POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT
STRATEGIC MANAGEMENT
STUDY GUIDE
Copyright © 2016 MANAGEMENTCOLLEGE OF SOUTHERN AFRICA All rights reserved; no part of this book may be reproduced in any form or by any means, including photocopying machines, without the written permission of the publisher. Please report all errors and omissions to the following email address:
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Strategic Management TABLE OF CONTENTS
Section
Title of Section
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The Strategic Management Process
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Strategic Direction and Corporate Governance
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Internal Environmental Analysis
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External Environmental Analysis
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Strategy Formulation: Long Terms Goals and Generic Strategies
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Grand and Functional Strategies
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Industry Specific Strategies
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Strategic Analysis and Choice
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The Drivers of Strategy Implementation
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Continuous Improvements Through Strategic Control and Evaluation
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Strategic Management in Not-for-Profit Organisations
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Strategic Management concepts in the global marketplace Bibliography
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CHAPTER 1
The Strategic Management Process
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Strategic Management The Strategic Management Process Learning Outcomes After studying this chapter you should be able to do the following:
Understand the definition and explanation of strategic management.
Identify the people involved in strategic management.
Differentiate between qualitative and quantitative decisions.
Understand the strategic management process.
Appreciate the challenge of change for strategic managers.
Recognise the benefits of strategic management.
Recognise the dysfunctional aspects (risks) of strategic management.
Perceive how strategic management could benefit not-for-profit and global organizations.
1.1 Introduction In a world where competition is harsh and no mercy is given to anyone in the business environment, organizations have to plan for the future and prepare themselves for any unforeseen circumstances. The world has changed so radically in the past few decades that the factors and competencies that made an organization successful in the past do not guarantee success in the future. On the contrary, they might even lead to its downfall. Factors that made organizations successful two years ago and were seen as a norm may not even be applicable today. The reason for this is the rapidity of change in the environment in which we live. Technological, economic, sociocultural and political changes make the management environment much harder and tougher to compete in today. So what should managers of any organization to ensure that they cope in this changing environment and are prepared for whatever the future holds? The answer lies in strategic management. To be an expert in all the different functions of an organization - namely finance, marketing, human resources, operations etc. is no longer adequate. Whether your organization is a public or private company, close corporation, joint venture, sports club, church or government organization, you cannot survive the volatile future without proper strategic management.
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Strategic Management In developing regions like Southern Africa, the practice of strategic management is even more important, especially since they face more factors and complicated environmental changes, including cultural and political ones. The strategic management should be seen as essential to the management process of any organization. This study guide book therefore aims to guide Southern African students and managers through the process of strategic management with a view to enhancing their performance and abilities as strategic managers (Ehlers and Lazenby 2007). 1.2 What is strategic management Strategic management can be defined as the process whereby all the organizational 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 organization and therefore gain a competitive advantage through adding value for stakeholders (Ehlers and Lazenby 2007: 2). Barney and Hesterley (2010: 4) say that a firm’s strategy is defined as its theory about how to gain competitive advantages. A good strategy is one that actually generates such advantages. The important term here is competitive advantage. Competitive advantage is the edge that one organization has over another, achievable through strategies like lower costs, a wider range of products or services (differentiation), or a focus on a specific niche market segment. A strategy can therefore be defined as an effort or deliberate action that an organization implements to outperform its rivals. However, as a result of modern technology and management processes, any competitive advantage lasts for only a short period of time, because competitors are able to mimic/emulates a rival firm’s strategy and retaliate in a more competitive way. The phenomenon of staying on par with one’s rivals is one of the main reasons why business in the 21st century is escalating at such a fast pace in respect of products, services and technology (Ehlers and Lazenby 2007: 3). To be able to achieve such competitive advantage, an organization needs to meet the need of its stakeholders, which means adding value. Adding value can be defined as adding certain characteristics to the product/service that the competitor and customer (or other stakeholders) cannot do themselves. 3
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Strategic Management Who are the stakeholders? Anyone who is directly or indirectly influenced by the acts of the organization is a stakeholder. Stakeholders have divergent goals and are not only driven by profits but also by social responsibility, media relations, community services, government relations and the like. David (2013: 35) defines strategic management as the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives. This definition implies that strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and information systems to achieve organizational success. 1.2.1
The people involved in the strategic management process
People are the most important asset at the disposal of any organization. No matter what client value you have, human resource is the most important asset in the organization because the implementation of the strategy will be driven by the employees. There are three stages in the strategic management process. 1.3 The strategic management process According to David (2013: 35) the strategic management process consists of three stages: strategy formulation, strategy implementation and strategy evaluation.
The first stage is the strategy formulation process involving the environmental analysis and will be the responsibility of every manager at every level. It is the responsibility of top management to formulate strategies according to the results of the environmental analysis.
The second stage of the strategic management process, strategy implementation, is often the most challenging one. This is where all the strategies in the previous stages must all come to life and can only be done through effective communication by all parties involved – the employees and even other stakeholders. From this it is evident that strategy is not only the responsibility of the top management, but filters down throughout the organization (Ehlers and Lazenby 2007: 3-4).
The last stage is the strategy control process. Here aspects such as total quality management and the balanced scorecard are tools which can help and improve the manager’s task of successfully controlling the strategic management process.
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Strategic Management 1.3.1 Strategy Formulation Strategy formulation includes:
Developing a vision and mission,
Identifying the organization’s external opportunities and threats,
Determining external strengths and weaknesses,
Establishing long term objectives,
Generating alternative strategies and
Choosing certain strategies to pursue.
Once the environmental analysis is complete, the organization is now in a position to develop long term objectives through strategy formulation. Strategy formulation issues include:
Deciding what new business to enter
What businesses to abandon
How to allocate resources
Whether to expand operations or to diversify
Whether to enter international markets
Whether to merge or form a joint venture
How to avoid a hostile takeover (Ehlers and Lazenby 2007: 5-7).
1.3.2 Strategy Implementation In order to implement the strategies above, certain driving forces are available to successfully achieve the objectives and mission. These include:
Leadership
Culture
Reward systems
Organizational structures, and
Allocation of resources
These are supplemented by strategic instruments like short term objectives and policies.
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Strategic Management 1.3.3 Strategic control through continuous improvement is seen as the last step in the strategic management process (Ehlers and Lazenby 2007: 7). 1.4 Functional aspects (benefits) of strategic management
Higher profitability – organizations that have used strategic management as the foundation of their business has shown better improvement in turnover and profits (Ehlers & Lazenby 2007: 7; Thompson & Strickland, 2003: 56).
Higher Productivity - These organizations show higher profits and through better planning and utilization of resources and materials they deliver more and better outputs, thus improving their productivity.
Improved communication across different functions in the organization.
Empowerment- if managed correctly it can directly benefit the strategic management process. Employees have to take direct control and ownership of certain strategies.
Displays discipline and a sense of responsibility to the management of the organization.
More effective time management – all strategic plans must be developed by a certain due date.
More effective resource management.
Strategic management – This provides a framework/process in which every employee can see and understand through which phase the strategic process is currently moving. It encourages the proactive thinking of employees and therefore breaks down the resistance to change (Ehlers and Lazenby 2007: 7).
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Strategic Management 1.5 Dysfunctional aspects (risks) of strategic management The following are some potential risks associated with strategic management and should be avoided:
Time – often time is wasted in the strategic management process in fighting fires and there is no time for strategic management.
Unrealistic expectations from managers and employees.
The uncertain chain of implementation.
Negative perception of strategic management.
No specific objectives and measurable outcomes.
Culture of change – a positive culture of change will increase the positive acceptance of new ideas and strategies.
Success groove – managers become over-confident and focused on their current success that they do not see strategic management as necessary (Ehlers and Lazenby 2007: 9-10).
Figure 1.1 The hierarchy of strategy Implementation (Ehlers and Lazenby 2007:10)
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Strategic Management 1.6 The challenge of change We live in the world of constant change, especially in the business environment. Organizations have to cope with the change on a continuous basis, not only to succeed, but sometimes purely to survive. But certain things stay the same. The strategic objectives of any organization are still to stay competitive and earn above – average returns through its competitive advantage. This means that even though organizations have to adapt quite rapidly to change, still have to focus on their primary goals. This is as true for a large corporate firm as it is for a small local proprietorship (Ehlers and Lazenby 2007: 10). 1.7 Contemporary applications of strategic management Many managers still see strategic management as a tool only to be used by big corporate firms and try to bypass it by stating that strategic management is not for them, similarly, in not-forprofit organizations like governmental institutions, academic institutions, clubs and churches. In fact not-for-profit organizations need it more than large corporate firms do. Because profit and growth is not their main goal they tend to lose focus and are only concerned about expenses and income. For long-term sustainability and even survival, these organizations should undoubtedly implement strategic management. 1.7.1
Strategic management in not-for-profit organizations
The approach of strategic management has become more acceptable to non-profit organizations much later than it has to the normal profit-making organization. The argument for strategic management in non-profit organizations is actually stronger than that for profit making organizations. The reason for this is that they usually have more time on their hands to go through the strategic management process and they do not operate in a fast moving environment as the profit-making firms.
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Strategic Management 1.7.2
Strategic management in organizations doing global business
The trend of doing business globally as opposed to domestically has only increased rapidly over the past few years. The phenomenon is due largely to globalization and economies that have integrated with one another and with many trade blocs developing between countries – for example the EU and SADC countries. The options for and possibilities of doing global business have become a viable and very successful option. Most organizations might face this reality as an opportunity or a threat one day. The basic process of strategic management still stays the same, but there are a few more options available for managers who pursue this route of global business (Ehlers and Lazenby 2007: 12-13). 1.8 Chapter Summary This chapter has provided an overview of the strategic management process and how it will be dealt with in this study guide. Strategic management can be defined as the process whereby all the organizational 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 organization and therefore gain a competitive advantage through adding value for stakeholders. The challenge of change in today’s business environment makes the whole process of strategic management much more important. But there are certain specific benefits and risks which must be evaluated and taken into consideration by management when starting the strategic management process(Ehlers and Lazenby 2007: 13).
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Strategic Management 1.9 Review and Discussion 1.9.1 In your own words, define strategic management. Strategic management can be defined as the process whereby all the organizational 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 organization and therefore gain a competitive advantage through adding value for stakeholders (Ehlers and Lazenby 2007:2) 1.9.2 List and briefly describe the stages in the strategic management process. The strategic management process consists of strategy formulation, strategy implementation and strategy evaluation. Strategy formulation involves the looking at the strengths and weaknesses in the organization as well as looking at the opportunities and threats in the external environment. Together with the vision, mission and objectives a strategy can be formulated 1.9.3 Name the benefits of strategic management.
Higher profitability
Higher productivity
Better communication
Empowerment
Discipline and sense of responsibility
Time management
Resource management
Framework for employees
Proactive thinking of employees
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CHAPTER 2 Strategic Direction and Corporate Governance
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Strategic Management Strategic Direction and corporate governance Learning outcomes
Understand corporate governance
Recognise the importance of the King II Report (2002) on Corporate Governance for South Africa 2002. (The King III report was released on 1 September 2009 and represents a significant milestone in the evolution of corporate governance in South Africa. There are significant opportunities for organisations that embrace its principles).
Understand corporate citizenship
Describe the link between corporate governance and corporate citizenship
Discuss contemporary corporate citizenship issues such as environmental responsibility, social responsibility, sustainability, stakeholder engagement and triple bottom line reporting
Understand the importance of corporate citizenship and corporate governance and its implication for strategic planning
Know how to set strategic direction: the first step in the strategic management process
Understand and discuss the vision statement, strategic intent and the mission statement as ways to set strategic direction.
2.1 Introduction It has recently become very important for organizations to ensure that all strategic decisions incorporate good corporate citizenship and corporate governance principles. In order to understand how this impacts on the setting of strategic direction, it is necessary to first understand what corporate governance and corporate citizenship in South Africa encompass. 2.2 Corporate governance What is corporate governance? In its narrowest sense, corporate governance refers to the formal system of accountability of the board of directors to shareholders. In its broadest sense, corporate governance refers to the formal and informal relationships between the corporate sector and its stakeholders. The King II Report embodies this wider MANCOSA – PGDBM
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Strategic Management meaning of corporate governance and uses the following definition: “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”. It follows that corporate governance deals with the way an organization aligns its own goals with those of its stakeholders and manages its relationship with both its internal and external stakeholders. This relationship impacts on the strategic direction of the organization and subsequently on its performance. An organisation’s approach to corporate governance is reflected and enforced by its values, actions and standards. 2.3 The King II Report on Corporate Governance for South Africa (2002) The purposes of the King II Report include the following:
To review and clarify the proposal for an inclusive approach adopted by the King I Report (1994)
To recognize the increasing importance placed on reporting on social, ethical, environmental, health and safety matters
To recommend that the new code of corporate governance for South Africa be measured and based on outcomes
The King II Report identifies seven characteristics of good corporate governance:
Discipline
Transparency
Independence
Accountability
Responsibility
Fairness
Social responsibility
The recommendations of the King II Report remain largely self-regulatory, as it is virtually impossible to monitor and supervise the wide spectrum of economic and commercial activities of organizations. 13
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The Code of Practices and Conduct included in the King II Report provides recommendations for good corporate governance on aspects such as boards and directors, risk management, internal audits, integrated sustainability reporting, organizational integrity/code of ethics, accounting and auditing, relations with shareholders, communication and the implementation of the code. BOARDS AND DIRECTORS The board of directors is seen as the focal point of corporate governance systems and is ultimately responsible and accountable for the performance and affairs of the organization. The King II Report recommends that the board does the following:
Give strategic direction to the organization
Appoint the CEO
Retain control over the organization
Monitor management in implementing formulated plans and strategies
Ensure that the organization complies with all relevant laws, regulations and codes of business practice
Identify and monitor the non-financial aspects relevant to the organization
Communicate with both internal and external stakeholders openly and promptly
Identify key risks as well as the key performance indicators of the organization and monitor these regularly
The chairperson of the board appraises the role of the CEO at least annually
Includes strong non-executive directors, who have the necessary skills and experience to make judgments on the strategy, performance, resources, transformation, employment equity and standards of conduct of the organization;
Appoint a remuneration committee, tasked to make recommendations regarding the remuneration of executives and executive directors
RISK MANAGEMENT The King II recommendations state that the board is responsible for the entire process of risk management. MANCOSA – PGDBM
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Strategic Management The board is responsible for the following:
Set risk strategy policies which must be communicated to all employees
Decide on the organisation’s tolerance for risk to ensure that management designs, implements and monitors the process of risk management and integrates it into the daily activities of the organisation
Ensure that the organization has an effective on-going risk identification process and takes proactive steps to manage risks.
INTERNAL AUDIT The King II report emphasizes the importance of an effective internal audit function that has the respect and co-operation of the board and management. It is recommended that if the internal and the external audit function is carried out by the same accounting organization there should be adequate segregation of the two functions to ensure that their independence is not impaired. SUSTAINABILITY REPORTING In line with its wide and integrative approach to corporate governance, the King II Report recommends that every organization report at least annually on the nature and extent of its social, transformation, ethical, safety, health and environmental management policies and practices. ACCOUNTING AND AUDITING The King II Report recommends that the board appoint an audit committee that has a majority of independent non-executive directors and the majority of these members be financially literate. The audit committee must also set principles for the recommendation of using the auditing organization for non-audit services. RELATIONS WITH SHAREHOLDERS AND COMMUNICATION The King II Report emphasizes that organizations should constructively engage with institutional investors to ensure mutual understanding of objectives. It is also the responsibility of the board to report in a balanced and understandable way on matters of significant interest 15
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Strategic Management and concern to all stakeholders. All stakeholders with a legitimate interest in the organization should be able to obtain a full, fair and honest account of the organization’s performance.
2.4 Corporate Citizenship What is corporate citizenship? Corporate citizenship is based on the concept that organizations have a duty to serve not only the financial interests of shareholders, but also the interests of society. Corporate citizenship comprises the extent to which an organization makes a positive contribution to society by respecting and showing consideration to its stakeholders; has high ethical values, adheres to legislation, rules and regulations and has a high regard for the natural environment. 2.4.1 Contemporary Corporate citizenship issues 2.4.1.1 Corporate social responsibility It is an organizational decision making linked to ethical values, compliance with legal requirements and respect for communities and the environment. There are three reasons why it is important for strategists to take social responsibility into account when formulating strategies:
The organisation’s right to exist depends on its environment and society
National legislation threatens increased regulation if organizations do not meet changing social standards
A responsive corporate policy may enhance an organisation’s long-term profitability and sustainability.
2.4.1.2 Environmental responsibility The issue of environmental responsibility exceeds the mandates and capabilities of many corporations. Only corporations having the resources, technology, global reach and motivation to address the problem of explosive population growth through sustainable developments, need to take action. Those corporations which lack the resources and infra structure must develop and/or obtain them and address the issues at hand. MANCOSA – PGDBM
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Strategic Management Many organizations have taken not to harm the environment – but the challenge is to develop a sustainable global economy that the planet is capable of supporting indefinitely. 2.4.1.3 Sustainability In order to ensure sustainable development, organizations need to consider how their strategies impact not only on their financial performance, but also on wider economic systems, the environment, and the national and international communities in which they operate and how all of these are interlinked. 2.5 Setting strategic direction: Vision, strategic intent and mission In order to select an appropriate strategy for an organization, it is first necessary to determine the strategic direction of the organization. Setting strategic direction is the first step in the strategic management process. Organisations set direction by using the following tools – namely vision and mission statements. The use of the vision statement, strategic intent and mission statement for setting strategic direction differs from one organization to the next. It is important to note that the King II report states that the vision, mission and core values of an organization should form the basis not only for its strategic goals, but also for stakeholder relationships. 2.5.1 The vision statement A vision statement is often 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 road map of the organization. Many vision statements are only one statement. For example, the vision of Nedbank is “to become Southern Africa’s most highly rated and respected bank by our staff, clients, shareholders, regulators and communities.” When an organization is formulating a vision statement, there are several matters which should be taken into consideration to ensure that it is of value to the organization.
Firstly, as many managers as possible should give input into the creation of a vision statement.
Secondly, a vision statement should be achievable in the long term or else it will lose its value to motivate.
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Lastly, once a vision statement has been achieved, it loses its power and has to be redeveloped to ensure continued focus on a desirable future.
A vision statement has several purposes: 1. It provides a way for managers to integrate a wide variety of goals, dreams, challenges and ideas into one theme 2. It provides focus and direction 3. It serves as a powerful motivational tool The vision statement must be communicated to the entire workforce in such a way that it clarifies the purpose of the organization to all its stakeholders. 2.5.2 Strategic intent. The concept of strategic intent was developed by Hamel and Prahalad. According to them strategic intent envisions a desired leadership position and establishes the criterion the organization will use to chart its progress (Hamel & Prahalad, 1989:64). 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. This gives a sense of direction and purpose to the members of the organisation. It drives strategic decisionmaking and provides a basis for resource allocation. The organisation’s current capabilities and resources are often not sufficient for the reaching of this overarching stretch goal. Therefore setting such a goal challenges managers to look for ways to significantly improve the organisation’s current operations. It also forces managers to be innovative and inventive in their use of limited resources. An organization exhibits strategic intent when it persistently pursues its overarching stretch goals and concentrates all its competitive actions and operational activities on achieving it. Strategic intent requires the commitment and personal effort of the entire organisation to the goal. It has been effectively formed if the entire workforce of an organization believes passionately in its product and its ability to win. Strategic intent has an internal focus and can be used as a basis for setting the mission statement. As strategic intent focuses in the distant future, it leaves room for flexibility in terms of the short-term actions required for the achievements of the goal (Hamel and Prahalad 1989).
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Strategic Management 2.5.3 The mission statement A mission statement is often derived from the vision or strategic intent to deal with the question: “What is our business?” As an important part of the strategic management process, the mission statement comprises various components and strives to address the interests of the organisation’s stakeholders. 2.5.3.1 The role of the mission statement in the strategic management process The mission statement is an enduring status of purpose that distinguishes an organization from other similar ones. It identifies the scope of the organisation’s operations in terms of product, market and technology. It provides answers to the questions: “What is our business?” and “What should our business be?” A mission statement therefore indicates an organisation’s reason for being. A mission statement typically has four focus areas. The first is the purpose which addresses the reason for the organisation’s existence. Secondly, it identifies the organisation’s strategy in terms of the nature of the business, its competitive positioning in terms of other organizations and the source of its competitive advantage. Thirdly, it also refers to the organisation’s behaviour standards and culture in terms of the way it does business. The fourth focus area of the mission statement is about the values, beliefs and moral principles that support the behavioural standards. 2.5.3.2 The components of a mission statement A mission statement comprises of eleven components: product/service; market; technology; profitability; growth and survival; philosophy of the organization; public image; self-concept of the organization; quality and customers. PRODUCT /SERVICE, MARKET AND TECHNOLOGY These three form the core components of the mission statement. They specify the basic product or service, the primary market and the principal technology used for the product or delivery of the products and services. In combination these three components describe the business activities of the organization.
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Strategic Management SURVIVAL, GROWTH AND PROFITABILITY These three components are closely related and deal with the economic goals of the organization. A mission statement may not explicitly state it, but organizations survive through growth and profitability. THE PHILOSOPHY OF THE ORGANISATION An organisation’s philosophy reflects its beliefs, values, aspirations, priorities and commitment in terms of how the organization will be managed. PUBLIC IMAGE The public as well as present and potential customers, has certain perceptions and expectations regarding an organization. An organization can use its mission statement to instill a positive image of itself, especially in cases where it may have had a negative image in the past. ORGANISATIONAL SELF-CONCEPT This deals with the organisation’s ability to know itself. In order to take advantage of opportunities in the external environment and neutralize any threats, an organization must be able to evaluate its own strengths and weaknesses realistically. An organisation’s ability to survive in the long term would be severely limited if it did not know its own capabilities and limits. CUSTOMERS AND QUALITY Organisations are also increasingly using customers and quality as important components of a mission statement. As these issues are gaining importance worldwide, it has become important to include them in the development of mission statements and strategic plans. Customers, as a component of the mission statement, imply three dimensions:
The identification of customer groups
Customer needs
Skills or competencies required to satisfy these
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2.5.3.3 Stakeholders and the mission statement The inclusive approach as applied by the King II Report, recognizes that the interests of stakeholders should be considered when formulating a strategy. The mission statement forms the basis from which strategies are chosen; therefore it is very important for organizations to recognize the legitimate claims of its stakeholders when formulating a mission statement. The inclusive approach also requires an organization to communicate its purpose and values to all stakeholders. 2.5.3.4 Formulating a mission statement There is no set recipe for the formulation of a mission statement. The following highlight some important factors that need to be taken into consideration:
As many managers as possible should be involved in the formulation of a mission statement. On the one hand this ensures a variety of views from different perspectives; on the other hand it creates a sense of ownership. It also ensures that all managers have the same understanding of the organisation’s strategic direction.
The process of developing a mission statement should create an emotional bond and sense of mission between the organization and its employees.
The mission should be communicated to all internal and external stakeholders of the organization.
2.6 Vision, strategic intent and mission Some organizations use one statement as both a vision and a mission statement, but a vision and a mission are not entirely overlapping concepts. A vision statement focuses on the future, something better, whereas the mission statement focuses on the present or the reality. As a management tool or concept, strategic intent contains elements of both the vision and the mission. On the one hand it focuses on a future goal or dream, and also loses its power once achieved. On the other hand it focuses, in the same way as the mission, on the purpose and strategy of the organization. An organisation’s vision or mission statement can articulate or include the organisation’s strategic intent. 2.7 Conclusion The King II Report makes several recommendations regarding the incorporation of the corporate governance and corporate citizenship practices and regulations into the operational 21
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Strategic Management activities of organizations. When developing or changing strategic direction, it has become imperative that they incorporate the elements of the King II Report into their plan to ensure a competitive advantage. ACTIVITY: Divide the class into groups of 5-8 students and develop a vision, mission statement and strategic intent for any South African organization. The strategy must incorporate principles of good governance that are in line with international best practice. You may choose from the following organizations but ensure that no one group is the same. Alternatively you may choose any organization of your choice. - BMW SA - Toyota SA - VW SA - MTN - Nokia - Cell C - Edcon group - Woolworths - Pick ’n Pay - Shoprite / Checkers - Tiger Brands / Premier Foods - Unilever
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Strategic Management References and Recommended Reading: Ehlers and Lazenby Hamel, G. and Prahlad, C.K. 1989. Strategic Intent. Harvard Business Review, May- June 6376 King Committee on Corporate Governance 2002. King Report on Corporate Governance for South Africa 2002. Executive Summary. South Africa: Government Printer. Kumba Resources Annual Report, 2005 Smit, P.J. & Cronje, G de J. 2003. Management Principles – a contemporary edition for Africa. 3rd ed. Cape Town: Juta Thompson, A.A. & Strickland, A.J. 2003. Strategic management: concepts and cases, 13 th ed. Boston: McGraw-Hill Irwin. Think Point: 2.1 Why is the King Report of 1994 important?
