MNG301A Strategic Management
Contents
Topic 1 | The strategic management process p1 ............................................................................ 5
Introduction p1 [read] ....................................................................................................................... 6
Study unit 1.1 | What is strategic management? p3 [study] ...................................................... 6
Defining strategic management p3 [study] ............................................................................... 6
Views on strategy p4 [study] ....................................................................................................... 8
The people involved in the strategic management process p4 [study] ................................ 8
Qualitative and quantitative decisions p6 [study] .................................................................... 8
Study unit 1.2 | The strategic management process p7 [study] ................................................ 8
Strategic visualisation p7 [study].............................................................................................. 11
Organisational direction and environmental analysis p8 [study] ......................................... 11
Strategy formulation (strategy planning) p10 [study] ............................................................ 12
Strategy implementation p10 [study] ....................................................................................... 12
Contemporary applications of strategic management p11 [study] ..................................... 13
Study unit 1.3 | Benefits and risks of strategic management p12 ........................................... 13
Functional aspects (benefits) of strategic management p12 [study] .................................. 13
Dysfunctional aspects (risks) of strategic management p13 [study] .................................. 14
Strategic issues and concepts leading us into the future p15 [study] .................................... 15
Ethics and strategy p15 [study] ................................................................................................ 15
Stakeholder management p15 [study] .................................................................................... 15
Innovation economy and knowledge management p16 [study] .......................................... 16
Change Management p20 [study]............................................................................................ 18
Strategic leadership p20 ........................................................................................................... 18
Assessment ..................................................................................................................................... 19
Text Book..................................................................................................................................... 19
Study Guide SG49/206 ............................................................................................................. 22
Study Guide SG55/206 ............................................................................................................. 22
Topic 2 | Strategic direction p58 ...................................................................................................... 23
Study unit 2.1 | Strategic direction SG45 ......................................................................................... 23
Strategic leadership p59 [study] ................................................................................................... 23
Strategic intelligence (SQ) p64 [read] ..................................................................................... 27
Setting strategic direction: vision, strategic intent and mission p65 [study] ...................... 28
Assessment ..................................................................................................................................... 33
Study Guide SG87/206 ............................................................................................................. 33
Topic 3 | Corporate governance and strategy p87 ........................................................................ 34
Study unit 3.1 | Corporate governance SG77 ............................................................................ 34
Responsible leadership p88 [study] ........................................................................................ 34
What is corporate governance p91 [study] ............................................................................. 35
Corporate governance in South Africa p95 ............................................................................ 37
Assessment ..................................................................................................................................... 39
Study Guide SG106/206 ........................................................................................................... 39
Topic 4 | Internal Environmental Analysis p109 [study] ............................................................... 41
Introduction p109 [study] ............................................................................................................... 44
Study unit 4.1 | The importance and challenge of internal analysis p110 [study] ............... 44
SWOT analysis p11 [study] ...................................................................................................... 45
Internal analysis for effective strategy development p114 [study] ...................................... 47
Study unit 4.2 | Resource-based view (RBV) p114 [study]..................................................... 48
Resources p115 [study]............................................................................................................. 48
Capabilities p116 [study] ........................................................................................................... 50
Study unit 4.3 | Value chain analysis (VCA) p120 [study]....................................................... 51
Primary activities p122 [study].................................................................................................. 52
Support activities p123 [study] ................................................................................................. 53
Study unit 4.4 | Functional approach p124 [study] ................................................................... 53
Assessment ..................................................................................................................................... 54
The importance and challenge of internal analysis SG116/206 ......................................... 54
Assessment | Resource-Based View SG123/206 ................................................................. 55
Assessment | Value chain analysis SG127/206 .................................................................... 55
Assessment | Functional approach SG131/206: ................................................................... 55
Topic 5 | External environmental analysis SG121 ................................................................................ 56
Study unit 5.1 | The macroenvironment SG121 ............................................................................... 56
Learning outcome SG121 .............................................................................................................. 56
The importance of an external environmental assessment SG122 .............................................. 56
Composition of the macroenvironment SG125 ............................................................................ 59
The five dimensions of the macroenvironment:........................................................................... 59
Forecasting techniques and scenario planning SG134 ................................................................. 63
Assessment SG137 ........................................................................................................................ 64
Study unit 5.2 | The industry or market environment SG139 .......................................................... 64
Learning outcomes SG139 ............................................................................................................ 65
The industry environment (also known as the market or task environment) SG140 .................. 65
Competitor analysis SG145 ........................................................................................................... 72
Limitations of Porter’s Five Forces model SG146 ......................................................................... 73
Assessment SG146 ........................................................................................................................ 73
Topic 6 | Formulating long-term goals SG149 ...................................................................................... 75
Study unit 6.1 | Formulating long-term goals SG149 ....................................................................... 75
Learning outcome SG149 .............................................................................................................. 75
Translating the mission statement into measurable long-term goals SG150............................... 75
Study unit 6.2 | Generic strategies SG155 ........................................................................................ 78
Learning outcome SG155 .............................................................................................................. 78
Strategy selection SG156 .............................................................................................................. 78
Factors that impact on strategic choice SG157 ............................................................................ 79
Generic strategies (sometimes referred to as competitive strategies) SG158 ............................. 79
Comparison between the generic strategies ................................................................................ 83
Criticisms of generic strategy framework SG160 .......................................................................... 88
Assessment SG160 ........................................................................................................................ 88
Topic 7 | Grand strategies SG163 ......................................................................................................... 89
Study unit 7.1 | Grand strategies SG163 .......................................................................................... 89
Learning outcome SG163 .............................................................................................................. 89
Grand strategies SG164 ................................................................................................................ 89
Combination of grand strategies p213 ......................................................................................... 97
Functional strategies SG167 ......................................................................................................... 97
Assessment SG168 ........................................................................................................................ 98
Table of Tables ...................................................................................................................................... 99
Table of Figures ..................................................................................................................................... 99
Topic 1 | The strategic management process p1
Figure 1 Learning Outcomes | Study Unit 1.1
Figure 2 Learning Outcomes | Study Unit 1.2
Figure 3 Learning Outcomes | Study Unit 1.3
Introduction p1 [read]

Prahalad [2000:76] identified 4 transformations that influenced and continue to
influence the business models and work of strategists’ p2:
1. Expansion of available strategic space p2
2. Business will be global p2
3. Speed will be critical p2
4. Innovation as a new source of competitive advantage p2
Study unit 1.1 | What is strategic management? p3 [study]
Defining strategic management p3 [study]

Definition: strategic management p3

Competitive advantage p3

Definition: strategy p3

Leap-frog effect p4
Views on strategy p4 [study]

The new view of strategy contrasts with the traditional view p4 [Table 1.1: New view
of strategy]

Definition: Montgomery (2008) on strategy p4
The people involved in the strategic management process p4 [study]

Employees (human resources) as drivers of strategy implementation p4

The 3 stages of the strategic management process p4:
1. Environmental analysis – responsibility of every manager at every level p4
2. Strategy formulation - top management, input from all levels management
p5
3. Strategy implementation – most challenging, needs buy-in from employees
p5

The 3 stages of the strategic management process SG45/206:
1. Strategic planning
2. Strategy implementation
3. Strategic control

Definition: strategic planning champions (Nordqvist & Melin, 2008) p5:
o
Social craftsperson p6
o
Artful interpreter p6
o
Known stranger p6
Qualitative and quantitative decisions p6 [study]

Qualitative decisions – intuition, gut feeling p6

Quantitative decisions – built on proper strategic analysis and choice p7

Levels of strategy SG24/206:
1. Corporate strategy (not in scope) - Carpenter & Sanders (2009) SG24/206
2. Business strategy
3. Functional strategy
Study unit 1.2 | The strategic management process p7 [study]

Figure 1.1: The strategic management process p9

The strategic management process is a continuous activity that focuses on the longterm sustainability of the organisation SG46/206

It is a sequential set of analyses and choices that enables organisations to achieve
above-average returns and add value to its stakeholders SG46/206

Strategic management consists of three distinct phases/stages SG46/206:
1. Strategy formulation
2. Strategy implementation
3. Strategy evaluation and control
Figure 4 The Strategic Management Process SG46/206
The strategic management phases consist of the following SG47/206:

Strategy planning SG47/206 - this stage is largely the responsibility of top
management. It is the first stage in the strategic management process and focuses
on the organisation’s strategic direction. This is also called a thinking stage:
o
It involves the formulation or review of a company’s vision, mission and longterm goals
o
It also evaluates the environments in which the organisation operates to
identify the strengths, weaknesses, opportunities and threats
o
The components of the strategic planning process are SG48/206:
1. Strategic direction
2. Long-term objectives
3. Environmental analysis
4. Generic strategies
5. Grand strategies
Figure 5 The Strategic Planning Process SG48/206

Strategy implementation SG47/206 - once an organisation has decided on the
destination and the strategy (route) it will take to get there, it needs to move towards
that specific destination. This is where the strategy implementation process comes
into play. This is also called an action stage:
o
Strategy implementation is the action stage of the strategic management
process and requires input and participation from everyone in the
organisation
o
There are different drivers and instruments that can be used to implement the
chosen strategy to eventually reach the desired destination/outcome

Strategic control SG47/206 - the last stage in the strategic management process is
the evaluation stage. Strategic control is, in effect, a checking stage:
o
Strategic control aims to assess the progress made towards achieving the
desired outcome
o
It gives feedback and alerts top management to problems or potential
problems before a situation becomes critical
Strategic visualisation p7 [study]

Visualisation, the graphic representation of strategic content, can improve the quality
of the strategic management process p7

Table 1: Strengths of visualisation p8
Organisational direction and environmental analysis p8 [study]

Figure 1.1: The strategic management process p9

Environment analysis consists in evaluating and analysing (SWOT analysis) p8:
1. The external environment for possible opportunities and threats
2. The internal environment for possible strengths and weaknesses

The internal environment is also known as the company profile p9

Environmental analysis is essential for the next phase, strategy formulation p10

The use of visualisation methods to structure vast amounts of information p10:
o
Quantitative data (sales and marketing data) – structured by means of
standard techniques such as bar charts, line charts, pie charts
o
Qualitative data – structured by means of standard structures (2x2 matrixes)
customised by the user or for specific tasks (SWOT matrix)
o
Porter’s five forces p10: http://alturl.com/z9bx9
1. Threat of new competition
2. Threat of substitute products or services
3. Bargaining power of customers (buyers)
4. Bargaining power of suppliers
5. Intensity of competitive rivalry
o
S-curve diagram p10: http://alturl.com/reyy2
Strategy formulation (strategy planning) p10 [study]

Given the strategic direction and environmental analysis, the organisation is now in a
position to develop long-term goals, derived from the mission statement p10

The organisation decides what is the appropriate way forward by means of p10:
1. Corporate strategies
2. Generic strategies – the organisation can formulate specific strategies known
as grand strategies, these can be divided into three major groups p10:


Growth strategies

Decline strategies

Corporate combinations
Visualisation helps with generic options for the following actions and techniques p10:
o
Actions - strategic goals, milestones, activities, resource deployment
o
Techniques – knowledge mapping, concept mapping, mind mapping,
decision-trees, morphological boxes
Strategy implementation p10 [study]

The drivers (driving forces) available for successfully achieving the goals and mission
(to be able to implement the formulated strategies) are as follows p10:
1. Leadership
2. Culture
3. Reward systems
4. Organisational structures
5. Allocation of resources

The drivers are supplemented by strategic instruments such as: short-term goals and
policies p10

Strategic control is the last step in the strategic management process and includes
tools P10:
1. Total-quality management p11
2. Balanced scorecard p11

Aspects typical of this stage: actions, relationships, results p11
Contemporary applications of strategic management p11 [study]

Not-for-profit organisations and international (global) organisations p11

Strategic management for long-term sustainability and even survival p11
Strategic management in not-for-profit organisations p11 [study]

Maximising stakeholders’ wealth vs. maximising profits p11

Strategic management in not-for-profit organisations vs. profit-making organisations
p12
Strategic management in organisations doing global business p12 [study]

Doing business globally as an opportunity or a threat p12

The basic process of strategic management remains the same p12
Study unit 1.3 | Benefits and risks of strategic management p12
Functional aspects (benefits) of strategic management p12 [study]
The benefits of strategic management differ according to what is being influenced by the
process p12:

Higher profitability – greater improvements in turnover and profits p12

Higher productivity – deliver more and better outputs through better planning and
utilisation of resources and materials (inputs), improving productivity

Improved communication across the different functions in the organisation –
employees tend to understand the goals of the organisation better; an understanding
of why the organisation does things in a certain way and where the organisation is
heading will make stakeholders more committed to the cause p13

Empowerment – employees have to take direct control and ownership of certain
strategies, so if they are involved they will be more committed p13

Discipline and a sense of responsibility to the management of the organisation
– this develops because the management team takes full responsibility for its
strategic plans and implementation p13

More effective time management – strategic plans must be implemented by certain
due dates; breakdown into more specific time frames gives employees a better idea
of their own time management p13

More effective resource management – resources are more carefully managed
through controlled resource allocation p13

Strategic management – provides a framework or process in which employees can
see and understand through which phase the strategic process is currently moving; it
encourages employees to think proactively and breaks down resistance to change
p13
Dysfunctional aspects (risks) of strategic management p13 [study]
Risks associated with strategic management that should be avoided p13:

Time p13

Unrealistic expectations from managers and employees – several ideas and
strategic suggestions will not be accepted, this could lead to demotivation among
staff p14

