1.2 Defining strategy

Chapter 01: What is strategy? Integration and Strategic AlignmentHOUGH | THOMPSON | STRICKLAND | GAMBLE


1.2 Defining strategy

A company’s strategy is all about how• how management intends to grow the business• how it will build a loyal clientele and outcompete

rivals,• how each functional piece of the business will be

operated• how performance will be boosted


1.3 Defining Vision and Mission

A strategic vision portrays a company’s future business scope (where we are going),

whereas a company’s mission typically describes its present business and purpose (who we are, what we do, and why we are here)


1.4 Strategy and the quest for Competitive Advantage

Four of the most frequently used anddependable strategic approaches :

1. Low-cost provider2. Differentiation3. Niche focus4. Unique capabilities


1.5 The Relationship between a Company’s Strategy and Business Model

A company’s business model thus explains why its business approach and strategy will generate ample revenues to cover costs and capture a profit.


Figure 1.1


1.7 The Concept of a Company Value Chain

Chapter 4 describes a company’s value chain as two broad categories of activities:

• namely the primary activities that are foremost in creating value for customers, and the

• requisite support activities that facilitate and enhance the performance of the primary activities.


1.9 Killers of Strategic Alignment and Fit

• Unclear strategy and/or conflicting priorities• An ineffective top management team• A leadership style that is too top-down or,

conversely, too laissez-faire• Poor coordination across functions,

businesses, or geographic regions• Inadequate leadership skills and development

of down-the-line leaders• Poor vertical communication


1.10 Managing Alignment: Different Views

6 steps to achieve alignment:1. Articulate the key strategic drivers of your business

and the main areas of focus that will make your organization successful.

2. Define critical strategic goals that you perceive should be deployed throughout your organization.

3. Develop performance measures for each of these key goals.



Figure 2.1


2.2 Developing a Strategic Vision (Part 1)

Top management’s views and conclusions about the company’s direction and future product/ market/ customer/ technology focus constitute a strategic vision for the company.


Capsule 2.1: Examples of Strategic Visions - How Well Do They Measure Up?

• Vodacom• Coca-Cola Sabco• Basil Read• Peugeot• Atlanta Web Printers• Balanced Scorecard Institute of South

Africa


2.2.2 Strategic Vision Covers Different Ground From the Typical Mission Statement

The defining characteristic of a well-conceived strategic vision is what it says about the company’s future strategic courseIn contrast, the mission statements typically provide a brief overview of the company’s present business purpose and raison d’être, and sometimes its geographic coverage or standing as a market leader


2.2.3 Communicating the Strategic Vision

• Expressing the Essence of the Vision in a Slogan

• Breaking Down Resistance to a New Strategic Vision

• Understanding the Benefits of a Clear Vision Statement


2.2.4 Linking the Vision/Mission with Company Values

Many companies have developed a statement of values to guide the company’s pursuit of its vision/mission, strategy, and ways of operating. By values (or core values, as they are often called), we mean the beliefs, traits, and ways of doing things.


Illustration Capsule 2.2: The Connection Between Yahoo’s Mission and Core Values

• Excellence• Innovation• Customer Fixation• Teamwork• Community• Fun• What Yahoo doesn’t value


2.3 Setting Objectives (Part 2)2.3.1 Nature of Objectives

The managerial purpose of setting objectives is to convert the strategic vision into specific performance targets—results and outcomes the company’s management wants to achieve. Objectives represent a managerial commitment to achieving particular results and outcomes.


2.3.2 What Kinds of Objectives to Set: The Need for a Balanced Scorecard

Two very distinct types of performance yardsticks are required: those relating to financial performance and those relating to strategic performance—outcomes that indicate a company is strengthening its marketing standing, competitive vitality, and future business prospects.


2.3 Setting Objectives (Part 2)

The Case for a Balanced Scorecard: Improved Strategic Performance Fosters Better Financial Performance

The best and most reliable leading indicators of a company’s future financial performance and business prospects are strategic outcomes that indicate whether the company’s competitiveness and market position are stronger or weaker.