It institutionalised corporate governance in South Africa.
It was unique because it not only provided guidelines regarding financial reporting but also emphasised good social, ethical and environmental practice.
2.2 List the characteristics of good corporate governance as identified by the King II Report.
Discipline
Responsibility
Transparency
Fairness
Independence
Social responsibility
Accountability
2.3 How are the principles of corporate governance applied in the organisation that you work at? Learners are to provide answers that are relevant to their organisation.
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CHAPTER 3
Internal environmental analysis
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Strategic Management Internal environmental analysis After studying this chapter you should be able to do the following:
Discuss the importance and challenge of internal environmental analysis.
Apply SWOT analysis and explain its importance in environmental analysis
Identify all the resources and capabilities in an organization and discuss their importance with regard to internal environmental analysis.
Describe value chain analysis as a method for performing internal environmental analysis
Understand and apply the internal factor matrix as a method of doing an internal audit
3.1 Introduction Many organizations try to build their capacity as a source of competitive advantage in terms of their resources and capabilities. In order to do so, it is important to identify and evaluate the organisation’s strengths and weaknesses in all its functional areas. Organisations that have built a competitive advantage through their capacity include Coca Cola, Nike sports shoes and Pick ’n Pay. It is also recognized that one of the key ingredients of a successful strategy is that it should place realistic requirements on the firms’ resources. The stronger the organisation’s overall performance, the less need there will be for radical changes in strategy. Invariably such firms are implementing their strategies well. Although many managers can do the internal analysis subjectively, basing their analysis on intuition and gut feeling, this reliance on past experience may cause near-sightedness on the part of management. Emotive and subjective decisions are not conducive to successful strategy development and implementation and may lead to organizational failure. The different techniques of internal development will be examined. They are the resource –based view in which the organization is analyzed as a collection of tangible and intangible resources and organizational capabilities and value-chain analysis. Emphasis will be placed on the individual activities of the organization that add value to its products or services and thus create value for the organization. 3.2 The importance and challenge of internal analysis 25
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Strategic Management An organization cannot decide on a specific strategic direction to follow if it does not know what it can and cannot do and what assets it has and does not have. When an organization is able to match what it can do with what it might do, this allows the organization to develop its vision or strategic intent, to pursue its strategic mission, and to select and implement its strategies. But the link between the organisation’s vision of what it wants and the internal environment situation cannot be overlooked. The outcome of the internal analysis will determine what an organization can do, while the outcome of the external environmental analysis will identify what the organization may choose to do. It is not only the organisation’s ability to change that will make it successful; it is also critical that managers view the organization as a bundle of resources, capabilities and core competencies that can be used to create an exclusive position in the market. This implies that an organization does have some resources and management capabilities that other organizations do not have. The presence of these resources and capabilities leads to strategic competitiveness when an organization is able to use them to satisfy the demands of its external environment. This relationship between resources and organizational capabilities, value chain analysis and SWOT analysis, and strategic competitiveness is illustrated in Figure 3.1.
Figure 3.1 The relationship between the components of internal analysis and strategic competitiveness.
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Strategic Management 3.3 SWOT analysis SWOT is an acronym for strengths, weaknesses, opportunities and threats and provides a framework for analyzing these elements in the organizations’ external and internal environment. SWOT analysis highlights the basic raw material or specific conditions in the business’s environment for environmental analysis. Environmental analysis is about internal and external assessment of the organization – about what the organization has or does not have in terms of resources and capabilities and about what is happening in the external environment. The success of a new strategy for the organization depends on the strategic fit between the internal situation of the organization and the external conditions. The objective of a good strategy will be to increase the strengths and optimize the opportunities and to decrease the influence of internal weaknesses and external threats. What is strength? It is a resource or capability that the organization has which is an advantage relative to what competitors have. What is a weakness? This refers to the lack of, or deficiency in a resource that represents a relative disadvantage to an organization in comparison to what competitors have. Limited financial resources, poor marketing skills, poor after sales service and negative organizational culture may be examples of weaknesses. These deficiencies prevent the organization from developing a competitive position in the market industry. What is an opportunity? This is a favourable situation in the organization’s external (market and macro) environment. A decrease in the interest rate can be seen as an opportunity for an organization that still has a loan obligation. The closing down of one of its major competitors is also a favourable condition in the market environment of the organization.
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Strategic Management What is a threat? This is an unfavourable situation in the organisation’s external environment. Again the organization does not have any control over what is happening in the external environment but, for instance, an increase in the interest rate (economic and environment) is a major threat for the cash flow for an organization with a big loan. A SWOT analysis consists of a careful listing of the strengths, weaknesses, opportunities and threats. The SWOT analysis has the following limitations:
It has a static approach – a one shot view of a moving target
The focus on the external environment may be too narrow
The strengths that are identified may perhaps not lead to an advantage
It may lead to an over-emphasis of a single feature or strength and disregard other important factors that may lead to competitive success.
3.4 Internal analysis for effective strategy development In order to develop the most effective and efficient strategy, it is important to analyse the organization internally; that is to look more closely at the organisation’s resources, capabilities and core competencies, in order to have an informed understanding of its current situation. Methods of conducting an internal analysis are discussed below. 3.4.1 Resource – based view (RBV) Resources, organizational capabilities and competencies must be seen as the foundation characteristics that make up the competitive advantage of an organization. Organizational resources have an impact on the management capabilities of the organization which in turn are the sources of core competencies that may ultimately lead to a competitive advantage. The RBV holds that the organisation’s resources are more important than the industry structure in an attempt to gain and keep its competitive advantage. It also sees organizations as very different in terms of their collections of assets and organizational capabilities – no two organizations will be similar, because they have different experiences, different assets and capabilities and different organizational cultures. The argument is that it is the resources and MANCOSA – PGDBM
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Strategic Management capabilities that will determine how efficiently and effectively the organization is functioning. The main concern for competitive advantage according to the RBV is thus organizational resources and capabilities. If management wants to manage strategically, it is important to understand exactly what resources and what characteristics will make them unique. 3.4.1.1 Resources Central to the RBV is that there are three types of resources that will lead to distinctive competencies and therefore competitive advantage.
Tangible assets
Intangible assets
Organisational capabilities
Resources may include all the financial, physical, human and intangible assets that are used by an organization to develop, manufacture and deliver products and /or services to its customers or clients.
Tangible assets – easiest to identify because they are visible. The value of these resources can be determined by looking at the financial statements – especially the balance sheet.
Intangible assets are assets one cannot touch but are often the critical assets that create the real competitive advantage.
The advantage of intangible assets is that as a result of their non visibility it is more difficult for competitors to understand, purchase, imitate or replace. For this reason organizations often rely more on intangible resources for creating core competencies and competitive advantage. 3.4.1.2 Capabilities There is no competitive advantage to an organization if resources are available but there is no capacity to deploy them through a complex process of interactions with the tangible and intangible resources. Capabilities are actually the glue that emerges over time and binds the 29
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Strategic Management organization together. The organizational capabilities are the complex network of processes and skills that determine how efficiently and effectively the inputs in the organization will be transformed into outputs. By themselves resources are not productive – they must be processed or used in some way to draw the value out of them. The foundation of many organizations’ 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 organization. As employees do their work, combining the tangible and intangible resources within the structure of the organizational processes, they actually accumulate knowledge and experience about how to create value from the resources for the organization and turn them into possible core competencies or distinctive organizational capabilities. This is why organizations should invest in their employees’ continuous development, so that this human capital – one of the most significant capabilities, together with resources can contribute to competitive advantage. The majority of capabilities are developed in specific functional areas, like effective motivation and empowerment skills in the human resource department, effective promotion of brand names and customer service in the marketing department, product and design quality in the production department and the ability to envision the future as a general management capability. It is important that the capabilities must also be developed at top management level and not only at the functional level. In a dynamic business environment, in order to ensure its success, the organization must demonstrate timely responsiveness, rapid and flexible product innovation and also management expertise in coordinating and deploying the organizational resources and capabilities. This is at the heart of competitive advantage. It is this distinction that contributes to the organisation’s core competencies.
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Strategic Management What are the distinguishing aspects between capabilities and core competencies? Core competencies are only possessed by those organizations whose performance is superior to the industry average. They also add greater value than general competencies or capabilities and they are based upon superior organizational skills and knowledge. For example, in the motor industry, all motor manufacturers have the necessary competencies or capabilities and resources to build motor vehicles, but a company like BMW has core competencies in design and engine technology which act as the basis of its reputation for high quality and high-performance cars. According to the RBV, it is important for the resource capabilities to be unique and capable of leading to a sustainable competitive advantage. They must be difficult to create, buy, replace or imitate. A resource should be of real value to add to the competitive advantage. There are a few characteristics or guidelines that make a resource valuable: VALUE An organizational resource is valuable if it adds value, if it helps an organization to exploit the external opportunities or when it can cope with and neutralize the negative external threats. Skilled employees are an example of an organizational resource that will fulfil both these requirements. SUPERIOR RESOURCES If the resource is superior to those that the competitor has, and it fulfils a customer’s needs better, then the resource is superior and valuable.
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Strategic Management SCARCITY If a resource is in short supply and ideally no other organization possesses it, then it becomes a distinctive competence for the organization. The resource must be able to fulfil the need of the customer. INIMITABILITY If a resource is hard to imitate, it is likely to offer a long-term competitive advantage to the organization. Organizations are looking for resources that are hard to imitate, because they generate revenues that will probably continue to flow in. Imitation can happen in two ways:
Duplication – where the same kind of resource is built
Substitution – replacing a resource with an alternative resource that achieves the same results.
Resources that are difficult to imitate include goodwill, a good location, a patented product and organizational culture. KFCs difficult to imitate recipe is a good example. KFC advertises ‘secret herbs and spices’ making the recipe for tasty chicken difficult to copy or imitate.
CAPACITY TO EXPLOIT THE RESOURCE If an organization does not have the capacity or ability to exploit the resource, the resource that could create a competitive advantage will not be in a position to do this. Some of the resources may need a large capital investment to be exploited. This will enhance the inimitability of a resource, thus making it more valuable. 3.4.2 Value chain analysis (VCA) Every organization has a chain of activities through which inputs are transformed into outputs. Examining the value chain as a method of doing internal analysis refers to a way of looking at a chain of activities to determine where value is really added to the product or service. In simple terms, value added to a product or service is the difference in money value of the finished product compared to the money value of the inputs.
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Strategic Management There are three aspects of resources in particular that create customer value:
The product is unique and/or different;
The product is cheaper than that of competitors. For example, Game is committed to providing value-for-money shopping across Africa to ensure its position as Africa’s most dynamic discount group.
The organization has the ability to respond to the customer’s needs very quickly.
Value chain analysis (VCA) is thus a systematic method of determining how the organisation’s different activities contribute to creating value for the customer. Michael Porter (1980) also developed the concept of the value chain. He was concerned with how to create more value for the customer, and how the different organisational routines and processes (the different work activities of employees in an organisation) contribute to the ultimate value which the customer experiences. This process point of view is thus the central theme in VCA. This means that the VCA views the organisation as a sequential process that includes all the value-creating activities in the organisation. Value chain analysis helps to identify where the most value is added and especially where there is potential to add more value. In the analysis of the chain of activities, one can identify what the organization is doing well and by really adding value for the customer (this will be its strengths) and where there is the potential for improvement (perhaps weaknesses). What is the meaning of value in the VCA? Value can be described as the amount of money that customers are willing to pay for what the organisation is providing them. The more value they experience receiving, the higher the amount they are willing to pay. The activities in the VCA can be grouped into two categories, namely the primary activities and the support activities. It is obvious from the names of these two categories that the primary activities are those that create the physical product or service and customer value (if done effectively and efficiently), while the support activities provide support and thus add value throughout the process. 3.4.2.1 Primary activities Some of the different items in the organisation that should be studied in terms of the primary activities are as follows:
Input logistics. This activity, which Porter originally called ‘inbound’ logistics, is associated with the receiving, storing and distributing of inputs to the product. Is there
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Strategic Management a material controls system? How, and how effectively and efficiently are the raw materials handled and warehoused?
Operations. These activities include all those that are associated with the transformations of the inputs into the final product. Questions to answer in this regard are: How efficient is the layout of the manufacturing plant? Is a production control system in place and how effective and efficient is it? What is the level of automation?
Output logistics. This activity which porter originally called ‘outbound’ logistics refers to all the issues related to the distribution of the product or service to the customers. How effectively and efficiently are products and services delivered to customers? How, and how effectively and efficiently, are the finished products handled and warehoused?
Marketing. Customers must buy the final products and services. This activity refers then to the inducements (persuade or incentives) used to get customers to make the purchases. What is the level of marketing and competency in terms of sales? Is market research effective in terms of identifying the customer’s needs? What is the situation and effectiveness of the marketing strategy in terms of the four P’s (product, promotion, place and price)? How effective is the organisation in creating brand loyalty in customers?
Customer service. There are some basic activities that the organisation must undertake to make sure the value of the product is maintained, such as installation, repair, training, the supply of parts and perhaps product adjustment. How effective and efficient are the customer services that the organization provides? What guarantees and warranties are offered to the customers? Does the organisation listen to complaints of customers and then act upon them?
3.4.2.2 Support activities In any organisation and industry there are support activities that add value by themselves or through the important relationships they have to all the other activities in the organisation. The performance of the primary activities depends on the support activities. Support activities include the following:
Procurement. This activity refers to the function of purchasing inputs. It can be perceived that there is an overlap between this activity and the primary one known as input logistics. This support activity, however, refers to the actions that can be taken to optimise the quality and speed of the procurement of inputs, and not to the inputs
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Strategic Management themselves. Questions that should be answered include: Are the resources procured at the lowest possible cost and acceptable quality levels? Are sound relationships being established with suppliers?
Technological development. Technology is important for all activities. The technologies used to include the different processes and equipment throughout the entire value chain. Questions that should be addressed include: What is the level and quality of technological development? What is the ability of the technological activities to meet the critical deadlines? Is there a culture in the organisation that enhances creativity and innovation?
Human resource management. The importance of this activity cannot be overemphasised, because the recruitment, selection, training, and compensation of employees will affect all levels in the organisation. The issues that are important in terms of this activity will include the following: How effective are the human resource management procedures? What is the level of employee motivation? What can be done to ensure a quality work environment?
General administration and infrastructure. It is important to achieve the overall goals of the organisation. That is why there must be a certain general administration and organisational infrastructure in place, for example effective and efficient planning systems. The issues that should be addressed are: Are all the value chain activities coordinated and integrated throughout the organisational value chain? What are the relationships with all the stakeholders of the organisation? What systems are in place to ensure a good public image and reputation?
Financial management. Porter (1980) did not originally include this activity in the value chain. It is, however, important that sound financial practices be in place throughout the value chain. All activities must adhere to effective financial recording and control. The issues that should be addressed are: Are all the value activities recorded according to sound financial principles as described in GAAP (general accepted accounting practices)? What systems are in place to ensure effective financial recording?
If there are no efficient management systems in place with regard to all the activities in the value chain, an organisation will quickly experience problems such as inventory, shortages,
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Strategic Management ineffective marketing and sales, slow responsiveness to competitors’ actions and perhaps also in terms of its operations inefficiency. It is very important to emphasise the extent to which value chain activities support the current strategy of the organisation. If the organisation is following a low-cost strategy, then the activities in the value chain must be organised in such a way as to support the strategy of minimising costs. If the strategy of the organisation is based on high quality, then all activities must be configured to ensure the high quality of products or services. The strategic alignment between the value chain activities and the strategy cannot be over-emphasised. 3.4.3 Functional approach An effective, simple approach to internal environmental analysis is to conduct an internal audit using a functional approach. The usual business functions in almost all organisations are finance and accounting, marketing, production, purchasing, corporate communications (public relations), human resources and administration. Research and development may also be added. It is, however, also important to remember that individual organisations are likely to have their own unique functions that may not be covered by the above. The premise of the internal audit is that it can be conducted by analysing the organisation’s functional activities. In the same way that the value chain approach assumes that the organisation needs customers and that the customers expect value in order for the organisation to achieve competitive advantage, the premise of the internal audit is that every organisation has specific functions that it must perform. It can thus be said that an internal audit is an assessment of the various functional areas of the organisation. What are the issues in the functional areas that should be included in an internal audit? The following table lists some of the internal audit questions that can be asked in order to assess the strengths and weaknesses of each of the functional areas. This is, of course, not a comprehensive list and it remains the responsibility of every organization to determine its own internal audit questions.
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Table 3.1 Some internal audit questions in terms of the functional areas Source: Adapted from Coulter (2002:137-139).
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Strategic Management The major objective of the internal audit is to determine how well or poorly these functions are being performed and what resources these functional areas actually need to perform effectively. The disadvantage of this approach is, however, that the attention is entirely focused on the functional areas, while there is no determination of whether a specific functional area makes an important contribution to the organisation’s competitive advantage. 3.4.4 The Internal Factor Evaluation Matrix A method that can be used to conduct an internal audit is through the construction of an Internal Factor Evaluation Matrix (IFE Matrix). This evaluates the major strengths and weaknesses in the different functional areas. This could also be regarded as a summary of the internal factors identified in the previous internal analysis methods. The answers to the questions asked will provide the starting point for this matrix. It is far more important to understand why the internal factors are selected as strengths and weaknesses, than to rely on the actual number that is arrived at.
Table 3.2 A sample Internal Factor Evaluation Matrix for an organisation
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Strategic Management The following five steps are used to complete the summary of the internal audit in the IFE Matrix: 1. List the 10 to 15 most important internal factors that are identified in the internal audit. The factors will include both strength and weaknesses. These factors can be listed in the first column - first the strengths and then the weaknesses. 2. In the next column a weight can be assigned to a given factor that will indicate the relative importance of the factor in terms of the success of the organization in relation to its specific industry. The higher the weight, the more important the factor is for the current and future success of the organization. The sum of the weights must always equal 1,00. If the factor is not important, it will receive a low weight e.g. 0,10. If it is an important factor that may contribute, for example, to 80 per cent of the current and future success of the organization, it will receive a weight of 0,80. 3. In the third column a rating out of 5 can be used to rate these factors. (Sometimes a rating out of 4 is also used.) These ratings are based on the current response to that specific factor. Whereas the weights are based on the success in the industry, these ratings are based on the company’s response to that specific factor. If the factor is an outstanding strength it will receive a 5, above average a 4 and average receive a 3. If the factor is a major weakness, it will receive a 1 and if it is a minor weakness it will receive a 2. 4. In the last column the weight is multiplied by the rating of the factor to get the weighted score. The sum of these scores will range from 5,00 (outstanding) to 1,00 (poor), with 3,00 as average. 5. Sometimes it can be useful to include some comments in a further column to make the understanding of the selected factors more useful. The important principle to remember is that the weights must always add up to a total of 1,00. As already indicated, the average score is 3,00. When an organisation thus scores higher than 3,00, it means that it is above average in its overall internal analysis in relation to other organisations in that specific industry. (The weights relate to the importance of a factor with regard to success in that specific industry.) If an internal factor is both a strength and a weakness, it must be included twice in the matrix. A rating as well as a weight must be assigned to each statement. In table 3.2 the ratings and score of a hypothetical legal firm are included as an example. The total weighted score of 3,25 indicates that the firm is above average in 39
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Strategic Management its overall internal strength. This matrix can also be used to compare organisations with one another. Of course it will be difficult to get information from competing organisation, but a matrix can perhaps be developed on their behalf. This makes comparison more meaningful and relevant. All the information provided through this evaluation matrix will help the organisation to develop more effective and relevant strategies. 3.5 Conclusion It is important for any organisation to engage in an internal environmental analysis before any strategic decisions can be taken. The use of the traditional SWOT analysis is a good starting point for the internal analysis, but owing to its inherent limitations, it should be complemented by the resource base view and the value chain analysis which will provide a more useful framework. References and Recommended Reading: Coulter, M. 2002. Strategic Management in action, 2 nd ed. Upper Saddle River, New Jersey, Prentice Hall. David, F.R. 2013. Strategic Management Concepts and Cases, 14th ed. Boston, Pearson. Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2003. Strategic management: competitiveness and globalization, 5th ed. Mason, Ohio: Thomas Learning. Pearce, J.A. & Robinson, R.B. 2003. Strategic management: formulation, implementation and control, 8th ed. Boston. McGraw-Hill. Thompson, A.A. & Strickland, A.J. 2003. Strategic management: concepts and cases, 13 th ed. New York: McGraw-Hill.
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Strategic Management THINK POINT: 1. Do a SWOT analysis of your organization or any other organization of your choice, using the following methods:
SWOT analysis
Resource-based view
Answers SWOT Analysis Strengths Outline any strength that the organization may have. The strength can be seen in the organizational resources such as its intellectual capital, technological resources and development, physical resources and any aspect that it may have that will give it a competitive advantage. Weaknesses Any deficiency in a resource that is disadvantageous to the organization in relation to its competitors. These can be poor marketing skills, untrained staff, poor service delivery, a negative organizational culture or any other aspect that will prevent the organization from developing a competitive advantage. Opportunity It is a favourable situation in the organization’s external environment – e.g., a decrease in the interest rate, closing down of a major competitor. Threat Establish an unfavourable situation in the organization’s external environment – e.g., an increase in the interest rate, competitors entering the market.
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Strategic Management Resource-based View
Organization’s resources are more important than the industry structure.
Organizations as very different in the manner in which it acquires assets and develops its organizational capabilities. Identify the resources that will enable the organization to function effectively and efficiently.
Identify the unique nature and characteristics of the organization’s resources that will enable management to manage strategically.
2. What is the function of the Internal Factor Evaluation Matrix and how does it apply to your organization?
To determine how well or poorly the functions are being performed.
To establish what resources these functional areas actually need to perform effectively.
Establish the assets, the tangible assets, intangible assets and discuss the organization’s capabilities.
Look at the value of the resources – that is, -
Are the resources in the organization of value?
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Can its external capabilities be exploited?
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Are the resources superior to those of the competitor?
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Are the resources scarce and the competitors not have them?
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Is it easy to imitate the resource?
Use the Internal Factor Evaluation Matrix (IFE Matrix) to evaluate the major strengths and weaknesses in the different functional areas.
It is important to understand why the internal factors are selected as strengths and weaknesses.
Refer to the steps in the process
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Strategic Management
CHAPTER 4
External environmental analysis
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Strategic Management External environmental analysis Learning objectives After studying this chapter you should be able to do the following:
Know how to set strategic direction: the first step in the strategic management process.
Describe all the elements of the external environment.
Apply all the elements of the macro environment in the environmental analysis of an organization.
Describe what an industry is and how to do an industry competitive analysis by using Porter’s model.
Identify all the market environmental factors and know how to use them in an environmental analysis.
4.1 Introduction The organisation and the environment in which it operates are not closed systems because they influence each other. The organization thus cannot be successful if it is not in step with its environment. The fact that the organization 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 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 organization can adjust to it. Because of the increasing turbulence and continuous changes in markets and industries around the world, external environmental analysis has become an explicit and vital part of the strategic management process. External environmental analysis focuses its attention on identifying and evaluation 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. If this external environmental analysis is done thoroughly, it enables managers to formulate strategies to take advantage of opportunities and avoid or reduce the impact of threats.
