STRATEGIC MANAGEMENT IN THE CINTEXT OF EXISTING …



TOPIC 1: ALL ABOUT STRATEGIC MANAGEMENT

*Study unit 1.1: A review of our existing knowledge of business management

*Study unit 1.2: The strategic management process and strategic planning

*Study unit 1.3: Foundational concepts of strategic management

*Study unit 1.4: Advantages and disadvantages of strategic management

TOPIC 2: THE FIRST STEP IN THE STRATEGIC PLANNING PROCESS: SETTING STRATEGIC DIRECTION

*Study unit 2.1: Importance of strategic direction, vision and strategic intent

*Study unit 2.2: Mission statement and stakeholders

TOPIC 3: THE SECOND STEP IN THE STRATEGIC PLANNING PROCESS: ENVIRONMENTAL ASSESSMENT

*Study unit 3.1: The rationale for assessing the environment

*Study unit 3.2: Internal environmental assessment using a resource-based view

*Study unit 3.3: Internal environmental assessment using a value-chain analysis

*Study unit 3.4: Internal environmental assessment using a functional approach and financial ratio analysis

*Study unit 3.5: Macro environmental assessment

*Study unit 3.6: Industry environmental assessment

*Study unit 3.7: Market or task environmental assessment

*Study unit 3.8: Interpreting and applying the results of an environmental assessment

TOPIC 4: THE THIRD STEP IN THE STRATEGIC PLANNING PROCESS: SETTING STRATEGIC GOALS

*Study unit 4.1: Developing strategic goals

TOPIC 5: THE FINAL STEP IN THE STRATEGIC PLANNING PROCESS: STRATEGIC CHOICES

*Study unit 5.1: What are the strategic options?

*Study unit 5.2: Making a choice

STUDY GUIDE REFERENCES TO BE FOUND IN THE TEXT BOOK:

*1.1 1.2.1/1.2.2/1.2.3/1.6/1.7

*1.2 1.3

*1.3 2.2/2.2.1/2.2.2/2.2.3/2.3

*1.4 1.4/1.5

*2.1 2.1/2.4.1/2.4.2

*2.2 2.4.3/2.4.3.1/2.4.3.2/2.4.3.3/2.4.3.5/2.5/2.3.3.5/2.6

*3.1 3.1/3.2/3.3/4.1

*3.2 3.4.1

*3.3 3.4.2

*3.4 3.4.3/3.5

*3.5 4.2/4.3/forecasting

*3.6 4.4/4.4.1/4.4.5/4.4.6

*3.7 4.5

*3.8 3.5/4.7

*4.1 5.1

*5.1 5.3/5.4/5.5/6.1/6.2/6.3/6.4/6.5

*5.2 ------

THE EXAM!

• Section A comprises 4 paragraph type questions for 20 marks

• Section B comprises essay-type questions for 50 marks

• Learning outcome standards

• Activities in the study guide

• Self-assessment assignments

Exam tips

• Previous exam paper

• Start preparing today!

• Use diagram of strategic management process for context

STRATEGIC MANAGEMENT IN THE CONTEXT OF EXISTING MANAGEMENT PRINCIPLES

• Organisations operate in changing environments.

• An interdependent relationship between the organisation and the environment.

• Systems theory concept: the organisation is a system that operates in a specific environment.

• Synergy: the whole is greater than the sum of its parts. The organisation consists of subsystems that work together to achieve goals and objectives

• Management levels: top management, also known as strategic management (CEO and the board of directors), middle management is the functional managers (HR, Finance managers etc.) and lower/first-line managers are the supervisors they have more technical skills and are involved in day-to-day operations.

• Skills for sound management: conceptual skills, interpersonal skills and technical skills.

• Management decisions are made at different levels: the tactical level and the strategic level.

DEFINING STRATEGIC MANAGEMENT

• Management: planning, leading, organizing and controlling

• Strategy: an effort or deliberate action that an organisation implements to outperform its rivals. An organisations theory about how to gain competitive advantage.

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

• The art and science of formulating, implementing and evaluation cross-functional decisions that enable an organisation to achieve its objectives. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow.

• The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives

• The process by which a firm incorporates the tools and frameworks for developing and implementing a strategy

• All the decisions and actions arising from the formulation and implementation of strategies with the aim of achieving the organisations objectives

• Competitive advantage: the edge that an organisation has over others. To achieve this an organisation needs to meet he needs of stakeholders, which means adding value

• Stakeholders: anyone who is directly or indirectly influenced by the acts of the organisation. Long-term wealth maximization is for stakeholders and short-term profit maximization is for shareholders. Shareholders, media/press, government, suppliers, community, employees, financial institutions and customers

• Wealth maximization incorporates all spheres of the organisation and emphasises sustainability and survival in the long term.

• Profit maximization emphasises maximum profits and therefore focuses only on turnover, sales and marketing

• The people involved in strategic management: environmental analysis is the responsibility of every manager. A strategy formulation is mainly the responsibility of top management. Strategic implementation can only be achieved with communication from all the parties involved

• Qualitative and quantitative decisions. Qualitative decisions are based on intuition, whereas qualitative decisions are built on proper strategic analysis and choice. Both should be used in conjunction with the other.

• Levels of strategy: 3 levels- corporate level, business level and functional level.

• Corporate strategy: for guiding a firms entry into and exit from different businesses, for determining how a parent company add value to and manages its portfolio of businesses, and for creating value through diversification

• Business strategy: developing and sustaining a competitive advantage for the goods and services that are produced. Strategy for competing against competitors within a particular industry

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

THE CONTEMPORARY BUSINESS ENVIRONMENT

• Organisations have to adapt rapidly to change

• Non-profit organisations also need to apply strategic management.

• Globalization involves more strategic management options

• Technology affects the business environment as does the political, social, economic environments.

• Technology has brought about change in the marketing aspects of business and as well as change in the processes, production methods and new ways to make an established product.

• Partnerships, outsourcing, flexible labour, work-around-the-clock and interim managers are different ways of creating a competitive advantage

THE STRATEGIC MANAGEMENT PROCESS AND STRATEGIC PLANNING

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

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

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

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

WEALTH MAXIMISATION v PROFIT MAXIMISATION

• Wealth maximization modifies the goal of profit maximization in order to deal with the complexities of the business environment- both the external and the internal environment. It takes the long-term view of the success of the organisation, which is often in conflict with the short-tem yardstick of profit maximization

SUCCESS IN STRATEGIC MANAGEMENT TERMS

• Strategic competitiveness implies that an organisation has created a competitive advantage which other organisations are unable to duplicate or find too costly to imitate.

• Above average returns are returns in excess of what an investor expects to earn from other investments with a similar exposure to risk.

• By exploiting its competitive advantage and realizing above average returns the organisation will achieve its primary objective of wealth maximization

• Strategic management is about surviving in a changing environment, and to do this strategic managers will have to make decisions that allow them to achieve a competitive advantage and above average returns.

CORPORATE GOVERNANCE

• Corporate governance is about setting standards for business ethics in South Africa and world wide to ensure that an organisation accept and extend the organisations responsibility beyond its primary function of generating profit and creating wealth for its stakeholders.