2.3.2 What Kinds of Objectives to Set

• The Case for a Balanced Scorecard: Improved Strategic Performance Fosters Better Financial Performance

• Both Short-Term and Long-Term Objectives Are Needed

• Strategic Intent: Relentless Pursuit of an Ambitious Strategic Objective

• The Need for Objectives at All Organizational Levels• Objective Setting Needs to Be Top-Down Rather

than Bottom-Up


2.4 Crafting a Strategy (Phase 3)

The task of crafting a strategy entails answering a series of hows:

• how to grow the business• how to please customers • how to outcompete rivals • how to respond to changing market conditions• how to manage each functional piece of the business• how to achieve strategic, financial and operational

objectives


2.4.3 A Company’s Strategy-Making Hierarchy

The strategy-making task involves four distinct types or levels of strategy:

1. Corporate strategy2. Business strategy3. Functional-area strategies4. Operating strategies


2.4.5 A Strategic Vision + Objectives + Strategy = A Strategic Plan

Developing a strategic vision and mission, setting objectives, and crafting a strategy are basic direction-setting tasks.


2.7 Corporate Governance: The Role of the Board of Directors

Although senior managers have lead responsibility for crafting and executing a company’s strategy, it is the duty of the board of directors to exercise strong oversight and see that the five tasks of strategic management are done in a manner that benefits shareholders (in the case of investor-owned enterprises) or stakeholders (in the case of not‑for-profit organizations).



Figure 3.1


Figure 3.2


3.4 What are the Industry’s Dominant Economic Features?

An industry’s dominant economic features are defined by such factors as market size and growth rate, the number and sizes of buyers and sellers, the geographic boundaries of the market, the degree to which sellers’ products are differentiated, the pace of product innovation, market supply/demand conditions, the pace of technological change, the extent of vertical integration, and the extent to which costs are affected by scale economies and learning/ experience curve effects


3.5 What Kinds of Competitive Forces are Industry Members Facing?

Competitive pressures operating in five areas of the overall market:

1. Rival sellers2. New entrants3. Substitute products4. Supplier bargaining power5. Buyer bargaining power


3.5.1 Competitive Pressures Associated with Rival Sellers

The strongest of the five competitive forces is nearly always the market manoeuvring and jockeying for buyer patronage that goes on among rival sellers of a product or service.The challenge is to craft a competitive strategy that, at the very least, allows a company to hold its own against rivals and that, ideally, produces a competitive edge over rivals.


3.5.2 Competitive Pressures Associated with the Threat of New Entrants

Several factors determine whether the threat of new companies entering the marketplace poses significant competitive pressure. One factor relates to the size of the pool of likely entry candidates and the resources at their command. A second factor concerns whether the likely entry candidates face high or low entry barriers.


Illustration Capsule 3.1: Can Mango Give Low-Cost Rivals the Pip in Turbulent Times and

Prevent Overlapping?

An entrant like Mango Airlines (SAA’s low-cost airline) can have second thoughts when financially strong incumbent companies send clear signals that they will give newcomers a hard time and when there is an overlap with its own parent company.



Three additional aspects need to be mentioned specifically in the South African context, namely:

• the role of competition policy, • the pressure to privatize previously state owned

businesses• the onslaught on traditional protection afforded

by patent rightsThese may remove barriers to entry that previously existed.



In evaluating whether the threat of additional entry is strong or weak, company managers must look at

1. how formidable the entry barriers are for each type of potential

2. how attractive the growth and profit prospects are for new entrants


3.5.3 Competitive Pressures from the Sellers of Substitute Products

Companies in one industry come under competitive pressure from the actions of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes.


3.5.4 Competitive Pressures Stemming from Supplier Bargaining Power and Supplier-Seller

Collaboration

Whether supplier–seller relationships represent a weak or strong competitive force depends on

1. whether the major suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favour

2. the nature and extent of supplier–seller collaboration in the industry


3.6 What Factors are Driving Industry Change and What Impacts Will They Have?

All industries are characterized by trends and new developments that gradually or speedily produce changes important enough to require a strategic response from participating companies. A popular hypothesis states that industries go through a life cycle of take-off, rapid growth, early maturity and slowing growth, market saturation, and stagnation or decline.


3.6.1 The Concept of Driving Forces

The most powerful of the change agents are called driving forces because they have the biggest influences in reshaping the industry landscape and altering competitive conditions.


3.6.2 Identifying an Industry’s Driving Forces | Table 3.2


Illustration Capsule 3.2: SABmillers’ BEE Deal Shuns the Fashionable Recipient

South African issues that are particular strategic from a government policy-intervention point are broad-based Black Economic Empowerment (BEE) and Employment Equity (EE) or affirmative action. The BEE legislation defines this intervention as the economic empowerment of all black people including women, workers, youth, people with disabilities, and people living in rural areas, through diverse but integrated socio-economic strategies.


3.9 What are the Key Factors for Future Competitive Success?

An industry’s key success factors (KSFs) are those competitive factors that most affect industry members’ ability to prosper in the marketplace.