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Strategic Management After external opportunities and threats have been identified, evaluated and matched with knowledge about the internal environment (the organisation’s strengths and weaknesses), it will be easier for the organisation to develop a clear mission, design strategies to achieve longterm objectives, respond either offensively or defensively to the factors, and develop policies to achieve the objectives which will result in strategic competitiveness and above – average returns. To build their knowledge and capabilities and to take actions that buffer or build bridges to external stakeholders, organizations must effectively analyse the external environment. Technological improvement, economic fluctuations, changing social values, political changes, aggressive international competition and the like continually change the environment in which an organisation exists in such a way that it has to adapt to ensure survival. If one looks at the environment that confronted Pep Stores the last few years, it is evident that a number of factors had to be taken into consideration by organizations. The successful process of political negotiations and the general democratic elections in 1994 in South Africa led to an upswing in consumer confidence. This was evident in the Pep Stores market. This was further inspired by the promised RDP expenditure and the government’s proposed large expenditure on social upliftment targeted at the very sectors that Pep Stores traditionally served. There are factors that also contributed to the Pep Stores market for example an increase in crime and unemployment. This was the catalyst for its competitors Woolworths and Edgars to offer credit facilities and lured the Pep Stores customers away. A continuous process of external environmental analysis is important and includes four interrelated activities, namely scanning, monitoring, forecasting and assessing.
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Strategic Management
Scanning Early signs of environmental changes and trends are identified.
Monitoring Meaning of environmental changes and trends is detected through ongoing observation.
Forecasting Based on monitored changes and trends, projections of anticipated outcomes are developed.
Assessing The timing and importance of environmental changes and trends for organizations’ strategies and their management are determined Figure 4.1 Components of the external environmental analysis Source: adapted from Hitt, Ireland & Hoskisson (2003:43) 4.2 The external environment For organizations to be able to understand the present and predict the future, an integrated understanding of the external and internal environments is essential. An organization’s external environment is divided into three major areas – the macro, industry and market environments (see Figure 4.2). It is important to understand that the elements of the external environment not only influence the environment and the decision making of managers of organizations, but also one another, thereby resulting in continuous changes in the environment in which organizations have to operate and compete.
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Figure 4.2 the different environments of an organization An important principle is that organizations 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 organizations. The following are some elements in the external environment that will influence the organisation in different ways:
Consumer demand for both industrial and consumer products and services
Types of products needed to be developed
Nature of positioning and market segmentation strategies
Types of services needed
Choice of businesses to acquire or sell
Competitors’ actions
The selection of suppliers and distributors
Government’s regulations and laws
Organizations need to anticipate, mobilize and empower their managers and employees to identify, monitor, forecast and evaluate key external forces; otherwise they may fail to anticipate emerging opportunities and threats.
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Strategic Management 4.3 The macro environment The different dimensions in the macro environment are grouped into five environmental segments:
Political, governmental and legal forces
Economic forces
Social, cultural and demographic forces
Technological forces
Ecological forces
Figure 4.3 Some of the elements of the macro environment Source: Adapted from Hitt, Irelenad and Hoskisson (2003:42) 4.3.1 Political environment The political environment is where various laws, regulations, judicial decisions and political forces are analysed (Coulter 2010: 82). This environment includes the parameters within which organizations and interest groups compete for attention, and provides a voice in overseeing the body of laws and regulations that guide the interactions between organizations and the environment. Essentially this aspect represents how organizations try to influence government and how government influences them. Any government is a major regulator, deregulator, subsidizer, employer and customer of an organization. MANCOSA – PGDBM
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Strategic Management Political, governmental and legal factors can represent key opportunities or threats for both small and large organizations. The direction and stability of political factors in a country are major considerations for managers when they have to formulate the strategy of their organization. Managers of large organizations are spending more time anticipating and influencing public policy actions, meeting with government officials, trade groups and industry associations, because they know what the influence of political and legal issues will be on their organizations. It is important that organizations consider the impact of political variables on the formulation and implementation of competitive strategies because of the increasing global interdependence among economies, markets, governments and organizations. Increasing global competition accentuates the need for accurate environmental forecasts and before entering or expanding international operations, strategists need a good understanding of the political and decisionmaking process in countries where their organizations may conduct business. 4.3.2 Economic environment Economic factors have a direct impact on the potential attractiveness of various strategies and consumption patterns in the economy, and also have significant and unequal effects on organizations in different industries and in different locations. Because consumers are forced to reconsider their consumption priorities, the following influence the demand for goods and services:
Inflation
Recession
Interest rates
Organisations must know the economic situation in a country and managers must consider:
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Employment rates
The level of disposable income
The availability and cost of credit
The trends in the Gross Domestic Product (GDP)
The total value of goods and services produced in a country in one year
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Strategic Management 4.3.3 Socio-cultural environment The socio-cultural environment is concerned with a society’s attitudes and cultural values. These variables shape the way people live, work, produce and consume. The growing customer demand for healthy food products for instance provides and opportunity for organizations to expand their offerings.
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Strategic Management Reading Activity Read the case study Food for thought - Ehlers and Lazenby (2007: 109) and answer the following question. According to restaurant industry statistics and Franchise Directions consultancy, the South Africa Restaurant industry has been growing in real terms by at least 10 per cent a year. The growth in restaurant and the changing eating habits (increasing consumption of health foods) of South Africans hold major opportunities for the food and processing sector. Pieter Cornelius, stock and vegetable manager for research group AMT in Pretoria, says that demand and price gains of agricultural products are largely due to the local restaurant industry and its growth. Prices depend largely on the local markets, because so little is exported or imported and therefore price rises for vegetables are demand-driven. South Africa’s annual onion consumption is 200 000 tons, with the restaurant industry clearly the main growth area. The Spur Group alone buys 3300 tons of onions, which account for nearly 2 per cent of South Africa’s total onion consumption. Cabbages are now one of the best performing vegetables locally, the demand for garlic has grown faster than any other kind of vegetable (thanks to the growing awareness of the health benefits and increasing use of it on pizza and in pasta dishes), and potatoes, South Africa’s most popular vegetable, are also benefiting from the flourishing restaurant industry. Because of the growing customer demand for healthier food, the food and processing sector is flourishing and restaurants offering the healthier alternative are thanking the external environment for their success! Source: Adapted from Finance Week (22nd January 2003:50) What benefits will the organization derive from expanding on its offering?
Increase in profits brought about by increased sales.
Increased customer satisfaction – resulting in retention of loyal customers.
Expand its target market to which the offerings can be sold.
Opportunity to create jobs and add to economic growth.
First mover advantage and able to capture the market early
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Strategic Management 4.3.4 Technological environment Technological change affects many aspects of society. These effects occur primarily through new products, processes and materials and to avoid obsolescence and promote innovation an organisation must be aware of technological changes that might influence its industry. The implications of technological innovation and advancements are as follows:
They dramatically affect organizations’ products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices and competitive position.
They create new markets.
They result in 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.
No company or industry is insulated against emerging technological development, and management must take cognizance thereof when doing strategic planning. 4.3.5 Ecological or natural environment The ecological environment refers to the relationship between human beings – and thus organizations – 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. The global climate change has thus far had a profound effect on the environment – in some instances creating scarcity. This will present both opportunities and threats to the organisation. In order to maintain a sustainable business, management must take the physical onslaught on the environment into consideration.
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Strategic Management It is precisely this aspect that the King III report addresses in its triple bottom line. This issue of corporate governance and business ethics will be discussed later. 4.4 Industry environment A group of organisations that produces products which are close substitutes for one another, or which customers defect to as a suitable replacement, thereby influencing one another in the course competition, is known as an industry. An organisation must know which industry it is competing in, what the structure of the industry is what the major determinants of the competition are and which organizations are the competitors. Industry structure depends on four variables: 1. Concentration 2. Economies of scale 3. Product differentiation 4. Barriers to entry Competition in industry is influenced by Michael Porter’s Five Forces Model. Figure 4.4 illustrates Porter’s Five-Forces Model. The intensity of competition among firms varies widely from industry to industry.
Figure 4.4: Porter’s Five Forces Model
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Strategic Management According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces. a.
Rivalry among competitive firms.
b.
Potential entry of new competitors.
c.
Potential development of substitute products.
d.
Bargaining power of suppliers.
e.
Bargaining power of consumers.
a) Rivalry among competing firms is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. b) Potential entry of new competitors. Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. c) Potential development of substitute products. In many industries, firms are in close competition with producers of substitute products in other industries. d) Bargaining power of suppliers. The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are a large number of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw materials is especially costly. e) Bargaining power of consumers. When customers are concentrated, large, or buy in volume, their bargaining power represents a major force affecting intensity of competition in an industry. In particular, consumers gain increasing bargaining power under the following circumstances: a.
If the switch to competing brands or substitutes, is inexpensive,
b.
If they are particularly important to the seller,
c.
If sellers are struggling in the face of falling consumer demand,
d.
If they are well informed about sellers’ products, prices, and costs, and
e.
If they have discretion in whether and when they purchase the product.
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Strategic Management The following three steps can reveal whether competition in a given industry is such that a firm can make an acceptable profit:
Identify key aspects or elements of each competitive force that impact the firm.
Evaluate how strong and important each element is for the firm.
Decide whether the collective strength of the elements is worth the firm entering or staying in the industry.
4.5 Limitations of Porter’s Five Forces Model 4.5.1 Instead of determining the attractiveness of the industry, there is evidence that the organisation’s competencies are more important than industry factors. 4.5.2 The model implies that the five forces apply equally to all competitors in the industry. The truth may be that the strength of the forces differs from organization to organization. 4.5.3 Product and resource markets are not adequately covered by the model. 4.5.4 The model can never be applied in isolation. 4.5.5 The model assumes that the relationship between competitors is always hostile.
4.6 The market or task environment An organisation’s immediate environment is known as the market or task environment and it comprises the suppliers, intermediaries, customers and competitors. These variables can be either an opportunity or a threat, and as in the macro environment, management has no control over these variables, but can influence their effect through changes in the organization’s strategy. The most important task of management in capitalizing 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 the other variables of this external environment do not represent a threat to the organization. 4.6.1 Suppliers Suppliers are the individuals and companies that provide an organisation with the input resources – raw materials, component parts or labour – that the organisation needs to produce goods and services. It is important that management secures a reliable supply of input resources. 55
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Strategic Management It is important for an organisation to assess its relationships with its suppliers and therefore several factors have to be considered – namely:
How competitive are the products of the suppliers?
How competitive are suppliers in terms of their production standards and the quality of their products?
How competitive are the suppliers in terms of their ability for speedy and reliable delivery?
What are their reputations?
How efficient and effective are they in terms of after- sales service delivery?
4.6.2 Distributors or intermediaries Distributors are organizations that help other organizations to bridge the gap between manufacturer and customer by selling their goods and services to the final consumer. The nature of distributors is also changing and this may also bring about an opportunity or threat for the managers in the organizations. 4.6.3 Customers Customers are those people, individuals and groups, who buy the goods and services that an organization produces. Customers are the most important and vulnerable variable of the market environment and the most difficult to understand. Opportunities and threats arise from changes in the number and type of customer or changes in customers’ tastes and needs and an organization’s success depends on its response to these changes. 4.6.4 Competitors Competitors are organizations that produce goods and services similar to a particular organization’s goods and services and compete for the patronage of the same customers. The more intense the competition the more important it is for an organization to understand its competitors. The following is important in the competitor analysis: What are the future objectives of the competitors? What are their current strategies? What do the competitors believe about the industry – what are their assumptions? What are their capabilities?
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Strategic Management
Figure 4.5 Components of a competitor analysis Source: Adapted from Hitt, Ireland & Hoskisson (2003:66) 4.7 Summary The external environment of the organization is complex and challenging. The increasing turbulence in this environment also makes it important for an organisation to be involved in an external environmental analysis by auditing all the factors that pose opportunities and threats to the organization. As many managers and employees as possible must be involved in the process of external environmental analysis, as participation in the strategic management process can lead to an understanding of the organization’s situation and a commitment from organizational members to the process and implementation of the strategy. Further questions 1. In the competitive environment, what aspects can be regarded as entry barriers?
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Economies of scale
-
Product differentiation
-
Capital requirements
-
Switching costs
-
Access to distribution channels
-
Cost disadvantages independent of scale
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Strategic Management 2. What are the specific conditions that contribute to intense competition among existing competitors? -
Numerous or equally balanced competitors
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Slow industry growth
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High fixed or storage costs
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Lack of differentiation or low switching costs
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High exit barriers
3. When are suppliers powerful? When -
The supplier sector is dominated by a few large organizations and is thus more concentrated than the industry it sells its products to.
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No satisfactory substitutes are available for customers to buy.
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Industry organizations are not important customers for the supplier group.
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Suppliers’ goods are critical to buyers’ organizations.
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Switching costs are high.
4. When do buyers have bargaining power? When -
They purchase a large quantity of a seller’s products or services
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The sales of a product sold accounts for a large portion of the seller’s revenue
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Few, if any, costs are incurred when customers switch to another product
-
The same reason (shopping for low prices) is applicable if the customer or buyer earns low profits
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The products or services purchased by the customer account for a large portion of the organization’s costs
-
The industry’s products are undifferentiated or standardized
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Customers have access to a lot of information
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Strategic Management
CHAPTER 5 Strategy Formulation: long-term goals and generic strategies
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Strategic Management Strategy Formulation: long-term goals and generic strategies Learning Outcomes After studying this chapter you should be able to do the following:
Define long term goals and discuss the requirement that they should meet in order to be used effectively in the strategic management process.
Explain what competitive advantage is.
Discuss the generic strategies identified by Michael Porter and illustrate with practical examples how these strategies can contribute to the attainment of competitive advantage for an organisation.
Outline and discuss the distinguishing features of each of the generic strategies, optimum conditions for selecting each specific strategy and potential pitfalls of each generic strategy.
5.1 Introduction Strategy is about positioning organizations for long term competitive advantage. It requires that managers make choices about markets and segments to participate in and avoid. The choice of products and services to deliver and the acquisition and allocation of resources to ensure that this is done in a professional, timely and profitable way are essential components of a good strategy. The primary aim of strategy is to create value for shareholders and other stakeholders by providing customer value. Strategy is also important because recent evidence suggests that there is a relationship between strategy, business performance and good governance. Successful firms are careful to ensure that their strategies are related to their structures and to the demands and peculiarities of the environment and operating context. They will leverage their core competences and particular skills and abilities to maintain their competitive vitality. Sound strategy is rooted in a deep understanding of what current and potential customers’ value, how much they are prepared to pay, the profile and posture of the competition and how such elements are likely to change. It should also reflect a clear strategic intent and competitive innovation driven by sound, effective leadership (Beaver, 2003:287).
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Strategic Management This chapter will explore the nature of long term goals, the importance of gaining a competitive advantage and the possible generic strategies to choose from in pursuing organizational long term goals and ultimately achieving the vision. 5.2 Long-term goals Long-term goals (sometimes called long-term objectives) are determined in line with the organisation’s vision. These goals are strategic in nature and reflect the organisation’s specific direction on a high level. Strategic objectives, or the so-called long term goals, are the premise for more specific objectives, or the so-called short-term /functional objectives (Ehlers and Lazenby 2007:136). The word “strategy” has been handed down from the military, and refers to the important aspects of the plan; “tactics” on the other hand, refers to the details. “One person’s strategies are another’s tactics- what is strategic depends on where you sit”, say Mintzberg, Quinn and Ghoshal (1995:17). Mintzberg et al. furthermore point out what seems tactical today may prove strategic tomorrow. What they mean is that although long-term strategic objectives are important because they set a specific direction, the importance of tactics cannot be ignored. Sometimes a tactical decision, such as Henry Ford’s decision to manufacture his cars only in black (which lost him the war with General Motors), may prove to have critical competitive consequences. Table 5.1 summarises some of the differences between long-term strategic goals and shortterm tactical objectives.
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Strategic Management
Table 5.1 Differences between long term strategic goals and short term tactical objectives Long-term goals serve as a reference for the specific strategies and the associated short-term objectives of each organisational unit and its sub-units. Policies may also be reflected in Figure 5.1 and can be defined as the rules or guidelines that express the limits within each action resulting from a short-term (and by implication long-term) objective; for example: “Purchases in excess of R10 000 need to be approved by the purchasing and logistics manager”. Like the objectives they support, policies exist in a hierarchy throughout the organisation. Long-term and short-term objectives need to comply with specific requirements to make it clear to all in the organisation. A long-term goal should not be open to interpretation that varies from employee to employee, but should clearly and unambiguously indicate what management wants to achieve in the future. These objectives should provide direction to the organisation, establish organisational priorities, reduce uncertainty and serve as the basis for allocating and managing resources in the organisation. For example, if a long-term goal states that market share should be increased, the sales and marketing department’s short-term objectives would typically include increased sales to MANCOSA – PGDBM
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Strategic Management customers. This would mean that the employees in that department now know what their priority should be. Sales targets are determined for each unit and individual employee, and performance on those targets can now be measured. Increased sales of a product will mean that the production department needs to increase productivity to provide for the increased demand created by the activities of the sales and marketing department. The long-term goal of increased market share therefore needs to be actioned from their side as well. They should also consider the implications of other departments’ objectives and consequent actions on their performance requirements, and build that into their objectives and planned actions. It is therefore critical that objectives should be realistic, clear and decisive to ensure concerted and coordinated effort by all organisational units. Some considerations should include the following (Mintzberg et al., 1995:12)
Are all efforts directed towards clearly understood, decisive and attainable overall objectives?
Specific objectives of subordinate units may change in the heat of campaigns or competition, but the overriding long-term objectives for all units must remain clear enough to provide continuity and cohesion for tactical choices during the time horizon of the strategy.
If the objectives are to be achieved, they should ensure the continued viability and vitality of the entity vis-à-vis its opponents
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Strategic Management Some additional considerations include the following:
Objectives should be measurable and clearly indicate a time-frame. This means objectives should be expressed in quantifiable terms, such as target dates and numerical targets; for example: “The return of equity must increase from x percent to y percent by the end of 20XX financial year”.
Objectives should also be consistent and congruent across organisational units. Managers should ensure that the objectives they set for their specific unit/department do not conflict with those of other units/departments. For example, one if the organisation’s long-term goals may be to grow its customer base in terms of more profitable customers. The sales department, however, still chases numbers regardless of customer profile and with little concern for customer profitability. Another example is where an organisation wants to expand its market share through canvassing new corporate clients. The following two departmental objectives might be conflicting in the pursuit of this objective: the credit department is aiming to decrease the number of creditors on its books by 10 percent by the end of the same year as the marketing department is aiming to increase its corporate client base by the same percentage. These objectives are not congruent, since corporate clients usually expect credit terms of between 30 and 60 days.
Clearly defined objectives provide direction to the organisation, establish priorities, reduce uncertainty and assist the allocation of resources.
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Strategic Management 5.3 Competitive advantage According to Michael Porter (1985), competitive strategy is all about activities an organisation undertakes to gain a competitive advantage in a particular industry. These activities (and objectives) are determined by the strategic decision on the particular competitive advantage which the organisation is attempting to achieve. The competitive advantage of an organisation is the answer to the question: “What competence/advantage should the organisation use to distinguish it from its competitors?” The competitive advantage should elevate the organisation from its competition. This competitive advantage should fulfil certain criteria. It must:
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.
Consequently, the competitive advantage that an organisation selects should be based on its resources, strengths or distinctive competencies relative to the competitors, but must also be perceived as such by its customers. This implies that an organisation should not only consider its competitors when determining its competitive advantage, but also its customers and their value proposition.
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Strategic Management 5.4 Generic competitive strategies Porter combines the organisation’s ‘scope of operations’ and competitive advantage to derive three generic types of competitive strategies. Organisations have to select specific generic strategies complementing their competitive advantage. Generic strategies provide focus and direct organisational activities. According to Porter, an organisation can strive to supply a product or service in three distinct ways, by pursuing one of the following generic strategies, i.e.: 1. By being more cost-effective than its competitors, i.e. cost leadership 2. By adding value to the product or service through differentiation and command higher prices, i.e. differentiation 3. By narrowing its focus to a special product market segment which it can monopolise; i.e. focus. Combining the cost and differentiation advantage, adds another generic competitive strategy. 4. By offering the lowest (best) prices compared to rivals offering products with comparable attributes, i.e. best-cost strategy
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Strategic Management The choice of generic strategy should be based on the organisation’s strengths and weaknesses relative to those of its competitors. The different competitive strategies are depicted in Figure 5.1.
Figure 5.1 Three competitive generic strategies Source: Adapted from Porter (1980:35-40) 5.4.1 Cost leadership Organisations pursuing a cost leadership strategy usually sell a product or service that appeal to a broad target market. Their products or services are highly standardised and not customised to an individual customer’s tastes, needs or desires. To achieve a cost advantage, an organisation’s cumulative costs across its overall value chain must be lower than 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 costproducing activities.
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Strategic Management Some of the associated cost drivers that need to be managed as part of a cost leadership strategy are the following:
ECONOMIES OF SCALE Economies 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 like research and development (R&D) and advertising over a greater sales volume. A large established retail chain like Pick n’ Pay has much more bargaining power with suppliers of fast-moving consumer goods than newly established supermarket chain with two branches in Pretoria. The prices Pick ‘n’ Pay negotiates with suppliers will therefore be much lower than those that the new supermarket will be able to negotiate.
EXPERIENCE AND LEARNING-CURVE EFFECTS Costs of organisations can decline as employee experience increases. This leads to higher productivity, employees applying technology better or devising ways of improving systems.
THE PERCENTAGE OF CAPACITY UTILISATION Increased capacity utilisation leads to fixed costs being spread over a larger unit volume which lowers 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.
TECHNOLOGICAL ADVANCES Investment in cost-saving technologies can enable organisations to reduce the unit cost of their products or services significantly. Investments in technology are often associated with manufacturing activities, but investment in office and service automation is also popular. For instance, the scanning system that Pick n’ Pay invested in to scan the prices of groceries at till points not only decreased the time per transaction, but also enabled it to reduce its stock management costs.
IMPROVED EFFICIENCIES AND EFFECTIVENESS THROUGH SUPPLY CHAIN MANAGEMENT
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Strategic Management Dell is a good example of a firm leveraging its supply chain relations to reap cost benefits. Dell is able to exploit a comparative advantage in a key part of the supply chain- assembling built-to-order computers and computer solutions and delivering them directly to the customers. 5.4.1.1 Distinguishing features of cost leadership strategy Table 5.2 outlines the parameters that distinguish a cost leadership strategy from the other generic strategies.
Table 5.2 Distinguishing features of a cost leadership strategy Source: Adapted from Thompson et al (2000:113).
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Strategic Management 5.4.1.2 When cost leadership is the best strategy to follow A cost leadership strategy is the best generic strategy to follow when
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. For example, it costs nothing to change your brand of toothpaste every month.
5.4.1.3 Potential pitfalls of a cost leadership strategy The potential pitfalls of a cost leadership strategy are as follows:
Sometimes organisations stand the risk of being overly aggressive with their price cutting and ending up with lower profitability. South Africa cellular operators at some stage offered handset packages and starter packages at such low prices that their profitability was seriously eroded as they still had significant capital costs associated with buying handsets from equipment providers. Prices at the bottom end of the range soon evaporated and became more competitive overall.
Value-creating activities that form the basis of this strategy can often be imitated too easily.
A degree of differentiation is often still needed. A low-cost provider’s product offering must always contain enough attributes to be attractive to prospective buyers- low price is not always appealing to buyers. Mr Price cannot only rely on a cost advantage as their name suggests, but has to stay abreast of newest trends in fashion, demand for variety and comparable quality.
