3.3.1 The role of the mission statement in the strategic ...€¦ · Web viewA mission statement is also called a purpose statement, because it also deals with the role of stakeholders

TOPIC 1 – STUDY UNIT 1.1 – AN OVERVIEW OF STRATEGIC MANAGEMENT

1.1 INTRODUCTION (READ)Managers should realize they have an influence they can influence the competitive landscape. They need to start with a point of view of how the world can be, not how to improve what is available but rather how to alter it drastically. There are 4 transformations that influenced and continue to influence the business models and work of strategists:

1. Expansion of available strategic space – Companies can decide and change their business portfolios. The forces of change have provided business with new strategies and new opportunities.

2. Business will be global – All adds to the complexity of strategic management and planning.3. Speed will be critical – A critical element due to the nature of competitive changes. 4. Innovation as a new source of competitive advantage – usually tied to product and process innovation but has shifted

to innovation in business models.

Managers operate in changing environments, taking resources from the environment and transforming these resources into final products or services. The concept of systems theory describes the organisation is an open system that operates in a specific environment, the whole is greater than the sum of its parts.

Management consists of four functions: planning, organising, leading and controlling. Different managers work at different levels and meet different requirements. Management levels consist of top management, middle management and lower/first-line management. Top management is represented by the CEO andthe board of directors: together, they are responsible for the whole organisation.The middle management level represents the functional managers, such as the HR manager, the marketing manager and the financial manager. They are only responsible for the specific department or functional area under them. The lower/first-line managers are the supervisors who have more technical skills and who are more actively involved in the day-to-day business operation.

2.2 DEFINING STRATEGIC MANAGEMENT (1.2.1)

Management involves planning, leading, organizing and controlling. Strategy is an effort or deliberate action that an organisation implements to outperform its rivals. It is an organisations theory about how to gain competitive advantage.

Strategic management - the process whereby all the organisational functions and resources are integrated and coordinated to implement formulated strategies which are aligned with the environment, in order to achieve the long-term objectives of the organisation and therefore gain a competitive advantage through adding value for the stakeholders.

Competitive advantage is the edge that an organisation has over others. To achieve this, an organisation needs to meet the needs of stakeholders, i.e. adding value. The leap-frog effect is when competitors emulate your strategy and retaliate in a more competitive way.

H.Crassas – 2014 – MNG3701 Page 1

The three main skills for sound management :1. conceptual skills - refer to the mental ability to

view the organisation as a whole 2. interpersonal skills - refer to the ability to work

with people3. technical skills - refer to the ability to use the

knowledge or techniques of a specific discipline to attain objectives

Corporate Strategy

Business Strategy

Functional Strategy

2.2.1 STRATEGY: DIFFERENT VIEWPOINTS (1.2.2)

Montgomery states that strategy is to just a plan that positions a company in its external landscape but rather strategy guides the development of the company’s identity over time, i.e. a strategy as a set solution, with the missing element, namely strategy as a dynamic process.

Traditional View Emerging ViewView Strategy as fit with resource Strategy as stretch and leverageIndustry Space Strategy as positioning in existing

industry spaceStrategy as creating new industry space

Responsibility Strategy as top management activity

Strategy as total and continuous organisational process

Exercise Strategy as an analytical exercise Strategy as an analytical and organisational exercise

Direction Strategy as extrapolating from the past.

Strategy as creating the future.

2.2.2 THE PEOPLE INVOLVED IN STRATEGIC MANAGEMENT (1.2.3; 1.2.4)Environmental analysis is the responsibility of every manager. A strategy formulation is mainly the responsibility of top management. Strategic implementation can only be achieved with communication from all the parties involvedEmployees are the catalysts and drivers of strategy implementation. The 3 stages of the strategic management process are:

1. Environmental analysis – responsibility of every manager at every level but driven by top management but by means of inputs from all levels. Functional and supervisory managers work as specialists so their environmental scanning is important.

2. Strategy formulation - top management responsibility to formulate strategy from results of environmental analysis with input from all levels management.

3. Strategy implementation – most challenging stage when formulated strategy needs to come to life with the buy-in from employees and other stakeholders.

Strategic planning champions (SPC) refers to strategy practitioners who “introduce, promote and guide the strategies planning process in an organisation”. An SPC is thus a skillful strategic thinker and analytical planner and should also be:

Social craftsperson – The ability to bring different expectations from different the different groups together. Artful interpreter – Who has enough understanding of the local norms, routines and positions of other role players to

be able to adjust the strategic planning process to suit local rules. Known stranger – Who has the ability to maintain a balance between closeness and distance to other players in the

strategic planning process.

Strategic management involves both qualitative and quantitative decisions: Quantitative decisions are built on proper strategic analysis and choice. Strategic options and plans are developed after

a thorough environmental analysis. Qualitative decisions are based on a ‘gut feeling’ or intuition.

2.2.3 LEVELS OF STRATEGYStrategic decisions are made at three levels. This module focuses on business level strategy, which is also referred to as competitive strategy. Carpenter & Sanders (2009) state that:


Corporate strategy - guides a firm’s entry and exit from different businesses, determines how a parent company adds value to and manages its portfolio of businesses, and creates value through diversification.

Business-level strategy - more concerned about developing and sustaining a competitive advantage for the goods and services that the company produces. It is the strategy used to compete against other companies in a particular industry.

Functional strategy - decisions involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.

3. CONTEMPORARY APPLICATIONS OF STRATEGIC MANAGEMENT (1.3.5)

Strategic management not only applies to profit-oriented organisations, but is also relevant to the survival of non-profit organisations and NGOs. These include governments, schools, sports clubs and churches. As profits are not their main goal, they tend to focus on expenses and income. Many not-for-profit organisations have more stakeholders than big corporations. Argument is stronger to implement strategic management as they have more time, do not operate in a cut-throat and fast moving environment.

The trend of doing business globally has increased over the past few years, largely due to globalization and integrated economies. This can be seen as an opportunity and a threat but the basics of strategic management remain the same, but with a few more options available to managers.

Strategic issues and concepts leading us into the future (1.6)Ethics and strategyCompanies cannot ignore the link between ethics and strategy after Enron and WorldCom scandals. The strategy process represents an ‘appropriate locus’ for ethical reflection within the organisation. Strategy formulations representing ethical reflection on a corporate level

Stakeholder managementStakeholders in a firm are individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and who are therefore its potential beneficiaries or risk bearers.Stakeholders play an important part in the creation of organisational wealth. 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 and usually relationships rather than transactions responsible for organisational wealth.

Voluntary stakeholders - contribute directly to the operations of the organisation, include investors, employees, customers, market partners, etc.

Involuntary stakeholders – Thos affected by things such as pollution and congestions and the focus is on reducing harm and avoiding or creating benefits.

Innovation economy and knowledge managementThere has been a clear shift from industrial economy to innovation economy as rapid sharing of knowledge forces those involved to reinvent and constantly adapt. Companies that will be successful are those that take information and transform it into value-creating knowledge and use it to innovate, i.e. creative thinking and visionary companies succeed, innovate or be damned. Innovation – New products, business processes and organic changes that create wealth or social welfare.

Knowledge managementKnowledge management – in its broadest sense it is seen as a generic process through which organisations generate value from knowledge. There is a difference between knowledge and information. Information is data organized into meaningful patterns and this is transformed into knowledge when read, understood, interpreted and applied to a function.

Tacit knowledge – knowledge that cannot be explained properly. It can only be passed from one person to the next by a long process of apprenticeship.

Explicit knowledge – easy to communicate and easily transferred, resides in formulae, textbooks or technical documents.

Knowledge can lead to competitive advantage but organisations are already flooded with more knowledge that they can handle. Knowledge management solves this by designing processes that oversee the creation, distribution and utilization of knowledge to meet organisational goals.


