. The underlying problem for the successful

survival of an organisation is the fact that the environment usually changes faster than the

organisation can adjust to it.

External environment analysis focuses attention on identifying and evaluating trends and events

beyond the control of a single organisation, and also reveals key opportunities and threats

confronting the organisation that could have a major influence on the firm’s strategic actions.

An opportunity is a favourable condition in the external environment and can lead to

strategic competitiveness;

A threat is an unfavourable condition in the external environment that may hinder an

organisation’s efforts to achieve strategic competitiveness.

Figure 21 Components of the external environmental analysis p137

Several sources can be used to analyse the external environment:

Printed material;

Trade shows;

Suppliers;

Customers and external network contacts;

Sales people, purchasing managers, and customer service representatives.

The external environment p138

An organisation’s external environment is divided into three major areas:

1. Global;

2. Macro;

3. Industry or market environment.

Assessing

ForecastingBased on monitored changes and trends, projections of anticipated outcomes are developed

MonitoringThe meaning of environmental changes and trends is detected through ongoing observation

ScanningEarly signs of environmental changes and trends are identified

The timing and importance of environmental changes and trends for organisations’ strategies and their management are determined

Figure 22 The different environments of an organisation p138

The elements of the external environment not only influence the environment and the decision

making of managers, but also one another. The result of this is a set standard of living for the

community.

An important principle is that organisations cannot directly control the external environment’s

segments and elements, but that these elements and changes in the external environment have a

major influence on organisations.

The South African environmental context p140

Inequality is measured by the Gini coefficient, which normally varies from 0 (perfect equality) to 1,00

(perfect inequality).

Composition of the macroenvironment SG125

The five dimensions of the macroenvironment:

1. Political, governmental and legal forces;

2. Economic forces;

3. Social, cultural and demographic forces;

4. Technological forces;

5. Ecological forces.

GlobalMacroMarket/industry[Micro]

The analysis of these factors is sometimes called the PESTE analysis (political, economic, social,

technological, ecological factors). Another important macroenvironmental aspect that should be

analysed is the global environment – all the factors relevant to PESTE can be applied here.

Figure 23 Some of the elements of the macroenvironment p141

Dimension 1 | Political environment p141

The political environment includes the parameters within which organisations and interest groups

compete for attention, resources and a voice in overseeing the body of laws and regulations that

guide the interactions between organisations and the environment. Essentially this aspect

represents how organisations try to influence government and how government influences them.

The political/legal environment can be divided into three parts:

1. Existing legislation;

2. Amended legislation: of which the public is advised in advance; and

3. Unannounced new legislation and regulations: or the suspension of existing legislation.

MacroEnvironment

Political/legal environment

Antitrust laws, labour training

laws

Sociocultural environmentDemographic

changes

Ecological environment

Land, water and air pollution

Technological environment

Product innovations, new communication

technologies

Economic environment

Inflation rates, interest rates

Any government is a major regulator, deregulator, subsidiser, employer and customer of an

organisation. In this respect the South African government has the following aims that will influence

organisations:

To enhance the process of social and economic transformation;

To emphasise the effectiveness and efficiency of delivery in respect of government actions

and initiatives;

To stimulate job creation in alliance with the private sector;

To be seen to be serious in its approach to dealing with law and order;

To enhance the process of the “African Renaissance”

Increasing global competition accentuates the need for accurate environmental forecasts.

Variables in the political/legal environment:

Black economic empowerment;

Government legislation on conditions of employment;

Monetary and fiscal policy;

Pricing policies;

Tax;

Minimum wage legislation;

Subsidies and grants;

Regulation of fuel prices;

Local, municipal laws;

Social unrest;

Stability of government;

Form of government;

Strengths of opposition parties and groups;

Foreign policy.

Dimension 2| Economic environment p143

Economic factors affect the nature and direction of the economy in which an organisation operates.

Organisations have to study the economic environment to identify changes and trends, and their

strategic implications. Economic factors have a direct impact on the attractiveness of various

strategies and consumption patterns in the economy. Inflation, recession, the level of disposable

income, the availability of credit, and interest rates influence the demand for goods and services.

When assessing the economic environment as part of the macroenvironment, one should first try to

relate the financial results of the organisation to the general progress of the economy.

Gross domestic product (GDP) is the total value of goods and services produced in a country in one

year. If the growth rate of the GDP is lower than the growth rate of the population, there will be a

decline in the standard of living.

The monetary policy of the government influences the inflow of foreign capital into the country.

High interest rates favour capital inflow but are less advantageous for South African consumers.

Dimension 3 | Sociocultural environment p144

The sociocultural environment is concerned with society’s attitudes and cultural values. It includes

changes in social, cultural and demographic variables. These variables shape the way people live,

work, produce and consume.

The change from a production economy dominated by male workers to a service economy has

meant that there are now more women in the workplace. Jobs have also become unisex in nature.

Culture in South Africa is not homogeneous. Different subcultures are based on population groups,

religion and geographical areas. Some additional trends include: consumers who are more educated,

some populations that are ageing, minorities who are becoming more influential, a higher incidence

of single parenthood, and consumers who are more inclined to buy local product.

Dimension 4 | Technological environment p145

Technological changes affect many aspects of society. These affects occur primarily through new

products, processes and materials.

Technological change has at least two dimensions:

1. Change brought about for marketing reasons e.g. new product development; and

2. Change in processes and production methods.

The technological environment includes the institutions and all the activities involved in creating

new knowledge, and translating that knowledge into new outputs, products, processes and

materials.

The implications of technological innovation and advancements are as follows:

They dramatically affect the organisations’ products, services, markets, suppliers,

distributors, competitors, customers, manufacturing processes, marketing practices and

competitive position;

They create new markets;

They result in the proliferation of new and improved products;

They change the relative cost positions in the industry;

They make existing products and services obsolete;

They reduce or eliminate cost barriers between businesses;

They create shorter production runs;

They create shortages in technical skills;

They result in changing values and expectations of employees, managers and customers;

They create new competitive advantages that are more powerful than existing ones.

Dimension 5 | Ecological environment (the natural environment) p147

The ecological environment refers to the relationship between human beings – and thus

organisations – and the air, soil and water in the physical environment. It refers to the limited

natural resources from which an organisation obtains its raw materials. Organisations should know

what their influence on the ecological environment is.

Dimension 6 | The international environment SG131

The international environment has an impact on an organisation’s activities, whether that

organisation operates locally or internationally. International laws, human rights, boycotts etc. have

become variables that can easily derail even the smallest local organisation.

Forecasting techniques and scenario planning SG134

Strategic planning, as the name suggests, deals with the future, and assumptions about the future.

These assumptions must be clarified and made explicit.