3.9 What are the Key Factors for Future Competitive Success?

In addition, the answers to three questions help identify an industry’s key success factors:

1. On what basis do buyers of the industry’s product choose between the competing brands of sellers?

2. Given the nature of competitive rivalry and the competitive forces prevailing in the marketplace, what resources and competitive capabilities does a company need?

3. What shortcomings are almost certain to put a company at a significant competitive disadvantage?


3.10 Does the Outlook for the Industry Present the Company with an Attractive Opportunity?

Factors needed to decide whether the outlook for the industry presents the company with a sufficiently attractive business opportunity:

• Industry growth potential• Competitive forces• Industry profitability• Degree of risk and uncertainty



4.1 Introduction

The analytical spotlight will focus on the following five questions:

1. How well is the company’s present strategy working?2. What are the company’s resource strengths and

weaknesses, and its external opportunities and threats?

3. Are the company’s prices and costs competitive?4. Is the company competitively stronger or weaker than

key rivals?5. What strategic issues and problems merit front-burner

managerial attention?


4.2 How Well is the Company’s Present Strategy Working?

While there is merit in evaluating the strategy from a qualitative standpoint the best quantitative evidence of how well a company’s strategy is working comes from its results. The two best empirical indicators are:

1. whether the company is achieving its stated financial and strategic objectives, and

2. whether the company is an above-average industry performer.


4.2 How Well is the Company’s Present Strategy Working?

The stronger a company’s current overall performance, the less likely the need for radical changes in strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned. Weak performance is almost always a sign of weak strategy, weak execution, or both.


4.3 What are the Company’s Resource Strengths and Weaknesses and its External

Opportunities and Threats?

Appraising a company’s resource strengths and weaknesses and its external opportunities and threats, commonly known as SWOT analysis, provides a good overview of whether the company’s overall situation is fundamentally healthy or unhealthy.


4.3.1 Identifying Company Resource Strengths and Competitive Capabilities

A resource strength is something a company is good at doing or an attribute that enhances its competitiveness in the marketplace.Resource strengths can take any of several forms:

• A skill, specialized expertise, or competitively important capability

• Valuable physical assets • Valuable human assets and intellectual capital


4.3.1 Identifying Company Resource Strengths and Competitive Capabilities (cont)

Resource strengths can take any of several forms:

• Valuable organizational assets• Valuable intangible assets• An achievement or attribute that puts the

company in a position of market advantage• Competitively valuable alliances or co-

operative ventures


4.3.2 Assessing a Company’s Competencies and Capabilities - What Activities Does it

Perform Well?

One of the most important aspects of appraising a company’s resource strengths has to do with its competence level in performing key pieces of its business. A company’s proficiency in conducting different facets of its operations can range from merely a competence in performing an activity to a core competence to a distinctive competence.


4.3.3 What is the Competitive Power of a Resource Strength?

The competitive power of a resource strength is measured by how many of the following four tests it can pass:

1. Is the resource strength hard to copy?2. Is the resource strength durable - does it have

staying power?3. Is the resource really competitively superior?4. Can the resource strength be trumped by the

different resource strengths and competitive capabilities of rivals?


4.3.4 Identifying Company Resource Weaknesses and Competitive Deficiencies

A company’s resource weaknesses can relate to

1. inferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business

2. deficiencies in competitively important physical, organizational, or intangible assets

3. missing or competitively inferior capabilities in key areas


4.3.5 Identifying a Company’s Market Opportunities

Market opportunity is a big factor in shaping a company’s strategy. Indeed, managers cannot properly tailor strategy to the company’s situation without first identifying its market opportunities and appraising the growth and profit potential each one holds.


4.3.6 Identifying the External Threats to a Company’s Future Profitability

Often, certain factors in a company’s external environment pose threats to its profitability and competitive well-being. It is management’s job to identify the threats to the company’s future prospects and to evaluate what strategic actions can be taken to neutralize or lessen their impact.


4.3.7 What do the SWOT Listings Reveal?

SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are drawing conclusions from the SWOT listings about the company’s overall situation, and translating these conclusions into strategic actions the better to match the company’s strategy to its resource strengths and market opportunities, to correct the important weaknesses, and to defend against external threats.