Innovation managementInnovation management is a field of discipline that deals directly with issues relating to how the innovation process can be managed efficiently. It is essential to create efficient use of knowledge to create better, faster, more cost-effective innovations to stay competitive. Knowledge management and innovation management should not be treated separate.

Knowledge innovationKnowledge innovation is defined as the creation, evolution, exchange and application of new ideas into marketable goods and services, leading to the success of an enterprise, the vitality of a nation’s economy and the advancement of society.Knowledge innovation recognizes 2 key elements:

1. Knowledge, not finance or technology, as one of the core components of innovation and 2. Actions associated with managing the flow and use of knowledge in an innovation process

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

Multiculturalism of South African organisations and knowledge management.Knowledge depends on experience and can be regarded as a process that is personal and subjective. Culture plays an essential role in knowledge sharing and challenge is to utilize the richness of ethnic groups in order to enhance productivity and global competitiveness. Advantages of multiculturalism are the diversity of ideas, influences and cultures which can lead to new and innovative thinking.The knowledge manager acts as a change agent and facilitator for new ideas. Distrust and miscommunication are causes for the breakdown of multicultural knowledge sharing. Trust as an integral part of the knowledge sharing process. The manager showing sensitivity to towards the different languages may encourage understanding.Multiculturalism in the corporate knowledge environment is a reality that needs to be utilized to achieve innovation. A culture of trust, understanding, support and openness needs to be actively encouraged.

Corporate entrepreneurshipIntangibles such as knowledge, innovation and entrepreneurial leadership are assets that help companies gain a competitive advantage. In turbulent rich environments the combination of technological opportunities and demand for new products creates technology push and market pull forces increasing entrepreneurial behavior. Corporate entrepreneurship – is the term used to describe the process in which an individual, or group in alliance with an existing organisation creates a new organisation or instigates renewal or innovation within the organisation.The 3 dimensions of an entrepreneurial orientation in companies are:

1. Innovativeness – the ability to generate ideas that will result in the production of new products, services and technologies.

2. Risk taking – refers to the willingness to make resources available to pursue opportunities that may fail but take precautions to minimize uncertainties. Risks are calculated and manageable.

3. Proactiveness - reflects a managerial orientation of initiative, competitive aggressiveness and boldness in pursuing opportunities.

Change ManagementChange with the times or fail. A primary role of strategists is to deal with change. The common success factors for managing change, called an Organisational Change Framework, include;

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


Strategic leadershipLeadership’s task’s includes the full circle of vision, mission and profile, to strategy, to action, and to results.Hussey (1998) states that technological change has at least two dimensions:The first is the change implemented is for marketing reasons.The second is change in the organisation’s processes, production methods and other technology, all of which alter the way a product is manufacturedHandy 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


Strategy formulation

Strategy implementation

Strategy evaluation and control

The Strategic Planning Process and Components

TOPIC 1 – STUDY UNIT 1.2 – THE STRATEGIC MANAGEMENT PROCESS AND STRATEGIC PLANNING

2. THE STRATEGIC MANAGEMENT PROCESS AND STRATEGIC PLANNING (1.3)

Organisational direction: developed on the basis of ethical behaviour and corporate governance. Direction is provided by the vision and the mission statement of the organisation.

Environmental analysis: evaluating and analyzing the external environment for opportunities and threats, and the internal environment for strengths and weaknesses (SWOT analysis)

Strategy formulation: long-term goals are developed- derived from the mission statement and a generic strategy is chosen and grand strategies developed.

Strategy implementation : strategic drivers are implemented i.e. leadership, culture, reward systems, organisational structures and allocation of resources. Improvement through strategic control and evaluation.


The strategic management process is a continuous activity that focuses on the long-term sustainability of the organisation. It is a sequential set of analyses and choices that enables organisations to achieve above-average returns and add value to its stakeholders. Strategic management consists of three distinct phases/stages:

1. Strategy formulation (thinking stage)2. Strategy implementation (action stage)3. Strategy evaluation and control (evaluation stage)

1. Strategy formulation – this stage is largely the responsibility of top management. It is the first stage in the strategic management process and focuses on the organisations strategic direction. This is also called a thinking stage. It involves the formulation or review of a company’s vision, mission and long-term goalsIt also evaluates the environments in which the organisation operates to identify the strengths, weaknesses, opportunities and threat. The components of the strategic planning process are

Strategic direction Long-term objectives Environmental analysis Generic strategies Grand strategies

2. Strategy implementation - once an organisation has decided on the destination and the strategy it will take, 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: Strategy implementation is the action stage of the strategic management process and requires input and participation from everyone in the organisation. There are different drivers and instruments that can be used to implement the chosen strategy to eventually reach the desired destination/outcome.

3. Strategic control - the last stage in the strategic management process is the evaluation stage. Strategic control is, in effect, a checking stage: Strategic control aims to assess the progress made towards achieving the desired outcome It gives feedback and alerts top management to problems or potential problems before a situation becomes critical

Strategic visualization (1.3.1)Visualization, the graphic representation of strategic content, can improve the quality of the strategic management process

Organisational direction and environmental analysis (1.3.2)Environment analysis consists in evaluating and analyzing (SWOT analysis):

1. The external environment for possible opportunities and threats2. The internal environment for possible strengths and weaknesses, also known as the company profile

Environmental analysis is essential for the next phase, namely strategy formulation.The use of visualization methods are used to structure vast amounts of information, mostly structuring methods:

Quantitative data (sales and marketing data) – structured by means of standard techniques such as bar charts, line charts, pie charts

Qualitative data – structured by means of standard structures (2x2 matrixes) customized by the user or for specific tasks (SWOT matrix)

Porter’s five forces and S-curve diagrams are other task specific visualizations.1. Threat of new competition 2. Threat of substitute products or services 3. Bargaining power of customers (buyers) 4. Bargaining power of suppliers5. Intensity of competitive rivalry

Strategy formulation (strategy planning) Given the strategic direction and environmental analysis, the organisation is in a position to develop long-term goals, derived from the mission statement. The organisation decides what is the best way forward by means of:

Corporate strategies Generic strategies – the organisation can formulate specific strategies known as grand strategies, these can be divided

into three major groups:1. Growth strategies2. Decline strategies3. Corporate combinations

Visualization helps with generic options for the following actions and techniques. Actions - strategic goals, milestones, activities, resource deployment Techniques – knowledge mapping, concept mapping, mind mapping, decision-trees, morphological boxes

Strategy implementationThe drivers (driving forces) available for successfully achieving the goals and mission (to be able to implement the formulated strategies) are as follows:

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

The drivers are supplemented by strategic instruments such as: short-term goals and policies. Strategic control is the last step in the strategic management process and includes tools:

Total-quality management Balanced scorecard


TOPIC 1 – STUDY UNIT 1.3 – BENEFITS AMD RISKS OR STRATEGIC MANAGEMENT

2. BENEFITS OF STRATEGIC MANAGEMENT (1.4)

The benefits of strategic management differ according to what is being influenced by the process:1. Higher profitability – greater improvements in turnover and profits.2. Higher productivity – deliver more and better outputs through better planning and utilization of resources and

materials (inputs), improving productivity3. 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.

4. Empowerment – employees have to take direct control and ownership of certain strategies, so if they are involved they will be more committed.

5. 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.

6. 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.

7. More effective resource management – resources are more carefully managed through controlled resource allocation.8. 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.

3. RISK IN STRATEGIC MANAGEMENT (1.4)

Risks associated with strategic management that should be avoided:1. Time - management is too busy fighting fires that there is no time for strategic management.2. Unrealistic expectations from managers and employees – several ideas and strategic suggestions will not be accepted,

this could lead to demonization among staff.3. The uncertain chain of implementation – there should be a clear chain of implementation down to lower levels, and

clear responsibility areas and outcomes.4. Negative perception of strategic management – requires support from top-level management.5. 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.6. Culture of change – A positive culture increases the acceptance of new ideas and strategies. Flexibility and creativity

are fundamental in change management.7. Success groove – Being overconfident and focused on current success they do not see any future difficulties.