• Corporate and business governance is a partnership of shareholders, directors and management to provide wealth creation and economic well-being to the wider community of stakeholders and society.

• Narrow sense: corporate governance refers to the formal system of accountability of the board of directors to shareholders

• Broad sense: corporate governance refers to the informal and formal relationship between the corporate sector and its stakeholder; and the impact of the corporate sector on society in general

• King report: “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals… the aim is to align as nearly as possible the interest of individuals, corporations and society”

• 7 characteristics of good corporate governance: discipline, transparency, independence, accountability, responsibility, fairness and social responsibility

• Recommendations for good corporate governance on aspects: board and directors, risk management, internal audit, sustainability report, accounting and auditing and relations with shareholders and communications

• Disclosure and transparency relate to the communications of outcomes.

CORPORATE CITIZENSHIP

• Is based on the idea that organisations have a duty to serve not only the financial interests of shareholders, but also the interests of society

• The extent to which an organisation makes a positive contribution to society by respecting and showing consideration to its stakeholders; has high ethical values; adheres to legislation, rules and regulations; and has a high regard for the natural environment.

• Contemporary corporate citizenship issues:

← Corporate social responsibility- organisational decision making linked to ethical values, compliance with legal requirements, and respect for communities and the environment

← 3 reasons for taking social responsibility into account: an organisations right to exist depends on its environment and society; national legislation threatens increased regulations if organisations do not meet changing social needs and a responsive corporate policy may enhance an organisations long-term profitability and sustainability.

← Environmental responsibility- organisations have to take responsibility to do no harm to the environment and use their resources and technology to address the issue of population growth through sustainable development

← Sustainability- development: development that meets the needs of ht e present generation without compromising the ability of future generations to meet their own needs

← Sustainability and the triple bottom line reporting- the triple bottom line approach embraces the economic, environmental and social aspects of an organisations activities, therefore organisations will report on these aspects

← Stakeholder engagement- the king report recommends that the board identifies the organisations stakeholders and agree on policies which dictate how relationships with them should be managed. The king report follows the inclusive approach which recognises that organisations should consider the needs of its stakeholders when formulating strategies.

← The king report recommends that a balance between individual interests of the stakeholders and the collective good of the organisation be established

← Freemantle and Rockey: guidelines for engaging with stakeholders

─ Understand the purpose of stakeholder engagement

─ Map all stakeholders

─ Link sustainability issues to core stakeholder engagement

─ Go deeper than research

─ Select the most appropriate methods

─ Deal with conflicting stakeholder demands

─ Stakeholder engagement informs reporting

• Direct drivers which provide momentum for corporate citizenship: legislation, JSE social responsibility index, industry charters and the king code on corporate governance in South Africa

ADVANTAGES STRATEGIC MANAGEMENT

• Higher profitability

• Higher productivity

• Improved communication across the different functions in the organisation

• Empowerment

• Discipline and a sense of responsibility to the management of the organisation

• More effective time management

• Strategic management

DISADVANTAGES (RISKS) OF STRATEGIC MANAGEMENT

• Time- strategic management only shows fruits in the long-term

• Unrealistic expectations from managers and employees

• The uncertain chain of implementations

• Negative perceptions of strategic management

• No specific objectives and measurable outcomes- no measurement tools to measure implementation success

• Culture of change- ever changing environment

• Success groove- mangers get stuck in a success rut and forget to foresee future difficulties

STRATEGIC DIRECTION

• Strategic planning begins with the setting of strategic direction. To set strategic direction, organisations use a vision statement, a mission statement or strategic intent

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

• Mission: implies that throughout an organisation’s many activities there should be a shared theme.

• Strategic intent: the leaders clear sense of where they want to lead their company and what results they expect to achieve

• The vision statement: what do we want to become?

• As many managers as possible should give input into the creation of a vision statement and achievable in the long run.

• Functions: way to integrate a wide variety of goals into one theme; provides focus and direction; forms the foundation for a mission statement, long-term objectives and strategy decisions; can serve as a motivational tool.

• the vision statement should be communicated in such a way that it clarifies the purpose of the organisation to all its stakeholders

• Strategic intent: creating a sense of urgency through the setting of an overarching, ambitious goal that stretches the organisation and focuses on winning in the long run.

• Gives a sense of direction and purpose; it drives strategic decision making and provides a basis for resource allocation; forces manages to be innovative and inventive in their use of limited resources; leaves room for short-term flexibility

• Has an internal focus can be used as a basis for setting the mission statement

THE MISSION STATEMENT: WHAT IS OUR BUSINESS?

• The role of the mission statement: Is an enduring statement of purpose that distinguishes an organisation from other similar ones; identifies the scope of the organisations operations; indicates an organisations reason for being

• 4 focus areas: purpose ( the reason for the organisations being)

• identifies the organisations strategy in terms of the nature of the business, its competitive positioning in terms of other organisations and the sources of its competitive advantage

• it refers to the organisations behaviour standards and culture in terms of the way it does business

• The mission statement is about the values, beliefs and moral principles that support the behavioral standards.

• Components of the mission statement:

← Product/services, market and technology

← Survival, growth and profitability

← The philosophy of the organisation

← Public image

← Organisational self-concept

← Customers and quality

• Stakeholders and the mission statement: the legitimate claims of the organisations stakeholders should be considered when formulating a mission statement.

• Formulating a mission statement: as many managers as possible should be involved in the process; the process of developing a mission statement should create an emotional bond and sense of mission between the organisation and its employees; the mission should be communicated to all internal and external stakeholders of the organisation

• Vision, strategic intent and mission: a vision statement focuses on the future, whereas the mission statement focuses on the present or the reality. Strategic intent contains elements of both the vision and the mission- like the vision ,it focuses on a goal, and also loses its power once achieved, but it also focuses on the purpose and strategy of the organisation like the mission

STAKEHOLDERS

• Any one who is directly or indirectly influenced by the acts of the organisation

• Employees- want job security, job satisfaction and compensation

• Shareholders- want dividends, capital growth and safe investment

• Government- wants taxes, employment, skills development and BEE

• Media and press- want transparent and honest reporting

• General community- wants fair employment, socially and environmentally responsible actions and no discrimination

• Financial institutions- want interests and security of loans

• Competitors- want fair business practices and ethical competition

• Customers- want high quality products and good service value

• Suppliers- want regular payments, continuity of business and long-term relationships.

COMPOSITION OF THE ENVIRONMENT

• Macro-environment, market environment, internal environment, industry environment and the operating environment

THE RATIONALE FOR ASSESSING THE ENVIRONMENT

• The importance of internal environment assessment: an organisation cannot decide on a specific strategic direction if it does not know what it can and cannot do, what assets it has and does not have.

• Only when an organisation is able to match what is can do with what it might do can it develop its vision or strategic intent. The vision of what it actually wants to become must actually set a challenge to the internal resources of the organisation

• The outcome from an internal environment analysis will determine what the organisation can do, while the outcome form an external environment analysis will identify what the organisation can choose to do.

