year 3 semester 2 - mypctbc.co.zamypctbc.co.za/het2016/bems/bachelor of business...

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BUSINESS ADMINISTRATION, MANAGEMENT &

COMMERCIAL SCIENCES

STRATEGIC MANAGEMENT 731

Year 3 Semester 2

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BUSINESS ADMINISTRATION, MANAGEMENT &

COMMERCIAL SCIENCES

STUDY GUIDE

MODULE: STRATEGIC MANAGEMENT 731

(2nd

SEMESTER)

Copyright © 2016

PC Training & Business College (Pty) Ltd

Registration Number: 2000/000757/07

All rights reserved; no part of this publication may be reproduced in any form or by any means, including photocopying machines,

without the written permission of the Institution.

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Table of Contents

TOPIC 1 .................................................................................................................................................. 20

STRATEGIC DIRECTION ...................................................................................................................... 20

1.1. INTRODUCTION ..................................................................................................................... 20

1.2 WHAT IS STRATEGIC LEADERSHIP? ....................................................................................... 21

1.2.1 Viewpoints on strategic leadership ................................................................................... 21

1.2.2 Components of Strategic Leadership ................................................................................ 22

1.2.3 Leadership Tasks ............................................................................................................... 24

1.2.4 Strategic Intelligence ......................................................................................................... 25

1.3 SETTING STRATEGIC DIRECTION: VISION, STRATEGIC INTENT AND MISSION ...................... 26

1.3.1 The vision statement ......................................................................................................... 26

1.3.2 The strategic Intent ........................................................................................................... 26

1.3.3 The mission statement ...................................................................................................... 27

1.3.4 Vision, Strategic Intent and Mission ................................................................................. 27

1.4 CONCLUSION ......................................................................................................................... 28

1.5 REVISION QUESTION ............................................................................................................. 28

TOPIC 2 .................................................................................................................................................. 29

CORPORATE GOVERNANCE AND STRATEGY ..................................................................................... 29

2.1 DEFINING CORPORATE GOVERNANCE .................................................................................. 29

2.2.THE MAJOR PARTIES IN CORPORATE GOVERNANCE .................................................................. 30

2.2.1 Responsibilities of the board of directors ......................................................................... 30

2.2.2 Stakeholder interests ........................................................................................................ 31

2.3 CORPORATE GOVERNANCE AND STRATEGY ......................................................................... 33

2.4 CORPORATE GOVERNANCE IN SOUTH AFRICA ..................................................................... 34

2.4.1 The King I Report on Corporate Governance .................................................................... 37

2.4.2 The King II Report on Corporate Governance ................................................................... 37

2.4.3 The King III Report on Corporate Governance .................................................................. 38

2.5 CONCLUSION ......................................................................................................................... 39

2.6 REVISION QUESTIONS ........................................................................................................... 39

Corporate governance highlights of MTN SOUTH AFRICA .................................................................... 40

TOPIC 3 .................................................................................................................................................. 46

INTERNAL ENVIRONMENT ANALYSIS ................................................................................................ 46

3.1 INTRODUCTION ..................................................................................................................... 47

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3.2 THE IMPORTANCE AND CHALLENGE OF INTERNAL ANALYSIS .............................................. 48

3.3 SWOT ANALYSIS .................................................................................................................... 49

3.4 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY DEVELOPMENT ......................................... 51

3.4.1 Resource-based view(RBV) ............................................................................................... 51

3.4.2 Resources .......................................................................................................................... 52

3.4.3 Capabilities ........................................................................................................................ 53

3.4.4 Value chain analysis (VCA) ................................................................................................ 55

3.4.5.Functional approach ................................................................................................................ 60

3.4.6.The internal factor evaluation matrix ...................................................................................... 61

3.5 Significance of Environmental analysis ................................................................................. 62

3.6 IDEAS IN PRACTICE ................................................................................................................ 64

3.7 CONCLUSION ......................................................................................................................... 70


TOPIC 4 .................................................................................................................................................. 74

EXTERNAL ENVORONMENT ANALYSIS .............................................................................................. 74

4.1 INTRODUCTION ..................................................................................................................... 74

4.2 THE EXTERNAL ENVIRONMENT ............................................................................................. 76

4.2.1 The South Africa environmental context .......................................................................... 63

4.3 THE MACRO ENVIRONMENT ................................................................................................. 63

4.3.1 Political environment ........................................................................................................ 64

4.3.2 Economic environment ..................................................................................................... 65

4.3.3 Sociocultural environment ................................................................................................ 66

4.3.4 Technological environment .............................................................................................. 67

4.3.5 Ecological environment ..................................................................................................... 67

4.4 INDUSTRY ENVIRONMENT .................................................................................................... 69

4.4.1 Threat of new entrants ..................................................................................................... 70

4.4.2 Bargaining power of suppliers .......................................................................................... 72

4.4.3 Bargaining power of buyer ................................................................................................ 72

4.4.4 Threat of substitution products ........................................................................................ 73

4.4.5 Rivalry among competing organization ............................................................................ 73

4.4.6 Limitations of Porter’s Five Forces Model ........................................................................ 75

4.4.7 Key factors for success in the industry.............................................................................. 75

4.5 THE EXTERNAL FACTOR EVALUATION MATRIX ..................................................................... 77

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4.6 CONCLUSION ......................................................................................................................... 77

TOPIC 5 .................................................................................................................................................. 83

STRATEGY FORMULATION LONG-TERM GOALS ............................................................................... 83

5.1 INTRODUCTION ..................................................................................................................... 83

5.2 LONG-TERMS GOALS ............................................................................................................. 84

5.3 COMPETITIVE ADVANTAGE ................................................................................................... 86

5.4 GENERIC COMPETITIVE STRATEGIES ..................................................................................... 87

5.4.1 Cost Leadership ................................................................................................................. 87

5.4.2 DIFFERENTIATION ............................................................................................................. 91

5.5 FOCUS STRATEGY .................................................................................................................. 93

5.6 BEST-COST STRATEGY ........................................................................................................... 95

5.7 CRITICISM AGAINST THE GENERIC STRATEGY FRAMEWORK................................................ 96

5.8 CONCLUSION ......................................................................................................................... 97


TOPIC 6 .................................................................................................................................................. 98

GRAND AND FUNCTIONAL STRATEGIES ............................................................................................ 98

6.1 INTRODUCTION ..................................................................................................................... 98

6.2 GRAND STRATEGIES .............................................................................................................. 99

6.2.1.2 Market Development ...................................................................................................... 100

6.2.1.3 Product development ..................................................................................................... 100

6.2.1.4 Innovation ....................................................................................................................... 101

6.2.2 External growth strategies .............................................................................................. 102

6.2.2.1 Diversification ................................................................................................................. 102

6.2.2.2 Integration ...................................................................................................................... 104

6.2.3 DECLINE STRATEGIES ...................................................................................................... 106

6.2.4 CORPORATE COMBINATION STRATEGIES ....................................................................... 108

6.3 COMBINATION OF GRAND STRATEGIES ............................................................................. 109

6.4 FUNCTIONAL STRATEGIES ................................................................................................... 110

6.5 CONCLUSION ....................................................................................................................... 110

6.6 Revision Questions .............................................................................................................. 111

TOPIC 7 .................................................................................................................................................. 84

STRATEGIC ANALYSIS AND CHOICE ................................................................................................... 84

7.1 INTRODUCTION ..................................................................................................................... 84

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7.2 STRATEGY ANALYSIS FRAMEWORK ....................................................................................... 84

7.3 THE THREE STRATEGIC ANALYSIS MATRIXES ........................................................................ 79

7.3.1 The SWOT Matrix .............................................................................................................. 79

7.3.2 The SPACE Matrix .............................................................................................................. 79

7.3.3 The Grand Strategy Matrix ................................................................................................ 80

7.4 FINAL STRATEGIC CHOICE/DECISION .................................................................................... 81

7.5 CONCLUSION ......................................................................................................................... 82

ADDENDUM 731: ASSIGNMENT QUESTION ....................................................................................... 138

PREFACE

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1. WELCOME

Welcome to the Business Administration, Management & Commercial Sciences at Richfield

Graduate Institute of Technology. We trust you will find the contents and learning outcomes

of this module both interesting and insightful as you begin your academic journey and

eventually your career in the business world. This section of the study guide is intended to

orientate you to the module before the commencement of formal lectures.

Please note that this study guide covers the content for the Business Management module

of the Bachelor of Business Administration Programme NQF level 7, your lecturers will

provide further guidance and additional study materials covering parts of the syllabi that

may have been omitted from this study guide.

The following study units will be covered:

WELCOME & ORIENTATION

Study unit 1: Orientation Programme

Introducing academic staff to the learners by academic head.

Introduction of institution policies.

Lecture 1

Study unit 2: Orientation of Learners to Library and Students

Facilities

Introducing learners to physical structures

Issuing of foundation learner guides and necessary learning material

Lecture 2

Study unit 3: Uploading of Strategic

Management 731 learner guide and orientation on prescribed

textbooks.

Materials

Lecture 3

Study unit 4: Discussion on the Objectives and Outcomes of

Strategic Management 731

Lecture 4

Study unit 5: Orientation and guidelines to completing

Assignments

Review and Recap of Study units 1-4

Lecture 5

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2. TITLE OF MODULES, CODE, NQF LEVEL, CREDITS & MODE OF DELIVERY

1ST Semester

BACHELOR OF BUSINESS

ADMINISTRATION

Title of Module:

Code:

NQF Level: Credits:

Mode of Delivery:

Strategic Management 731

BBA Strat Man 731

NQF 7; 15

Contact & Distance

Contact

3. PURPOSE OF MODULE

3.1 Strategic Management 731

To prepare the learner to understand the barriers to strategy implementation and Implement

bench marking, TQM and re-engineering as tools of a strategic plan that was formulated and

completed in business plan for an organization

3.2 Business Management 731

The purpose of the module guide: To help students with the development of strategic

management techniques; by identify problems and formulate solutions in the form of

scientific strategic plans; the product life cycle; the competitive strategic structure; product

portfolio analysis; new product strategy development; innovations including the role of R and

D; and strategy pioneering. Key relationships and global strategies are building a value mix,

planning and control. However, students are encouraged to read prescribed and

recommended books in order to get more details and depth understanding of the subject.

4. LEARNING OUTCOMES

On completion of this module the student will be able to:

Demonstrate sound knowledge and understanding on the various barriers to

strategy implementation.

Identify and analyze the drivers of strategy implementation.

Design and develop the most suitable structure for a particular business type

Draw improvement plans to effectively control an organization after

formulation and implementing a particular strategy

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Implement bench marking, TQM and re-engineering as tools of a strategic plan

that was formulated and completed.

5. METHOD OF STUDY

Only the key sections that have to be studied are indicated under each topic in this study

guide are expected to have a thorough working knowledge of the prescribed text book. These

form the basis for tests, assignments and examinations. To be able to do the activities and

assignments for this module, and to achieve the learning outcomes and ultimately to be

successful in the tests and examination, you will need an in-depth understanding of the

content of these sections in the learning guide and the prescribed books. In order to master

the learning material, you must accept responsibility for your own studies. Learning is not

the same as memorizing. You are expected to show that you understand and are able to apply

the information. Use will also be made of lectures, tutorials, case studies and group

discussions to present this module.

6. LECTURES AND TUTORIALS

Learners must refer to the notice boards on their respective campuses for details of the

lecture and tutorial time tables. The lecturer assigned to the module will also inform you of

the number of lecture periods and tutorials allocated to a particular module. Prior

preparation is required for each lecture and tutorial. Learners are encouraged to actively

participate in lectures and tutorials in order to ensure success in tests, group discussions,

assignments and examinations.

7. NOTICES

All information pertaining to this module such as tests dates, lecture and tutorial time

tables, assignments, examinations etc. will be displayed on the notice board located at your

campus. Learners must check the notice board on a daily basis. Should you require any

clarity, please consult your lecturer, programme manager or administrator of your respective

campus.

8. PRESCRIBED & RECOMMENDED MATERIAL

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8.1 Prescribed Material

Ehlers, T. and Lazenby, K. 2014. Strategic Management: Southern African concepts and cases

3rd ed. Pretoria. Van Schaik Publishers.

8.2 Recommended material

Ehlers, T. and Lazenby, K. 2008. Strategic Management: Southern African concepts and

cases. 3rd ed. Pretoria. Van Schaik Publishers.

Smit, P., J., Cronje, G.J., Brevis, T. and Vrba, M., J. 2013. Management Principles: A Contemporary

edition for Africa. 5th ed. Cape Town. Juta & Company Ltd

8.3 Library Infrastructure

The following services are available to you:

8.3.1 Each campus keeps a limited quantity of the recommended reading titles and a larger

variety of similar titles which you may borrow. Please note that learners are required

to purchase the prescribed materials.

8.3.2 Arrangements have been made with municipal, state and other libraries to stock our

recommended reading and similar titles. You may use these on their premises or

borrow them if available. It is your responsibility to safe keep all library books.

8.3.3 PCT&BC has also allocated one library period per week as to assist you with your

formal research under professional supervision.

8.3.4 PCT&BC has dedicated electronic libraries for use by its learners. The computers

laboratories, when not in use for academic purposes, may also be used for research

purposes. Booking is essential for all electronic library usage.

9. ASSESSMENT

Final Assessment for this module will comprise two Continuous Assessment Tests, an

assignment and an examination. Your lecturer will inform you of the dates, times and the

venues for each of these. You may also refer to the notice board on your campus or the

Academic Calendar which is displayed in all lecture rooms.

9.1 Continuous Assessment Tests

There are two compulsory tests for each module (in each semester).

9.2 Assignment

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There is one compulsory assignment for each module in each semester. Your lecturer will

inform you of the Assignment questions at the commencement of this module.

9.3 Examination

There is one two hour examination for each module. Make sure that you diarize the correct

date, time and venue. The examinations department will notify you of your results once all

administrative matters are cleared and fees are paid up.

The examination may consist of multiple choice questions, short questions and essay type

questions. This requires you to be thoroughly prepared as all the content matter of lectures,

tutorials, all references to the prescribed text and any other additional

documentation/reference materials is examinable in both your tests and the examinations.

The examination department will make available to you the details of the examination

(date, time and venue) in due course. You must be seated in the examination room 15

minutes before the commencement of the examination. If you arrive late, you will not be

allowed any extra time. Your learner registration card must be in your possession at all

times.

9.4 Final Assessment

The final assessment for this module will be weighted as

follows:

Assessment Test 1

Assessment Test 2

Assignment 1 40%

Examination 60%

Total 100%

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9.5 Key Concepts in Assignments and Examinations

In assignment and examination questions you will notice certain key concepts (i.e.

Words/verbs) which tell you what is expected of you. For example, you may be asked in a

question to list, describe, illustrate, demonstrate, compare, construct, relate, criticize,

recommend or design particular information / aspects / factors /situations. To help you to

know exactly what these key concepts or verbs mean so that you will know exactly what is

expected of you, we present the following taxonomy by Bloom, explaining the concepts

and stating the level of cognitive thinking that theses refer to.

Competence

Skills Demonstrated

Knowledge

observation and recall of information knowledge of dates, events, places

knowledge of major ideas mastery of subject matter

Question

Cues

list, define, tell, describe, identify, show, label, collect, examine,

tabulate, quote, name, who, when, where, etc.

Comprehension

understanding information grasp meaning translate knowledge into new

context interpret facts, compare, contrast order, group, infer causes

predict consequences

Question

Cues

summarize, describe, interpret, contrast, predict,

associate,

distinguish, estimate, differentiate, discuss, extend

Application

use information,use methods, concepts, theories in new situations solve

problems using required skills or knowledge

Questions

Cues

apply, demonstrate, calculate, complete, illustrate, show, solve,

examine, modify, relate, change, classify, experiment, discover

Analysis

seeing patterns

organization of parts

recognition of hidden meanings identification of components

Question

Cues

analyze, separate, order, explain, connect, classify, arrange, divide,

compare, select, explain, infer

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Synthesis use old ideas to create new ones, generalize from given facts, relate

knowledge from several areas predict, draw conclusions

Question

Cues

combine, integrate, modify, rearrange, substitute, plan, create,

design, invent, what if?, compose, formulate, prepare, generalize,

rewrite

Evaluation

compare and discriminate between ideas, assess value of theories,

presentations make choices based on reasoned argument, verify value

of evidence recognize subjectivity

Question

Cues

assess, decide, rank, grade, test, measure, recommend, convince,

select, judge, explain, discriminate, support, conclude, compare,

summarize

10. WORK READINESS PROGRAMME (WRP)

In order to prepare learners for the world of work, a series of interventions over and above

the formal curriculum, are concurrently implemented to prepare learners. These include:

Soft skills

Employment skills

Life skills

End –User Computing (if not included in your curriculum)

The illustration below outlines some of the key concepts for Work Readiness that will be

included in your timetable.

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It is in your interest to attend these workshops, complete the Work Readiness Log Book and

prepare for the Working World.

WORK READINESS

PROGRAMME

SOFT SKILLS

Time Management

Working in Teams

Problem Solving Skills

Attitude & Goal Setting

Etiquettes & Ethics

Communication Skills

LIFE SKILLS

Manage Personal Finance

Driving Skills

Basic Life Support & First Aid

Entrepreneurial skills

Counselling skills

EMPLOYMENT SKILLS

CV Writing

Interview Skills

Presentation Skills

Employer / Employee Relationship

End User Computing Email & E-Commerce Spread Sheets Data base Presentation Office Word

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11. WORK INTEGRATED LEARNING (WIL)

Work Integrated Learning forms a core component of the curriculum for the completion of

this programme. All modules making of the Bachelor of Business Adminsitration will be

assessed in an integrated manner towards the end of the programme or after completion of

all other modules. Prerequisites for placement with employers will include:

Completion of all tests & assignment

Success in examination

Payment of all arrear fees

Return of library books, etc.

Completion of the Work Readiness Programme.

Learners will be fully inducted on the Work Integrated Learning Module, the Workbooks and

assessment requirements before placement with employers.

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The partners in Work Readiness Programme (WRP) include:

Good luck and success in your studies…

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Registered with the

Department of Higher Education as a Private Higher Education Institution under the Higher Education Act, 1997. Registration

Certificate No. 2000/HE07/008

BUSINESS ADMINISTRATION, MANAGEMENT & COMMERCIAL

SCIENCES

QUALIFICATION TITLE:

BACHELOR OF BUSINESS ADMINISTRATION

LEARNER GUIDE

MODULE: STRATEGIC MANAGEMENT 731 (1ST Semester)

TOPIC 1: STRATEGIC DIRECTION

TOPIC 2: CORPORATE GOVERNANCE AND STRATEGY

TOPIC 3: INTERNAL ENVIRONMENT ANALYSIS

TOPIC 4: EXTERNAL ENVIRONMENT ANALYSIS

TOPIC 5: STRATEGY FORMULATION

TOPIC 6: STRATEGIC ANALYSIS OF GRAND & FUNCTIONAL

STRATEGIES

TOPIC 7: STRATEGIC IMPLEMENTATION, MONITORING & EVALUATION

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INTERACTIVE ICONS USED IN THIS LEARNER GUIDE

Learning Outcomes Study

Read

Writing Activity

Think Point

Research

Glossary

Key Point

Review Questions

Case Study

Bright Idea

Problem(s)

Multimedia Resource

Web Resource

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TOPIC 1

STRATEGIC DIRECTION

LEARNING OUTCOMES

After studying this topic, you should be able to

Analyse strategic leadership & understand the strategic management process

Distinguish between the great leader view and the great groups view of strategy

Evaluate the components of strategic leadership

Understand and apply strategic intelligence

Synthesise leadership tasks that are emerging as priorities

Understand when to apply the first step in the strategic management process

Evaluate the vision statement, the strategic intent, the mission statement as ways

to set strategic direction.

Study

Study Ehler and Lazenby (2010:57-80) or any relevant literature &

determine the elements of the strategic management process and

the factors that influence strategic direction of the company.

1.1. INTRODUCTION

Strategic leadership is needed in a world where competition for success in the business

environment is very challenging. The world in which we live has changed so radically in the

past few decades that the factors and competencies that made an organisation successful in

the past do not guarantee success in the future. On the contrary, they might even lead to its

downfall. Strategic leadership will help stabilize organizations and will ultimately be possible

if strategic intelligence is determined and improved where necessary. Strategic intelligence is

a subset of strategic leadership. A better strategic intelligence will lead to a better strategic

leadership. This chapter helps to explain strategic leadership and its relationship with strategic

intelligence , distinguish between the great leader view and the great groups view of strategy,

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know the components of strategic leadership, Understand and apply strategic intelligence

Discuss the six leadership tasks that are emerging as priorities, Know how to set strategic

direction, which is the first step in the strategic management process Understand and discuss

the vision statement, the strategic intent, the mission statement as ways to set strategic

direction.

1.2 WHAT IS STRATEGIC LEADERSHIP?

Strategic Leadership is defined as “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 organization. It has the following elements

Flexibility

Strategic thinking

Initiation of change

Strategic leadership emanated from two schools of thought which are the “great leader view

of strategic leadership” orientation in the 1960’s and 1970’s to the ‘great group view of

strategic leadership” orientation in the 21st century discussed as follows.

1.2.1 Viewpoints on strategic leadership

1.2.1.1 The Great Leader View of Strategic Leadership

According to this school of thought, in the past a handful of CEO’S were of the opinion that

strategic decision making is their responsibility alone. It resulted in a top- down management

style which resulted in good management of uncertainty because the environments were

fairly predictable and stable. Due to the change of time and the dynamics of the business

environment, single individuals no longer had all the insights and direction to successfully

manage the company’s direction. Having all companies’ decision making in an individual or

group of people is no more effective and in the long run counterproductive. Senior

management now realizes that they don’t have answers to all the question’s posed to them

by business challenges created by the global economic turbulence and they are willing to learn

together with others to tackle the challenges. This now led to the emergence of the second

school of thought.

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1.2.1.2 The Great group view of strategic Leadership

The nature of organization in the 21st century is quite different. The organization is not

regarded as a piece of property that belongs to the shareholders anymore, but it’s rather seen

as a community. In the organizational community the strategic leadership is distributed

amongst diverse individuals who have a shared responsibility to secure a viable future for the

organization. Many “citizens” will serve their “community” as leaders. The combination of

these organizational citizens is known as “great groups”. The most important “great group”

in the organization is the top management team which consists of relatively small group of

executives (between 3-10 people).This group is formed by the CEO, represents the high point

of the organization and provides strategic leadership.