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Strategic Management 5.4.1.4 Advantages of cost leadership As we have said, pursuing a cost leadership strategy increases the potential of an organisation to increase its market share as well as it profitability. For this reason competitors are not very likely to start a price war in an industry where there is a dominant cost leader. 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. Customers often prefer to buy from well-known, established organisations, especially when after-sales service is important. Customer loyalty is therefore often 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. 5.4.2 Differentiation Differentiation consists of creating differences in the organisation’s product or service offering by creating something that is perceived as unique and valued by customers. Differentiation can take on many forms, such as the following:
Prestige or brand image (BMW automobiles, Nike trainers, Carrol Boyes homeware, Rolex)
Technology (LG electronic equipment)
Innovation (Nokia cellular phones)
Features (Microsoft Office)
Customer service (Investec Personal Banking)
Product reliability (Johnson & Johnson baby products)
A unique taste (Nando’s Chicken)
Speed and rapid response through activities such as prompt response to customer complaints, shorter product development cycles, speedy delivery, etc. (Outsurance)
The most appealing approaches to differentiation are those that are difficult for competitors to imitate. The most important by-product of a differentiation strategy is customer retention and loyalty. This means that customers are locked in and are therefore safe from rival competitive activities.
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Strategic Management 5.4.2.1 Distinguishing features of the differentiation strategy Table 5.3 outlines the parameters that distinguish a differentiation strategy from the other generic strategies. Strategic target
A broad cross-section of the market
Basis of competitive advantage
Ability to offer buyers something attractively different from competitors
Product line
Many product variations; wide selection; emphasis on differentiating features
Production emphasis
Differentiating features buyers are willing to pay
Marketing emphasis
Flaunting differentiation features; charging a premium price to cover the extra costs of differentiating features
Key to sustaining the strategy
Constant innovation to stay ahead of imitative competitors A few key differentiating features
Table 5.3 Distinguishing features of a different strategy Source: Adapted from Thompson et al (2004:113).
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Strategic Management 5.4.2.2 When differentiation is the best strategy to follow A differentiation strategy is the best generic strategy to follow when:
Buyers’ preferences are diverse and varied
Fewer competitors follow a similar differentiation approach with less head-on-head rivalry
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 around changing product features
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. This lowers customer propensity to switch products and services as well as their sensitivity to price. Retail banking in South Africa is characterised by brand loyalty, and differentiation of products and services is a common strategy among rivals.
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Strategic Management 5.4.2.3 Potential pitfalls of a differentiation strategy Despite numerous benefits, the following pitfalls to following a differentiation strategy should be avoided:
Uniqueness that is not valuable. It is not sufficient to be different- the key is providing a valuable uniqueness and difference. In such instances market research and reliable information on customer preferences are critical to the success of a differentiation strategy.
Too much differentiation. The key to success is providing an appropriate level of quality at a lower price. Mardesich (1999, in Dess et al., 2004: 152) reminds us of the release of Windows 2000 that was delayed for over a year because of the 35 million lines of code necessary to accommodate its extensive list of features.
Charging too high premium. Prices still need to be competitive in order to reduce switching to lower-priced competitive products or services.
A uniqueness that is easily imitated
Dilution of brand identification through product-line extensions. Profit declines can occur because of differentiation to a product or product line at the expense of another. Another possibility is that one product can cannibalise the revenues of another in the organisation at the expense of overall profitability.
5.4.3 Focus The focus generic strategy is based on the choice of a narrow competitive scope within an industry. The organisation targets a specific customer segment or group of segments to which to provide products or services. A 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 competitors. A focus strategy based on differentiation aims securing a competitive advantage by offering niche members a product they perceive as being well suited to their own unique tastes and preferences.
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Strategic Management 5.4.3.1 Distinguishing features of a focus strategy Table 5.4 provides some of the distinguishing features of a focus strategy. Focus: low cost Strategic target
Focus: differentiation
A narrow market niche where buyer A narrow market niche where needs and preferences are distinctly buyer needs and preferences are different
distinctively different
Basis of
Lower overall costs that rivals in Attributes that appeal specifically
competitive
serving niche members
to niche members
advantage Product Line
Features and attributes tailored to the Features and attributes tailored tastes and requirements of niche to the tastes and requirements of members continuous
niche members
Production
A
search
for
cost Custom-made
products
that
emphasis
reduction while incorporating features match the tastes and requireand attributes matched to niche ments of niche members member preferences
Marketing
Communicating attractive features of Communicating
emphasis
a budget – priced offering that fits offering does the best job of niche buyers’ expectations
how
product
meeting niche buyers’ expectations
Keys to sustaining Constant innovation to stay ahead of Commitment to serving the niche the strategy
imitative competitors. A few key differ- better than rivals; do not blur the entiating features.
organisation’s image by entering other market segments or adding other products to widen market appeal
Table 5.4 Distinguishing features of a focus strategy Source: Adapted from Thompson et al (2004:113)
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Strategic Management 5.4.3.2 When focus is the best strategy to follow A focus strategy is the best generic strategy to follow when:
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 does 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, regardless of the price they have to pay for the particular product or service
5.4.3.3 Potential pitfalls of a focus strategy
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 innovative products that may redefine the preferences of the niche the organisation has been concentrating on
The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and eroding profits.
5.4.4 Best-cost strategy Organisations that successfully integrate cost leadership and differentiation strategies find that their competitive advantage is often more difficult for competitors to imitate. An integrated strategy enables an organisation to provide value in terms of differentiated attributes as well as lower prices. The objective is to provide unique products and services more efficiently than competitors do. These strategies are also referred to as middle of the road strategies.
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Strategic Management 5.4.4.1 Distinguishing features of the best-cost strategy Table 5.5 outlines the parameters that distinguish a best-cost strategy from the other generic strategies. Strategic Target
Value –conscious buyers
Basis of competitive
Ability to give customers more value for money
advantage Product line
Items with appealing attributes; assorted upscale features
Production emphasis
Upscale features and appealing attributes at lower cost that rivals
Marketing emphasis
Flaunt delivery of best value Either deliver comparable features at a lower process than rivals or else match rivals on prices and provide better features
Keys to sustain the strategy
Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes
Table 5.5 Distinguishing features of a best cost strategy Source: Adapted from Thompson et al. (2004:113) 5.4.4.2 When best-cost is the best strategy to follow A best-cost strategy is the best generic strategy to follow, when:
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 low
Customers are simultaneously price and quality sensitive
Mass customisation becomes a possibility because of advanced technological, distribution and marketing capabilities. Examples include advances in manufacturing technology; the rapid use of modular product design techniques (like those ‘Semble It’ is using the kitchen cupboard industry); the growth of the Internet as a distribution channel (Pick n’ Pay and Woolworths’ home shopping; Internet banking); and advanced market segmentation capabilities that enable organisations to locate and uncover previously neglected customer needs and market niches.
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Strategic Management 5.4.4.3 Potential pitfalls of a best-cost strategy
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. Think Point 1.
What role do long term goals play in the strategic management process?
Long term goals are the results that an organization would like to achieve over a specified period – usually three to five years). Clearly defined goals and objectives provide direction to the organization, establish priorities, reduce uncertainty and assist in the allocation of resources. 2.
What are the issues to consider when developing long-term goals?
They should be clearly understood, decisive and attainable
They should provide continuity and cohesion for tactical choices during the time horizon of the strategy
They should ensure the continued viability and vitality of the entity vis-à-vis its opponents
They should be measurable
They should be consistent and congruent across organizational units
3.
What do the generic strategies identified by Michael Porter entail?
a) Cost leadership Organizations that pursue a cost leadership strategy usually sell a product or service that appeal to a broad target market. Their products or services are highly standardized and not customized to an individual customer’s tastes, needs or desires. b) Differentiation Differentiation consists of creating differences in the organization’s product or service offering by creating something that is perceived as unique and valued by customers. MANCOSA – PGDBM
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Strategic Management c) Focus The focus generic strategy is based on the choice of a narrow competitive scope within an industry. The organization targets a specific customer segments or groups of segments to which it provides its products or services. The essence is exploiting a market niche that differs from the rest of the industry. d) Best cost An integrated strategy enables an organization to provide value in terms of differentiated attributes as well as lower prices. The objective is to provide unique products and services more efficiently than the competitors do. 4.
What is a best-cost strategy and which generic strategies are involved in pursuing this kind of strategy? Organizations that pursue a best-cost strategy pursue the most reasonable trade-off between low cost and differentiating features. The primary objectives of these organizations are customization and cost-effectiveness, and through mass customization they endeavour to produce products or deliver services to smaller and smaller segments while simultaneously lowering their costs.
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Strategic Management
CHAPTER 6
Grand and functional strategies
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Strategic Management Grand and functional strategies Learning outcomes After studying this chapter you should be able to do the following:
Explain the relationship between Porter’s generic strategies and grand strategies.
Discuss the grand strategies that organisations can pursue to achieve their long term objectives, with specific reference to the circumstances under which each strategy would be appropriate.
Illustrate how each of the grand strategies is implemented by organisations.
Explain what a combination of strategies entail.
Explain the relationship between grand strategies and functional strategies.
6.1 Introduction In the previous chapter the three generic strategies based on three distinct competitive advantages were discussed, namely cost leadership, differentiation and terms of focus. It has been argued that the generic strategies restrict organisations in terms of strategic options and that the reduction of possible competitive advantages to two broad categories (cost and differentiation) is too simplistic and does not consider other possibilities for competitive advantage. Additional and more specific strategies complementing the generic strategies are therefore needed. One classification of such complementary strategies to enhance the range of strategic options is termed grand strategies. These strategies are also referred to as alternative strategies, business strategies or master strategies. Grand strategies provide basic direction for strategic actions. They use as a point of departure a selected generic strategy with its associated competitive advantage. They form the basis of coordinated and sustained efforts directed toward achieving long-term objectives. A grand strategy can be described as a comprehensive general approach that guides a firm’s major actions.
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Strategic Management Fifteen principal grand strategies are defined and classified under four broad categories, namely external growth strategies, internal growth strategies, decline strategies and corporate combination strategies. The purpose of this chapter is twofold: firstly, to illustrate the relationship between generic and grand strategies and to provide guidelines with regard to their application in different circumstances. Secondly, it will briefly look at the action plans that organisations will have to formulate at functional level in order to ensure that the strategies they have identified are implemented effectively. The industry life cycle will be used as a framework to illustrate the selection of appropriate grand strategies in each stage of the life cycle. Figure 6.1 illustrates the interrelationships between Porter’s generic strategies and the grand strategies. This diagram illustrates how the grand strategies can contribute to achieving cost leadership, differentiation and focus. The grand strategies identified next to each generic strategy are those most commonly used to achieve each competitive advantage; however, the assumption should not be made that these alternatives are the only options available to an organisation.
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Figure 6.1 The relationship between Porter’s generic strategies and grand strategies. 6.2 Grand strategies There is a variety of grand strategies that organisations can pursue to achieve their long-term goals. As illustrated in Figure 6.2, these can be broadly grouped into three types: growth strategies, decline strategies and corporate combination strategies. In the growth strategy section, there may be an internal and external growth strategy. The internal growth strategy focuses on the internal environment of the organisation, while the external growth strategies are more focused on the market and task environment.
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Figure 6.2 The three groups of grand strategies 6.2.1 Internal growth strategies 6.2.1.1 Concentrated growth Concentrated growth, also referred to as market penetration, is a strategy that seeks to increase the market share of an organisation through concentrated marketing efforts. A concentrated growth or market penetration 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.
Scale economies can provide cost benefits to organisations.
There is not much fluctuation in the availability, price and quality of raw materials and other resources required to provide the specific product or service that consumers require.
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Strategic Management 6.2.1.2 Market development A market development strategy involves expanding the portfolio of markets that the organisation serves. Present products or services are therefore introduced into new geographic areas, including other countries. A market development strategy is especially 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 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. When Pick ‘n’ Pay entered the Australian market it acknowledged its own weaknesses in the particular market and established a strategic partnership with an Australian distribution company, Metcash Trading, ensuring a supply chain at least as good as any of its competitors in the Australian market.
6.2.1.3 Product development Improving and modifying the products and services of the organisation in order to increase sales is called product development. Product development is particularly 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:
In industries that are characterised by rapid technological developments, especially when their major competitors offer better quality products at comparable prices.
When capital is available for capital investment in research and development, technology and the attainment of appropriate human resources.
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Strategic Management 6.2.1.4 Innovation Organisations that have distinct technological competencies and capital reserves to invest in research and development 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 research and development skill
Organisational culture fosters innovativeness.
6.2.2 External growth strategies 6.2.2.1 Diversification Adding new but related products and services to the product line of the organisation 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 Related or concentric diversification This refers to businesses diversifying into related markets or industries. Markides and Williamson (1994:149) argue that relatedness not only has to do with market or industry but also relatedness in terms of strategic assets (i.e. those that cannot be accessed quickly and cheaply by non-diversified competitors). For example, Canon’s deployment of technology from its camera unit in developing its photocopier business is a good example of where relatedness stems from strategic assets.
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Strategic Management A related or concentric diversification strategy can be effective if the following conditions prevail:
Industries that experience slow growth or no growth
Organisations whose current products or services are in the decline stage of the product life cycle.
Where the potential exists to reap economies of scale across business units that can share the same strategic asset such as a common distribution system
Where the potential exists to utilise a core competence 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.
Unrelated or conglomerate diversification This involves adding new, unrelated products or services in an effort to reach and penetrate new markets. This 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 include the following:
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
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Strategic Management In conclusion, diversification is directly concerned with extending the organisation beyond its original boundaries (industry and market). The major benefits that diversification can provide to an organisation include the following:
Opportunities for faster growth, higher profitability and greater stability
Access to key resources like capital, technology and expertise
Sharing the value chain activities to provide greater economies of scale and thus lower costs
Risks associated with diversification
Ignorance about newly entered markets could result in inefficiency as a result of inadequate knowledge about customer needs, technological development and environmental shifts.
Reduction of management effectiveness. It may be difficult for managers to understand the core technologies and appreciate the special requirements of individual business units in an unrelated diversified organisation
Sharing value chain activities is costly with regard to communication, compromise and accountability.
6.2.2.2 Integration Integration 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: forward vertical, backward vertical and horizontal. Figure 6.3 illustrates the three types of integration.
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Figure 6.3 Integration strategies VERTICAL INTEGRATION This extends the scope and operations 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 resources it deems critical to its competitive advantage. Vertical integration can be achieved in two directions, namely forward and backward. Backward vertical integration Backward vertical integration involves gaining ownership or increased control of an organisation’s suppliers. This type of strategy is particularly common in industries where low cost and certainty of supply are vital to maintaining the competitive advantage of the organisation in its market. Toyota SA pursued this strategy when it gained ownership of Raylite batteries and Armstrong, manufacturers of shock absorbers. Backward vertical integration is appropriate when the current suppliers of an organisation are unreliable, too costly or incapable of meeting the needs of the organisation with regard to parts, components or materials. Needless to say, adequate capital and human resources are prerequisites for pursuing this strategy.
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Strategic Management Forward vertical integration This entails gaining ownership over distributors or retailers. When organisations cut out the retailers and sell directly to the consumers is also a form of forward integration. Forward integration is attractive when existing distributors/retailers are unreliable, have high profit margins (which inflate the price that the consumer has to pay for the product) or are incapable of servicing the consumers of the organisation’s products effectively. Benefits of vertical integration They reduce economic uncertainties and transaction costs facing an organisation in a particular industry. Risks Capital intensive resulting in high fixed costs which may leave the organisation vulnerable in an industry downturn. Vertical integration can pose problems with regard to integrating different sets of capabilities, skills, management styles and values. HORIZONTAL INTEGRATION This takes place when an organisation seeks ownership 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 the organisation has both the capital and human talent needed to successfully manage an expanded organisation. Example: Volkskas, United, Allied and Trust Bank merged to form ABSA – a good example of horizontal integration. Problems with horizontal integration arises when there are differences in the culture, capabilities, skills, management styles and values of the organisations involved in the merger or acquisition. Example when America Online and Time Warner merged in 2000, shareholders and investors feared that the sheer size of Time Warner who had 70 000 employees could sap AOL’s (12 000
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Strategic Management employees) creative energy and result in a bureaucratic giant. These concerns were reflected in the sharp drop of AOL’s stock price of 2000. 6.2.3 Decline strategies Decline strategies are also often referred to as defensive strategies. These strategies are pursued when an organisation finds itself in a vulnerable position as a result of poor management, inefficiency and ineffectiveness. There are four types of defensive strategies:
Retrenchment or turnaround
Divestiture
Liquidation
Bankruptcy
6.2.3.1 Retrenchment or turnaround Turnaround strategies are appropriate for organisations that have distinctive competencies but have been managed poorly or have grown too quickly and therefore need major reorganisation in order to survive. These organisations are usually plagued by inefficiency, low productivity, poor profitability, low employee morale and pressure from their shareholders to increase performance. 6.2.3.2 Divestiture This involves selling a division or part of the organisation to raise capital for further acquisitions or investments. In can also be part of an overall retrenchment strategy to get rid of divisions that are unprofitable or no longer fit in with the strategic direction that the organisation is embarking on. 6.2.3.3 Liquidation This strategy 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 and ceasing operations is the only alternative to bankruptcy. Liquidation is therefore a planned and orderly way of converting the
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Strategic Management assets of the organisation into cash in an attempt to minimise losses for the shareholders of the organisation. 6.2.3.4 Bankruptcy An organisation that has no hope of turning its activities around might decide to close its doors and declare bankruptcy in order to avoid major debt obligations and union contracts. Bankruptcy is a type of retrenchment strategy 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 written off. 6.2.4 Corporate combination strategies Organisations have realised that their competitive powers could be increased by joining efforts and working together to achieve their objectives. Corporate combination strategies are especially appropriate for organisations that operate in global, dynamic and technologically driven industries. These strategies are:
Joint ventures
Strategic alliances
Consortia
6.2.4.1 Joint ventures A 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.
Forming a joint venture is an attractive strategy when the distinct competencies of two or more organisations complement each other. Smaller organisations can increase their competitiveness by joining forces against larger organisations. MANCOSA – PGDBM
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Strategic Management 6.2.4.2 Strategic alliances Strategic alliances differ from joint ventures in the sense that the organisations involve do not share ownership in a specific business venture. These organisations tend to share skills and expertise for a defined period, usually linked to a life cycle of a specific project. An organisation that wants to venture into new and unfamiliar markets, especially those overseas, can benefit immensely from forming a strategic alliance with another organisation that is already established in that particular market and therefore has expert knowledge with regard to consumer behaviour and market conditions. Strategic alliances are popular in the automotive industry, where organisations like Toyota and Volkswagen will outsource the production of key components to their partner in order to reduce costs and to secure greater economies of scale. 6.2.4.3 Consortia Consortia 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 of organisations. Some of the linkages are financial, whereby organisations own major stakes in one another. Other relationships involve the complex sharing of technologies, resources or value creating activities among different partners. Risks Partners may become incompatible over time. They can become too dependent on each other. The organisation runs the risk of providing the partner with more insight into knowledge and skills than intended and they cannot limit the assets being used. Cost intensive – especially as far as co-ordination, learning and flexibility are concerned. 6.3 Combination of Grand Strategies The extent, to which an organisation can embark on a combination strategy, will be determined by its access to the relevant resources. With limited resources an organisation will not be able to implement more than one strategy at a time. Even organisations with vast resources will not be able to implement all the strategies that could be beneficial for them. Therefore alternative 93
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Strategic Management strategies should be carefully evaluated in order to establish the potential benefits and costs of each one. 6.4 Functional strategies The grand strategies that organisations identify for achieving their objectives have to be implemented at both functional and operational level. In practical terms this means that 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. At a functional level (human resources, capital and time) will enable top managers to realistically evaluate the potential of each strategic alternative. For this reason it is imperative that functional managers be included in the strategic planning process. Functional strategies will be discussed in greater detail when strategy implementation is discussed. Think Points 1. What is the relationship between Porter’s generic strategies and grand strategies? Porter’s generic strategies identify bases from which organizations can pursue competitive advantage. However, it is not always clear how a particular competitive advantage is achieved practically. Grand strategies, often referred to as business strategies, are more specific strategies that organizations can pursue in order to achieve cost leadership, differentiation or focus. They enable organizations to co-ordinate their efforts towards the attainment of their long-term objectives. For example, differentiation, one of Porter’s generic strategies, can be achieved in various ways. An organization can differentiate itself by having the most innovative and technologically advanced products, by providing the lowest priced products or by the quality of its service. Each of these differentiation objectives can be achieved by a different grand strategy or even by a combination of two or three grand strategies
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Strategic Management 2. Achieving growth is the major focus any organization’s future strategy. Pick ‘n Pay, South Africa’s second largest retail group has set its sights on growth after showing losses in the last financial year. What grand strategies should Pick n’ Pay consider and what does each of them entail?
Concentrated growth -
Increase market share through concentrated marketing efforts
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Stay focused on present markets, products and services
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The challenge is to grow market share through the customization of product features, price, distribution channels and promotional strategies in order to meet the needs and expectations of consumers in that particular market better than any of our competitors do
Market development -
Expand the portfolio of markets
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Enter new geographic areas
Product development -
Improve and modify products and services to increase sales
Innovation -
If there are technological competencies and capital reserves, make innovation the grand strategy
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Instead of expanding on existing life cycles, create new life cycles that will make similar existing products or services obsolete
Diversification -
Add new but related products/services – related/concentrated diversification), or
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New, unrelated products/services (unrelated/conglomerate diversification) to the product line of your organization in an effort to expand your market share, or alternatively, to enter new markets
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Integration -
Gain control over suppliers, distributors or competitors in a particular industry to enhance the effectiveness and efficiency of your organization
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Consider three types of integration – backward vertical, forward vertical and horizontal integration.
3. What will the situation be if an organization in a vulnerable position as a result of inefficiency and ineffectiveness. What strategies must be considered? -
Retrenchment/turnaround
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Divestiture
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Liquidation
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Bankruptcy
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CHAPTER 7
Industry Specific Strategies
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Strategic Management Industry Specific Strategies Learning Outcomes After studying this chapter, you should be able to do the following:
Understand the importance of the industry life cycle when doing the external environmental analysis
Identify the strategies applicable for organizations in emerging markets.
Apply your knowledge to the identification of strategic options for competing in turbulent high – velocity markets.
Understand the strategies for competing in mature markets.
Understand what a declining industry is and what strategic options may be available in these industries.
Identify the strategies applicable for organizations in fragmented markets.
Apply your knowledge for identifying strategies for industry leaders.
Align a strategy with a specific organizational situation.
7.1 Introduction Organizations are part of different industries that experience a different life – cycle phase in growth. It is important for organizations to customize their strategy to the specific industry situation. The various external and internal considerations must be weighed and a fine balance of the pros and cons of the various strategic options must be found. 7.2 The industry Life Cycle If products have a life cycle, the industries that produce those products must also go through the same life cycle. This industry life cycle can be regarded as the supply – side equivalent of the product life cycle. The industry life cycle can be described as the changes that take place in an industry as it goes through the stages of birth, growth, maturity and decline. The industry life cycle is also an important determinant of the nature and extent of the forces in an organization’s task environment.
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Strategic Management The stages produce different opportunity and threats to an organization as it moves through the life cycles. It is thus important to understand what is happening in each stage.
Figure 7.1 Stages in the industry life cycle Source: Adpated from Jones & George (2003:161). THE MAIN CHARACTERISTICS OF THE DIFFERENT LIFE CYCLE STAGES Introductory Stage In this stage the environment is uncertain and difficult to predict and control, because relationships of the organization with its suppliers, customers and distributors are likely to change quickly. Growth When the product gains customer acceptance, customers enter and the second stage in the life cycle begins. Demand for the product or service rises and this attracts many new organizations into the industry, thus increasing the level of competition. In this way new organizations have the advantage of pioneering new varieties of products or new and improved ways of producing and delivering those products to the customers.
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Strategic Management Maturity In this stage demand is growing slowly or can be regarded as constant with most of the customers having already bought the product. Relationships with suppliers, distributors and competitors are more predictable and this makes the industries’ task environment more stable. Customers have also developed brand loyalty and the managers develop good working relationships with distributors. The level of competition is lower or at least more predictable, because each one can predict how its competitors will behave. If an organization has survived till the maturity stage then they are protected from new entrants by high entry barriers. Even though the organization may be stable and enjoying high profits, the threat of new entrants and the rapid environmental changes should not be overlooked. Decline This stage starts when the customer demand for a product decreases and this falling demand leads to a situation where more of the product is being produced than the customers want to buy. Organizations react to this by cutting prices thus causing competition to increase. This results in the most inefficient companies being driven out of the industry. The forces that are driving the evolution of an industry through the different phases are as follows: The changes in the industry’s growth rate over time – this is determined by the demand for the products supplied by the industry and this leads to the life cycle phases of the industry. Knowledge New knowledge in the form of product innovation is responsible for the birth and introduction of a new industry- example the life cycle of the computer industry has seen the birth and decline of different data storage systems (floppy and stiffy discs, CDs etc) and operating systems (DOS and Windows).