• It is important for managers to view the organisation as a bundle of resources, capabilities and core competencies that can be used to create an exclusive position in the market

• The recognition of core competencies is essential before any strategic management decision can be taken

• The importance of external environmental assessment: the organisation and the environment in which it operates is not a closed system, because they influence each other

• The environment usually changes faster than the organisation can adjust to it

• External environmental analysis focuses its attention on identifying and evaluating trends and events beyond the control of a single organisation, and also reveals key opportunities and threats confronting the organisation that could have a major influence of the organisations strategic actions

• An opportunity is a favourable condition in the external environment, if seized by the organisation to its advantage, strategic competitiveness can be achieves

• A threat is an unfavourable condition in the external environment that may hinder an organisations efforts to achieve strategic competitiveness

• After external opportunities and threats have been evaluated and combined with the knowledge of the internal environment it will be easier for the organisations to:

← Develop a clear mission

← Design strategies to achieve long-term objectives

← Respond either offensively or defensively to the factors

← Develop policies to achieve the objectives which will result in strategic competitiveness and above-average returns

• Factors in the external environment: technological improvements, economic fluctuations, changing social values, political changes, aggressive international competition

• Components of the external environmental analysis:

← Scanning: early signals of environmental changes and trends are identified

← Monitoring: meaning of environmental changes and trends is detected through ongoing observation

← Forecasting: based on monitored changes and trends, projections of anticipated outcomes are developed

← Assessing: the timing and importance of environmental changes and trends for organisations strategies and their management are determined

SWOT ANALYSIS

• Strengths, Weaknesses, Opportunities and threats

• Strengths and weaknesses = internal environment

• Opportunities and threats = external environment

• The objectives of a good strategy will be to increase the strengths and optimize the opportunities and to decrease the influence of internal weaknesses and external threats

• Strength: is a resource or capability that the organisation has which is an advantage compared to what the competitors have. As well as resources and capabilities that contribute to the organisations sustainability

• Weakness: refers to the lack of, or deficiency in a resource that represents a relative disadvantage to the organisation compared to what the competitors have.

• Opportunity: refers to a favourable situation in the organisation’s external environment

• Threat: is an unfavourable situation in the organisations external environment. The organisation has no control over what is happening in the external environment

• Disadvantages: SWOT analysis is a strategic approach and often focuses on only one dimension; it cannot show the organisation how to achieve competitive advantage; it only stimulates self-perception; the focus of the external environment may be to narrow; a static assessment method; strengths that are identified may not lead to an advantage; may lead to overemphasis on a single feature or strength and disregard other important factors that might lead to competitive success

RESOURCE-BASED VIEW IN ASSESSING THE INTERNAL ENVIRONMENT

• The RBV holds that an organisation’s resources are more important than the industry structure in an attempt to gain and keep its competitive advantage.

• It is the resources and capabilities that will determine how efficiently and effectively the organisation is functioning

• 3 types of resources: tangible assets (things you can touch), intangible resources (such as reputation) and organisational capabilities

• The customers perception of the organisations product and delivery quality is more critical than the 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

• Capabilities: are the complex network of processes and skills that determine how efficiently and how effectively the inputs in the organisation will be transformed into outputs

• Foundation of capabilities lies in the skills and knowledge of the employees and often in their functional expertise

• As employees do their work, combining tangible and intangible resources within the structure of the organisational processes, they actually accumulate knowledge and experience about how to create value from the resources for the organisation and turn them into possible core competencies or distinctive organisational capabilities.

• Capabilities must also be developed at top management level and not only at functional level

• Dynamic capabilities: the organisations ability to build, integrate and restructure capabilities to address the rapidly changing environment

• Core competencies are only possessed by those organisations whose performance is superior to the industry average, they also add greater value that general competencies or capabilities.

• It is important according to the RBV that resources and capabilities be unique and capable of leading to a sustainable competitive advantage; they must be difficult to create, buy, replace or imitate

• Characteristics/ guidelines of a valuable resources:

← Value: a resource is valuable if it helps the organisation exploit external opportunities or to neutralize external threats

← Superior resources: fills customers needs better

← Scarcity: if a resource is in short supply and ideally no other organisation possesses it, then it becomes a distinctive competence for the organisation. Ti must however be sustainable

← Inimitability: hard to imitate imitation can occur by either duplication or substitution

← Capacity to exploit the resource: the organisation must have to ability and capacity to exploit the resource. will enhance the inimitability of the resource, thereby increasing its value

• Resource-based analysis

1. determine what resources the organisation has

2. determine which of those resources are considered tangible assets, which are considered intangible assets and which are considered organisational capabilities

3. determine why the resources are considered strengths or weaknesses

4. break down the resource into more specific competencies to determine exactly where the strengths are

5. determine if any pattern has emerged

VALUE-CHAIN ANALYSIS OF THE INTERNAL ENVIRONMENT

• Chain of activities in which the inputs are transformed into the outputs

• To determine where value is really added to the product or service

• Value added to the product or service is the difference in money value of the finished product compared to the money value of the inputs

• 3 aspects of resources that create customer value:

← The product is unique or different

← The product is cheaper than that of competitors

← The organisation has the ability to respond to the customers needs very quickly

• The value-chain analysis is a systematic method of determining how the organisations different activities contribute to creating value for the customer.

• Michael Porter: the VCA views the organisation as a sequential process that includes all the value-creating activities in the organisation

• VCA helps to identify where the most value is added and where there is potential to add more value

• Value: the amount of money that customers are willing to pay for what the organisation is providing them.

• Activities of the VCA: primary and secondary

← Primary activities:

← Input logistics: associated with the receiving, storing and distributing of inputs to the product- is there a material control system? How, and how effectively and efficiently are the raw materials handled and warehoused?

← Operations: include all those activities associated with the transformation of the inputs into the final product- how efficient is the layout of the manufacturing plant? Is a production control system in place and how effective and efficient is it?

← Output logistics: refers to all the issues related to the distribution of the product or service to the customers- how efficiently are products and service delivered to customers? How? And how effectively and efficiently are the finished products handled and warehoused?

← Marketing: refers to the inducements used to get customers to make purchases- what is the level of marketing and competency in terms of sales? How successfully is the organisation creating brand loyalty in customers?

← Customer service: basic activities the organisation must undertake to make sure the value of the product is maintained- how effective and efficient are the customer services the organisation provides?

← Support activities:

← Procurement: refers to the function of purchasing inputs, refers to actions that can be taken to optimize the quality and speed of the procurement of inputs and not to the inputs themselves- are the resources procured at the lowest possible cost and acceptable quality level?

← Technological development: includes the different processes and equipments used throughout the value chain- what is the level and quality of technological development? Is there a culture in the organisation that enhances creativity and innovation?

← Human resource management: how effective are the MR management procedures? What is the level of employee motivation?

← General administration and infrastructure: e.g. effective and efficient planning systems- are the value chain activities coordinated and integrated throughout the organisational value chain? What are the relationships with stakeholders like?

← Financial management: all activities must adhere to effective financial recording and control throughout the value chain- are all the value chain activities recorded according to sound financial principles as described in GAAP?