Mind map of Topic 1:


TOPIC 2 – STUDY UNIT 2.1 – SETTING STRATEGIC DIRECTION: VISION, MISSION AND STRATEGIC INTENT

1. INTRODUCTIONBefore an organisation can choose appropriate strategic goals (long-term goals) and strategies, it first needs to determine its strategic direction. Strategic direction is first step in the strategic planning process. A detailed discussion of strategic leadership and strategic direction and involvement by other stakeholders in the process of setting strategic direction follows.

2. STRATEGIC LEADERSHIP

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

Flexibility Strategic thinking Initiation of change

Leadership evolved from the “great leader view of strategic leadership” orientation to the “great group’s view of strategic leadership” orientation in the 21st century

2.1 VIEWPOINTS ON STRATEGIC LEADERSHIPLeadership evolved from the “great leader view of strategic leadership” orientation to the “great group’s view of strategic leadership” orientation in the 21st century

The great leader view of strategic leadershipCEO’s acted as a ‘lone ranger’ and a top-down approach was used to direct the company. Uncertainty was manageable as the environment was predictable and stable. This was acceptable before the new competitive landscape lead to:

Shorter product lifecycles Accelerated rates and types of change The explosion of data The need to convert the data into usable information

Insightful managers realized that is was counterproductive and they did not have all the answers and single individuals no longer had all the insights.

The great groups view of strategic leadershipMany “citizens” will serve the “community” as leaders. 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.The most important “great group” in the organisation is the top management team. Twenty-first century strategic leadership is implemented by means of interactions in which knowledge, insights and responsibilities for achieved outcomes are shared. These “interactions: should occur between top managers and the “citizens” of the organisation.


2.2 COMPONENTS OF STRATEGIC LEADERSHIPThe six components of strategic leadership are:

1. Determining the company’s purpose or vision – Directing the company still rests on the CEO but they must work with top management and provide general guidelines and key steps. Most important of the competencies held.

2. Exploiting and maintaining core competencies – The resources and capabilities that ensure a competitive advantage over rivals. Core competencies rather than markets served are what company’s build base their long-term strategy.

3. Developing human capital – The skill and knowledge of an organisations work force. Strategic leaders view the workforce as a critical resource. Companies should be willing to invest significantly in their human capital in order to derive the full competitive benefit

4. Sustaining an effective organisational culture – The complex set of ideologies and symbols that are shared throughout the organisation. The context within which strategies are formulated and implemented is provided by the culture. Culture reflects what the organisation has learned over time which becomes a competitive advantage.

5. Emphasizing ethical practices - The moral filter that evaluates potential courses of action.

6. Establishing balanced organisational control – Controls are balanced to make sure goals are reached. Strategic leaders create controls that are still flexible and innovate employee behavior.

2.3 STRATEGIC LEADERSHIP TASKSAbell (2006) identified six leadership tasks that are emerging as priorities:

1. Recognize the dual nature of strategy (short-term as well as long-term) - Balance today-for-today (short-term) strategies with today-for-tomorrow (long-term) strategies.

2. Start with vision, mission and distinctive profile - Companies and leaders that will create a clear-cut framework for strategy definition and action use the following skills:

Clear vision of the company they are trying to create Clear sense of mission Clear sense of their distinctive profile in terms of the competition

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

4. Focus on strategy as being the alignment between the external and the internal worlds of the company - Leaders have to work on two types of strategic alignment:

a) Upstream alignment – alignment of the core strategy with the outside world i.e. the competitive environment of the industry.

b) Downstream alignment – the alignment of the internal organisation with the changing core strategy.

5. Competing through business systems, not through businesses - Creating value for the customer happens by means of the vertical business chain as a whole. Supply chain management should not be regarded as a primarily logistics concept in which the leader’s task is to reduce time delays. An important part of the leader’s tasks is to develop partnership relationships between key actors in the supply chain. Coordination between all the elements in the value-creating process will lead to the creation of higher value and lower costs

6. Recognize that there is a growing decentralization of strategy-making and leadership - The leadership task is two-fold. Entrepreneurial initiative from below should be encouraged. Create the leadership culture, systems and approaches from above which will help decentralized leadership to do well.


2.4 STRATEGIC INTELLIGENCE

Strategic intelligence (SQ) – is the “ability” to interpret cues and develop appropriate strategies for addressing the future impact of these cues”. This includes timing, instinct, Political savvy, Curiosity, Flexibility, Expertise to simplify, Fitability Imagination, The “ability” to interpret circumstances as they unfold.Strategic intelligence is about using your realistic situational understanding to develop a strategy that is appropriate and that works. The Strategic intelligence “commandments” include the following.

1. An organisation has to have a clear understanding of the reason for its existence – the “why” of the organisation2. 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.

Traits associated with strategic intelligence (SQ). Natural Strengths

o Is comfortable with new circumstanceso Is a situation simplifiero Seizes the momento Observant, aware, realistic.

Natural Weaknesseso Is aloof, unaware or inattentiveo Is a situational complexifiero Wont assimilate into realityo Overreacts to new circumstances

Nurtured Strengthso Appropriate visibilityo Analytical and visionaryo Conscious reading of the situationo A steady, unflappable ‘street smart’ facilitator

Nurtured Weaknesseso Poor assumptionso Failure to grasp historyo Judgementalismo Inappropriate for circumstances

3. SETTING STRATEGIC DIRECTION

Setting strategic direction is the first step in the strategic management process. Strategic planning begins with the setting of strategic direction. To set strategic direction, organisations use a vision statement, a mission statement or strategic intent.

Vision statements - translates what is essentially an act of imagination into terms that describe possible future courses of action for the organisation

Mission statements - implies that throughout an organisation’s many activities there should be a shared theme. Strategic intent – the leaders clear sense of where they want to lead their company and what results they expect to

achieveThe 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

3.1 THE VISION STATEMENT

The vision statement is considered to be the first step in the strategy formulation and strategic management processes. The vision statement answers the question: “what do we want to become?” and serves as the roadmap of the organisation. A vision statement is a dream that focuses on a desirable future and is often referred to as being an enduring promise. When formulating a vision statement, there are four matters that should be taken into consideration:

1. As many managers as possible should contribute to the creation of a vision statement2. A vision statement should be achievable in the long term3. Developing a vision statement is an exercise in thinking creatively about the future direction of the organisation4. 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:1. It provides a way for managers to integrate a wide variety of goals, dreams, challenges and ideas into one theme2. It provides focus and direction3. A vision statement forms the foundation for a mission statement, long-term goals and strategy-selection decisions4. 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

3.2 STRATEGIC INTENT

Strategic intent – envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress (Hamel and Prahalad, 1989)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. It was developed by Hamel and Prahalad.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. Strategic intent requires the entire organisation’s commitment to the goal and their personal efforts. Strategic intent has an internal focus and can be used as the basis for setting the mission statement. The three attributes of strategic intent are as follows:

1. Sense of direction – implies a view of the future; the long-term market and competitive position the company hopes to build

2. Sense of discovery – differentiated and unique point of view about the future p713. Sense of destiny – the perception that the goal is worthwhile p71

3.3 THE MISSION STATEMENT

Vision and strategic intent answer the question: “what do we want to become?” A mission statement asks the question: “what is our business?”

3.3.1 The role of the mission statement in the strategic management processMission statement – the mission statement is an enduring statement of purpose that distinguishes an organisation from other similar ones. It identifies the scope of an organisation’s operations in terms of:

Product (what) Market (who) Technology (how)

It identifies an organisations reason for being and serves as the foundation for the development of long-term goals and the selection of strategies. A mission statement is not about measurable targets but rather is a statement of intent, attitude, outlook and orientation. A mission statement has four focus areas:

1. Purpose – the reason for the organisation’s existence p722. Strategy - Its strategy in terms of the nature of the business. Its competitive position in terms of other organisations.