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Strategic Management The main characteristics of the different life cycle stages: FACTOR
INTRODUCTION
GROWTH
MATURITY
DECLINE
Demand
Early adopters of the
Increasing market
Mass market,
Obsolescence of
product
penetration
replacement/
products
repeat buying; Price sensitive customers Technology
Competing
Standardization around
Well diffused
Little product or
technologies
dominant technology
technical know how
process innovation
Rapid Product
Rapid process
Quest for
Innovation
Innovation
technological improvements
Products
Poor quality
Design and quality
Attempts to
Commodities the
Wide variety of
improve
differentiate by
norm
features and
Emergence of
branding, quality,
Differentiation
technologies
dominant design
bundling
difficult and
Frequent design
unprofitable
changes Competition
Few companies
Entry, mergers and
Shake-out
Price wars
exits
Exits Price competition increases
Key
Product innovation
Design for manufacture
Cost efficiency
Success
Establishing credible
Factors
image of firm and
Access to distribution
intensity, scale
product
Building strong brand
efficiency, and low
Low overheads
through capital
input costs Fast product development
Buying selection Signalling commitment
High quality Rationalising
Process innovation
capacity
Table 7.1 The main characteristics of the different life-cycle stages Source: Adapted from Grant (2005)
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Strategic Management There are different industry and organization situations in these different stages of the industry life cycles. These situations and how to tailor the strategy will now be discussed. 7.3 Strategies for competing in emerging industries of the future What is an emerging industry? An emerging industry is an industry in the early formative stage where the focus is on innovation. Example - online education, internet banking. Typical characteristics of organizations in this type of industry is that they are perfecting technology, adding people, acquiring or constructing facilities, gearing up operations and trying to broaden distribution and gain buyer acceptance. The type of industry that is trying to broaden technology is sometimes called a technology-intensive industry. Some of the characteristics of emerging industries present managers with unique issues that will guide them in making strategic choices:
The market is new and unproven, which leaves much speculation and many opinions about how it will function, how fast it will grow and how big it will get. It is uncertain about how the industry will attract customers for the product and how much they will be willing to pay for it.
Technological know-how underlying the products of emerging industries is proprietary and therefore closely guarded. This serves as a barrier to entry.
There is no consensus regarding which of several competing technologies will win or which product attributes will prove decisive in winning buyer favour.
All buyers are first time users. The marketing task is thus to induce initial purchase and overcome customers’ concerns about product features, performance reliability and the conflicting claims of rival firms.
Potential buyers expect first generation products to improve rapidly, so they delay purchase until technology and product design mature.
Emerging organizations have a problem securing ample supplies of raw materials and components.
Organizations also find themselves short of funds to support R&D and experience tough times until the product becomes established.
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Strategic Management There are two critical strategic issues that confront organizations in an emerging industry. 1. How to finance the initial operations until sales and revenues take off; 2. What market segments to target and what specific competitive advantage is important to secure a leading position. These two issues imply that an organization with solid resource capabilities and a good strategy has an opportunity to shape the rules and establish itself as the recognized industry leader. What are the options available for organizations in an emerging industry? To be successful, organisations have to pursue one or more of the following strategic avenues:
To be industry leaders with risk-taking entrepreneurship and a creative strategy.
Perfect the technology, improve product quality and develop additional attractive performance features- the goal is to attract as many customers as possible.
Form strategic alliances with key suppliers to gain access to specialized skills, technological capabilities and critical materials and components.
Diversify or form alliances with companies that have related or complementary technological expertise and have a competitive advantage.
Gain first – mover advantage.
Constant focus on acquiring new customer groups.
Make it easy and cheap for first time buyers.
Price cuts to attract the next level of price – sensitive buyers.
But being in an emerging market has its challenges: 1. It is challenging to manage the organization’s rapid expansion. 2. Defending oneself against competitors. 3. Building a competitive position which extends beyond its initial product or market is important.
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Strategic Management 7.4 Strategies for competing in turbulent, high-velocity markets The next developmental phase in the life cycle is where organizations find themselves in industries where there is rapid technological change and short product life cycles because of the pace at which next generation products are introduced and entry of new rivals in the market. Change is a fundamental characteristic of a turbulent market environment and thus poses a challenge for strategy making. An organization in this industry has three strategic options in dealing with the change:
It will react to change – by responding to a competitor’s new product with a better one.
It will anticipate change – where the organization looks ahead to analyze what is going to happen and then prepare and position itself for that future. This is a defensive strategy
It will lead change – where the organization is the first in the market with a new product. It is an industry leader and adopts an offensive strategy.
To manage the change, organizations should incorporate all three of these strategic postures. What determines competitive success in these fast changing markets? The organization’s ability to improvise experiment, adapt, reinvent and regenerate as market and competitive conditions shift rapidly and sometimes unpredictably are key factors for success. The following strategic moves will help the organization gain a competitive advantage:
Invest aggressively in research and development
Respond quickly to competitor’s moves.
Rely on strategic partnerships with outside suppliers because the organization may not have all the resources.
Organization must be proactive by making time-paced moves.
It is important to keep the company’s products and services fresh and exciting enough to stand out in the midst of all the change that is taking place.
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Strategic Management 7.5 Strategies for competing in a maturing market A maturing industry is one that experiences slower growth and when all the potential buyers of that product in the industry are already using that product. Industry maturity has two important implications for competitive advantage. Firstly it tends to reduce the number of opportunities to establish a competitive advantage; Secondly, opportunities for competitive advantage move from differentiation-based to costbased factors. This means that an organization has to focus on low costs as a way to achieve competitive advantage in a matured industry and therefore pay attention to the following three cost drivers: 1. Economies of scale 2. Low cost inputs 3. Low overheads Changes in the industries’ competitive environment in the case of a maturing industry:
Slow growth buyer demand generates intense competition for market share. Price cutting and increased advertising are some of the aggressive tactics competitors use to gain market share.
Buyers become more sophisticated and have experience with the product and are also familiar with competing brands
Buyers begin to focus on which seller offers the best combination of price and service
The increased competition, slow industry growth and more sophisticated buyers put pressure on industry profitability.
Mergers and acquisitions between competitors increase as competition becomes stiffer.
What are the strategic options available for maturing industries?
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A positive step to get rid of slow moving products
More emphasis is placed on the value-chain innovation
Trim costs
Increase sales to present customers.
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Strategic Management There are also pitfalls in maturing industries. The biggest mistake is to get stuck in the middle of the three generic strategies – namely, lowcost, focused and differentiation. Being slow to adapt to existing competencies and capabilities Protecting short term profitability rather than building or maintaining long-term competitive position. 7.6 Strategies for firms in stagnant or declining industries Some organizations operate in industries where the demand is growing more slowly than the economy-wide average or even declining. These organizations must follow a divestiture strategy to obtain the greatest cash flow. There is however strong competitors that may be able to achieve good performance in a stagnant market environment. Organizations that succeed in stagnant industries employ one of three strategies: They pursue a focused strategy aimed at the fastest –growing market segments within the industry; They differentiate based on quality improvement and product innovation. They strive to drive costs down and become the industry’s low cost leader. Pitfalls: They can get trapped in a profitless competition war. They become overly optimistic about the industry’s future and spend too much on improvements in anticipation that things will improve. This can lead to liquidation or bankruptcy. 7.7 Strategies for competing in fragmented industries A fragmented industry is characterized by the absence of a market leader. The most common reason for fragmentation on the supply side of an industry is:
The absence of market leaders,
Low entry barriers that allow small forms to enter quickly and cheaply
Customers who require relatively small quantities of customized products
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Strategic Management 7.8 Strategies for industry leaders There are two strategies:
Offensive
Defensive
The offensive strategy is the first mover, where an organization attempts to exploit and strengthen its competitive position through staying a step ahead and forcing competitors into a reactive mode Defensive strategy – makes it harder for challengers to gain ground and for new organizations to enter the industry. The defensive strategy best suits organizations that have already achieved industry dominance. 7.9 Alignment of strategy with specific situation In order to decide on a strategy for a specific industry or organization situation, it is important to make a quick diagnosis of the specific environment and the organization’s competitive situation in the industry. Two basic questions need to be answered: 1. What industry environment is the company operating in? Is it an emerging, rapid growth, mature or fragmented industry? In answering and identifying the industry, it will be possible for the organization to identify the specific strategic moves that are best suited for the specific type of environment. 2. What is the specific position of the organization in the industry? Does it have a leadership or a weak or crisis-ridden position? This will again help the organization to identify its strategic options. To decide on a specific strategy, it is important that the organization considers the primary internal and external environmental situations and to decide how all these factors add up in order to make a sensible strategic decision.
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Strategic Management The pros and cons of all the different generic strategies in the different situations must be considered to help make a final decision. This final strategic choice must fit both the industry environment as well as the organization’s situation with regard to the competitors. The following questions can help with the decision of the best possible strategic choice for the specific situation:
What kind of competitive advantage can the organization realistically achieve?
Does the organization have the capabilities and resources to be successful in these moves?
How can the organization protect its competitive advantage? Are any defensive strategy moves necessary?
Is it necessary for the organization to mount an offensive strategy to capitalize on the weakness of competitors?
There are some pitfalls to avoid:
An overly ambitious plan
One that does not fit the organizational culture
Lack of commitment to the chosen strategy
7.10 Conclusion It is one thing to have a good understanding of an organisation’s basic competitive strategies such as low- cost leadership, broad differentiation, and focused low-cost and differentiation strategies. It is important to understand that some of these strategic options are better suited to certain specific industries and competitive environments, and certain specific organizational situations than others.
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Chapter 8 Strategic Analysis and Choice
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Strategic Management Strategic Analysis and Choice Learning Outcomes After studying this chapter you should be able to do the following:
Discuss the strategy analysis framework
Implement the SWOT Matrix
Implement the SPACE Matrix
Implement the Grand strategy Matrix
Implement the QSPM
8.1 Introduction After completing the chapters on strategy formulation, we need to know how to analyse and choose the best possible strategies. This chapter deals with analyzing the possible strategies presented in the previous chapter and choosing the strategy that will be best suited to the situation. 8.2 Strategy analysis framework Most organizations face the very important question of deciding which strategy to pursue further in order to best create more value for their customers and therefore create a competitive edge. In order to make this decision, one has to first look at the IFE Matrix and the EFE Matrix. The next phase is to develop any of the following matrixes in order to narrow the possible strategies down to more specific ones. The three matrixes are as follows:
SWOT Matrix
SPACE Matrix
Grand Strategy Matrix
The final phase of the strategy analysis is to make a choice between specific strategies. The strategic manager has the option of choosing specific strategies by a quantifiable method. This method is called the QSPM – Quantitative Strategic Planning Matrix. It is still risk - but the most calculated one you will find in strategic management.
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Strategic Management 8.3 The three strategic analysis matrixes The vision, mission statement, external and internal analysis of the organisation’s environment and the long term objectives provide the basis for the various matrixes to follow. The same people responsible for and taking part in these processes should preferably also take part in strategy analysis and choice. They can still contribute valuable inputs during this phase, which is after all still the first phase of strategic management- namely strategy formulation. It is important to ensure that all individuals involved in this process have all the relevant information of the previous stages at their disposal with special emphasis on the IFE and EFE.
SWOT MATRIX
SPACE MATRIX
GRAND STRATEGY MATRIX
QSPM
STRATEGY TO BE IMPLEMENTED
Figure 8.1 Process of strategic analysis and choice.
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Strategic Management 8.3.1 The SWOT Matrix SWOT is the acronym for strengths, weaknesses, opportunities and threats. The steps for constructing a SWOT Matrix are as follows: Step 1 A SWOT matrix is composed of nine cells. The left top of which is always left blank. Step 2 The other two top cells represent first the strengths (S) and then the weaknesses (W) of the organisation. These are listed next to each other in their respective cells and would be the most important internal strengths and weaknesses as derived from the IFE. Step 3 The other two cells on the left side of the matrix represent the opportunities (O) and the threats (T). These are listed below each other in their respective cells and would of course be the most important external opportunities and threats derived from the EFE. Step 4 Match the internal strengths with the external opportunities and record the outcomes (possible strategies) in the appropriate cell namely SO strategies. Write down what options the organisation has related to specific strengths and opportunities and specify these in brackets. Example: “Open a new outlet in Port Elizabeth (S1, O3, and O4)”. Step 5 Match the internal weaknesses with the external opportunities and record the outcomes (possible strategies) in the appropriate n/cell, namely WO strategies. Write down what options the organisation has related to specific weaknesses and opportunities and specify these in brackets, for example:”Go into merger with Nu Metro theatres. (W1, W3, O2, O3)”.
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Strategic Management Step 6 Match the internal strengths with the external threats and record the common outcomes (possible strategies) in the appropriate cell, namely ST Strategies. Write down what options the organization has related to specific strengths and threats and specify these in brackets, for example: “Divest/sell the children’s clothing section (S1, S3, O1, and O4)”. Step 7 Match the internal weaknesses with the external threats and record the outcomes (possible strategies) in the appropriate cell, namely WT strategies. Write down what options the organization has related to specific weaknesses and threats and specify these in brackets, for example: “Liquidate all Western Cape operations (W1, T1, and T2)”. After completion of this matrix you end up with four sets of strategies, namely SO, WO, ST and WT strategies respectively. Before writing them down in the respective cells, it is very important to apply good judgment and realize that there is no one perfect strategy. They should be carefully discussed and evaluated as alternative options. Always keep the following in mind:
SO strategies use the organisation’s internal strengths to take advantage of the external opportunities that exist.
WO strategies are trying to improve the organization’s weaknesses by taking advantage of the external opportunities
ST strategies again use the organisation’s internal strengths to try to avoid the possible external threats.
WT strategies are very defensive by nature and are supposed to try to reduce the internal weaknesses and also avoid the external threats to the organization.
Note that all the alternative strategies chosen in the different cells are only possible feasible strategies. The matrix does not give an indication of which one to use, but it does help managers to see that there are certain viable options available to the organization. It is also advisable for each alternative strategy to be identified as a specific grand strategy. This gives the organization an idea of what resources and other implications are going to be involved.
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Strategic Management It is interesting to note that the SO are commonly growth and development strategies while the WT strategies will commonly be defensives ones. The other two strategies (WO and ST) may differ from aggressive to defensive, depending on the specific factors chosen. The SWOT Matrix gives an indication of what possible strategies are available, but still does not help with a final choice between them. In the final decision stage (QSPM Matrix) those alternative strategies can be analysed further.
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Strategic Management The table below depicts a practical example of a SWOT Matrix in practice. STRENGTHS – S 1.
Hi-tech audio and video
1.
Current ratio of 0.25
equipment
2.
Expensive renting
2.
Positive cash flow
3.
Profitable in Gauteng and
ALWAYS LEAVE BLANK
WEAKNESSES – W
from landlords 3.
KwaZulu-Natal
Labour union problems
4.
Positive employee morale
4.
5.
Good advertising
Cape and
6.
Good internal communication
Mpumalanga 5.
Losses in Western
No formal staff training programme
6.
Expense of purchasing international movies
OPPORTUNITIES –O 1.
Opening economies in sub-
SO STRATEGIES 1.
Saharan Africa 2.
Per capita income growth in
2.
SA 3.
WO STRATEGIES
Introducing Africa to movies
1. Possible merger with African
(S2, O1)
movie theatres and African
Extensive marketing in new
movies (W4, W6, O1, O4)
complexes (S5, O6)
Possible mergers with food and entertainment chains
4.
New SA movie producers
5.
Use of technology such as IMAX
6.
Entertainment complexes
THREATS –T 1.
Seasonality of movie
ST STRATEGIES 1.
WT STRATEGIES
Open video rental stores in all 9
1. Divest Western Cape and
releases
provinces (S1, S2, S5, T1, T2,
KwaZulu-Natal operations (W1,
2.
DStv
T4, T6)
W4, T4, T6)
3.
High crime leading to
2.
Construct 10 new multi-
cocooning
dimensional entertainment
4.
Other entertainment
complexes (S2, T1, T2, T4)
5.
Ageing population
6.
High prices due to exchange rates
Table 8.1 SWOT Matrix
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Strategic Management The SPACE Matrix SPACE is an acronym for strategic position and action evaluation. This matrix consists of four quadrants: aggressive, conservative, defensive and competitive. The names of the respective quadrants give an indication of the kinds of strategy that the organization should pursue. These four quadrants are made up by crossing two axes. The first two scales represent two internal dimensions, namely:
Financial strengths (FS)
Competitive advantage (CA)
The other two scales represent the external dimensions, namely:
Environmental stability (ES)
Industry strength (IS)
These four factors are seen as the most important determinants of an organisation’s overall strategic position. Figure 8.2 shows how these four quadrants and the four points on the axes are drawn up.
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Strategic Management
Figure 8.2 Space Matrix As with the SWOT Matrix, the organisations should make use of the information gathered from the IFE and EFE matrixes. These internal and external factors identified in the SWOT analysis will be the main factors to consider when drawing u the SPACE Matrix. They should, however, be re-arranged so that they fit in with the four dimensions of the SPACE Matrix namely, the financial strengths (FS) of the organization, its current competitive advantage (CA), the environmental stability (ES) within which it operates and the industry strength (IS) in which it competes. Not all of the factors in the SWOT analysis would be used; only those that represent these four dimensions.
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Strategic Management The following steps will help in developing the SPACE Matrix: Step 1 Select all the variables that fit under the four dimensions namely financial strength (FS), competitive advantage (CA), environmental stability (ES) and industry strengths (IS). These variables are typical products of the internal and external analysis done in the earlier stage of the strategic management process Step 2 Allocate a value ranging from 1 (worst) to 6 (best) to each of the variables that make up the FS and IS dimensions. Also allocate a value ranging from -1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. Step 3 Calculate an average score for each if the dimensions by adding al the scores from that one dimension (for example FS) and dividing the total by the number of variables chosen for FS. Do this for all four dimensions (FS, CA, ES and IS). Step 4 Plot the average scores for each dimension (FS, CA, ES, and IS) on their specific axes on the SPACE Matrix. Step 5 Now add the two scores on the x axis and plot that point on the x axis. Do the same for the y axis. Then plot the intersection of these two points (xy) on the SPACE Matrix. Step 6 Now draw a straight line from the 0 point of the matrix through the new intersection point (xy point).
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Strategic Management This vector on the SPACE Matrix is the result which shows us what type of strategy would be most advisable for the organization. It would be one of the following four:
Aggressive
Competitive
Defensive
Conservative
It is important to note that these four quadrants only give an idea of which broader type of strategy would be advisable to pursue. The organization should now evaluate the 15 different grand strategies and decide whether they are aggressive, competitive, defensive or conservative. The following categories might help management to narrow down their options. When the SPACE Matrix suggests the aggressive quadrant, the following strategies might be feasible:
Concentrated growth
Market penetration/development
Product development
Vertical integration
Horizontal integration
Concentric diversification
Conglomerate diversification
When the SPACE Matrix suggests the conservative quadrant the following strategies might be feasible
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Market penetration/development
Product development
Concentric diversification
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Strategic Management When the SPACE Matrix suggests the defensive quadrant, the following strategies might be feasible:
Concentric diversification
Divestiture
Turnaround
Liquidation
When the SPACE Matrix suggests the competitive quadrant, the following strategies might be feasible:
Vertical integration
Horizontal integration
Market penetration/development
Product development
Any of the corporate combinations (joint ventures/strategic alliances/ consortia)
8.3.2 The Grand Strategy Matrix The Grand Strategy Matrix offers the same results as the previous two matrixes and is the final one in this strategy analysis trio. The advantage of the Grand Strategy Matrix is that an organization need not be positioned in this matrix in a certain quadrant only; should it have more than one division or unit, the others could also
be plotted on this matrix, thus
distinguishing between different business units in the same organization. The Grand Strategy Matrix is simple and easy to do which is possibly why it is a very popular strategic management tool. It is based on only two specific dimensions, namely:
Competitive position
Market Growth
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Strategic Management The matrix also consists of four quadrants namely quadrants I, II, III, and IV. The two axes represent the two dimensions respectively:
The x axis represents the competitive position and is divided into two extremes on either side, namely weak competitive position and strong competitive position (once again based on the internal analysis of the organization).
The y axis represents the market growth and is divided into two extremes on either side, namely rapid market growth or slow market growth (based on the external analysis of the organization in its industry).
Figure 8.3 The Grand Strategy Matrix Source: Adapted from David (2013:220) In each quadrant are listed specific grand strategies discussed in an earlier chapter. These are possible options/strategies to pursue when an organization finds itself in this quadrant.
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Strategic Management It is a simple process. All the organization has to d is measure whether it is in rapid or slow market growth and plots that on the matrix, and then analyse whether it is in a weak or strong position currently in its industry and also plot that. This will ensure that the organization ends up in one of the quadrants. Each quadrant can be explained as follows: Quadrant 1 represents an excellent strategy. Organisation in this position should not move away from their current competitive advantage unless they are too heavily involved with a single dominant product – when concentric diversification would be a good option. The other most feasible strategies to pursue would be product development and market development /penetration. If the organization has the necessary resources, vertical and horizontal integration are also advisable. Quadrant II organizations are competing in a strong growing market but they do not have a particularly strong position compared with their competitors. Internal growth should be the first option (Product development and market development/penetration), but if the organization does not have any distinctive competencies, then horizontal integration would be advisable. Sometimes defensive strategies like divesting to provide funds for other strategies could be pursued as well. Quadrant III organizations compete in a slow-growth industry and also have a weak competitive position. Before liquidation is the only strategy available, divestiture, like asset reduction or retrenchment, might be a viable strategy alternatively, diversifying their product range could be an option. Quadrant IV organizations are in the unique situation of showing a strong competitive position but in a slow – growing market. They will immediately have to pursue any of the diversification strategic options or even opt for a partner in a corporate combination like a joint venture
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Strategic Management 8.4 Final strategic choice/decision After completing the previous step, the organization will have several optional strategies to choose from. Those strategies that have been identified could all be viable ones to pursue in order to achieve the competitive edge. Managers should now evaluate these strategies qualitatively. Even though the matrixes have shown the possibility of certain strategies, they might still not be viable for the organization for various reasons. Therefore the management team should try to narrow them down to the three or four most feasible strategies. The next and final stage of strategy analysis is thus the decision stage. Here we make use of the QSPM to once again quantify our different strategic options and then finally choose the best strategy. 8.4.1 The QSPM (Quantitative Strategic Planning Matrix) There is only one real analytical technique designed to evaluate and determine the best strategy available to the organisation: the QSPM. It is a technique that can objectively indicate which strategy would be the best for the organization. All the information that was compiled through the IFE and EFE matrixes and the three matrixes discussed in this chapter – SWOT, SPACE and Grand Strategy Matrix – should be used to develop and draw up the QSPM. Even though the QSPM is a predominantly quantitative method, managers still need to show good intuitive judgment to get the best results. Please note that only strategies of the same type (group) can be compared with one another. The same applies to the group of corporate combination strategies. That means that growth strategies are not evaluated in the QSPM against, for example, defensive strategies. The previous stage should be the indicator of which group of strategies are going to be evaluated during the QSPM phase. If the organization ended up in an aggressive quadrant in the SPACE Matrix and has these growth strategies as options, the managers would consider all the possibilities and, for example, decide on three grand strategies, namely vertical integration, horizontal integration or concentric diversification. These three final grand strategies would then be evaluated in the QSPM to decide which one would be the most feasible for the organization. The following are the different steps in the QSPM read in conjunction with the Nu-Kinekor example. See Figure 8.5. 123
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Strategic Management Step 1 SWOT analysis. From the IFE and EFE matrixes’ information, the most important opportunities and threats from the external environment as well as the most important strengths and weaknesses from the internal environment are written n the left-hand side of the matrix. It is advisable to have at least ten external and at least ten internal factors. Step 2 Weights assigned (W). The next column from the left is the weights column. Weights are allocated to each factor and should be more or less the same as those in the IFE and EFE matrixes. Each environment is weighted separately; in other words, the total of the external factors should add up to 1.0 and the same for the internal environment. These weights represent the importance of each factor in relation to the organisation. Step 3 Alternative strategies. From the previous stage’s matrixes (SWOT, SPACE and Grand strategy) the most feasible strategies that are being considered for implementation should be described in the top row of the QSPM, next to each other. There could be any number between two and four different strategies. Step 4 Attractiveness scores (AS). Each strategy is now individually evaluated against each individual factor. The question should be asked whether this factor would affect the choice of strategy. If the answer is yes, then a score from 1-4 should be allocated among the different strategies. The strategy that is the most attractive in relation to this specific factor should get 4 (highly attractive) and the one that is least attractive should get 1 (not attractive). The other strategies should be evaluated in between: as either 2 (somewhat attractive) or 3 (reasonably attractive). No strategies can score the same for the same factor. By clearly allocating different scores the organization will be able to distinguish between the possible strategies. If the answer is ‘no’, meaning that the respective factor has no influence or effect on the optional strategies, then no scores should be given to any of the strategies.