We need to predict what the variables that we have identified in the macroenvironment might look

like in the future. Forecasts are what might be called “educated assumptions” about future trends

and events. Environmental forecasting helps the organisation to be proactive.

Accurate forecasting enables an organisation to either benefit from, or at least mitigate, the impact

of economic changes. To forecast the environment, one needs forecasting tools which can be

categorised into the following two groups:

1. Quantitative techniques: are particularly appropriate when historical data is available and

when the relationships among key variables are expected to remain the same in the future.

As historical relationships become less stable, quantitative forecasts become less accurate,

which is when qualitative forecasts can, and should, be used;

2. Qualitative techniques.

The choice of a suitable forecasting technique depends not only on the availability of historical data,

but also on factors such as costs, time and the accuracy of the forecast information that is needed.

When studying quantitative and qualitative forecasting techniques, you need to pay special attention

to the following:

How to select critical environmental variables;

Which sources provide significant environmental information;

Which forecasting techniques are available to the strategic planner;

How to evaluate forecasting techniques;

How to integrate forecast results with the strategic management process;

How to monitor the critical aspects of forecasts.

Scenario planning is that part of strategic planning which relates to the tools and technologies for

managing the uncertainties of the future (Ringland 2006). A scenario is not a forecast, but one

possible future outcome.

Assessment SG137

1. Explain what external assessment means in strategic planning terms

2. Describe the components of, and process involved, in conducting a macroenvironmental

analysis

3. Diagrammatically depict and explain the position of external environmental assessment in

the strategic planning process

4. Explain how the macro-, industry and operating environments are all interrelated

5. Identify and explain the macroenvironment variables that impact on an organisation

6. Discuss the use of forecasting techniques.

Study unit 5.2 | The industry or market environment SG139

Learning outcomes SG139

In this study unit, we focus on the following learning outcome:

Analyse and interpret the results of an external environmental assessment


Diagrammatical depict and explain how Porter’s five forces model is used in assessing the

industry environment

Give guidelines on how to perform a competitor analysis

Describe the limitations of Porter’s five forces analysis

Explain the importance of assessing the industry environment as part of an external

environmental assessment.

The industry environment (also known as the market or task environment) SG140

After the macroenvironment has been analysed, the next step in the external environmental

assessment process is to examine the industry environment. It is comprised of:

Suppliers;

Intermediaries;

Customers;

Competitors.

Management has no control over these variables but can influence their effect through changes in

the organisation’s strategy.

An industry can be defined as a group of organisations that produce products and services that are

close substitutes for one another or which customers perceive to be substitutable for one another

(Ehlers & Lazenby, 2010). In South Africa, for example, we speak of the textile industry, the mining

industry, the banking industry and so forth.

Before an organisation can carry out an industry analysis, it needs to:

Identify the industry in which it competes; and then determine

The structure of the industry, which is influenced by:

o The concentration of a few organisations that dominate sales in an industry;

o Economies of scale;

o Product differentiation; and

o The barriers to entry.

Identify competitors

An organisation also has to identify its competitors before performing an industry analysis. The

industry life cycle is a significant determinant of the nature and the extent of the power of the

variables in the market environment.

Industry or market environment p148

In summary to the previous section, an organisation needs to know:

In which industry it is competing;

What the structure of that industry is;

What the major determinants of competition are;

Which organisations are the competitors.

In terms of identifying the industry, the following questions can be asked:

Which organisations have the same type of goals as our organisation has?

In which industry are these organisations competing?

In this industry, what are the key ingredients for success?

Industry structure depends on enduring characteristics that give the industry its distinctive character

and can be identified by examining four variables:

1. Concentration: extent to which industry sales are dominated by only a few organisations;

2. Economies of scale: savings companies achieve within an industry due to increased volume;

3. Product differentiation: extent to which customers perceive goods and services offered by

organisations in an industry as different from one another;

4. Barriers to entry: obstacles that an organisation must overcome in order to enter an

industry.

The most important task of management in capitalising on the market environment is to identify,

evaluate and exploit opportunities that exist in the market and to develop the marketing strategy of

the organisation in such a way that competitors and other variables of this external environment do

not pose a threat to the organisation.

Five competition forces influence the intensity of competition in an industry and the industry’s profit

potential. Michael Porter identified these as:

1. The threats posed by new entrants;

2. The bargaining power of suppliers;

3. The bargaining power of buyers;

4. Product substitutes;

5. The intensity of rivalry amongst competitors.

Knowledge of these forces helps to provide the basis for a strategic plan of action. This model also

expands competitive analysis to current and potential competitors.

Figure 24 The Five Forces model for industry analysis p150

According to Porter (2008), an industry’s profit potential is determined by the collective strength of

the five forces mentioned above. When we look at figures such as the average return on investment

(ROI) of three different industries, we can see that different industries have different profit

potentials – that is, some industries are more profitable than others.

Industry competitors

Rivalry among existing

organisations

Potential entrantsThreat of

new entrants

BuyersBargaining power of

buyers

SubstitutesThreat of substitute products

SuppliersBargaining power of suppliers

A strategic group consists of a cluster of similar organisations that offer similar goods to the same

customer base; these organisations are also likely to use comparable production technology.

An organisation has to be positioned within the industry. According to Porter, ”positioning” means

just that: the organisation has to position itself by doing the following:

Achieving lower costs than its rivals (i.e. becoming a cost leader);

Through differentiation, by adding value in an area that the customer regards as important;

Focusing on only one market segment or, at most, a limited range of segments (i.e. in an

effort to lower costs or differentiate itself from its competitors).

Competitive force 1 | Threat of new entrants p149

New entrants can threaten the market share of existing competitors by bringing additional

production capacity to the industry.

Two factors influence whether new organisations will enter an industry:

1. Barriers to entry;

2. Expected retaliation.

Influence 1 | Barriers to entry p150

Examples of entry barriers include:

Economies of scale: the advantages of economies of scale are that they enhance an

organisation’s flexibility, may keep the price constant and increase profits.

Product differentiation: customers become loyal to a product over time, if new entrants

want to change the idea of uniqueness, they have to offer products and services at lower

prices.

Capital requirements;

Switching costs: these are once-off costs customers incur when they switch from one

supplier’s product or service to another. New entrants can overcome this by offering a

substantially lower price.

Access to distribution channels: new entrants have to persuade distributors to carry their

products.

Cost advantages independent of scale: includes access to raw materials and government

subsidies.

Influence 2 | Expected retaliation p151

If existing organisations are able to retaliate swiftly and vigorously, the likelihood of new

organisations entering is reduced. Locating market segments that are not adequately served by

existing organisations allows easier entry for the new entrant. This will also avoid stepping on the

toes of existing organisations and thus risking retaliation from them.