Steps in the value-chain analysis:

• Pearce and Robinson

1. identify and classify activities

2. allocate costs to every activity

3. identify the activities that will differentiate the organisation from its competitors and serve as a competitive advantage

4. examine the value chain and classify the various activities as strengths or weaknesses of the organisation

USING A FUNCTIONAL APPROACH AND FINANCIAL RATIOS TO ANALYSE THE INTERNAL ENVIONMENT

The functional approach

• is an internal audit using a functional approach

• is an assessment of the various functional areas of the organisation

• the functional approach aims to determine how well or poorly these functions are being performed and what resources these functional areas need to perform effectively

• some functional areas include: financing and accounting, marketing, production, research and development and Human resources

• The disadvantage of this approach is that the attention is entirely focuses on the functional areas, while there is no determination of whether a specific functional area makes an important contribution to the organisations competitive advantage. Known as the “silo” effect

Financial ratio analysis

• Disadvantages: the analysis is based on past data; the analysis is only as good as the accounting procedures that have provided the information

• Liquidity ratios:

• Current ratio: current assets/ current liabilities. Generally 2:3. used to determine the organisations ability to meet its short term obligations

• Acid test ratio or quick ratio: total assets- stock/ current liabilities. Generally 1:1. the extent to which an organisation can meet its short term debt obligations without relying on sales

• Leverage ratios: identifies the source of capital

• Debt ratio: total debt/ total assets. Higher than 0.5 is considered safe

• Debt-to-equity ratio: total debt/ total shareholder equity. % of total funds provided by creditors vs. owners

• Long-term debt to equity ratio: long term debt/ total shareholders equity. Extent to which sources of LT financing are provided by creditors

• Times-interest-earned ration: profits before earnings and taxes/ total interest charges. Extent to which earning can decline without the organisation becoming unable to meet its annual interest costs

• Activity ratios:

• Asset-turnover ratio: sales/ total assets. Indicates how effectively an organisation is using its resources

• Fixed asset turnover: sales/ net fixed assets. Measure of the turnover on plant and equipment

• Inventory turnover: sales/ inventory of finished goods. Indicates whether an organisation holds excessive stock

• Accounts receivable turnover: annual credit sales/ accounts received. How long it takes an organisation to collect credit sales expressed as a %

• Average collection ratio: accounts receivable/ total credit sales/ 365 days. Average collection period it takes an organisation to collects credit sales

• Profitability ratios:

• Return on sales ratio: net earning/ sales

• Return on investment: Net earning/ total assets

• Gross profit margin: sales- cost of sales/ sales. Total margin available to cover operating expenses and yield a profit

• Earnings-per-share ratio; net income/ number of shares of common stock outstanding

Standards for making meaningful comparisons

• The past performances of the organisation or business unit

• Results from previous internal environment analysis

• Industry ratio’s or norms

• Benchmarks such as industry best practices

• The performance of the organsiations competitors

Compiling an organisational profile

• An organisational profile is the end result of an internal environment analysis

• It is a diagrammatical depiction of an organisations strengths and weaknesses of its various critical success factors compared with previous years

• The critical success factors used will depend on the internal environmental analysis method used

MACROENVIRONMENTAL ASSESSMENT

Process for conducting a macroenvironmental assessment

• Scanning: early signals of environmental changes and trends are identified

• Monitoring: meaning of environmental changes and trends is detected through ongoing observation

• Forecasting: based on monitored changes and trends, projections of anticipated outcomes are developed

• Assessing: the timing and importance of environmental changes and trends for organisations strategies and their management are determined

• Some elements of the external environment that will influence the organisation:

← 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 to sell

← Competitors actions

← The selection of suppliers and distributors

← Governments regulations and laws

• Organisations need to anticipate, mobilize and empower their managers and employees to identify, monitor and evaluate key external forces

• The South African environmental context:

• The challenges and the complexities facing south Africa cannot be separated from the broader international environment

• The major threat and challenge for South African organsiations is to manage the problem of inequality. Inequality is measured by the Gien coefficient

• The impact of income and status inequalities in the South African society undermines social cohesion, efficiency and economic growth. This also influences the economic development in the country

• The distortion of resource allocation in the labour market, the difference in the levels of savings and investments and the high unemployment levels are some of the factors that can be directly or indirectly attributed to the inequality problem

• Some characteristics of the external environment of South African organsiations: high expectation of some inhabitants of a decrease in this inequality level, their growing impatience for a dramatic improvement in their quality of life, the fear of others of losing everything, and high rates of violence and crime.

THE MACRO ENVIRONMENT

Political environment

• Includes the parameters within which organisations and interest groups compete for attention, resources and a voice in overseeing the body of laws and regulations that guide the interactions between organisations and the environment

• How organsiations try to influence government and how the government influences them

• Every government is a major regulator, susidiser, employer and customer of an organisation

• Focus’s of the South African government that will influence organisations:

← To enhance the process of social and economic transformation

← To emphasis 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 organsiations

• The direction and stability of political factors in a country are a major consideration for managers when they have to formulate the strategy of their organisation

• Important that organisations consider the possible impact of political variables on the formulation and implementation of competitive strategies because of the increasing global interdependence among economies , markets, governments and organsiations

The economic environment

• Economic factors affect the nature and direction of the economy in which the organisation operates

• Economic factors have a direct impact on the potential attractiveness of various strategies and consumption patterns in the economy, and have signification and unequal effects on organisations in different industries and in different locations

• Economic factors: inflation, recession, interest rates, GDP, the monetary policy, unemployment levels etc.

Sociocultural environment

• Concerned with a society’s attitudes and cultural values

• These variables i.e. threats and opportunities arising from the changes in social, cultural and demographic variables, shape the way people live, work, produce and consume

• Religion, geographic area, culture, education levels, age, family compositions etc.

Technological environment

• The effects of the technological environment occur primarily through new products, processes and materials, and to avoid obsolescence and promote innovation, an organisation must be aware of technological changes that might influence its industry

• The technological environment includes the institutions and all the activities involved in creating new knowledge, and translating that knowledge into new outputs, products, processes and material

• Implications of technological innovation and advancements:

← They dramatically affect organsiations products, services ,markets, suppliers, distributors, competitors, consumers, 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 position 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 skilss

← They result in changing values and expectations of employees, mangers and customers

← They create new competitive advantages that are more powerful that existing ones

Ecological environment

• Refers to the relationship between human beings and the air, soil and water in the physical environment. The limited natural resources from which an organisation obtains its raw materials

• important questions that organisations should know with regard to the ecological environment:

← does the organisation have a physical environmental policy

← What is the organisations environmental performance so far and how does it compare with that of other organisations?

← What will be the potential impact of environmental issues on the future demand for the organisations products/ or services?

← Do environmental issues form part o the organisations agenda at management meetings?

← Does the organisation engage objective 3rd party assessments of the effectiveness of its environmental management?

• Necessary that any detrimental effects that the organisation may have on the environment be avoided as far as possible

• PESTE analysis- political, economic, Sociocultural, technological and ecological analysis of the macro environment

FORECASTS, TECHNIQUES AND SCENARIO PLANNING

• Forecasts are educated assumptions about future trends and events

• Forecasting tools: quantitative techniques and qualitative techniques

• Quantitative forecasts: most appropriate when historical data is available and where the relationship between the key variables is expected to remain the same in the future.