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Strategic Management Step 5 Total attractiveness score (TAS). The TAS is calculated by multiplying the weight (W) of the factor by the attractiveness score (AS) for each strategy: W X AS = TAS There would then be a TAS for each factor in each of the strategies, the higher the TAS the more attractive the proposed strategy regarding that specific factor. Step 6 Sum total attractiveness score (STAS). Now all the TAS scores for each strategy are added up to give the sum total attractiveness score (STAS) for each strategy. The final STAS will show that the strategy with the highest score is the best strategy to pursue. This answer has taken into consideration all the relevant external = and internal (SWOT) factors that could affect the different strategies available. The order of implementation or even desirability is now clearly shown by means of the QSPM. In the example shown in Figure 8.5 below, it is quite clear that a joint venture with Namibia is therefore a much better alternative than one with Zimbabwe. IT is clear that the QSPM is a very good analytical tool which can help management to make a clear, calculated decision. It is however also clear that intuitive skills and management expertise are fundamental in deciding which weights to allocate to the different factors as well as which scores to allocate to each of these.
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Figure 8.4 A QSPM for Nu-Kinekor
8.5 Conclusion There are basically three important types of matrix in strategy analysis developed from IFE and EFE discussed earlier in the study guide. This means a full environmental analysis is necessary where after different grand strategies are chosen. These grand strategies can then be evaluated and narrowed down by means of the three strategy analysis matrixes, namely the SWOT, SPACE and Grand Strategy Matrixes. After the results of these three matrixes have been established, the QSPM is used to decide on a final strategy to implement for the specific situation.
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Strategic Management Think Point 1. Which strategies are possibilities when the SPACE Matrix suggests the aggressive quadrant?
Concentrated growth
Market penetration development
Product development
Vertical integration
Horizontal integration
Concentration diversification
Conglomerate diversification
2. Name the dimensions on which the Grand Strategy Matrix is based?
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Competitive position
Market growth
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CHAPTER 9
The drivers of strategy implementation
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Strategic Management The drivers of strategy implementation 9.1 Introduction Once long-term goals have been set and the appropriate strategy or strategies selected, the strategic management process moves into a critical new phase- that of strategy implementation. Strategy implementation, or execution, is the action phase of the strategic management process. Implementing strategies in an environment characterised by rapid change is a tremendous challenge. Organisations need to ensure that their entire workforce is committed to strategy implementation and change. In order to achieve successful strategy implementation, organisations make use of various strategy implementation drivers, namely leadership, organisational culture, reward systems, organisational structure and resource allocation. In order to understand the role of these drivers in strategy implementation, it is first of all important to understand the significance of strategy implementation as a component of the strategic management process. 9.2 The significance of successful strategy implementation 9.2.1 What is strategy implementation? Strategy implementation can be defined as the process that turns strategic plans into a series of action tasks, and ensures that these tasks are executed in such a way that the objectives of the strategic plan are achieved. In other words, strategy implementation is the communication, interpretation, adoption and enactment of strategic plans. It is clear from this definition that strategy implementation deals with translating thoughts, or the strategic plan, into action. It is the way in which management aligns or matches leadership, organisational culture, organisational structures, reward systems and resource allocation with the chosen strategy or strategies. Strategy implementation is an essential component of the strategic management process, as it deals with the strategic change required within an organisation to make the new strategy work and to achieve the desired results. It is significant that it has often been considered the most difficult part of the strategic management process. Research has indicated that it is much easier to formulate a strategic plan than to implement it, and that it is at the implementation stage that strategies often fail.
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Strategic Management Research has also indicated that the real value of strategy can only be recognised through implementation, and the ability to implement strategy is considerably more important than the quality of the strategy itself. Strategy implementation poses a challenge to management not only in terms of the motivation of employees but also in terms of the required discipline, commitment and sacrifice. Strategy implementation differs from strategy formulation in several ways. Firstly, strategy implementation is the intellectual or thinking phase, whilst implementation is the phase where these thoughts are operationalised and turned into action. Secondly, strategy formulation is mostly a market-driven activity with an external focus, whereas strategy implementation is an internal, operations-driven activity. Another difference between these two phases is evident in the required skills: strategy formulation requires good intuitive and analytical skills, whilst strategy implementation requires motivation and leadership skills. Strategy implementation is also not as well structured, rational and controlled as strategy formulation. Strategy formulation and implementation differ considerably in terms of who takes responsibility for each phase. Strategy formulation takes place mostly at top and senior management levels, in spite of attempts to include wider participation during the last few years of the 20 th century. Strategy implementation, in contrast, is the responsibility of all levels of management, from supervisor level to the board of directors. Middle management, especially, plays an important role in strategy implementation. Middle managers are the recipients of decisions made by top management and are instrumental in motivating lower-level managers and employees to continuously improve on how strategy-critical activities are performed. Top management relies on the support of middle management to push strategy implementation daily into all functional areas and operating units. It is important for the strategy formulators to remain genuinely committed to the implementation process and serve as a powerful inspirational force for managers and employees. Strategy implementation affects the entire organisation, and all employees are participants in the implementation process.
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Strategic Management In spite of strategy implementation being an essential ingredient in the formula of success of any organisation, no single winning strategy implementation recipe exists. In each organisation strategy implementation takes place in a different organisational context. Strategy implementation can serve as a source of competitive advantage in industries where unique strategies are difficult to create. The challenge of successful strategy implementation is to create a series of tight fits between the chosen strategy and leadership, strategy and culture, strategy and reward systems, strategy and structure, and strategy and resource allocation. There should also be a close link between the chosen strategy and short-term objectives, functional tactics and policies. A change in strategy will require a change in any of these. 9.2.2 Strategy implementation as a component of the strategic management process Although depicted as two separate, sequential steps in a linear process, strategy formulation and implementation often overlap in practice. In the contemporary business environment characterised by high levels of uncertainty, turbulence and rapid change, a strategy can be obsolete by the time it has been implemented. The strategic management process is a dynamic, interrelated one. Formulation decisions impact directly on strategy implementation, which in turn impacts directly on strategic control. 9.2.3 Barriers to strategy implementation Before the drivers and instruments that aid managers in strategy implementation are introduced, it is perhaps worthwhile to identify some of the problems organisations often experience when attempting to implement their chosen strategy or strategies. Some of these problems include the following:
The coordination of implementation efforts is not sufficiently effective.
Leadership and direction provided by top and middle managers is inadequate.
Goals have not been sufficiently defined and are not well understood by employees.
The formulators of the strategy are not involved in implementation, or have left before the implementation is finished.
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Key changes in responsibilities of employees have not been clearly defined.
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Strategic Management In the late 1990s the Balanced Scorecard Collaborative, a company founded and led by the creators of the balanced scorecard, found that nine out of ten organisations fail to implement strategies, and as few as 10 per cent of effectively formulated strategies are effectively implemented. Nearly ten years later strategy implementation still remains a challenge to organisations, and recent research on change management and leadership supports the findings of the Balanced Scorecard Collaborative and suggests that as many of 70 per cent of all change initiatives fail. The Balanced Scorecard Collaborative identified four barriers to strategy implementation. These are diagrammatically depicted in figure 9.1.
Figure 9.1 Barriers to successful strategy implementation Source: Adapted from Business Day (30 September 1999:37) Strategy implementation should take both corporate governance and corporate citizenship issues into consideration. Top management must ensure that strategy implementation activities support the drive towards corporate social and environmental responsibility. Stakeholder engagement should be encouraged and, where appropriate, strategy implementation progress should be linked to sustainability reporting. Various strategy experts emphasise that in order to successfully implement strategies, the organisation must achieve consensus both within and outside the organisation.
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Strategic Management If an organisation fails to take external stakeholders such as regulatory agencies, environmental groups and the community into consideration, it could seriously jeopardise strategy implementation efforts if these groups have power to block or delay key elements of the strategy. 9.2.4 Drivers and instruments for strategy implementation From the discussion above it is clear that strategy implementation is a tremendous challenge to organisations. In order to steer strategy implementation efforts in the right direction, organisations make use of several strategy implementation drivers:
Leadership
Organisational culture
Reward systems
Organisational structure
Resource allocation
The first three drivers, leadership, organisational culture and reward systems, are critical to the contemporary organisation as they concern the people of the organisation. Since the 1990s the environment has been increasingly characterised by uncertainty, rapid change and turbulence. In order to remain competitive, organisations have to embrace constant change in a volatile environment. Strategic change requires strong leadership and adaptive organisational cultures. This chapter focuses on the roles of leadership and organisational culture as two very important drivers for strategy implementation. Managers and employees need to be motivated to accomplish strategy implementation goals. Reward systems, the third strategy implementation driver introduced in this chapter, form the key for motivating people. Along with the strategy implementation drivers, organisations also make use of various instruments to aid the strategy implementation process. These are as follows:
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Short-term objectives
Functional tactics
Policies
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Strategic Management Daniel Goleman’s research on emotional intelligence is one of the most significant contributions in the field of leadership. Whilst a high IQ and technical skills are also important, emotional intelligence explains why someone with good, but not exceptional, intellectual and technical skills sometimes makes a better leader than a highly intelligent, highly skilled individual who is promoted into a leadership position and then does not live up to expectations Emotional intelligence includes aspects such as:
Self-awareness,
Self – regulation,
Motivation,
These are self management skills
Empathy and social skills focus on the individual’s ability to manage relationships with other people.
Leaders vs. Managers Leadership differs from management in various ways: Kotter (2001: 85) says that management is about coping with complexity; leadership is about coping with change. Managers and leaders differ in their approach to their work as indicated in Table 9.1: Managers
Leaders
Tend to be more analytical, structured and
Leaders tend to be more experimental,
controlled
visionary, flexible and creative
They see their work as a quantitative science.
They value the intuitive side of their work.
Managers focus on the details and instruct Leaders focus on the bigger picture, inspire and apply authority
and apply influence.
Table 9.1 Comparison of a Manager and a Leader It is important to note that leadership is not better than management or a replacement for it. Leadership and management complement each other and expertise in both is necessary for successful strategy implementation and survival in the contemporary business environment.
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Strategic Management A critical element of strategic success is the ability of top management, through superior leadership and management skills, to respond swiftly to changes in the global business environment. Key responsibilities of a Strategic Leader. Leadership is a key component in the strategy implementation process. Leaders are typically responsible for the following activities:
Developing an appropriate vision or strategic direction for the organization in which as many stakeholders as possible have participated.
Communicating the vision and strategic direction to all the employees and other stakeholders of the organization.
Inspiring and motivating the employees to achieve the strategic objectives of the organisation.
Designing the appropriate reward systems and organisational structures
Developing and maintaining an effective organisational culture.
Incorporating good corporate governance principles into its strategies and operations.
Matching Leadership style with the chosen strategy To ensure a fit between the strategy and the leadership, a change in strategy also necessitates a change in leadership. For example, when a growth strategy is followed, it is important that the leader pays attention to managing relationships, inspiring people and communicating the objectives and strategies to them. Corporate combination strategies require a leader who can integrate different cultures and value systems and identify synergies and who possess a combination of people and task skills. Organizations that follow decline strategies need leaders who are task oriented and who focus on reducing assets and costs. Such a leader will often be more autocratic than when a growth strategy is followed. There is evidence of a correlation between the position of the organization in its life cycle and its leadership style. Rothschild (1996) proposes that an organization in its start –up or embryonic phase needs a risk taker as leader. Risk takers are highly intuitive, aggressive visionaries with an entrepreneurial leadership style
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Strategic Management Once an organization reaches a certain size and moves into its rapid growth phase it needs a caretaker who builds on strengths and creates gradual change with commitment to the longer term. As the business matures, another leadership style is required – surgeon. Such a leader is selective, decisive, and delegative, knows what is attractive and is able to make tough decisions. Organizations in the mature phase of the life cycle often undergo restructuring and re-engineering which starts another rapid growth phase. If the organisation does not go through this second growth phase, it may have to be put to rest and an undertaker takes over. Such a leader will be faced with tough decisions.
Figure 9.2 Leadership styles and the organizational life cycle Source: Adapted from Rothschild(1996:17)
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Strategic Management 9.4 Organizational culture as a driver for strategy implementation 9.4.1 The role of organisational culture in strategy implementation Organizational culture can be defined as the set of important often unstated, assumptions, beliefs, behavioural norms, and values that the members of an organisation share. An organisation’s culture is its personality. The culture can either be a valuable ally or a stumbling block to successful strategy implementation. When the organisation’s beliefs, visions and objectives underpinning its chosen strategy are compatible with its organisational culture, culture serves as a valuable driver and simplifies strategy implementation efforts. Reshaping organisational culture is a complex and time –consuming task yet in order to execute strategies successfully, top management must establish a tight fit between the chosen strategy and culture. Organizational leadership and culture are closely related. An organisation’s founders are particularly important in determining culture, as they often imprint their values and leadership style on the organisation’s way of doing things. As the organisation grows it attracts managers and recruits employees that share in the founders’ values and belief system. Subsequently an organisation’s culture becomes more and more distinct as its workforce becomes more similar. 9.4.2 Types of Organizational Culture Strategic management authors divide culture into four broad categories: Strong In a strong organisational culture, values, norms and beliefs are deeply ingrained and difficult to eliminate. If a tight fit exists between the chosen strategy and a strong culture it is a valuable asset. A strong culture that does not match a chosen strategy is a liability to the organisation and the strategy implementation process. Weak A weak organisational culture is a fragmented one. There are few traditions and few values and beliefs are shared. Sub-cultures exist, there is very little cohesion and organizational members do not have a sense of corporate identity. Weak cultures seldom serve as a driver for strategy implementation.
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Strategic Management Unhealthy In this culture there is a politicised internal environment where influential managers operate in autonomous ‘kingdoms’. The organizational culture is characterized by a hostile resistance to change and to people who advocate new ways of doing things. For instance an entrepreneur will not be rewarded in this culture. This organization will seldom benchmark its practices and processes against those of industry leaders, clinging to the belief that it has all the solutions and answers. Adaptive The members share a feeling of confidence that the organisation can neutralise threats and exploit opportunities that cross its path. Adaptive cultures are characterised by receptiveness to risk taking, innovation and experimentation. A proactive approach to strategic change is evident and strategies are changed whenever necessary. Charles Handy (1993) has a different approach and describes culture in terms of Power, Role, Task and Person.
Power Culture This is found in small entrepreneurial organisations. It can be compared to a spider in the centre. The power culture depends on its central power source or ‘spider’. Even though this power source is connected to the functional or specialist areas, it remains the centre of activity and influence. Organizations with power cultures depend on trust and empathy for their effectiveness and personal conversation for communication. Individuals in these organisations tend to be power-orientated, politically minded and risk taking with little desire for security. Power cultures are strong and move quickly.
Role Culture The role culture is often stereotyped as a bureaucracy where logic, rationality, rules and procedures dominate. Here the role or job description is more important than the individual who fills it. Individuals are selected for satisfactory performance of a clearly defined role. Role cultures offer security, predictability and the opportunity of acquiring specialist expertise. The role culture is found in organizations where economies of scale are more important than flexibility and innovation.
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Task Culture The task culture is project orientated and is often found in organisations with matrix structures. The task structures seek to bring together the right people, functional expertise and resources. The task culture is appropriate where flexibility, speed of reaction and sensitivity to the market or environment is important. It is however difficult to produce economies of scale or great depth of expertise in such a culture.
Person Culture In the person culture the individual is the central point and the organisation exists only to serve the individuals within it. A person culture is formed if a group of individuals decide to band together in order to follow their own interest better through for example, sharing office space, secretarial services and equipment. Examples include architect’s partnerships, doctors, lawyers and even social groups. Few organisations can exist with this type of culture since organisations tend to have objectives over and above those of the individual.
Figure 9.3 A framework for managing the strategy-culture relationship Source: Adapted from Pearce & Robinson (2003:301)
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Strategic Management 9.5 Reward systems as a driver for strategy implementation Motivating managers and employees to give their commitment to the implementation of the new chosen strategy is another key success factor. New strategies involve risks and imply changes in leadership, culture and structure and may cause uncertainty about the future. Encouraging leaders and employees to work towards the achievement of strategic objectives poses a significant challenge to top management. One of the ways organisations can improve employee commitment and encourage behaviour consistent with the new strategy is to improve their understanding of the strategy and the required implementation process. Another way of ensuring that strategy-specific supportive tasks are performed and implementation objectives are met is through the establishment of reward systems Definition of a Reward System Reward systems can be defined as the umbrella term for the different components considered in performance evaluation and the assignment of monetary and non-monetary rewards to them. Rewards systems should be created in such a way that they are tightly linked to the strategy, encourage a change in behaviour to support strategy implementation, and reward managers for performance over the long term. In addition, reward systems have to be tied to achieving the specific outcomes necessary to make the new strategy work and must emphasise rewarding people for accomplishing results, not just for dutifully performing assigned tasks. It is important to note that reward systems reflect top management’s attitude to performance and influence organisational culture and leadership styles. Reward systems are too often designed with a short term focus and for top management only. In order to be an effective motivator for strategy implementation, it has to extend to the middle and lower management as well as the entire workforce. 9.5.1 Types of Reward They can be monetary or non-monetary. Monetary compensation includes salary increases, profit sharing, share options, cash bonuses and retirement packages. Non-monetary rewards include status, recognition, awards, job security, promotion, perks, stimulating assignments and the corner office.
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Strategic Management Reward systems may also focus on the performance of the individual or on performance of the group. Share Options This concept was popularised during the technology boom of the 1990s. It included linking individual rewards to organisational performance. They are based on the premise that members of top management, through share options, will be motivated to pursue long term goals in line with shareholder’s expectation rather focusing on short-term goals that might be detrimental to the maximisation of shareholders’ wealth. Top management teams rewarded with share options may be more entrepreneurial and concerned with quality and innovation. Restricted share Plan A restricted share plan also uses company shares as an incentive for executives. Under such a plan an executive is typically given a certain number of shares, but may not sell them for a specified period of time. Should the executive leave the company before the restricted period ends, the shares are forfeited. The rationale behind a restricted share plan is that it promotes longer executive tenure than other forms of compensation – so that if the executive has been part of the strategy formulators, he will implement the strategy. Golden Handcuffs Another type of executive bonus compensation that offers an incentive for executives to remain with the company is the golden handcuffs. In this case cash bonuses are deferred in a series of annual instalments. Should the executive leave the company before a certain time, compensation is forfeited. This type of reward system is also used to retain specialised skills. Golden Parachutes This is used to retain talented executives. Under such a compensation plan an executive retains a substantial cash bonus regardless of whether the executive quits, resigns or is fired. Cash Bonuses These are cash payouts calculated on the Return on Equity, earnings per share and growth ratios. Profit sharing is also widely used.
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Strategic Management 9.5.2 Aligning reward systems with the chosen strategy If there is a change in strategy, reward systems should also be altered to ensure a continued tight fit with the chosen strategy. Different types of reward systems accomplish different purposes. To match the reward system with a strategy the following can be used as guidelines:
Organisations in the start-up phase of the organizational life-cycle that pursue growth strategies should incorporate larger salaries and equity into their reward systems.
In the rapid-growth phase of the organizational life-cycle, reward systems should include a salary plus large bonuses for growth targets, plus equity for key people.
Organisations faced with maturity should link reward systems to efficiency and profit margin performance.
During the decline phase, reward systems should be linked to cost savings.
9.5.3 Reward systems and corporate governance Reward systems affect the kinds of norms, values and culture that develop in an organisation. They also affect the way managers and employees behave. Therefore it is important to design rewards in such a way to ensure that the principles of good governance are instilled in the organisation. According to the King II report, one of the responsibilities of the board of directors is to monitor remuneration. It suggests that organisations should appoint a remuneration committee to make recommendations to the board of directors on the organisation’s framework of executive remuneration and to determine specific remuneration packages for each of the executive directors. Furthermore organizations should provide full disclosure of director remuneration and give details of earnings, share options, restraint payments and all other benefits. Another recommendation of the King II report is that performance – related elements of remuneration should constitute a substantial portion of the total remuneration package of executives in order to align their interests with that of the shareholders, Reward systems should be designed in such a way that they provide incentives to perform at the highest operational standards. Lastly, organizations should establish a formal and transparent procedure for developing a policy on executive and director remuneration which should be supported by a statement of remuneration philosophy in the annual report. 143
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Strategic Management 9.6 Conclusion Strategy implementation is a crucial component of the strategic management process. The ability to implement strategies successfully can be a competitive advantage in an environment characterized by increased ambiguity and rapid change. Later the focus shifted from product to people. Leadership, organizational culture and reward systems are strategy implementation drivers that focus on the people inside an organization. These are also the drivers for strategy implementation through which good corporate governance principles can be incorporated into every aspect of organizational life. In a way these three drivers form the cornerstone of strategy implementation and are perhaps the most significant strategy implementation tools. Think Point Case Study In line with the recommendations of the King II Report, Allied technologies Limited (Altech) has included a remuneration report as part of the sustainability report in its 2005 annual report. The remuneration report focuses on the reward systems of Altech pertaining to its directors. The report consists of several sections and deals with such issues as governance, the remuneration policies, the remuneration of executive directors and the fees of non-executive directors. The report also provides details on the share options of the directors. Altech’s remuneration philosophy is also contained in the remuneration reportand is “to set appropriate remuneration levels to attract, retain and motivate top grade/high calibre employees”. (Altech, 2005:40) Altech Group’s remuneration structure for senior management consists of three components: namely fixed remuneration such as annual salaries and benefits; variable remuneration which includes short term performance-related incentive scheme; and share options which is a longterm performance-related incentive scheme. Source: Adapted from Allied technologies Limited (Altech) annual report (2005) 1. From the above case study discuss the applicable reward systems.
Cash bonuses
Share options
Golden handcuffs
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Profit sharing
Non monetary rewards
2. A change in strategy requires a change in reward systems. Provide brief guidelines for matching reward systems and strategies with reference to the organizational life cycle
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Start up phase – organizations that pursue growth strategies should incorporate large salaries and equity into their reward systems.
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Rapid growth phase – reward systems should include a salary plus large bonuses for growth targets, plus equity for key people
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Maturity phase – Reward systems should be linked to efficiency and profit margin performance
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Decline phase - Reward systems should be linked to cost saving.
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CHAPTER 10
Continuous improvement through strategic control and evaluation
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Strategic Management Continuous improvement through strategic control and evaluation Learning Outcomes After studying this chapter you should be able to do the following:
Understand and discuss strategic control as a component of the strategic management process.
Describe the different types of strategic control
Design a strategic control system
See the value of the role of the balanced score card in strategy implementation and control.
Appreciate the relationship between strategic control and corporate governance.
Understand benchmarking, total quality management and re-engineering as ways of sustaining a competitive advantage through continuous improvement.
