2 STRATEGIC MANAGEMENT IN THE CONTEXT OF EXISTING ...



Explain what the term ``strategic management'' entails in your own words.

It is a deliberate effort by the organization to allocate resources in such a way that the organization could realize an above average return in order to have a competitive advantage over its competitors over long term for the wealth maximization of all its stakeholders

2.2.2 Levels of strategy (refer 1.2 of study guide)

corporate strategy is strategy for guiding a firm's entry into and exit from different businesses, for determining how a parent company adds value to and manages its portfolio of businesses, and for creating value through diversification.

Business level strategy is more concerned about developing and sustaining a

competitive advantage for the goods and services that are produced. It is 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 STRATEGIC MANAGEMENT PROCESS AND STRATEGIC PLANNING. Strategic planning

Done by top management, it is the first stage in the strategic planning process and deals with the strategic planning and direction of the organization. It involves the formulation of the company’s mission or review of a company vision , mission and long term goals. It also evaluates the environments in which the organization operates in order to identify swot.

. Strategy implementation Strategy implementation is the action stage of the strategic management process and requires input and participation from everyone in the organisation.

. Strategic control

The final stage in the strategic management process is the evaluation stage. Strategic control aims to assess the progress made towards achieving the desired outcome. It offers feedback and alerts top management to problems or potential problems before a situation becomes critical. Change in one of the stages may necessitate a change in any or all of the other stages. Strategic planning, strategy implementation and strategic control should be performed on a continuous basis - the process never ends.

WEALTH MAXIMISATION VERSUS PROFIT MAXIMISATION

Profit maximization emphasizes maximum profit and therefore focuses only on turnover, sales and marketing. This is a short sighted approach and will only secure survival in the short term .

Wealth maximization incorporates all spheres of the organization and emphasis on sustaininability and survival in the long term . Wealth maximization modifies the goal of profit profit maximation in order to deal with the complexities of the business environment.

EXPLAIN WHAT CORPORATE GOVERNANCE ENTAILS AND YOU’RE COMMENTS ON ITS IMPACT ON STRATEGIC MANAGEMENT

REFERS TO THE FORMAL SYSTEM OF ACCOUNTABILITY OF THE BOARD OF DIRECTORS TO SHAREHOLDERS.

IN ITS BROADEST SENSE IT REFERS TO THE INFORMAL AND FORMAL REALTIONSHIP BETWEEN THE CORPORATE SECTOR AND ITS STAKEHOLDERS AND THE IMPACT OF THE CORPORATE SECTOR ON SOCIETY IN GENERAL.

GOOD CORPORATE GOVERNANCE REASSURES STAKEHOLDERS THAT THE COMPANY IS BEING RUN WELL.IT FOLLOWS CORPORATE GOVERNANCE DEALS WITH THE ORG AND ALIGNS ITS OWN GOALS WITH THOSE OF THE STAKEHOLDERS AND MANAGERS, ITS REALTIONSHIP WITH BOTH ITS INTERNAL AND EXTERNAL STAKEHOLDERS.

DISCUSS THE CONTEMPORARY CORPORATE GOVERNANCE ISSUES

1CORPORATE SOCIAL RESONSIBILITY- ORG DECISION MAKING LINKED TO ETHICAL VALUES, COMPLIANCE WITH LEGAL REQ AND RESPECT FOR COMMUNITIES AND THE ENVIRONMENT.

2. ENVIRONMENTAL RESPONSIBILITY-MANY ORG HAVE TAKEN STEPS TO DO NO HARM TO THE ENVIRONMENT-THE CHALLENGE IS TO DEVELOP A SUSTAINTABLE GLOBAL ECONOMY

3. SUSTAINABILITY-SUSTAINABLE DEVELOPMENT MEETS THE NEEDS OF THE PRESENT GENERATION WITHOUT COMPRIMISING THE ABILITY FUTURE GENERATIONS TO MEET THEIR OWN NEEDS.

4. SUSTAINABILITY REPORTING AND THE TRIPLE BOTTOM LINE-IT REFERS TO THE ECONOMIC, ENVIRONMENTAL AND SOCIAL ASPECTS OF THE BUSINESS.THE ENVIRONMENTAL REPORTING REFERS TO HOW THE PRODUCT/SERVICE AFFECTS THE ENVIRONMENT.