The source of its competitive advantage3. 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. A mission statement is also called a purpose statement, because it also deals with the role of stakeholders in the strategic planning process. 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.


The components of a mission statementA mission statement has eleven components:

1. Product, service, market and technology – these form the core components of the mission statement and describe the business activities of the organisation, the principle market and technology used.

2. Survival, Growth and profitability – deal with the economic goals of the organisation. Profitability and growth are some of the main goals of an organisation.

3. 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.

4. Public image – The mission statement can be used to instill a positive image of itself. 5. Self-concept of the organisation - an organisation’s ability to know itself and evaluate the strengths and weaknesses to

take advantage of opportunities and neutralize any threats. 6. Customers and quality – Important components of a mission statement. Customers as a component of a mission

statement, imply three dimensions. a. Identification of customer groups b. Customer needs c. Skills or competencies required to satisfy these

Stakeholders and the mission statement A stakeholder can be defined as anyone who, directly or indirectly, is influenced by what the organisation does. The inclusive approach – as applied by the King III Report, recognizes that the interests of stakeholders should be considered when formulating a strategy. The inclusive approach also requires an organisation to communicate its purpose and values to all stakeholders. There are nine groups of stakeholders:

Shareholders Employees Customers Competitors Financial institutions General community Media and press Government Suppliers

Formulating a mission statementAs 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. The process of developing a mission statement should create an emotional bond and a sense of mission between the organisation and its employees. The mission should be communicated to all internal and external stakeholders.


TOPIC 3 – STUDY UNIT 3.1 – CORPORATE GOVERNANCE AND STRATEGIC MANAGEMENT

1. INTRODUCTIONThis study unit discusses corporate governance in strategic management. Corporate governance is a foundational concept in strategic management.

2. SUCCESS IN STRATEGIC MANAGEMENT TERMSWhat is success in strategic management terms? Strategic management is about surviving in a changing environment, and not simply about increasing company profits every year. To survive in this continuously changing environment, strategic managers need to make decisions that will enable the company to remain strategically competitive and achieve above-average returns. Above average returns are returns in excess of those an investor expects to earn from other investments with a similar risk exposure. An inability to earn at least average returns will result in the company failing, simply because investors will stop investing in such a company. By exploiting its competitive advantage and realising above-average returns, an organisation should be able to accomplish its primary objective: wealth maximisation.

3. RESPONSIBLE LEADERSHIP

Responsible leadership – the exercise of ethical, values-based leadership in the pursuit of economic and societal progress and sustainable development. Organisations are required act ethically within a set of guiding principles and to take ownership of the consequences of their business activities on three levels

1. Economic 2. Social 3. Environmental level

There are two main business responsibility movements:1. Corporate social responsibility (CSR) – is associated with ethical issues; doing what is right and fair, and avoiding harm

and seen as a way of corporate self-regulation.a. Corporate citizenship – emphasizes the contribution a company makes to society through its core business

activities, its social investment and its engagement in good causes. b. 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 p892. Corporate sustainability – is associated with support for sustainable development and the long-term performance,

stability and survival of the organisation. It addresses needs of stakeholder while seeking to protect human and natural resources need in the future.

Corporate sustainability performance is measured by the triple bottom line, economic, social and environmental impact associated with stakeholder satisfaction. Sustainability impact can be defined as follow:

1. Economic impact – human rights, labour, health, engagement in sustainable wealth-creation processes at the global, national and local levels.

2. Social impact – the impact of products or operations on human rights, labour, health, safety, regional development and other community concerns.

3. Environmental impact – the impact of products or operations on environmental degradation, including the company’s related emissions and waste


4. CORPORATE GOVERNANCE

4.1 What is corporate governance (3.3) Corporate governance is about control, not about constraints. Performance, accountability, transparency and disclosure are central to the notion of corporate governance, which is the responsibility of the board of directors.Corporate governance provides the foundation for responsible leadership and good corporate citizenship. 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.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

4.2 The major parties in corporate governance (3.3.1)The alignment of interests is a key element of corporate governance, the assumption is that the goals of individuals, organisations and stakeholders are not automatically aligned. Managers act as agents on behalf of principals or 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.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.Major parties in corporate governance p91

4.3 Corporate governance and strategy (3.3.2)Strategic management is focused on leading the most competitive strategy that lead to the highest profits. But focusing on corporate governance, an organisation has to think differently about the optimal strategy.Corporate governance is critical in the strategic management process with regard to the following areas:

Formulation:o Setting direction in terms of the broader principles of economic, social and environmental performanceo Reflecting the vision and mission in the strategy and setting the scene for responsible business aims, practices

and general conducto Considering organisational risks when determining strategic goalso Setting clear, transparent, attainable and measurable goalso Determining strategies that benefit all stakeholders o Clarifying the role of the board of directors in strategy formulation

Implementation:o Clarifying the role of the board of directors and management in overseeing strategy implementationo Developing specific, measurable action planso Measuring the triple bottom line

Control and evaluation: o Clarifying the role of the audit committee in managing and overseeing strategy implementation o Determining checks and balances for strategy controlo Ensuring that executives are appropriately penalized or rewarded for failure or success (responsibility of the

board of directors)


Early corporate governanceThe agency problemPrincipals <> Agents

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

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

consumers, consumer associations, NGOs, political parties

Shift in focus from protecting shareholder rights to aligning interests of all stakeholders.

4.4 Corporate governance and ethics (3.3.3)Many large corporate failures and scandals can be attributed to poor corporate governance. Recognizing and remedying signs of ethical collapse is also part of good corporate governance. Steps may include drawing up ethical codes and implementing certain forms of training programmes.The signs of ethical collapse are said to be the following:

1. Pressure to meet the numbers – emphasis is on a meaningless exercise to reach desired numbers. Financial reporting is done to merely reflect what the organisation wants the market to see.

2. Far away and silent – Often employees kept quiet but knew what was going on.3. Sycophantic executives and an iconic CEO – The too prominent CEO who is given iconic status in the media and

surrounded by ingratiating and flattering managers. 4. A weak board – The boards of companies at risk of ethical collapse are weak and ineffectual. 5. Conflicts of interest - companies at risk of ethical collapse have a distinct atmosphere of nepotism and back-scratching.

Awarding of contracts, recruitment and discipline becomes clouded with self-interest.6. Overconfidence - companies at risk of ethical collapse often exude overconfidence from earlier success.7. Social responsibility being the only measure of goodness – A company must have a balance and show both social,

environmental and economic responsibility.

5. CORPORATE GOVERNANCE IN SOUTH AFRICA (READ ONLY) Governance codes (3.4.1)Governance can be on a statutory basis, as a code of principles and practices, or a combination of the two. The definitive authority on corporate governance in South Africa is the King Report on Corporate Governance

5.1 The King I Report on Corporate Governance (3.4.2)Published in 1994, it addressed fundamental principles of good financial, social, ethical and environmental practices.Two components of corporate governance were specifically addressed:

1. Financial aspects – responsibility towards shareholders2. Ethical aspects – standards of ethics in organisations

5.2 The King II Report on Corporate Governance (3.4.3)Published in 2002, the King Committee identified seven primary characteristics of good corporate governance p96:

1. Discipline2. Transparency3. Independence4. Accountability

5. Responsibility6. Fairness7. Social responsibility

5.3 The King III Report on Corporate Governance (3.4.4)The King III Report philosophy. Good governance is essentially about effective leadership. 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. Innovation, fairness, and collaboration are key aspects of any transition to sustainability. The legacy of apartheid is fundamentally unsustainable, social transformation and redress needs to be integrated within the broader transition to sustainability. Sustainability reporting is in need of renewal to respond to:

The lingering distrust among civil society of the intentions and practices of big business Concerns among business decision makers that sustainability reporting is not fulfilling their expectations in a cost-

effective mannerTable 3.2: The responsibilities of the board of directors (Pg99)Key aspects adopted in King III:

Integrated reporting Risk-based internal audit Shareholder approval Remuneration policies Performance evaluation of directors


TOPIC 4 – STUDY UNIT 4.1 – INTERNAL ENVIRONMENTAL ANALYSIS

1. INTRODUCTION (4.1)Organisations try build their capacity as a source of competitive advantages through resources and capabilities and therefore important to identify and evaluate their strengths and weaknesses in all functional areas.The stronger an organisations overall performance, the less need there will be for radical changes in strategy.Methods of internal analysis include:

Resource-based view – Organisational is analysed as a collection of tangible and intangible resources and capabilities Value chain analysis

2. INTERNAL ENVIRONMENT

The environment in which an organisation operates can be divided into the internal environment and the external environment.