Due to the change in the business landscape, the collective intellect of a top management

team is needed for effective leadership in a company. The large number of organizational

stakeholders and the global economy has created the need for a top management team to

exercise strategic leadership effectively. The CEO remains the top leader but must make the

most of the different sets of knowledge and skills to manage and lead the company

successfully. 21st century strategic leadership is therefore implemented by means of

interactions in which knowledge, insights and responsibilities for achieved outcomes are

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

organization.

1.2.2 Components of Strategic Leadership

1.2.2.1 Determining the company’s purpose or vision

The task of determining the direction of the company still lies with the CEO. The CEO works

together with the top management team and must provide general guidelines as to where

the company is heading towards and what the major steps are that needs to be taken to reach

this position.

1.2.2.2 Exploiting and maintaining core competence

The resources that ensure a competitive advantage over the rivals of the organization are

known as core competencies. Core competences have become the basis of the new

competitive land-scape on which organizations build their long-term strategies. The ability to

develop and take advantage of core competencies will have a significant impact on the

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organization’s success in the 21st century.

1.2.2.3 Developing human capital

This entails the knowledge and skills of an organization’s work force. Strategic leaders are the

ones that view the workforce as a critical resource on which many core competencies are built

and through which competitive advantages become a reality. Companies should be willing to

invest in their human capital in order to derive the full competitive benefit.

1.2.2.4 Sustaining an effective organizational culture

Organizational culture refers to the complex set of ideologies, symbols and core values that

are shared throughout the organization. It’s believed that it is not the technical and rational

issues that may constitute the challenge in an organization, but the organizational culture.

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

organizational culture. The culture is rooted in the history of the organization and it reflects

what the organization has learned overtime because of its response to continuous challenges

of survival and growth. Culture influences the way in which a company carries out its business

and can become a competitive advantage. Strategic leaders who are capable of learning how

to shape the organizational culture in a competitively relevant way will become valued

sources of competitive advantage.

1.2.2.5 Emphasizing ethical practices

Top management influences the company’s ethical practices and outcomes. Ethical practices

are the moral filter that evaluates potential course of action. Effective strategic leaders will

base their decision on honesty, trust and integrity. Strategic leaders who display these

qualities will be inspirational leaders to their employees and will be able to develop an

organizational culture in which ethical practices are the behavioral norm rather than the

exception.

1.2.2.6 Establishing balanced organizational control

Controls are needed to guide work in such a way that performance goals are reached. The

opportunities presented by the new competitive landscape are addressed more effectively by

means of innovation and creativity. Strategic leaders who are able to establish controls that

still allow for flexible, innovative employee behavior will ensure a competitive premium for

their companies.

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1.2.3 Leadership Tasks

Abell (2006:311) views the primordial task of leadership as the strategic one of moving the

company towards the future. He identified six leadership tasks that are emerging as priorities.

1.2.3.1 Recognize the dual nature of strategy (short term as well as long term)

Companies should balance today-for-today strategies (short-term orientation), in which

existing resources and competencies are deployed, with today-for-tomorrow strategies (long-

term orientation) that will carry them into the future.

1.2.3.2 Start with vision, mission and distinctive profile

Previously, business success was related to running the business well rather than changing it,

and business definition was regarded as the starting point of strategic planning. The

accelerating pace of change has, however, “changed” that viewpoint. Today it is rather the

companies and leaders who have a clear vision of the company they are trying to create, a

clear sense of mission and a clear sense of their distinctive profile In terms of the competition

that will create a clear-cut framework for strategy definition and action.

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

Resource-based strategic thinking was more appropriate in the past, less dynamic market in

which resource and competence building provided the necessary muscle power to win the

battles. In today’s changing markets, competencies and resource (the “can”) have to be

closely aligned with future opportunities (the “could”).Simply defining opportunities, even

though this is necessary, is still not sufficient. In rapidly changing environments that the vision

and mission are high priority and what managers ”want” to create, as well as what they

“should” create from the point of view of being a responsible part of society, become equally

important in the strategic equation. The “can” and “could” are toned down by the “want” and

“should”.

1.2.3.4 Focus on strategy as being the alignment between the external and the internal

worlds of the company.

Leaders have to work on two kinds of strategic alignment 1): upstream alignment. This entails

the alignment of the core strategy with the outside world e.g. the competitive environment

of the industry, and 2): the down-stream alignment which is the alignment of the internal

organization with the changing core strategy.

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1.2.3.5 Competing through business system, not through businesses

Creating value for the customer does not happen by means of a single business entity but by

means of the system (the vertical business chain) as a whole. Organizations in which supply

chain management is still regarded primarily as a logistics concept closely linked to IT strategy,

in which the leader’s task is to reduce time delays and reduce unnecessary inventory buffers

and to make the order-to-delivery process more efficient, miss out on the important

leadership task of developing partnerships between the key actors in the supply chain. This

coordination between all the elements in the value –creating process will then lead to the

creation of higher value but will also lower costs.

1.2.3.6 Recognise that there is a growing decentralization of strategy-making and leadership

This decentralization has to be accompanied by new managerial frameworks and assistance

from the top. The leadership task is thus twofold. On the one hand, entrepreneurial initiative

from below should be encouraged, but on the other hand, the task is to create the leadership

culture, systems and approaches from above which will help decentralized leadership to do

well.

1.2.4 Strategic Intelligence

Strategic intelligence (STRATINT) pertains to the collection, processing, analysis, and

dissemination of intelligence that is required for forming policy and military plans at the

national and international level. Most but not all of the information needed for strategic

reflections comes from Open Source Intelligence Strategic intelligence pertains to the

following system of abilities which characterize some of the most successful leaders in business

and government:

foresight, the ability to understand trends that present threats or opportunities for an

organization;

visioning, the ability to conceptualize an ideal future state based on foresight and create

a process to engage others to implement it;

System thinking, the ability to perceive, synthesizes, and integrates elements that

function as a whole to achieve a common purpose.

Motivating, the ability to motivate different people to work together to implement a

vision. Understanding what motivates people is based upon ability, personality

intelligence.

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Partnering, the ability to develop strategic alliances with individuals, groups and

organizations. This quality also depends on personality intelligence

Study

Study Ehler and Lazenby (2010:67-68) or any

relevant literature & determine the factors that

influence the vision, strategic intent & mission

statement of Massmart.

Writing Activity

1.3 SETTING STRATEGIC DIRECTION: VISION, STRATEGIC INTENT AND MISSION

Setting strategic direction is the first step in the strategic management process. Organizations

set strategic direction in different ways. Two of the most used tools are Vision and mission

statements. Recently strategic intent has been introduced as another way of setting strategic

direction. The use of the vision, mission statement and strategic intent differs from

organization to organization. Some may prefer to use one statement, others may prefer to

use two or all of the three for their strategic planning process.

1.3.1 The vision statement

This is the first step in the strategic management and formulation process. It answers the

question “what do we want to become?” and serves as the road map of the organization. The

vision statement serves different functions. Firstly, it provides focus and direction; it provides

a way for managers to integrate a wide variety of goals, dreams, challenges and ideas into

one theme. It’s also the foundation for a mission statement, long term goals and strategy-

selection decisions.

1.3.2 The strategic Intent

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

ambitious goal that stretches the organization and focuses on winning in the long run.

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

efforts. It answers the question “what do we want to become”. It focuses on the distant

future; it leaves room for flexibility in terms of the short-term actions required for the

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achievement of the goal. It has three distinct attribute which are:

a) Sense of direction: - This implies a view of the future, specifically about the long-term

market or competitive position that a company hopes to build.

b) Sense of discovery: - This means a differentiated point of view about the future. It is a

promise to employees that new competitive territories will be explored.

c) Sense of destiny:- The emotional edge of strategic intent relates

Strategic intent can, like a vision statement, be a basis for a mission statement.

1.3.3 The mission statement

A mission statement is often derived from the vision or strategic intent to deal with the

question: “what is our business”. As an important part of the strategic management process,

the mission statement comprises various components and strives to address the interest of

the organization’s stakeholders. Some of the components are product /service, technology,

market, growth, profitability, quality, customer etc.

Study

Study Ehler and Lazenby (2010:68-72) or any relevant

literature & evaluate the relationship between vision

statements, the strategic intent, the mission statement

as ways to set strategic direction of the company.

1.3.4 Vision, Strategic Intent and Mission

Vision statement and mission statement are two different statements that address different

issues. The vision statement focuses on the future, something better whereas the mission

statement focuses on the present and reality. Strategic intent contains element of both the

vision and the mission. On the one hand, it focuses on a future goal, and also loses its power

once achieved. On the other hand, it focuses on the purpose and strategy of the organization.

An organization’s vision or mission statement can include the organization’s strategic intent.

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Writing activity

As a young entrepreneur, create a company for yourself and identify

the vision statement, mission statement and the strategic intent for

your new company.

1.4 CONCLUSION

Whichever statement organization decides to use to set strategic direction, it should be

unique and reflect the culture of the organization. It should address the stakeholder concern’s

and be communicated to all stakeholders. To ensure successful strategy implementation, it is

necessary for organizations to set a strategic direction that is practicable, realistic and can be

implemented.

1.5 REVISION QUESTION

Read the case studies from page 81-86 to answer the questions that

follows:

1. Analyse each mission statement in terms of its components.

2. Does each mission statement cover all the components?

3. Suggest reasons why some mission statements do not cover all the components?

4. Why in your opinion, have many of the companies cited in these case studies included

their values as part of their strategic direction?

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TOPIC 2

CORPORATE GOVERNANCE AND STRATEGY

LEARNING OUTCOMES


Define “corporate governance”

Analyse the link between corporate governance and strategy

Explain the initiatives taken in South Africa to ensure good corporate governance

in organizations.

Evaluate the applicability of the principles of good corporate governance as set

out in the King Reports (I; II; III) on corporate governance.

Study

Study Ehler and Lazenby (2010:90-94) or any relevant literature &

determine whether corporate governance is just a myth of reality

also distinguish between corporate governance and ethics.

Make own notes based on your findings

2.1 DEFINING CORPORATE GOVERNANCE

The system of rules, practices and processes by which a company is directed and controlled.

Corporate governance essentially involves balancing the interests of the many stakeholders

in a company - these include its shareholders, management, customers, suppliers, financiers,

government and the community. Since corporate governance also provides the framework

for attaining a company's objectives, it encompasses practically every sphere of management,

from action plans and internal controls to performance measurement and corporate

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disclosure. Corporate governance has also been defined as "a system of law and sound

approaches by which corporations are directed and controlled focusing on the internal and

external corporate structures with the intention of monitoring the actions of management

and directors and thereby, mitigating agency risks which may stem from the misdeeds of

corporate officer.

2.2.THE MAJOR PARTIES IN CORPORATE GOVERNANCE

Key parties involved in corporate governance include stakeholders such as the board of

directors, management and shareholders. External stakeholders such as creditors, auditors,

customers, suppliers, government agencies, and the community at large also exert influence.

The agency view of the corporation posits that the shareholder forgoes decision rights

(control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as

a result of this separation between the two investors and managers, corporate governance

mechanisms include a system of controls intended to help align managers' incentives with

those of shareholders. Agency concerns (risk) are necessarily lower for a controlling

shareholder.

2.2.1 Responsibilities of the board of directors

Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board is

responsible for the successful perpetuation of the corporation. That responsibility cannot be

relegated to management." A board of directors is expected to play a key role in corporate

governance. The board has responsibility for: CEO selection and succession; providing

feedback to management on the organization's strategy; compensating senior executives;

monitoring financial health, performance and risk; and ensuring accountability of the

organization to its investors and authorities. Boards typically have several committees (e.g.,

Compensation, Nominating and Audit) to perform their work

The responsibilities of the board; some are summarized below:

Board members should be informed and act ethically and in good faith, with due

diligence and care, in the best interest of the company and the shareholders.

Review and guide corporate strategy, objective setting, major plans of action, risk

policy, capital plans, and annual budgets.

Oversee major acquisitions and divestitures.

http://en.wikipedia.org/wiki/Controlling_interest

http://en.wikipedia.org/wiki/Controlling_interest

http://en.wikipedia.org/wiki/General_Motors

http://en.wikipedia.org/wiki/Board_of_directors

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Select, compensate, monitor and replace key executives and oversee succession

planning.

Align key executive and board remuneration (pay) with the longer-term interests of

the company and its shareholders.

Ensure a formal and transparent board member nomination and election process.

Ensure the integrity of the corporations accounting and financial reporting systems,

including their independent audit.

Ensure appropriate systems of internal control are established.

Oversee the process of disclosure and communications.

Where committees of the board are established, their mandate, composition and

working procedures should be well-defined and disclosed.

2.2.2 Stakeholder interests

All parties to corporate governance have an interest, whether direct or indirect, in the

financial performance of the corporation. Directors, workers and management receive

salaries, benefits and reputation, while investors expect to receive financial returns. For

lenders, it is specified interest payments, while returns to equity investors arise from dividend

distributions or capital gains on their stock. Customers are concerned with the certainty of

the provision of goods and services of an appropriate quality; suppliers are concerned with

compensation for their goods or services, and possible continued trading relationships. These

parties provide value to the corporation in the form of financial, physical, human and other

forms of capital. Many parties may also be concerned with corporate social performance.

A key factor in a party's decision to participate in or engage with a corporation is their

confidence that the corporation will deliver the party's expected outcomes. When categories

of parties (stakeholders) do not have sufficient confidence that a corporation is being

controlled and directed in a manner consistent with their desired outcomes, they are less

likely to engage with the corporation. When this becomes an endemic system feature, the

loss of confidence and participation in markets may affect many other stakeholders, and

increases the likelihood of political action. There is substantial interest in how external

systems and institutions, including markets, influence corporate governance.

2.2.2.1 Control and ownership structures

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http://en.wikipedia.org/wiki/Corporate_social_responsibility

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Control and ownership structure refers to the types and composition of shareholders in a

corporation. In some countries such as most of Continental Europe, ownership is not

necessarily equivalent to control due to the existence of e.g. dual-class shares, ownership

pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer

additional voting rights to long-term shareholders. Ownership is typically defined as the

ownership of cash flow rights whereas control refers to ownership of control or voting rights.

Researchers often "measure" control and ownership structures by using some observable

measures of control and ownership concentration or the extent of inside control and

ownership. Some features or types of control and ownership structure involving corporate

groups include pyramids, cross-shareholdings, rings, and webs. German "concerns" (Konzern)

is legally recognized corporate groups with complex structures. Japanese keiretsu and South

Korean chaebol (which tend to be family-controlled) are corporate groups which consist of

complex interlocking business relationships and shareholdings. Cross-shareholding is an

essential feature of keiretsu and chaebol groups. Corporate engagement with shareholders

and other stakeholders can differ substantially across different control and ownership

structures.

2.2.2.2 Family control

Family interests dominate ownership and control structures of some corporations, and it has

been suggested the oversight of family controlled corporation is superior to that of

corporations "controlled" by institutional investors (or with such diverse share ownership that

they are controlled by management). A recent study by Credit Suisse found that companies

in which "founding families retain a stake of more than 10% of the company's capital enjoyed

a superior performance over their respective sectorial peers." Since 1996, this superior

performance amounts to 8% per year. Forget the celebrity CEO. "Look beyond Six Sigma and

the latest technology fad. One of the biggest strategic advantages a company can have is

blood ties," according to a Business Week study.

2.2.2.3 Diffuse shareholders

The significance of institutional investors varies substantially across countries. In developed

Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors

dominate the market for stocks in larger corporations. While the majority of the shares in the

http://en.wikipedia.org/wiki/Corporate_group

http://en.wikipedia.org/wiki/Corporate_group

http://en.wikipedia.org/wiki/Cross_ownership

http://en.wikipedia.org/wiki/Keiretsu

http://en.wikipedia.org/wiki/Chaebol

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Japanese market are held by financial companies and industrial corporations, these are not

institutional investors if their holdings are largely with-on group. The largest pools of invested

money (such as the mutual fund', or the largest investment management firm for

corporations, are designed to maximize the benefits of diversified investment by investing in

a very large number of different corporations with sufficient liquidity. The idea is this strategy

will largely eliminate individual firm financial or other risk and. A consequence of this

approach is that these investors have relatively little interest in the governance of a particular

corporation. It is often assumed that, if institutional investors pressing for will likely be costly

because of "golden handshakes" or the effort required, they will simply sell out their interest.

2.3 CORPORATE GOVERNANCE AND STRATEGY

Traditionally, strategic management focused on formulating the most competitive strategy,

in other words the strategy that would lead to the best profits. However, focusing on

corporate governance and the mindset of corporate citizenship means that an organization

has to think differently about selecting the optimal strategy. Corporate governance is critical

in the strategic management process with regard to the following areas:

a) Formulation

Setting direction in terms of the broader principles of economics, social and

environmental performance

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

business aims, practices and general conduct

Considering organizational risks when determining strategic goals

Setting clear, transparent, attainable and measurable goals

Determining strategies that benefit all stakeholders

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

b) Implementation

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

implementation

Developing specific, measurable action plans

Measuring the triple bottom line

c) Control and evaluation

http://en.wikipedia.org/wiki/Liquidity

http://en.wikipedia.org/wiki/Financial_risk

http://en.wikipedia.org/wiki/Golden_handshake

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

implementation

Determining checks and balances for strategy control

Ensuring that executives are appropriately penalized or rewarded for failure or

success.

2.4 CORPORATE GOVERNANCE IN SOUTH AFRICA

According to Malherbe, et al. (2007) by the late 1980s, many of South Africa’s corporations

were bloated, unfocused and run by entrenched and complacent managers. These firms were

sustained and tolerated by a very different environment from that in advanced economies

and capital markets. The mainstay of the South African environment was isolation. Tariffs and

political isolation shielded firms from foreign product competition, while financial sanctions

kept international institutions out of the domestic capital market, and South African firms out

of international capital markets. Corporate practices fell behind international norms, as did

laws and regulations.

In 2001, little of that comfortable, introverted world remains. With political reform,

engagement and change have replaced isolation and stasis. South African corporations, their

managers and domestic shareholders have been exposed, in succession, to a new political

system, rapid trade liberalization, demanding international investors, an emerging markets

crisis and rapid-fire regulatory reform.

Corporate structure has changed irrevocably. A decade ago, the six mining finance houses -

corporate structures peculiar to South Africa, though reminiscent of the Japanese pre-War

Zaibatsu, and formed in similar circumstances - dominated the economy. Today the mining

finance house no longer exists. Along with the demise of the mining finance house, two of its

widely imitated characteristics - diversified holdings and the entrenchment of control through

pyramid structures - have fallen from favour. Conglomerates have been unbundled and

elaborate control structures dismantled. At the same time legislation, regulations, listing rules

and accounting standards are converging to international norms.

The rapid changes are explained by the development path chosen by South Africa since

becoming a democracy. Upon taking power in 1994, the government chose to eschew

confiscation of property, and instead to seek growth, which, among other things, could fund

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expanded social services and more employment. To attain higher growth, South Africa will

need to increase mobilization of both domestic and foreign capital, as well as use that capital

more efficiently. Hence the central role of the capital market and private firms in the

government’s plans - a surprising policy choice that came at considerable political cost. Seen

in this light, corporate governance, by which we mean the quality of corporate monitoring

and decision-making, impacts both stability and growth prospects.

Stability: Modest debt-equity ratios and conservative banking practices enabled South African

firms to avoid liquidity and solvency problems during the emerging markets crisis. A number

of historic factors lie behind these sound balance sheets. But in future, proper disclosure,

governance and market oversight will be the most important check on corporate gearing and

bank lending. Also, by reducing investor risk, sound governance should increase the use of

equity and bond markets as capital-raising alternatives to the highly leveraged balance sheets

of banks. The future resilience of South African corporations and banks to macroeconomic

shocks is to some extent a governance issue.

Growth: Over the last five years, corporations have mobilized more than three-quarters of

South Africa’s domestic savings, allocated and planned 85 percent of all investment, and

currently own and manage three-quarters of the country’s capital stock. The better firms are

at allocating and managing these resources, the higher the output growth that can be

squeezed from South Africa’s modest accretion of capital stock. A knock-on effect of improved

performance would be more attractive capital markets, and larger capital inflows. Conversely,

misallocating resources to improve returns for control blocs, and shielding poor

managements from the market for corporate control, will, if pervasive, reduce growth.

A deep equity culture: More than one-third of the assets of non-financial listed firms in South

Africa were funded by the proceeds of equity issues, and more than half of recent asset

growth in technology, media and telecommunications companies has been funded by fresh

equity issues. However, the robustness of the primary market in equities has declined in the

last two years, with new equity issuance virtually drying up, particularly for small and medium

firms. Misgivings about the governance and leadership of smaller companies have played a

role.

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Forces for change: The most important force for corporate governance reform in South Africa

has been the market. Market discipline imposed through falling equity prices has led to radical

changes in corporate structure and conduct, among others the dismantling of the mining

finance houses. Undoubtedly one element of South Africa’s equity culture, widespread

executive share compensation, brought home the impact of market disenchantment. But the

leading role was played by foreign institutional investors, who robustly criticized corporate

structure, governance and performance upon their return to South African markets in 1994.

The government, regulatory agencies, the accountants’ profession and the stock exchange

have also been forces for change, motivated largely by the desire to apply international

standards in South Africa. New legislation against insider trading led to a palpable change in

market attitudes and conduct, while improved listing requirements and accounting standards

have eliminated some of the backlog of South African levels of disclosure compared to

international practice.

Areas of poor performance: Disappointing progress has been made in the areas of director

independence, director disclosure and the market for corporate control. A major factor has

been opposition from among control blocs and family-owners of mid-sized companies on the

Johannesburg bourse. However, in all three areas progress is imminent.

The need for truly independent directors. While the influential (and voluntary) King code of

corporate governance, released in 1994, stipulates that boards include non-executive

directors, they are not required to be independent of management or control blocs. In

addition, board chairmen are not required to be non-executive. An updated version of the

King Code, to be released later this year, is expected to reverse both these genuflections to

family-owned companies.