5. STAKEHOLDER ENGAGEMENT-THIS APPROACH REQUIRES AN ORG TO IDENTIFY AND COMMUNICATE TO ALL STAKEHOLDERS THE PURPOSE AND VALUES BY WHICH THE ORG WILL OPERATE.

4.3 The King Report on Corporate Governance for South Africa 2002 (King II Report)

-The King II Report identifies seven characteristics of good corporate governance. These include issues like discipline, transparency, independence, accountability, responsibility, fairness and social responsibility.

- recommends moves from single to triple bottom line measurement and reporting

-directors, management, employees and suppliers have a commitment to maintain the highest level of confidentiality in relation to the activities and assets of the business operations.

-Disclosure and transparency relate to the communications of outcomes, that is, the results of performance.

5.1 What is corporate citizenship?

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 by respecting and showing consideration to its stakeholders. Comprises the extent to which an organization makes a positive contribution to society by

➢ Respecting and showing consideration to its stakeholders

➢ Has high ethical values

➢ Adheres to legislation, rules and regulations

➢ And has a high regard for the natural environment

5.2 Contemporary corporate citizenship issues

The contemporary corporate citizenship issues are

. corporate social responsibility

. environmental responsibility

. sustainability

. sustainability reporting and the triple bottom line

. stakeholder engagement

5.3 The link between corporate governance and corporate citizenship

Corporate citizenship is a broader concept than corporate governance as corporate governance tends to focus on issues internal to the organization , whereas corporate citizenship also focuses on issues outside the organization, such as the community and an organisation’s obligation to broader social issues

5.4 The impact of corporate governance on strategic management

All strategic decisions should be taken within the context of good corporate

governance. Organisations should pay close attention to the King II Report when

developing or changing strategic direction. The King II Report forms an integral part of any organisation operating in South Africa.

Note that corrupt business practices have no place in sustainable business practices. It is possible to reap short- term rewards from corrupt practices, but no organisation that wants to survive in the long term will be able to do so if they do not adhere to sound business principles and good corporate governance.

EXPLAIN WHAT HE CONCEPT THE TRIPLE BOTTOM LINE ENCOMPASSES:

ECONOMIC, ENVIRONMENT AND SOCIAL.-THE TRIPLE BOTTOM LINE APPROACH EMBRACES THE ECONOMIC, ENVIRONMENTAL AND SOCIAL ASPECTS OF AN ORGANISATIONS ACTIVITIES, THEREFORE ORGANISATIONS WILL ALSO REPORT ON MATTERS SUCH AS THE EFFECT OF THE ENVIRONMENT OF THE PRODUCT OR SERVICE, PRODUCED BY THE ORGANISATION. (ENVIRONMENTAL ISSUES) AND THE VALUES ETHICS AND REALTIONSHIP WITH THE STAKEHOLDERS (SOCIAL ISSUES) AS WELL AS FINANCIAL MATTERS (ECONOMIC ISSUES). (5MARKS)

Advantages and disadvantages of strategic management

Advantages of strategic management

➢ Higher profitability –organizations that have used strategic management as the foundation of their business have shown better improvements in turnover and profits

➢ Higher productivity –better planning and utilization of resources and materials (inputs) tend to deliver more and better outputs, thus improving their productivity

➢ Improved communication – All employees tend to understand the goals and objectives of the organization better and this leads to more effective communication

➢ Empowerment – If employee are involved in the process of strategic of strategic planning they will be empowered and committed to making this a success

➢ Discipline and a sense of responsibility to the management of the organization –management takes full responsibility for its strategic plans and implementation which ensures that the process is managed and controlled in a disciplined way

➢ More effective time management – This strategic process in broken down into specific time frames giving all employees a better idea of their own time management

➢ More effective resource management – Resources are scarce therefore it is managed by resource allocation

➢ Strategic management – This provides a framework / process in which every employee can see and understand thru which phase the strategic process is currently moving.