The internal environment (micro-environment) - refers to the variables inside the organisation, i.e. the organisational structure, the resources, the assets, the employees, the mission and vision, the board of directors etc. It can be controlled by management.

The external environment - Is complex and one that is constantly changing. Management does not have control over what happens in the external environment. The external environment can be divided into three sub-environments: the market or task environment, the industry environment and the macro-environment

3. THE IMPORATANCE OF AN INTERANL ENVIRONMENT ANALYSIS (4.2)

The outcome resulting from internal analysis will determine what an organisation can and cannot do, while the outcome of external environmental analysis will identify what the organisation may choose to do. This allows the organisation to develop its vision or strategic intent and pursue and implement its strategies. It is critical for managers 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. 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.The process of identifying, developing and allocating resources, capabilities and core competencies is challenging and it is imperative that the resources and capabilities that really contribute to a company’s competitive advantage be clearly identified.

4. SWOT ANALYSIS (4.3)SWOT provides a framework for analysing the strengths, weaknesses, opportunities, and threats in the organisation’s external and internal environment and is one of the best techniques for internal and external environmental analysis. SWOT analysis highlights the specific conditions in the organisation’s environment for environmental analysis.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.

Strength – strength is a resource or a capability that the organisation has which is an advantage relative to what competitors have. Some resources may just contribute to sustainability.

o Skilful employees.o Large financial reserves.o Quality product or service.o Strong reputation.o Economies of scale.


Weakness – the lack or deficiency of a resource that represents a relative disadvantage to an organisation in comparison to what competitors have, for example:

o Limited financial resourceso Poor marketing skillso Poor after-sales serviceo Negative organisational culture

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

Threat – a threat is an unfavourable situation in the organisation’s external environment, for example:o An increase in the interest rate if the organisation has a big loan

SWOT does have limitations. SWOT analysis is a static approach and is also sometimes focused only on a single dimensionSWOT analysis cannot show the organisation how to achieve competitive advantage, a more in-depth analysis is needed. SWOT analysis therefore cannot be an end in itself, it actually only stimulates self-perception and the discussion about important issues. Limitations of SWOT analysis are:

The focus on the external environment may be too narrow It is perhaps a static assessment – a one-shot view of a moving target The strengths that are identified may not necessarily lead to a competitive advantage It may lead to overemphasis of a single feature or strength and disregard other important factors that may lead to

competitive success


SWOT analysis

Internal analysis

Strenths

Weaknesses

External analysis

Opportunities

Threats

TOPIC 4 – STUDY UNIT 4.2 – RESOURCE BASED VIEW

1. INTRODUCTION (4.1)An organisation needs to assess its own resources and capabilities and determine its core competencies. These represent the organisations strengths and weaknesses.

2. RESOURCE-BASED VIEW (4.1.1)

The resource-based view holds that an organisation’s resources are more important than the industry structure in gaining and keeping its competitive advantage. It argues that it is the resources and capabilities that will determine and efficiently and effectively the organisation is functioning.The main concerns for competitive advantage, according to the resource-based view are organisational resources and capabilities which are difficult to create, buy, replace or imitate; they must have the quality of inimitability.

3. CATEGORIES OF RESOURCES (4.1.1.1)

The basic argument of the resource-based view is that an organisations unique combination of resources and capabilities will determine how effectively the organisation functions. The nature of the organisations internal resources should be considered first when devising strategies that can lead to a sustainable competitive advantage. Resource-based analysis should be considered an on-going activity. The three broad categories of resources:

1. Tangible assets – are the easiest to identify because they are visible, financial, physical, human resources. Value can be determined by looking at the financial statements, especially the balance sheet. 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. Financial and physical.

2. Intangible assets – are the assets that one cannot touch. Intangible assets are often the critical assets that create the real competitive advantage 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). Technology, brand or reputation, cultures and values.

3. Organisational capabilities - are the combination of assets, people and processes that transforms the organisations inputs into outputs. Skills or know-how, motivations and capacity for communication and collaboration.

4. CHRACARTERISTICS THAT MAKE A RESOURCE AVAILABLE

Capabilities are the glue that emerges over time and binds the organisation together. 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.

The foundation of many organisations capabilities lies in the skills and knowledge of the employees and often in their functional expertise. 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.The majority of capabilities are developed in specific functional areas:

Dynamic capabilities – the organisation’s ability to build, integrate and restructure capabilities to address the rapidly changing environment. To be a successful organisation requires:

o Demonstrating timely responsivenesso Rapid and flexible product innovationo Management expertise in coordinating and deploying organisational resources and capabilities


Determine what resources the organisation has

Determine which of these resources are considered tangible assets, which are considered intangible assets, and which are considered organisational capabilities.

Determine why the resources are considered strengths or weaknesses, i.e. what makes the resources valuable or not

Breakdown the resources into more specific competence, to determine exactly where the strengths are (e.g. marketing can be broken down into advertising, personal selling etc)

Determine if any pattern has emerged (e.g. all strengths refer to internal process or system)

Distinctive capabilities – is the organisations ability to separate itself from competitors by offering something unique that will allow for leverage over competitors in the market.

Competitive advantage – resources and capabilities must be truly distinctive and also contribute to the development of an organisations core competencies.

Core competencies – only possessed by those organisations whose performance is superior to the industry average. Core competencies are based on superior organisational skills and knowledge.

The characteristics of valuable resources are:

Value – help the organisation to exploit external opportunities or neutralize negative external threats, for example: skilled employees.

Superior resources – fulfils a customer’s needs better e.g. two shops but one has a better location in the neighbourhood.

Scarcity – as long as it is valuable and sustainable. A company has a distinctive advantage if no other organisation posses it.

Inimitability – hard to imitate, for example: reputation (goodwill), a good location, a patented product, and organisational culture. Imitation happens in two ways:

o Duplication – same kind of resource is builto Substitution – replacing it with an alternative resource that achieves the same results

1. Capacity to exploit the resource – An organisation need the abilities and know-how to be able to exploit and use the resources available. If large capital is needed to exploit a resource, it will enhance the inimitability of the resource and make it more valuable.


It is important to keep in mind that resources change, and resource-based analysis should be considered an ongoing activity. The figure depicts this process.

TOPIC 4 – STUDY UNIT 4.3 – VALUE-CHAIN ANALYSIS

1. INTRODUCTION

An alternative method of analysing the internal environment is the value-chain analysis. This is a systematic method of determining how the organisations different activities contribute to creating value for the customer. In other words, it involves identifying the strengths and weaknesses in the organisations activities.