4.3.7 What do the SWOT Listings Reveal?

Just what story the SWOT listings tell about the company’s overall situation is often revealed in the answers to the following sets of questions:

• Does the company have an attractive set of resource strengths?• How serious are the company’s weaknesses and competitive deficiencies?• Do the company’s resource strengths and competitive outweigh its

resource weaknesses and competitive deficiencies?• Does the company have attractive market opportunities that are well suited

to its resource strengths and competitive capabilities?• Are the threats alarming, or are they something the company appears able

to deal with and defend against?• All things considered, how strong is the company’s overall situation?


4.4. Are the Company’s Prices and Costs Competitive?

Company managers are often stunned when a competitor cuts its price to “unbelievably low” levels or when a new market entrant comes on strong with a very low price. One of the most telling signs of whether a company’s business position is strong or precarious is whether its prices and costs are competitive with industry rivals.


4.4.1 The Concept of a Company Value Chain

Every company’s business consists of a collection of activities undertaken in the course of designing, producing, marketing, delivering, and supporting its product or service. All of the various activities that a company performs internally combine to form a value chain.


Figure 4.3


4.4.2 A Company’s Primary and Support Activities Identify the Major Components of its

Cost Structure

Segregating a company’s operations into different types of primary and support activities is the first step in understanding its cost structure. Each activity in the value chain gives rise to costs and ties up assets. The combined costs of all the various activities in a company’s value chain define the company’s internal cost structure.



5.2 The Five Generic Competitive Strategies

The most important differences among competitive strategies boil down to:

1. whether a company’s market target is broad or narrow, and

2. whether the company is pursuing a competitive advantage linked to low costs or product differentiation.


5.2 The Five Generic Competitive Strategies

1. A low-cost provider strategy2. A broad differentiation strategy3. A best-cost provider strategy4. A focused (or market niche) strategy

based on low costs5. A focused (or market niche) strategy

based on differentiation


Figure 5.1


5.3 Low-Cost Provider Strategies

Striving to be the industry’s overall low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers.


5.3.3 The Keys to Success in Achieving Low-Cost Leadership

To succeed with a low-cost-provider strategy, company managers have to scrutinize each cost-creating activity and determine what factors cause costs to be high or low. Then they have to use this knowledge to keep the unit costs of each activity low, exhaustively pursuing cost efficiencies throughout the value chain.


5.3.4 When a Low-Cost Provider Strategy Works Best

1. Price competition among rival sellers is especially vigorous

2. The products of rival sellers are essentially identical and supplies are readily available from any of several eager sellers

3. There are few ways to achieve product differentiation that have value to buyers

4. Most buyers use the product in the same ways


5.3.5 The Pitfalls of a Low-Cost Provider Strategy

A low-cost/low-price advantage results in superior profitability only if

1. prices are cut by less than the size of the cost advantage or

2. the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold.


5.4 Broad Differentiation Strategies

Successful differentiation allows a company to:

• Command a premium price for its product• Increase unit sales (because additional buyers are

won over by the differentiating features • Gain buyer loyalty to its brand


5.4.2 Where Along the Value Chain to Create the Differentiating Attributes

• Supply chain activities• Product R&D activities• Production R&D and technology-related

activities• Manufacturing activities• Distribution and shipping activities• Marketing, sales, and customer service

activities


5.4.3 The Four Best Routes to Competitive Advantage via a Broad Differentiation Strategy

• Incorporate product attributes and user features that lower the buyer’s overall costs of using the company’s product

• Incorporate features that raise product performance• Incorporate features that enhance buyer satisfaction

in non-economic or intangible ways• Deliver value to customers by differentiating on the

basis of competencies and competitive capabilities that rivals don’t have or cannot afford to match


5.4.5 When a Differentiation Strategy Works Best

• Buyer needs and uses of the product are diverse• There are many ways to differentiate the product or

service and many buyers perceive these differences as having value

• Few rival companies are following a similar differentiation approach

• Technological change is fast-paced and competition revolves around rapidly evolving product features


5.4.6 The Pitfalls of a Differentiation Strategy

• A differentiation strategy is always doomed when competitors are able to quickly copy most or all of the appealing product attributes a company comes up with.

• A second pitfall is that the company’s differentiation strategy produces a 50–50 market reception because buyers see little value in the unique attributes of a company’s product.

• The third big pitfall of a differentiation strategy is overspending on efforts to differentiate the company’s product offering, thus eroding profitability.


5.5 Best-Cost Provider Strategies

Best-cost provider strategies aim at giving customers more value for the money. The objective is to deliver superior value to buyers by satisfying their expectations on key quality/features/performance/service attributes and beating their expectations on price (given what rivals are charging for much the same attributes).