3 DISADVANTAGES IN STRATEGIC MANAGEMENT

If strategic planning and strategic management are executed incorrectly, it could negatively affect an organisation's productivity, profitability and competitive advantage.

> Time – Managers sometimes so busy fire –fighting (solving short term difficulties ) that there is really no time for strategic management .

> Unrealistic expectations from managers and employees – Even though the process of strategic management should include as many participants as possible, this is not always practically achievable.

> The uncertain chain of implementation – Strategic plans are formulated at higher managerial levels of the organization. This means that it usually someone else who has to implement them. It is important that there is a clear chain of implementation down to the lower levels. This can be done by identifying clear responsibility areas and outcomes.

> Negative perception of strategic management – Everyone in the organization should support the use and importance of strategic management especially every individual in top management. If this does not take place the organization risks a possible negative attitude from top management which would directly flow down to employees – implementation team.

> No specific objectives and measurable outcomes – There are no frequent measurement tools to see whether the organization is better off or not after the implementing strategies. Well formulated long term objectives and the balanced scorecard can help overcome this risk.

> Culture of change – Strategic management and organizational change go hand in hand. A positive culture would increase the positive acceptance of new ideas and strategies while the opposite is even more true.

> Success groove – Managers become over confident and focused on their current success that they do not foresee any difficulties in the future and therefore do not see strategic management as necessary.

The first step in the strategic

planning process: setting strategic direction

Importance of strategic direction, vision and

strategic intent

2 STRATEGIC DIRECTION

Before a strategy can be proposed, or implemented, the organisation must develop a clear idea of where it is going and why. Strategic planning begins with the setting of strategic direction for the organisation. Strategic direction can be set in different ways. Some organisations use a vision statement to set its strategic direction; others use a mission statement, while some organisations use both these tools.

Strategic intent may be defined as the leaders' clear sense of where they want to

lead their company and what results they expect to achieve

DIFFERENCIATE BETWEEN THE VISION, MISSION AND STARTEGIC INTENT

MISSION STATEMENT-IS REALISTIC AND ASKS THE QUESTIONS WHAT IS OUR BUSINESS.IT IS A STATEMENT OF PURPOSE THAT DISTINGUISHES AN ORGANISATION FROM SIMILARE ONES. Focuses on the present or the reality

VISION-IS A ROAD MAP OF THE ORGANISATION, IS A DREAM AND ANSWERS THE QUESTION OF WHAT WE WANT TO BECOME. Focuses on the future

STRATEGIC INTENT: USED TO SET THE STRATEGIC DIRECTION AND IS A BASIS FOR RESOURCE ALLOCLATION.ESTABLISHES CRITERIA THAT AN ORGANISATION WILL USE TO CHART ITS PROGRESS.

Mission statement and stakeholders

2.1 The role of the mission statement in the strategic management

process

Managers have two tools to use to set the strategic direction of an

organisation. The first tool is the vision statement. The second tool that managers have at their disposal is a mission statement.

The vision statement deals with the dream for the organisation, the mission

statement deals with the existing/current reality. It is also called a purpose

statement. A mission statement has four focus areas: the purpose, the organisation's strategy in terms of the nature of their business, its behaviour standards and culture, and lastly, its values, beliefs and moral principles.

The mission statement also indicates how the organisation sees its stakeholders. If

an organisation addresses its stakeholders directly in its mission statement it ensures

that the company earns the support of its stakeholders.

DISCUSS THE COMPONENTS OF THE MISSION STATEMENTPG 67 TB

PRODUCTS/SERVICE, MARKET AND TECHNOLOGY- FORM THE CORE COMPONENTS OF THE MISSION STAT.THESE COMP DESCRIBE THE BUSINESS ACTIVITIES OF THE ORG.

SURVIVAL, GROWTH AND PROFITABILITY-DEAL WITH THE ECONOMIC GOALS OF THE ORG.