The uncertain chain of implementation – there should be a clear chain of
implementation down to lower levels, and clear responsibility areas and outcomes
p14

Negative perception of strategic management – requires support from top-level
management p14

No specific goals and measurable outcomes – measurement tool should be in
place; well-formulated long-term goals and a balanced scorecard approach can help
overcome this risk p14

Culture of change - flexibility and creativity p14

Success groove – overconfidence p15
Top
Management
Strategy formulation
Middle Management
Strategy formulation
Lower Management/Supervisory Level
Strategy implementation
Employee Force
Strategy implementation
Figure 6 The Hierarchy of Strategy Implementation p15
Strategic issues and concepts leading us into the future p15 [study]
Ethics and strategy p15 [study]

The link between ethics and strategy p15

Appropriate locus for ethical reflection within the organisation p15

Strategy formulations representing ethical reflection on a corporate level p15
Stakeholder management p15 [study]

Stakeholders play an important part in the creation of organisational wealth p15

The challenge of strategic management is to create a balance between the interests
of diverse stakeholders who are voluntary or involuntary involved in the operation of
the business p15

Relationships rather than transactions responsible for organisational wealth p15

Definition: stakeholders (Post, Preston and Sachs, 2002)

Voluntary stakeholders contribute directly to the operations of the organisation p16:
o
Investors
o
Employees
o
Customers
o

Market partners
Involuntary stakeholders p16
Innovation economy and knowledge management p16 [study]

Shift from industrial economy to innovation economy p16

Companies that will be successful - Davenport, Leibold & Voelpel, 2006 p16

Creative thinking and visionary companies p16

Mantra for the 21st century – innovate or be damned p16

Innovation is much more than just invention – it is about thinking differently p16

Definition: innovation (OECD, Strategic Direction, 2008)
Knowledge management p16 [study]

Definition: knowledge management (Goh, 2005) p16

The difference between knowledge and information – information can be transformed
into knowledge p17

Knowledge can be tacit or explicit p17:
1. Tacit knowledge – knowledge that cannot be explained properly p17
2. Explicit knowledge – easy to communicate and easily transferred p17

Knowledge can lead to competitive advantage p17

Knowledge management is about people and the processes they use to share
information and build knowledge (Chyi Lee & Yang, 2000)
Innovation management p17 [study]

Efficient use of knowledge – better, faster, more cost-effective innovations p17

Definition: innovation management (Goh, 2005) p17
Knowledge innovation p17

Definition: knowledge innovation (Goh, 2005) p17, p18

Knowledge innovation recognises 2 key elements p17:
1. Knowledge, not finance or technology, as one of the core components of
innovation p18
2. Actions associated with managing the flow and use of knowledge in an
innovation process p18

The real benefit for companies lies in the ability to utilise knowledge for innovation
p18

Figure 1.3: Knowledge innovation p18
Multiculturalism of South African organisations and knowledge management p18
[study]

Knowledge as a process that is personal and subjective p18

Culture plays an essential role in knowledge sharing p18

Advantages of multiculturalism p18

The knowledge manager as a change agent and facilitator for new ideas p19

Causes for the breakdown of multicultural knowledge sharing p19

Trust as an integral part of the knowledge sharing process p19

Definition: multiculturalism (Finestone & Snyman, 2005) p19
Corporate entrepreneurship p19 [study]

Intangibles as assets that help companies gain a competitive advantage and keep it
p19:
1. Knowledge p19
2. Innovation p19
3. Entrepreneurial leadership p19

Technology push and market pull in turbulent opportunity-rich environments p19

Definition: corporate entrepreneurship (Scheepers & Hough, 2008)

Corporate entrepreneurship – entrepreneurial activities and entrepreneurship in
companies p19

The 3 dimensions of an entrepreneurial orientation in companies (Scheepers &
Hough, 2008) p19:
1. Innovativeness p20
2. Risk taking p20
3. Proactiveness - initiative, competitive aggressiveness and boldness in
pursuing opportunities p20
Change Management p20 [study]

Change with the times or fail p20

Common success factors for managing change (Oakland & Tanner, 2006) p20

The 5 themes of an Organisational Change Framework p20:
1. Leadership
2. Project management
3. Processes
4. People
5. Learning

Table 1.4: Themes of change p21
Strategic leadership p20

Leadership’s task includes the full circle – vision, mission and profile, strategy, action,
results

Hussey (1998) states that technological change has at least two dimensions:
1. The first is the change implemented for marketing reasons
2. The second is change in the organisation’s processes, production methods
and other technology, all of which alter the way a product is manufactured

Handy (in Hesselbein et al 1997) states that organisations no longer have to own all
the resources needed to get the work done. Partnerships, outsourcing, flexible
labour, work-around-the-clock and interim managers are different ways of creating a
competitive advantage and, ultimately, surviving in a hostile environment
Assessment
Figure 7 Mindmap of Topic 1
Text Book
1. Discuss strategic management in the context of existing management principles
2. Define what is meant by “strategic management
3. Explain the different views of strategic management
4. Discuss who is involved in the strategic management process
5. Differentiate between the different levels of strategy
Read the following article in the textbox and then answer the questions that follow:

How does the inflation rate affect economic growth?

How will an increase in the inflation rate impact on organisations that export
products?

What is the impact of a high inflation rate on business organisations

in South Africa?

What is the effect of inflation on consumers’ buying power?
Study Guide SG49/206
1. Diagrammatically depict with the aid of a diagram
2. Differentiate between and strategic control
Tips: The first question requires us to draw a picture of the strategic planning process –it is
important that the diagram indicate the sequential steps in the strategic planning process in
the correct sequence. Remember to use arrows to indicate the continuous nature of this
process. The last question requires you to differentiate between the three phases of the
strategic management process.
Study Guide SG55/206
1. Discuss the benefits and risks of strategic management in the contemporary
business environment
Topic 2 | Strategic direction p58
Figure 8 Learning Outcomes | Study Unit 2.1 SG57/206
Study unit 2.1 | Strategic direction SG45
Strategic leadership p59 [study]
 Definition: strategic leadership – a person’s ability to anticipate, envision, maintain
flexibility, think strategically, and work with others to initiate change that will create a
viable future for the organisation (Ireland & Hitt, 1999) p59

The main elements that set this definition apart from general leadership are p59:
1. Flexibility
2. Strategic thinking
3. Initiation of change

Leadership evolved from the “great leader view of strategic leadership” orientation to
the “great groups view of strategic leadership” orientation in the 21st century
Viewpoints on strategic leadership p59 [study]
The great leader view of strategic leadership p59 [study]
 This was acceptable before the new competitive landscape lead to p59:

o
Shorter product lifecycles
o
Accelerated rates and types of change
o
The explosion of data
o
The need to convert the data into usable information
Single individuals no longer had all the insights p59
The great groups view of strategic leadership p60 [study]
 Many “citizens” will serve the “community” as leaders p60

The combinations or collaborations of these organisational citizens are known as
“great groups”

Members of these great groups have different talents and work together to create an
environment in which knowledge is constantly produced and shared and innovation
occurs regularly p60

The most important “great group” in the organisation is the top management team
p60

Twenty-first century strategic leadership is implemented by means of interactions in
which knowledge, insights and responsibilities for achieved outcomes are shared p60

These “interactions: should occur between top managers and the “citizens” of the
organisation p60

The six components of strategic leadership p60:
1. Determining the company’s purpose or vision p60
2. Exploiting and maintaining core competencies p61
3. Developing human capital p61
4. Sustaining an effective organisational culture p61
5. Emphasising ethical practices p61
6. Establishing balanced organisational control p62
Components of strategic leadership p60 [study]
Determining the company’s purpose or vision p60 [study]
 Most important of the 21 competencies held to be crucial skills that global leaders
need to possess in the future – to articulate a tangible vision, values and strategy p61
Exploiting and maintaining core competencies p61 [study]
 Definition: core competencies – the resources and capabilities that ensure a
competitive advantage over the rivals of the organisation p61

In the new competitive landscape, organisations build their long-term strategies on
their core competencies p61
Developing human capital p61 [study]
 Definition: human capital – entails the knowledge and skills of an organisation’s
entire workforce p61

Companies should be willing to invest significantly in their human capital in order to
derive the full competitive benefit p61
Sustaining an effective organisational culture p61 [study]
 Definition: organisational culture – refers to the complex set of ideologies,
symbols and core values that are shared throughout the organisation p61

The context within which strategies are formulated and implemented is provided by
the culture p61

Culture reflects what the organisation has learned over time p61

Culture can become a competitive advantage p61
Emphasizing ethical practices p61 [study]
 Definition: ethical practices – the moral filter that evaluates potential courses of
action p61
Establishing balanced organisational control p62 [study]
 New leadership tasks have emerged p62:
1. Recognise the dual nature of strategy (short-term as well as long-term) p62
2. Start with vision, mission and distinctive profile p62
3. Replace “resource-based” strategy with a new basis of strategy formulation
p63
4. Focus on strategy as being the alignment between the external and the
internal worlds of the company p63
5. Competing through business systems, not through businesses p63
6. Recognise that there is a growing decentralisation of strategy-making and
leadership p63
Leadership tasks p62 [study]
Abell (2006) identified six leadership tasks that are emerging as priorities p62:
Recognise the dual nature of strategy (short-term as well as long-term) p62 [study]
 Balance today-for-today strategies with today-for-tomorrow strategies p62
Start with vision, mission and distinctive profile p62 [study]
 Companies and leaders that will create a clear-cut framework for strategy definition
and action use the following skills p62:
1. Clear vision of the company they are trying to create
2. Clear sense of mission
3. Clear sense of their distinctive profile in terms of the competition
Replace “resource-based” strategy with a new basis of strategy formulation p63 [study]
 Competencies and resources (the “can”) have to be closely aligned with future
opportunities (the “could”)

It is not sufficient to simply define opportunities; the “can” and “could” are toned down
by the “want” and “should”
Focus on strategy as being the alignment between the external and the internal worlds of the
company p63 [study]
 Leaders have to work on two types of strategic alignment p63:
1. Upstream alignment – alignment of the core strategy with the outside world
i.e. the competitive environment of the industry p63
2. Downstream alignment – the alignment of the internal organisation with the
changing core strategy p63
Competing through business systems, not through businesses p63 [study]
 Creating value for the customer happens by means of the vertical business chain as
a whole p63

Supply chain management should not be regarded as a primarily logistics concept in
which the leader’s task is to reduce time delays p63

An important part of the leader’s tasks is to develop partnership relationships
between key actors in the supply chain p63

Coordination between all the elements in the value-creating process will lead to the
creation of higher value and lower costs p63
Recognise that there is a growing decentralisation of strategy-making and leadership p63
[study]
 The leadership task is two-fold p63:
1. Entrepreneurial initiative from below should be encouraged p64
2. Create the leadership culture, systems and approaches from above which will
help decentralised leadership to do well p64
Strategic intelligence (SQ) p64 [read]

The progression should be from:
Strategic planning

Strategic thinking
Strategic leadership
Definition: strategic intelligence (SQ) – the “ability” to interpret cues and develop
appropriate strategies for addressing the future impact of these “cues”; this includes
p64:
o
Timing
o
Instinct

o
Political savvy
o
Curiosity
o
Flexibility
o
Expertise to simplify
o
Fitability
o
Imagination
o
The “ability” to interpret circumstances as they unfold
SQ is about using your realistic situational understanding to develop a strategy that is
appropriate and that works p64

The SQ “commandments” include the following p64:
1. An organisation has to have a clear understanding of the reason for its
existence – the “why” of the organisation
2. When possible, test the situation before pledging full commitment
3. The situation should always be used to develop strategic leaders
4. Timing should be kept in mind whenever you are addressing a situation and
its strategic solution
5. Theories should not hamper you, but they should not be disregarded
6. Rather discuss a situation than reach a decision without a proper discussion
7. Each new situation should be approached by way of the truth, not what you
hope to find
8. Become a strategic thinker, not just a strategic planner
9. Remember that strategy does not deal with future decisions, it deals with
decisions for the future

Table 2.1: Traits associated with strategic intelligence (SQ) p65
Setting strategic direction: vision, strategic intent and mission p65 [study]
 Setting strategic direction is the first step in the strategic management process p66

Two widely used tools to set strategic direction p66:
1. Vision
2. Mission statements
3. Strategic intent

The King II report states that the vision, mission and core values of an organisation
should form the basis not only for its strategic goals, but also for its stakeholder
relationships p67
The vision statement p68 [study]
 The vision statement is considered to be the first step in the strategy formulation and
strategic management processes p68

The vision statement answers the question: “what do we want to become?” and
serves as the roadmap of the organisation p68

A vision statement is a dream that focuses on a desirable future and is often referred
to as being an enduring promise p68

When formulating a vision statement, there are four matters that should be taken into
consideration p69:
1. As many managers as possible should contribute to the creation of a vision
statement
2. A vision statement should be achievable in the long term
3. Developing a vision statement is an exercise in thinking creatively about the
future direction of the organisation
4. Once a vision statement has been achieved, it loses its power and has to be
redeveloped to ensure continual focus on a desirable future

A vision statement has four purposes or functions p69:
1. It provides a way for managers to integrate a wide variety of goals, dreams,
challenges and ideas into one theme
2. It provides focus and direction
3. A vision statement forms the foundation for a mission statement, long-term
goals and strategy-selection decisions
4. An inspiring vision can serve as a powerful motivation tool