5.5.1 When a Best-Cost Provider Strategy Works Best

A best-cost provider strategy works best in markets where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value.This is because a best-cost provider can position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.


5.6 Focused (or Market Niche) Strategies

What sets focused strategies apart from low-cost leadership or broad differentiation strategies is concentrated attention on a narrow piece of the total market. The target segment, or niche, can be defined by geographic uniqueness, by specialized requirements in using the product, or by special product attributes that appeal only to niche members.


5.6.1 A Focused Low-Cost Strategy

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than rival competitors.This strategy has considerable attraction when a company can lower costs significantly by limiting its customer base to a well-defined buyer segment.


5.6.2 A Focused Differentiation Strategy

A focused strategy keyed to differentiation aims at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments).


5.6.3 When a Focused Low-Cost or Focused Differentiation Strategy is Attractive

• The target market niche is big enough to be profitable and offers good growth potential

• Industry leaders do not see that having a presence in the niche is crucial to their own success

• It is costly or difficult for multi-segment competitors to put capabilities in place to meet the specialized needs of buyers

• The industry has many different niches and segments• Few, if any, other rivals are attempting to specialize in the

same target segment• The focuser has a reservoir of customer goodwill and

loyalty


5.6.4 The Risks of a Focused Low-Cost or Focused Differentiation Strategy

1. The chance that competitors will find effective ways to match the focused company’s capabilities in serving the target niche

2. Employing a focus strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers.


5.7 The Contrasting Features of the Five Generic Competitive Strategies: A Summary

Deciding which generic competitive strategy should serve as the framework for hanging the rest of the company’s strategy is not a trivial matter. Each of the five generic competitive strategies positions the company differently in its market and competitive environment.



6.2 Strategies for Competing in Emerging Industries

An emerging industry is one in the formative stage. Many companies striving to establish a strong foothold in an emerging industry are startup enterprises busily engaged in perfecting technology, gearing up operations, and trying to broaden distribution and gain buyer acceptance. The business models and strategies of companies in an emerging industry are unproved.


6.2.1 The Unique Characteristics of an Emerging Industry (continued)

• Entry barriers tend to be relatively low, even for entrepreneurial start-up companies

• Strong experience/learning curve effects may be present, allowing significant price reductions as volume builds and costs fall

• Sometimes companies have trouble securing ample supplies of raw materials and components

• Undercapitalized companies, finding themselves short of funds to support needed

• R&D and get through several lean years until the product catches on


6.2.2 Strategy Options for Emerging Industries

1. Push to perfect the technology, improve product quality, and develop additional attractive performance features

2. Consider merging with or acquiring another company to gain added expertise and pool resource strengths

3. Try to capture any first-mover advantages by adopting technology quickly

4. Acquire or form alliances with companies that have related or complementary technological expertise

5. Pursue new customer groups, new user applications, and entry into new geographical areas


6.2.2 Strategy Options for Emerging Industries (continued)

6. Make it easy and cheap for first-time buyers to try the industry’s first-generation product

7. shift the advertising emphasis from creating product awareness to increasing frequency of use and building brand loyalty

8. Use price cuts to attract the next layer of price-sensitive buyers into the market.

9. Form strategic alliances with key suppliers


6.3 Strategies for Competing in Rapidly Growing Markets

Companies that have the good fortune to be in an industry growing at double-digit rates have a golden opportunity to achieve double-digit revenues and profit growth.


6.3 Strategies for Competing in Rapidly Growing Markets (continued)

• Driving down costs per unit so as to enable price reductions that attract droves of new customers

• Pursuing rapid product innovation, both to set a company’s product offering apart from rivals and to incorporate attributes that appeal to growing numbers of customers

• Gaining access to additional distribution channels and sales outlets

• Expanding the company’s geographic coverage• Expanding the product line to add models/styles that

appeal to a wider range of buyers


6.4 Strategies for Competing in Maturing Industries

A maturing industry is one that is moving from rapid growth to significantly slower growth. An industry is said to be mature when nearly all potential buyers are already users of the industry’s products and growth in market demand closely parallels that of the population and the economy as a whole.


6.10.3 Other Strategic Approaches for Runner-Up Companies

• Vacant-Niche Strategy• Specialist Strategy• Superior Product Strategy• Distinctive-Image Strategy• Content Follower Strategy


6.11 Strategies for Weak and Crisis-Ridden Business

A firm in an also-ran or declining competitive position has four basic strategic options. If it can come up with the financial resources, it can launch a turnaround strategy keyed either to “low-cost” or “new” differentiation themes, pouring enough money and talent into the effort to move up a notch or two in the industry rankings and become a respectable market contender within five years or so.