A robust market for corporate control. The rarity of hostile takeovers in South Africa is a

legacy of the clubby world of the mining finance house. Listed companies have used pyramid

structures and differential voting shares to entrench the control of founding blocs with a

minority stake. While market pressure has led to the dismantling of some of these

arrangements, many remain. In an important move, the JSE will henceforth prohibit further

listing of low-voting shares and shares of pyramid companies. But, establishing a vibrant

market for corporate control will require more action. The regulations and institutions that

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monitor take-overs have to be strengthened, and boards, particularly independent directors,

have to be trained as to their obligations and roles during take-overs.

Disclosure of director remuneration. The new listing requirements of the JSE require

disclosure of remuneration per director. Opposition from listed companies has led to a

postponement of the introduction of this requirement until 2002. The strength of opposition

has been surprising, and careful monitoring will be needed to ensure that the requirement is

not effectively evaded.

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

corporate Governance. The first King report (King I) was published in 1994 and a subsequent

report, (King II), was published in 2002. This has been further updated and a draft (King III)

was issued for comment in February 2009. The report was commissioned by the institute of

Directors in South AFRICA (IOD).

2.4.1 The King I Report on Corporate Governance

The King I Report, published in 1994, addresses fundamental principles of good financial,

social, ethical and environmental practices. The report went beyond the financial and

regulatory aspects of corporate governance. It proposed an integrated approach to good

governance in the interest of all stakeholders. Two dimensions of corporate governance were

specifically addressed, namely financial aspects (responsible towards shareholders) and

ethical aspects (standards of ethics in organization).

2.4.2 The King II Report on Corporate Governance

This second report is a reversal of King I report which incorporated recommendations on a

code of corporate practice and conduct for companies. The king committee identified seven

primary characteristics of good corporate governance which are explained below:

1. Discipline: - Corporate discipline is a commitment by a company’s senior management to

adhere to behaviors that is universally recognized and accepted to be correct and proper.

2. Transparency: - It’s the ease with which an outsider is able to make meaningful analysis

of a company’s actions, its economic fundamentals and the non-financial aspects

pertaining to that business. This measure of how good management is at making

necessary information available in an honest, accurate and timely manner. It also reflects

whether or not investors obtain a true picture of what is happening inside the company.

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3. Independence: - This is the extent to which mechanisms have been put in place to

minimize potential conflicts of interest that may exist, such as dominance by a strong chief

executive or large shareholder. These mechanisms range from the composition of the

board, to appointments to committees of the board and external parties such as the

auditors. The internal process established should be objective and not allow for undue

influences.

4. Accountability: - Individuals or groups in a company who makes decisions and take actions

on specific issues need to be accountable for their decisions and actions. Mechanism must

exist and be effective to allow for accountability.

5. Responsibility: - This pertains to behavior that allows for corrective action and for

penalizing mismanagement. Responsible management would, when necessary, put in

place what it would take to set the company on the right path

6. Fairness: - The system that exist within the company must balance in taking into account

all those that have an interest in the company and its future. The rights of various groups

have to be acknowledged and respected.

7. Social Responsibility: - A well-managed company will be aware of, and respond to social

issues placing a high priority on ethical standards. A company is likely to experience

indirect economic benefit such as improved productivity and corporate reputation by

taking those factors into consideration.

2.4.3 The King III Report on Corporate Governance

In this version, the 2009 King III report, governance, strategy and sustainability were

integrated. The report recommends that organizations produce an integrated report in place

of an annual financial report and a separate sustainability report and that company create

sustainability reports according to the Global Reporting Initiative's Sustainability Reporting

Guidelines. In contrast to the earlier versions, King III is applicable to all entities, public, private

and non-profit. King encourages all entities to adopt the King III principles and explain how

these have been applied or are not applicable. The code of governance was applicable from

March 2010.

The report incorporated a number of global emerging governance trends:

Alternative dispute resolution

Risk-based internal audit

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Shareholder approval of non-executive directors’ remuneration

Evaluation of board and directors’ performance

It also incorporated a number of new principles to address elements not previously included

in the King reports:

IT governance

Business Rescue

Fundamental and affected transactions in terms of director’s responsibilities during mergers,

acquisitions and amalgamations.

Web Resource

For a detailed account of the King III report go to

http://www.library.up.ac.za/law/docs/king111report.pdf or page 97-100

of the prescribed book and critique the key points of the this report.

2.5 CONCLUSION

In conclusion, the code of corporate governance is not enforced through legislation. However,

due to evolutions in South African law many of the principles put forward in King II are now

embodied as law in the Companies Act of South Africa of 2008. In addition to the Companies

Act, there are additional applicable statutes that encapsulate some of the principles of King

III such as the Public Finance Management Act and the Promotion of Access to Information

Act

2.6 REVISION QUESTIONS

Read

Study Ehler and Lazenby (2010:95-100) or any relevant literature & justify

the need for good corporate governance in the South African context?

Read the case study below and answer the questions that follows:

http://www.library.up.ac.za/law/docs/king111report.pdf%20or%20page%2097-100

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Corporate governance highlights of MTN SOUTH AFRICA

The MTN board believes that strong corporate governance is essential for the achievement

of sustainable value for all stakeholders. Accordingly, the Group is committed to

entrenching the highest levels of corporate governance and continues to make significant

progress in implementing structures, policies and procedures all aimed at strengthening

governance within the organization.

MTN aims to provide stakeholders with an accurate and transparent governance report

which provides details of governance enhancements and achievements during the year

under review.

Audit committee: AF van Biljon (chairman), NP Mageza, MJN Njeke, JHN Strydom

(withdrawn 29 May 2012), J van Rooyen

Risk management, compliance and corporate governance committee: J van Rooyen

(chairman), KP Kalyan, NP Mageza, MLD Marole, MJN Njeke, JHN Strydom

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Nominations committee: MC Ramaphosa (chairman), A Harper, AT Mikati, JHN

Strydom (nominated 5 March 2013), AF van Biljon,

Social and ethics committee: KP Kalyan (chairman), NP Mageza, MLD Marole, JHN

Strydom (withdrawn 5 March 2013), J van Rooyen

Remuneration and human resources committee: A Harper (chairman), AT Mikati, MC

Ramaphosa, JHN Strydom

Executive committee: RS Dabengwa (chairman), CM de Faria (withdrawn 31 January

2013), JA Desai, S Fakie, A Farroukh, B Goschen, PD Norman, NI Patel, KW Pienaar,

J Ramadan (withdrawn 31 March 2012), I Sehoole (withdrawn 31 March 2012), KL

Shuenyane

Group tender committee: WA Nairn (chairman), JA Desai, A Farroukh, NI Patel, KW

Pienaar, J Ramadan (withdrawn 31 March 2012), I Sehoole

Key governance enhancements and compliance

In 2011 the Group undertook to address some areas relating to King III and the Companies

Act, No 71 of 2008, which required enhancement and implementation. The following are

some of the key enhancements achieved in 2012:

Board committees'

terms of reference

All the committees’ terms of reference have been reviewed and adopted

by the board in 2012.

Board charter The board charter has been revised to align it with King III, the new MOI of

the Company as well as the Companies Act.

The revised board charter was adopted by the board in March 2013.

Board strategy review In addition to the conventional annual Group strategy session and in an

effort to increase the frequency of board and management engagement on

strategy and to improve strategic dialogue, a mid-term board strategy

review process was introduced to review strategic initiatives that had been

previously sanctioned. The review also affords the board an opportunity to

re-affirm the strategic direction.

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Board appraisal The board, through an independent service provider, conducted an

independent board performance appraisal. The appraisal report was

presented to the nominations committee and the board. The status of the

appraisal is set out on page 73 of the governance highlights.

Director training and

development

In line with section 88(2)(a) of the Companies Act which states that the

Company secretary must provide the directors with guidance as to their

duties, responsibilities and powers, among others the board was formally

advised by the sponsors on all JSE Listings Requirements' amendments,

which occurred during the year under review.

Independence review

for directors who have

served for an aggregate

period in excess of nine

years

If a director has served for an aggregate period in excess of nine years, the

new MOI requires the board to consider whether that director continues to

be independent.

The board approved a policy, which states that a non-executive director

who has served on the board for an aggregate period in excess of nine

years, will be subject to an annual rigorous review of his/her independence

and will thereafter be re-appointed annually. The board is satisfied with the

independence of all the independent non-executive directors, including the

independence of AF van Biljon and JHN Strydom who have served on the

board for an aggregate period in excess of nine years. Based on the

evaluation, there is no evidence of any circumstance and/or relationship

that would impair their judgement and their independence is not affected

by their length of service.

Application of the King

III principles

The Group is compliant with the mandatory principles concerning

governance in terms of the JSE Listings Requirements. A letter of

dispensation has been obtained from the JSE and it affords the Group the

opportunity to address any non-compliance with the non-mandatory

"apply or explain" corporate governance requirements in the 2013 financial

year. In assessing the Group's compliance and adherence to King III, an

Institute of Directors' Governance Toolkit was used.

Delegation of authority In line with King III, a revised delegation of authority was approved and

http://mtn-investor.com/mtn_ar2012/gov-highlights.php#p73

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implemented during the year under review.

Review of governance

policies

Among others, the following policies were reviewed:

The insider trading policy and share dealing policies were reviewed,

pending finalisation of the Financial Markets Bill.

The public information policy was revised and is in the process of being

adopted.

The Group directors and Group secretary appointment policy was adopted.

The policy outlines a formal process for the appointment of all directors and

the Group secretary.

The gifts policy, among others, embraces the prevention of any corrupt

activities and sets out a procedure to be followed when giving or accepting

gifts. This policy was revised and adopted.

The Group introduced the independence review policy which provides an

outline of how the director’s independence is reviewed. This policy was

adopted.

The code of ethics has been revised; however further work is still being

done. In the interim, the Group has adopted a social and ethics statement

which embodies the Group’s values and practices with regard to ethical

standards and behaviours.

Prescribed officers The prescribed officers have been designated and the board is satisfied that

they are adequately skilled for their responsibilities. All members of the

executive committee are designated as prescribed officers. The category of

persons designated as such will be reviewed on an ongoing basis. A

prescribed officers' policy is in the process of being approved.

Alignment of

memorandum of

incorporation with the

Act

The Group has concluded its new MOI, which is aligned with the Companies

Act and JSE Listing Requirements. The MOI has been approved by the board

and the JSE, and its salient features will be tabled for approval by

shareholders at the annual general meeting.

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Our approach to governance is to have a set of targets each year and report on our progress

against these targets. Looking ahead, we aim to continue focusing on embedding the highest

standards of ethics and good governance, monitor our regulatory compliance and respond to

any emerging issues related to our environment.

Governance structure

During the year under review, the board appointed Fani Titi as an independent non-executive

director on the board and as a member of the remuneration and human resources committee.

Fani has extensive experience in private equity, banking and general business.

Although the Group director and Group secretary appointment policy was not adopted at the

time of his appointment, his appointment process was formal and transparent. The Group

president and CEO disclosed the previous business association between Fani and himself.

Pursuant to that disclosure Fani was subjected to an independence review.

The outcome of the review showed that Fani was independent from the MTN Group business.

The board was satisfied that the business association between the Group president and CEO

and Fani would not have an impact on the performance of their duties and responsibilities.

The board's governance structure was reviewed and it was concluded that the Group tender

committee should be independent from the board. Thus the board resolved that this

committee will cease to be a standing committee of the board. The board is satisfied that its

committees are structured in such a way that there is sufficient competence to deal with

current and emerging issues of the business and is able to enhance the performance of the

Company.

The elements of the Group structure are replicated in major subsidiaries to maintain good

governance throughout the Group. The governance structures of subsidiaries across the

Group have been reviewed and are aligned with the operating model, which was

implemented in March 2012. The MTN Group has a unitary board structure with a majority of

independent non-executive directors. The board considers nine out of the eleven non-

executive directors to be independent.

The roles and duties of the non-executive chairman and the Group president and CEO are

separated and clearly defined. This division of responsibilities ensures a balance of authority

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and power, with no individual having unrestricted decision-making powers. Directors play a

critical role as board representatives on the various board committees and ensure that the

Company's interests are served by impartial, objective and independent views that are

separate from those of management and shareholders.

The MTN Group board retains full and effective control over the Group and is responsible,

inter alia, for the adoption of strategic plans, the monitoring of operational performance and

management, and the development of appropriate and effective risk management policies

and processes. The full extent of the board's responsibilities is contained in an approved board

charter. The directors are of the opinion that they have adhered to the terms of reference as

detailed in the board charter for the financial year under review.

Diversity on our board

Representation by gender on the board

The board will address this matter as part of the succession planning Programme in 2013.

Case study questions

1. Do think adoption of the good corporate governance by MTN is paying dividends?

Justify your answer

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2. “Our approach to governance is to have a set of targets each year and report on our

progress against these targets”. What mechanisms have been put in place to

achieve this goal?

TOPIC 3

INTERNAL ENVIRONMENT ANALYSIS

LEARNING OUTCOMES

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Discuss the importance and challenge of internal environmental analysis

Apply SWOT analysis and explain its importance in environmental analysis

Determine the important resource and capabilities in an organisation and

discuss their importance in the resource-based view with regards to internal

environmental analysis

Describe value chain analysis as a method for performing internal environmental

analysis

Apply the functional approach in internal environmental analysis

Understand and apply the internal factor evaluation matrix as a method of doing

an internal audit.

3.1 INTRODUCTION

Many organizations try to build their capacity as a source of competitive advantage in terms

of their resources and capability. In order to do so, it is important to identify and evaluate

the organization strengths and weaknesses in all its functional areas. Organizations that have

built a competitive advantage through their capacity include coca- coca, Nike sports shoes

and Pick and pay. It is also a recognized fact that one of the key ingredients of a successful

strategy is that it should place realistic requirements on the firm resources. The stronger an

organization overall performance, the less need there will be for radical changes in strategy.

Although many managers can do the internal analysis subjective, basing their analysis on

intuition and ‘gut feeling’, this reliance on past experience may cause near-sightedness on the

part of management. Emotive and subjective decisions are not conducive to successful

strategy development and implementation. There are numerous examples of this leading to

organization failure.

The rapid development and changes in the components of the external environment make it

difficult for organization to keep up their competitive advantage and reputation if they do not

also understand the internal environment of the organization. The well-known SWOT analysis

technique will be explained in terms of its value and limitation for environmental analysis,

both internally and externally.

We shall then examine the different method of internal analysis: the resource-based view, in

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which the organization is analyze as a collection of tangible and intangible resources, and

organizational capabilities; and value chain analysis. Emphasis will be placed on the individual

activities of the organization that add value to its products or services and thus create value

for the organization. The chapter will conclude with a mention of the functional approach and

an evaluation of the internal factor evaluation matrix.

3.2 THE IMPORTANCE AND CHALLENGE OF INTERNAL ANALYSIS

Competencies is essential before any strategic management may decision can be taken. Some

managers may select as the organization cannot decide on a specific strategic direction to

follow if it does not know what it can and cannot do, and what assets it has and does not have.

When an organization is able to match what it can do with what it might do, this allows the

organization to develop its vision or strategic intent, to pursue its strategic mission, and to

select and implement its strategies.

It is, however, important to stress that the link between the organization‘s vision of what it

wants to become and the internal assessment are favorable, if there is no challenging and

exciting vision the organization will not achieve strategic excellence. The vision of what it

wants to become must actually set a challenge to the internal resources of the organization.

The outcome resulting from internal analysis will determine what an organization can do,

while the outcome of external environment analysis will identify what organization may

choose to do.

In the past, factors like low labor cost, access to financial resource and protected markets

were regarded as the only sources of competitive advantage. This is no longer the case,

because the demands facing 21st century organization require more than excellence in the

above factors. It is important for organization to develop the ability to change, and to foster

an organization setting in which organization learning is expected and promoted, so that they

are able to make the most effective strategic decision. In order to come up with the most

effective and efficient strategy, it is important to known what the organization can do

particularly well and what resource it has.

It is not only the organization ability to change that will make it successful; it is also critical

that managers view the organization as a bundle of resources, capabilities and core

competencies that can be used to create an exclusive position in the market. This implies that

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an organization does have some resource and management capabilities that other

organizations do. The presence of these resources and capabilities leads to strategy

competitiveness when organizations do not. The presence of these resources and capability

leads to strategic competitiveness when an organization is able to use them to satisfy the

demands of its external environment.

This relationship between resources and organizational capabilities, value chain analysis and

SWOT analysis, and strategic competitiveness is illustrated in figure 3.1. The task of

identifying, developing and developing resources, capabilities and core competencies is as

difficult and challenging as any other strategic management task. The recognition of core

competencies resource and capabilities that do not really create competitive advantage. This

stresses the importance of the challenge of identifying the resource and capabilities that

really contribute to the competitive advantage of organization

3.3 SWOT ANALYSIS

This is one of the best known techniques for doing an environmental analysis. Although SWOT

applies to both external and internal environmental analysis, it will be discussed here as an

introduction to, as well as the method of, environmental analysis. SWOT is an acronym of

strength, weakness, opportunities and threats, and provides a framework for analyzing these

elements in the organization’s external and internal environment. SWOT analysis highlights

the basic raw material of specific conditions in the business’s environment for environmental

analysis.

Environmental analysis is about the internal and external assessment of the organization –

about what the organization has or does not have in terms of resources and capabilities, and

about what is happening in the external environment. The success of a new strategy for the

organization depends on the strategic fit between the internal situation of the organization

and the external conditions. The objective of a good strategy will be to increase the strengths

and optimize the opportunities, and to decrease the influence of internal weakness and

external threats.

What is strength? It is a resource or a capability that the organization has which is an

advantage relative to what competitors have. This is an important issue – a resource and/or

capability can only be strength in the sense that it offers a distinctive competence that gives

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the organization a competitive advantage. There may, however, be other resources and

capabilities that do not necessarily give the organization a competitive advantage but

contribute to its sustainability, and should therefore be nurtured and reinforced. Skillful

employees, large financial reserves, quality product or service, a strong reputation and

economies of scale can be strengths of the organization. The strength of the assuror, African

Life, for example, is the fact that First Rand is the anchor shareholder. This ensures large

financial reserves for the organizations.

What is a weakness? This term refers to the lack of, or deficiency in, a resource that

represents a relative disadvantage to an organization in comparison to what competitors

have. Limited financial resources, Poor marketing skills, poor after sales service and negative

organizational culture may be examples of weaknesses. These deficiencies prevent the

organization from developing a competitive position in the market industry. The greatest

weakness of African Life may be its relatively small size and therefore its potential

vulnerability to deterioration in the market environment.

As stated above, SWOT analysis includes both the external and internal environment. While

the strength and weaknesses relate to the internal or micro environment, the opportunities

and threats are the identified external factors in the market, industry and macro environment.

This is illustrated in figure 4.2

Study

Study Ehler, and Lazenby (2010:111-113) or any relevant literature

& examine the relationship between the components of internal

analysis and strategic competitive as well as determine the

significance of SWOT analysis to business organisations.

What is an opportunity? This term refers to a favorable situation in the organization’s

external (market and macro) environment. A decrease in the interest rate can be seen as an

opportunity for an organization that still has a loan obligation. The closing down of one of its

major competitors is also a favorable condition in the market environment of the

organization.

What is a threat? This is an unfavorable situation in the organization’s external environment.

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Again, the organization does not have any control over what is happening in the external

environment but, for instance, an increase in the interest rate (economic macro environment)

is a major threat for the cash flow of an organization with a big loan.

A SWOT analysis consists, then, of a careful listing of the above aspects. Although managers

rely on SWOT analysis to stimulate discussions about how to improve their organizations and

position them for success, it has its limitations. SWOT analysis is a static approach and is also

sometimes focused only on a single dimension. SWOT analysis cannot show the organizations

how to achieve competitive advantage. More in-depth analysis is needed. SWOT analysis

cannot therefore be an end in itself _ it actually only stimulates self-perception and the

discussion about important issues in the organization. The following limitations of the SWOT

analysis can thus be mentioned:

The focus on the external environment may be too narrow.

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

The strengths that are identified may perhaps not lead to an advantage.

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

important factors that might lead to competitive success.

When looking at the situation of the Mr. Price Group (Strategy in action 3.1), it is clear that

the cash sales and cash flow situation of the can be regarded as strengths. The possibility that

customers will try to cut down on their purchases of clothing can be seen as a major threat

for the company.

3.4 INTERNAL ANALYSIS FOR EFFECTIVE STRATEGY DEVELOPMENT

In order, then, to develop the most effective and efficient strategy, it is important to analyze

the organization internally, that is to look more closely at the organization’s resources,

capabilities and core competencies, in order to have an informed understanding of its current

situation. Methods of doing internal analysis will now be discussed. These techniques must

not be seen as exclusive as they may also be complementary.

3.4.1 Resource-based view(RBV)

As stated in the introduction, resources, organizational capabilities and competencies must

be seen as the foundation characteristics that make up the competitive advantage of an

organization. Organizational resources have an impact on the management capabilities of the

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organization, which in turn are the sources of core competencies that may ultimately lead to

a competitive advantage. It is a well-known fact that Pepsi was not very successful when trying

to enter the South African market after years of absence. Coca-Cola remains the clear world

leader. Many analysts agree that the superiority of Coke in terms of its tangible and intangible

assets makes it difficult for Pepsi.

Intangible assets, such as Coke’s reputation and brand-name awareness, were major reasons

why it was initially difficult for Pepsi to be successful in South Africa. Coke also has some

capabilities that make it easier to manage these assets more effectively. This example perhaps

helps to explain the concepts of the resource- based view (RBV). The RBV holds that an

organization’s resources are more important than the industry structure in an attempt to

gain and keep its competitive advantage. It also sees organizations as very different in

terms of their collections of assets organizational capabilities-no two organizations will be

similar, because they have different experiences, different assets and capabilities, and

different organizational cultures.

The argument is that it is the resources and capabilities that will determine how efficiently

and effectively the organization is functioning- how efficiently and effectively it will sell

hamburgers, deliver plumbing services, educate learners or repair motor vehicles. The main

concern for competitive advantage, according to the RBV, is thus organizational resources and

capabilities. If management wants to manage strategically, as a useful starting point for

internal analysis it is important to understand what exactly ‘resources’ are and what

characteristics will make them unique.