Competitive force 2 | Bargaining power of suppliers p152

Suppliers are the individuals and companies that provide an organisation with the input resources

(raw materials, component parts, or labour) that the organisation needs to produce goods and

services.

A threat arises when a supplier’s bargaining position becomes so strong that it can raise the prices of

the input resources it supplies to the organisation. Suppliers can exercise power over competing

organisations by increasing their prices and/or reducing the quality of their product. A supplier group

is powerful when:

It is dominated by a few large organisations and is thus more concentrated than the industry

to which it sells it products;

No satisfactory substitutes are available for customers to buy;

Industry organisations are not important customers for the supplier group because it sells to

several industries;

Suppliers’ goods are critical to byers’ organisations;

The cost for industry organisations to switch to another product or supplier are high because

of the supplier’s effectiveness or the differentiated products;

It poses a credible threat of forward integration whereby suppliers become their own

buyers, and therefore other buyers are not important for the success of the suppliers.

Competitive force 3 | Bargaining power of buyers p153

Buyers bargain for higher quality, lower prices and better services to reduce their costs. Customers

or buyers have bargaining power in the following cases:

They purchase a large quantity of a seller organisation’s products or services;

The sales of the product account for a large portion of the seller’s revenue;

Few, if any, costs are incurred when customers switch to another product. The customers

are not “married” to a specific supplier and can shop around;

As above if the customer or buyer earns low profits;

The products or services purchased by the customer account for a large portion of the

customer’s costs;

The industry’s products are undifferentiated or standardised;

The quality of the products that the customer purchases is not very important for the

buyer’s products;

Customers have access to a lot of information;

There is a credible threat of backward integration: the buyer becomes his own supplier,

therefore other suppliers are not important for the buyer’s success.

Competitive force 4 | The threat of substitute products p154

If a product or service from another industry can be used to perform similar functions to the product

or service in the industry, it is considered to be a substitute product or service.

Substitute products and services pose a strong threat to an organisation when the switching costs

for customers (if any) are low, the substitute product has a lower price, or its quality and

performance are equal to or superior to those of the competing product.

To withstand the threat of product and service substitution, an organisation can differentiate in

areas which customers perceive as creating more value, such as price, quality, after-sales services or

speed of delivery.

Competitive force 5 | Rivalry among competing organisations p155

This is the strongest of all the forces. Competitors are organisations that produce goods and services

similar to a particular organisation’s goods and services and compete for the patronage of the same

customers. It is often competitors and not consumers who determine the actual quantity of a

particular product to be marketed and what price should be asked for it. Organisations not only

compete for market share, but also for labour, capital and materials.

In a competitor analysis it is important for the organisation to understand:

The future goals of the competitors;

Their current strategies;

What the competitors believe about the industry – what their assumptions are;

What their capabilities are.

Learn Figure 5.5: Components of competitor analysis p156

The only way to create a competitive advantage is for an organisation to differentiate its products

from competitors’ offerings in ways that consumers will perceive as adding value. Rivalry is usually

based on visible aspects such as price, quality and innovation.

The following conditions will influence the intensity of rivalry between competitors:

Numerous or equally balanced competitors;

Slow industry growth;

High fixed or storage costs;

Lack of differentiation or low switching costs;

High exit barriers: exit barriers include economic, strategic and emotional factors that force

organisations to continue competing in an industry even though the profitability of doing so

is doubtful. It is difficult for them to exit the industry because some factors keep them in it.

Common exit barriers include:

Highly specialised assets: assets with value linked to a particular business or location;

Fixed exit costs: labour agreements;

Strategic interrelationships: strategic alliances where facilities or markets are shared;

Emotional barriers: fear of one’s own career and loyalty to employees;

Government and social restrictions: government’s concern for job losses and the effect on

the economy.

Identifying competitors within an industry p158

There are several variables that an organisation has to consider in identifying current and potential

competitors: They include the following:

The similarity of the definition of the scope (what business are we in?): this determines

whether organisations see each other as competitors;

The similarity of benefits customers derive from the products and services that other

organisations offer;

How committed the organisations are to the industry must be determined: this is because

it sheds light on their long term goals and intentions.

A method that an organisation can use to identify its competitors is strategic group mapping: a

strategic group consists of the clustering of a group of organisations that are:

Similar to one another;

Offer similar goods to similar customers; and

Possibly also make similar decisions about production technology and other organisational

aspects;

They are thus direct competitors in the same industry.

The classification of an industry into various strategic groups involves: deciding what characteristics

to use to map the organisations into strategic groups. The characteristics that can be used in a graph

include:

Breadth of product;

Geographic scope;

Price quality; and

Type of distribution.

Strategic grouping as an analytical tool for identifying customers helps an organisation to:

Identify the competitors at different competitive positions in the industry;

To chart the future direction of an organisation’s strategy or what direction it seems to move

in.

Common mistakes in identifying competitors p158

Examples of key mistakes include:

Overemphasizing current and known competitors; and

Ignoring the threat of potential new entrants or international competitors;

Focusing only on large competitors; and

Overlooking the possible threat of small competitors;

Assuming that competitors will continue to behave in the same way that they have in the

past.

Competitor analysis SG145

Guidelines on how to perform a competitor analysis:

Compare the future objectives of competitors with the organisation’s own objectives;

Determine the current strategies of competitors;

What assumptions are competitors making in terms of the future status of the industry?

What are the strengths and weaknesses of competitors?

Decide on how the organisation will respond to competitors.

Limitations of Porter’s Five Forces model SG146

The limitations to the model can be summarised as follows:

The model claims to assess the profitability of the industry: there is strong evidence that

organisation-specific factors, such as organisational competencies, are more important to

the individual organisation’s success than industry factors;

The model implies that the five forces apply equally to all competitors in an industry:

buyers’ power may differ from organisation to organisation, the same argument applies to

the bargaining power of suppliers;

Product and resource markets are not adequately covered by the model: in both these

markets the conditions are more complex than Porter’s model implies. The markets in which

products are sold (buyer power) need more in-depth analysis when determining their

strength;

The model can never be applied in isolation: the outcomes of the applications of the model

are only relevant while the macroenvironment remains constant and stable; however,

organisations function in complex and dynamic environments;

The model assumes that the relationship between competitors in an industry is always

hostile: it is more complex than the model suggests; competitors often see “fair play” or a

“give-and-take” relationship as an important quality of their interactions.

Assessment SG146

Diagrammatically depict and explain how Porter’s five forces model can be used to assess

the industry environment

Provide guidelines on how to perform a competitor analysis.

Discuss the limitations of Porter’s five forces analysis.

Explain the importance of industry assessment as part of external environmental

assessment.