6.11.1 Turnaround Strategies for Businesses in Crisis

• Selling Off Assets• Strategy Revision • Boosting Revenues• Cutting Costs• Combination Efforts


Illustration Capsule 6.4

Transnet’s Four-Point Growth Strategy1. Re-engineer integration, productivity and efficiency2. Ensure capital optimization and effective financial

management3. Developing our risk management systems, including

safety and governance4. Extending our human capital execution• Rail• Ports• Pipelines



7.2 Enterprise Performance Management Framework

Enterprise performance management integrates a range of key management processes to ensure its relevance and required impact for sustainable performance: a vision and strategy as input and context for all performance initiatives; balanced performance measures to map, balance and provide a measurement framework; people management process as a means for implementation; and performance management as the means for individual and team accountability and growth.


Figure 7.1


7.2.1 The Core Elements for Enterprise Performance Management

• Vision and strategy• Balanced performance measures• People management


Figure 7.2


7.4 Balanced Performance Measures: The Balanced Scorecard (continued)

For the purposes of enterprise performance management the following elements of the Balanced Scorecard will be highlighted:

• The (four) perspectives• Objectives, measures, targets and initiatives• The strategy map• Cause-and-effect relationships• Continuous improvement.


7.4.1 The Four Perspectives

• Financial perspective—If we succeed, how will we look to our stakeholders?

• Customer perspective—To achieve our vision, how should our customers perceive the organization?

• Internal perspective—To satisfy our customers, what management processes must we excel at?

• People/Innovation perspective—To achieve our vision, what culture and people will we need?


7.4.2 Objectives, Measures, Targets and Initiatives

Each of the four perspectives of the Balanced Scorecard is interpreted using the following components:

• Objectives• Measures • Targets• Initiatives


7.4.3 The Strategy Map

To test whether the organization’s vision and strategy will lead to success, a strategy map,indicating the ways in which the organization intends be successful, can be designed.A strategy map approach to the Balanced Scorecard clarifies the organization’s strategy hypothesis and a generic architecture for describing a strategy.


Figure 7.3


7.4.4 Cause-and-Effect Relationships

The organization’s strategy is based on assumptions of cause-and-effect relationships and can be found throughout the four perspectives of the Balanced Scorecard.Every Balanced Scorecard measurement should be part of a cause-and-effect relationship that communicates the meaning of the business’s strategy.


7.4.5 Value of the Balanced Scorecard and Strategy Map

1. map strategy on corporate and SBU levels2. integrate strategy company-wide3. align strategy with performance and ensure

consistent benchmarks and good reporting4. ensure line-of-sight5. communicate the strategic objectives6. focus everybody on the value propositions of the

company7. confirm corrective action, when needed and

apply the same terminology, consistently


7.4.6 Mapping the Strategy for Success

It is critical that the scorecard fulfils the following functions:

• It must reflect and drive the unique strategy of that organization.

• It must be used to communicate strategic objectives and implement these in the organization.

• It must reinforce a continuous improvement mindset within the whole organization.

• It must provide a balanced perspective and not only focus on financial objectives and measures.


Figure 7.4


7.5 People Management

Since people are at the core of business, the implementation of an enterprise performance management process requires good people management practices. People management is the most essential element of organizational capital, because it constitutes the strategic lever that provides the greatest opportunity for improved performance.


Figure 7.5


7.5.1 Recruitment and Selection

“The goal of recruitment and selection is to ensure that the organization is hiring the best capabilities in the market that are relevant to its business needs and strategies.”

The organization needs skilled employees to achieve its objectives. Without skilled employees, it is unlikely that the organization will be able to satisfy its customers’ needs.



9.2 What is Leadership?

Leadership is an extremely multifaceted concept and therefore there are numerous opinions regarding the definition of leadership.According to definitions, the achievement of strategic alignment requires that leaders influence people in such a way that their efforts contribute to the achievement of their role objectives, the objectives of their business units/departments and ultimately, the objectives of the organization as a whole.