2. THE VALUE CHAIN (4.4.2)

Every organisation has a chain of activities through which the inputs are transformed into outputs. The chain of activity is looked at to determine where value is really added to the product or service. There are three aspects of resources that create value for customers:

1. The product is unique and/or different2. The product is cheaper than that of competitors 3. The organisation has the ability to respond to the customer’s needs very quickly

Value chain analysis is a systematic method of determining how the organisation’s various activities contribute to creating value for the customer. Value chain analysis views the organisation as a sequential process which includes all the value-creating activities in the organisation.Value in value chain analysis – is the amount of money that customers are willing to pay for what the organisation is providing them. The activities in value chain analysis are the building blocks of competitive advantage; they can be grouped into two categories:

1. Primary activities – those that create the product or service and customer value2. Support activities – add support; add value throughout the process

2.1 PRIMARY ACTIVITIES

Primary activities are those activities involved in the physical creation of the product. Primary activities typically include the following:

1. Input or inbound logistics – inbound logistics is associated with the receiving, storing and distributing of inputs to the product.

2. Operations – Includes all the activities involved with the transformation of inputs into the final product.3. Output or outbound logistics – Refers to all the issues related to distribution of the product or service to customers.4. Marketing and sales – Refers to the method used to persuade customers to make purchases.5. Customer service – The basic activities that ensure the basic value of the product is maintained.

2.2 SECONDARY ACTIVITIES

Secondary activities, also called support activities, provide infrastructure or inputs to allow the primary activities to be carried out on an ongoing basis. Furthermore, the performance of the primary activities depends on the support activities. Support activities include:

1. Procurement – Refers to the function of purchasing inputs and the actions taken to optimize speed and quality of the procurement process.

2. Technological development – Include the different process and equipment used in the value chain. 3. Human resource management – Importance cannot be overemphasized as recruitment, selction, training and

remuneration affect all aspects of the business.4. General administration and infrastructure – The effective and efficient administration needed to achieve overall goals.5. Financial management – Sound financial practices are needed.


2.3 STEPS IN THE VALUE-CHAIN ANALYSIS

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 organisations activities. Steps in the value chain analysis:

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

Value-chain analysis is a method of analyzing the organisations internal environment. The value-chain analysis is a systematic approach which divides the organisations activities into primary and secondary activities in order to identify the organisations strengths and weaknesses.


TOPIC 4 – STUDY UNIT 4.4 – FUNCTIONAL APPROACH

1. INTRODUCTIONThe method can also be used to analyse the organisations internal environment. The functional approach proposes that each function in the organisation should be assessed to determine whether it is a strength or a weakness.

2. FUNCTIONAL APPROACHThe functional approach is a simplistic method of analysing an organisations business functions. The aim of the functional approach is to determine how well or poorly these functions are being performed and what resources these functional areas need to perform effectively.This approach does have major shortcomings. To begin with, the silo-effect is often evident in the final profiling of an organisation. The “silo-effect” refers to specialist functions that operate in isolation, but the impact they have on other functions is simply ignored. In simple terms, the “bigger picture” is missing, and strategic management is about the bigger picture. This means that the functional approach should not be used in isolation. Instead, it should be used in combination with one, or both, of the other two approaches namely SWOT analysis and the Functional Analysis.

2. MAKING MEANINFUL COMPARISONSNote that there is an element of subjectivity in all of the methods of internal environment analysis we have discussed so far. In an attempt to remain objective, strategic planners can use financial ratio analysis: these ratios are expressed in numbers that can be meaningfully compared with the organisations own past results, the competitor’s results, the results of industry leaders and the industry average.Notwithstanding its objectivity, financial ratio analysis does have some weaknesses.

1. The analysis is based on past data, which means that it can only be used to spot past trends, this type of analysis cannot be automatically regarded as applying to the future.

2. The analysis is only as good as the accounting procedures that have provided the information. the variability of accounting procedures should be considered when we compare an organizations performance with that of another organisation.

The following standards or yardsticks can be used to make meaningful comparisons: The organisation or business units past performance Results of a previous internal environmental analysis Industry ratios or norms Benchmarks (e.g. industry best practices) Performance of the organizations competitors

2. COMPILING AND ORGANISATIONAL PROFILE


The organizations profile is the end results of an internal environmental analysis: It is a diagrammatical depiction of the organizations strengths and weaknesses. Critical success factors are determined by conducting an internal environmental analysis. Resource-based view will categorise the success factors according to tangible assets, intangible assets and organisational capabilities. Value-chain analysis our success factors will be determined by the primary and support activities.Functional approach, the success factors will depend on how well or badly the organisation performs in its functional areas.

ScanningEarly signs of environmental changes and trends are identified

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

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

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

TOPIC 5 – STUDY UNIT 5.1 – THE MACRO-ENVIRONMENT

1. INTRODUCTION

The organisation operates within the macro-environment, outside the organisations control. Changes in the macro-environmental variables will affect the organisation and it is imperative that the strategic manager be aware of such changes.

2. THE IMPORTANCE OF AN EXTERNAL ENVIRONMENTAL ASSESSMENT

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.

3. PROCESS FOR CONDUCTING A ENVIRONMENTAL ASSESSMENT


A continuous process of external environmental analysis includes four interrelated activities:

1. Scanning2. Monitoring3. Forecasting4. Assessing

Several sources can be used in analysis the external environment:

Printed material; Trade shows; Suppliers; Customers and external network contacts; Sales people, purchasing managers, and

customer service representatives.

After an organisation has identified and evaluated opportunities and threats in the macro-environment and matched these to the organisations internal strengths and weaknesses, the organisation is in a better position to design strategies that will achieve its long-term objectives.

3. COMPOSISTION OF THE EXTERNAL ENVIRONMENTAL

An organisations external environment is divided into three major areas:1. Global2. Macro3. Industry or market environment.


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 five dimensions of the macro-environment:

1. Political, governmental and legal forces;2. Economic forces; 3. Social, cultural and demographic forces;4. Technological forces;5. Ecological forces.

The analysis of these factors is sometimes called the PESTE analysis (political, economic, social, technological, ecological factors). Another important macro-environmental aspect that should be analysed is the global environment – all the factors relevant to PESTE can be applied here.

GlobalMacroMarket/industry[Micro]

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

4.1 Political EnvironmentThe 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 legislation2. Amended legislation: of which the public is advised in advance3. Unannounced new legislation and regulations: or the suspension of existing legislation.

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.

4.2 Economic EnvironmentEconomic 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.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.

4.3 Sociocultural EnvironmentThe 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.


4.4 Technological EnvironmentTechnological 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.

4.5 Ecological Environment (the natural environment)The ecological environment is also referred to as the natural environment. Organisations need to adapt their manufacturing processes to become more environmentally-friendly, recycle used paper, and even design the workplace itself so that it is more ecologically sustainable.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.

4.6 The international environmentThe international environment has an impact on an organisations 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.

5. FORECASTING TECHNIQUES AND SCENARIO PLANNING .

Strategic planning, as the name suggests, deals with the future, and “educated assumptions” about future trends and events.. 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. 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:

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;

Qualitative techniques - are based on a ‘gut feeling’ or intuition.


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.A scenario can be defined as an internally consistent view of what the future might turn out to be – in other words, a scenario is not a forecast, but one possible future outcome.


TOPIC 5 – STUDY UNIT 5.2 – THE INDUSTRY OR MARKET ENVIRONMENT

1. INTRODUCTION

The industry environment consists of variables that can also present the organisation with either opportunities or threats. In this study unit, we will specifically examine the determinants of profit potential in the industry by using Porters five forces model.

2. THE INDUSTRY ENVIRONMENT

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:

1. Suppliers;2. Intermediaries;3. Customers;4. Competitors.

Management has no control over these variables but can influence their effect through changes in the organisations 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). 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; Economies of scale; Product differentiation The barriers to entry.

o Identify competitorsAn 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.

In terms of identifying the industry in which an organisation competes, 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. These are knows as Porters five forces.

3.1 Porter’s Five Forces Analysis


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. 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.

FORCE 1 - Threat of new entrantsNew 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:

Barriers to entry – These are the obstacles that an organisation must overcome in order to enter an industry. Expected retaliation – The retaliation of existing organisations in the industry.