• The choice of suitable forecasting method is dependant on the availability of historical data, cost, time and the accuracy of the required information

• Forecasting is not perfect

• Scenario planning: is that part of strategic planning which relates to the tools and techniques for managing the uncertainties of the future

THE INDUSTRY ENVIRONMENT

• An industry is a group of organisations that offer similar products and services

• An organisation needs to know in which organisation it is competing, what the structure of that industry is, what the major determinants of competition are and which organsiations are the competitors.

• Industry structure: identified by examining 4 variables-

o Concentration: this is the extent to which industry sales are dominated by only a few organsiations

o Economies of scale: these are the savings that companies achieve within an industry due to increased volume

o Product differentiation: this is the extent to which customers perceive goods or services offered by organisations in an industry as different from one another

o Barriers to entry: these are obstacles that an organisation must overcome in order to enter the industry

• The higher the similarity of benefits between organisations, the higher the stability between them and thus the higher the competition between these organisations as well

PORTERS 5 FORCES MODEL

• Michael Porter: 5 forces of competition influence the intensity of industry competition and the industry’s profit potential :

← The threats posed by new entrants

← The bargaining power of suppliers

← The bargaining power of buyers

← Product substitutes

← The intensity of rivalry among competition

• The collective strengths of these forces determines the ultimate profit potential of an industry

Threat of new entrants:

• Can threaten the market share of existing competitors by brining additional production capacity to the industry

• Two factors influence whether new organsiations will enter an industry: barriers to entry and expected retaliation

• Barriers to entry: examples:

← Economies of scale- 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. Advantages: they enhance an organsiations flexibility may keep the price constant and they increase profits

← Product differentiation- customers believe an organsiations product is unique, and they tend to become loyal to that organisation. New entrants have to offer products and services at lower prices

← capital requirements-

← switching costs- are once-ff costs customers have to incur when they switch from one suppliers product to another

← access to distribution channels- new entrants have to persuade distributors to carry their products

← Cost disadvantages independent of scale- some existing competitors have such as favourable access to raw material, government subsidies. These advantages are difficult to duplicate

• Expected retaliation: if existing organsiations can make this retaliation swift and vigorous, the likelihood of new organisations entering is reduced

• New entrants should locate market segments that are to adequately served

Bargaining power of suppliers

• Suppliers can exercise their power over competing organsiations by increasing their prices and/or reducing the quality of the their product, thereby reducing the profitability of an organisation that is unable to cover ten cost increase in its own prices

• A supplier group is powerful when:

← It is dominated by a few large organisations and is thus more concentrated than the industry it sells its products to

← No satisfactory substitutes are available for customers to buy

← Industry organsiations are not important customers for the supplier group because it sells to several industries

← Supplier’s foods are critical to buyer’s organsiations. These products are essential for the success of the buyers manufacturing process, so the buyer actually does not have another option than buying it from the supplier

← The switching costs for industry organisations to switch to another product or supplier are higher because of the suppliers effectiveness

← It poses a credit threat integrating forward i.e. the supplier becomes its own buyer

Bargaining power of buyers

• Organsiations want to maximize their sales and profit while buyers want to buy product and services at the lowest possible prices

• Customers have bargaining power in the following cases:

← When the purchase a large quantity of a seller organsiations products or services eg. Pick n pay is more powerful than its supplier

← The sales of the product being sold account for a large proportion of the seller’s revenue

← Few, if any costs are incurred when customers switch to another product

← The same reason (shopping for low prices) is applicable if the customer or buyer earns low profits

← The products or services purchased by the customer account for a large portion of the customers costs, the customer will shop around for lower prices

← The industry’s products are indifferent or standardized

← The products 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

← There is a credible threat of backward integration i.e. buyer becomes its own supplies

Threat of substitute products

• If a product or service from another industry can be used to perform similar functions as a product or service in the industry, it is considered to be a substitute product or service

• Substitutes pose a threat when the switching costs for customers are low, the substitute product has a lower price, or its quality and performance capabilities are equal to or greater than those of the competing product

Rivalry among competing organsiations

• Strongest of all the forces

• The only way to create competitive advantage is to differentiate your organisation’s products from competitor’s offerings.

• Some factors that will influence the intensity of rivalry between or among competitors:

← Numerous or equally balanced competitors

← Slow industry growth

← High fixed or storage costs

← Lack of differentiation or low switching costs

← High exit barriers- eg. Highly specialised assets, fixed costs of exit, strategic interrelationships, emotional barriers and government and social restriction

• Strategic groups within an industry: a strategic group consists of the clustering of a group of organsiations that are similar to one another, offer similar goods to similar customers and also might make similar decisions about production technology and other organisational characteristics.

• The classification of an industry into various strategic groups involves deciding what dimension to use on the graph: breadth of product, geographic scope, price, quality and type of distribution

• It helps an organisation to identify the competitors at different competitive positions in the industry

LIMITATION OF PORTERS 5 FORCES MODEL

• The model claims to asses the profitability of the industry. There is however, strong evidence that organisation-specific factors are more important to the individual organisations success than industry factors are

• The model implies that the 5 forces apply equally to all competitors in an industry. The truth is that the strength of the forces differs from organisation to organisation

• Product and resource markets are not adequately covered by the model

• The model can never be applied in isolation. It was accepted by Porter that the outcomes of the model’s application were only relevant where the macro environment remained constant and stable

• The model assumes that the relationship between the competitors is always hostile

THE MARKET OR TASK ENVIRONMENT

• Compromises of suppliers, intermediaries, customers and competitors.

• These variables can either pose a threat or an opportunity to the organisation

• Management has no control over these variables , but can influence their effect through changes in the organisations strategy

• Most important task of management in the market environment is to identify, evaluate and exploit opportunities and to develop the marketing strategy of the organisation in such away that competitors and other variables of this external environment do not present a threat to the organisation

Suppliers

• Are the individuals and companies that provide an organisation with the input resources that the organisation needs to produce goods and services

• A threat arises when a supplier’s bargaining position becomes so strong that it can raise the price of input resources it supplies to the organisation.

• Evaluation questions for suppliers: how competitive are the prices of suppliers? How competitive are suppliers in terms of their production standards and the quality of their products? How competitive are the supplier in terms of their ability for speedy and reliable delivery? What are their reputations? How efficient and effective are they in terms of after-sales service delivery?

Distributors or intermediaries

• Are organisations that help other organisations to bridge the gap between the manufacturer and customer by selling their goods and services to the final customer.

• Includes wholesalers, retailers, commercial agents and brokers. Eg a bank is a financial intermediary.

Customers

• Are those people, individuals and groups who buy the goods and services that an organisation produces.

• Most important variable in the market environment

• Organisations success depends on its ability to respond to changes in the customer’s tastes and needs and to changes in the number and type of customer.

• Information about the target market and customer’s needs, their purchasing power and purchasing behaviour are important.