9.3 Components of Leadership

• Personal• Interpersonal• Managerial• Organizational


Figure 9.1


9.3.1 Personal Level

At a personal level, leadership is determined by an individual’s trustworthiness. This is dependent on:

• Leadership character• Leadership competence


9.3.2 Interpersonal Level

Leadership at this level is determined by an individual’s ability to:

• Build mutual trust and cooperation• Interpret the meaning of events• Obtain necessary resources and

support


9.3.3 Managerial Level

At managerial level, there are a number of determinants of effective leadership. These determinants entail the ability to:

• Develop and empower people• Build task commitment and optimism• Organize and coordinate activities


9.3.4 Organizational Level

Effective leadership is most widely illustrated at an organizational level, where the individual has to portray the ability to:

• Create alignment of objectives and strategies• Strengthen collective identity• Encourage and facilitate collective learning• Promote social justice and morality


Figure 9.2


9.5 Four Leadership Styles

1. “Telling” is associated with low maturity and involves the provision of clear, specific direction and supervision

2. “Selling” is associated with low to moderate maturity and involves the provision of direction

3. “Participating” is associated with moderate to high maturity

4. “Delegating” is associated with high maturity


9.6 Becoming a More Effective Leader - Leadership Behaviour and Skills

The following specific types of leadership concerns or objectives can be explored in more detail:

• Task-oriented• Relation-oriented• Change-oriented


9.16.1 Forming

Typical features of a group during the forming stage:• General feeling of insecurity• Reluctance to participate• True feelings are hidden• Attempts are made to conceal personal shortcomings• Members make subjective evaluations of each other

The role of the team leader during the forming stage:• Spelling out expectations• Providing sufficient structure• Assuring group members that participation is appreciated• Rewarding good contributions• Clearly defining the process that should be followed


9.16.2 Storming

Typical features of a group during the storming stage are:• Alliance, group formation and polarization• Sharp fluctuations in relationships• Respect for certain members, but bitterness towards others• An awareness of one’s own shortcomings, but a focus on symptoms

rather than the real problem• Ulterior motives

The role of the team leader during the storming stage is to:• Be discreet when compiling subgroups in order to prevent alliances, the

forming of cliques and polarization• Focus on differences, but prevent arguments• Create opportunities for groups to compete as a group in order to

promote teambuilding


9.16.3 Norming

Typical features of a group during the norming stage are:• Establishment of values and norms• Openness within the group• Group cohesion• Willingness to experiment• Sensitivity to the opinions and feelings of others• Emphasis on individual rather than group performance

The role of the team leader during the norming stage is to:• Provide a common vision• Use group inputs to determine what should be done to become more

effective• Determine what can be done to support other groups in the organization• Be sensitive to individuals’ needs


9.16.4 Performing

Typical features of a group during the performing stage are:• The group has a clear vision• Decisions are of a high standard• A high degree of synergy is attained• The best methods, procedures and techniques are used• Outside help is appreciated• Action is taken to integrate the team’s work with that of other groups

The role of the team leader during the performing stage includes:• Guiding the group to redefine its vision at a higher level• Focusing on proactive action• Allowing unstructured discussions• Creating challenging opportunities• Assigning specific group members to facilitate aspects of work sessions



10.2 The King III Report

King III (2009)4 and a new Companies Act, the Public Finance Act and the Johannesburg Securities Exchange (JSE) adopting King principles in their listing requirements are all indicators that South Africa is moving in the right direction. The King Report II (2002) was essentially a suggested code of conduct developed with the Institute of Directors (IoD), while the United States Sarbanes–Oxley Act (2002) is legislation.


10.2.1 Governance Framework - “Apply or Explain”

King III follows an “apply or explain” approach. Where entities have applied the Code and best-practice recommendation in the Report, a positive statement to this effect should be made to stakeholders. In situations where the boards of directors (the “board”) or those charged with governance decide not to apply a specific principle and/or recommendation, this should be explained fully to the entity’s stakeholders.


10.2.2 Integrated Reporting

King II had a chapter dedicated to integrated sustainability reporting. The concept of reporting on economic, social and environment performance (the so-called “triple bottom line”) is thus not new. However, there is growing global and local attention to sustainability issues. King III requires the statutory financial information and sustainability information to be integrated in the “integrated report”.


10.2.3 Combined Assurance

Management, internal assurance providers such as internal audit and external assurance providers (such as external audit) are role-players in providing assurance to the board over risks in an enterprise. King III tasks the audit committee with the responsibility of monitoring the appropriateness of the company’s combined assurance model and ensuring that significant risks facing the company are adequately addressed.