Barriers to entryExamples of entry barriers include:

1. 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.

2. 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.

3. Capital requirements;4. 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.5. Access to distribution channels: new entrants have to persuade distributors to carry their products.6. Cost advantages independent of scale: includes access to raw materials and government subsidies.

Expected retaliationIf 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.


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

A strategic group consists of a cluster of similar organisations that offer similar goods to the same customer base.An organisation has to be positioned within the industry. ”positioning” means 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).

Industry competitors

Rivalry among existing

organisations

Potential entrants

Threat of new entrants

BuyersBargaining power of

buyers

SubstitutesThreat of substitute products

SuppliersBargaining power of suppliers

FORCE 2 - Bargaining power of suppliersSuppliers 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 its 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 buyers’ organisations; The cost 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.

FORCE 3 - Bargaining Power of BuyersBuyers 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.

FORCE 4 - The Threat of Substitute ProductsIf 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.Suppliers bargaining power, that is, the relative power of suppliers with regard to their buyers, increases according to the following:

The greater the concentration of suppliers relative to the concentration of buyers The fewer the number of substitutes for the suppliers goods or services The more differentiated the suppliers product or service The greater the interdependence of buyers and suppliers

FORCE 5 - Rivalry Among Competing Organisations


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

4. COMPETITOR ANALYSISThe 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 – Intense competition between organisations of equivalent size and power.

Slow industry growth – Competition in slow or low-growth markets with pressure to attract consumers. High fixed or storage costs – When fixed costs are high, organisations need to maximize productivity to create excess

capacity. Lack of differentiation or low switching costs – Differentiated products create less rivalry, similar products create

intense rivalry. 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:

o Highly specialised assets: assets with value linked to a particular business or location;o Fixed exit costs: labour agreements;o Strategic interrelationships: strategic alliances where facilities or markets are shared;o Emotional barriers: fear of one’s own career and loyalty to employees;o Government and social restrictions: government’s concern for job losses and the effect on the economy.

Identifying Competitors Within An Industry

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 CompetitorsExamples 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 AnalysisGuidelines 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 SG146The 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 macro-environment 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.

TOPIC 6– STUDY UNIT 6.1 – FORMULATING LONG-TERM GOALS


1. INTRODUCTIONThe choice of long-term goals is influenced by the strategic direction and the results of the organisations environmental assessment.

2. TRANSLATING THE MISSION STATEMENT INTO MEASURABLE LONG-TERM GOALS

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?

Sound strategy is rooted in a deep understanding of the current and potential customer value, how much they are prepared to pay, the profile and position of the competition, and how such elements are likely to change,

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.

Long-term goals are the results expected from pursuing certain strategies. Top management is responsible for the formulation of the organisations long-term goals. Middle management will then translate these long-term goals into more specific medium-term goals for each

functional level. The functional goals are then translated into short-term objectives. As the long-term goals are, in effect, cascaded

down the organisations hierarchy, a hierarchy of goals is created.

3.1 The Focus Areas of Long-term Goals

Long-term goals should focus on issues such as: Market Product Technology Survival

Growth Profitability Customers Quality

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).

The process of strategy formulation is shown below. It illustrates the relationship between environmental analysis, a company vision and the broad descriptive mission statement. The steps in process are as follows:


Vision and Mission

Strategic Goals(Long-term goals)

Strategies(Generic and grand)

Annual Goals(Short-term goals)Functional tactics

Policies

SWOT

Environmental Analysis

Strategists and managers

Industry Analysis Analysis

Macro Micro Market

External changesLife cycle changesDemand changesSupply changes

Strategy Formulation

Strategy Implementation

1. Setting strategic goals in line with the company vision and within the constraints of the mission statement and framework provided by the environmental analysis.

2. Selecting strategies that will ensure attainment of the strategic goals.3. Linking specific functional tactics with the long-term strategic goals. These are formulates in the form of annual,

monthly or at the most operational level, with weekly targets.

2.2 Criteria For Well-Formulated Long-Term Goals

It is essential that long-term goals be well formulated, as they should be cascaded down to smaller departments, sections and individuals in the organisation. Let us explore what a well formulated goal looks like. Well formulated goals should be acceptable to managers and employees in the organisation. To begin with, any long-term goal should be understood by everyone in the organisation. It should be clear to everyone how the long-term goals contribute towards achieving its mission. The goals should be specific, measurable, achievable, realistic and time-bound: SMART. They should also be flexible enough to be reformulated – simply because the premises on which they are based may well change.

2.3 Using The Balanced Scorecard To Set Long-Term Goals


The 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:

The financial perspective The internal business perspective The innovation and learning perspective The customer perspective

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

TOPIC 6– STUDY UNIT 6.2 – GENERIC STRATEGIES


1. INTRODUCTION

This step in the strategic planning process deals with decisions on how to compete. Once an organisation has set its strategic direction, performed an internal environmental analysis and an external environmental analysis and formulated long-term goals all that remains is to choose a strategy or strategies for the organisation to pursue.

2. COMPETITIVE ADVANTAGE

The 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.

3. STRATEGY SELECTION

A strategy is the game plan that an organisation selected to outwit its competitors; to help the organisation sustain its competitive advantage, and to realise above average returns. This should enable the organisation to maximise wealth and survive in the long-term.In 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.

The strategy chosen should enable the organisation to sustain its competitive advantage and realise above-average returns. Any organisation obviously has to limit the number of strategies it pursues.

4. FACTORS THAT IMPACT ON STRATEGIC CHOICE

There 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:

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

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

5. GENERIC STRATEGIES (sometimes referred to as competitive strategies) Generic strategies provide focus and direct organisational activities. Organisations may have to select specific generic strategies that complement their competitive advantage.


Focus

Uniqueness perceivedBy the customer Low-cost position

Competitive Advantage

Strategic

Target

Industry-wide

ParticularSegmentonly

Overall cost leadershipDifferentiation

Best-cost Provider

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.

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

5.1 Cost-leadership Strategy

Organisation’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 two 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.

Some of the associated cost drivers that need to be managed as part of a cost leadership strategy are: Economies of scale Experience and learning-curve effects


The percentage of capacity utilization Technological advances Improved efficiencies and effectiveness through supply chain management

Cost-Driver 1 | Economies Of ScaleEconomies 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 EffectsAn 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 UtilisationIncreased 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 AdvancesInvestment 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 ManagementAn organisation’s value chain is intimately linked to the value chains of its suppliers and customers in a highly interactive way e.g. Dell.

Distinguishing features of the cost leadership strategy:Strategic target A broad section of the marketBasis of competitive advantage Lower overall costs that those of competitorsProduct line A good basic product line with few frills (acceptable quality and limited selection)Production emphasis A continuous search for cost reduction without sacrificing acceptable quality and essential

featuresMarketing emphasis Trying to make a virtue out of product features that lead to low costKeys to sustain the strategy Economical prices and good value. Low costs, year after year, in every area of the business.When cost leadership is the best strategy to follow:

1. The organisation has the ability to reduce costs across the supply chain2. Price competition among competitors is vigorous3. The targets customer market price is sensitive.


4. Competitive products are similar and there is a great degree of product standardization.5. Brand loyalty does not play a role among consumers6. Buyers have high bargaining power because of high concentration7. New entrants to the industry use introductory low prices to attract buyers and build customer base.8. The market is large enough to provide the organisation with economies-of-scale advantages9. Buyers incur low switching costs

Potential pitfalls of cost leadership:1. Organisations run the risk of being overly aggressive with price cutting and end up with a lower profitability.2. Value creating activities that form the basis of this strategy can often be imitated easily3. A degree of differentiation is often still needed.

Advantages of cost leadership1. Pursuing cost leadership may increase market share and profitability increasing capital reserves allowing for greater

strategic alternatives when it comes to defending or expanding the market share.2. Customers of low-product leaders are unlikely to switch unless the competing brand has something different or unique

to offer.3. The ability to keep new entrants from entering the market as its expensive to set up and attain market share.