PHILOSPHY OF THE ORGANISATION-REFLECTS IN BELIEFS, VALUES, AND COMMITTMENT IN TEREMS OF HOW THE ORG WILL BE MANAGED

PUBLIC IMAGE- AN ORG AN USE ITS MISSION STAT TO INSTALL A PUBLIC IMAGE OF ITSELF

ORGANISATIONAL SELF CONCEPT-DEALS WITH AN ORG ABILITY TO KNOW ITSELF-IN TERMS OF ITS OWN CAPABILITIES AND LIMITS

2.4 Formulating a mission statement

The most important factor is to involve as many managers as possible.

Articles about mission statements should be selected, copied and distributed to the management team. All managers should be asked to read it as background information and then they should prepare a mission statement for the organisation..The premise is that if managers are more involved in the process of mission formulation, they will accept and support the strategic planning, implementation and control process more easily.

3 STAKEHOLDERS

F-FINANCIAL INSTITUTIONS-INTEREST

E-EMPLOYEES-SALARY

S-SUPPLIERS-PAYMENT

S-SHAREHOLDERS-DIVIDENDS

M-MEDIA-HONEST REPORTING/TRANSPERANCY

G-GOVERNMENT-TAXES

C-COMPETITORS-FAIR COMPETITION

C-CUSTOMERS-HIGH QUALITY PRODUCTS

COMMUNITY-SOCIAL RESPONSIBILITY

IMPORTANCE OF STAKEHOLDERS AND THEIR CLAIMS TO THE ORGANISATION

Any organization is the sum of its stakeholders. While all have a common interest in the org success , stakeholders have different perspectives on the org, each looking to take something out of it and all have an ability to influence that success. To achieve a competitive advantage an org needs to meet the needs of the stakeholders which mean adding value. Adding value can be defined as adding certain characteristics to the product/services that the competitor and customer(or other stakeholders) cannot do for themselves. Anyone who is directly influenced by the acts of the organization is seen as a stakeholder. Stakeholders usually have divergent goals and are driven not only by profit or other financial aspects. To ensure sustainability and long term survival of the organization it is important to ensure that the claims of the stakeholders are met. In the event of their claims being met, org will ,lose their competitive advantage and ultimately losing their sustainability over the long run

The second step in the strategic planning process:

environmental assessment

The rationale for assessing the environment

2 THE COMPOSITION OF THE ENVIRONMENT

The environment in which an organisation operates can be divided into the internal environment and the external environment Internal environment eg organisational structure, the resources, the assets, the employees, the mission and vision, the board of directors and so on. This environment is often referred to as the microenvironment and it is controllable through management decision making and action.

1EXPLAIN THE RATIONALE FOR ASSESSING THE EXTERNAL AND INTERNAL ENVIRONMENT

In order to develop the most effective and efficient strategy it is important to analyse the organisation internally .The success of a new strategy for an organisation depends on the strategic fit between the internal situation of the organisation and the external conditions. By using swot analysis an internal and external assessment is done on the organisation-about what the organisation has in terms of resources and capabilities and about what is happening in the environment. The organisation needs to use its resources, capabilities and skills to build a competitive advantage. Swot analysis highlights the basic raw materials of specific conditions in the business’s environment. If the external environment analysis is done thoroughly.

Strategic management aims for the long term survival or sustainability of the organisation.

The organisation operates in an environment which it cannot control. The organisations competitive advantage and survival is threatened by factors in the external environment. Competitors are competing for the organisations market share and customers. The organisations survival is influenced by the changing needs of its customers.

Factors in the macro environment which the organisation cannot control impacts on the operations and survival of the organisation.

4 SWOT ANALYSIS

Strengths,Weaknesses, Opportunities and Threats.

Strengths – refers to a resource or a capability that the organization has that is an advantage relative to what competitors have

Weaknesses – refers to the lack of or deficiency in a resource that is a relative disadvantage to an organization in comparison with what competitors have.

Opportunities – Refers to a favourable situation in the organization’s external (market and macro) environment)

Threats- Refers to an unfavourable situation in the organisation’s external environment

Limitations of SWOT analysis

➢ 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 a disregard for other important factors that may lead to competitive success.

The strengths and weaknesses are located in the internal environment. The

opportunities and threats are located in the external environment.

Internal environmental assessment using a resource-based view

2 RESOURCE-BASED VIEW

The resource-based view argues that internal resources are more important for an organisation than external factors in achieving and sustaining competitive advantage.