The vision should be communicated in such a way that it clarifies the purpose of the
organisation to all its stakeholders p70
Strategic intent p70 [study]
 Remember: strategic intent forms part of the strategic direction. However, strategic
intent is generally more detailed than the vision statement. In some cases, strategic
intent is used to describe the organisation’s vision and mission statements

Developed by Hamel and Prahalad p70

Definition: strategic intent – envisions a desired leadership position and
establishes the criterion the organisation will use to chart its progress (Hamel and
Prahalad, 1989) p70

Strategic intent is about creating a sense of urgency through the setting of an
overarching, ambitious goal that stretches the organisation and focuses on winning in
the long run p70

Strategic intent requires the entire organisation’s commitment to the goal and their
personal efforts p71

Strategic intent has an internal focus and can be used as the basis for setting the
mission statement p71

The three attributes of strategic intent are as follows p71:
1. Sense of direction – implies a view of the future; the long-term market and
competitive position the company hopes to build p71
2. Sense of discovery – differentiated and unique point of view about the future
p71
3. Sense of destiny – the perception that the goal is worthwhile p71
The mission statement p71 [study]
 Vision and strategic intent answer the question: “what do we want to become?”
p71
 A mission statement askes the question: “what is our business?” p71
The role of the mission statement in the strategic management process p71 [study]
 Definition: mission statement – the mission statement is an enduring statement of
purpose that distinguishes an organisation from other similar ones p71


It identifies the scope of an organisation’s operations in terms of p71:
o
Product (what)
o
Market (who)
o
Technology (how)
It identifies an organisation’s reason for being and serves as the foundation for the
development of long-term goals and the selection of strategies p71, p72

A mission statement is not about measurable targets but rather is a statement of
intent, attitude, outlook and orientation p71

A mission statement has four focus areas p71:
1. Purpose – the reason for the organisation’s existence p72
2. Strategy p72:

Its strategy in terms of the nature of the business

Its competitive position in terms of other organisations

The source of its competitive advantage
3. Behaviour standards and culture in terms of the way it does business
4. Values, beliefs and moral principles that support the behavioural standards

A mission statement should address and include the interests of all stakeholders p72
 A mission statement is also called a purpose statement, because it also deals with
the role of stakeholders in the strategic planning process SG76/206

Krattenmaker (2002) makes the point that mission statements should be long enough
to describe a company’s objectives in adequate detail and short enough to
encourage employees to read, understand and use it SG82/206
The components of a mission statement p75 [study]
A mission statement has eleven components p75:
1. Product/service – the core components of the mission statement; describe the
business activities of the organisation p75
2. Market
3. Technology
4. Survival – deal with the economic goals of the organisation p76
5. Growth
6. Profitability
7. Philosophy of the organisation – reflects beliefs, values, aspirations, priorities and
commitment in terms of how the organisation will be managed; organisations often
use a creed as a statement of their philosophy p76
8. Public image p76
9. Self-concept of the organisation - an organisation’s ability to know itself p76
10. Customers – imply three dimensions p76:
a. Identification of customer groups p77
b. Customer needs p77
c. Skills or competencies required to satisfy these p77
11. Quality
Stakeholders and the mission statement p77 [study]
 Definition: stakeholder - A stakeholder can be defined as anyone who, directly or
indirectly, is influenced by what the organisation does SG83/206

The inclusive approach – as applied by the King III Report, recognises that the
interests of stakeholders should be considered when formulating a strategy p77

The inclusive approach also requires an organisation to communicate its purpose
and values to all stakeholders p77

There are nine groups of stakeholders SG84/206:
1. Shareholders
2. Employees
3. Customers
4. Competitors
5. Financial institutions
6. General community
7. Media and press
8. Government
9. Suppliers
Formulating a mission statement p77 [study]
 As many managers as possible should be involved in the formulation of a mission
statement – this ensures a variety of views and a sense of ownership p77

The process of developing a mission statement should create an emotional bond and
a sense of mission between the organisation and its employees p77

The mission should be communicated to all internal and external stakeholders p77
Assessment
Figure 9 Mindmap of Topic 2 - Setting Strategic Direction SG88/206
Study Guide SG87/206
1. Explain the various viewpoints of strategic leadership
2. Discuss the components of strategic leadership
3. Identify and explain various strategic leadership tasks
4. Explain the importance of strategic direction in strategic planning
5. Diagrammatically depict the position of strategic direction in the strategic planning
process
6. Differentiate between the vision statement, the mission statement and strategic intent
7. Discuss the components of a mission statement
8. How do stakeholders’ different interests influence the formulation of a mission
statement?
9. Discuss the claims and expectations of an organisation’s stakeholders and explain
why these are important in setting an organisation’s strategic direction
Topic 3 | Corporate governance and strategy p87
Figure 10 Learning Outcomes | Study Unit 3.1 SG 89/206
Study unit 3.1 | Corporate governance SG77
Responsible leadership p88 [study]
 Definition: responsible leadership – the exercise of ethical, values-based
leadership in the pursuit of economic and societal progress and sustainable
development p88

Organisations are required to take ownership of the consequences of their business
activities on three levels p88:
1. Economic
2. Social
3. Environmental level

There are two main business responsibility movements p88:
1. Definition: corporate social responsibility (CSR) – is associated with
ethical issues; doing what is right and fair, and avoiding harm p88

Corporate citizenship – emphasizes the contribution a company
makes to society through its core business activities, its social
investment and its engagement in good causes p89

Social accountability – the management of the quantitative and the
qualitative aspects of social, ethical and environmental performance
and reporting on these to both internal and external stakeholders p89
2. Definition: corporate sustainability – is associated with support for
sustainable development and the long-term performance, stability and
survival of the organisation p89

Corporate sustainability performance is measured by the triple bottom
line p89:
I.
Economic impact – human rights, labour, health, engagement
in sustainable wealth-creation processes at the global, national
and local levels p89
II.
Social impact – the impact of products or operations on
human rights, labour, health, safety, regional development and
other community concerns p89
III.
Environmental impact – the impact of products or operations
on environmental degradation, including the company’s related
emissions and waste p89
What is corporate governance p91 [study]
 Corporate governance is about control, not about constraints SG104/206

Performance, accountability, transparency and disclosure are central to the notion of
corporate governance, which is the responsibility of the board of directors SG104/206

Corporate governance provides the foundation for responsible leadership and good
corporate citizenship p90

It also provides the structures and processes for managing a responsible
organisation that strives to perform well on an economic, social and environmental
level, and strives to achieve a sound triple bottom line p90

Definition: corporate governance (King II Report on Corporate Governance, 2002)
– corporate governance is concerned with holding the balance between economic
and social goals and between individual and communal goals; the aim is to align as
nearly as possible the interests of individuals, corporations and society p90
The major parties in corporate governance p90 [study]
 Definition: the agency problem – the agency problem arises because there is a
separation between ownership of the capital needed to fund the organisational
operations and the management thereof; in other words, the separation between
ownership and control p90

More on agency – managers act as agents on behalf of principals, shareholders; the
assumption of the agency problem is that owners want to make money and
managers tend to act in their best interests, which does not always translate into
higher profits p90

Figure 3.1: Major parties in corporate governance p91
Corporate governance today
Early corporate governance
The agency problem
Principals <> Agents
Aligned with corprate citizenship/CSR/sustainability
Governments, business associations, shareholders,
management, other employees, trade unions,
suppliers, competitors, supply chain partners,
enviornmentalists, consumers, consumer
associations, NGOs, political parties
Figure 11 Major Parties in Corporate Governance p91
Corporate governance and strategy p90 [study]
Corporate governance is critical in the strategic management process with regard to the
following areas p91:

Formulation p91:
o
Setting direction in terms of the broader principles of economic, social and
environmental performance
o
Reflecting the vision and mission in the strategy and setting the scene for
responsible business aims, practices and general conduct

o
Considering organisational risks when determining strategic goals
o
Setting clear, transparent, attainable and measurable goals
o
Determining strategies that benefit all stakeholders
o
Clarifying the role of the board of directors in strategy formulation
Implementation p91:
o
Clarifying the role of the board of directors and management in overseeing
strategy implementation

o
Developing specific, measurable action plans
o
Measuring the triple bottom line
Control and evaluation p92:
o
Clarifying the role of the audit committee in managing and overseeing
strategy implementation
o
Determining checks and balances for strategy control
o
Ensuring that executives are appropriately penalised or rewarded for failure or
success (responsibility of the board of directors)
Corporate governance and ethics p92 [study]
The signs of ethical collapse are said to be the following (Jennings, 2006) p93:
1. Pressure to meet the numbers p93
2. Far away and silent
3. Sycophantic executives and an iconic CEO
4. A weak board
5. Conflicts of interest
6. Overconfidence
7. Social responsibility being the only measure of goodness
Corporate governance in South Africa p95
Governance codes p95 [study]
 Governance can be on a statutory basis, as a code of principles and practices, or a
combination of the two p95

The definitive authority on corporate governance in South Africa is the King Report
on Corporate Governance p95
The King I Report on Corporate Governance p96 [read]
 Published in 1994, it addressed fundamental principles of good financial, social,
ethical and environmental practices p96

Two components of corporate governance were specifically addressed p96:
1. Financial aspects – responsibility towards shareholders
2. Ethical aspects – standards of ethics in organisations
The King II Report on Corporate Governance p96 [study]
 Published in 2002, the King Committee identified seven primary characteristics of
good corporate governance p96:
1. Discipline p96
2. Transparency p96
3. Independence p97
4. Accountability p97
5. Responsibility p97
6. Fairness p97
7. Social responsibility p97
The King III Report on Corporate Governance p97 [study]
The King III Report philosophy p98

Good governance is essentially about effective leadership p98

Sustainability is the primary moral and economic imperative for the 21st century, and
it is one of the most important sources of both opportunities and risks for businesses
– current incremental changes towards sustainability are not sufficient p98

Innovation, fairness, and collaboration are key aspects of any transition to
sustainability p98

The legacy of apartheid is fundamentally unsustainable – social transformation and
redress needs to be integrated within the broader transition to sustainability p98

Sustainability reporting is in need of renewal to respond to p98:
o
The lingering distrust among civil society of the intentions and practices of big
business
o
Concerns among business decision makers that sustainability reporting is not
fulfilling their expectations in a cost-effective manner

Table 3.2: The responsibilities of the board of directors p99

Key aspects adopted in King III SG106/206:
o
Integrated reporting
o
Risk-based internal audit
o
Shareholder approval
o
Remuneration policies
o
Performance evaluation of directors
Assessment
Figure 12 Mindmap of Study Unit 3.1 | Corporate Governance in Strategic Management sg106/206
Study Guide SG106/206
1. Explain how success is measured in strategic management terms
2. Explain the concept of responsible leadership. Discuss the concept of corporate
governance. Discuss, specifically, the major parties in corporate governance,
corporate governance and strategy, and what is involved in corporate governance
and ethics
3. Explain the importance of corporate governance in strategic management
4. Describe the impact of the King reports on corporate governance. Specifically refer to
the key points/differences adopted in the King III Report
Topic 4 | Internal Environmental Analysis p109 [study]

The environment in which an organisation operates consists of the SG109/206:
1. Internal environment
2. Macroenvironment
3. Industry environment
4. Operating environment

There is an element of subjectivity in all of the methods of internal environment
analysis. To remain objective, strategic planners can use financial ratio analysis:
these ratios are expressed in numbers that can be meaningfully compared with:

o
The organisation’s own past results
o
The competitors’ results
o
The results of industry leaders
o
The industry average
Financial ratio analysis does have some weaknesses SG129/206:
o
The analysis is based on past data - it can only be used to spot past trends,
so it cannot be automatically regarded as applying to the future
o
The analysis is only as good as the accounting procedures that have provided
the information


The four basic groups of financial ratios are SG130/206:
o
Liquidity
o
Leverage
o
Activity
o
Profitability
The strategic manager will find it difficult to classify strengths and weaknesses if he
or she does not have something by which to measure the results of the internal
environmental analysis – the following standards or yardsticks can be used to make
meaningful comparisons SG130/206:
o
The organisation or business unit’s past performance
o
Results of a previous internal environmental analysis
o
Industry ratios or norms
o
Benchmarks (e.g. industry best practices)
o
Performance of the organisation’s competitors
Table 1 Organisational Profile | RBV Framework SG131/206
Critical
Results of 2007 internal
Results of 2005 internal
success
environmental analysis
environmental analysis
factors
Strengths
Weaknesses
Strengths
Weaknesses
Tangible
assets:

Land

Equipment

Capital
Intangible
assets:

Brand
name

Reputation
Capabilities:

Expertise
Knowledge
Table 2 Organisational Profile | Value Chain Framework SG131/206
Critical success
Results of 2007 internal
Results of 2005 internal
factors
environmental analysis
environmental analysis
Strengths
Primary activities:

Input logistics

Operations

Output
logistics

Marketing

Customer
service
Secondary:

Procurement

Technology

HR
Weaknesses
Strengths
Weaknesses
Critical success
Results of 2007 internal
Results of 2005 internal
factors
environmental analysis
environmental analysis

Administration

Finance
Table 3 Organisational Profile | Functional Areas Framework SG131/206
Critical success
Results of 2007 internal
Results of 2005 internal
factors
environmental analysis
environmental analysis
Strengths
Functional areas:

Finance

Marketing

Production

Purchasing

Public
relations

HR

Administration

Research and
development

Weaknesses
Strengths
Weaknesses
Figure 13 Internal Environmental Analysis | Learning Outcomes
Introduction p109 [study]

The stronger an organisation’s overall performance, the less need there will be for
radical changes in strategy p109

Methods of internal analysis p110:
o
Resource-based view – tangible and intangible resources
o
Organisational capabilities
o
Value chain analysis
o
Functional approach
o
Internal Factor Evaluation Matrix
Study unit 4.1 | The importance and challenge of internal analysis p110
[study]

The outcome resulting from internal analysis will determine what an organisation can
do p110

The outcome of external environmental analysis will identify what the organisation
may choose to do p110

It is critical for manager s to view the organisation as a bundle of resources,
capabilities and core competencies that can be used to create an exclusive position
in the market p110

This implies that the organisation has some resources and management capabilities
that other organisations do not have
- the presence of these resources and
capabilities leads to strategic competitiveness when an organisation is able to use
them to satisfy the demands of the external environment p110
Organisational
resources
Establishing the core
competencies
Competitive advantage
Strategic
competitiveness
Management
capabilities
Value chain analysis
Determining the
strengths and
weaknesses in the
SWOT analysis

Figure 14 The relationship between the components of internal analysis and strategic competitiveness
p111
SWOT analysis p11 [study]
 Definition: SWOT – SWOT provides a framework for analysing the strengths,
weaknesses, opportunities, and threats in the organisation’s external and internal
environment p111

SWOT analysis highlights the specific conditions in the organisation’s environment
for environmental analysis p111

Environmental analysis is about the internal and external assessment of the
organisation – what the organisation does and does not have in terms of resources
and capabilities, and what is happening in the external environment p111

Definition: strength – a strength is a resource or a capability that the organisation
has which is an advantage relative to what competitors have, for example p111:
o
Skilful employees p112

o
Large financial reserves p112
o
Quality product or service p112
o
Strong reputation p112
o
Economies of scale p112
Definition: weakness – the lack or deficiency of a resource that represents a
relative disadvantage to an organisation in comparison to what competitors have, for
example p112:
o
Limited financial resources
o
Poor marketing skills
o
Poor after-sales service
o
Negative organisational culture
SWOT analysis
Internal
analysis
External
analysis
Strenths
Opportunities
Weaknesses
Threats

Figure 15 The relationship between SWOT and the environment analysis p112

Definition: opportunity – an opportunity is a favourable situation in the
organisation’s external environment (market and macro environment), for example
p112:

o
A decrease in the interest rate (if an organisation has a loan)
o
The closing down of a major competitor
Definition: threat – a threat is an unfavourable situation in the organisation’s
external environment, for example p113:
o
An increase in the interest rate if the organisation has a big loan

The other side of SWOT analysis p113:
o
SWOT analysis is a static approach – sometimes focused only on a single
dimension
o
SWOT analysis cannot show the organisation how to achieve
competitive advantage – more in-depth analysis is needed
o
SWOT analysis is not an end in itself – it stimulates self-perception and the
discussion about important issues

Limitations of SWOT analysis p113:
o
The focus on the external environment may be too narrow
o
It is perhaps a static assessment – a one-shot view of a moving target
o
The strengths that are identified may not necessarily lead to a competitive
advantage
o
It may lead to overemphasis of a single feature or strength and disregard
other important factors that may lead to competitive success
Internal analysis for effective strategy development p114 [study]
Figure 16 Resource-Based View | Learning Outcome SG117/206


Method’s used to analyse the organisation’s internal environment SG117/206:
o
Resource-based view
o
Value chain analysis
o
Functional analysis
Internal analysis includes – looking more closely at the organisation’s:
o
Resources
o
Capabilities
o
Core competencies
Study unit 4.2 | Resource-based view (RBV) p114 [study]

The RBV holds that an organisation’s resources are more important than the industry
structure in gaining and keeping its competitive advantage p114

RBV argues that it is the resources and capabilities that will determine and efficiently
and effectively the organisation is functioning p115

The main concerns for competitive advantage, according to the RBV, are
organisational resources and capabilities p115

According to the RBV, resources and capabilities must be difficult to create, buy,
replace or imitate; they must have the quality of inimitability p119
Resources p115 [study]
Resource
Examples
Indicator
Tangible resources –

Financial – cash reserves

Cash flow
financial, physical,

Physical – excellent

Profitability
location, technically

Solvency
advanced equipment,

Liquidity
reserves of raw material

Market value of assets
Technological –

Capital equipment
technological

trademarks and
copyrights
Intangible resources –
Intellectual property,

Patents and copyrights
human, innovation and
knowledge and skills of

Brand recognition
reputation resources
employees, reputation with

Corporate reputation
customers, brand names,

Brand equity
perception of product/service
quality and delivery
Figure 17 Examples of different resources p115

The three broad category of resources p115:
1. Tangible assets – financial, physical, human
2. Intangible assets
3. Organisational capabilities

Tangible assets – are the easiest to identify because they are visible p115:
o
Value can be determined by looking at the financial statements, especially the
balance sheet p116
o
The above values do not reflect market values (real values) as they do not
show how the asset is being utilised e.g. an airplane that is always fully
booked p116

Intangible assets – are the assets that one cannot touch p116:
o
Intangible assets are often the critical assets that create the real competitive
advantage
o
Intangible resources are a superior and more potent source of core
competencies

Characters and guidelines that make a resource valuable (give it a competitive
advantage) p119:
o
Value – help the organisation to exploit external opportunities or neutralise
negative external threats, for example: skilled employees
o
Superior resources – fulfils a customer’s needs better e.g. two shops but
one has a better location in the neighbourhood
o
Scarcity – as long as it is valuable
o
Inimitability – hard to imitate, for example: reputation (goodwill), a good
location, a patented product, and organisational culture. Imitation happens in
two ways:
1. Duplication – same kind of resource is built
2. Substitution – replacing it with an alternative resource that achieves
the same results
o

Capacity to exploit the resource
Resource-based analysis should be considered an on-going activity SG122/206:

Figure 18 The Resource-based Analysis Process
Capabilities p116 [study]
 Definition: capabilities – capabilities are the glue that emerges over time and binds
the organisation together p116

Organisational strategic capabilities – are the complex network of processes and
skills that determine how efficiently and effectively the inputs in the organisation will
be transformed into outputs p116

The foundation of many organisation’s capabilities lies in the skills and knowledge of
the employees and often in their functional expertise p116

The essence of capabilities is the human capital of the organisation – as employees
do their work, combining the tangible and intangible resources of the structure of the
organisational processes, they accumulate knowledge and experience about how to
create value from the resources for the organisation and turn them into possible core
competencies or distinctive organisational capabilities p116

The majority of capabilities are developed in specific functional areas p117

Definition: dynamic capabilities – the organisation’s ability to build, integrate and
restructure capabilities to address the rapidly changing environment p117

To be a successful organisation requires p117:
o
Demonstrating timely responsiveness
o
Rapid and flexible product innovation
o
Management
expertise
in
coordinating
and
deploying
organisational
resources and capabilities

Definition: competitive advantage – resources and capabilities must be truly
distinctive and also contribute to the development of an organisation’s core
competencies p118

Definition: core competencies – only possessed by those organisations whose
performance is superior to the industry average p118

Core competencies are based on superior organisational skills and knowledge p118
Study unit 4.3 | Value chain analysis (VCA) p120 [study]
Figure 19 Value chain analysis | Learning outcome SG124/206

Every organisation has a chain of activities through which the inputs are transformed
into outputs p120

The chain of activity is looked at to determine where value is really added to the
product or service p120

There are three aspects of resources that create value for customers p121:
1. The product is unique and/or different
2. The product is cheaper than that of competitors
3. The organisation has the ability to respond to the customer’s needs very
quickly

Definition: value chain analysis – a systematic method of determining how the
organisation’s various activities contribute to creating value for the customer p121

VCA views the organisation as a sequential process which includes all the valuecreating activities in the organisation p121

Definition: value in VCA – the amount of money that customers are willing to pay
for what the organisation is providing them p122

The activities in VCA are the building blocks of competitive advantage; they can be
grouped into two categories p122:
1. Primary activities – those that create the product or service and customer
value
2. Support activities – add support; add value throughout the process

Remember that we are discussing a method used in internal environment analysis,
that is, we are trying to identify the organisation’s strengths and weaknesses. In its
most basic form, the value-chain analysis attempts to identify the strengths and
weaknesses in the organisation’s activities SG125/206

Steps in the value chain analysis SG126/206:
1. Identify and classify activities - the first step in performing a value chain
analysis is to identify the various primary and secondary activities
2. Allocate costs - the next step in performing a value-chain analysis is to try
and allocate costs to every activity, as each activity occurs
3. Identify the activities that differentiate the organisation from its
competitors - using a value-chain analysis will help an organisation to
determine the activities that differentiate it from its competitors and that serve
as sources of competitive advantage
4. Examine the value chain - the last step in the value-chain analysis is to
scrutinise the results of the value-chain analysis and to classify the various
activities as strengths or weaknesses of the organisation
Primary activities p122 [study]
Some of the different items regarding the primary activities in an organisation p122-123:

Input logistics (inbound) p122

Operations – transformation of inputs into the final product p122

Output logistics (outbound) p123

Marketing – method used to persuade customers to buy the product p123

Customer service p123
Support activities p123 [study]
The performance of the primary activities depends on the support activities p123:

Procurement – purchasing inputs p123

Technological development p123

Human resources management – recruitment, selection, training, remuneration
p124

General administration and infrastructure – effective and efficient planning
systems p124

Financial management – effective financial recording p124
Study unit 4.4 | Functional approach p124 [study]

In this study unit, we focus on the following learning outcome SG128/206:
o
Analyse and interpret the results of an assessment of the organisation’s
internal environment approach

To achieve this learning outcome, you must be able to SG128/206:
o
Explain what the functional approach entails
o
Briefly comment on how meaningful comparisons can be made when
conducting an internal assessment

The usual business functions in most organisations are p124:
o
Finance (and accounting)
o
Marketing
o
Production
o
Purchasing
o
Corporate communications (public relations)
o
Human resources
o
Administration
o
Research and development

Every organisation has specific functions that it must perform; therefore an internal
audit can be regarded as an assessment of the various functional areas p125


The objective of the internal audit is to p125:
o
Determine how well or poorly these functions are being performed
o
What resources these functional areas need to perform effectively
The disadvantage – attention is focused entirely on the functional areas, while there
is no determination of whether a specific functional area makes an important
contribution to the organisation’s competitive advantage p125
Assessment
Equation 1 Topic 4 | Internal environmental analysis | Mindmap SG132/206
The importance and challenge of internal analysis SG116/206
1. Discuss the importance of an internal environment assessment
2. Explain the use of the SWOT analysis in assessing the environment
3. Comment on the limitations of the SWOT analysis
4. Explain what a SWOT analysis entails
5. Diagrammatically depict and explain where internal assessment fits into the strategic
planning process
Assessment | Resource-Based View SG123/206
1. Explain what the resource-based view of an organisation encompasses
2. Identify and differentiate between an organisation’s main resources
3. Explain what makes a resource valuable
Assessment | Value chain analysis SG127/206
Figure 20 Value chain analysis | Mindmap SG 127/206
1. Explain what a value-chain analysis entails
2. Discuss the steps in conducting a value-chain analysis
3. Diagrammatically depict and explain the value-chain method of assessing the
organisation’s internal environment
4. Differentiate between primary and secondary activities
Assessment | Functional approach SG131/206:
1. Explain what the functional approach entails
2. Briefly comment on how meaningful comparisons can be made when conducting an
internal assessment
Topic 5 | External environmental analysis SG121
Study unit 5.1 | The macroenvironment SG121
Learning outcome SG121
In this study unit, we focus on the following outcome:

Analyse and interpret the results of an external environmental assessment.
To achieve this learning outcome, you must be able to:

Explain what external assessment means in strategic planning terms;

Describe the components of, and process involved in, conducting a macroenvironmental
analysis;

Diagrammatically depict and explain the position of external environmental assessment in
the strategic planning process;

Explain the interrelatedness of the macro-, industry and operating environments;

Identify and explain the macroenvironment variables that impact on an organisation;

Discuss the use of forecasting techniques.
The importance of an external environmental assessment SG122
Key points for explaining the reasons for assessing the external environment:

The aim of strategic management is an organisation’s long-term survival or sustainability;

The organisation operates in an environment which it cannot control;

The organisation needs to use its resources, capabilities and skills to build and gain a
competitive advantage;

The organisation’s competitive advantage, and survival, are threatened by factors in the
external environment;

Other organisations are competing for market share and the same customer base;

The organisation’s survival is influenced by the changing needs of its customers;

Both the organisation’s operations and survival are factors in the macroenvironment (which
the organisation cannot control), which impact on the operations of the organisation.
This means that the strategic manager needs to know what tools, resources, capabilities and
competitive edge the organisation possesses so that this information can be used to respond to
challenges in the external environment.
After an organisation has identified and evaluated opportunities and threats in the
macroenvironment and matched these to the organisation’s internal strengths and weaknesses, the
organisation is in a better position to design strategies that will achieve its long-term objectives.
Introduction p135
The organisation cannot be successful if it is not in step with its environment. The fact that an
organisation interacts with its environment means that it is acting as an open system and will both
affect and be affected by the environment. This means that the organisation draws its inputs, such
as: human, physical, financial and informational resources, from the environment and distributes
its products and services back to the environment. The underlying problem for the successful
survival of an organisation is the fact that the environment usually changes faster than the
organisation can adjust to it.
External environment analysis focuses attention on identifying and evaluating trends and events
beyond the control of a single organisation, and also reveals key opportunities and threats
confronting the organisation that could have a major influence on the firm’s strategic actions.