5.2 Differentiation

This 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.

When differentiation is the best strategy to follow:1. Buyers preferences are divers and varied2. Fewer competitors follow a similar differentiation approach with less head-to-head rivalry.3. There are many ways to differentiate the product or service. 4. Technology changes frequently and competition often centre on changes product features5. Higher industry barriers result in higher demand for products and less price sensitivity6. The differentiated product or service can be designed so that is has wide appeal to many market sectors.

Potential pitfalls if a differentiation strategy: Uniqueness that is not valuable – The product must add value and be different Too much differentiation – Providing the appropriate level of quality at the right price. Charging too high premium – Prices still need to be competitive


A uniqueness that is easily imitated Dilution of brand identification through product-line extensions.

Distinguishing features of the differentiation strategy:Strategic target A broad section of the marketBasis of competitive advantage Ability to offer buyers something attractively different from that of its competitors.Product line Many product variations; wide selection; emphasis on differentiating features.Production emphasis Differentiating features that buyers are willing to pay for; product superiority.Marketing emphasis Flaunting differentiation features; charging a premium price to cover the extra costs of

differentiating featuresKeys to sustain the strategy Constant innovation to stay ahead of imitative competitors. A few key differentiating

features.

5.3 Focus Strategy

This 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.

When focus strategy is the best strategy to follow:1. The target market niche is large enough to be profitable and offers good growth potential2. It provides a way for a smaller organisation to avoid direct competition with the larger organisations that do not deem

the segment important enough.3. It is viable for larger organisations to meet specialized needs of the niche segment without affect main markets4. The industry has a variety of potentially profitable market segments and so less risk of over-crowding.5. Customers are willing to pay a high premium for the perceived value of service.6. Customers are brand loyal and are unlikely to shift their loyalty.

Potential pitfalls if a focus strategy: The needs, expectations and characteristics of the market may gradually shift toward buyers in the broader market. Competitors may develop technologies of innovative products that may redefine the preferences of the niche. The segment may become so attractive that it is soon inundated with competitors.

Distinguishing features of the Focus Strategy:Strategic target A narrow market niche, buyers preferences are very differentBasis of competitive advantage Lower overall costs that rivals in servicing niche buyersProduct line Features and attributes tailored to the tastes and requirements of niche buyers.Production emphasis An ongoing search for cost-reduction incorporating niche buyers preferences.Marketing emphasis Communicating features of a budget priced offering that fits niche buyers expectationsKeys to sustain the strategy Constant innovation to stay ahead of imitative competitors. Few differentiating features.

5.4 Best Cost Strategy


This 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.

When best-cost strategy is the best strategy to follow:1. There is a potential for economies of scale in the market.2. Customer demand, expectations and needs provide impetus for investment in enhance efficiencies and cost savings.3. Competition is fierce and barriers to entry are low4. Customers are simultaneously price and quality sensitive5. Mass customization becomes a possibility due to advanced technological, distribution and marketing capabilities.

Potential pitfalls if a Best cost strategy: Organisations that fail to create both competitive advantages may end up with neither. Organisations may underestimate the challenges and expense with providing low prices and differentiating at the same

time. Organisations may miscalculate the source of revenue within the industry failing to achieve expected profitability.

Distinguishing features of the best cost Strategy:Strategic target Value-conscious buyersBasis of competitive advantage Ability to give customers more value for moneyProduct line Items with appealing attributes, assorted upscale features.Production emphasis Produce upscale features and appealing attributes at lower cost.Marketing emphasis Flaunt delivery of best value. Either delivers same features at lower price or more features at

the same price.Keys to sustain the strategy Unique expertise in simultaneously managing costs down while incorporating upscale

features and attributes.

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.

Distinguishing features of the each Strategy:Parameter Cost leadership Differentiation Focus: low cost Focus: Best-cost


strategy strategy differentiation strategyStrategic 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 features

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 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 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; 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.

Advantage and pifalls 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)



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 form the basis of this strategy can often be imitated too easily;

A degree of differentiation is often still needed.

Uniqueness that is not valuable: market research and reliable information are critical to the success of a differentiation strategy;

Too much differentiation;

Charging too high a premium;

A uniqueness that is easily imitated;

Dilution of brand identification through product-line extensions.

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 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.

Organisations that fail to create both competitive advantages simultaneously may end up with neither and become stuck in the middle;

Organisations may 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.

TOPIC 7– STUDY UNIT 7.1 – GRAND STRATEGIES


1. INTRODUCTION

In this study unit we continue looking at how an organisation decides to compete in the marketplace. This study unit focuses on the second main type of strategic choice: the grand strategy.

2. GRAND STRATAGIES

Grand 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 relationship between Porters generic strategies and grand strategies is shown below. The diagram shows how grand strategies can be used to achieve cost leadership, differentiation and focus. The grand strategies identified are the most commonly used to achieve competitive advantage but not unique.

2.1. The interrelationship between Porter’s generic strategies and grand 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

Grand strategies can be divided into three groups: growth strategies, corporate combination strategies and decline strategies. Growth strategies can be further divided into internal and external growth strategies.The three groups are:

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 strategies3. Decline strategies.

Growth strategies can be further divided into internal and external growth strategies.

2.2. Growth strategies

As stated earlier, growth strategies can be further divided into internal and external growth strategies. Internal growth strategies focus on the organisations internal environment, while external growth strategies focus on the market environment.The various internal and external growth grand strategies are listed below:Internal growth strategies:

Concentrated growth (also referred to as market penetration) Market development Product development Innovation

External growth strategies: Related or concentric diversification Unrelated or conglomerate diversification Vertical integration (backward and forward vertical integration) Horizontal integration


INTERNAL GROWTH STRATEGIES1. Concentrated Growth (also referred to as market penetration)Concentrated 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. The challenge it faces is to grow its share of the particular market through the customization of its product features, prices, distribution channels and promotional strategies. Through this customized approach it endeavors to increase its usage rate of its present customers, attract non-users to buy its product, and/or attract its competitor’s 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.

2. Market developmentA 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.

3. Product developmentProduct 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.

4. InnovationOrganisations 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.


EXTERNAL GROWTH STRATEGIES1. DiversificationCan be brokens down into related or concentric diversification and unrelated or conglomerate diversification. Diversification is directly concerned with extending the organisation beyond its original boundaries (industry and market). The major benefits and risks associated with diversification are:

# 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.

1a. 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.

1b. Unrelated or conglomerate diversificationAdding 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.


2. IntegrationIntegration 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.

2a 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:

Unreliable; Have high profit margins; 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:

Unreliable; Too costly; Incapable of meeting the needs of the organisation with regard to parts, components, or materials.

2b 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.


3. Decline strategies (often referred to as defensive strategies).Decline 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.

3a. Retrenchment of turnaroundA turnaround strategy focuses on strengthening the distinctive competencies of the organisation in order to break the downward spiral of sales and profits. Emphasis is placed on reengineering of process and introduction of total quality management (TQM). They often appoint new managers with new perspectives and specialised skills. Usually persued for organisations that have distinctive core competencies but have been poorly managed or grown too quickly. Usually plagued by inefficiency, low employee morale and stakeholder pressure to increase profits.

3b. DivestitureDivestiture 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.

3c. LiquidationLiquidation 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.

When failure is inevitable. BankruptcyBankruptcy 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.

4. Corporate combination strategiesCorporate 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.

4a Joint venturesA 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.


4b. Strategic alliancesThe 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.

4c. ConsortiaConsortia 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 strategiesThe 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 strategiesThe 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.



Documents

3.3.1 The role of the mission statement in the strategic ...€¦ · Web viewA mission statement is also called a purpose statement, because it also deals with the role of stakeholders