Categories of resources:

➢ Tangible assets – The value of tangible resources can be det by looking at the organization financial statement ie balance sheet

➢ Intangible assets – are assets that one cannot touch ie patents and copyrights, brand recognition, corporate reputation and brand equity

➢ Organisational 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.

2.2 Characteristics that make a resource valuable:

1. value – if organizational resource is valuable it adds value ie a resource is valuable if it helps the organization to exploit the external opportunities

2. superiority – If the resource is superior to those that the competitor has and it fulfils a customer needs better then the resource is superior and valuable

3. scarcity – If the resource is in short supply and no other organization possesses it then it becomes a distinctive competence for the organisation

4. inimitability – If the resource is hard to imitate, it is likely to offer a long term competitive advantage to the organization ie reputation (goodwill) patented product, good location and organizational culture

5. capacity to exploit the resources

Internal environmental assessment using a value chain analysis

2 THE VALUE CHAIN

take inputs from the environment, to transform them and then to deliver an output. These activities can be classified as primary activities and secondary activities.

Three aspects of resources that result in customer value:

1) The product is unique and of different

2) The product is cheaper than that of competitors

3) The organization has the ability to respond to the customer’s needs very quickly

2.1 Primary activities

Primary activities are those activities involved in the physical creation of the product.

Primary activities typically include the following:

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

. operations – activities associated with the transformation of the inputs into the final product

. output or outbound logistics – refer to all the issues related to the distribution of the product of services to customers

. marketing and sales – refers to all the inducements used to get customers to make the purchases

. customer service – Basic activities that the organization must undertake to make sure the value of the product is maintained such as installation,repairs, training etc

2.2 Secondary activities

Secondary activities, also called support activities, provide infrastructure or

inputs to allow the primary activities to take place on an ongoing basis. These

activities literally support the primary activities and the performance of the

primary activities depends on the support activities. Support activities include

. procurement –refers to the actions that can be taken to optimize the quality and speed of the procurement of inputs, and not to the inputs thmselves

. technological development – include the different processes and equipment throughout the entire value chain

. human resource management – the recruitment, selection and training and development will affect all levels in the organisation

. general administration and infrastructure – effective and efficient planning systems

. financial management – All activities must adhere to effective financial recording and control

2.3 Steps in value-chain analysis

(1) Identify and classify activities: identify the various primary and secondary activities of an organisation.

(2) Allocate costs. allocate costs to every activity, as each activity incurs costs and ties up time and assets. Activity-based costing is a method that can be

used in this step

(3) Identify the activities that differentiate the organisation. its competitors and serve as sources of competitive advantage.

(4) Examine the value chain. scrutinise the results of the value-chain analysis and to classify the various activities as strengths or weakness of the org.

Internal environmental assessment using a functional approach and financial ratio analysis

2 THE FUNCTIONAL APPROACH

simplistic method of analysing the usual business functions in an organisation.

4 MAKING MEANINGFUL COMPARISONS

In order to make meaningful comparisons the following standards or

yardsticks may be of help:

> the past performance of the organisation or business unit

>results of a previous internal environmental analysis

> industry ratios or norms

>benchmarks such as industry best practices

> the performance of the organisation's competitors

Macroenvironmental assessment

PROCESS FOR CONDUCTING A MACROENVIRONMENTAL ASSESSMENT

The process for conducting a macroenvironmental assessment is ongoing and consists of four interrelated activities: scanning, monitoring, forecasting and assessing.

3 COMPOSITION OF THE MACROENVIRONMENT

The macroenvironment deals with changes in the political, technological, ecological and international environments.

3.1 The political/legal environment

The political/legal environment has 3 parts: existing laws under which organisations operate, laws of amendments of which the public is advised in advance and unannounced new laws and regulations or suspended clauses of existing laws. This environment also includes the political convictions of the country in which the organisation operates and any initiatives from government, or government appointed bodies, that may impact on the organisation.