Topic 6 | Formulating long-term goals SG149

Study unit 6.1 | Formulating long-term goals SG149

Learning outcome SG149

In this study unit, we focus on the following learning outcome:

Interpret the organisation’s strategic goals (long-term goals).


Explain what is meant by “long-term goals”;

Diagrammatically depict the position of long-term goals in the strategic planning process;

Explain how the mission statement is translated into strategic goals (long-term goals);

Differentiate between long- and short-term goals;

Draw a diagram showing the four dimensions of the balanced scorecard;

Comment on the criteria used to judge whether a long-term goal is well formulated or not.

Translating the mission statement into measurable long-term goals SG150

The vision statement is the organisation’s “dream” – its ”perfect future”. This perfect future is then translated into reality – the mission statement. However, the mission statement is only a set of guidelines. The mission statement sets parameters within which strategic management should make decisions. It does not state what exactly should be attained, or when it should be attained. It is therefore not measurable.

Long-term goals, also called strategic goals, translate the mission statement into something measurable. It looks at the following:

Who should attain the goals? What should the focus be on? What action is needed? How will goals be measured? Within what time frame should it occur?

Long-term goals should focus on issues such as:

Market; Product; Technology;

Survival; Growth; Profitability; Customers; Quality; and The organisation’s philosophy; Public image; Self-concept.

Focus areas may include issues such as:

Continuous improvement; Customer service; Employee efficiency; Innovation; Sales and financial criteria (return on investment, earnings per share, revenue, turnover).

Strategy is about positioning organisations for long-term competitive advantage. The primary aim of strategy is to create value for shareholders and other stakeholders by providing customer value.

The essential components of a good strategy include:

The choice of which products and services to deliver;

The acquisition and allocation of resources to ensure the delivery of the products and

services is done in a professional, timely and profitable way.

Sound strategy is rooted in:

A deep understanding of what current and potential customers value;

How much they are prepared to pay;

The profile and position of the competition; and

How such elements are likely to change.

Study Figure 6.1: Strategic goals and associated strategies in context p175

Long-term goals (sometimes called long-term objectives) p175Long-goals are determined in line with the organisation’s vision. These goals are strategic in nature and reflect the organisation’s specific direction on a high level. Strategic goals are the basis for more specific tactical goals, or the so-called short-term/functional goals.

Study table 6.1: Differences between long-term strategic goals and short-term tactical goals p176

Policies can be defined as the rules or guidelines that express the limits within each action resulting from a short-term goal.

Long-term and short-term goals need to comply with specific requirements:

A long-term goal should not be open to interpretation from employee to employee; Long-term goals should provide direction to the organisation, establish organisational

priorities, reduce uncertainty; and Serve as the basis for allocating and managing resources in the organisation.

Some additional considerations include:

Goals should be measurable and clearly indicate a time frame; Goals should be consistent and congruent across organisational units

Using the balanced scorecard to set long-term goals SG152The balanced scorecard is a set of measures that are linked directly to the organisation’s vision, mission and strategy. It balances short- and long-term measures; financial and nonfinancial measures and internal and external performance perspectives. The balanced scorecard account compromises the following four perspectives:

1. The financial perspective;2. The internal business perspective;3. The innovation and learning perspective;4. The customer perspective.

Each of the above perspectives in itself consists of clearly stated objectives, measures, targets and initiatives.

Figure 25 The balanced scorecard SG153

The balanced scorecard can be used as a framework for setting long-term goals.

Assessment p1541. Differentiate between long- and short-term goals.2. Depict the position of long-term goals in the strategic planning process.3. Comment on the criteria used to judge whether a long-term goal is well formulated or not.4. Explain how the balanced scorecard is used to formulate long-term goals.

Study unit 6.2 | Generic strategies SG155

Learning outcome SG155In this topic we focus on the following outcome:

Defend the choice of a generic strategy, or strategies, based on the strategic planning process.

To achieve this learning outcome, you must be able to: Diagrammatically depict the position of strategy choice in the strategic planning process; Explain what is meant by a “competitive advantage”; Comment on the factors that impact on strategic choice; Explain what the generic strategies entail differentiate between the four generic strategies; Comment on the criticisms levelled against the use of a generic strategy framework.

Competitive advantage p178The competitive advantage should elevate the organisation from its competition. This competitive advantage should fulfil certain criteria:

Relate to an attribute with value and relevance to the targeted customer segment; Be perceived by the customer as a competitive advantage; Be sustainable, i.e. not easily imitated by competitors.

An organisation should consider now only its competitors when determining its competitive advantage, but also its customers and their value proposition.

The opportunity for companies to sustain competitive advantages is determined by their capabilities. For the purposes of strategy, the key distinction is between distinctive capabilities and reproducible capabilities:

Distinctive capabilities: are those characteristics of a company that cannot be replicated by competitors, or can be replicated only with great difficulty;

Reproducible capabilities: can be bought or created by any company with reasonable management skills and financial resources.

Only distinctive capabilities can be the basis for sustainable competitive advantage.

Strategy selection SG156In simple terms, a strategy is the route that the organisation believes will take it to its destination. A strategy also indicates how an organisation intends competing in the marketplace.

There are three main categories of strategies:

1. Generic strategies (low cost, differentiation, focus and best cost);

2. Grand strategies;3. Functional strategies.

Factors that impact on strategic choice SG157There are various factors that play a role in the selection of a strategy or strategies. The different components of the strategic planning process, for example, would impact on the choice of a strategy. A change in any of the strategic planning process components may therefore require a change in strategy or strategies.

In addition, major factors that impact on choosing a strategy are:

1. Appropriateness: refers to the needs of the environment, the resources (available and needed), the organisation’s values, and its current mission;

2. Feasibility: refers to the timing, the availability of finance and other resources, and meeting key success factors.

3. Desirability: refers to the ability of the strategy to satisfy the organisation’s objectives, its synergy, certain inherent risk factors and, of course, shareholders’ needs and preferences.

Generic strategies (sometimes referred to as competitive strategies) SG158Generic strategies provide focus and direct organisational activities. Organisations mhave to select specific generic strategies that complement their competitive advantage.

Competitive strategy is about formulating a strategy that enables the organisation to compete against other organisations within its industry. In order to gain a competitive advantage, an organisation must decide to adopt one of these generic strategies. An organisation also decides on a grand strategy in order to strengthen the generic strategy in its pursuit of competitive advantage.

Generic strategies fall into four categories:

1. Cost leadership strategy: by being more cost-effective than its competitors;2. Differentiation strategy: by adding value to the product or service through differentiation;3. Focus strategy: by narrowing its focus to a special market segment which it can monopolise.

Combining the cost and differentiation advantage adds another generic competitive strategy:

4. Best-cost strategy: by offering the lowest (best) prices compared with rivals offering products with comparable attributes.