3.4.2 Resources

Central to the RBV is that there are three types of resources that will lead to distinctive

competencies and therefore to competitive advantage. These three broad categories of

resources are as follows:

Tangible assets.

Intangible assets.

Organizational capabilities.

Resources may include all the financial, physical, human and intangible assets that are used

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by an organization to develop, manufacture and deliver products and/or services to its

customers or clients. .

Study

Study Chapter 4, of the prescribed book of Ehlers and

Lazenby (2010:115) (Table 4.1) and synthesise examples

of different resources

Tangible assets are the easiest to identify, because an organization’s location and the status

of its building and equipment are visible. The value of many of these tangible resources can

be determined by looking at the financial statements, especially the balance sheet. It is,

however, important to remember that these statements do not account for the real value of

the assets, because they do not reflect market value. A good location is a tangible asset or

resource, but the real value is only visible if an organization is successful at that specific

location. A good aero plane is a tangible asset for South African Airways, but it is only valuable

for the organization if it is fully booked and uses routes that are in demand.

Intangible assets are assets that one cannot touch, but they are often the critical assets that

create the real competitive advantage. The reputation and brand name of Coca-Cola is the

reason why it has a competitive advantage over Pepsi. It is thus fair to say that intangible

resources are a superior and more potent source of core competencies. The perception of

customers in terms of the organization’s product and delivery quality is perhaps more critical

than the tangible assets, and is also evidence that it is growing in importance relative to

tangible assets.

The advantage of intangible assets is that they are less visible and thus more difficult for

competitors to understand, purchase, imitate or replace. This is the reason why organizations

rely more on intangible resources for resources for creating core competencies and

competitive advantage.

3.4.3 Capabilities

There is no competitive advantage to an organization if resources are available but there is

no capacity to deploy them through a complex process of interactions with the tangible and

intangible resources. Capabilities are actually the glue that emerges over time and binds the

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organizations together. We can say then that organizational capabilities are the complex

network of processes and skills that determine how efficiently and effectively the inputs in

the organization will be transformed into outputs. By themselves resources are not

productive-they must be processed or used in some way to draw the value out of them. The

interrelationship between resources and capabilities is illustrated in Figure 3.1. Coke’s

formula is not valuable unless someone knows how to implement it and produce the Coke. A

database is not useful for the Glomail Company if it does not have someone who uses it to

make decisions.

The foundation, then, of many organizations’ capabilities lies in the skills and knowledge of

the employees and often in their functional expertise. The essence of capabilities is the human

capital of the organization. As employees do their work, combining the tangible and

intangible resources within the structure of the organizational processes, they actually

accumulate knowledge and experience about to create value from the resources for the

organization and turn them into possible core competencies or distinctive organizational

capabilities. This is why organizations should invest in their employees’ continuous

development.

Organizational leaders all over the world are supporting the view that the knowledge of

employees, also known as human capital, is one of the most significant capabilities of the

organization and may contribute, together with resources, to competitive advantage. This

implies that organizations have to utilize the knowledge in the organization. It should be

transferred in the operating of the organization, otherwise it is useless. This is thus a

challenge to the organization to create an organizational environment that allows

employees to fit all their knowledge together to the advantage of the organization.

The majority of capabilities are developed in specific functional areas, li8ke effective

motivation and empowerment skills in the human resource department, effective promotion

of brand names and customer service in the marketing department, product and design

quality in the production department and the ability to envision the future as a general

management capability. It is, however, important to immediately state capabilities must also

be developed at top management level and not only at the functional level.

3.4.3.1 Value

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An organizational resource is available is valuable if it adds value. A resource is valuable if it

helps the organization to exploit the external opportunities or when it can be used to cope

with and neutralize the negative external threats. Skilled employees can be an example of an

organizational resource that will fulfill both these requirements.

3.4.3.2 Superior resources

If the resource is superior to those that the competitor has, and it fulfills a

customer’s needs better, then the resource is superior and valuable. Two supe5rmarkets offer

the same range of products, they have the same pricing structure, and they are equal in size.

The one supermarkets is, however, more successful. Why? The supermarkets resource of the

one supermarket is only its more convenient neighborhood location.

3.4.3.3 Scarcity

If a resource is in short supply and ideally no other organization possesses it, then it becomes

a distinctive competence for the organization. The important thing, however, is that the

resource be sustainable. Another important characteristic is also that the resource must be

valuable in the sense that it fulfills the needs of customers.

3.4.3.4 Inimitability

If a resource is hard to imitate, it is likely to offer a long-term competitive advantage to the

organization. Organizations are looking for resources that are hard to imitate, because they

generate revenues that will probably continue to flow in. Imitation by competitor

organizations can happen in at least two ways: duplication and substitution. There is a clear

difference between the two. Duplicating a resource is where the same kind of resource is

built, while substitution of a resource involves replacing it with an alternative resource that

achieves the same results. Difficult-to-imitate resources will include, for example, reputation

(goodwill), a good location, a patented product and organizational culture. KFC’s difficult-to-

imitate recipe is a good example.

3.4.4 Value chain analysis (VCA)

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

outputs. Examining the value chain as a method of doing internal analysis refers to a way of

looking at a chain of activities to determine where value is really added to the product or

service. In simple terms, value added to a product or service is the difference in money value

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of the finished product compared to the money value of the inputs. One ton of metal as an

input in motorcar manufacturing is less valuable than the finished motor car. It is important

for customers to receive value when they buy a product or service, since they actually demand

some type of value. What do customers need or demand when they buy a product or service?

What do they actually regard as value or when do they experience value?

There are three aspects of resources in particular that create customer value. Although they

will be discussed in later chapters, they are also relevant hare. They are as follows:

The product is unique and/ or different.

The product is cheaper than that of competitors. For example, Game is committed to

providing value-for-money shopping to consumers across the continent of Africa to

ensure its position as Africa’s most dynamic discount group.

The organization has the ability to respond to the customer’s needs very quickly.

Value chain analysis (VCA) is thus a systematic method of determining how the

organization’s different activities contribute to creating value for the customer. The

‘father’ of the Five Forces model, Michael Porter, also developed the concept of the value

chain. He was concerned with how to create more value for the customer, and how the

different organizational routines and processes (the different work activities of employees in

an organization) contribute to the ultimate value which the customer experiences. This

process point of view is thus the central theme in VCA. This means that VCA views

organization as a sequential process that includes all the value-creating activities in the

organization.

During the process from the inputs to outputs, different activities have to be performed. It is

important to understand all these activities that occur in the organization. This actually

involves disaggregating all the activities in the organization to determine the costs of each

one in order to determine where differentiation takes place, or where cost advantages occur.

These are two of the aspects pointed out above as factors that create value for the customer.

Value chain analysis helps to identify where the most value added and especially where there

is potential to add more value. In the analysis of the chain of activities, one can identify where

the organization is doing things well and really adding value for the customer (this will be its

strengths) and where there is the potential for improvement (perhaps weaknesses).

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What is the meaning of value in the VCA? Value can be described as the amount of money

that customers are willing to pay for what the organization is providing them. The more value

they experience receiving, the higher the amount they are willing to pay. In competitive

terms, then, it can be said that an organization is profitable if this amount exceeds the total

costs involved in creating product or service. It is important to understand that the

organization will only receive high returns if it is successful in creating value. It is clear that

the activities in the VCA are actually the building blocks of competitive advantages.

The activities in the VCA can be grouped into two categories, namely the primary

activities and the support activities It is obvious from the names of these two categories that

the primary activities are those that create the physical product or service and customer

value if done effectively and efficiently, while the support activities provide support and thus

add value throughout the process.

Study

Study Ehlers and Lazenby (2010:122) (Figure 4.3) and examine the

primary and support activities of the value chain

3.4.4.1 Primary activities

Some of the different items in the organization that should be studied in terms of the primary

activities are as follows:

Input logistics: - This activity, which Porter originally called ‘inbound’ logistics, is associated

with the receiving, storing and distributing of inputs to the product. Is there a materials

control system? How, and how effectively and efficiently, are the raw materials handled and

warehoused?

Operations: These activities include all those that are associated with the

transformation of the inputs into the final product. Questions to answer in this regard are:

How efficient is the layout of the manufacturing plant? Is a production control system in place

and how effective and efficient is it? What is the level of automation?

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Output logistics: This activity, which Porter originally called ‘outbound’ logistics refers to all

the issues related to the distribution of the product or services the customers. How

effectively and efficiently are products and services delivered to customers? How and how

effectively efficiently, are the finished products handled and warehoused?

Marketing: Customers must buy the final products and services. This activity refers then to

the inducements used to get customers to make the purchases. What is the level of marketing

and competency in terms of sales? Is market research effective in terms of identifying the

customer’s needs? What is the situation and effectiveness of the marketing strategy in terms

of the four Ps (product, promotion, place and price)? How successful is the organization in

creating brand loyalty in customers?

Customer service: There are some basic activities that the organization must undertake to

make sure the value of the maintained, such as installation, repair, training, the supply of

parts and perhaps product adjustment. How effective and efficient are the customer services

the organization provides? What guarantees and warranties are offered to the customers?

Does the organization listen to the complaints of customers and then act upon them?

3.4.4.2 Support activities

In any organization and industry there are support activities that add value by themselves or

through the important relationship they have to all the other activities in the

organization. The performance of the primary activities depends on the support activities the

support activities also have some important value aspects that should be in place in order to

add value for the customer. Support activities include the following:

Procurement: This activity refers to the function of purchasing inputs. It can be perceived

that there is an overlap between this activity and the primary one known as input logistics.

This support activity, however, refers to the actions that can be taken to optimize the quality

and speed of the procurement of inputs, and not to the inputs themselves. Questions that

should be answered include: Are the resources procured at the lowest possible cost and

acceptable quality levels? Are sound relationships being established with suppliers?

Technological development: Technology is important for all activities. The technologies

used include the different processes and equipment throughout the entire value chain.

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Questions that should be addressed include: What is the level and of technological

development? What is the ability of the technological activities to meet the critical deadlines?

Is there a culture in the organization that enhances creativity and innovation?

Human resource management: The importance of this activity cannot be overemphasized,

because the recruitment, selection, training and compensation of employees will affect all

levels in the organization. The issues that are important in terms of this activity will include

the following: How effective are the human resource management procedures? What is the

level of employee motivation? What can be done to ensure a quality work environment?

General administration and infrastructure: - It is important to achieve the overall goals of the

organization. That is why there must be certain general administration and organizational

infrastructure in place, for example effective and efficient planning systems. The issues that

should be addressed are: Are all the value chain activities coordinated and integrated

throughout the organizational value chain? What are the relationships with all the

stakeholders of the organization? What systems are in place to ensure a good public image

and reputation?

Financial management: - Porter did not originally include this activity in the value chain. It is,

however, important that sound financial practices be in place throughout the value chain. All

activities must adhere to effective financial recording and control. The issues that should be

addressed are: Are all the value activities recorded according to sound financial principles as

described in GAAP (general accepted accounting practices)? What systems are in place to

ensure effective financial recording?

If there are no efficient management systems in place with regard to all the activities in the

value chain, an organization will quickly experience problems such as inventory shortages,

ineffective marketing and sales, slow responsiveness to competitor’s actions and perhaps also

inefficiency in terms of its operations. All of these activities are important and if every activity

is viewed as part of an interconnected process in the organization; it is possible for the

organization to optimize value and profit. It is, however, important to remember that each

organization will have its own unique primary support activities. It must identify them and do

everything in its power to optimize value for the customer.

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It is very important to emphasize the extent to which value chain activities support the current

strategy of the organization. If the organization is following a low cost strategy, then the

activities in the value chain must be organized in such a way as to support the strategy of

minimizing costs. If the strategy of the organization is based on high quality, then all activities

must be configured to ensure the high quality of products or services. The strategic alignment

between the value chain activities and the strategy cannot be overstressed.

3.4.5.Functional approach

An effective and simple approach to internal environment analysis is to conduct an

internal audit using a functional approach. The usual business functions in almost all

organizations are finance and accounting, marketing, production, purchasing, corporate

communications (public relations), human resources and administration. Research and

development may also be added. It is, however, important to remember that individual

organizations are likely to have their own unique functions that may not be covered by the

above. The premise of the internal audit is that it can be conducted by analyzing the

organization’s functional activities.

In the same way that the value chain approach assumes that the organization needs

customers and that the customers expect value in order for the organization to achieve

competitive advantages, the premise of internal audit is that every organization has specific

functions that it must perform. It can thus be said that an internal audit is an assessment of

the functional areas of the organization. What are the various issues in the functional areas

that should be included in an internal audit? Table 4.2 lists some of the internal audit

questions that can be asked in order to assess the strengths and weaknesses of each of the

functional areas.

This is, of course, not a comprehensive list and it remains the responsibility of every

organization to determine its own internal audit questions. The major objective of the

internal audit is to determine how well or poorly these functions are being performed

and what resources these functional areas actually need to perform effectively. The

disadvantage of this approach is, however, that the attention is entirely focused on the

functional areas, while there is no determination of whether a specific functional area makes

an important contribution to the organization’s competitive advantage.

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Study

Study Ehlers, et al. (2010:126)(Table 4.2) & discuss /

comment on the importance of undertaking an internal

factor evaluation matrix variables

3.4.6.The internal factor evaluation matrix

A method that can be used to conduct an internal audit is through the construction of an

Internal Factor Evaluation Matrix (IFE Matrix). This evaluates the major strengths and

weaknesses in the different functional areas. This could also be regarded as a summary of the

internal factors identified in previous internal analysis methods. The answers to the questions

in Table 4.3 will provide the starting point for this matrix. It is far more important to

understand why the internal factors are selected as strengths and weaknesses, than to rely

solely on the actual number that is arrived at.

a) List the 10 to 15 most important internal factors that are identified in the internal audit.

The factors will include both include both strengths and weaknesses. These factors can be

listed in the first column of Table 3.3- first the strengths and then the weaknesses.

b) In the next column a weight can be assigned to a given factor that will indicate the relative

importance of the factor in terms of the success of the organization in its specific industry.

The higher the weight, the more important the factor is for the current and future success

of the organization. The sum of the weights must always be equal to 1, 00. If the factor is

not important, it will receive a low weight, e.g. 0, 10. If it is an important factor that may

contribute, for example, to 80 per cent of the current and future success of the

organization, it will receive a weight of 0, 80.

c) In the third column a rating out of 5 can be used to rate these factors. (Sometimes a rating

out of 4 is also used.) These ratings are based on the current response to that specific

factor. Whereas the weights are based on success in the industry, the ratings are based

on the company’s response to that specific factor. If the factor is an outstanding strength

it will receive a 5, above average a 4 and average receive a 3. If receive a 2.

d) In the last column the weight is multiplied by the rating of the factor to get the weighed

score. The sum of these scores will range from 5, 00 (outstanding) to 1, 00 (poor), with

3,00 as the average.

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e) Sometimes it can be useful to include some comments in a further column to make the

understanding of the selected factors more useful.

The important principle to remember is that the weights must always add up to a total of

1,00. As already indicated, the average score is 3,00. When an organization thus scores higher

than 3,00, it means that it is above average in its overall internal analysis in relation to other

organizations in that specific industry. (The weights relate to the importance of a factor with

regard to success in that specific industry.) If an internal factor is both strength and a

weakness, it must be included twice in the matrix. A rating as well as a weight must be

assigned to each statement.

In Table 4.3 the ratings and score of a hypothetical legal firm are included as an example. The

total weighted score of 3, 25 indicates that the firm is above average (above 3, 00) in its overall

internal strength. This matrix can also be used to compare organizations with one another. Of

course it will be difficult to get the information from competing organizations, but a matrix

can perhaps be developed on their behalf. This makes comparison more meaningful and

relevant. All the information provided through this evaluation matrix will help the

organisation to develop effective and relevant strategies.

Study

Study Ehlers and Lazenby (2010:128) (Table 4.3)and examine a

sample of factor evaluation matrix for an organisation

3.5 Significance of Environmental analysis

The importance of a business environment

All organisations must work within their business environment, which consists of all the external

factors that affect its operations, but which it cannot control. This is a very complex concept, with

many competing stakeholders. Managers have to asses their environment, and then design a

strategy that allows the organisation to work successfully within it.

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The factors that form an environment

The environment is a complex combination of the economic system, political system, legal restraints,

society, industry, labour relations, customer expectations, markets, competition, technology,

culture, history, infrastructure, state of the economy, shareholder demands, natural environment,

labour conditions, and so on. We can classify these factors into five categories of the physical

environment, political and legal factors, economic factors, social and socio-cultural factors, and

technological factors. Alternatively we can consider inherent or macro factors that give the

infrastructure and framework, and competitive or micro factors that are set by the industry and

market.

The economic context of operations.

The type of economic system is probably the dominant factor in an organisation’s macro

environment, as it defines the basic relationships between supply and demand. We assume that

most organisations work in some kind of market economy. Then economic analyses give a lot of

essential information about costs, supply, demand, competition, and so on.

The concept of an industry and the features that make it attractive to an organisation.

An industry is a group of organisations that use similar resources to make equivalent products to

satisfy the same customer demand. When planning its products, an organisation implicitly makes a

choice about the industry it works in. many features can make an industry attractive, including the

size of market, financial performance, type of products, point in their life cycles, number and

features of customers, patterns of demand, state of competitors, basis of competition, resource

requirements, efficiency, economies of scale, levels of technology, seasonal variations, entry and exit

barriers, relations in the supply chain, risks, and so on.

The concept of a market and the features that make it attractive to an organisation.

The market is the set of customers who buy – or might buy – a particular type of product. As a

rule, organisations do not like working in markets that are aggressively competitive. This

means that in more attractive markets Porter’s five competitive forces are all weak – in other

words, there is little competition from existing organisations, weak suppliers and customers,

and low chance of substitute products and new entrants. But the market does not have to

look like this, and a well-designed strategy can allow an organisation to succeed in even the

most hostile market.

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The ways that managers respond to changes in the environment.

There are continuous changes in the environment and managers have to make appropriate

responses. In effect, they have to assess potential events in the future, and then make decisions

based on the likelihood of these events occurring, and the consequences if they do occur. Several

analyses can help here, particularly decision rules and expected values (or utilities). Then the

chapter lists nine possible reactions, ranging from ignoring potential changes (particularly if they are

unlikely to happen or if the consequences are minor) to moving to another environment (if changes

are very likely to happen and have serious consequences).

3.6 IDEAS IN PRACTICE

AstraZeneca

Aim: to outline the way that one major company manages some interactions with its environment

One view of the environment considers a set of stakeholders, each of which puts pressure on the

company to work in certain ways and tries to constrain its activities. Pharmaceutical companies are

particularly prone to such pressures – including financiers trying to get a return on their enormous

research expenditure, governments setting maximum prices for health services, generic manufacturers

making competing products, customers trying to reduce prices, pressure groups aiming for cheap

products for developing countries, society looking for cures for every type of illness, and so on. These

different stakeholders try to push AstraZeneca – and every other pharmaceutical company – in

different directions.

AstraZeneca cannot change these pressures, so it has to accept them and work within their

constraints. To help with this, the company has developed a series of formal procedures for dealing

with its environment. These appear as core values that affect all aspects of operations, and ensure

that it can ‘set, promote and maintain high standards of corporate responsibility worldwide’. They

clearly state that ‘Our challenge is to sustain improvement in our environmental performance as we

continue to grow our business’. These values also appear in a Corporate Responsibility Priority

Action Plan which shows how the company responds to a series of key issues.

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Balakrishnan and Sons

Aim: to outline a specific example of a supply and demand analysis

Balakrishnan and Sons can get good estimates of its own costs for a product, and has to decide

whether this would be attractive in the prevailing environment. Surveys of potential customers can

give reasonable forecasts for likely demand at various prices. It is more difficult to assess likely

supply, but estimates can be found from the past performance of competitors. So for each level of

demand the company can estimate its own costs, likely total sales, and share of this market lost to

competitors.

The company really needed to sell 10,000 units to maintain a selling price of €26. But demand at the

proposed price would be around 7,000 – which would give spare capacity and higher unit costs. If

they raised the price demand would fall even lower, and more competitors would appear; if they

lowered the price they would sell more and competition would decline – but they would not cover

production costs. In this case, the sensible decision was not to develop the product.

Baileys

Aim: to give an example of the way that a major company responds to its environment – and can

even change it

In the 1970s, Diageo noticed an opportunity in its Dublin operations to take advantage of a local

surplus of milk – using this in an entirely new cream liqueur that they called Baileys. This proved so

successful over the next 20 years that it used all the surplus milk around Dublin, and began to create

a shortage. The operations of Diageo were so large that they changed the features of their

environment – and particularly affecting the economics of local dairy farming. Their next stage was

carefully planned, and consisted of steps to increase the efficiency of farmers, raising their

productivity and lowering costs. Their impact on the environment went wider, ranging from social

changes as agriculture became more attractive, to competitive forces as customers increased

demand for different types of drinks.

Huang Sho Lan Industries

Aim: to show how a scoring model is used to assess the attractiveness of an industry

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It is easy to say that managers look for attractive industries and markets, but the environment is so

complex and there are so many conflicting factors, that it is difficult to compare alternatives and say

exactly which is the most attractive. Several analyses can help with this, and scoring models are one

of the most robust and straightforward. They give a way of comparing alternatives, giving a

quantitative view of essentially qualitative factors and put decisions on a more objective footing.

Scoring models are widely used in many different circumstances, and here a company has used one

to assess a new market. By itself, the figures only give limited information – but perhaps a score of

885 out of 3,000 suggests that the market is not particularly attractive. The result is much more

useful for comparing different markets.

Decisions under strict uncertainty

Aim: to introduce the idea of strict uncertainty and decision rules

The characteristic of strict uncertainty is that we know which events might happen, but cannot put

realistic probabilities on their happening. Then there is no obvious ‘best’ policy and managers have

to use their judgement. To help, they often use some type of simple decision rule.

In this case, we have two events with the following costs (in millions of Euros).