An opportunity is a favourable condition in the external environment and can lead to
strategic competitiveness;

A threat is an unfavourable condition in the external environment that may hinder an
organisation’s efforts to achieve strategic competitiveness.
Scanning
Early signs of environmental changes and trends are identified
Monitoring
The 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 organisations’ strategies
and their management are determined
Figure 21 Components of the external environmental analysis p137
Several sources can be used to analyse the external environment:

Printed material;

Trade shows;

Suppliers;

Customers and external network contacts;

Sales people, purchasing managers, and customer service representatives.
The external environment p138
An organisation’s external environment is divided into three major areas:
1. Global;
2. Macro;
3. Industry or market environment.
Global
Macro
Market/industry
[Micro]
Figure 22 The different environments of an organisation p138
The elements of the external environment not only influence the environment and the decision
making of managers, but also one another. The result of this is a set standard of living for the
community.
An important principle is that organisations cannot directly control the external environment’s
segments and elements, but that these elements and changes in the external environment have a
major influence on organisations.
The South African environmental context p140
Inequality is measured by the Gini coefficient, which normally varies from 0 (perfect equality) to 1,00
(perfect inequality).
Composition of the macroenvironment SG125
The five dimensions of the macroenvironment:
1. Political, governmental and legal forces;
2. Economic forces;
3. Social, cultural and demographic forces;
4. Technological forces;
5. Ecological forces.
The analysis of these factors is sometimes called the PESTE analysis (political, economic, social,
technological, ecological factors). Another important macroenvironmental aspect that should be
analysed is the global environment – all the factors relevant to PESTE can be applied here.
Political/legal
environment
Antitrust laws,
labour training
laws
Economic
environment
Sociocultural
environment
Inflation rates,
interest rates
Demographic
changes
Macro
Environment
Technological
environment
Product
innovations, new
communication
technologies
Ecological
environment
Land, water and
air pollution
Figure 23 Some of the elements of the macroenvironment p141
Dimension 1 | Political environment p141
The political environment includes the parameters within which organisations and interest groups
compete for attention, resources and a voice in overseeing the body of laws and regulations that
guide the interactions between organisations and the environment. Essentially this aspect
represents how organisations try to influence government and how government influences them.
The political/legal environment can be divided into three parts:
1. Existing legislation;
2. Amended legislation: of which the public is advised in advance; and
3. Unannounced new legislation and regulations: or the suspension of existing legislation.
Any government is a major regulator, deregulator, subsidiser, employer and customer of an
organisation. In this respect the South African government has the following aims that will influence
organisations:

To enhance the process of social and economic transformation;

To emphasise the effectiveness and efficiency of delivery in respect of government actions
and initiatives;

To stimulate job creation in alliance with the private sector;

To be seen to be serious in its approach to dealing with law and order;

To enhance the process of the “African Renaissance”
Increasing global competition accentuates the need for accurate environmental forecasts.
Variables in the political/legal environment:

Black economic empowerment;

Government legislation on conditions of employment;

Monetary and fiscal policy;

Pricing policies;

Tax;

Minimum wage legislation;

Subsidies and grants;

Regulation of fuel prices;

Local, municipal laws;

Social unrest;

Stability of government;

Form of government;

Strengths of opposition parties and groups;

Foreign policy.
Dimension 2| Economic environment p143
Economic factors affect the nature and direction of the economy in which an organisation operates.
Organisations have to study the economic environment to identify changes and trends, and their
strategic implications. Economic factors have a direct impact on the attractiveness of various
strategies and consumption patterns in the economy. Inflation, recession, the level of disposable
income, the availability of credit, and interest rates influence the demand for goods and services.
When assessing the economic environment as part of the macroenvironment, one should first try to
relate the financial results of the organisation to the general progress of the economy.
Gross domestic product (GDP) is the total value of goods and services produced in a country in one
year. If the growth rate of the GDP is lower than the growth rate of the population, there will be a
decline in the standard of living.
The monetary policy of the government influences the inflow of foreign capital into the country.
High interest rates favour capital inflow but are less advantageous for South African consumers.
Dimension 3 | Sociocultural environment p144
The sociocultural environment is concerned with society’s attitudes and cultural values. It includes
changes in social, cultural and demographic variables. These variables shape the way people live,
work, produce and consume.
The change from a production economy dominated by male workers to a service economy has
meant that there are now more women in the workplace. Jobs have also become unisex in nature.
Culture in South Africa is not homogeneous. Different subcultures are based on population groups,
religion and geographical areas. Some additional trends include: consumers who are more educated,
some populations that are ageing, minorities who are becoming more influential, a higher incidence
of single parenthood, and consumers who are more inclined to buy local product.
Dimension 4 | Technological environment p145
Technological changes affect many aspects of society. These affects occur primarily through new
products, processes and materials.
Technological change has at least two dimensions:
1. Change brought about for marketing reasons e.g. new product development; and
2. Change in processes and production methods.
The technological environment includes the institutions and all the activities involved in creating
new knowledge, and translating that knowledge into new outputs, products, processes and
materials.
The implications of technological innovation and advancements are as follows:

They dramatically affect the organisations’ products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing practices and
competitive position;

They create new markets;

They result in the proliferation of new and improved products;

They change the relative cost positions in the industry;

They make existing products and services obsolete;

They reduce or eliminate cost barriers between businesses;

They create shorter production runs;

They create shortages in technical skills;

They result in changing values and expectations of employees, managers and customers;

They create new competitive advantages that are more powerful than existing ones.
Dimension 5 | Ecological environment (the natural environment) p147
The ecological environment refers to the relationship between human beings – and thus
organisations – and the air, soil and water in the physical environment. It refers to the limited
natural resources from which an organisation obtains its raw materials. Organisations should know
what their influence on the ecological environment is.
Dimension 6 | The international environment SG131
The international environment has an impact on an organisation’s activities, whether that
organisation operates locally or internationally. International laws, human rights, boycotts etc. have
become variables that can easily derail even the smallest local organisation.
Forecasting techniques and scenario planning SG134
Strategic planning, as the name suggests, deals with the future, and assumptions about the future.
These assumptions must be clarified and made explicit.
We need to predict what the variables that we have identified in the macroenvironment might look
like in the future. Forecasts are what might be called “educated assumptions” about future trends
and events. Environmental forecasting helps the organisation to be proactive.
Accurate forecasting enables an organisation to either benefit from, or at least mitigate, the impact
of economic changes. To forecast the environment, one needs forecasting tools which can be
categorised into the following two groups:
1. Quantitative techniques: are particularly appropriate when historical data is available and
when the relationships among key variables are expected to remain the same in the future.
As historical relationships become less stable, quantitative forecasts become less accurate,
which is when qualitative forecasts can, and should, be used;
2. Qualitative techniques.
The choice of a suitable forecasting technique depends not only on the availability of historical data,
but also on factors such as costs, time and the accuracy of the forecast information that is needed.
When studying quantitative and qualitative forecasting techniques, you need to pay special
attention to the following:

How to select critical environmental variables;

Which sources provide significant environmental information;

Which forecasting techniques are available to the strategic planner;

How to evaluate forecasting techniques;

How to integrate forecast results with the strategic management process;

How to monitor the critical aspects of forecasts.
Scenario planning is that part of strategic planning which relates to the tools and technologies for
managing the uncertainties of the future (Ringland 2006). A scenario is not a forecast, but one
possible future outcome.
Assessment SG137
1. Explain what external assessment means in strategic planning terms
2. Describe the components of, and process involved, in conducting a macroenvironmental
analysis
3. Diagrammatically depict and explain the position of external environmental assessment in
the strategic planning process
4. Explain how the macro-, industry and operating environments are all interrelated
5. Identify and explain the macroenvironment variables that impact on an organisation
6. Discuss the use of forecasting techniques.
Study unit 5.2 | The industry or market environment SG139
Learning outcomes SG139
In this study unit, we focus on the following learning outcome:

Analyse and interpret the results of an external environmental assessment

To achieve this learning outcome, you must be able to:

Diagrammatical depict and explain how Porter’s five forces model is used in assessing the
industry environment

Give guidelines on how to perform a competitor analysis

Describe the limitations of Porter’s five forces analysis

Explain the importance of assessing the industry environment as part of an external
environmental assessment.
The industry environment (also known as the market or task environment) SG140
After the macroenvironment has been analysed, the next step in the external environmental
assessment process is to examine the industry environment. It is comprised of:

Suppliers;

Intermediaries;

Customers;

Competitors.
Management has no control over these variables but can influence their effect through changes in
the organisation’s strategy.
An industry can be defined as a group of organisations that produce products and services that are
close substitutes for one another or which customers perceive to be substitutable for one another
(Ehlers & Lazenby, 2010). In South Africa, for example, we speak of the textile industry, the mining
industry, the banking industry and so forth.
Before an organisation can carry out an industry analysis, it needs to:

Identify the industry in which it competes; and then determine

The structure of the industry, which is influenced by:
o
The concentration of a few organisations that dominate sales in an industry;
o
Economies of scale;
o
Product differentiation; and
o
The barriers to entry.

Identify competitors
An organisation also has to identify its competitors before performing an industry analysis. The
industry life cycle is a significant determinant of the nature and the extent of the power of the
variables in the market environment.
Industry or market environment p148
In summary to the previous section, an organisation needs to know:

In which industry it is competing;

What the structure of that industry is;

What the major determinants of competition are;

Which organisations are the competitors.
In terms of identifying the industry, the following questions can be asked:

Which organisations have the same type of goals as our organisation has?

In which industry are these organisations competing?

In this industry, what are the key ingredients for success?
Industry structure depends on enduring characteristics that give the industry its distinctive character
and can be identified by examining four variables:
1. Concentration: extent to which industry sales are dominated by only a few organisations;
2. Economies of scale: savings companies achieve within an industry due to increased volume;
3. Product differentiation: extent to which customers perceive goods and services offered by
organisations in an industry as different from one another;
4. Barriers to entry: obstacles that an organisation must overcome in order to enter an
industry.
The most important task of management in capitalising on the market environment is to identify,
evaluate and exploit opportunities that exist in the market and to develop the marketing strategy of
the organisation in such a way that competitors and other variables of this external environment do
not pose a threat to the organisation.
Five competition forces influence the intensity of competition in an industry and the industry’s profit
potential. Michael Porter identified these as:
1. The threats posed by new entrants;
2. The bargaining power of suppliers;
3. The bargaining power of buyers;
4. Product substitutes;
5. The intensity of rivalry amongst competitors.
Knowledge of these forces helps to provide the basis for a strategic plan of action. This model also
expands competitive analysis to current and potential competitors.
Potential
entrants
Threat of
new entrants
Suppliers
Bargaining
power of
suppliers
Industry
competitors
Rivalry among
existing
organisations
Buyers
Bargaining
power of
buyers
Substitutes
Threat of
substitute
products
Figure 24 The Five Forces model for industry analysis p150
According to Porter (2008), an industry’s profit potential is determined by the collective strength of
the five forces mentioned above. When we look at figures such as the average return on investment
(ROI) of three different industries, we can see that different industries have different profit
potentials – that is, some industries are more profitable than others.
A strategic group consists of a cluster of similar organisations that offer similar goods to the same
customer base; these organisations are also likely to use comparable production technology.
An organisation has to be positioned within the industry. According to Porter, ”positioning” means
just that: the organisation has to position itself by doing the following:

Achieving lower costs than its rivals (i.e. becoming a cost leader);

Through differentiation, by adding value in an area that the customer regards as important;

Focusing on only one market segment or, at most, a limited range of segments (i.e. in an
effort to lower costs or differentiate itself from its competitors).
Competitive force 1 | Threat of new entrants p149
New entrants can threaten the market share of existing competitors by bringing additional
production capacity to the industry.
Two factors influence whether new organisations will enter an industry:
1. Barriers to entry;
2. Expected retaliation.
Influence 1 | Barriers to entry p150
Examples of entry barriers include:

Economies of scale: the advantages of economies of scale are that they enhance an
organisation’s flexibility, may keep the price constant and increase profits.

Product differentiation: customers become loyal to a product over time, if new entrants
want to change the idea of uniqueness, they have to offer products and services at lower
prices.

Capital requirements;

Switching costs: these are once-off costs customers incur when they switch from one
supplier’s product or service to another. New entrants can overcome this by offering a
substantially lower price.

Access to distribution channels: new entrants have to persuade distributors to carry their
products.