Study Figure 6.2: Three generic competitive strategies p180

These strategies combine the organisation’s “scope of operations” and competitive advantage to derive the three generic types of competitive strategy.

Generic strategy 1 | Cost-leadership strategy SG158Organisation’s pursuing a cost-leadership strategy usually sell a product or service that appeals to a broad target market. Their products or services are highly standardised and nor customised to an individual’s tastes, needs or desires. According to David (2009), the cost leadership strategy emphasises the production of standardised products at a very low per-unit cost for price-sensitive consumers.

To achieve a cost advantage, an organisation’s cumulative costs across its overall value chain must be lower than its competitors’ cumulative costs. There are tow ways to accomplish this:

1. Out-manage rivals in the efficiency with which value chain activities are performed and in controlling the factors that drive the costs of value chain activities;

2. Revamp the organisation’s overall value chain to eliminate or by-pass some cost-producing activities.

The underlying premise of cost leadership is that, by making products with as few modifications as possible, the organisation can exploit the cost-reduction benefits that accrue from:

High capacity utilisation; Economies of scale; Technological advances; and Learning and experience.

Organisations usually decide to pursue a cost leadership strategy to provide the lowest prices to consumers in order to gain market share in a particular industry. There are both benefits and risks to pursuing a cost leadership strategy. The aim of cost leadership is to become the lowest-cost provider of a specific product or service.

The table below outlines the parameters that distinguish a cost-leadership strategy from the other generic strategies:

Cost-driver 1 | Economies of scale p181Economies of scale arise whenever activities can be performed more cheaply at larger volumes than smaller volumes and from the ability to spread out certain fixed costs such as R&D and advertising over a greater sales volume. The various costs involved in production and which should be reviewed when economies of scale come into play are:

The total cost account for all the production costs: total cost increases as output increases; Fixed costs (land and equipment) remain the same for different levels of production unless

the production operations are expanded in size; Variable costs: the costs of variable inputs (raw materials and labour) that vary with output; Average cost: the mean cost of total production (total costs/total number of units produced

during a given period). Economies of scale exist if average costs are lower at higher levels of production.

In essence economies of scale entail:

Spreading the fixed costs over a greater volume; Specialising in a specific production process; Practicing superior inventory management; Exercising purchasing power; or Spending more effectively on advertising.

Cost-driver 2 | Experience and learning curve effects p182An organisation’s costs can decline as employee experience increases. This leads to higher productivity, employees applying technology better or devising ways of improving systems.

Learning fosters increased understanding of responsibilities and leads to the mastering of skills to achieve organisational goals more effectively and efficiently.

Cost-driver 3 | The percentage of capacity utilisation p182Increased capacity utilisation leads to fixed costs being spread over a larger unit volume which lowers the fixed cost per unit, especially in capital-intensive organisations. Ways to achieve this are through better demand forecasting, conservative expansion policies, aggressive pricing and increased depreciation rates.

Cost-driver 4 | Technological advances p182Investment in cost-saving technologies can enable organisations to reduce the unit cost of their products or services significantly.

Cost-driver 5 | Improved efficiencies and effectiveness through supply chain management p182An organisation’s value chain is intimately linked to the value chains of its suppliers and customers in a highly interactive way e.g. Dell.

Generic strategy 2 | Differentiation strategy SG159This is a strategy aimed at producing products and services which are perceived to be different, and more value is added in comparison to competitors’ products and services. The perceived uniqueness of products often lies in the:

Quality; Technological superiority; Design; or Image.

Organisations that pursue a generic strategy can increase revenue by charging more for perceived added value. Sustainable differentiation is usually linked to core competencies, unique competitive capabilities and superior management of value chain activities which competitors cannot readily match. As a rule, differentiation yields a longer-lasting and more profitable competitive edge when it is based on:

Product innovation; Technical superiority; Product quality and reliability; Comprehensive customer service; and

Unique competitive capabilities.

The most important by-product of a differentiation strategy is customer retention and loyalty. This means that customers are locked in.

Generic strategy 3 | Focus strategy SG159This strategy involves providing products and services that fulfil the needs of a narrow segment of consumers with unique tastes and preferences i.e. it is based on a choice of a narrow competitive scope within an industry. The focus strategy means choosing a particular market and catering for the very specific needs of consumers in this market. The essence is exploiting a market niche that differs from the rest of the industry.

Focus strategy based on cost leadership: aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and price than its competitors;

Focus strategy based on differentiation: aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique tastes and preferences.

Generic strategy 4 | Best-cost strategy (middle-of-the-road strategies) SG159This strategy is a combination of low cost leadership and differentiation strategies. It is generally ideal for value conscious buyers. The basic competitive advantage is more value for money for products and services; the competitive advantage is more difficult for competitors to imitate. This integrated strategy often has a positive relationship with above-average returns.

Comparison between the generic strategies

Distinguishing features of each generic strategy

Table 4 Distinguishing features of the different generic strategies

Parameter Cost leadership strategy

Differentiation strategy Focus: low cost Focus: differentiation Best-cost strategy

Strategic target A broad cross-section of the market

A broad cross-section of the market

A narrow market niche in which buyer needs and preferences are distinctively different

A narrow market niche in which buyer needs and preferences are distinctively different

Value-conscious buyers

Basis of competitive advantage

Lower overall costs than those of competitors

Ability to offer buyers something attractively different from that of its competitors

Lower overall costs that rivals in serving niche buyers

Attributes that appeal specifically to niche buyers

Ability to give customers more value for money

Product line A good basic product with few frills (acceptable quality and limited selection)

Many product variations; wide selection; emphasis of differentiating features

Features and attributes tailored to the tastes and requirements of niche buyers

Features and attributes tailored to the tastes and requirements of niche buyers

Items with appealing attributes; assorted upscale features

Production emphasis A continuous search for cost reduction without sacrificing acceptable quality and essential features

Differentiating features that buyers are willing to pay for; product superiority

A continuous search for cost reduction while incorporating features and attributes matched to niche buyer preferences

Custom-made products that match the tastes and requirements of niche buyers

Produce upscale features and appealing attributes at lower cost than rivals

Marketing emphasis Trying to make a virtue out of product features that lead to low cost

Flaunting differentiation features; charging a premium price to cover the extra costs of differentiating

Communicating attractive features of a budget-priced offering that fits niche buyers’ expectations

Communicating how the product offering does the best job of meeting niche buyers’ expectations

Flaunt delivery of best value; deliver comparable features at a lower price than rivals or match rivals’ prices

Parameter Cost leadership strategy

Differentiation strategy Focus: low cost Focus: differentiation Best-cost strategy

features and provide better features

Keys to sustaining the strategy

Economical prices/good value; low costs (year after year) in every area of the business

Constant innovation to stay ahead of imitative competitors; a few key differentiating features

Constant innovation to stay ahead of imitative competitors; a few key differentiating features

Commitment to serving the niche better than rivals; does not blur the organisation’s image by entering other market segments or adding other products to widen market appeal

Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes

When each strategy is the best strategy to follow

Table 5 When each strategy is the best strategy to follow

Strategy When it is the best to follow which strategyCost leadership The organisation has the ability to reduce costs across the supply chain;

Price competition among competitors is vigorous; The targeted customer market is price sensitive; Competitive products are similar and there is a great degree of product standardisation; Brand loyalty does not play a big role among customers; Buyers have high bargaining power because of higher concentration; New entrants to the industry use introductory low prices to attract buyers and build a customer base; The market is large enough to provide the organisation with economies-of-scale advantages; Buyers incur low switching costs.