10.3 New Concepts Introduced in King III

• IT Governance• Shareholders Approval of Remuneration

Policies• Directors’ Performance Evaluation• Business Rescue• Alternative Dispute Resolution (ADR)• Fundamental and Affected Transactions


10.4 Public Companies

There are a number of forms to a business such as sole proprietor, partnership and private and public companies. However, what distinguished public companies is that they can raise money by issuing shares to investors. Shareholders are the owners of public corporation.Benefits are:

• Individual can invest in business and increase their wealth over the long term

• Business with growth potential can obtain capital needed to expand


10.4.1 Separation of Ownership and Control

Corporate ownership and control are divided between two parties - stakeholders and management.This divergence of shareholder objectives and managerial incentives gives rise to agency problems.Attempted solutions to this problem tend to come in two categories, incentives and monitoring.


10.4.1 Separation of Ownership and Control (continued)

The separation of ownership and control that exists in the corporate world, in one way or another leads to a conflict of interests. A board of directors owes a fiduciary duty of loyalty to the corporation and its shareholders. Courts have characterized the duty of loyalty as the rule that requires an undivided and unselfish loyalty to the corporation demands and that there should be no conflict between duty and self-interest.


10.5 Corporate Governance10.5.1 Defining Governance

Corporate governance is key to any business that wants to be a force in the local and global business arenas. The word governance is derived from Latin “gubernare”, and means to steer. Public entities and non-profit-making organizations can also follow governance tests to see if good governance principles are adhered to.


10.5.1 Defining Corporate Governance (continued)

A successful business needs good management. But in order to satisfy and be effective in its relationships with shareholders, directors, management and other stakeholders, corporate and business governance need be the goal of the organization.


10.5.2 Governance TestTable 10.3

Public entities and non-profit-making organizations can follow the following governance tests to see if good governance principles apply.


10.6 The King Reports on Corporate Governance for South Africa

The King III (2009) is a sequel to the King I (1994) and King II (2002) These reports on corporate governance are issued by the King Committee, headed by Mervin King, a corporate lawyer and former High Court judge. The decision to proceed with King III was based on the fact that corporate governance is a dynamic process. King III was also necessitated by the anticipated new Companies Act of South Africa and changes in international governance trends, since the release of the second King Report on Corporate Governance. These reports are initiatives of the Institute of Directors (IoD) in South Africa and the JSE.


10.6 The King Reports on Corporate Governance for South Africa (continued)

King II identifies the following as the seven primary characteristics of good governance (King II, 2002: II–12):

1. Discipline2. Transparency3. Independence4. Accountability5. Responsibility6. Fairness7. Social responsibility


10.7 Sustainability and Ethics

Ethical standards or the study of unethical approaches in business is the cornerstone of corporate governance and underlies sustainability. Stakeholders’ expectation and demands have never been higher. An ethical climate enables business to develop a strong link to best practice which is key to a sustainable strategy.


10.7.1 Link to Strategy

• Develop customer relationships that retain the loyalty of existing customers and enable new customer segments and market areas to be served efficiently and effectively.

• Introduce innovative products and services desired by targeted customer segments.

• Produce customized, high-quality products and services at low cost and with short lead times.

• Mobilize employee skills and motivation, for continuous improvements in process capabilities, quality, and response times.


10.8 Directors, Boards and Committees

The role of the board and the directors is to govern, to make decisions and to delegate decision-making authority to board committees so as to obtain detailed information.Duties are delegated but never the authority and responsibility. The usual committees are—audit (getting the right auditors), remuneration (getting the right compensation mix), nomination (getting the right non-executive and executive directors).


10.8.1 Board Committees

Board committees should only comprise members of the board. External parties may be present at committees meetings by invitation. The respective committees’ chairmen should give at least an oral summary of their committee’s deliberations at the board meeting following the committee meeting.


10.8.2 Effective Board Leadership

The responsibilities of the Board of Directors are:

• To hire, evaluate and even fire top management, with the CEO position being the most crucial

• To vote on major financial decisions• To vote on major operating proposals• To offer expert advice to management


10.8.3 Role of the Chairman and the Non-Executive Director

The chairperson of the board plays major roles in different companies. In major public companies where the roles of the chairman and CEO are separated, studies have shown that the chairman has a very important and growing set of responsibilities. In other large companies the chairperson’s responsibilities are shared amongst a number of directors.


10.8.4 Board Failure

• Micromanaging an organization• An ineffective nominating committee• Size of the board• Non-functioning committee structure• No strategic plan• No orientation plan• No rotation plan


10.9 Risk Governance10.9.1 Risk Management

Risk management is the identification and evaluation of actual and potential risk areas pertaining to a business and the subsequent and continuous development of programmes that are aimed at reducing any loss before it occurs, either by controls and assurance measures or by financing and insurance measures.

Documents

1.2 Defining strategy