Competitors

• Are organisations that produce goods and services similar to a particular organisations goods and services and compete for the patronage of the same customers.

• High levels of competitions often results in price competition, falling prices reduces access to resources and lower profit potential

• Competitor analysis: what are the future objectives of the competitor? What are their current strategies? What do the competitors believe about the industry- what are their assumptions? What are their capabilities?

• A competitor profile gives an indication of the strengths and weaknesses of major competitor

• How to identify competitors: the similarity of scope definitions i.e. what business are we in? ; the similarity of the benefits customers derive from the products and services that other organsiations offer; how committed the organisation is to the industry i.e. is the parent or primary company in the same industry, is the organisations main focus area the same industry?

• Common mistakes in identifying competitors: overemphasizing current and known competitors and forgetting about new entrants or international competition, concentrating on the large organisations and forgetting about the small, assuming competitors will behave in the same way

THE INTERNAL FACTOR EVALUATION MATRIX

• Is a useful method for obtaining a quantitative value for the organisations internal situation.

• This value can be used to measure the organisations internal situation against what is expected in the industry

THE EXTERNAL FACTOR EVALUATION MATRIX

• Uses the key variables that pose opportunities and threats in the external environment

• Can be used to evaluate the market and the industry in terms of the opportunities and threats, but it must also be remembered that good intuitive judgment remains important in this evaluation process.

MIND MAP OF TOPIC 3

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TRANSLATING THE MISSION STATEMENT INTO MEASURABLE LONG-TERM GOALS

← Long-term goals represent the results expected from pursuing certain strategies

← Hierarchy of goals: long-term goals are the responsibility of top managements, middle management then translates the long-term goals into more specific goals for each functional level, these functional level goals are then translated into short-term goals

← The focus area/issues of long-term goals:

← Market

← Product

← Technology

← Survival

← Growth

← Profitability

← Customers

← Quality

← Continuous improvement

← Customer service

← Employee efficiency

← Innovation

← Sales

← Finance

← Criteria for well-formulated long-term goals:

← They should be acceptable to the managers and the employees in the organisation

← It should be clear how the long-term goals contribute towards achieving the organisations mission

← Should measurable, motivating and achievable

← Should allow for some flexibility and reformulation

← Clearly defined goals/objectives provide direction to the organisation, establishes priorities, reduces uncertainty and assists in the allocation of resources

USING THE BALANCED SCORECARD TO SET LONG-TERM GOALS

← The balanced score card is a set of measures that are linked directly to the vision, mission and strategy of the organisation

← It balances short and long-term measures; financial and nonfinancial measures and internal and external performance perspectives.

← Comprises of 4 perspectives: financial, internal business, innovation and learning and the customer perspective

← Can be used as a framework for setting long-term goals as each perspective has clearly stated objectives, measures, targets and initiatives

MIND MAP FOR TOPIC 4

COMPETATIVE ADVANTAGE

– Competitive strategy is all about activities an organisation undertakes to gain a competitive advantage in a particular industry

– The competitive advantage of an organisation is the answer to: what competence/advantage should the organisation use to distinguish it from its competitors?

– Competitive advantage should:

← Relate to an attribute with value and relevance to the targeted customer segment.

← Be perceived as a competitive advantage

← Be sustainable i.e. not easily imitated

– Should be based on the organsiations resources, strengths or distinctive competencies relative to competitors, but must also be perceived as such by its customers.

STRATEGY SELECTION

← A strategy is the game plan that an organisation elects to use to outwit its competitors; to help the organisation sustain its competitive advantage, and to realise above-average returns. It should enable the organisation to maximize wealth and survive in the long-term.

← Two main categories of strategies: generic and grand strategies

← Grand strategies can be divided into 3 groups: growth, corporate and decline strategies

GENERIC COMPETATIVE STRATEGIES

← Competitive strategy is about formulating a strategy that enables the organisation to compete with other organisations in its industry or sector

← The generic strategies were developed by Michael porter

← An organisation can strive to supply a product or service in 3 distinct ways:

1. by being more cost-effective than its competitors: Cost leadership

2. by adding value to the product of service through differentiation and command higher prices: differentiation

3. by narrowing its focus to a special product market segment which it can monopolise: Focus

4. by combing the cost and differentiation advantage, the organisation can offer the lowest prices compared to rivals offering products with comparable attributes: best-cost

Cost-leadership

← the products are highly standardized and appeal to a broad target market

← two ways to accomplish lower cumulative costs than competitors:

1. out-manage rivals in the efficiency with which the value-chain activities are performed and in controlling the factors that drive the costs of the value-chain activities

2. revamp the organisations overall value chain to eliminate or by-pass some cost-producing activities

← some associated cost drivers that need to be managed:

– economies of scale arise whenever activities can be performed more cheaply at larger volumes than smaller volumes and from the ability to spread out certain fixed costs over a greater sales volume

– Experience and learning-curve effects costs of organisations can decrease as employee experience increases. This leads to higher productivity, better application of technology etc.

– The % of capacity utilization increased capacity utilization leads to fixed costs being spread over a large unit volume which lowers fixed costs per unit especially in capital-intensive organisations

– Technological advances investment in cost-saving technologies can enable organisations to reduce the unit cost of their products or service significantly

– Improved efficiencies and effectiveness through supply chain management an organisations value chain is directly linked to the value chain of its suppliers and customers

← Cost leadership is the best strategy to follow when:

← The organisation has the ability to reduce costs across the supply chain

← Price competition among competitors is vigorous

← The targeted customer market is price sensitive

← Competitive products are similar and there is a greater degree of product standard

← Brand loyalty does not play a big role among customers

← Buyers have high bargaining power because of higher concentration

← New entrants to the industry use introductory low prices to attract buyers and build a customer base

← The market is large enough to provide the organisation with economies of scale advantages

← Buyers incur low switching costs

← Potential pitfalls of a cost leadership strategy:

o Sometimes organisations stand the risk of being overly aggressive with their price cutting and ending up with lower profitability

o Value-creating activities that form the basis of this strategy can often by imitated to easily

o A degree of differentiation is still need. A low price providers offering must always contain enough attributes to be attractive to prospective buyers

← Advantages of cost leadership:

← Increases the potential of an organisation to increase its market share as well as its profitability

← Competitors are not likely to start a price war in an industry where there is a dominant cost leader

← Customer loyalty develops in a prolonged cost leadership strategy

← Ability to keep new entrants from entering the market

Differentiation

← Consists of creating differences in the organisations product or service offering by creating something that is perceived as unique and valued by customers

← Prestige or brand image, technology, innovation, features, customer service, product reliability, a unique taste, speed and rapid response through activities such as prompt response to customer complaints

← Sustainable differentiations is usually linked to core competencies, unique competitive capabilities and superior management of the value chain activities that competitors cannot readily match

← Differentiation is the best strategy to follow when :

← Buyers preferences are diverse and varied

← Fewer competitors follow a similar differentiation approach with less head-on-head rivalry

← There are many ways to differentiate the product or service and many buyers perceive difference as having value

← Technology changes frequently and competition often centers around changing product features