3.2 The economic environment

Always try to align ones goals with that of the economy. Closely related to economic performance in inflation rate Other variables in the economic environment include government's monetary and fiscal policy, interest rates

3.3 The technological environment

Change brought about for marketing reasons ie new product development and change in processes. Production methods and other methods used to produce a product or deliver a service

3.4 The social environment

Society is also in a continuous process of change. Some trends are related to different lifestyles. More people work from home and have dual careers. Jobs become unisex in nature. trend towards healthier eating and good energy.

3.5 The ecological environment

Organisations need to adapt their manufacturing processes to become more

environmentally friendly, recycle used paper and even design the workplace so that it blends with the environment.

3.6 The international environment

Has an impact in terms of international law, human rights, boycotts and have become variables that can easily derail the smallest ,local org

Industry environmental assessment

2 THE INDUSTRY ENVIRONMENT

3 PORTER'S FIVE FORCES ANALYSIS

Michael Porter identified five competitive forces:

(1) the threat of new entrants

(2) rivalry among existing organisations

(3) the bargaining power of buyers

(4) the bargaining power of suppliers

(5) the threat of substitute products or services

The five forces model is only one way of analysing competition within a particular

industry.

Following is a brief summary of Porter's five forces model:

. Threat of new entrants

The extent to which new entrants are a threat depends on the existence and level of barriers to entry into the industry, where barriers to entry provide an advantage to existing companies over new entrants.

Barriers to entry are many and varied, including the level of capital requirements, economies of scale, absolute cost advantages, product differentiation, access to distribution channels, legal/regulatory barriers as well as the likelihood of retaliation by competitors

Examples of entry barriers :

1) Economies of scale – are achieved when production is increased during a given time period and this results in lower manufacturing costs because of spreading of costs over a larger number of units. The advantage of economies of scale are that they enhance an organisation’s flexibility may keep the price constant and they increase profits. New entrants functioning on small scale do not have these cost advantages when entering the industry.

2) Product differentiation – Over time an organization’s service to the customer, effective advertising campaigns or being the first to market a product or service leads customers to believe that the organizations product is unique and they tend to become loyal to the organization. If new entrants wants to change the idea of uniqueness they have to offer products and services at lower prices but this will result in lower profits or even losses

3) Capital requirement – To compete in a new industry an organization needs considerable resources ie capital to buy physical facilities, inventories and to bridge customer credit and absorb start up costs

4) Switching costs- are once off costs customers have to incur when they switch from one supplier’s product /service to another

5) Access to distribution channels – New entrants have to persuade distributors to carry their products. This process of securing distribution of products may reduce the new entrant profit potential because they have to do so by offering price breaks and cooperative advertising allowances

6) Cost disadvantage independent of scale – Some existing competitors may have cost advantages independent of their size or economies of scale ie favourable access to raw materials and government subsidies. It may be difficult for new entrants to duplicate these cost advantages

RIVALRY AMONGST EXISTING ORGANISATIONS:

Level of rivalry between firms in the industry is affected by a number of factors including the underlying market structure (type of competition, degree on concentration), the maturity of the industry, the degree to which the product or service is differentiated and the size of exit barriers.

Bargaining power of the buyers:

Buyers bargain for higher quality, lower prices and better services to reduce their costs. The bargaining power of buyers lies in their size and numbers

Bargaining power of the suppliers:

The bargaining power of suppliers depends on their numbers, how differentiate their product supplied is, the number of substitute products available and the interdependence between buyers and suppliers.

Threat of substitute products:

Substitutes pose a threat if they are cheaper than, has a greater quality or performance capability, or have lower switching costs than those of the competing product.

LIMITATIONS OF PORTER'S FIVE FORCES MODEL

1) The model claims to assess the profitability of the industry.

2) The model implies that the five forces apply equally to all competitors in an industry.

3) Product and resource markets are not adequately covered by the model.

4) The model can never be applied in isolation.

5) The model assumes that the relationship between competitors is always hostile.

Market or task environmental assessment

2 THE MARKET OR TASK ENVIRONMENT

comprises the suppliers, intermediaries, customers and competitors.

Suppliers provide the input resources so that an organisation can produce products and services.

Intermediaries help other organisations bridge the gap between the manufacturers

and customers by distributing the products and services to the final consumers.