Event New competitor

enters market

New competitor does not

enter market

Increase promotion now 0.2 0.2

Do not increase promotion now 0.0 1.0

Three common decision rules are:

1. Laplace – choose the option with the lowest average cost, which is to increase promotion now.

2. Wald – find the highest potential cost for each event (€200,000 for increasing promotion now,

and €1 million for not increasing promotion). Then choose the event with the lowest of these

potential costs, which is to increase promotion now

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3. Hurwicz – which calculates for each event

α lowest cost + (1 – α) highest cost

where α is a constant between zero and one which reflects management attitude towards risk. If we

set α = 0.5, this gives:

increase promotion now: 0.5 0.2 + 0.5 0.2 = 0.2

do not increase promotion now 0.5 0 + 0.5 1 = 0.5

Then we choose the lowest of these notional costs, which is to increase promotion now.

Other rules are possible, but in this case there seems a clear consensus for increasing promotion

now as the safer option.

Expected values

Aim: to introduce the ideas of risk, expected values and decision trees

The characteristic of decision making under risk is that we can give a reasonable probability to the

likelihood of an event occurring. Then we can calculate an expected value from:

EV = Probability of an event occurring value of the outcome when it occurs

It follows that managers should be most concerned over events that have a high probability and/or a

particularly serious outcome.

Here the directors of the company could calculate expected values for their alternatives, and use

these to identify a reasonable course of action. Of course, the final decision is made by managers in

the light of all available information – only one part of which comes from the expected value. And

they have to remember that the expected value does have weaknesses, in that it uses subjective

estimates for probabilities, forecasts of future conditions, linear values of money, gives the expected

return over the long-term, and ignores attitudes towards risk. Sometimes an expected utility can

give a clearer picture.

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CASE STUDY – ROYAL DUTCH / SHELL GROUP

It might be a broad statement, but oil companies do not seem to generate much goodwill. They are

generally seen as making excessive profits, causing pollution through spills, depleting scarce natural

resources, wasting gas by flaring it, damaging natural environments through exploration and

recovery – and generally being poor corporate citizens. Because of this reputation, the leading

companies go out of their way to improve their image. Shell shows how this works in a major

company as it works ‘in partnership with industry, government and society to deliver what is

expected of us – economically, socially and environmentally’. They also have rigorous Business

Principles and their annual report reviews environmental and social performance.

What are the main elements in Shell’s business environment?

In common with all other organisations, we can classify the factors in Shell’s business environment

as physical environment, political and legal factors, economic factors, social and socio-cultural

factors, and technological factors. Because of the nature of its primary operations in oil, the physical

environment is likely to be more important than in many other industries. Oil exploration and

recovery is done in remote areas, with major impact on the natural surroundings.

Having said this, major elements in Shell’s business environment are still the economic environment

(which depends on the country of operations) and the industries and markets that it chooses to work

in. Most people probably imagine Shell as a leading company in the oil industry. However, it has

diversified and describes itself as working in the broader energy industry. Within this, it works in

different segments for oil, oil products, electricity, solar power, renewable resources, energy

efficiency, efficiency advice, and so on. It also works in the related industries, such as

petrochemicals and transport.

The problem with trying to describe Shell’s business environment is that it is a huge organisation that

works virtually everywhere, and whose global operations can be affected by almost anything that

happens.

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How would you summarise the environmental concerns facing Shell? What strategies does it

have to deal with these concerns?

Again, we have to say that Shell is such a huge organisation, that it is concerned by

almost every possible environmental factor. The illustrations given in the book

mention some of Shell’s current projects and their difficulties. From these, we can

deduce some of Shell’s broader concerns. For example, its Nigerian operations

have a significant effect on the physical environment; this brings contacts no only

with local communities, but also with governments, international organisations and

pressure groups. These operations also have political considerations arising from

the style of governments – and this, in turn, determines the distribution of benefits. If

this distribution seems unfair, Shell has to consider social factors top ensure that

local communities get a reasonable share of benefits.

We could keep developing these ideas and reinforce them with suggestions from the

other illustrations – but it is already clear that Shell work in a very complex

environment. Their way of responding is based on strategies that define formal

procedures and guidelines for all operations. These strategies do not just appear but

are carefully crafted – the company consider each type of problem, then develops a

response, and incorporates this in strategies for the future. It is impossible to list all

aspects of their strategy, which is broad and often hazy. But we can infer some

points, such as social responsibility, concern for their environment in its broadest

sense, high ethical standards, integrity, diversification, political neutrality, safe and

healthy operations, profitability, responsibility to stakeholders, open communications,

fair competition, and so on.

How does the environment of oil companies compare with that of major companies in other

industries?

In principle, the problems met by the oil industry are similar to those in other industries. They have

to put more emphasis on certain areas, such as the physical environment, but similar questions are

raised in, say, the transport industry, pharmaceuticals, or nuclear energy. Perhaps the single

distinguishing feature about oil is its size and scope. It is the largest international industry, and

operates in every area of the world.

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3.7 CONCLUSION

It is important for any organization to engage in an internal environmental analysis before any

strategic decisions can be taken. The traditional approach to doing an internal environmental

analysis is by using the traditional SWOT analysis approach, whereby the management of the

organization identifies its strengths and weaknesses. This is perhaps still a good starting point

for internal analysis, but because of some inherent limitations it must complemented by some

of the other approaches discussed in this chapter.

The resource-based view and the value chain analysis provide perhaps better and more useful

frameworks for doing an internal analysis. In the resource-based approach the organization is

considered as a combination of tangible and intangible resources and organizational

capabilities. An organization can gain a sustainable competitive advantage if it has scarce

resources, or resources and capabilities that would be difficult to imitate. When using the

value chain analysis, the activities of the organization must be divided in the categories of

primary and support activities. All the activities performed by though organization must then

be analyses in terms of the value that specific activity will add for the customers. Instead of

simply determining is analyzed to determine which activities contribute to a competitive

advantage situation.

Assessing the internal environment of the organization can also be done by using a functional

approach when doing an internal audit. This is a useful approach if one is also competitive

advantage position for the organization. This chapter concludes with the Internal Factor

Evaluation Matrix, a useful method for obtaining a quantitative value for the organization’s

internal situation. This value can be to measure the organization’s internal situation against

what is expected in the industry.



1. Perform a proper internal analysis of any known company in South Africa of your

choice using the following methods

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SWOT analysis

Resource-based view

Value chain analysis

Functional approach analysis

2. Compile an IFE Matrix of the company you have identified

3. What factors should managers consider in their organisation’s environment?

In principle, they should consider every external factor that is likely to affect

performance. This can be a very broad group indeed, so it is realistically impossible to

consider every factor. Normally managers concentrate on a small number of factors that

they think are most important. These typically centre on questions of the industry and

market.

4. Do you agree with the view that business should not be concerned with ethics, as any

action that is sufficiently harmful will be illegal, and any action that is legal must be

acceptable?

This is a view that is quite widely held – anything legal is permissible. However, most

people disagree and say that companies should behave responsibly and ethically as well

as just legally. As individuals we do things because they are ‘right’ – at least most of us

do – and we should expect organisations to behave in the same way.

5. Some people say that organisations do not succeed by fitting their strategy to

opportunities in an existing environment, but by developing strengths to create

entirely new opportunities. What does this mean?

The traditional view says that the environment is fixed, so organisations must adopt their

own operations to succeed within this environment. Some more aggressive competitors

say that this gives conformity, and if managers are innovative enough they can actually

change the environment and create new opportunities, industries and markets. For

example, when Amazon.com started selling books through their Website they did not

compete in an existing environment, but developed a completely new product and

market – thus changing the business environment.

6. Economic analyses, like the models for supply and demand, are usually so simplified

that they are of little practical value to organisations. Do you think this is true?

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Not really. It is true that economic models are simplified views of reality – but so is every

other kind of model. The point of a model is not that it is a perfect reproduction of

reality, but that it gives information that can help managers make decisions. Based on

this criterion, economic models can be very useful.

7. What is the difference between an industry and a market?

An industry is a group of organisations that use similar resources to make equivalent

products to satisfy the same customer demand. The market is the set of customers who

buy – or might buy – a particular type of product. So the industry focuses on supply,

while the market focuses on demand.

8. An organisation has to match its operations to both the industry that it works in and

the market that it satisfies. How can it satisfy both of these requirements?

This needs a balance – and achieving this balance is one of the most difficult jobs of

management. If they put too much emphasis on the market, they may not satisfy their

internal requirements; if they put too much emphasis on their own operations, they may

not satisfy the market. This becomes easy when the two requirements are aligned – and

we shall see in later chapters that high quality products or fast delivery give benefits to

both customers and suppliers. Often, though, there is some conflict between

requirements, and then finding the best balance is more difficult. The trend in recent

years has been increasingly to put more emphasis on customer requirements – with the

implication that it is easier to adjust internal operations than find new customers.

9. Organisations only succeed by satisfying market requirements. Does this mean that

marketing is the only really import function?

No. It is easy to satisfy customers if you put unlimited resources into customer

satisfaction, with no regard for the internal operations. A car manufacturer could satisfy

customers by supplying a car with higher specifications and quality than a Rolls Royce,

but charging less than a Hyundai. But it could only do this until it went out of business.

And there are many more aspects of the external environment to consider than the

market. The aim of an organisation is to balance all of the external requirements –

including the market – with all of the internal requirements.

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10. If you ask senior managers what they do, they say that they analyse circumstances to

design and implement strategies. If you watch what they do, they spend most time

reviewing past performance and justifying their previous decisions. Why is this?

There are really two aspects to this question. The first is a matter of the image that

managers want to portray. They want to be seen as productive and leading their

business into the future rather than mulling over past events. So they inevitably

emphasise their role in plotting future directions and moving the business forward. Also,

they do not want to be seen as irrational, subjective decision makers, so they emphasise

rational analyses and the formal procedures they use to make decisions. Unfortunately,

this image may be far from reality, where managers often make decisions in quite

irrational ways. And this leads to the second factor, which arises from management

rewards that are based on the performance of their organisations. But management is

not an exact science where people look for the single best solution, and performance

depends on many factors, only some of which are directly controlled by managers. So

they have to convince everyone that their decisions were the best ones in the prevailing

circumstances.

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TOPIC 4

EXTERNAL ENVORONMENT ANALYSIS

LEARNING OUTCOMES


Evaluate & synthesise all the elements of the external environment

Apply all the elements of the macro environment in the environmental analysis

of the organization

Describe and identify what an industry is and how to do an industry-competitive

analysis by using Porter’s model

Analyse the important of key success factors for an organisation

Construct a strategic group diagram for an organisation

Construct an external factor evaluation matrix for an organisation

4.1 INTRODUCTION

The organization and the environment in which it operates are not closed systems they

influence each other. The organization thus cannot be successful if it is not in step with its

environment. The fact that the organization interacts with its environment means that it is

acting as an open system and will both affect and be affected by the environment. This means

that the organization draws its input, such as human .financial and information resources,

from the environment and distributes its products and services back to the environment. If

at a given moment the organization is thus in touch with its environment (meaning that the

organization with its available resources can take a full advantage of the available

opportunities and there are few or no threats) this does not mean this relationship will

continue unruffled.

The underlying problem for the successful survival of an organization will continue unruffled.

The underlying problem for the successful survival of an organization is the fact that the

environment usually changes faster than the organization can adjust to it. The experience and

research of organization suggest that their growth and profitability are affected by what is

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happening in the external environment. Because of the increasing turbulence and

continuous changes in market and industries around the world, external environmental

analysis has become an industry around the world; external environmental analysis has

become an explicit and vital part the strategic management process.

External environment analysis focuses its attention on identifying and vital part of the

strategic management process. External environment analysis focuses its attention on

identifying and evaluating trend and events beyond the control of an organization and also

reveals key opportunities and threats confronting the organization that could have a major

influence on the firm’s strategic actions. If this external environmental analysis is done

thoroughly it enables manager to formulate strategies to take advantage of opportunities

and avoid or reduce the impact of threats. The concepts of opportunity and threat have been

explained in the previous chapter as follows:

An opportunity is a favorable condition in the external environment. If seized by the

organization to its advantage, strategic competitiveness can be achieved.

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

an organizations effort to achieve strategic competitiveness.

After external opportunities and threat have been identified, evaluated and match with

knowledge about the internal environment it will be easier for the organization to develop

a clear mission, design strategies to achieve long-term objectives. Respond either

offensively or defensively to the factors, and develop policies to achieve the objective

which ill result strategic competitiveness and above-average returns. To build their

knowledge and capabilities and to take actions that buffer or build bridges to external

stakeholders, organization must effectively analyze the external environment. Technological

improvement, economic fluctuations, changing social values, political changes. Aggressive

international competition and the like continually change the environment in which an

organization exists in such a way that it has to adapt to ensure survival. If one looks at the

environment that confronted Standard Bank, it is evident that a number of factors had to

be taken into consideration by organization

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Study

Study Ehlers, and Lazenby (2010:137) (Figure 5.1) or any other relevant

text and examine external environment analysis variables and their

impact of business organisations. Provide suitable examples to

reinforce your argument.

A continuous process of external environment analysis is, however, important and

includes four interrelated activities, namely scanning, monitoring, forecasting and assessing

(figure 5.1). Several sources can be used to analyze the external environment, including a

wide variety of printed materials and trade shows, Suppliers, customers an external network

contacts can be particularly rich sources of information. Salespersons, purchasing manager

customer service representatives are also example of information sources. It is important that

as many source as possible should be analyzed to get the information needed to determine

the relevant external issues for the organization

4.2 THE EXTERNAL ENVIRONMENT

For organization to be able to understand the present and predict the future, an integrated

understanding of the external environment is essential. An organizations external

environment is divided into three major areas the macro, industry and market environments.

Figure 4.1: The different environments of an organisation

Source: Ehlers and Lazenby (2010:138)

Global

Macro

Market/Industry

Micro

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The external environment is composed of the entire dimension in the broader society that

influences an industry and the organization within it. For organizations to achieve strategic

competitiveness, they must aware of and understand in the broader society that influence an

industry and the organization within it. For organization to achieve strategic competitiveness,

they must be aware of and understand all the dimension of the external environment. It is

also important to understand that the element of the external environment not only

influence the environment and the decision making of manager of organizations, but also one

another. This results discontinuous changes in the environment in which organizations have

to operate and compete.

For example, the South Africa community, with its different cultures and values, decided in

1994 to send the ANC to parliament to be the ruling party. The ANC government decides now

what the political structure is and this structure in turn marshals the ways of the community.

Policies and economics are intertwined. Economics is influenced by the trend of policies that

are to be followed. The result of this is a set standard of living for the community. An

important principle is that organizations cannot directly control the external environments

segments and aliments; but that these elements and changes in the external environment

have a major influence on organizations. The following are some elements in the external

environment that will influence the organization in different ways:

Consumer demand for both industrial and consumer products and services

Types of product needed to be developed

Nature of positioning and market segmentation strategies

Types of services needed

Choice of businesses to acquire or sell

Competitors actions

The selection of suppliers and distributors

Governments regulations and laws

Organizations need to anticipate mobilize and empower their managers and employees to

identify, monitor, forecast and evaluate key external forces; otherwise they may fail to

anticipate emerging opportunities and threats. In Strategy in action 4.2, the influence of the

stronger rand in the economic environment is clearly spelt out.

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4.2.1 The South Africa environmental context

It will be relevant to briefly consider the sociological context of the South African economy. It

must immediately be stressed that the challenges and the complexities that are facing South

Africa cannot be separated from the broader international environment .South African

organizations will have to put in a lot effort to survive in the international war of competition

.The “new “South Africa after the democratic elections in 1994 has still a long way to go in

terms of economic and social transformation. The major threat and challenge for South

African organizations is to manage the problem of inequality. Inequality is measured by the

Gini coefficient, which normally varies between 0(perfect equality) and 1, 00 (perfect

inequality).

The economic inequality in the South African society at the beginning of this century was

estimate at 0, 69. The Impact of income and status inequalities in the South African society

undermines social cohesion, efficiency and economic growth. This definitely also has a

negative influence on family life and individuals in the country .The distortion of resource

allocation in the labor market, the difference in the levels of savings and investments and the

high unemployment levels are but a few of the factors that can be attributed directly or

indirectly to the inequality problem .

Some of the characteristics in the external environment of organizations in the South

African context include the high expectations if some inhabitant of a decrease in this level

of inequality ,their growing impatience for a dramatic improvement in the quality of their life

,the fear of others of losing everything and high rates of violence and crime. It is also true that

the feelings of uncertainty and mistrust between different groups continue to exist in South

Africa. These are but a few issues that contribute to the complex external environment of

South African organizations. There are many more elements in the complex and dynamic

economic and social environment that play an important role. It is important for South African

organizations to understand this in order to compete in a global environment

4.3 THE MACRO ENVIRONMENT

The different dimensions in the macro environment are grouped into five environmental

segments and will be discussed in more detail. (The global environment is also part of the

macro environment, but will be discussed in a later chapter.)

64

Political, government and legal forces

Economics forces

Social, cultural and demographic forces

Technological forces

Ecological forces

4.3.1 Political environment

The political environment includes the parameters within which organizations and interest

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

regulations that guide the interaction between organizations and the environment.

Essentially this aspect represents how organizations try to influence government and how

government influences them. Political decisions by government can a tremendous influence

on a country. Think of events in Zimbabwe; organizations throughout this country were

severely affected by decisions of the government. Any government is a major regulator,

deregulator, subsidizer, employer and customer of an organization. In this respect the South

African government has the following focus aims that will definitely have an influence on

organization:

To enhance the process of social and economic transformation

To emphasize 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”

Political, governmental and legal factors can thus represent key opportunities or threats for

both small and large organization. Local, provincial and national laws, regulations and special

interest groups can have a major impact on the strategies of all organizations. The

deregulation of fuel prices could pose a credible threat for small filling stations, but at the

same time it could be a tremendous opportunity for Pick “n Pay, because it would decrease

the price of petrol at its filling stations to attract customers to its supermarkets and

hypermarket. The direction and stability of political factor in a country are major

considerations for managers when they have to formulate the strategy of their

65

organization.

Managers of large organizations are spending more time anticipating and influencing public

policy actions, meeting with government officials, trade groups and industry association,

because they know what the influence of political and legal issues will be on their

organizations. There are a number of political constraints that are being placed on

organizations. These include company tax and other tax-related decision and laws by the

government, and minimum wage legislation, as was seen in 2002-2003 with regard to

domestic and farm workers. Farmers also manage an organization (the farm) and these laws

have a tremendous influence on their cash flow and potential.

Tax law and regulation tends to reduce the profit potential of organizations; however, some

political actions are designed to benefit and protect organizations. Pricing policies, like the

above- mentioned regulation of fuel prices, also influence organizations; it is imperative that

organizations consider the possible impact if political variable on the formulation and

implementation of competitive strategies, because of the increasing global interdependence

among economies, markets, governments and organizations. Increasing global completion

accentuates the need for accurate environmental forecasts, and before entering or expanding

international operations, strategists need a good understanding of the political and decision-

making processes in countries where their organization may conduct business.

4.3.2 Economic environment

The health of a nation’s economy effects individual organizations and industries, and because

economic factor will affect the nature and direction of the economy in which an organization.

This is why organizations have to study the economic environment to identify changes

and trends, and their strategic implications. Economic factors have a direct impact on the

potential attractiveness of various strategies and consumption patterns in the economy and

have significant and unequal effects on organizations in different industries and in different

locations. Inflation, recession, interest rates and so on influence the demand for goods and

services because consumption priorities.

It is important for organization to know what the economic situation in a country is. Managers

have to consider the unemployment rate, the level of disposable income, the availability and

cost of credit, and the trends in trends in the gross domestic product (GDP): the total value of

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goods and services produced in a country in one year. If the growth rate in the GDP is smaller

than the growth that the growth rate in the population, it is logical that there will be a decline

in the standard of living. This knowledge is important on a national and an international level.

The monetary policy of the government especially that of the South African Reserve Bank

influences the inflow of foreign capital into South Africa. High interest rates favors capital

inflow, but are less advantageous for South African consumers. The low interest rates

over the past year or two have had a favorable influence on the strategic planning of

South African organizations.

4.3.3 Sociocultural environment

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

Small, large, profit-making and not-for-profit organizations in all industries are challenged by

the opportunities and threats arising from changes in social, cultural and demographic

variables. These variables shape the way people live, work, produce and consume. The

growing customer demand for healthy food products, for instance, poses an opportunity for

organizations. In Strategy in action 4.3 it is argued that the restaurant growth offers good

opportunities for the agricultural industry.

The culture in South Africa is not homogeneous. Different subcultures are not only based on

population group, but also on religion and geographic area. These subcultures influence

organizations and have implications for management. New trends in the sociocultural

environment are creating a different type of consumer and thus a need for different products,

different services and consequently different strategies for organizations. There are

significant trends in the 2000s that organizations should be aware of.

These trends include consumer who are more educated, some populations who are ageing,

minorities who become more influential, a higher incidence of single parenthood, and

customers who are more inclined to buy local products. If you have a business in a geographic

area where a large group of elderly people live, you have realized that they are customers

with the constraints of a fixed monthly income. Single parents also have the constraints of

only one income per household. Such aspects will effetely have an influence on the strategy

of an organization. It is a difficult process to translate all the social and cultural changes in a

society into forecast for organizations. It remains, however, important to do some estimation

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in order to be successful with strategic planning for an organization.

4.3.4 Technological environment

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

new product, processes and materials and to avoid obsolescence and promote innovation, an

organization must be aware of technological changes that might influence its industry.

Revolutionary technological changes and discoveries such as superconductivity, computer

engineering, robotics, miracle drugs, space communications, space manufacturing, laser,

cloning, satellite networks, fiber optics, biometrics and electronic funds transfer. These have

a dramatic impact on organizations, because they create not only opportunities for some

organizations, but also threats for others

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

creating new knowledge, and translating that knowledge into new out-puts, products,

processes and materials. Given the rapid pace of technological change, it is vital for

organizations to study the technological environment and the major opportunities and theses

that it represents thoroughly when they formulate their strategies. The implication of

technological innovation and advancements are as follows:

They dramatically affect organizations products, services, markets, suppliers, distributors,

competitors, customers, manufacturing processes, marketing practices and competitive

position.

They create new markets

They result in proliferation of new and improved products.

They change the relative cost positions in an 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 ones.

4.3.5 Ecological environment

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

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Organizations -and the air, soil and water in the physical environment. It refers to the limited

natural resources from which an organization obtains its raw materials. The physical

environment is also the dustbin of was materials, referred to as various forms of Pollution –

air, water and soil pollution. Since the 1960s protest has grown against all forms of pollution

and the destruction of the physical environment because of a growing awareness of the need

to conserve the limited resources of the natural environment.