Differentiation Buyer’s preferences are diverse and varied; Fewer competitors follow a similar differentiation approach with less head-to-head rivalry e.g. Woolworths; There are many ways to differentiate the product or service and many buyers perceive differences as having value; Technology changes frequently and competition often centres on changing product features e.g. mobile handsets;

Strategy When it is the best to follow which strategy Higher industry entry barriers result in higher demand for products and less price sensitivity; The differentiated product or service can be designed so that it has wide appeal to many market sectors; Brand loyalty exists e.g. retail banking.

Focus: low cost The target market niche is large enough to be profitable and offers good growth potential; It provides a way for a smaller organisation to avoid direct competition with the larger organisations that do not deem the

segment important to compete in; It is viable for larger organisations to meet the specialised needs of the niche segment while still maintaining performance in

their mainstream markets; The industry has a variety of potentially profitable market segments and over-crowding by competitors is thus less of a risk; Customers are willing to pay a high premium for the perceived value that they attach to a differentiated (customised) product

or service; Customers are brand loyal and are unlikely to shift their loyalty to a competing brand.

Best-cost The potential for economies of scale and learning exists in the market; Customer demand, expectations and needs provide sufficient impetus for investment in enhanced efficiencies and cost

savings, as well as differentiation; Competition is fierce and barriers to entry are low; Customers are simultaneously price and quality sensitive; Mass customisation becomes a possibility because of advanced technological, distribution and marketing capabilities.

Advantages and potential pitfalls of each strategy

Table 6 Advantages and potential pitfalls of each strategy

Cost leadership strategy Differentiation strategy Focus Best-cost strategyAdvantages Increases the potential of an

organisation to increase both its market share and its profitability;

Customers who are familiar with the products and services of low-cost leaders are unlikely to switch to a competing brand, unless the competing brand has something very different or unique to offer – customer loyalty is an advantage of a prolonged cost leadership strategy;

One of the most important advantages that cost leaders have is their ability to keep new entrants from entering the market.

(not stipulated in the test book) (not stipulated in the test book) (not stipulated in the test book)

Potential pitfalls

Sometimes organisations run the risk of being overly aggressive with their price cutting and ending up with lower profitability;

Value-creating activities that

Uniqueness that is not valuable: market research and reliable information are critical to the success of a differentiation strategy;

Too much differentiation;

The needs, expectations and characteristics of the market may gradually shift towards attributes desired by the majority of buyers in the broader market, which will

Organisations that fail to create both competitive advantages simultaneously may end up with neither and become stuck in the middle;

Organisations may

Cost leadership strategy Differentiation strategy Focus Best-cost strategyform the basis of this strategy can often be imitated too easily;

A degree of differentiation is often still needed.

Charging too high a premium;

A uniqueness that is easily imitated;

Dilution of brand identification through product-line extensions.

decrease the profit potential of this segment;

Competitors may develop technologies or innovate products that may redefine the preferences of the niche;

The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and eroding profits.

underestimate the challenges and expenses associated with providing low prices and differentiating at the same time;

Organisations may miscalculate the sources of revenue within the industry and fail to achieve expected profitability.

Criticisms of generic strategy framework SG160The most important objections to Porter’s generic strategy framework are:

An organisation can employ a successful hybrid strategy without being stuck in the middle e.g. Nissan;

Low-cost strategy does not in itself sell products; Price can sometimes be used to differentiate.

Assessment SG160 Diagrammatically depict the position of strategies choice in the strategic planning process. Explain what is meant by a “competitive advantage”. Comment on the factors that impact on strategic choice. Explain what the generic strategies entail. Differentiate between the four generic strategies. Comment on criticisms levelled against the use of a generic strategy framework.

Topic 7 | Grand strategies SG163

Study unit 7.1 | Grand strategies SG163

Learning outcome SG163In this topic we focus on the following learning outcome:

Defend the choice of a strategy, or strategies, on the basis of the strategic planning process.


Diagrammatically depict the position of strategic choice in the strategic planning process; Explain what the grand strategies entail; Explain and differentiate between growth, decline and corporate combination strategies; Describe functional strategies and how they are related to grand strategies.

Grand strategies SG164Grand strategies, also referred to as business strategies, alternative strategies, or master strategies, are the specific “game plans” that explain, in detail, how the organisation will compete in the marketplace. Grand strategies provide the basic direction for strategic actions. A grand strategy can be described as a comprehensive general approach that guides a firm’s major actions.

Fourteen principal grand strategies are defined and classified under four broad categories, namely:

1. External growth strategies;2. Internal growth strategies;3. Decline strategies; and4. Corporate combination strategies.

The interrelationship between Porter’s generic strategies and grand strategies SG164

Figure 26 The relationship between Porter's generic strategies and grand strategies p200

Grand strategies can be divided into three groups:

1. Growth strategies:a. Internal: focuses on the internal environment of the organisaiton;b. External: focuses on the market and task environment.

2. Corporate combination strategies; and 3. Decline strategies.

Growth strategies can be further divided into internal and external growth strategies.

Cost leadership

Forward integration

Backward integration

Horizontal integration

Concentrated growth

Joint venture

Strategic alliances

Differentiation

Concentrated growth

Product development

Market development

Conglomerate diversification


Concentric diversification

Focus

Concentrated growth

Product development


Concentric diversification

Joint venture

Strategic alliances

Figure 27 The three groups of grand strategies p201

1 | Growth strategies p201

1a | Internal growth strategies p201

1a-1 | Concentrated growth (also referred to as market penetration) p201Concentrated growth is a strategy that seeks to increase the market share of an organisation through concentrated market efforts. The organisation stays focused on its present market, as well as its present products and services. For example: Cell C.

The challenge it faces is to grow its share of the particular market through the customisation of its product features, prices, distribution channels and promotional strategies. Through this customised approach it endeavours to increase its usage rate of its present customers, attract non-users to buy its product, and/or attract its competitors consumers and convince them to switch brands.