← Higher industry barriers result in higher demand for products and less price sensitivity

← The differentiated product or service can be designed so that it has wide spread appeal to many market sectors

← Brand loyalty exists, the lower the chance of customers to switch and their sensitivity to price

← Potential pitfalls of a differentiation strategy:

o Uniqueness that is not valuable

o Too much differentiation

o Charging too high a premium- prices still need to be competitive

o A uniqueness that is easily imitated

o Dilution of brand identification through product line extensions- i.e. a new product comes out that makes your differentiated product obsolete

Focus

← Is based on the choice of a narrow competitive scope within an industry

← A focus strategy based on cost leadership aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and price than competitors

← A focus strategy based on differentiation as at securing a competitive advantage by offering niche members a product they perceive as well suited to their unique tastes and preferences

← Focus is the best strategy to follow when:

← The target market niche is large enough to be profitable and offers good growth potential

← It provides a way for a smaller organisation to avoid direct competition with the larger organisations that do not deem the segment important to compete in

← It is viable for larger organisations to meet the specialised needs of the niche segment while still maintaining performance in their mainstream markets

← The industry has a variety of potentially profitable market segments, and overcrowding by competitors is thus less of a risk

← Customers are willing to pay a high premium for the perceived value that they attach to a differentiated product or service

← Customers are brand loyal and unlikely to shift their loyalty to a competing brand, regardless of the price they have to pay for the particular product or service

← Potential pitfalls of a focus strategy:

o The needs, expectations and characteristics of the organisation may gradually shift towards attributes desired by the majority of buyers in the broader market, which will decrease the profit potential of this segment

o Competitors may develop technologies or innovative products that may redefine the preferences of the niche

o The segment may become so attractive that it is soon inundated with competitors

Best-cost strategy

← An integrated strategy enables an organsiations to provide value in terms of differentiated attributes as well as lower prices

← the objective becomes to provide unique products and services more efficiently than competitors do

← although immediately differentiation increase unit costs, the costs will decrease as volume increases

← the best-cost strategy is the best strategy to follow when:

← the potential for economies of scale and learning exists in the market

← Customer demand, expectations and needs provide sufficient impetus for investment in enhanced efficiencies and cost savings as well as differentiation

← Competition is fierce and barriers to entry low

← Customers are simultaneously price and quality sensitive

← Mass customisation becomes possible because of advances technological, distribution and marketing capabilities

← Potential pitfalls of a best-cost strategy:

o Organisations that fail to create both competitive advantages simultaneously may end up with neither

o Organsiations may underestimate the challenges and expenses associated with providing low prices and differentiation at the same time

o Organisations may miscalculate the sources of revenue within the industry and fail to achieve expected profitability

CRITISISM AGAINS THE GENERIC STRATEGY FRAMEWORK

← An organisation can employ a successful hybrid strategy without being stuck in the middle

← Low cost strategy does not in itself sell products i.e. it needs a lower price before it will sell

← Price can sometimes be used to differentiate

GRAND STRATEGIES

← A grand strategy is a comprehensible general approach that guides a firms major actions

← Use the selected generic strategy with its competitive advantage as a point of departure

← 4 broad categories: external growth strategies, internal growth strategies, decline strategies and corporate combination strategies

Most common partnering of generic and grand strategies:

Internal growth strategies

Concentrated growth (market penetration)

← Is a strategy that seeks to increase the market share of an organisation through concentrated marketing efforts

← Stays focus on the present product and the present market

← Effective with the following conditions:

o The market for a specific product or service is not saturated

o There is room to increase the usage rate of present customers

o The market share of its major competitors have been declining while total sales in the particular industry have been increasing

o Scale economies can provide cost benefits to organisations

o There is not fluctuation in the availability, price and quality of raw materials and other resources required to provide the specific product or service that consumers require

Market development

← Involves expanding the portfolio of markets that the organisation serves

← Effective with the following conditions:

o An organisation has access to reliable and affordable distribution channels in the area it wishes to enter

o Cultural barriers and a lack of insight with regard to the buying behaviour of consumers in the foreign country present challenges to organisations that consider entering international markets. Some organisations form strategic partnerships in the country they wish to enter

Product development

← Improving and modifying the products and services of the organisation in order to increase sales

← Effective when an organisation has a successful product reaching the maturity stage of their product life cycle

← effective with the following conditions:

o in industries that are characterised by rapid technological developments, especially where their major competitors offer better quality products at comparable prices

o when capital is available for capital investment in research and development, technology and in the attainment of HR

Innovation

← instead of concentrating on extending the life cycle of a product, these organisations endeavor to create new product life cycles that will make similar products or services obsolete

← effective in the following conditions:

o customers demand differentiation

o the industry is characterised by rapid changes and advances in technology

o the organisation has research and development skills

o organisational culture fosters innovation

External growth strategies

Diversification

← related or concentric diversification refers to businesses diversifying into related markets or industries or even strategic assets

o effective in the following conditions:

– 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

– organisations whose current products or services are in the decline stage of the product life cycle

– the potential exists to reap economies of scale across business units that can share the same strategic assets

– the potential exists to utilise a core competence developed through the experience of building strategic assets in existing businesses, to create a new strategic asset in a new business at a lower or faster cost

← unrelated or conglomerate diversification involves adding new, unrelated products or services in an effort to reach and penetrate new markets

o effective in the following conditions:

– The basic industry of the organisation is experiencing a declining sales and profits

– Existing markets for the products and services of the organisation are saturated

– The organisation has the capital and managerial talent needed to compete successfully in a new industry

o Some methods through which an organisation can pursue unrelated diversification:

– Buying a high-performing organisation in an attractive industry

– Buying a cash strapped organisation that can be turned around quickly through additional capital investment

– Buying an organisation whose seasonal and cyclical patterns would provide stability to the cash flow and profitability of the organisation

– Buying a largely debt-free organisation to improve the borrowing power of the acquiring organisation

← Benefits of diversification:

← More attractive scope that can provide opportunities for growth faster, high 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

← Risks associated with diversification:

← Ignorance about new market could result in inefficiency as a result of inadequate knowledge of customer needs, technological developments and environmental shifts

← Risk of reducing management effectiveness

← Sharing value chains with another organisation often entails substantial costs with regard to communication, compromise and accountability

Integration

← vertical integration: characterised by the expansion of the organisations into other parts of the industry value chain directly related to the design, production, distribution or marketing of its existing products

o backward integration involves gaining ownership or increased control of an organisations suppliers

o Forward integration entails gaining ownership over distributors or retailers

o Benefits: reduce the economic uncertainties and transaction costs facing an organisation in a particular industry

o Risks: organsiations can over commit scarce resources to a technology that may become obsolete; capital intensive which results in high fixed costs; problems integrating management, employees and values

← Horizontal integration: when an organisation seeks ownership or increased control over certain value chain activities of its competitors. Through mergers, acquisitions and takeovers

← Problems could occur in integrating the differences in organisational culture, capabilities, skills, management styles and values of the organisations involved in the merger

Decline strategies

← Retrenchment or turnaround: Focuses on strengthening the distinctive competencies of the organisation in order to break the downward spiral with regard to sales and profits

← Focuses is on ways to reduce costs in order to stabalise the financial condition of the organisation and put it on a path to recovery

← Re-engineering of processes, TQM, reducing assets, outsourcing, new management, retrenchment etc.