The global climate is changing and there is enough evidence to show that human activities are

accelerating thus change. In South Africa too these global climatic changes will have a severe

effect on organizations, and management must take the influence of the physical

environment on their organization into serious consideration. It is however, also important

that organizations know what their influence on the ecological environment is. There are

some important questions that organization should answer with regard to the ecological

environment.

Does the organization have a physical environment policy?

What is the organizations environmental performance so far and how does it compare

with that of other organizations?

What will be the potential impact of environmental issues on the future demand for

the organizations products and services?

Do environmental issues form part of the organizations agenda at management

meetings?

Does the organization engage objective third-party assessment of the effectiveness of

its environment management?

These are important question to answer because it is necessary that any detrimental effects

that the organization may have on the environment be avoided as far as possible, out of

concern for the environment and in order prevent unfavorable attitudes toward the

organization. The analysis of the above factors is sometimes called PESTE (political, economic,

social, technological and ecological factors) analysis. Another important macro environmental

aspect that should be analyzed is the global environment. All the factors relevant to the PESTE

analysis can also be applied to the analysis of the global environment.

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4.4 INDUSTRY ENVIRONMENT

A group of organizations that produces products which are close substitutes for one

another or which customers perceive to be substitutable for one another and which

influence one another in the course of competition, is known as an industry. Before an

organization can do an industry environmental analysis, it is important to find some answers

which will help to determine which strategy is appropriate for and available to the

organization. An organization needs to know in which industry is, what the major

determinants of competition are and which organizations are the competitors. In terms of

identifying the industry, the following questions can be asked:

Which organizations have the same type of goals as our organization has?

In which industry are these organizations competing?

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

It is also relevant to know what the structure of the industry is. Industry structure depends on

enduring characteristics that give the industry its distinctive character and can be identified

by examining four variables, namely:

Concentration: - This is the extent to which industry sales are dominated by only a few

organizations

Economies of scale: - These are the savings that companies achieve within an industry due to

increased volume

Product differentiation:- This is extent to which customers perceive goods and services

offered by organizations in an industry as different from one another

Barriers to entry: - These are the obstacles that an organization must overcome in order to

enter industry

In order to perform an industry analysis it is also important to identify the competitors in that

specific industry. To do so, organizations have to look at the similarity of benefits, the higher

the substitutable between them and thus the higher the competition between these

organizations as well. An organization’s industry environment is also known as the market

environment or task environment and it comprises of four variables which are the suppliers,

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intermediaries, customers and competitors. These variables can pose either a threat or an

opportunity to the organization, and they influence management decisions on a daily basis

because they might affect an organization’s ability to obtain inputs or dispose of its outputs.

The most important task of management in capitalizing on the market environment is to

identify, evaluate and exploit opportunities that exist in the market and to develop the

marketing strategy of the organization in such a way that competitors and the other variables

of this external environment do not pose a threat to the organization. According to Michael

Porter (of the Harvard Business School, Harvard University, US) he identified five competitive

forces that influences the intensity of competition in an industry and the industry’s profit

potential. They are

The threats posed by new entrants

The bargaining power of suppliers

The bargaining powers of buyers

Product Substitutes

The intensity of rivalry among competitors.

The combination of the above five determine the ultimate profits potential of an industry.

Study

Study Ehlers and Lazenby (2010:150 ) (Fig 5.4) or any other

relevant literature and examine the elements of the Five forces

model for industry analysis

4.4.1 Threat of new entrants

It is important to identify new entrants as they can threaten the market share of existing

competitor’s by bringing additional production capacity to the industry. This force thus refer

to the possible that profits of established organizations in the industry may be reduced

by the entrance of new competitors organizations. Competition will be fiercer thus will result

in less revenue and lower returns for competing organizations unless the demand for a

product or services is increasing.

4.4.1.1 Barriers to entry

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If high entry barriers exist, they make difficult for new organizations to enter the industry and

thereby diminish the competitive advantage these organizations could have posed. Examples

of entry barriers are as follows:

Economies of scale: Economies of scale are achieved when production is increased during a

given time period, and this results in lower manufacturing costs because of the spreading of

costs over a large number of units.

Product differentiation:- Over time an organizations service to the customer, effective

advertising campaign the first to market a product or service leads customers to believe

that an organization. If new entrants want to change the idea of uniqueness, they have to

offer products and services at lower prices, but this will results in lower profits or even losses.

Capital requirements: To compete in a new industry an organisation needs considerable

resources. Capital to buy physical facilities and inventories, and capital to perform marketing

activities, to bridge customer’s credit and to absorb all the start- up costs should be in place.

Switch costs: Switching costs are once-off costs customers have to incur when they switch

from one suppliers product or service to another. For example, when a customer switches to

different toothpaste the switching costs are low, but airlines that award frequent flyer miles

impose high switching costs.

Access to distribution channels: - New entrants have to persuade distributors to carry their

products. The more limited the wholesales or retails channels the more that existing

competitors have these tied up, the tougher entry into the industry will be.

Cost disadvantage independent of scale: - Some existing competitors may have cost

advantages independent of their size or economies of scale, like favorable access to raw

materials and perhaps government subsidies such as business experienced during the time of

separate economic development in South Africa in the 1970s and 1080s.

4.4.1.2 Expected retaliation

Organizations entering a new market should keep in mind that existing organizations in the

industry might retaliate. If existing organizations can make this retaliation swift and vigorous,

the likelihood of new organizations entering is reduced. The question can thus be asked: How

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will it be possible for a new entrant to enter the industry? Locating market segments that are

not adequately served by existing organizations allows easier entry for the new entrant.

4.4.2 Bargaining power of suppliers

Suppliers are organization that supply raw materials, equipment, and machinery and

associated services. The supply of labour is also an important input to an organization, and

organized lab our can thus be regarded as supplier group. It is thus possible for suppliers to

squeeze the probability of organizations in an industry to such limits that they will be unable

recover the cost of the materials input.

A supplier group is powerful when

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

industry it sells its product to

No satisfactory substitutes are available for customers to buy

Industry organizations are not important customers for the supplier group because it

sells to several industries

Supplier’s goods are critical to buyer’s organization

The switching costs for industry organizations to switch to another product or

suppliers are high because of the supplier are high

It poses a credible threat of integrating forward. With forward integration the supplier

becomes its own buyer therefore other buyers are not important for the success of

the supplier

4.4.3 Bargaining power of buyer

Buyers are the customers of the organizations. There is always a conflict between the

objectives of customers and those of organizations. Organizations want to maximize their

sales and profit, while buyers want to buy products and services at the lowest possible prices.

When are customers powerful? They have bargaining power in the following cases:

They purchase a large quantity of a seller organization products or services. Pick n Pay and

Shop rite Checkers can be very powerful as customers of suppliers and wholesalers.

The sales of the product being sold account for a large proportion of the seller’s revenue.

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

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The same reason is applicable if the customer or buyer earns low profits.

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

customers costs.

The industry’s products are undifferentiated or standardized.

The product that the buyer purchases are not very important with regard to the quality of

the buyers products

Customers have access to a lot of information about the market conditions, which can also

give them some bargaining power.

There is a credible threat of backward integration. With backward integration the buyer

becomes its own supplier.

4.4.4 Threat of substitution products

What is a substitute product? If a product or service from another industry can be used to

perform similar functions as a product or service in. An example of a substitute product is

when generic medicine is used rather than prescription medicine. Cellular phone services

(MTN, VODACOM and CELL C) pose a threat to the services that Telkom provides. It is obvious

that if there are no substitutes, this threat will be not very high. The opposite is of course true.

4.4.5 Rivalry among competing organization

This is the strongest of all the forces. There are many competitors of the original Coke. In the

chicken fast food industry, Nando’s and Chicken Licken are direct competitors of KFC. First

National Bank seized the opportunity to gain market share in the 2010 Soccer World Cup

series. The only way to create competitive advantage is to differentiate your

organizations products from competitors offering in ways that consumers will perceive as

value. The following specific conditions are some of the factors that will influence the intensity

of rivalry between or among competitors:

Numerous or equal balance competitors

Intense competition is common in industries with many organizations.

Slow industry growth

If markets are still growing, pressure to attract customers from competitors is reduced.

Competition in static or slow growth markets is, however, intense, because organizations

battle to increase their market share by attracting competitor’s customers and to protect their

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own market share.

High fixed or storage costs

Organizations try to maximize the use of their productive capacity when their fixed costs are

high, and this could create excess capacity on an industry wide basis.

Lack of differentiation or low switching costs

If organizations are successfully differentiating their products there is less rivalry, but when

buyers view products as similar, competition intensifies.

High exist barrier

What are exist barriers? They include economic, strategic and emotional factors that force

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

is questionable. SAB may be one organization in South Africa that experience high exit

barriers. It possesses for example high specialized assets.

4.4.5.1 Identifying competitors within an industry

It is important to identify competitors. There are several variables that an organization has to

consider in identifying current and potential competitors. They include the following:

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

organisations determines whether organisations see each other as competitors.

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

other organisations offer is important. The greater the similarity, the greater the

substitutability of the products or services and thus the greater the competition.

How committed the organization are to the industry must be determined, because it

sheds lights on their long-term goals and intentions. If organization are very

committed to a specific industry, they will be more committed to being strong

competitors.

A method that an organization can use to identify its competitors is strategic group mapping.

A Strategic group consists of the clustering of organizations that are similar to one another,

offer similar goods to similar customers and might make similar decisions about production

technology and other organizational aspects. What is the value of strategic grouping as an

analytical tool for identifying competitors? It helps an organization to identify he competitors

at different competitive positions in the industry.

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4.4.6 Limitations of Porter’s Five Forces Model

It is obvious that the model of porter has great value as a tool for managers to analyze the

external environment. There are however a few limitations to the model, which can be

summarized as follows:

The model claims to assess the profitability of the industry. Porter’s idea was that the

model would help an organization to determine the attractiveness of the industry by

referring to its profitability. There is, however, strong evidence that organization-

specific factors (such as specific organizational competencies) are more important to

the individual organization’s success than industry factors.

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

The truth may be that the strength of the forces differs from organization to

organization. The model implies, for example, that if the bargaining power of buyers

is strong, it will apply to all the organizations in the industry. The truth might be that

the buyer’s power may differ from organization to organization.

Product and resources markets are not adequately covered by the model. Buyers and

suppliers power relate to the product and resource markets respectively. In both these

markets, the conditions are more complex than Porter’s model implies. Think about

the differences between organizations in terms of their marketing success in market

segmentation and applying a successful marketing strategy.

The model can never be applied in isolation. It was accepted by Porter that the

outcomes of the models application were only relevant while the macro environment

remained constant and stable. It’s now recognized that organizations functions in

complex and dynamic environment.

The model assumes that the relationship between competitors is always hostile but

more complex than the model suggests. Competitors often see ‘fair play” or a “give-

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

4.4.7 Key factors for success in the industry

Porter’s five forces model enables an organization to determine the attractiveness of the

organization’s industry and by implication the potential for profitability and growth. It’s also

important to understand the ingredients for success in an industry if an organization wishes

to align its strategy with the external environment. The requirements from external

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stakeholders, such as quality products, quick deliveries, good services etc. are the things that

organizations must do well in order to be an effective competitor and to thrive in the industry.

These requirements are known as (KSFs-Key success factors)

An industry’s Key success factors are those factors in the industry that contribute to the

organization’s and its competitor’s success. KSF’S varies from one industry to another and

apply to the entire industry e.g. of KSF’S are Marketing related KSFs, Technology related KSF,

Distributed related KSF’s.

Study

Study Ehlers and Lazenby (2010:161) (Table 5.1) or any other related

literature regarding industry KSF and evaluate their impact on business

organisations.

For organization’s to satisfy their stakeholders, and especially their customers, as well as

survive and outperform their competitors, their competitive offering must consist of the

following elements

They must have the ability to recognize the KSF’s for their specific industry.

They must make sure that they have the competence and capabilities that will help them

to gain a competitive advantage.

They must have the ability to use these competencies and capabilities to meet the KSF’S

and thereby satisfy the needs of their customers in a way that actually surprises them.

These identified KSFs can be measured by Key Performance Indicators (KPIs). Key

Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect

the critical success factors of an organization. They will differ depending on the organization.

Whatever Key Performance Indicators are selected, they must reflect the organization's goals,

they must be key to its success, and they must be quantifiable (measurable). Key Performance

Indicators usually are long-term considerations. The definition of what they are and how they

are measured do not change often. The goals for a particular Key Performance Indicator may

change as the organization's goals change, or as it gets closer to achieving a goal. If the KSF is,

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for example, excellent customer service, the performance of this KSF can be measured

through a customer service survey. The result of this measurement is the KPI, which is actually

a quantification “qualitative” KSF. It is important not only to identify the KSFs for a specific

organization, but also the KPIs .It will help organization to decide on its strategic goals for

increasing the performance on the KSFs.

4.5 THE EXTERNAL FACTOR EVALUATION MATRIX

All the important and applicable external forces have now been discussed. It is however

important to remember that it is not necessary to use all the identified opportunities and

threats in the External Factor Evaluation (EFE) Matrix, but rather the key variables that offer

actionable responses from the organization. This external audit is necessary before the EFE

Matrix can be constructed.

Read

Study Ehlers and Lazenby (2010:162)Table 5.2(Sample of EFE

MATRIX)

4.6 CONCLUSION

The external environment of an organization is complex and challenging. That is why it’s

important for organization to do an external environmental analysis by auditing all factors

that pose opportunities and threats. The macro environmental factors were also discussed.

These elements provide many opportunities as well as threats to an organization.

Organizations have to understand that they do not have any control over these aspects, but

that they do have an important influence on the organization. The key variables that pose

opportunities and threats in the external environment can be used to construct the EFE

Matrix. The matrix can be used to evaluate the opportunities and threats in the market and

the industry, but it must also be remembered that sound judgment remains important in this

evaluation process.

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REVISION QUESTIONS

1. Revolutionary technological changes and discoveries such as superconductivity,

computer engineering, robotics, miracle drugs, space communications, space

manufacturing, laser, cloning, satellite networks, fiber optics, biometrics and

electronic funds transfer. These have a dramatic impact on organizations, because

they create not only opportunities for some organizations, but also threats for others.

Critique this statement.

2. Perform a field work case study of Pick ‘n Pay and undertake macro environmental

analysis of this company. What are the key success factors for Pick ‘n Pay? Justify

your answer with suitable practical examples.

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TOPIC 5

STRATEGY FORMULATION LONG-TERM GOALS

LEARNING OUTCOMES


Define long term goals and discuss the requirements that they should meet in

order to be used effectively in the strategic management process

Evaluate the pros and cons of competitive advantage

Synthesise how capabilities contribute to competitive advantage

Critique the generic strategies identified by Michael Porter and how these

strategies can contribute to the attainment of competitive advantage for an

organization

Argue the distinguishing features of each of the generic strategies, optimum

conditions for selecting each specific strategy and the potential pitfalls of each

generic strategy

5.1 INTRODUCTION

Strategy is about positioning organizations for-term competitive advantage. It requires that

managers make choice about what markets and segments to participate in and avoid. There

is a common agreement that the primary aim of strategy is to create value for shareholders

and other stakeholders by proving customer value. Furthermore strategy is important

because recent evidence suggest that there is relationship between strategy business

performance and good governance. successful firms are careful to ensure that their strategy

are related to their structures and to demand and peculiarities of their strategies are related

to their structure and to and to the demand and peculiarities of the environment and

operating context. They will leverage their core competence and particular skills and abilities

to maintain their competitive vitality. Crafting and effective strategy is hard work. It requires

both analysis and synthesis and therefore is as much as analytic as a creative act. Sound

strategy is rooted in a deep understanding of what current and potential customer values,

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how much they are prepare to pay , the profile and posture of the competitive and how much

element likely to change . It should also reflect a clear strategic intent and competitive

innovation driven by sound, effect leadership (Beaver 2003:287).

Study

Study Ehlers and Lazenby (2010:175) strategic goals and associated

strategies in context.

This chapter will explore the nature of long-term goals, the importance of gaining a

competitive advantage and the possible generic strategies to choose from in pursuing

organization long-term goals and ultimately achieving the vision

5.2 LONG-TERMS GOALS

Long-term goals (sometime called long-term objective) are determined in line with the

organization vision. These goals are strategic in nature and reflect the organization specific

direction on high level. Strategic objective, or the so called long-term goal, are the premise

for more specific tactical objectives, or the so-called short-term /functional objectives .The

word strategy has been handed down from the military, and refers to the important thing;

tactics on the other hand, refers to the details “one person strategies are another tactics –

what seems tactical today may prove strategic tomorrow.

What they mean is that although long-term strategies objectives are important because they

means is that what seems tactical today may prove strategic objectives are important because

they set a specific direction , the importance of tactic cannot be ignored . Sometimes a tactical

decision, such as Henry Ford’s decision to manufacture his cars only in black (which lost him

the war General Motors), may prove to have critical competitive consequences. Ehlers and

Lazenby (2010:176) summarize some of the differences between long-term strategic goals

and short-term tactical objectives (Table 6.1)

Long term serve as a reference for the selection of specific strategies and the associated

short-term objective of each organization unit and its subunit policies are also reflect in 6.1

and can be defined as the rules or guidelines that express the limits within each action

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resulting from a short-term (and by implication long-term) objective; for example: “purchases

in excess of R10 000 need to be approved by the purchasing and logistic manager “ like the

objectives they support , policies exist in a hierarchy throughout the organization .

Long-term and short-term objectives need to comply with specific requirements to make it

clear to all in the organization. A long-term goal should not be open to interpretation that

varies from employee to employee, but should clearly and unambiguously indicate what

management wants to achieve in future. These objectives reduce uncertainly and serve as the

basis for allocation and managing resources in the organization. for example ,if a long-term

goal state that market share should be increase , the sale and marketing department’s short-

term object would be increase department’s short-term objectives would typical include

increase sales to customers .

This would means that the employee and performance on that target can now be measured.

Increase sales of the productivity to provide for the increase demands created market share

therefore need to be action from their side as well. they should also consider the implication

of other departments’ objectives and consequent action on their performance requirement ,

and build that into their objectives and planned actions it is therefore critical that objectives

should be realistic clear and decisive to ensure concerted and coordinated effect by all

organization units .some considerations should include the following (Mintzberg et

al;1995;12)

Is all effort direction toward clearly understood, decisive and attainable over all

objectives?

The specific objectives of subordinate units may change in the heat of campaigns or

competition, but the overriding long-term objectives for all units must remain clear

enough to provide continuity and cohesion for tactical choices during the time horizon of

the strategy.

If the objective are to be achieved they should ensure the continued vitality of the entity

vis-à-vis its opponents

Some additional considering includes the following:

Goals should measurable and clearly indicate a time-frame .this means objectives should

be expressed in quantifiable terms , such as target dates and numerical target for example

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“the return on equity must increase from x percent to y per cent by the end of 20xx

financials year”

Goals should also be consistent and congruent across organization units managers should

ensure that the objective with those of other units/departments. For example, one of the

organization’s long-term objectives may be to grow its customer base in terms of more

profitable customers. The sales department, however, still chases number regardless of

customer profile and with little concern for customer profitability. Another example is

where an organization wants to expand its market share through canvassing new

corporate client. The following two departmental objectives might be conflicting in the

pursuit of these objectives the credit department is aiming to decrease the number of

creditors on its books by 10 per cent by the end of the same year as the same percentage.

These objectives are not congruent, since corporate client usually expect credit terms of

between 30 and 60 day. Clearly defined provide direction to the organization, establish

priorities reduce uncertainty and assist in the allocation of resource

5.3 COMPETITIVE ADVANTAGE

According to Michael porter (1985), competitive strategy is all about activities an organization

undertakes to gain a competitive advantages in particular competitive industry these

activities (and objectives)are determined by the strategic decision on the particular

competitive advantages of an organization in the answer to the question :”what competence

/advantages should the organization use to distinguish it from its competitors? The

competitive advantages should elevate the organization from its competition .this

competitive advantages should fulfill certain criteria. It must:

Related to an attribute with value and relevance to the targeted customer segment

Be perceived by the customer as a competitive advantages

Be sustainable, i.e. not easily imitated by competitors.

Consequently , the competitive advantages that an organization select should be based on

its resource , strengths or distinctive competence relative to competitors but must also be

perceived as such by it customer . This implies that an organization should not only consider

its competitors when determining its competitive advantages but also its customers and value

proposition. Mr. Price Home achieve value for customers by providing fashionable ,trendy

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décor items of an acceptable quality at affordable price , while distinguishing itself from

competitors by providing lower-priced décor product as an alternative to traditionally

priced product.

5.4 GENERIC COMPETITIVE STRATEGIES

Organization embarks on specific strategies complementing their distinctive competencies in

order to achieve their long-term goals. Porter combines the organization’s scope of operation

and competitive advantages to derive three generic types of competitive strategies. before

moving to each generic strategy , it is important to note that research support the notion

that firm siding with one of these generic competitive strategies outperform their rivals.

However , there some authors that criticize Porter’s two basic competitive strategies types as

oversimplifying potential source of differentiation these authors maintain that differentiation

strategies can be carried out in different variants or that differentiate and cost

advantages can be combined to deliver more strategy and research ,and therefore critical to

strategic management theory . Organization has to select specific generic strategies

complementing their competitive advantages. Generic strategies provide focus and direct

organizational activities. According to Porter, an organization can strive to supply a product

or service inn three distinct ways by pursuing one of the following generic strategies I. e:

By being more cost-effect than its competitors, i.e. cost leadership

By adding value to the product or service through differentiation and commanding higher

prices, i.e. differentiation

By narrowing its focus to a special product market segment which it can monopolies; i.e.

focus combining the cost and differentiation advantages, add another generic competitive

strategy, namely:

By offering the lowest (best)price compare to rival offering with product with

comparable attribute , i.e. best-cost strategy

5.4.1 Cost Leadership

Organization pursuing a cost leadership strategy usually sells a product or service that appeal

to a broad target market. their product or service are highly standardize and not customer’s

taste or desire to achieve a cost advantage , an organization cumulative cost across its overall

value chain must be lower than cumulative costs .there are two ways to accomplish this:

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1. Out-managers rival in the efficiency with which value chain activity are preformed and

in controlling the factors that drive the costs of value chaise activity

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

production activities

Some of the associated cost drivers that need to be managed as of a cost leadership strategy

are the following:

Economies of scale

Economic of scale arise whenever activities can be performed more cheaply at large volumes

than smaller volume and from the ability to spread out certain fixed costs like research and

development (R&D) and advertising over a greatest sales volume. For example,

manufacturing economic can usually be achieve by simplifying the product line scheduling

longer production runs for few models , standardizing products and service , or reaping the

benefits of quantity discount . a large established retail chain like Pick ‘n Pay negotiates with

suppliers will therefore be much lower than those that the new supermarket will be to

negotiate.