A concentrated growth strategy can be effective if the following conditions prevail:

The market for a specific product or service is not saturated; There is room to increase the usage rate of present customers; The market shares of its major competitors have been declining while total sales in the

particular industry have been increasing; Economies of scale can provide cost benefits to organisations; There is not much fluctuation in the availability, price and quality of the raw materials and

other resources required tom provide the specific product or service that consumers require.

1a-2 | Market development p202A market development strategy involves expanding the portfolio of markets that the organisation serves. Present products or services are therefore introduced into new geographical areas, including other countries.

A market development strategy is effective when the following conditions prevail:

An organisation has access to reliable and affordable distribution channels in the area it wishes to enter;

Cultural barriers and a lack of insight with regard to the buying behaviour of consumers in the foreign country present challenges to organisations that consider entering international markets. To overcome these barriers some organisations decide to form strategic partnerships with organisations in the foreign country that they wish to enter.

1a-3 | Product development p204Product development involves improving and modifying the products and services of the organisation in order to increase sales. Product development is effective when an organisation has successful products that are reaching the maturity stage of their product life cycle.

A product development strategy can be effective if the following conditions prevail:

If the industry is characterised by rapid technological developments, especially when major competitors offer better quality products at comparable prices;

When capital is available for capital investment in R&D, technology and the attainment of appropriate human resources.

1a-4 | Innovation p204Organisations that have distinct technological competencies and capital reserves to invest in R&D may find it profitable to make innovation their grand strategy. Instead of concentrating on extending the life cycle of their products or services through differentiation and product development, these organisations endeavour to create new product life cycles that will make similar existing products or services obsolete.

An innovation strategy can be effective if the following conditions prevail:

Customers demand differentiation; The industry is characterised by rapid changes and advances in technology; The organisation has R&D skills; The organisational culture fosters innovativeness.

1b | External growth strategies p205

1b-1 | Diversification p205Diversification is directly concerned with extending the organisation beyond its original boundaries (industry and market). The major benefits and risks associated with diversification are:

Table 7 Benefits and risks associated with diversification

# Benefit Risk1 Opportunities for faster growth, higher

product and service offering profitability and greater stability

Ignorance about newly entered markets could result in inefficiency as a result of inadequate knowledge about customer needs, technological developments and environmental shifts

2 Access to key resources such as capital, technology and expertise

Risk of reducing management effectiveness. Places significant demands on senior executives due to increased complexity and technological differences across industries

3 Sharing of value chain activities to provide greater economies of scale and thus lower total cost

Sharing value chain activities with another organisation often entails substantial costs with regard to communication, compromise and accountability.

i | Concentric diversificationAdding new but related products and services to the product line is called related or concentric diversification. The objective of related diversification is usually to expand the market share of an organisation in an existing market, or alternatively to enter new markets. For example: Dove. Relatedness has to do not only with market or industry, but also relates to strategic assets i.e. those that cannot be accessed quickly and cheaply by non-diversified competitors. For example: Canon with cameras and then photocopiers.

A related or concentric diversification strategy can be effective if the following conditions prevail:

Industries that experience slow growth or no growth, the goal is to increase sales by increasing the number of products consumed by each individual customer;

The current products or services of an organisation are in the decline stage of the product life cycle;

The potential exists to reap economies of scale across business units that can share the same strategic asset (such as a common distribution system);

The potential exists to utilise a core competency developed through the experience of building strategic assets in existing businesses to create a new strategic asset in a new business faster or at a lower cost.

ii | Unrelated or conglomerate diversification Adding new, unrelated products or services in an effort to reach and penetrate new markets. This type of strategy is a corporate strategy, which is usually applicable to large conglomerate multi-business organisations.

An unrelated or conglomerate diversification strategy can be effective if the following conditions prevail:

The basic industry of the organisation is experiencing declining sales and profits; Existing markets for the products and services of the organisation are saturated;

The organisation has the capital and managerial talent needed to compete successfully in a new industry.

Some of the methods through which an organisation can pursue unrelated diversification are:

Buying a high-performing organisation in an attractive industry; Buying a cash-strapped organisation that can be turned around quickly through additional

capital investment; Buying an organisation whose seasonal and cyclical sales patterns would provide stability to

the cash flow and profitability of the organisation; Buying a largely debt-free organisation to improve the borrowing power of the acquiring

organisation.

1b-2 | Integration p208Integration strategies involve gaining control over suppliers, distributors or competitors in a particular industry to enhance the effectiveness and efficiency of the organisation. There are three types of integration:

1. Forward vertical integration;2. Backward vertical integration;3. Horizontal integration.

i | Vertical integrationVertical integration extends the scope of an organisation to other activities within the same industry. This strategy is characterised by the expansion of the organisation into other parts of the industry value chain directly related to the design, production, distribution or marketing of its existing products and services.

The primary objective of vertical integration is to strengthen the hold of the organisation on the resources it deems critical to its competitive advantage.

The cumulative potential benefit of vertical integration strategies is that they tend to reduce the economic uncertainties and transaction costs facing an organisation in a particular industry.

The disadvantages are as follows:

It can lead an organisation to over-commit scarce resources to a given technology, production process or other activity that could become obsolete in a certain industry;

It is capital intensive, resulting in high fixed costs that may leave the organisation vulnerable in an industry downturn;

It can pose problems with regard to integrating different sets of capabilities, skills, management styles and values.

1. Forward vertical integration: entails gaining ownership over distributors or retailers. Forward integration is attractive when existing distributors/retailers are:

a. Unreliable;b. Have high profit margins;c. Incapable of servicing the consumers of the organisation’s products effectively.

2. Backward vertical integration: involves gaining ownership or increased control of an organisation’s suppliers. Backward integration is appropriate when the current suppliers of an organisation are:

a. Unreliable;b. Too costly;c. Incapable of meeting the needs of the organisation with regard to parts,

components, or materials.

ii | Horizontal integrationHorizontal integration takes place when an organisation seeks ownership of or increased control over certain value chain activities of its competitors. It occurs through mergers, acquisitions and takeovers.

This type of strategy is attractive when:

An organisation competes in a growing industry, where the achievement of economies of scale could provide cost benefits or other forms of competitive advantage; and

Where an organisation has both the capital and human talent needed to manage an expanded organisation successfully.

Horizontal integration can pose problems with regards to integrating the differences in organisational culture, capabilities, skills, management styles and values of the organisations involved in the merger or acquisition.

2 | Decline strategies (often referred to as defensive strategies) p209Decline strategies are pursued when an organisation finds itself in a vulnerable position as a result of poor management, inefficiency and ineffectiveness. There are three types of defensive strategy:

1. Retrenchment or turnaround;2. Divestiture;3. Liquidation.

2a | Divestiture p210Divestiture involves selling a division or part of the organisation to raise capital for further acquisitions or investments or to get rid of divisions that are no longer profitable or no longer fit in with the strategic direction that the organisation is embarking on.