Cost advantages independent of scale: includes access to raw materials and government
subsidies.
Influence 2 | Expected retaliation p151
If existing organisations are able to retaliate swiftly and vigorously, the likelihood of new
organisations entering is reduced. Locating market segments that are not adequately served by
existing organisations allows easier entry for the new entrant. This will also avoid stepping on the
toes of existing organisations and thus risking retaliation from them.
Competitive force 2 | Bargaining power of suppliers p152
Suppliers are the individuals and companies that provide an organisation with the input resources
(raw materials, component parts, or labour) that the organisation needs to produce goods and
services.
A threat arises when a supplier’s bargaining position becomes so strong that it can raise the prices of
the input resources it supplies to the organisation. Suppliers can exercise power over competing
organisations by increasing their prices and/or reducing the quality of their product. A supplier group
is powerful when:

It is dominated by a few large organisations and is thus more concentrated than the industry
to which it sells it products;

No satisfactory substitutes are available for customers to buy;

Industry organisations are not important customers for the supplier group because it sells to
several industries;

Suppliers’ goods are critical to byers’ organisations;

The cost for industry organisations to switch to another product or supplier are high because
of the supplier’s effectiveness or the differentiated products;

It poses a credible threat of forward integration whereby suppliers become their own
buyers, and therefore other buyers are not important for the success of the suppliers.
Competitive force 3 | Bargaining power of buyers p153
Buyers bargain for higher quality, lower prices and better services to reduce their costs. Customers
or buyers have bargaining power in the following cases:

They purchase a large quantity of a seller organisation’s products or services;

The sales of the product account for a large portion of the seller’s revenue;

Few, if any, costs are incurred when customers switch to another product. The customers
are not “married” to a specific supplier and can shop around;

As above if the customer or buyer earns low profits;

The products or services purchased by the customer account for a large portion of the
customer’s costs;

The industry’s products are undifferentiated or standardised;

The quality of the products that the customer purchases is not very important for the
buyer’s products;

Customers have access to a lot of information;

There is a credible threat of backward integration: the buyer becomes his own supplier,
therefore other suppliers are not important for the buyer’s success.
Competitive force 4 | The threat of substitute products p154
If a product or service from another industry can be used to perform similar functions to the product
or service in the industry, it is considered to be a substitute product or service.
Substitute products and services pose a strong threat to an organisation when the switching costs
for customers (if any) are low, the substitute product has a lower price, or its quality and
performance are equal to or superior to those of the competing product.
To withstand the threat of product and service substitution, an organisation can differentiate in
areas which customers perceive as creating more value, such as price, quality, after-sales services or
speed of delivery.
Competitive force 5 | Rivalry among competing organisations p155
This is the strongest of all the forces. Competitors are organisations that produce goods and services
similar to a particular organisation’s goods and services and compete for the patronage of the same
customers. It is often competitors and not consumers who determine the actual quantity of a
particular product to be marketed and what price should be asked for it. Organisations not only
compete for market share, but also for labour, capital and materials.
In a competitor analysis it is important for the organisation to understand:

The future goals of the competitors;

Their current strategies;

What the competitors believe about the industry – what their assumptions are;

What their capabilities are.
Learn Figure 5.5: Components of competitor analysis p156
The only way to create a competitive advantage is for an organisation to differentiate its products
from competitors’ offerings in ways that consumers will perceive as adding value. Rivalry is usually
based on visible aspects such as price, quality and innovation.
The following conditions will influence the intensity of rivalry between competitors:

Numerous or equally balanced competitors;

Slow industry growth;

High fixed or storage costs;

Lack of differentiation or low switching costs;

High exit barriers: exit barriers include economic, strategic and emotional factors that force
organisations to continue competing in an industry even though the profitability of doing so
is doubtful. It is difficult for them to exit the industry because some factors keep them in it.
Common exit barriers include:

Highly specialised assets: assets with value linked to a particular business or location;

Fixed exit costs: labour agreements;

Strategic interrelationships: strategic alliances where facilities or markets are shared;

Emotional barriers: fear of one’s own career and loyalty to employees;

Government and social restrictions: government’s concern for job losses and the effect on
the economy.
Identifying competitors within an industry p158
There are several variables that an organisation has to consider in identifying current and potential
competitors: They include the following:

The similarity of the definition of the scope (what business are we in?): this determines
whether organisations see each other as competitors;

The similarity of benefits customers derive from the products and services that other
organisations offer;

How committed the organisations are to the industry must be determined: this is because
it sheds light on their long term goals and intentions.
A method that an organisation can use to identify its competitors is strategic group mapping: a
strategic group consists of the clustering of a group of organisations that are:

Similar to one another;

Offer similar goods to similar customers; and

Possibly also make similar decisions about production technology and other organisational
aspects;

They are thus direct competitors in the same industry.
The classification of an industry into various strategic groups involves: deciding what characteristics
to use to map the organisations into strategic groups. The characteristics that can be used in a graph
include:

Breadth of product;

Geographic scope;

Price quality; and

Type of distribution.
Strategic grouping as an analytical tool for identifying customers helps an organisation to:

Identify the competitors at different competitive positions in the industry;

To chart the future direction of an organisation’s strategy or what direction it seems to
move in.
Common mistakes in identifying competitors p158
Examples of key mistakes include:

Overemphasizing current and known competitors; and

Ignoring the threat of potential new entrants or international competitors;

Focusing only on large competitors; and

Overlooking the possible threat of small competitors;

Assuming that competitors will continue to behave in the same way that they have in the
past.
Competitor analysis SG145
Guidelines on how to perform a competitor analysis:

Compare the future objectives of competitors with the organisation’s own objectives;

Determine the current strategies of competitors;

What assumptions are competitors making in terms of the future status of the industry?

What are the strengths and weaknesses of competitors?

Decide on how the organisation will respond to competitors.
Limitations of Porter’s Five Forces model SG146
The limitations to the model can be summarised as follows:

The model claims to assess the profitability of the industry: there is strong evidence that
organisation-specific factors, such as organisational competencies, are more important to
the individual organisation’s success than industry factors;

The model implies that the five forces apply equally to all competitors in an industry:
buyers’ power may differ from organisation to organisation, the same argument applies to
the bargaining power of suppliers;

Product and resource markets are not adequately covered by the model: in both these
markets the conditions are more complex than Porter’s model implies. The markets in which
products are sold (buyer power) need more in-depth analysis when determining their
strength;

The model can never be applied in isolation: the outcomes of the applications of the model
are only relevant while the macroenvironment remains constant and stable; however,
organisations function in complex and dynamic environments;

The model assumes that the relationship between competitors in an industry is always
hostile: it is more complex than the model suggests; competitors often see “fair play” or a
“give-and-take” relationship as an important quality of their interactions.
Assessment SG146

Diagrammatically depict and explain how Porter’s five forces model can be used to assess
the industry environment

Provide guidelines on how to perform a competitor analysis.

Discuss the limitations of Porter’s five forces analysis.

Explain the importance of industry assessment as part of external environmental
assessment.
Topic 6 | Formulating long-term goals SG149
Study unit 6.1 | Formulating long-term goals SG149
Learning outcome SG149
In this study unit, we focus on the following learning outcome:

Interpret the organisation’s strategic goals (long-term goals).
To achieve this learning outcome, you must be able to:

Explain what is meant by “long-term goals”;

Diagrammatically depict the position of long-term goals in the strategic planning process;

Explain how the mission statement is translated into strategic goals (long-term goals);

Differentiate between long- and short-term goals;

Draw a diagram showing the four dimensions of the balanced scorecard;

Comment on the criteria used to judge whether a long-term goal is well formulated or not.
Translating the mission statement into measurable long-term goals SG150
The vision statement is the organisation’s “dream” – its ”perfect future”. This perfect future is then
translated into reality – the mission statement. However, the mission statement is only a set of
guidelines. The mission statement sets parameters within which strategic management should make
decisions. It does not state what exactly should be attained, or when it should be attained. It is
therefore not measurable.
Long-term goals, also called strategic goals, translate the mission statement into something
measurable. It looks at the following:





Who should attain the goals?
What should the focus be on?
What action is needed?
How will goals be measured?
Within what time frame should it occur?
Long-term goals should focus on issues such as:



Market;
Product;
Technology;








Survival;
Growth;
Profitability;
Customers;
Quality; and
The organisation’s philosophy;
Public image;
Self-concept.
Focus areas may include issues such as:





Continuous improvement;
Customer service;
Employee efficiency;
Innovation;
Sales and financial criteria (return on investment, earnings per share, revenue, turnover).
Strategy is about positioning organisations for long-term competitive advantage. The primary aim of
strategy is to create value for shareholders and other stakeholders by providing customer value.
The essential components of a good strategy include:

The choice of which products and services to deliver;

The acquisition and allocation of resources to ensure the delivery of the products and
services is done in a professional, timely and profitable way.
Sound strategy is rooted in:

A deep understanding of what current and potential customers value;

How much they are prepared to pay;

The profile and position of the competition; and

How such elements are likely to change.
Study Figure 6.1: Strategic goals and associated strategies in context p175
Long-term goals (sometimes called long-term objectives) p175
Long-goals are determined in line with the organisation’s vision. These goals are strategic in nature
and reflect the organisation’s specific direction on a high level. Strategic goals are the basis for more
specific tactical goals, or the so-called short-term/functional goals.
Study table 6.1: Differences between long-term strategic goals and short-term tactical goals p176
Policies can be defined as the rules or guidelines that express the limits within each action resulting
from a short-term goal.
Long-term and short-term goals need to comply with specific requirements:



A long-term goal should not be open to interpretation from employee to employee;
Long-term goals should provide direction to the organisation, establish organisational
priorities, reduce uncertainty; and
Serve as the basis for allocating and managing resources in the organisation.
Some additional considerations include:


Goals should be measurable and clearly indicate a time frame;
Goals should be consistent and congruent across organisational units
Using the balanced scorecard to set long-term goals SG152
The balanced scorecard is a set of measures that are linked directly to the organisation’s vision,
mission and strategy. It balances short- and long-term measures; financial and nonfinancial
measures and internal and external performance perspectives. The balanced scorecard account
compromises the following four perspectives:
1.
2.
3.
4.
The financial perspective;
The internal business perspective;
The innovation and learning perspective;
The customer perspective.
Each of the above perspectives in itself consists of clearly stated objectives, measures, targets and
initiatives.
Figure 25 The balanced scorecard SG153
The balanced scorecard can be used as a framework for setting long-term goals.
Assessment p154
1. Differentiate between long- and short-term goals.
2. Depict the position of long-term goals in the strategic planning process.
3. Comment on the criteria used to judge whether a long-term goal is well formulated or not.
4. Explain how the balanced scorecard is used to formulate long-term goals.
Study unit 6.2 | Generic strategies SG155
Learning outcome SG155
In this topic we focus on the following outcome:







Defend the choice of a generic strategy, or strategies, based on the strategic planning
process.
To achieve this learning outcome, you must be able to:
Diagrammatically depict the position of strategy choice in the strategic planning process;
Explain what is meant by a “competitive advantage”;
Comment on the factors that impact on strategic choice;
Explain what the generic strategies entail differentiate between the four generic strategies;
Comment on the criticisms levelled against the use of a generic strategy framework.
Competitive advantage p178
The competitive advantage should elevate the organisation from its competition. This competitive
advantage should fulfil certain criteria:



Relate to an attribute with value and relevance to the targeted customer segment;
Be perceived by the customer as a competitive advantage;
Be sustainable, i.e. not easily imitated by competitors.
An organisation should consider now only its competitors when determining its competitive
advantage, but also its customers and their value proposition.
The opportunity for companies to sustain competitive advantages is determined by their capabilities.
For the purposes of strategy, the key distinction is between distinctive capabilities and reproducible
capabilities:


Distinctive capabilities: are those characteristics of a company that cannot be replicated by
competitors, or can be replicated only with great difficulty;
Reproducible capabilities: can be bought or created by any company with reasonable
management skills and financial resources.
Only distinctive capabilities can be the basis for sustainable competitive advantage.
Strategy selection SG156
In simple terms, a strategy is the route that the organisation believes will take it to its destination. A
strategy also indicates how an organisation intends competing in the marketplace.
There are three main categories of strategies:
1. Generic strategies (low cost, differentiation, focus and best cost);
2. Grand strategies;
3. Functional strategies.
Factors that impact on strategic choice SG157
There are various factors that play a role in the selection of a strategy or strategies. The different
components of the strategic planning process, for example, would impact on the choice of a
strategy. A change in any of the strategic planning process components may therefore require a
change in strategy or strategies.
In addition, major factors that impact on choosing a strategy are:
1. Appropriateness: refers to the needs of the environment, the resources (available and
needed), the organisation’s values, and its current mission;
2. Feasibility: refers to the timing, the availability of finance and other resources, and meeting
key success factors.
3. Desirability: refers to the ability of the strategy to satisfy the organisation’s objectives, its
synergy, certain inherent risk factors and, of course, shareholders’ needs and preferences.
Generic strategies (sometimes referred to as competitive strategies) SG158
Generic strategies provide focus and direct organisational activities. Organisations mhave to select
specific generic strategies that complement their competitive advantage.
Competitive strategy is about formulating a strategy that enables the organisation to compete
against other organisations within its industry. In order to gain a competitive advantage, an
organisation must decide to adopt one of these generic strategies. An organisation also decides on a
grand strategy in order to strengthen the generic strategy in its pursuit of competitive advantage.
Generic strategies fall into four categories:
1. Cost leadership strategy: by being more cost-effective than its competitors;
2. Differentiation strategy: by adding value to the product or service through differentiation;
3. Focus strategy: by narrowing its focus to a special market segment which it can monopolise.
Combining the cost and differentiation advantage adds another generic competitive strategy:
4. Best-cost strategy: by offering the lowest (best) prices compared with rivals offering
products with comparable attributes.
Study Figure 6.2: Three generic competitive strategies p180
These strategies combine the organisation’s “scope of operations” and competitive advantage to
derive the three generic types of competitive strategy.
Generic strategy 1 | Cost-leadership strategy SG158
Organisation’s pursuing a cost-leadership strategy usually sell a product or service that appeals to a
broad target market. Their products or services are highly standardised and nor customised to an
individual’s tastes, needs or desires. According to David (2009), the cost leadership strategy
emphasises the production of standardised products at a very low per-unit cost for price-sensitive
consumers.
To achieve a cost advantage, an organisation’s cumulative costs across its overall value chain must
be lower than its competitors’ cumulative costs. There are tow ways to accomplish this:
1. Out-manage rivals in the efficiency with which value chain activities are performed and in
controlling the factors that drive the costs of value chain activities;
2. Revamp the organisation’s overall value chain to eliminate or by-pass some cost-producing
activities.
The underlying premise of cost leadership is that, by making products with as few modifications as
possible, the organisation can exploit the cost-reduction benefits that accrue from:




High capacity utilisation;
Economies of scale;
Technological advances; and
Learning and experience.
Organisations usually decide to pursue a cost leadership strategy to provide the lowest prices to
consumers in order to gain market share in a particular industry. There are both benefits and risks to
pursuing a cost leadership strategy. The aim of cost leadership is to become the lowest-cost provider
of a specific product or service.
The table below outlines the parameters that distinguish a cost-leadership strategy from the other
generic strategies:
Cost-driver 1 | Economies of scale p181
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 such as R&D and advertising
over a greater sales volume. The various costs involved in production and which should be reviewed
when economies of scale come into play are:




The total cost account for all the production costs: total cost increases as output increases;
Fixed costs (land and equipment) remain the same for different levels of production unless
the production operations are expanded in size;
Variable costs: the costs of variable inputs (raw materials and labour) that vary with output;
Average cost: the mean cost of total production (total costs/total number of units produced
during a given period). Economies of scale exist if average costs are lower at higher levels
of production.
In essence economies of scale entail:





Spreading the fixed costs over a greater volume;
Specialising in a specific production process;
Practicing superior inventory management;
Exercising purchasing power; or
Spending more effectively on advertising.
Cost-driver 2 | Experience and learning curve effects p182
An organisation’s costs can decline as employee experience increases. This leads to higher
productivity, employees applying technology better or devising ways of improving systems.
Learning fosters increased understanding of responsibilities and leads to the mastering of skills to
achieve organisational goals more effectively and efficiently.
Cost-driver 3 | The percentage of capacity utilisation p182
Increased capacity utilisation leads to fixed costs being spread over a larger unit volume which
lowers the fixed cost per unit, especially in capital-intensive organisations. Ways to achieve this are
through better demand forecasting, conservative expansion policies, aggressive pricing and
increased depreciation rates.
Cost-driver 4 | Technological advances p182
Investment in cost-saving technologies can enable organisations to reduce the unit cost of their
products or services significantly.
Cost-driver 5 | Improved efficiencies and effectiveness through supply chain management p182
An organisation’s value chain is intimately linked to the value chains of its suppliers and customers in
a highly interactive way e.g. Dell.
Generic strategy 2 | Differentiation strategy SG159
This is a strategy aimed at producing products and services which are perceived to be different, and
more value is added in comparison to competitors’ products and services. The perceived uniqueness
of products often lies in the:




Quality;
Technological superiority;
Design; or
Image.
Organisations that pursue a generic strategy can increase revenue by charging more for perceived
added value. Sustainable differentiation is usually linked to core competencies, unique competitive
capabilities and superior management of value chain activities which competitors cannot readily
match. As a rule, differentiation yields a longer-lasting and more profitable competitive edge when it
is based on:


Product innovation;
Technical superiority;



Product quality and reliability;
Comprehensive customer service; and
Unique competitive capabilities.
The most important by-product of a differentiation strategy is customer retention and loyalty. This
means that customers are locked in.
Generic strategy 3 | Focus strategy SG159
This strategy involves providing products and services that fulfil the needs of a narrow segment of
consumers with unique tastes and preferences i.e. it is based on a choice of a narrow competitive
scope within an industry. The focus strategy means choosing a particular market and catering for the
very specific needs of consumers in this market. The essence is exploiting a market niche that differs
from the rest of the industry.


Focus strategy based on cost leadership: aims at securing a competitive advantage by
serving buyers in the target market niche at a lower cost and price than its competitors;
Focus strategy based on differentiation: aims at securing a competitive advantage by
offering niche members a product they perceive as well suited to their own unique tastes
and preferences.
Generic strategy 4 | Best-cost strategy (middle-of-the-road strategies) SG159
This strategy is a combination of low cost leadership and differentiation strategies. It is generally
ideal for value conscious buyers. The basic competitive advantage is more value for money for
products and services; the competitive advantage is more difficult for competitors to imitate. This
integrated strategy often has a positive relationship with above-average returns.
Comparison between the generic strategies
Distinguishing features of each generic strategy
Table 4 Distinguishing features of the different generic strategies
Parameter
Strategic target
Cost leadership
strategy
A broad cross-section
of the market
Differentiation
strategy
A broad cross-section
of the market
Basis of competitive Lower overall
advantage
than
those
competitors
Product line
Production emphasis
Marketing emphasis
costs Ability to offer buyers
of something attractively
different from that of
its competitors
A good basic product Many product
with
few
frills variations; wide
(acceptable quality and selection; emphasis of
limited selection)
differentiating features
A continuous search for Differentiating features
cost reduction without that buyers are willing
sacrificing acceptable to pay for; product
quality and essential superiority
features
Trying to make a virtue Flaunting
out of product features differentiation
that lead to low cost
features; charging a
premium price to cover
the extra costs of
Focus: low cost
Focus: differentiation
Best-cost strategy
A narrow market niche
in which buyer needs
and preferences are
distinctively different
Lower overall costs that
rivals in serving niche
buyers
A narrow market niche
in which buyer needs
and preferences are
distinctively different
Attributes that appeal
specifically to niche
buyers
Value-conscious buyers
Features and attributes
tailored to the tastes
and requirements of
niche buyers
A continuous search for
cost reduction while
incorporating features
and attributes matched
to niche buyer
preferences
Communicating
attractive features of a
budget-priced offering
that fits niche buyers’
expectations
Features and attributes
tailored to the tastes
and requirements of
niche buyers
Custom-made products
that match the tastes
and requirements of
niche buyers
Items with appealing
attributes; assorted
upscale features
Communicating how
the product offering
does the best job of
meeting niche buyers’
expectations
Flaunt delivery of best
value; deliver
comparable features at
a lower price than rivals
or match rivals’ prices
Ability to give
customers more value
for money
Produce upscale
features and appealing
attributes at lower cost
than rivals
Parameter
Cost leadership
strategy
Keys to sustaining the Economical prices/good
strategy
value; low costs (year
after year) in every
area of the business
Differentiation
strategy
differentiating features
Focus: low cost
Constant innovation to
stay ahead of imitative
competitors; a few key
differentiating features
Constant innovation to
stay ahead of imitative
competitors; a few key
differentiating features
Focus: differentiation
Commitment to serving
the niche better than
rivals; does not blur the
organisation’s image by
entering other market
segments or adding
other products to
widen market appeal
Best-cost strategy
and provide better
features
Unique expertise in
simultaneously
managing costs down
while incorporating
upscale features and
attributes
When each strategy is the best strategy to follow
Table 5 When each strategy is the best strategy to follow
Strategy
Cost leadership
Differentiation
When it is the best to follow which strategy
 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.
 Buyer’s preferences are diverse and varied;
 Fewer competitors follow a similar differentiation approach with less head-to-head rivalry e.g. Woolworths;
 There are many ways to differentiate the product or service and many buyers perceive differences as having value;
Strategy
Focus: low cost
Best-cost
When it is the best to follow which strategy
 Technology changes frequently and competition often centres on changing product features e.g. mobile handsets;
 Higher industry entry barriers result in higher demand for products and less price sensitivity;
 The differentiated product or service can be designed so that it has wide appeal to many market sectors;
 Brand loyalty exists e.g. retail banking.
 The target market niche is large enough to be profitable and offers good growth potential;
 It provides a way for a smaller organisation to avoid direct competition with the larger organisations that do not deem the
segment important to compete in;
 It is viable for larger organisations to meet the specialised needs of the niche segment while still maintaining performance in
their mainstream markets;
 The industry has a variety of potentially profitable market segments and over-crowding by competitors is thus less of a risk;
 Customers are willing to pay a high premium for the perceived value that they attach to a differentiated (customised)
product or service;
 Customers are brand loyal and are unlikely to shift their loyalty to a competing brand.
 The potential for economies of scale and learning exists in the market;
 Customer demand, expectations and needs provide sufficient impetus for investment in enhanced efficiencies and cost
savings, as well as differentiation;
 Competition is fierce and barriers to entry are low;
 Customers are simultaneously price and quality sensitive;
 Mass customisation becomes a possibility because of advanced technological, distribution and marketing capabilities.
Advantages and potential pitfalls of each strategy
Table 6 Advantages and potential pitfalls of each strategy
Cost leadership strategy
Advantages  Increases the potential of an
organisation to increase both
its market share and its
profitability;
 Customers who are familiar
with the products and
services of low-cost leaders
are unlikely to switch to a
competing brand, unless the
competing
brand
has
something very different or
unique to offer – customer
loyalty is an advantage of a
prolonged cost leadership
strategy;
 One of the most important
advantages that cost leaders
have is their ability to keep
new entrants from entering
the market.
Potential
 Sometimes organisations run
pitfalls
the risk of being overly
aggressive with their price
cutting and ending up with
lower profitability;
 Value-creating activities that
Differentiation strategy
(not stipulated in the test book)
Focus
(not stipulated in the test book)
Best-cost strategy
(not stipulated in the test book)




Uniqueness that is not
valuable: market research
and reliable information are
critical to the success of a
differentiation strategy;
Too much differentiation;
The needs, expectations and
characteristics of the market
may gradually shift towards
attributes desired by the
majority of buyers in the
broader market, which will

Organisations that fail to
create both competitive
advantages simultaneously
may end up with neither and
become stuck in the middle;
Organisations may
Cost leadership strategy
form the basis of this
strategy can often be
imitated too easily;
 A degree of differentiation is
often still needed.
Differentiation strategy
 Charging too high a
premium;
 A uniqueness that is easily
imitated;
 Dilution of brand
identification through
product-line extensions.
Focus
decrease the profit potential
of this segment;
 Competitors may develop
technologies or innovate
products that may redefine
the preferences of the niche;
 The segment may become so
attractive that it is soon
inundated with competitors,
intensifying rivalry and
eroding profits.
Best-cost strategy
underestimate the
challenges and expenses
associated with providing
low prices and differentiating
at the same time;
 Organisations may
miscalculate the sources of
revenue within the industry
and fail to achieve expected
profitability.
Criticisms of generic strategy framework SG160
The most important objections to Porter’s generic strategy framework are:



An organisation can employ a successful hybrid strategy without being stuck in the middle
e.g. Nissan;
Low-cost strategy does not in itself sell products;
Price can sometimes be used to differentiate.
Assessment SG160
 Diagrammatically depict the position of strategies choice in the strategic planning process.
 Explain what is meant by a “competitive advantage”.
 Comment on the factors that impact on strategic choice.
 Explain what the generic strategies entail.
 Differentiate between the four generic strategies.
 Comment on criticisms levelled against the use of a generic strategy framework.
Topic 7 | Grand strategies SG163
Study unit 7.1 | Grand strategies SG163
Learning outcome SG163
In this topic we focus on the following learning outcome:

Defend the choice of a strategy, or strategies, on the basis of the strategic planning process.
To achieve this learning outcome, you must be able to:




Diagrammatically depict the position of strategic choice in the strategic planning process;
Explain what the grand strategies entail;
Explain and differentiate between growth, decline and corporate combination strategies;
Describe functional strategies and how they are related to grand strategies.
Grand strategies SG164
Grand strategies, also referred to as business strategies, alternative strategies, or master strategies,
are the specific “game plans” that explain, in detail, how the organisation will compete in the
marketplace. Grand strategies provide the basic direction for strategic actions. A grand strategy can
be described as a comprehensive general approach that guides a firm’s major actions.
Fourteen principal grand strategies are defined and classified under four broad categories, namely:
1.
2.
3.
4.
External growth strategies;
Internal growth strategies;
Decline strategies; and
Corporate combination strategies.
The interrelationship between Porter’s generic strategies and grand strategies SG164
Cost leadership
Differentiation
Focus
Forward
integration
Concentrated
growth
Concentrated
growth
Backward
integration
Product
development
Product
development
Horizontal
integration
Market
development
Horizontal
integration
Concentrated
growth
Conglomerate
diversification
Concentric
diversification
Joint venture
Horizontal
integration
Joint venture
Strategic
alliances
Concentric
diversification
Strategic
alliances
Figure 26 The relationship between Porter's generic strategies and grand strategies p200
Grand strategies can be divided into three groups:
1. Growth strategies:
a. Internal: focuses on the internal environment of the organisaiton;
b. External: focuses on the market and task environment.
2. Corporate combination strategies; and
3. Decline strategies.
Growth strategies can be further divided into internal and external growth strategies.
Figure 27 The three groups of grand strategies p201
1 | Growth strategies p201
1a | Internal growth strategies p201
1a-1 | Concentrated growth (also referred to as market penetration) p201
Concentrated growth is a strategy that seeks to increase the market share of an organisation
through concentrated market efforts. The organisation stays focused on its present market, as well
as its present products and services. For example: Cell C.
The challenge it faces is to grow its share of the particular market through the customisation of its
product features, prices, distribution channels and promotional strategies. Through this customised
approach it endeavours to increase its usage rate of its present customers, attract non-users to buy
its product, and/or attract its competitors consumers and convince them to switch brands.
A concentrated growth strategy can be effective if the following conditions prevail:





The market for a specific product or service is not saturated;
There is room to increase the usage rate of present customers;
The market shares of its major competitors have been declining while total sales in the
particular industry have been increasing;
Economies of scale can provide cost benefits to organisations;
There is not much fluctuation in the availability, price and quality of the raw materials and
other resources required tom provide the specific product or service that consumers
require.
1a-2 | Market development p202
A market development strategy involves expanding the portfolio of markets that the organisation
serves. Present products or services are therefore introduced into new geographical areas, including
other countries.
A market development strategy is effective when the following conditions prevail:


An organisation has access to reliable and affordable distribution channels in the area it
wishes to enter;
Cultural barriers and a lack of insight with regard to the buying behaviour of consumers in
the foreign country present challenges to organisations that consider entering international
markets. To overcome these barriers some organisations decide to form strategic
partnerships with organisations in the foreign country that they wish to enter.
1a-3 | Product development p204
Product development involves improving and modifying the products and services of the
organisation in order to increase sales. Product development is effective when an organisation has
successful products that are reaching the maturity stage of their product life cycle.
A product development strategy can be effective if the following conditions prevail:


If the industry is characterised by rapid technological developments, especially when major
competitors offer better quality products at comparable prices;
When capital is available for capital investment in R&D, technology and the attainment of
appropriate human resources.
1a-4 | Innovation p204
Organisations that have distinct technological competencies and capital reserves to invest in R&D
may find it profitable to make innovation their grand strategy. Instead of concentrating on extending
the life cycle of their products or services through differentiation and product development, these
organisations endeavour to create new product life cycles that will make similar existing products or
services obsolete.
An innovation strategy can be effective if the following conditions prevail:




Customers demand differentiation;
The industry is characterised by rapid changes and advances in technology;
The organisation has R&D skills;
The organisational culture fosters innovativeness.
1b | External growth strategies p205
1b-1 | Diversification p205
Diversification is directly concerned with extending the organisation beyond its original boundaries
(industry and market). The major benefits and risks associated with diversification are:
Table 7 Benefits and risks associated with diversification
#
1
2
3
Benefit
Opportunities for faster growth, higher
product and service offering profitability and
greater stability
Risk
Ignorance about newly entered markets could
result in inefficiency as a result of inadequate
knowledge
about
customer
needs,
technological
developments
and
environmental shifts
Access to key resources such as capital, Risk of reducing management effectiveness.
technology and expertise
Places significant demands on senior
executives due to increased complexity and
technological differences across industries
Sharing of value chain activities to provide Sharing value chain activities with another
greater economies of scale and thus lower organisation often entails substantial costs
total cost
with regard to communication, compromise
and accountability.
i | Concentric diversification
Adding new but related products and services to the product line is called related or concentric
diversification. The objective of related diversification is usually to expand the market share of an
organisation in an existing market, or alternatively to enter new markets. For example: Dove.
Relatedness has to do not only with market or industry, but also relates to strategic assets i.e. those
that cannot be accessed quickly and cheaply by non-diversified competitors. For example: Canon
with cameras and then photocopiers.
A related or concentric diversification strategy can be effective if the following conditions prevail:




Industries that experience slow growth or no growth, the goal is to increase sales by
increasing the number of products consumed by each individual customer;
The current products or services of an organisation are in the decline stage of the product
life cycle;
The potential exists to reap economies of scale across business units that can share the
same strategic asset (such as a common distribution system);
The potential exists to utilise a core competency developed through the experience of
building strategic assets in existing businesses to create a new strategic asset in a new
business faster or at a lower cost.
ii | Unrelated or conglomerate diversification
Adding new, unrelated products or services in an effort to reach and penetrate new markets. This
type of strategy is a corporate strategy, which is usually applicable to large conglomerate multibusiness organisations.
An unrelated or conglomerate diversification strategy can be effective if the following conditions
prevail:


The basic industry of the organisation is experiencing declining sales and profits;
Existing markets for the products and services of the organisation are saturated;

The organisation has the capital and managerial talent needed to compete successfully in a
new industry.
Some of the methods through which an organisation can pursue unrelated diversification are:




Buying a high-performing organisation in an attractive industry;
Buying a cash-strapped organisation that can be turned around quickly through additional
capital investment;
Buying an organisation whose seasonal and cyclical sales patterns would provide stability to
the cash flow and profitability of the organisation;
Buying a largely debt-free organisation to improve the borrowing power of the acquiring
organisation.
1b-2 | Integration p208
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:
1. Forward vertical integration;
2. Backward vertical integration;
3. Horizontal integration.
i | Vertical integration
Vertical integration extends the scope of an organisation to other activities within the same industry.
This strategy is characterised by the expansion of the organisation into other parts of the industry
value chain directly related to the design, production, distribution or marketing of its existing
products and services.
The primary objective of vertical integration is to strengthen the hold of the organisation on the
resources it deems critical to its competitive advantage.
The cumulative potential benefit of vertical integration strategies is that they tend to reduce the
economic uncertainties and transaction costs facing an organisation in a particular industry.
The disadvantages are as follows:



It can lead an organisation to over-commit scarce resources to a given technology,
production process or other activity that could become obsolete in a certain industry;
It is capital intensive, resulting in high fixed costs that may leave the organisation vulnerable
in an industry downturn;
It can pose problems with regard to integrating different sets of capabilities, skills,
management styles and values.
1. Forward vertical integration: entails gaining ownership over distributors or retailers.
Forward integration is attractive when existing distributors/retailers are:
a. Unreliable;
b. Have high profit margins;
c. Incapable of servicing the consumers of the organisation’s products effectively.
2. Backward vertical integration: involves gaining ownership or increased control of an
organisation’s suppliers. Backward integration is appropriate when the current suppliers of
an organisation are:
a. Unreliable;
b. Too costly;
c. Incapable of meeting the needs of the organisation with regard to parts,
components, or materials.
ii | Horizontal integration
Horizontal integration takes place when an organisation seeks ownership of or increased control
over certain value chain activities of its competitors. It occurs through mergers, acquisitions and
takeovers.
This type of strategy is attractive when:


An organisation competes in a growing industry, where the achievement of economies of
scale could provide cost benefits or other forms of competitive advantage; and
Where an organisation has both the capital and human talent needed to manage an
expanded organisation successfully.
Horizontal integration can pose problems with regards to integrating the differences in
organisational culture, capabilities, skills, management styles and values of the organisations
involved in the merger or acquisition.
2 | Decline strategies (often referred to as defensive strategies) p209
Decline strategies are pursued when an organisation finds itself in a vulnerable position as a result of
poor management, inefficiency and ineffectiveness. There are three types of defensive strategy:
1. Retrenchment or turnaround;
2. Divestiture;
3. Liquidation.
2a | Divestiture p210
Divestiture involves selling a division or part of the organisation to raise capital for further
acquisitions or investments or to get rid of divisions that are no longer profitable or no longer fit in
with the strategic direction that the organisation is embarking on.
2b | Liquidation p210
Liquidation entails selling all the assets of an organisation in an attempt to avoid bankruptcy.
Liquidation is usually pursued when efforts to turn an organisation around through retrenchment
and divestiture have been unsuccessful.
2c | Bankruptcy p211
Bankruptcy as a strategic option is where all the assets of the organisation are sold in parts for their
tangible worth. Creditors are compensated to the extent that cash resources allow and the rest of
the debt of the organisation is then written off. Bankruptcy allows organisations to reorganise and
come back after filing a petition for bankruptcy.
3 | Corporate combination strategies p211
Corporate combination strategies are appropriate for organisations that operate in global, dynamic
and technologically driven industries. Corporate combinations involve the following types:



Joint ventures;
Strategic alliances;
Consortia;
The risks associated with corporate combination strategies involve:




Partners becoming incompatible over time;
Partners becoming too dependent on each other;
Running the risk of providing partners with more insight into their knowledge and skills base
than intended;
Corporate combination strategies can become very cost-intensive, especially as far as
coordination, learning and flexibility are concerned.
3a | Joint ventures p211
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.
Sharing R&D costs, distribution channels and manufacturing agreements can enable organisations to
achieve economies of scale, reduce production costs and minimise risks.
Forming a joint venture is an attractive strategy when the distinct competencies of two or more
organisations complement each other.
3b | Strategic alliances p212
The organisations involved do not share ownership in a specific business venture. These
organisations tend to share skills and expertise for a defined period, usually linked to the life cycle of
a specific project.
An organisation that wants to venture into new and unfamiliar markets, especially those overseas,
can benefit immensely from a strategic alliance (partnership) with another organisation that is
already established in that particular market and therefore has expert knowledge with regard to
consumer behaviour and market conditions there.
3c | Consortia p212
Consortia are large interlocking relationships between organisations in a particular industry. These
relationships represent the most sophisticated form of strategic alliance as they involve multipartner alliances and highly complex linkages between groups or organisations. Some of the linkages
are financial. Other relationships involve the complex sharing of technologies, resources or valuecreating activities among different partners.
Combination of grand strategies p213
The extent to which an organisation can embark on a combination strategy is determined by its
access to the relevant resources. Organisations that have limited resources will most probably not
be able to implement more than one strategy at a time.
Functional strategies SG167
The grand strategies that organisations identify for achieving their objectives have to be
implemented at both financial and operational level. These strategies have also been referred to as
annual tactics, associated with a specific business unit.
Functional strategies and action plans have to be formulated to ensure that all organisational units,
divisions, departments and project teams do what is required in order to implement the strategy
successfully.
The implementation process is not complete until short-term goals and action plans have been
formulated for each of the functional strategies identified.
The balanced scorecard management system was developed to assist organisations with clarifying
their strategies and translating them into action, and to provide meaningful feedback with regard to
their performance. The balanced scorecard enables managers to evaluate the organisation from four
perspectives:
1.
2.
3.
4.
Financial performance;
Customer knowledge;
Internal organisation processes; and
Learning and growth.
Figure 28 Topic 7 | Conclusion
Assessment SG168
1. Diagrammatically depict the position of the choice of a strategy in the strategic planning
process.
2. Explain what is meant by a “grand strategy”.
3. Describe, with examples, each of the grand strategies.
4. Explain and differentiate between growth, decline and corporate combination strategies.
5. Describe functional strategies and how these are related to grand strategies.
Table of Tables
Table 1 Organisational Profile | RBV Framework SG131/206 .................................................... 42
Table 2 Organisational Profile | Value Chain Framework SG131/206 ....................................... 42
Table 3 Organisational Profile | Functional Areas Framework SG131/206 .............................. 43
Table 4 Distinguishing features of the different generic strategies ..................................................... 83
Table 5 When each strategy is the best strategy to follow .................................................................. 84
Table 6 Advantages and potential pitfalls of each strategy .................................................................. 86
Table 7 Benefits and risks associated with diversification.................................................................... 93
Table of Figures
Figure 1 Learning Outcomes | Study Unit 1.1 ........................................................................................ 5
Figure 2 Learning Outcomes | Study Unit 1.2 ........................................................................................ 5
Figure 3 Learning Outcomes | Study Unit 1.3 ........................................................................................ 6
Figure 4 The Strategic Management Process SG46/206 ...................................................................... 9
Figure 5 The Strategic Planning Process SG48/206............................................................................ 10
Figure 6 The Hierarchy of Strategy Implementation p15 .................................................................... 15
Figure 7 Mindmap of Topic 1 ................................................................................................................... 19
Figure 8 Learning Outcomes | Study Unit 2.1 SG57/206 .................................................................... 23
Figure 9 Mindmap of Topic 2 - Setting Strategic Direction SG88/206 .............................................. 33
Figure 10 Learning Outcomes | Study Unit 3.1 SG 89/206 ................................................................. 34
Figure 11 Major Parties in Corporate Governance p91 ...................................................................... 36
Figure 12 Mindmap of Study Unit 3.1 | Corporate Governance in Strategic Management
sg106/206 ............................................................................................................................................ 39
Figure 13 Internal Environmental Analysis | Learning Outcomes .................................................... 44
Figure 14 The relationship between the components of internal analysis and strategic
competitiveness p111....................................................................................................................... 45
Figure 15 The relationship between SWOT and the environment analysis p112........................... 46
Figure 16 Resource-Based View | Learning Outcome SG117/206 .................................................... 47
Figure 17 Examples of different resources p115 ................................................................................. 48
Figure 18 The Resource-based Analysis Process ............................................................................... 50
Figure 19 Value chain analysis | Learning outcome SG124/206 ....................................................... 51
Figure 20 Value chain analysis | Mindmap SG 127/206 ...................................................................... 55
Figure 21 Components of the external environmental analysis p137 ............................................................. 58
Figure 22 The different environments of an organisation p138...................................................................... 59
Figure 23 Some of the elements of the macroenvironment p141 .................................................................. 60
Figure 24 The Five Forces model for industry analysis p150 ........................................................................... 67
Figure 25 The balanced scorecard SG153 ....................................................................................................... 77
Figure 26 The relationship between Porter's generic strategies and grand strategies p200 ........................... 90
Figure 27 The three groups of grand strategies p201 ..................................................................................... 91
Figure 28 Topic 7 | Conclusion ....................................................................................................................... 98