Experience and Learning Curve Effects

Cost of organization can decline as employee experience increase. This lead to higher

productivity, employee applying technology better or devising ways of improving system.

Learning foster increase understanding of responsibilities and leads to mastering of skill to

achieve organizational objectives more effectively and efficiently.

The Percentage of Capacity Utilization

Capacity utilization is an important cost drive for value chain activities associated with

substantial fixed cost being spread over a larger unit’s volume which lowers fixed cost per

units, especial in capital-intensive organization. Ways to achieve this are through better

demand force casting, conservative expansion policies, aggressive pricing and increase

depreciation rates.

Technological Advances

Investment in cost-serving technology can enable organization to reduce the units cost of

their product or service significantly. Investment technologies are often association with

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manufacturing activities, but investment in office and service automation is also popular.

For instance the scanning system that Pick n’ Pay invested in scan the prices of groceries at

till point not only decrease the time per transaction, but also enable it to reduce its stock

management costs .stock levels are update automatically by the computer when the code the

bar code is canned into the system.

Improved efficiencies and Effectiveness through Supply Chain Management

An organization‘s value chain is intimately linked to the value chains of its suppliers and

customers in a highly interactive way. Dell is good example of a firm leveraging its supply chain

relation to reap to cost benefits. Dell out sources component supply and some parts of after-

sales service but it has eliminated all alternative distribution channels and concentrates on a

direct customer relationship. Dell is able to exploit comparative advantages in a key part of

the supply chain – assembling built-to-order computers and computers solution and

delivering them directly to the customers focusing on activities in which it portrays

competencies save time and money (Marcus, 2005:54).

5.4.1.1 Distinguishing features of the cost leadership strategy

Table 5.3 outlines the parameters that distinguish a cost leadership strategy from the other

generic strategies

Strategic target A broad cross-section of the market

Basis of competitive advantage Lower overall costs than those of competitors

Product line A good basic product with few frills( acceptable

quality and limited selection)

Production emphasis A continuous search for cost reduction without

sacrificing acceptable quality and essential features

Marketing emphasis Trying to make a virtue out of product features that

lead to low cost

Keys to sustaining the strategy Economical prices/good value

5.4.1.2 When cost leadership is the best strategy to follow

A cost leadership is the best generic strategy to follow when

The organization has the ability to reduce cost across the supply chain

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Price competition among competitors among competitors is vigorous

The targeted customers market is price sensitive.

Competitive products are similar and there is great degree of product

standardization

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 price to attract buyers and built a

customer base

The market is large enough to provide the organization with economies-of-scale

advantages

Buyers incur low switching costs. For example, it costs nothing to change your brand of

toothpaste every month. Buying new computers-operating software however, means

the customers has to pay a significant amount has to ensure all other software is

compatible and needs to be trained in using the new software switching cost is higher.

Similar, switching costs is lower for buying a new car than for buying a new house

5.4.1.3 Potential of a cost leadership strategy

Sometimes organization stand the risk of being overly aggressive with their price

cutting and ending with lower profitability .South Africa cellular operation at some stage

offered handset packaged and starter packages at such low prices at their profitability

was seriously eroded as they still had significant capital costs association with buying

handsets from equipment providers. Prices at bottom end of the rage soon evaporate

and became more competitive overall.

Value-creating activities that from the basic of this strategy can often be imitated too

easily

A degree of differentiation is often still needed. A low-cost provider’s product offering

must always contain enough attributes to be attractive to prospective buyers –low price is

not always appealing to buyers. Mr. Price cannot only rely on a cost advantage as their

name suggest, but has to stay abreast of newest trends in fashion, demand for variety and

comparable quality .Similarly, organization proving online degree programmers may offer

lower prices, but they will not be successful unless the quality of their course and

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instruction is perceived to be comparable to traditional providers.

5.4.1.3 Advantages of cost leadership

As we have said, pursuing a cost leadership strategy increase the potential of an

organization to increase its market share as well as its profitability. In cases where high

profitable is obtained, the capital reserves that are accumulation also provide the

organization with a greater variety of strategic alternatives when it comes to defending or

expanding the market share of the organization. For this reason competitors are not very

likely to start a price war in an industry where there is a dominant cost leader.

Customers who are familiar with the products and services of low-cost leaders are unlike to

switch to a competing brand, unless the competing brand has something very different or

unique to offer. Customers often prefer to buy from well known, established organization,

especially when after-sale service is important customer loyalty is therefore often an

advantage of a prolonged cost leadership strategy.

One of the most important advantages that cost leaders have is their ability to keep new

entrance from entering the market. Establishing a new organization usually requires vast

capital investment in fixed assets. These new organization usually do not have the turnover

to create economies of learning and experience. They therefore find it very difficult to attain

market share in a market where a dominant cost leader already has a majority of the market

share as well as price-cutting power.

5.4.2 DIFFERENTIATION

Differentiation consist of creating difference in the organization’s product or service

offering by creating something that is perceived as unique and valued by customers .

Differentiation can take on many forms such as the following:

Prestige or brand image (BMW automobile, Nike trainers , Carrrol Boyes home ware,

Rolex)

Technology (LG electronic equipment )

Innovation (Nokia cellular phone )

Feature (Microsoft office )

Customer service(Investec Personal banking)

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Product reliability(Johnson &Johnson baby products)

A unique taste (Nando’s Chicken)

Speed and rapid response through activities such as prompt response to customer

complain shorter product development cycle delivery, i.e. outsurance.

The most appealing approaches to differentiation are difficult for competitors to imitate

approach. Sustainable differentiation is usually liked to core competencies unique

competitive capability and superior management of value chain activities that competitors

cannot readily match. As a rule, differentiation yields a longer-lasting more profitable

competitive capacity and reliability, comprehensive customer service and unique competitive

capability. Such differentiating attribute tend to be difficult for rival to copy or offset

profitability, and buyers widely perceive them as having value.

The most important by-product of a differentiation strategy is customer retention and loyal.

This means that customers are locked in and therefore safe from rival competitive activities.

5.4.2.1 distinguishing features of the differentiation strategy


generic strategies

Strategic target A broad cross-section of the market

Basis of competitive advantage Ability to offer buyers something attractively

different from that of its competitors

Product line Many product variations, emphasis on differentiating

features

Production emphasis Differentiating features that buyers are willing to pay

Marketing emphasis Charging a premium price to cover the extra costs of

differentiating features

Keys to sustaining the strategy Constant innovation to stay ahead of imitative

competitors

5.4.2.2 When differentiation is the best strategy to follow

A differentiation strategy is the best generic strategy to follow when

Buyer’s preferences are diverse and varied

Fewer competitors follow a similar a differentiation approach with less head-on head

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rivalry

There are many to differentiate the product or service and many buyers-perceive

difference as having value

Technology changes frequently and competition often centers on changing product

features such as the case with mobile handsets.

Higher industry entry barriers result in higher demand for product less price

sensitivity.

The differentiated product or can be designed so that it has wide appeal to many

market sector.

Brand loyalty exists :-this lower customer propensity to switch products and service as

well as their sensitivity to price retail banking in South Africa is characterized by

brand loyalty and differentiation of product and services is a common strategy

among rivals

5.4.2.2 Potential pitfalls of a differentiation strategy

Despite numerous benefits the following pitfalls to a differentiation strategy be avoided:

Uniqueness that is not valuable: It is sufficient to be difference. In such instance market

research and reliable information on customer preferences are critical to the success of a

differential strategy.

Too much differentiation: The key to success is providing an appropriate level of quality

at a lower price.

Charging too high premium: - prices still need to be competitive in order to reduce

switching to lower-priced competitive products or services.

A uniqueness that is easily imitated.

Dilution of brand identification through product-line extensions: - profit declines can

occur because of differentiation to a product or product line at the expense of another.

Another possibility is that one product can cannibalize the revenues of another in the

organization at the expense of overall profitability.

5.5 FOCUS STRATEGY

The focus generic strategy is based on the choice of a narrow competitive scope within an

industry. The organization targets a specific customer segment or group of segments to which

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to provide products or services. The essence is exploiting a market niche that differs from the

rest of the industry. Examples of focus strategies within well-defined industries are eBay

(online auctions), Porsche (sports cars) and Tree house (a South African retail chain featuring

children’s furniture and accessories).

A focus strategy based on cost leadership: - aims at securing a competitive advantage by

serving buyers in the target market niche at lower cost and prices than its competitors.

A focus strategy based on differential:- aims at securing a competitive advantage by

offering niche members a product they perceive as well suited to their own unique taste and

preferences.

5.5.1 Distinguishing features of a focus strategy

(Please go to the prescribed textbook on page 188 to read table 5.5 about the focus strategy)

5.5.2 When focus is the best strategy to follow

A focus is the best generic strategy to follow, when

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

It provide a way for a smaller organization to avoid direct competition with the large

organization that do not deem the segment important to compete in

It is viable for large organization to meet the specialized need of the niche segment, while

still maintaining performance in their main streams markets

The industry has a variety of potentially profitable market segment and overcrowding

by competitors is thus less risk

Customers are willing to pay a high premium for the perceived value that they attach to a

differentiated (customized) product or service

Customers are brand loyal and are unlikely to shift their loyalty to a competing brand

regardless of the price they have to pay for the particular product or service

5.5.2 Potential pitfalls of a focus strategy

The need expectation and characteristics of the market may gradually shift towards

attribute desired by the majority of buys in the broader market , which will decrease the

profit potential of this segment

Competitors may develop technology or innovative product that may redefine the

preference of the niche the organization has been concentrating on

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The segment may became so attractive that is soon inundated with competitors ,

intensifying rivalry and eroding profits

5.6 BEST-COST STRATEGY

Organization that successfully integrated cost leadership and differentiation strategies find

that their competitive advantages often more difficult for competitors to imitate. An

integrated strategy enables an organization to provide values in term of differentiate attribute

as well as low price. The objective becomes to provide unique product and service more

efficiently than competitors do. These strategies are also referred to as middle road

strategies. Although the immediate effect of differentiation is to increase unit cost, they will

decrease in the long run as volume increase, because differentiation makes the product more

attractive to the market in the automotive industry motors manufacture companies are

currently exploring avenues to produce an increasing variety of product while simultaneously

lowering their cost.

5.6.1 Distinguishing features of the best-cost strategy


generic strategies

Strategic target Value-conscious buyers

Basis of competitive advantage Ability to give customers more value for money

Product line Items with appealing attributes, assorted upscale

features

Production emphasis Produce upscale features and appealing attributes at

lower cost than rivals

Marketing emphasis Flaunt delivery of best value

Keys to sustaining the strategy Unique expertise in simultaneously managing costs

down while incorporating upscale features and

attributes

5.6.2 When best-cost is the best strategy to follow

A best-cost strategy is the best generic strategy to follow when

The potentials for economic of scale learning exist in the market

Customer demand, expectation and need provide sufficient impetus for investment

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enhanced efficiencies and cost servings as well differentiation

Competition is fierce and barriers to entry low

Customers are simultaneously price and quality sensitive

Mass customization became a possibility because of advance technological, distribution

and marketing capability. Example include advanced in manufacturing technology the

rapid use of modular product design techniques (Pick n’ Pay and Woolworths ‘home

shopping; internet banking); and advanced market segmentation capabilities that enable

Organization to locate and uncover previously neglected customers need and market

niches.

5.6.3 Potential pitfalls of a best-cost strategy

Organization that fails to crease both competitive advantages simultaneously may end

with neither and became stuck in the middle

Organization may underestimate the challenges and expenses associated with provide

low price and differentiation at the same time.

Organization may miscalculate the sources of revenue within the industry and fail to a

achieve expected profitable

5.7 CRITICISM AGAINST THE GENERIC STRATEGY FRAMEWORK

The Porte’s generic strategy framework has also been the target of increasing criticisms. The

most important objective are explained below

An organization can employ a successful hybrid strategy without being stuck in the

middle: - Porter argued that an organization must decide on either a differentiation or a

low-cost strategy. If an organization is stuck in middle it will result in suboptimal

performance. There is example where organization with low cost can nevertheless sell

their product with a price premium. A good example is Nissan, the Japanese motor

manufacture. Their unit costs are he lower in the industry, but they charge a price

premium because customers perceive their product to be reliable and thus differentiated

this is, however a stuck in the middle position according to porter

Low-cost strategy does not in itself sell product: - If the lower costs are not reflected in a

lower price, the products will not sell.

Price can sometimes be used to differentiate:-Porter did not take into consideration that

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price can be used to differentiate. Henry Mintzberg , however argued that price ,

together with image , quality and design can be used a basis of differentiation.

Despite these objective and limitation, Porter provides a useful framework for categorizing

and understanding some source of competitive advantages.

5.8 CONCLUSION

Long term goals are the footlights of organizational strategic priorities. They illuminate the

direction that the organization should follow to reach its future vision. They guide the paths

to organizational success and provide the basis for subsequent short-term, tactical goals.


QUESTIONS

1. What are the long term goals and what role do they play in the strategic management

process?

2. What is competitive advantage and how do the resources of an organisation

contribute to the attainment of competitive advantage?

3. What do the generic strategies identified by Michael porter entail? Explain each in

terms of potential pitfalls

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TOPIC 6

GRAND AND FUNCTIONAL STRATEGIES

LEARNING OUTCOMES


Explain the relationship between Porter’s generic strategies and grand strategies

Discuss the grand strategies that organisations can pursue in order to achieve

their long-term objectives, with specific reference to the circumstances under

which each strategy would be appropriate

Depict with practical examples how each of the grand strategies is implemented

by organizations in the South African organizational environment

Examine what a combination of strategies entails

Analyse the relationship between grand strategies and functional strategies.

6.1 INTRODUCTION

The previous chapter the three generic strategies based on three distinct competitive

advantages were discussed, namely cost leadership, differentiation and focus. It has been

argued that the generic strategies restrict organizations in terms of strategic options that

the reduction of possible competitive advantages to two broad categories (cost and

differentiation) is too simplistic and does not consider other possibilities for competitive

advantages. Additional and more specific strategies complementing the generic strategies are

therefore needed. One classification of such complimentary strategies to enhance the range

of strategic options is termed grand strategies.

These strategies are also referred to as alternative strategies, business strategies or master

strategies. Grand strategies provide basic direction for strategic actions. They use as a pint

of departure a selected generic strategy with its associated competitive advantage. They

form the basis of coordinated and sustained efforts directed toward achieving long-term

objectives. A grand strategy can be described as a comprehensive general approach that

guides a firm’s major actions. Fourteen principal grand strategies are defined and classified

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under four broad categories, namely external growth strategies, internal growth strategies,

decline strategies and corporate combination strategies.

The purpose of this chapter is twofold: firstly, to illustrate the relationship between generic

and grand strategies and to provide guidelines with regard to their application in different

circumstances. Secondly, it will briefly look at the action plans that organizations will have

formulate at functional level in order to ensure that the strategies they have identified are

implemented effectively. The industry life cycle will have an influence on the selection

of appropriate grand strategies.

Study

Study Ehlers and Lazenby (2010:200) (figure7.1) or any other relevant

text and examine the relationship between porter’s generic

management and the grand strategies

6.2 GRAND STRATEGIES

There is a variety of grand strategies that organizations can pursue to achieve their long- term

goals. These can be broadly grouped into three types: growth strategies, decline strategies

and corporate combination strategies. In the growth strategy section, there may an internal

and external growth strategy. The internal growth strategy focuses on the internal

environment of the organization, while the external growth strategies are more focused on

diversification and integration.

6.2.1 Internal growth strategies

6.2.1.1 Concentrated growth

It refers to as market penetration, is a strategy that seeks to increase the market share of an

organization through concentrated marketing efforts. The organization stays focused on its

present market as well as present products and services. The challenge is pursues is to

grow its share of the particular market through the customization of its product features,

prices, distribution channels and promotional strategies in order to meet the needs and

expectations of consumers in that particular market better than any of its competitors.

Through this customized approach it Endeavour’s to increase the usage rate of its present

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customers and convince them to switch brands.

A concentrated growth or market penetration strategy can be effective if the following

conditions prevail:

The market for a specific product or service is not saturated.

There is room to increase the usage rate of present customers

The market shares of its major competitors have been declining while total sales in the

particular industry have been increasing.

Economies of scale can provide cost benefits to organizations

There is not much fluctuation in the availability, price and quality and raw materials and

other resources required to provide the specific product or service that consumers

require.

6.2.1.2 Market Development

A market development strategy involves expanding the portfolio of markets that the

organization serves. Present products or services are therefore introduced into new

geographic areas, including other countries. MTN followed a market development approach

when it decided to enter the African markets with its technology and networks. A market

development strategy is especially effective when the following conditions prevail:

An organization 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 behavior of consumers in

the foreign country present challenges to organizations that consider entering

international markets. To overcome these barriers, some organizations decide to form

strategic partnerships with organizations in the foreign country that they wish to enter.

When Pick ’n Pay entered the Australian market it acknowledged its own weaknesses in

that particular market and established a strategic partnership with an Australia

distribution company, Metcash Trading, ensuring a supply chain at least as good as any of

its competitors in the Australian market.

6.2.1.3 Product development

Improving and modifying the products and services of the organization in order to increase

sales is called product development. Product development is particularly effective when an

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organization has successful products that are reaching the maturity stage of their product life

cycle. The new Corolla that Toyota launched in 2003 was not only a technological

improvements on the previous model, but it also boasted a new sporty look that appealed to

a wider market. With this strategy Toyota not only increased sales, but also expanded its

market to include the younger generation.

Internationally Pfizer, the pharmaceutical giant pursues a definite product development and

innovation strategy with its host of prescription and over-the-counter medicines. With 2005

actual spending of $7.4 billion in research and development (R&D), Pfizer boasts the industry’s

largest pharmaceutical R&D organization: Pfizer Global Research and Development. In

addition more than 12 500 Scientists are employed at Pfizer research facilities around the

world (http://www.pfizer.com)

A product development strategy can be effective if the following conditions prevail:

In industries that are characterized by rapid technological developments, especially when

their major competitors offer better quality products at comparable prices.

When capital is available for capital investment in research and development,

technology and the attainment of appropriate human resources.

6.2.1.4 Innovation

Organizations that have distinct technological competencies and capital reserves to invest in

research and development may find it profitable to make innovation their grand strategy.

Instead of concentrating on extending the life cycle of their products or services through

differentiation and product development, these organizations Endeavour to create new

product life cycles that will make similar existing products or services obsolete. While most

growth-oriented organizations innovate from time to time, organizations that makes

innovation their grand strategy use innovation as the fundamental way of relating to their

markets.

An innovation strategy can be effective if the following conditions prevail:

Customers demand differentiation.

The industry is characterized by rapid changes and advances in technology.

The organization has research and development skills.

Organizational culture fosters innovativeness.

http://www.pfizer.com/

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6.2.2 External growth strategies

6.2.2.1 Diversification

Adding new but related products and services to the product line of the organization is called

related or concentric diversification. The objective of related diversification is usually to

expand the market share of an organization in an existing market, or alternatively to

enter new markets.

Related or concentric diversification refers to businesses diversification into related markets

or industries. Markides and Williamson (1994:149) argue that relatedness not only has to do

with market or industry but also relatedness in terms of strategic assets (i.e. those that cannot

be accessed quickly and cheaply by non-diversified competitors). Canon’s deployment of

technology from its camera business unit in developing its photocopier business is a good

example of where relatedness stems from strategic assets. A related or concentric

diversification strategy can be effective if the following conditions prevail:

In industries that experience slow growth or no growth, the objective is to increase sales

in this particular market by increasing the number of products consumed by each

individual consumer. Needless to say, the organization should be able to offer the

additional products at highly competitive prices and should ensure that brand loyalty is

obtained before the additional products are introduced to the market.

Organizations whose current products or services are in the decline stage of the product

life cycle.

The potential exists to reap economics of scale across business units that can share the

same strategic asset (such as a common distribution system).

The potential exists to utilize a core competence developed through the experience of

building strategic assets in existing businesses, to create a new strategic asset in a new

business faster or at a lower cost (such as using the experience of building a motorbike

distribution to build a new, parallel distribution system for lawn mowers, which are

generally sold through a different type of outlet).

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a) Unrelated or conglomerate diversification

This involves adding new, unrelated products or services in an effort to reach and penetrate

new markets. This type of strategy is a corporate strategy, which is usually applicable to

large conglomerate multi business organizations.

An unrelated or conglomerate diversification strategy can be effective if the following

conditions prevail:

The basic industry of the organization is experiencing declining sales and profits.

Existing markets for the products and services of the organization are saturated.

The organization has the capital and managerial talent needed to compete successfully in

a new industry.

Some of the methods through which an organization can pursue unrelated diversification

include the following:

Buying a high-performing organization in an attractive industry

Buying cash -strapped organization that can be turned around quickly through additional

capital investment.

Buying an organization whose seasonal and cyclical sales patterns would provide

stability to the cash flow and profitability of the organization.\

Buying a largely debt-free organization to improve the borrowing power of the

acquiring organization.

In conclusion, diversification is directly concerned with extending the organization beyond its

original boundaries (industry and market). The major benefits that diversification can provide

to an organization include the following:

More attractive scope that can provide opportunities for faster growth, higher

profitability and greater stability.

Access to key resources like capital, technology and expertise.

Sharing of value chain activities to provide greater economies of scale and thus lower total

cost.

The risks associated with diversification include the following:

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Ignorance about newly entered markets could result in inefficiency as a result of

inadequate knowledge about customer needs, technological developments and

environments shifts.