← Divestiture : Involves selling a division or part of the organisation to raise capital for further acquisitions or investments

← Liquidation: A planned and orderly way of converting the assets of the organisation into cash in an attempt to minimize losses for the shareholders of the organisation

← Bankruptcy: is a type of retrenchment strategy where all the assets of the organisation are sold in parts for their tangible worth. bankruptcy allows organisations to reorganize and come back after filing a petition for bankruptcy

Corporate combination strategies

Joint ventures

o Is a temporary partnership formed by two or more organsiations for the purpose of capitalizing on a particular opportunity

o Forming a joint venture is an attractive strategy when the distinct competencies of two or more organisations complement each other

Strategic alliances

o The organisation involved do not share ownership in a specific business venture, these organsiations tend to share skills and expertise for a defined period, usually linked to the life cycle of a specific project

Consortia

o Are large interlocking relationships between organsiations in a particular industry.

o Involve multi-partner alliances and highly complex linkages between groups of organisations

o Eg. The organsiations own major equity stakes in each other

o Risks: partners can become incompatible over time; no control over how partners use the knowledge gained from the cooperation; can be very cost intensive

FUNCTIONAL STRATEGIES

← Functional strategies and action plans have to be formulated to ensure that all organisation units, divisions, departments and project teams do what is required in order to implement the chosen strategy

← The balanced scorecard can be used to clarify the organisations strategies and to translate them into action

FACTORS THAT MAY IMPACT ON STRATEGIC CHOICE

The strategic planning process, the preferences of top management, the organisations leadership and the organisational culture if the organisation as well as the history of the organisation

MIND MAP OF TOPIC 5

|STRATEGIC PLANNING |PAGE |

|“Explain what strategic management is and how it fits into the contemporary business environment” |  |

|1.      Differentiate between the different levels of management decision making |  |

|2.      depict and explain the logical flow of activities in the strategic management process diagrammatically |  |

|3.      differentiate between strategic planning, strategy implementation and strategy control |  |

|4.      explain the assumptions on which strategic management models are based |  |

|5.      explain the dangers of “short-terminism” in defining organisational success |  |

|6.      differentiate between profit maximization and wealth maximisation |  |

|7.      cite basic arguments for the meaning of survival as far as strategic management is concerned |  |

|8.      explain the concept of corporate governance |  |

|9.      describe the impact of the King II report on corporate governance for South Africa on strategic planning |  |

|10.   explain what corporate governance entails |  |

|11.   discuss the impact of corporate citizenship on strategic planning |  |

|12.   arguments for and against strategic management |  |

|“Explain and interpret the strategic direction of an organisation” |  |

|13.   expound on the importance of strategic direction in strategic planning |  |

|14.   depict the position of strategic direction in the strategic planning process diagrammatically |  |

|15.   explain what a vision statement is |  |

|16.   explain what strategic intent is |  |

|17.   comment on how the vision is shares with all managers and employees |  |

|18.   evaluate and interpret the strategic direction of an organisation in the context of its strategic plans |  |

|19.   explain what a mission statement is |  |

|20.   differentiate between a vision statement, a mission statement and strategic intent |  |

|21.   explain the components of the mission statement |  |

|22.   expound of the factors that impact on the setting of strategic direction |  |

|23.   analyse the extent to which their claims were satisfied by the mission statement |  |

|24.   Briefly comment on the recommendation of the King II report regarding the responsibility of directors to formulate a |  |

|mission statement. | |

|25.   comment on how the strategic direction is shared with all stakeholders |  |

|“Analyse and interpret the results of an assessment of the internal and external environment” |  |

|26.   explain the rationale for assessing the environment |  |

|27.   discuss the importance of environmental assessment |  |

|28.   expound on the use of SWOT analysis in assessing environment |  |

|29.   describe the components of the environment in which the organisation operates |  |

|30.   explain what internal assessment means in strategic planning terms |  |

|31.   explain what external assessment means in strategic planning terms |  |

|32.   diagrammatically depict and explain where internal assessment fits into the strategic planning process |  |

|33.   diagrammatically depict and explain the position of external environmental assessment in the strategic planning process |  |

|34.   identify and differentiate the main resources of an organisation |  |

|35.   explain what the resource-based view of an organisation encompasses |  |

|36.   explain what makes a resource valuable |  |

|37.   interpret the results of a resource based internal assessment |  |

|38.   diagrammatically depict and explain the value-chain approach to assessing the internal environment of an organisation |  |

|39.   list the steps involved in conducting a value-chain analysis |  |

|40.   differentiate between primary and secondary activities |  |

|41.   critique the use of the functional approach in the contemporary organisation |  |

|42.   explain what the use of the functional approach entails |  |

|43.   comment on the use of financial ratios in internal assessment |  |

|44.   comment on the importance of meaningful comparisons when conducting an internal assessment |  |

|45.   interpret the results of a financial analysis |  |

|46.   diagrammatically depict the external environment |  |

|47.   explain the interrelatedness of the macro, industry and operating environments |  |

|48.   identify and explain the variables that comprise the macro environment |  |

|49.   describe the key macroenvironmental changes that impact on South African organsiations |  |

|50.   diagrammatically depict and explain how Porter’s five forces model is used in industry assessment |  |

|51.   describe the limitation of Porters five forces analysis |  |

|52.   explain the importance of industry assessment as part of the external environment assessment |  |

|53.   describe the industry life-cycle in external environment assessment |  |

|54.   comment of the variables in the operating environment |  |

|55.   offer guidelines for performing a competitor analysis |  |

|56.   explain the rationale for assessing the operating environment |  |

|57.   interpret the results of an environmental assessment |  |

|“Interpret the strategic goals (long-term goals) of the organisation” |  |

|58.   explain what is meant by long-term goals |  |

|59.   diagrammatically depict the position of long-term goals in the strategic planning process |  |

|60.   explain how the mission statement is translated into strategic goals |  |

|61.   identify and explain the focus areas of long-term goals |  |

|62.   diagrammatically depict the four dimensions of the balanced scorecard |  |

|63.   evaluate an organisations long-term goals |  |

|64.   interpret and organisations long-term goals |  |

|“Defend the choice of a strategy, or strategies, based on the strategic planning process” |  |

|65.   explain what a strategy is |  |

|66.   comment on the importance of choosing the right strategy or strategies in strategic planning |  |

|67.   explain what generic strategies entail |  |

|68.   differentiate between the three generic strategies |  |

|69.   diagrammatically depict grand strategies |  |

|70.   differentiate between growth, decline and corporate combination strategies |  |

|71.   explain grand strategies |  |

|72.   comment on the factors that impact strategic choice |  |

|73.   defend the choice of a specific strategy for a specific organisation |  |

|74.   interpret the convince of a strategy in terms of its relevance to attain the strategic direction of the organisation |  |

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MIND MAP TOPIC 1

MIND MAP TOPIC 2

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