10.1 Introduction This chapter deals with strategic control and evaluation. In a stable, predictable business environment characterized by evolutionary change, strategic control can be seen as the ‘last’ phase of the strategic management process. But in order to sustain a competitive advantage in a dynamic, uncertain environment characterized by rapid change, organizations should aim for continuous improvement through their strategic management process. In other words, once an effectively formulated strategy has been successfully implemented, controlled and evaluated, organizations need to review their strategic choices to remain competitive over the long term. Thus strategic management does not end with the strategic control phase. This chapter describes the importance of strategic control as a component of the strategic management process. The different types of strategic control are introduced and guidelines for designing a strategic control system are discussed. The balanced scorecard is a valuable strategic control tool that aids continuous improvement. Total quality management, six-sigma and re-engineering are other approaches to continuous improvement briefly reviewed in this chapter. The chapter concludes with a discussion of the interrelatedness of the strategic management process.
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Strategic Management 10.2 Strategic control 10.2.1 Strategic control as a component of the strategic management process Strategic control provides feedback on the formulation and implementation phases of the strategic management process. This feedback indicates the adjustments an organization will need to make in order to align itself better with its environment, and improve the likelihood of successful strategy implementation. Strategic control or strategy evaluation results may lead to changes in the choice of strategy or to the choice of how strategy is being implemented. The results could also lead to changes in both the formulation and implementation phases or may show no need for changes at all. Strategic control can be linked to strategy implementation by using the short term objectives as a basis for performance measurement. In the same way, the resource allocation can be used to monitor strategic progress. Reward systems are often tied to the results of the strategic control process. It is clear that the strategic management process is interrelated and that actions and decisions in one phase impact on the other phases. Strategic control is in essence the phase of the strategic management process that concentrates on evaluating the chosen strategy in order to verify whether the results produced by the strategy are those that were intended. Strategies focus on the long-term future, and time lapses between the formulation and implementation of a strategy and the achievement of its intended results. During this time lapse, organizations make investments and undertake projects to implement the chosen strategy, and there may be changes in both the eternal and internal environments that could affect the chosen strategy. It is therefore important for managers, on the one hand, to ensure that the organization’s implementation activities are performed effectively and efficiently and on the other hand to continually be aware of deviations from the strategic plan in order to take corrective action. Thus strategic control has two focal points: 1. To review the content of the strategy, and 2. To evaluate and control the implementation process. Strategic control differs from organizational or traditional managerial control in several ways. Traditional management control focuses on the implementation process in all its detail, MANCOSA – PGDBM
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Strategic Management whereas strategic control focuses on the key success factors of the strategy. Operational control focuses on the short term, and strategic control focuses on the long term. In traditional or operational control, action is only taken after deviations to performance measures have occurred, whereas strategic control is concerned with guiding the action as the strategy takes place and where the end results are still several years away. Strategic control is an important component of the strategic management process, as chosen strategies can become obsolete as the organization’s environment changes. Strategic control identifies and interprets critical events, or change triggers, in the external environment that require a response from the organization. Timely strategy evaluation can alert management to deviations and problems or potential problems which may require corrective action. Strategic control should initiate managerial questioning of performance, assumptions and expectations in order to determine to what extent the organization is achieving its short-term objectives. It is important that strategy evaluation be performed on a continuous basis and not at the end of specified periods of time. 10.2.2 Types of strategic control There are four types of strategic control that organizations can use, namely premise control, strategic surveillance, special alert control and implementation control. The first three are used to review the content of a strategy and the last is used to evaluate strategy implementation.
10.2.2.1 Premise control A chosen strategy is based on certain assumptions or premises made during the strategy formulation phase. Strategic planners need to make assumptions for two reasons: Firstly, detailed information on all the factors that may influence the choice of the strategy is available to the strategic planners. Secondly, it is necessary to simplify the complexity of the organization’s environment by making assumptions or premises. Strategy formulation premises are primarily based on environmental and industry factors. Premise control is used to systematically and continuously check whether the premises and assumptions on which the strategy is based are still valid. (Pearce and Robinson, 2005:366) If a key premise is no longer valid, a change in strategy may be required. Premise control is a focused type of strategic control.
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Strategic Management 10.2.2.2 Strategic surveillance During strategy formulation and implementation the organization narrows its focus to a relatively small numbers of factors. Strategic surveillance is a type of strategic control whereby the organization monitors and interprets a broad range of events not previously identified, both internal and external to the organization that may affect the course of the strategy. It is based on the idea that important yet unanticipated information may be discovered by a general monitoring of multiple information sources. These sources could include conferences, conversations, journals such as the Financial Mail and The Economist or newspapers such as Business Day or Mail and Guardian. 10.2.2.3 Special Alert Control Special Alert Control is the “thorough and often rapid, reconsideration of the organization’s strategy because of a sudden, unexpected event” (Pearce and Robinson, 2005:368). Example after the Teacher’s strike in August 2010 – immediately after the extra long school holiday – the education department had to drastically reconsider its strategies. Special alert control is a focused type of strategic control that supports strategic surveillance and premise control in reviewing the content of a chosen strategy. 10.2.2.4 Implementation control The strategy implementation process consists of various activities, initiatives and programmes that occur over a period of time. These may entail appointing key people, restructuring the organization, allocating resources, performing certain functional tasks relating to the strategy and developing reward systems. Implementation control is the type of control that must be exercised as the implementation process unfolds. The purpose of implementation control is two-fold: 1. It provides managers with information regarding success of the implementation process in terms of performance levels; and 2.
It indicates whether the basic strategic direction needs to be alerted.
Implementation control is enabled through operational control. Strategic control evaluates the organization over an extended period, whereas operational control provides feedback over shorter periods such as months, quarters and so forth. Operational control systems usually take four steps common to all post-action control: 1. Set standards of performance MANCOSA – PGDBM
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Strategic Management 2. Measure actual performance 3. Identify deviations from standards set 4. Initiate corrective action Operational systems evaluate the progress of strategy implementation by monitoring the achievement of short - term objectives. Examples of operational control systems include budgets, schedules and key success factors. These must have measurable performance indicators and should receive constant management attention. 10.2.3 Designing a strategic control system Traditionally, organizations make use of management and operational control to ensure that managers and employees acted in accordance with the established strategic plan. Within these systems measures were set, performance was measured, deviations were identified and corrective action was taken. The performance measurement results provided a feedback loop to strategy formulation that typically involved a lengthy time lag. Strategies were then adapted accordingly. If deviations occurred these were corrected without questioning whether the planned results were still viable or desirable or whether such methods were used to achieve the planned objectives were still appropriate. In such a control system single-loop learning takes place. In today’s turbulent business environment characterized by speed and change, organizations need to be able to review and adapt their strategies as it becomes necessary. These organizations also require double-loop learning, which occurs when the underlying assumptions of the strategy are questioned to ensure that these remain valid. Managers do need feedback on strategy implementation progress as supplied by single-loop learning control systems. However, feedback is also necessary on the chosen strategy itself. The main objective of a strategic control system is to identify critical events that impact on the strategy. These events are often referred to as change triggers to which the organization responds in order to improve strategy implementation. Therefore an effective strategic control system should provide accurate, timely information that provides an updated, true picture of the organization’s performance and should be flexible enough to allow managers to respond to change triggers. A strategic control system should be designed in such a way that managers are able to review the content of the strategy and evaluate the implementation progress. Using the balanced score card as a strategic control framework or tool, ensure that both focal points of strategic control are incorporated into one system. 151
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Strategic Management 10.3 The balanced scorecard in strategy implementation and control 10.3.1 A review of the balanced scorecard The balanced scorecard was introduced as a guideline for translating an organization’s vision into strategic or long-term goals in four perspectives: Financial, customer, internal business process and learning and growth. These objectives are statements of critical success factors that indicate what must be achieved for the strategy to be successful. Each of these long term goals has measures that indicate how the atonement of the objective will be measured and tracked. Within the balanced scorecard these measures become drivers of performance. Short term objectives are set for each of these measures. This translates the long-term goals into specific targets which indicate the performance or level of improvement needed. Lastly, key action programmes or initiatives are developed to achieve the objectives. These can be compared to functional tactics. In other words, the balanced score card sets objectives, measures, targets and initiatives for four organizational areas based on vision or strategy. The balanced scorecard is more than just a collection of key success factors, objectives and measures organized into several perspectives. For the balanced scorecard to be of value, the various objectives and measures in each perspective should be consistent and reinforcing in terms of the objectives and measures in other perspectives. The balanced scorecard should incorporate the complex set of cause-and-effect relationships among the critical variables (Kaplan and Norton 19996c:66). Cause-and-effect relationships form the basis of strategy and can be expressed by ‘if-then’ statements. For example, to achieve a certain percentage of return on capital employed (ROCE) may be a financial objective. This objective may be dependent on expanded sales from existing loyal customers (customer perspective), which could be dependent on time delivery. In order to achieve on time delivery, the organization may need to achieve short cycle times in operating processes and high quality internal business processes. For employees to be able to achieve high levels of quality and reduce cycle times, training may be necessary (learning and growth)
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Figure 10.1 Illustration of cause-and-effect in balanced scorecard Source: Adapted from Kaplan & Norton (1996: 66)
10.3.2 The balanced scorecard as a strategy implementation and control system By using the balanced scorecard, organizations can monitor and evaluate short term results in four different perspectives in order to see if the strategic objectives are being achieved. The balanced scorecard provides managers with the ability to know at any point during strategy implementation whether the chosen strategy is working. It also shows if the strategy is not working and why it is not working. However, the value of the balanced scorecard in strategic control runs much deeper than initially thought. When creating and implementing balanced scorecards for the purposes of performance measurement systems, the developers of the balanced scorecards found that four distinct management processes emerged. These four processes form a framework for strategy implementation and control of evaluation. The balanced scorecard had thus evolved from a performance measurement system to a management system that provides for both focal points of strategic control. The balanced scorecard enables organizations to evaluate implementation activities and to test the validity of the assumptions on which the strategy is based in one framework.
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Strategic Management The four processes that form this framework are depicted below:
Figure 10.2 The balanced scorecard as a framework for strategic control Source: Kaplan & Norton (1996c:77).
Translating the vision This is the first process that form a framework for strategic control is that of translating long term objectives. It ensures that the strategy is the reference point and it forces top management to gain consensus on the organizations vision and strategy. It ensures that the vision is translated into integrated measures and objectives linked to the strategy in which people can act.
Communicating and linking The second process creates an opportunity for managers to ensure that the long term strategy is clearly understood by the entire organization through communicating and linking. In order to implement a strategy it is necessary for managers to educate those involved, about the strategy. Communicating the strategy to all employees ensures that
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Strategic Management both the strategy and critical objectives that have to be met are clear to the entire workforce. Employees understand how their tasks and responsibilities fit into the overall organizational strategy. The balanced scorecard is also a means of communicating the strategy to its outside stakeholders. This is in fact a recommendation of the King II report. Communicating the balanced scorecard promotes commitment and accountability to the organization’s strategy. This process is also concerned with translating long term objectives and measures into operational objectives and measures that can then be translated into personal objectives and measures, reward systems can be linked to these.
Business Planning The third process enforces organizations to link their business plans to the strategy through the setting of targets or milestones. Strategic initiatives are clearly identified and indicate where investments should be made. Through this process organizations integrate their strategic planning and budgeting processes, ensuring that the resource allocation plans support the chosen strategies.
Feedback and Learning The fourth process that emerges from using a balanced scorecard provides organizations with the capacity for strategic learning. Strategic learning consists of gathering feedback, testing assumptions on which the strategy is based and making the necessary adjustments. The balanced scorecard supports strategic learning as it tests, validates and modifies the assumptions on which the strategy is based.
The first three of these processes provide a framework for implementation control. The vision is translated and communicated, goals are set and initiatives are taken. Performance can be measured and any deviations can be corrected. As the objectives remain constant, single-loop learning takes place. The fourth process provides a foundation for reviewing the content of the strategy. In order to do so it is necessary to gather feedback on the strategy, test the validity of the assumptions on which the strategy is based and make the necessary adjustments. As stated earlier, the strategic objectives within the four dimensions are interlinked in terms of cause and effect. This specification of the causal relationships between the performance drivers and objectives allows 155
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Strategic Management management to use its periodic review sessions to evaluate the validity of the strategy and the quality of its execution. If the objective of increasing return on capital has not been achieved, yet customer loyalty has increased the process cycle time has been reduced, on- time delivery targets have increased and the relevant training has been performed, the assumption underlying the strategy may not be valid. Management may decide to affirm its belief in the strategy but to adjust the quantitative relationship among the strategic measures on the balanced scorecard. Alternatively it may decide that in view of new market conditions a new strategy is required. Thus, through using the balanced scorecard as a framework for strategic control, managers are able to review the content of the strategy, the second focal point of strategic control. The balanced scorecard serves as a valuable strategic management tool, as it enables organizations to clarify their strategies, translate them into action and obtain meaningful feedback. 10.4 Strategic control and corporate governance The King II report contains several recommendations that impact on strategic control as a component of the strategic management process. These can be summarized as follows: 1. The board as the focal point of the corporate governance system must retain full and effective control over the company and must monitor management in implementing board plans and strategies. The board of directors should also monitor operational performances and management. 2. In terms of the financial aspects, the key risk areas and the key performance indicators of the organization must be identified. These should be monitored regularly with particular emphasis on technology and systems. The board should also monitor the non –financial aspects relevant to the organization’s operations. 3. The board must ensure that adequate internal controls exist and that the organization’s information systems can cope with the strategic direction in which the organization is headed. These among other duties and responsibilities of the board must be recorded in a charter which is to appear in the organization’s annual report. 10.5 Sustaining competitive advantage through continuous improvement In order to achieve strategic success over the long term, organizations should perform all strategic management activities within the context of continuous improvement through the adoption of practices such as benchmarking, total quality management and re-engineering. MANCOSA – PGDBM
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Strategic Management 10.5.1 Benchmarking Benchmarking is the comparison of selected performance measures or operational processes against some challenging yardsticks. These yardsticks could be comparisons with the organization’s own history, against key competitors in the industry or against best-in-class performers. Organizations should have a strong commitment to benchmarking their activities against best-in-industry or best-in-world performers which could subsequently be incorporated into strategy implementation efforts and strategic control systems. 10.5.2 Total quality Management Total quality management (TQM) focuses on designing and delivering quality products to customers and can dramatically improve organizational performance. TQM may be defined as a culture inherent in this total commitment to quality and attitude expressed by everybody’s involvement in the process of continuous improvement of products and services through the use of innovative scientific methods.(Melnyk and Denzler, 1996:295). This definition identifies the four basic principles of TQM: 1. The first principle is a commitment to quality at four different levels:–
the workforce must make a commitment to producing quality products
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each individual in the organization must make a commitment to customers
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top management must be committed to TQM
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The entire organization, including its suppliers, needs to be committed to the organization as a whole.
2. TQM involves the use of scientific tools, technologies and methods to assist managers in making systematic changes in processes and products. 3. TQM requires total involvement in the quality undertaking through teamwork and empowerment. People from different functional areas in the organization have different perspectives. By bringing people from the different functional areas together to form a team, the decision-making process is enriched. 4. Continuous improvement is also referred to as kaizan. TQM requires the organization and its members to improve on something everyday. Improvement should be neverending. 10.5.3 Six Sigma approach to continuous improvement Six Sigma was first launched by Motorola in the late 1980 and hailed as the new TQM. At the core of the Six Sigma approach is a methodology and framework for linking improvement to profitability, irrespective of the functional area. It requires leadership and is becoming an 157
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Strategic Management increasingly popular continuous improvement tool to realize above average financial returns. Companies that have used the Six Sigma approach have reported huge savings in production and service areas. The Six Sigma approach comprises five steps namely, define, measure, analyze, improve and control. Pearce and Robinson (2005: 376) describe Six Sigma as a highly rigorous and analytical approach to quality and continuous improvement with the objective of improving profits through defect reduction, yield improvement, improved customer satisfaction and best-in-class performance. Six sigma compliments TQM by focusing on management /leadership, continuous education, customers and statistics. The critics of TQM emphasize the following key success factors that differentiate Six Sigma from TQM (Pearce & Robinson, 2005:376):
A heightened understanding of customers and the product or service provided
Emphasis on the science of statistics and measurement
Meticulous and structured training and development
Strict- and project-focused technologies
Top management support and continuous education
Six Sigma scorecards have been developed and these can be linked to the organization’s overall strategic goals and vision by linking the Six Sigma scorecard to the balanced scorecard. 10.5.4 Re-engineering Another popular approach to ensuring continuous strategic success in the 21 st century is reengineering or business process re-engineering (BPR). Through BPR an organization is reorganized in such a way that it creates value for the customers by eliminating the following barriers that create distance between employees and customers. Processes are re-engineered with the question in mind: “how can we reorganize the way we do our work to provide the best quality and the lowest cost goods and services to the customer?” process is focused on customer needs rather than specific tasks or functional areas. Re-engineering and TQM are interrelated and complementary. Once business processes have been re-engineered, TQM principles can be used to continuously improve the new processes and find better ways to manage tasks and roles.
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Strategic Management 10.6 Conclusion Strategic control is an essential component of strategic management, as it is the phase that evaluates the chosen strategy. If the results are not those intended by the strategy, corrective needs to be taken. In today’s rapidly changing dynamics of the business world, not only the strategy must be modified, but also to question the validity of the assumption on which the strategy is based. The strategic management process is an interrelated one. A strategy formulation decision will impact on a strategy implementation decision which will impact on a strategy implementation decision, which will in turn impact on a strategic control decision. The strategic management process does not stop with the strategic control phase, and in turn, strategic control decisions will impact on strategy formulation and implementation decisions.
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Strategic Management Think Point Case Study Special alert control at Eskom Since Sepember 2005, there has been an increase in power supply interruptions throughout South Africa, especially in the Western Cape. Electricity in this problem is supplied by Eskom’s Koeberg power station. Koeberg has two reactors and in December 2005 one of them was severely damaged after a bolt was apparently misplaced in it. In February 2006 the Western Cape was experiencing power outages almost daily. It is estimated that businesses in the Western Cape have lost about R500 million due to the power outages. Eskom had to review their strategy drastically. Subsequently they decided to source the part that would restore Koeberg from overseas and also fast-track their plans to build an additional generator in the Western Cape. There are a few parts available worldwide that would restore Koeberg. Eskom approached France’s state-owned power utility EFD. They were prepared to lend the relevant part to South Africa in the interim. The replacement rotor, weighing 200 tons, arrived in Cape Town harbour on 5th April 2006. Eskom planned to have full power restored to the Western Cape by the end of July 2006. Source: www.eskom.co.za 1. Why is strategic control an important component of the strategic management process of Eskom? -
Provides feedback on formulation and implementation phases of the strategic management process
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Strategic control evaluates the chosen strategy in order to verify whether the results produced by the strategy are those intended
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Strategic Management 2. Explain how strategic control will differ from Eskom’s operational or traditional management control.
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Traditional management control focuses on the implementation process; strategic control focuses on the key success factors of the strategy.
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Operational control focuses on the short term, while strategic control focuses on the long term.
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In traditional or operational control, action is only taken after deviations to performance measures have occurred. Strategic control is concerned with guiding the action as the strategy takes place and where the end results are still several years away.
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CHAPTER 11
Strategic management in not-for-profit organisations
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Strategic Management Strategic management in not-for-profit organisations Learning Outcomes After studying this you should be able to do the following
Discuss the usefulness of strategic management concepts and techniques for nonprofit or not-for-profit organisations.
Explain the difference between revenue sources for profit-seeking and not-for-profit organisations.
Identify the constraints on strategic management for not-for-profit organisations.
Apply some strategies for not-for-profit organisations.
11.1 Introduction Strategic management is essential and relevant to all types of organisations. The main reason why non-profit or not-for-profit (NFP) organisations are so important is because they account for an average of at least 5 per cent of all jobs worldwide. They also constitute an important sector of the economy of any country as they provide services and goods that profit-seeking organisations cannot or will not provide. Organisations such as churches, schools, museums and charities clearly fall into sector. From some NFP’s, like churches, people receive a benefit although they do not pay for the services. Many of the services provided by government are ‘free’ (although paid for through taxes). The government provides ‘free’ primary health-care services, for instance, as it is not a profit-seeking organisation. The fees charged by the organisations such as the Society for the Prevention of Cruelty to Animals (SPCA) and the Cancer Association of South Africa (Cansa) cannot generate a profit or even cover their costs. Although the services provided by NFP organisations cannot generate a profit, the organisations are necessary for any community. 11.2 The benefits of strategic management concepts and techniques As with profit-seeking organisations, it is of central concern to NFP organisations to achieve competitive advantage. This raises specific strategic questions, such as the following:
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Why do we exist?
What do we want to be for our clients?
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How can a competitive advantage be gained or sustained?
Who are our competitors in terms of the services we provide?
Who are our competitors in terms of the limited financial resources?
What are the influences of the external environment on the organisation?
What do we do well?
What can be improved?
If the output of an organisation in terms of services and products is not objectively measurable, it is more difficult to apply strategic management. This is why so many NFP organisations fail to use strategic management principles. The fact that revenue is determined by sponsors and not generated by selling products or rendering services, makes it easy for NFP organisations to neglect strategic management. When thinking about the applicability of strategic management concepts to NFP organisations, it is clear that some of the concepts cannot be applied in the same way as profit-seeking organizations. One of the important concepts in strategy, namely competition, clearly has different meanings for the two categories of organisation. When profit-seeking organisations seek competitive advantage, they have a profit-making advantage in mind. NFP organisations would rather speak of institutional advantage when they are performing their tasks more effectively and efficiently than other comparable organisations. It is, however, important that NFP organisations have a clear idea about their vision, what they want to become, and how they will achieve it. A clear mission statement is thus an essential part of any NFP organisation’s strategic planning. The mission is actually the broad objective of how the vision or dream of the NFP organisation is to be achieved. There is no doubt that these components of strategic management are just as relevant for NFP organisations as they are for profit-seeking ones. It is important for NFP organisation to know where they are going (vision) to be able to answer the questions what, for whom and how in terms of the mental analysis, and to answer questions on what they are doing well and what can be improved. These answers will determine their strengths and weaknesses. It is equally important for NFP organisations to take note of what is happening in the political, economic, social, technological and ecological environments, because these will influence the opportunities for, and threats to them. MANCOSA – PGDBM
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Conventional strategic management analysis distinguishes between suppliers and buyers in the external environment and the different internal value chain activities of the organisation. Such separation of the value chain activities is often less in many cases. It is also important for any NFP organisation to determine what it aims to achieve in order to gain an institutional advantage. One of the key conditions for competitive or institutional advantage for an NFP organisation is credible commitment and social perception of legitimacy. An aspect that can give an organisation an institutional advantage is when it provides a unique service that is in fact inimitable. It is this condition of inimitability that it must exploit. NFP organisations must also be clear on their market segmentation and the product/service they provide. If they are not successful in satisfying the needs of clients and convincing the community about their role in terms of social responsibility, then they do not have a reason to exist, and certainly will not be able to achieve a positive cash flow. It is thus clear that many strategic management concepts are just as relevant for NFP organisations as they are for profit-seeking organisations. NFP organisations also have to become more market-oriented (client-oriented) and this necessitates the use of strategic management. Strategic management for NFP organisations will become more important in the future because of the turbulent environment and the limited revenue resources.
11.3 Revenue sources for not-for-profit organisations The main difference between NFP and profit-making organisations is the source of revenue. In the case of the former, revenue is normally not obtained from the sale of goods or services to customers, but from donations, which are needed to break even. In profit-making enterprises the normal business is the selling of products and services to which a profit to the costs of the service or goods provided has been added. Revenue for an NFP organisation is generated from a variety of sources. These may include sponsors and/or grants from the government and clients who pay for the services they receive. Donations usually account for the major portion of revenue.
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Strategic Management There is a special relationship between the client and the NFP organisation, which differs from the direct relationship between the customer or client and the profit-seeking organisation. In the case of NFP organizations, a third party, usually sponsors, is the more important party in the relationship. The direct relationship between the profit-seeking organisation and its customer/client can be seen in the aggressive marketing attempts to attract and please customers.
Figure 11.1 The effect of Sources of Revenue on different organizations Source: Adapted from Wheelan & Hunger (2002:328).