Organizational that pursue unrelated diversification run the risk of reducing their

management effectiveness. Unrelated diversification places significant demands on

senior executives due to increased complexity and technological differences across

industries. It might be very difficult for managers to understand each of the core

technologies and appreciate the special requirements of each the individual business units

in an unrelated diversified organization.

Sharing value chain activities chain activities with another organization often entails

substantial costs with regard to communication, compromise and accountability.

6.2.2.2 Integration

Integration strategic involves gaining control over suppliers, distributors or competitors in a

particular in a particular industry to enhance the effectiveness and efficiency of the

organization. There are three types of integration, namely forward vertical, backward vertical

and horizontal.

This extends the scope and operations of an organization to other activities within the same

industry. This strategy is characterized by the expansion of the organization 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 organization on resources it deems critical to its competitive

advantage. Vertical integration can be achieved in two directions, namely forward and

backward.

Backward vertical integration: - Involves gaining ownership or increased control of an

organization’s suppliers. This type of strategy is particularly common in industries where

low cost and certainly of supply is vital to, maintaining the competitive advantage

of the organization in its market. Toyota South Africa pursued this strategy when it gained

ownership of Raylite batteries and of Armstrong, manufacturers of shock absorbers.

Backward vertical integration is appropriate when the current suppliers of an organization

are unreliable, too costly or incapable of meeting the needs of the organization with

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regard to parts, components or materials. Needless to say adequate capital and human

resources are prerequisites for pursuing this strategy.

Forward vertical integration:-It entails gaining ownership over distributors or retailers.

Established websites to sell products directly to consumers is also a form of forward

integration, as the organization cuts out retailers and distributes its products directly to

consumers. Forward integration is attractive when existing distributors / retailers are

unreliable, have high profit margins (which inflate the price that the consumer has to pay

for the product) or are incapable of servicing the consumers of the organization’s products

effectively.

There are benefits and risks associated with vertical integration. The cumulative potential

benefit of vertical integration strategies is that they tend to reduce the economic

uncertainties and transaction costs facing an organization in a particular industry.

However, vertical integration can sometimes lead an organization to overcommit scarce

resources to a given technology, production process or other activity that could become

obsolete in a certain industry. This strategy is also capital intensive, resulting in high fixed

costs that may leave the organization vulnerable in an industry downturn. Lastly, vertical

integration can pose problems with regard to integrating different sets of capabilities, skills,

management styles and values.

Horizontal Integration: This takes place when an organization seeks ownership or

increased control over certain value chain activities of its competitors. It occurs through

mergers, acquisitions and takeovers. This type of strategy is attractive when an

organization competes in a growing industry, where the achievement of economics of

scale could provide cost benefits or other forms of competitive advantage and where an

organization has both the capital and human talent needed to successfully manage an

expanded organization. The merger between Volkskas, United, Trust Bank and allied that

resulted in Absa Bank is a good example of horizontal integration.

Horizontal integration can pose problems with regard to integrating the differences in

organizational culture, capabilities, skills, management styles and values of the organizations

involved in the merger or acquisition. In January 2000 America Online (AOL), the world’s

largest online company, and Time Warner, the world’s largest media company, announced

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their plans to emerge. Analysts and shareholders feared that the sheer size of Time Warner

(which had 70 000 employees) compared with that of AOL (with its 12 000 employees) could

sap AOL’s creative energy and result in a bureaucratic giant. These concerns were reflected in

the sharp drop of AOL’s stock price in 2000.

6.2.3 DECLINE STRATEGIES

Decline strategies are also often referred to as defensive strategies. These strategies are

pursued when an organization finds itself in a vulnerable position as a result of poor

management, inefficiency and ineffectiveness. There are four types of defensive strategies,

as follows:

a) Retrenchment or turnaround

Some organizations find themselves in a situation where their profits are declining. This can

result from a variety of reasons, including a decline in sales, adverse economic conditions,

increased competition, products becoming outdated or obsolete (when competitors

launch innovative products), ineffective production and distribution processes, and poor

management.

A turnaround strategy focuses on strengthening the distinctive competencies of the

organization in order to break the download spiral with regard to sales and profits. Activities

focus on ways to reduce costs in order to stabilize the financial condition of the organization

and to put it on a path to recovery. Emphasis is often on re-engineering of processes and the

introduction of total quality management (TQM) programmes to increase the cost-

effectiveness of the organizations. Activities may also include reduced assets, for example the

selling of land and buildings to aid cost-cutting, the outsourcing of activities that are not the

core competencies of the organization, reduction of personnel and curtailment of managerial

perks. Organizations that pursue turnaround strategies often appoint new managers with

new perspectives and specialized skills to facilitate dramatic changes like restructuring and

re-engineering.

Turnaround strategies are appropriate for organizations that have distinctive competencies

but have been managed poorly or have growth too quickly and therefore need major

reorganization in order to survive. These organizations are usually plagued by

inefficiency, low productivity, poor profitability, low employee morale and pressure from

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their shareholders to increase performance.

b) Divestiture

Divestiture involves selling a division or part of the organization to raise capital for further

acquisition or investments. It can also be part of an overall retrenchment strategy to get rid

of divisions that are unprofitable or no longer fit in with the strategic direction that the

organization is embarking on. In diversified organizations divestiture will entail selling one or

two units that have become liabilities in the portfolio of the organization due to poor

profitability, which often results from a lack of expertise or increased competition in a

particular industry.

c) Liquidation

This strategy entails selling all the assets of an organization in an attempt to avoid

bankruptcy. Liquidation is usually pursued when efforts to turn an organization around

through retrenchment and divestiture have been unsuccessful, and ceasing operations is the

only alternative to bankruptcy. Liquidation is therefore a planned and orderly way of

converting the assets of the organization into cash in an attempt to minimize losses for the

shareholders of the organization.

The decision to embark on liquidation is usually a very emotional one, because it basically

means admitting defeat and embarking on activities that result in hardship for the employees

and other stakeholders of the organization. However, pursuing liquidation is a better option

than bankruptcy, as management has the opportunity to plan the activities in such a way that

the loss to all the stakeholders of the organization is minimized.

d) Bankruptcy

An organization that has no hope of turning its activities around might decide to close its doors

and declare bankruptcy in order to avoid major debt obligations and union contracts.

Bankruptcy is a type of retrenchment strategy where all the assets of the organization 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 organization is then written off. Bankruptcy

allows organizations to reorganize and come back after filing a petition for bankruptcy.

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6.2.4 CORPORATE COMBINATION STRATEGIES

In a business world that is becoming more competitive and volatile by the day,

organizations have come to the realization that their competitive powers could be

increased by joining efforts and working together to achieve their objectives. Corporate

combination strategies are especially appropriate for organizations that operate in global,

dynamic and technologically driven industries. Corporate combinations involve the following:

a) Joint ventures

A joint venture is a temporary partnership formed by two or more organizations for the

purpose of capitalizing on a particular opportunity. Partners contribute their own

proportional amounts of capital, distinctive skills, managers and technologies to the

specific venture. Organizations usually enter into joint ventures to seek some degree of

vertical integration (with potential cost benefits); to acquire or learn a partner’s distinctive

skills in some value-creating activity; to upgrade and improve internal skills; and lastly to

develop and commercialize new technologies that may significantly influence an industry’s

future direction.

Kathryn Harrigan, in David (2003:178), says that in today’s global organization environment

of scarce resources, rapid technological change and rising capital requirements, the important

question is: “Which joint ventures and cooperative agreements are most appropriate for our

needs and expectations?” followed by: “ How do we manage these ventures most

effectively?”. Sharing research and development costs, distribution channels and

manufacturing agreements can enable organizations to achieve economies of scale, reduce

production costs and minimize risks.

Forming a joint venture is an attractive when the distinct competencies of two or more

organizations complement each other. Smaller organizations can increase their

competitiveness by joining forces against larger organizations.

b) Strategic alliances

Strategic alliances differ from joint ventures in the sense that the organizations involved do

not share ownership in a specific business venture. These organizations tend to share skills

and expertise for a defined period, usually linked to the life cycle of a specific project.

Organizations that want to venture into new and unfamiliar markets, especially those

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overseas, can benefit immensely from forming a strategic alliance (partnership) with another

organization that is already established in that particular market and therefore has expert

knowledge with regard to consumer behavior and market conditions there. As explained

before, Pick’ n Pay used this strategy very effectively when it ventured into the Australian

market.

Strategic alliances are popular in the automotive industry, where organizations like Toyota

and Volkswagen will outsource the production of key components to their partner in order

to reduce costs and to secure greater economies of scale.

c) Consortia

Consortia are large interlocking relationships between organizations in a particular industry.

These relationships represent the most sophisticated form of strategic alliance, as they

involve multiple partner alliances and highly complex linkages between groups of

organizations. Some of the linkages are financial, whereby organizations own major equity

stakes in one another. Other relationships involve the complex sharing of technologies,

resources or value-creating activities among different partners.

Risk of combination strategies

Risk associated with corporate combination strategies involves partners becoming

incompatible over time. Partners could, on the other hand, become too dependent on each

other. Furthermore, organizations involved in corporate combination strategies run the risk

of providing partners with more insight into their knowledge and skills base than intended.

Very often these organizations cannot effectively limit how their partners use the knowledge

gained from cooperation. Lastly, corporate combination strategies can become very cost-

intensive, especially as far as coordination, learning and flexibility are concerned.

6.3 COMBINATION OF GRAND STRATEGIES

Few organizations will embark on a strategy that is a pure form of just one of the grand

strategies described above. Usually they integrate two or more of these strategies on order

to achieve their objectives.

Having examined the combination strategy that Cell C embarked on, we should emphasis that

the extent to which an organization can embark on a combination strategy will be determined

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by its access to the relevant resources. Organizations that have limited resources will most

probably not be able to implement more than one strategy at a time. Even organizations with

vast resources will not be able to implement all the strategies that could be b e n e f i c i a l

f o r t h e m . Therefore, alternative strategies s h o u l d b e c a r e f u l l y evaluated in order

to establish the potential benefits and costs of each one. Priorities should then be

established to ensure that the resources (capital, people and skills)of the organization are

not spread too thinly, as this will negatively affect the competitive position of the

organization.

6.4 FUNCTIONAL STRATEGIES

The grand strategies that organizations identify for achieving their objectives have to be

implemented at both functional and operational level. In chapter 5 these strategies have also

been referred to as annual tactics, associated with a specific business unit.

In practical terms this means that functional strategies and action plans have to be

formulated to ensure that all organization units, divisions, departments and project teams do

what is required in order to implement the strategy successfully. Keeping in mind what will

be required at functional level (human resources, capital and time) will enable top managers

to realistically evaluate the potential of each strategic alternative. For this reason it is

imperative that functional managers be included in the strategic planning process. However,

at this stage it is important to understand the functional implications of grand strategies

formulated at top management level.

Study

Study Ehler and Lazenby (2010:214) strategy in action 7.8

Woolworth Food Stores

6.5 CONCLUSION

Grand strategies are pursued by organizations to achieve competitive advantage based on

cost leadership, differentiation or focus and to coordinate their efforts towards the

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attainment of their long term goals. Most organizations integrate two or more grand

strategies in order to achieve their long term goals. However, the extent to which an

organization can embark on a combination strategy will be determined by its access to the

relevant resources. Once an organization has finalized its strategy, functional strategies have

to be formulated to ensure that the chosen strategy or combination of strategies is

implemented successfully.

6.6 Revision Questions

REVISION QUESTIONS

1. Achieving growth is the major focus of my future strategy. What grand strategies

should I consider and what does each of them entail?

2. May organisation is in a vulnerable position as a result of inefficiency and

ineffectiveness. What strategies should I consider?

3. Discuss the relationship between grand strategies and functional strategies. Provide

practical business examples to enhance your answer.

4. Read the case study the prescribed book Ehlers & Lazenby (2010:219-222) entitled

Toyota SA and answer the following questions


Identify the grand strategies that Toyota has implemented over the last 40 years

to distinguish itself as a leader in the SA motor industry.

Identify two grand strategies that Toyota SA will be pursuing in the future.

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TOPIC 7

STRATEGIC ANALYSIS AND CHOICE

LEARNING OUTCOMES


Apply the SWOT Matrix

Perform a feasibility study of the SPACE Matrix

Implement the Grand strategy Matrix

Implement the Quantitative Strategic Planning Matrix(QSPM)

7.1 INTRODUCTION

It’s important to note at this stage that although the matrixes being discussed could apply to

any organization, they apply more particularly to single, dominant products/services

institution. For more diversified organizations, other matrixes such as the BCG (Boston

Consulting Group) Matrix and the IE (Internal-External) Matrix could also be used. These two

matrixes are not however, discussed for the purpose of this text.

7.2 STRATEGY ANALYSIS FRAMEWORK

Most organizations face the very important question of deciding which strategy to pursue

further in order to best create more value for their customers and thereby gain a competitive

edge. Here it is assumed that all the information’s analyzed using the IFE Matrix and the EFE

Matrix in the formal chapters is readily available. The next phase is to develop any of the

following matrixes in order to narrow the possible strategies down to more specific ones.

These three matrixes are as follows:

SWOT Matrix

SPACE Matrix

Grand Strategy Matrix

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The final phase of the strategy analysis is to make choice between specific strategies. The

strategic manager has the option of choosing specific strategies by using a quantifiable

method. This process is called the QSPM (Quantitative Strategic Planning Matrix). This is

illustrated in a flow chart below.

PROCESS OF STATEGIC ANALYSIS AND CHOICE

7.3 THE THREE STRATEGIC ANALYSIS MATRIXES

These matrixes are stated below.

7.3.1 The SWOT Matrix

SWOT is an acronym for strength, weakness, opportunities and threats. As a starting point, it

is important to note that the role players involved in compiling this matrix would need all the

identified threats, opportunities, strengths and weakness as analyzed in the earlier stages of

the strategic management process. There are seven steps involved.

Study

Study Ehlers and Lazenby (2010:243-245) examine the steps that

construct a SWOT Matrix

7.3.2 The SPACE Matrix

SPACE is an acronym for strategic position and action evaluation. It consists of four quadrants:

SWOT ANALYSIS SPACE MATRIX GRAND

STRATEGY

MATRIX

QSPM

STARTEGY TO BE

IMPLEMENTED

80

aggressive, constructive, defensive and competitive. The names of the respective quadrants

give an indication of the kinds of strategies that the organization should pursue. These four

quadrants are made up by crossing two axes. The first two scales represent two internal

dimensions, namely

Financial strength (FS)

Competitive Advantage(CA)

The other two scales represent the external dimensions, namely

Environmental stability (ES)

Industrial strength (IS)

The diagrammatic look and the steps involved in developing a space matrix can be seen from

the prescribed text book

Study

Study Ehlers, et al. (2010:246-248)The four quadrants and steps

in constructing a SPACE Matrix

7.3.3 The Grand Strategy Matrix

It’s a matrix that is simple and easy to do, which is possibly why it is a very popular strategic

management tool. It’s based on two dimensions, namely:

Competitive position

Market growth

The matrix has two axis and four quadrants namely I, II, III, IV. The two axes are

X-axis:- which represent the competitive position and is divided into two extremes on

either side, namely weak competitive position and strong competitive position.

Y-axis:- Which represent the market growth and is divided into two extreme on either

side, namely rapid market growth or slow market growth.

The four quadrants are discussed below

Quadrant I: - This quadrant represents an excellent strategic position. Organizations in

81

this position should not move away from their current competitive advantages unless they

are too heavily involved with a single, dominant product when concentric diversification

would be a good option.

Quadrant II: - These organizations are competing in a strongly growing market but they

do not have a particularly strong position compared with their competitors.

Quadrant III: - These organizations compete in a slow-growth industry and also have a

weak competitive position.

Quadrant IV: - These organization are in the unique situation of showing a strong

competitive position but in a slow-growing market. They will immediately have to pursue

any of the diversification strategic options or even opt for a partner in a corporate

combination, such as a joint venture.

Study

Study Ehlers and Lazenby (2010:250) and analyse the Grand

Strategy Matrix

7.4 FINAL STRATEGIC CHOICE/DECISION

The next and final stage of strategy analysis is thus the decision stage. Here we make use of

the QSPM (Quantitative strategic Planning Matrix) to once again quantify our different

strategic options and then finally choose the best strategy.

The QSPM (Quantitative Strategic Planning Matrix)

QSPM is a technique that can objectively indicate which strategy would be the best for the

organization. All information contained in other matrix stated before e.g. SWOT, Space and

the Grand strategy Matrix should be used to develop and draw up the QSPM.

82

Study

Study Chapter9,

Ehlers, et al. (2008:251-253) and critique the six steps of in

QSPM

7.5 CONCLUSION

No matter how many different analytical tools or matrixes are used during the strategic

management process, they can still not guaranteed competitive advantage and long-term

sustainability. They can however, decrease the amount of uncertainty and risk. If these tools

and matrixes are used efficiently, the organization aligns itself for success and eliminates most

uncertainties and contingencies. It’s however important to remember that these matrixes will

be influenced by changes in the environment, emphasis is on strategic management process.

Management should therefore always keep a watchful eyes out for any changes and should

adapt and alter these matrixes where needed.

7.6 Revision Questions

REVISION QUESTIONS

Use the information gained from the IFE and EEE Matrixes in to undertake/perform the

following on an organisation of your choice

A SWOT matrix

A SPACE Matrix

A grand Strategy Matrix

A QSPM

A BCG Matrix

83

Richfield Graduate Institute of Technology

BUSINESS ADMINISTRATION, MANAGEMENT & COMMERCIAL SCIENCES

ASSIGNMENT COVER SHEET / / / SEMESTER: ________________

Name & Surname: ______________________ ICAS No: ______________________________

Qualification: ___________________Year_______ Module Title & Code: ____________________

Specialization: _________________________Assignment Due Date: __/___/___/___

ID Number: ___________________________ Date submitted: ____/____/____/____

ASSESSMENT CRITERIA MARK

ALLOCATION

EXAMINER’S

MARK

MODERATOR’S

MARKS REMARKS

DISTRIBUTION OF MARKS

INTRODUCTION

Outlines the subject matter clearly and

precisely

5%

ANALYSIS

Thorough with clear well-argued points

on the range of options

35

CRITICAL THINKING & PROBLEM SOLVING.

Looking at issues at many different

angles and perspective

Ability to solve problems in a logical and

sequential manner.

35%

CONCLUSION

Recommendations and Suggestion

Framework/models/visual aids

10%

REFERENCE

According to the Harvard Method

5%

PRESENTATION (MARKS FOR TECHNICAL

ASPECTS)

Table of contents layout

Grammar & Spellings

Font – Arial 12

Line Spacing - 1.5

Margin should be justified.

15%

TOTAL ASSIGNMENT MARKS OUT 100%

Examiner’s Comments:

84

Moderator’s Comments:

Examiner’ Name: Moderator’s Name:

Examiner’s Signature: __________________ Moderator’s Signature:______________________

Date: __/___/___/_____ Date: __/___/___/____

The purpose of an assignment is to ensure that the Learner is able to:

Use methods of enquiry and research in a disciplined field.

Interpret and evaluate text.

Have a sound understanding of key principles and theories, rules and awareness.

Solve unfamiliar problems using correct procedures as well as investigate and critically analyse

information and report thereof.

Present and communicate information reliably and coherently.

Instructions and guidelines for writing assignments

1. Use the correct cover page provided by the institution.

2. All essay type assignments must include the following:

2.1. Table of contents

2.2. Introduction

2.3. Main body with subheadings

2.4. Conclusions and recommendations

2.5. Bibliography

3. The length of the entire assignment must have minimum of 5 pages. Preferably typed with font

size 12

85

4. The quality of work submitted is more important than the number of assigned pages.

5. Copying is a serious offence which attracts a severe penalty and must be avoided at all costs. If

any learner transgresses this rule, the lecturer will retain the assignments and ask the affected

learners to resubmit a new assignment which will be capped at 50%.

6. Use the Harvard referencing method.

7. Please note that these guidelines are not applicable to NUMERIC & PRACTICAL assignments.

138

ADDENDUM 731: ASSIGNMENT QUESTION

Question One (50 Marks)

Read the extract below and answer the question that follows:

STRATEGY IN ACTION: CELL C

Entering the cellular as the third license holder, Cell C did exceptionally well as the follower in this

fast moving industry. Its two main competitors that entered the market first, VODACOM and MTN

achieved spectacular growth financial results and gained the majority of market share. It would seem

that the South African market is maturing, and the cost of acquiring and retaining a subscriber has

grown whilst higher interconnection fees have further eroded margins. According to industry

sources, Cell C has benefitted from the focus and MTN on foreign expansion. This has left the

opportunity for Cell C to capture a larger share of the South African market. Six months after the

initial launch, Cell C had 500 000 subscribers.

Cell C announced after its full year in operation that it would not increase its prices and it tried to

undercut the prices of its two competitors. In 2006, Cell C started a joint venture with Virgin Group,

which saw Virgin Mobile launched in South Africa on Cell C’s network. Cell C is continuously trying

to focus on the disenchanted customers of VODACOM and MTN. Cell C uses intensive advertising

campaigns to attract new customers and to persuade the customers of its competitors to switch

brands. Cell C uses the slogan “Cell C… for yourself”, which differentiates its cell phone service from

that of MTN and Vodacom. Cell C communicates to consumers that it offers a cell phone service that

is customized to the personal needs of each customer. Its packages are therefore very flexible and

allow customers to choose those options that suit their lifestyle best. By entering the South African

cell phone market, Cell C expanded its organization activities to a new geographical area. Cell C

is constantly investigating new ways to offer a personalized service to its customers.

140

The jury is still out on the long term success of Cell C Already there is a realization from VODACOM

and MTN that they need to refocus on their domestic market. Another factor which needs to be

taken into account is that government is investigating the viability of allowing a fourth Cell phone

operator to enter the domestic market. Only time will tell how successful Cell will be.

Source: Jooste et al. (2008: 240). Applied Strategic Marketing

Case Study Question

Synthesise the grand and generic strategies being pursued by Cell C in the South African cell phone

market. Provide suitable examples to enhance your answer.

QUESTION TWO (50 Marks)

Choose a reputable company of you are familiar with and perform following for the

company you have chosen. Provide suitable examples to enhance your answer.

A SPACE Matrix

BCG Matrix

TOTAL 100

year 3 semester 2 - mypctbc.co.zamypctbc.co.za/het2016/bems/bachelor of business...

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