2b | Liquidation p210Liquidation entails selling all the assets of an organisation in an attempt to avoid bankruptcy. Liquidation is usually pursued when efforts to turn an organisation around through retrenchment and divestiture have been unsuccessful.

2c | Bankruptcy p211Bankruptcy as a strategic option is where all the assets of the organisation are sold in parts for their tangible worth. Creditors are compensated to the extent that cash resources allow and the rest of

the debt of the organisation is then written off. Bankruptcy allows organisations to reorganise and come back after filing a petition for bankruptcy.

3 | Corporate combination strategies p211Corporate combination strategies are appropriate for organisations that operate in global, dynamic and technologically driven industries. Corporate combinations involve the following types:

Joint ventures; Strategic alliances; Consortia;

The risks associated with corporate combination strategies involve:

Partners becoming incompatible over time; Partners becoming too dependent on each other; Running the risk of providing partners with more insight into their knowledge and skills base

than intended; Corporate combination strategies can become very cost-intensive, especially as far as

coordination, learning and flexibility are concerned.

3a | Joint ventures p211A joint venture is a temporary partnership formed by two or more organisations for the purpose of capitalising on a particular opportunity. Partners contribute their own proportional amounts of capital, distinctive skills, managers and technologies to the specific venture.

Organisations usually enter into joint ventures to:

Seek some degree of vertical integration (with potential cost benefits); Acquire or learn a partner’s distinctive skills in some value-creating activity; Upgrade and improve internal skills; Develop and commercialise new technologies that may significantly influence an industry’s

future direction.

Sharing R&D costs, distribution channels and manufacturing agreements can enable organisations to achieve economies of scale, reduce production costs and minimise risks.

Forming a joint venture is an attractive strategy when the distinct competencies of two or more organisations complement each other.

3b | Strategic alliances p212The organisations involved do not share ownership in a specific business venture. These organisations tend to share skills and expertise for a defined period, usually linked to the life cycle of a specific project.

An organisation that wants to venture into new and unfamiliar markets, especially those overseas, can benefit immensely from a strategic alliance (partnership) with another organisation that is already established in that particular market and therefore has expert knowledge with regard to consumer behaviour and market conditions there.

3c | Consortia p212Consortia are large interlocking relationships between organisations in a particular industry. These relationships represent the most sophisticated form of strategic alliance as they involve multi-partner alliances and highly complex linkages between groups or organisations. Some of the linkages are financial. Other relationships involve the complex sharing of technologies, resources or value-creating activities among different partners.

Combination of grand strategies p213The extent to which an organisation can embark on a combination strategy is determined by its access to the relevant resources. Organisations that have limited resources will most probably not be able to implement more than one strategy at a time.

Functional strategies SG167The grand strategies that organisations identify for achieving their objectives have to be implemented at both financial and operational level. These strategies have also been referred to as annual tactics, associated with a specific business unit.

Functional strategies and action plans have to be formulated to ensure that all organisational units, divisions, departments and project teams do what is required in order to implement the strategy successfully.

The implementation process is not complete until short-term goals and action plans have been formulated for each of the functional strategies identified.

The balanced scorecard management system was developed to assist organisations with clarifying their strategies and translating them into action, and to provide meaningful feedback with regard to their performance. The balanced scorecard enables managers to evaluate the organisation from four perspectives:

1. Financial performance;2. Customer knowledge;3. Internal organisation processes; and4. Learning and growth.

Figure 28 Topic 7 | Conclusion

Assessment SG168

1. Diagrammatically depict the position of the choice of a strategy in the strategic planning process.

2. Explain what is meant by a “grand strategy”.3. Describe, with examples, each of the grand strategies.4. Explain and differentiate between growth, decline and corporate combination strategies.5. Describe functional strategies and how these are related to grand strategies.

Table of TablesTable 1 Organisational Profile | RBV Framework SG131/206....................................................42Table 2 Organisational Profile | Value Chain Framework SG131/206......................................42Table 3 Organisational Profile | Functional Areas Framework SG131/206..............................43Table 4 Distinguishing features of the different generic strategies.....................................................83Table 5 When each strategy is the best strategy to follow..................................................................84Table 6 Advantages and potential pitfalls of each strategy.................................................................86Table 7 Benefits and risks associated with diversification...................................................................93

Table of FiguresFigure 1 Learning Outcomes | Study Unit 1.1.......................................................................................5Figure 2 Learning Outcomes | Study Unit 1.2.......................................................................................5Figure 3 Learning Outcomes | Study Unit 1.3.......................................................................................6Figure 4 The Strategic Management Process SG46/206.....................................................................9Figure 5 The Strategic Planning Process SG48/206..........................................................................10Figure 6 The Hierarchy of Strategy Implementation p15..................................................................15Figure 7 Mindmap of Topic 1................................................................................................................. 19Figure 8 Learning Outcomes | Study Unit 2.1 SG57/206...................................................................23Figure 9 Mindmap of Topic 2 - Setting Strategic Direction SG88/206.............................................33Figure 10 Learning Outcomes | Study Unit 3.1 SG 89/206................................................................34Figure 11 Major Parties in Corporate Governance p91.....................................................................36Figure 12 Mindmap of Study Unit 3.1 | Corporate Governance in Strategic Management

sg106/206......................................................................................................................................... 39Figure 13 Internal Environmental Analysis | Learning Outcomes...................................................44Figure 14 The relationship between the components of internal analysis and strategic

competitiveness p111.................................................................................................................... 45Figure 15 The relationship between SWOT and the environment analysis p112..........................46Figure 16 Resource-Based View | Learning Outcome SG117/206...................................................47Figure 17 Examples of different resources p115...............................................................................48Figure 18 The Resource-based Analysis Process.............................................................................50Figure 19 Value chain analysis | Learning outcome SG124/206......................................................51Figure 20 Value chain analysis | Mindmap SG 127/206.....................................................................55Figure 21 Components of the external environmental analysis p137............................................................58Figure 22 The different environments of an organisation p138....................................................................59Figure 23 Some of the elements of the macroenvironment p141.................................................................60Figure 24 The Five Forces model for industry analysis p150.........................................................................67Figure 25 The balanced scorecard SG153.....................................................................................................77Figure 26 The relationship between Porter's generic strategies and grand strategies p200...........................90Figure 27 The three groups of grand strategies p201...................................................................................91Figure 28 Topic 7 | Conclusion..................................................................................................................... 98

MNG301A Study Notes 2012 Semester 2€¦ · Web viewcorporate entrepreneurship (Scheepers &...

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