The sources of revenue will influence the strategic decision making of NFP organisations, which is clearly illustrated in 11.2. The direct relationship and thus strong influence of the client on the organisation is clear in the case of a profit-seeking organisation. In the case of the private school, sponsors have a marginal influence on the organisation; the clients (learners and parents) have a stronger influence and will definitely have an effect on strategic decision making. In the case of the charity (NFP) organisation the client has no direct influence because the organisation is not dependent on the client’s money for the services rendered.
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Figure 11.2 The influences on organizations Source: Adapted from Wheelan & Hunger (2002:328) The important thing to understand in terms of the management of NFP organisations is who pays for the services delivered. If the recipients pay for the services, they have to be taken into consideration when strategic decisions are being made. If the clients do not pay for the services, the NFP organisation must focus its strategic decisions on sponsors, who do pay. The sources of revenue thus play an important role in the sense that they will have an effect on the strategic planning and management of the organisation. Despite the fact that most strategic management concepts are applicable to NFP organisations, there are some constraints that should be taken into consideration.
11.4 Constraints on strategic management for NFP organisations NFP organisations do have some specific characteristics that have an impact on the behaviour of the organisation and as a logical consequence will impact on its strategic management as well.
The services that are provided by the charity organisation are not tangible. Quite often this service is actually hard to measure. The service must not only satisfy the sponsors, but also the needs of the clients who make use of it.
The fact that the organisation is dependent on clients and sponsors makes it difficult for it to be too particular. It is, for example, difficult to target a specific market. Another effect is that these sponsors may intrude on the organisation’s internal management.
The community actually expects the service which NFP organisations provide. Communities even expect central, provincial or local government to render this kind of
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Another characteristic of NFP organisations is that they often entail community involvement.
Some ‘employees’ of NFP organisations are part-time or even voluntary workers. They may also be professional people serving on the board of directors in terms of their professional knowledge. Their main commitment is to their other, full-time job.
These characteristics of NFP organisations sometimes make it difficult to do strategic planning in the full sense of the word. These issues can be seen as constraints for strategic management in NFP organisations and will influence the three main elements of strategy: formulation, implementation, and evaluation and control. The impact of these constraints will be discussed in terms of these three elements. 11.4.1 Impact of constraints on strategy formulation As pointed out at the beginning of this chapter, clear-cut performance measures are not part of NFP organisations. Performance measures like increasing profits or market share are not typical of these organisations. NFP organizations have different and divergent goals and objectives. This is something that sometimes makes rational strategic planning difficult. The influence of sponsors in the internal management of NFP organizations can prevent management from being specific in its mission statement for fear of sponsors cancelling the donation of funds to the organisation. Several studies throughout the world found that many of these organisations have very general and sometime ambiguous objectives. Earlier we stressed the importance of revenue sources for NFP organisations. Such organisations may tend to shift their focus from results to resources, especially revenue resources. The focus is thus on the input side and perhaps not that much on the output side. Outputs which are in the form of services rendered are not that easily measured, while it is easy to measure the financial inputs. The ultimate goal of the NFP organization may thus raise enough revenue to carry on with its operations. This is known as goal displacement- the goal displacement is known as sub-optimisation. This is where the one division in the organisation functions as if it were the most important section in the organisation. This can happen in an NFP organisation when the department responsible for getting sponsors thinks that it is more important than the rest of the organisation. MANCOSA – PGDBM
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We have mentioned the fact that the objectives tend to be vague and also ambiguous. This creates opportunities for the internal politics and the said goal displacement. In many instances the effectiveness of NFP organisations is determined by the satisfaction of sponsors and not that of the needs of clients. Sometimes a sponsor will donate money for a new building so that the building can be named after him or her. The greater need for the upgrading and maintenance of existing buildings is overlooked. It is also common practice to select sponsors for the boards of directors or trustees as a way of thanking them for the sponsorship. They are not selected because they have managerial experience, but because they will ensure revenue resources for the organisation. This raises the question of how compatible this is with corporate governance principles. People serving the board of directors of trustees do not receive any remuneration or compensation, because they are voluntarily involved. They often do not have any interest in sound management and thus in the strategic management of the organisation. Some of these board members are even professional people to whom keeping to their professional values and traditions is more important than responding to the changing needs of their clients. These professional people are sometimes a barrier that holds the NFP organisation back from becoming more business-like. All these issues have an influence on strategy formulation. The impact will be in terms of formulating the mission statement, doing an environmental analysis, setting up long-term objectives, and deciding on a strategy. 11.4.2 Impact of constraints on strategy implementation It is well-known that the structure follows strategy, and if the constraints influence strategy, it follows logically that there will also be an impact on the structure that is part of implementation. The factors mentioned in terms of constraints or barriers on strategic management in NFP organisations also affect how an NFP organisation is organised in both its structure and job design. It is difficult for the management of an NFP organisation to delegate decision-making authority, because of its dependence on sponsors for revenue support. Top management must always be on alert for the needs of sponsors in terms of the organisational activities. If decision-making authority is delegated, it can happen that low-level managers take action that may offend 169
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Strategic Management of this new activity is solely to help subsidise the primary serviced programmes of the NFP organisation by generating revenue. This strategy is not about how to deliver a better service to the clients, but only about making up the shortfall in terms of revenue An example of this piggy-backing strategy is school shops selling school clothes and other basic requirements for learners. Some schools also engage in strong marketing activities involving their facilities, such as hiring out the school hall. Universities also make extra money by hiring out their facilities for conferences. The accommodation and the conference facilities generate extra income for the institution. Many churches engage in a variety of activities to generate extra income. It is, however, important for NFP organisations to remember that they need some resources to engage in successful strategic piggy-backing. They should have the following:
Something to sell. The NFP organisation should assess the needs of its clients in order to determine whether they will be willing to pay for some goods or services that are closely related to the organisation’s primary activity. Schools that sell school clothes, for example, help learners as well as subsidise some of the expenses of the school.
Venture capital. It takes money to make some money. If NFP organisations have revenue problems but do not have some extra start-up funds, it will be difficult for them to engage in strategic piggy-backing.
Management talent. Competent management people must be available to nurture and sustain an income venture over the long haul. As previously stated, management of an NFP organisation is sometimes difficult, and some competent people do not want to be managers. If the managers do not have any entrepreneurial talent, it will be difficult to be innovative.
Management/trustee support. The governing body of NFP organisations must support the income-generation ventures; otherwise its strong resistance will hinder commercial involvement and the resulting success of the venture.
It is clear that strategic piggy-backing can help an NFP organisation to pursuer its primary mission. There is, however, also a downside- resulting in some disadvantages to strategic piggy-backing if it is not managed with great care. Some disadvantages are:
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In any start-up venture it takes some time for an organisation to experience a positive cash flow. The same can happen here and the NFP organisation could even lose some money in the short term.
This new venture may become the primary purpose of the organisation. A loss of focus on the primary mission is the result.
If the organisation starts to make some money, previous sponsors could decide to withdraw their sponsorships.
11.5.2 Strategic alliances To form a strategic alliance with another organisation is an attractive alternative for profitseeking organisations if they want to bundle competences and resources that are more valuable in a joint effort than when kept separate. This can also be an attractive strategy for NFP organisations as a way of enhancing their capacity to serve the clients. Buying a school bus for usage by two schools is an example of bundling finances to obtain a necessary resource to provide a better service to their clients. It is also possible for strategic alliances to be found between NFP and profit-seeking organisations. At universities it is common-place for profit-seeking organisations to fund research in exchange for the results of the research. It is also commonplace for some schools to form a strategic alliance with an assurance broker or even an estate agent. The broker and estate agent get the opportunity to market their products and services to the parent community in exchange for a percentage of the commission in the case of resulting business. Many questions can be asked about this type of strategic alliance but they are likely to continue and even to prosper in the future. 11.6 Conclusion It is NFP organisations to employ a strategic management approach, because they can no longer function without proper management principles
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Source of revenue not obtained from sale of goods or services to customers
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They depend mainly on donations to break even
2. What are the constraints on strategic management for NFP organizations? -
The services provided by the charitable organization are not tangible
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The fact that the organization is dependent on clients and sponsors makes it difficult for it to make it to be too particular
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The community actually expects the service the NFP organization can provide
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Some employees of NFP organizations are part-time or even voluntary w workers
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CHAPTER 12
Strategic Management concepts in the global marketplace
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Strategic Management Strategic Management concepts in the global marketplace Learning Outcomes After studying this chapter you should be able to do the following:
Understand the scope and dynamics of the global business arena
Distinguish between globalization and ‘glocalisation’
Identify the various strategic orientations of a global firm
Understand the strategy and organization of international business
Describe modes of entry and countertrade
Discuss how Southern African organizations can become world class.
12.1 Introduction The environment in which the organization operates has been discussed in detail in previous chapters but not the international or global environment. This environment includes aspects such as the different political, economic and cultural influences found in different nations, and such factors play an important part in deciding and choosing strategies while doing business globally. The strategy and structure of international business and the different options in modes of entry form the core contents of this chapter. In the same way as the value chain affects a local business, international business also engage in value creation, and should operate using exactly the same strategies.
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Strategic Management 12.2 The scope and dynamics of global business 12.2.1 Overview of global business Change has become the only constant reality of our time. The world around us is moving at a rapid rate. Many familiar aspects have changed, and what has been excellent for years is suddenly now no more than mediocre. We are at a time in our history where circumstances have changed sufficiently to warrant a major shift in assumptions, when more than minor changes are required. Jack Welch (CEO of General Electric) once said: “Destroy you business.com”. What he meant was that if you not destroy the old and irrelevant practices in your business, someone else will do it for you. In this changing climate, more challenges await us than ever before. These challenges can only be faced by employing international standards and international business practices. A fundamental shift is occurring in the world economy. We are moving further away from a world where national economies were relatively isolated from each other by different types of trade barriers such as the following:
Distance
Time zones
Language
Government regulations
Culture
Business systems and procedures
We are moving towards a world in which national economies are merging into an interdependent global economic system, commonly referred to as globalization. What is globalization? “A shift towards a more integrated and interdependent world economy” (Hill, 2001:5). While the trend towards globalisation is not new, the rate at which this shift has been occurring has accelerated in recent years, with far –reaching implications for business and management.
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Strategic Management The challenge is how to cope, remain competitive and prosper in this demanding and everchanging global environment. Globalisation reshapes the macroeconomic and the personal level of everyday life in every part of the world by opening up new opportunities and tearing down boundaries that keep people separate from one another. This means unlimited possibilities for interaction, co-operation and collaboration as well as personal, national, regional and global economic growth and prosperity, thereby making the globalization phenomenon more complex. The problem that multinational enterprises (MNEs) now encounter is not only the technological quick fixes of the past, but how they should be supplemented. Considerations like culturally influenced human behaviour, political and legal environments, the economic and monetary environments, and strategic alliances are just some of the complex global issues influencing the strategic manager’s task. 12.3 Strategic orientations of global organizations Globalization is defined as the shift towards a more integrated and interdependent world economy. The reality is however that because of differing cultures and other factors, this integration is not so easy. An easy starting point for many firms would be to adopt the alternative to the above definition of globalization, namely glocalisation. Glocalisation is built on the same principles as globalisation, except for the addition of the following important phrase: ‘Thinking globally, but acting locally’. This means that organizations should take note of and learn from international experiences as well as from other successful MNEs, but then adapt these successful strategies to the local market. Each local market needs different approaches, and therefore glocalisation is seen as a more hands-on approach than globalization. During this multinational operation, firms can execute their activities abroad by means of four different orientations: Ethnocentric orientation The values and priorities if the parent organization should be the preferred way of doing business in the foreign country. Often the parent organization uses its own employees.
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Strategic Management Polycentric orientation This is exactly the opposite of the ethnocentric orientation. Here the culture and policies of the foreign country are allowed to dominate and influence the strategies and operations implemented. Regiocentric orientation This is especially important in a region-sensitive foreign arena, where the parent organization blends its own management style with that of the foreign region. In doing so it tries to be especially sensitive to local needs. This is particularly important in Africa, where people may not have sophisticated management expertise and knowledge, but feel very strongly about their culture and way of life. Geocentric orientation This is the real global integration method. The best global systems, policies and procedures from experience across the globe are introduced to the foreign country. 12.4 The strategic choices of the global business 12.4.1 Strategy and organization of international business The primary concern of strategic managers is the aspects of the broader environment in which international businesses compete. The focus shifts from the environment to the organization itself and in particular to the actions managers can take to compete more effectively as an international business. The fundamental purpose of any business organization is to make a profit and organizations engage in value creation. The global organization should operate in very much the same way as a domestic organization manages by means of a value chain. Organisations can increase their profits in two ways:
By adding value to a product so that consumers are willing to pay more for it.
By lowering the costs of value creation ( the cost of production- inputs)
An organisation adds value to a product when it improves the product’s quality, provides a better service to the consumer or customizes the product to consumer needs in such a way that consumers will pay more for it – in other words, when the organization differentiates the MANCOSA – PGDBM
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Strategic Management product from that offered by competitors. There are three generic strategies for improving an organisation’s profitability and competitiveness as previously discussed:
Differentiation strategy
Low-cost strategy
Focus strategy
By means of the value chain’s primary and support activities, the organization may be able to expand globally, thereby increasing its profitability in ways not available to purely domestic enterprises. Organisations that operate internationally are able to do the following:
Earn a greater return from their distinctive skills or core competencies. Core competencies refer to a skill within an organization that competitors cannot easily match or imitate; they may exist in any of the organisation’s value-creation activities – production, marketing, research and development, human resources, general management and so on. For these organizations, global expansion is a way of further exploiting the value creation potential of their skills and product offerings by applying those skills and products in a larger global market.
Realise location economies by dispersing particular value-creation activities to locations where they can be performed most efficiently. Because of theories of international trade and due to the differences in factor costs, certain countries have a comparative advantage in the production of particular products. Location economies can therefore be defined as the economies that arise from performing a value-creation activity in the optimal location for that activity, wherever in the world that might be. They can therefore either lower the costs of value-creation or help the organization to achieve a low-cost position, or they can enable an organization to differentiate its product offering from that of competitors.
Realise greater experience-curve economies, which reduce the costs of value creation. This refers to the systematic reduction in production costs that has been observed to occur over the life of a product. This is explained by two factors: -
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Learning effects. The cost savings that result from learning by doing
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Economies of scale. Reduction in unit cost achieved by producing a large volume of a product
12.4.2 Strategy choices Together with the generic and grand strategies discussed earlier, organizations can use four basic strategies to compete in the international environment:
An international strategy
A multidomestic strategy
A global strategy
A transnational strategy.
Each has its own unique advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reduction and local responsiveness. Figure 12.1 shows when each of these strategies is most appropriate.
Figure 12.1 Four basic globalization strategies Source: Adapted from Hill (2002:392)
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Strategic Management INTERNATIONAL STRATEGY By means of this strategy, organizations try to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. They tend to centralize product-development functions at home (For example R&D). They also tend to establish manufacturing and marketing functions in each major country in which they do business. Examples are Toys-R-Us, McDonald’s, IBM and Kellogg’s. MULTIDOMESTIC STRATEGY These organizations try to achieve maximum local responsiveness. They also tend to transfer skills and products developed at home to foreign markets, but they also extensively customize both their product offering and their marketing strategy to different national conditions. They also have a complete set of value-creation activities in each major market; therefore they have a high cost structure. Examples are Toyota and Nissan, which adapt their motor cars specifically to the South African market (4x4s, right –hand drive etc.) GLOBAL STRATEGY These organizations focus upon increasing profitability by reaping the cost reductions that come from experience-curve effects and location economies. They are therefore pursuing a low cost strategy and their value-creation activities are concentrated in a few favourable locations. They further tend not to customize their products as this would raise costs. They prefer to market a standardized product worldwide and gain maximum benefits from economies of scale. Examples are SWATCH, Intel, Motorola and Nokia. TRANSNATIONAL STRATEGY These organizations are trying to simultaneously achieve low-cost and differentiation advantages. This is not an easy strategy to pursue because pressures for local responsiveness and cost reductions place conflicting demands on an organization. Being locally responsive raises costs, which obviously make cost reductions difficult to achieve. After the correct strategy has been chosen for entering a specific foreign market, the various grand strategies should then be considered. The normal strategic management process still continues and the international strategies are just added to the process.
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Strategic Management Whichever strategy is being pursued, it still leaves the organization with the important question of how to implement it by entering the specific markets. The modes of entry which is being discussed next, must be incorporated in the strategic management process. 12.4.3 Modes of entry Generally there are four basic modes of entry to foreign markets. They will be discussed from the lowest level of foreign involvement and investment required and the least amount of risk, to the highest end of the spectrum
Figure 12.2 Four modes of entry Source: Adapted from Jones, George & Hill (2000:131) IMPORTING AND EXPORTING These are the least complex global operations. Exporting means making products at home and selling them abroad. Organisations might sell their own products abroad or make use of a local organization in the foreign country to distribute their products – for example Compaq and Microsoft. There are few risks associated with exporting because a company does not have to invest in developing manufacturing facilities abroad. The same principles apply for importing. LICENSING AND FRANCHISING By means of licensing, an organization (licensor), allows a foreign organization (licensee) to take charge of both manufacturing and distributing one or more of its products in the licensee’s country for a negotiated fee. The advantage is that the licensor does not have to bear the development costs associated with opening up in a foreign country – the licensee bears the MANCOSA – PGDBM
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Strategic Management costs. The risk is that the organization granting the license has to give its foreign partner access to its technological know-how and so risks losing control over its secret. Example is SA Breweries which has a license to produce Amstel Lager from Holland. Whereas licensing is pursued primarily by manufacturing organizations, franchising is pursued mainly by service organizations. In franchising, an organization (Franchisor) sells to a foreign organization (franchisee) the rights to use its brand name and operating know-how in return for a lump –sum payment And a management service fee. Example Steers. The advantage of franchising is that the franchisor does not have to bear the development costs of overseas expansion and avoids the many problems associated with setting up of foreign operations. On the negative side the franchisee may lose control over the way in which the franchisee operates and there is a risk that the quality of products and services may fall. STRATEGIC ALLIANCES The above modes of entry are associated with a loss-of-control problem when expanding globally, which could be overcome by a strategic alliance – an agreement in which managers share their organisation’s resources and know-how with a foreign organization and the two organizations share the rewards and risks of starting a new venture. A strategic alliance is usually a written contract between two or more companies to exchange resources, but it can also result in the creation of a new organization, the joint venture. A joint venture is a strategic alliance between two or more companies that agree to jointly establish and share the ownership of a new business. WHOLLY OWNED FOREIGN SUBSIDIARIES This is when the organization establishes production operations in a foreign country independent of any direct local involvement. Toyota for example has established its own car component companies in some countries to supply their factory in that country with high quality inputs. This method is much more expensive and one carries all the risks associated with the operation – requiring a higher level of foreign investment and presents far more threats. The advantage is high potential returns and there is no loss of control.
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Strategic Management 12.4.4 Countertrade Countertrade is just an alternative means of structuring an international sale when conventional means of payment are difficult, costly or non-existent. It denotes a whole range of barter-like agreements. Countertrade can therefore be defined as the trading of goods and services for other goods and services when they cannot be traded for money. The types of counter-trade are as follows:
Barter – this is the direct exchange of goods/services between two parties without a cash transaction
Counter-purchase – This is the reciprocal buying agreement, where an organization agrees to purchase a certain amount of material back from an organization to which a sale has been made.
Offset – this is similar to counter purchase except that the organization can fulfil the obligation with any organization in the country to which the sale is being made.
Switch trading – this refers to the use of a specialized third-party trading house in a countertrade arrangement. Example is the one between Poland and Greece who had a counter –purchase agreement that called for Poland to buy the same value of goods from Greece that is sold to that country, However Poland could not find enough Greek goods that it required, which resulted in a credit counter-purchase balance in Greece that it was unwilling to use. A switch trader bought the rights to US$250 000 from Poland for US$225 000 and sold them for US$235 000 to a European grape merchant, who used them to purchase grapes from Greece.
Compensation or buybacks – this occurs when an organization builds a plant in a country and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
The main attraction of countertrade is that it can give an organization a way to finance an export deal when other means are not available.
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Strategic Management 12.5 Southern Africa – an emerging global market Southern Africa has emerged as a potential importance to foreign investors. Continuous flows of investments and sustained growth and development will depend on the ability of industries in Southern Africa to compete within the domestic, regional and international markets. Factors that affect foreign direct investment in Southern Africa are as follows:
Political stability
Productivity
Infrastructure
Level of corruption
Levels of education
Skills shortage
Crime
Attention should be given to these factors by government to ensure future FDI. To be able to achieve this there are certain business sectors which could reflect high –growth opportunities in southern Africa, namely:
Tourism
Agriculture
Manufacturing
Financial services
Information technology
Food processing
Transport
Telecommunications
Today’s world class governments and organizations have found ways to create and sustain their global competitive advantage by applying technology, internal capabilities, talents from various stakeholders, suppliers, customers, competitors and strategic alliances. Southern Africa needs to be in the forefront of these issues, and government should enhance the opportunities for companies to compete successfully in the global marketplace.
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Strategic Management 12.6 Conclusion While the emerging global economy creates opportunities for new entrepreneurs and established organizations around the world, it also gives rise to the challenges and threats that yesterday’s business managers did not have to deal with. Managers have to decide whether and how to customize their product offerings, marketing policies, human resource practices and business strategies to deal with national differences in culture, language, business practices and government regulations. Think Point 1. Describe the difference between globalization and glocalisation Globalisation is the shift towards a more integrated and interdependent world economy. Glocalisation is the same thing but adding the following important phrase: thinking globally, but acting locally.
2. Countertrade is an alternative way of structuring an international sale. Explain the five types of countertrade. -
Barter
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Counter-purchase
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Offset
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Switch trading
-
Compensation or buybacks
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Strategic Management Bibliography Coulter, M. 2002 Strategic management in action, 2 nd ed. Upper Saddle River, New Jersey: Prentice Hall. David FR 2001. Strategic Management concepts. 8th ed. Upper Saddle River, New Jersey: Prentice Hall. David FR 2013. Strategic Management concepts. 14th ed. Upper Saddle River, New Jersey: Prentice Hall. Ehlers, T., and Lazenby, K (ed.) (2007) Strategic Management: Southern African Concepts and Cases, Cape Town: Van Schaik Ehlers, T., and Lazenby, K (ed.) (2010) Strategic Management: Southern African Concepts and Cases, Cape Town: Van Schaik Hamel, G & Prahalad, C.K. 1989 Strategic intent. Harvard Business Review, May-June: 63-76 Handy, C. 1993. Understanding organizations, 4th ed. London Penguin. Hill, CWL 2001 International business, 2nd ed. Cincinnati, Ohio: South Western/Thompson Learning Hitt, A.H. Ireland, R.D. & Hoskisson R.E. 2003. Strategic management: competitiveness and globalization, 5th edition Mason, Ohio: South Western/Thomson Learning Kaplan, R.S. & Norton, D.P. 19996c. Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1): 75-85. Kotter J.P. 2001. What leaders really do?. Harvard Business Review, 79(11): 85-96 Mardesich, J. 1999. What’s weighing down Microsoft? Fortune November 13:80, in Dess et al., 2004: 152 187
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Markides, C.C. & Williamson, P.J. 1994. Related diversification, core competencies and corporate performance. Strategic Management Journal 15 (Summer). 149-165 Melnyk, S.A. & Denzler, D.R.1996. Operations management: a value-driven approach. Boston: McGraw-Hill Irwin Mintzberg, Quinn and Ghoshal (1995:17). The Strategy Process Concepts, Contexts and Cases Pearson Education Limited Fourth Edition Porter, M. 1985. Competitive advantage: creating and sustaining superior performance. New York: Free Press Pearce, J.A. & Robinson, R.B. Formulation, implementation and control of competitive strategy, 9th ed. Boston: McGraw-Hill Irwin. Rothschild, W.E. 1996. A Portfolio of Strategic Leaders. Planning Review, January – February 16-19. Thompson, A.A. Strickland A.J. 2003 Strategic Management Concepts and Cases Tata McGraw-Hill Publishing Company Limited New Delhi 13th Edition
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