Customers – purchasers of org products and services

2.1 Competitor profile

In order to survive in the fiercely competitive business environment, it is essential to know your competition; however, you will find it far more difficult to assess its core competencies. A competitor profile gives an indication of the strengths and weaknesses of major competitors

The third step in the strategic planning process: setting strategic goals

Developing strategic goals

TRANSLATING THE MISSION STATEMENT INTO MEASURABLE LONG-TERM GOALS

Long-term goals, also called strategic goals, translate the mission statement into

something measurable.

Long-term goals represent the results expected from pursuing certain strategies. Top management is responsible for the formulation of the long-term goals of the

organisation. Middle management will then translate these long-term goals into more specific medium-term goals for each functional level.

2.1 The focus areas of long-term goals

The components of the mission statement provide guidelines for the areas that longterm goals should focus on. Long-term goals could therefore focus on issues such as market, product, technology, survival, growth, profitability, customers and quality.

2.2 Criteria for well-formulated long-term goals

It is essential that long-term goals be well-formulated, as they have to be cascaded down to smaller departments, sections and individuals in the organisation.Well-formulated goals should be acceptable to the managers and employees in the organisation. It should be clear to everyone how the long-term goals contribute towards achieving the organisation's mission. The goals should be measurable, motivating and achievable. They also need to allow for some flexibility for reformulation as the premises on which they were based when originally formulated could change over the years. Clearly defined objectives provide direction to the organisation, establish priorities, reduce uncertainty and assist in the allocation of resources.

2.3 Using the balanced scorecard to set long-term goals

The balanced scorecard is a set of measures that are linked directly to the vision,

mission and strategy of the organisation.

It balances short and long-term measures; financial and nonfinancial measures and

internal and external performance perspectives. The balanced scorecard comprises

the following four perspectives:

> the financial perspective

> the internal business perspective

> the innovation and learning perspective

>the customer perspective

Each of the above perspectives comprises clearly-stated objectives, measures,

targets and initiatives. The balanced scorecard can be used as a framework for setting long-term goals.

The final step in the strategic planning process: strategic choices

What are the strategic options?

2 COMPETITIVE ADVANTAGE

The strategic manager needs to choose a strategy that will lead to a competitive

advantage for the organisation in a particular industry. He or she should decide on a competitive advantage that is based on the organisation's resources, strengths and competencies.

3 STRATEGY SELECTION

There are two main categories of strategies, namely generic strategies and grand

strategies (also called business strategies). Grand strategies can be divided into three groups, namely growth strategies, corporate combination strategies and decline strategies.

4 GENERIC COMPETITIVE STRATEGIES

Competitive strategy is about formulating a strategy that enables the organisation

to compete with other organisations in its industry or sector.

4.1 Cost leadership strategy

The cost leadership strategy emphasises the production of standardised products at a very low per-unit cost for consumers who are price-sensitive.

The underlying premise of cost leadership is that by making products with as few

modifications as possible, the organisation can exploit the cost-reduction benefits that accrue from high capacity utilisation, economies of scale, technological advances and economies of learning and experience.

Organisations usually decide to pursue a cost leadership strategy for two reasons: to provide the lowest prices to consumers in order to gain market share in a particular industry and to provide the organisation with a bigger profit margin. There are both advantages and risks to pursuing a cost leadership strategy.

When cost leadership is the best strategy to follow

➢ The organization has the ability to reduce costs across the supply chain

➢ Price competition among competitors is vigorous

➢ The targeted customer market is price sensitive

➢ Competitive products are similar and there is a great degree of product standard-isation

➢ Brand loyalty does not play a big role among customers

➢ Buyers have high bargaining power because of higher concentration

Advantages of cost leadership

➢ increases the potential of an organization to increase its market share a swell as its profitability

➢ Customers who are familiar with the product and services of low – cost leaders are unlikely to switch to a competing brand unless competing brand has something very different or unique to offer

➢ Cost leaders have is the ability to keep new entrants from entering the market

Potential Pitfalls

➢ Lower profitability due to excessive price cuts

➢ The strategy is often limited 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. A low price is not always appealing to buyers.

4.2 Differentiation strategy

Differentiation strategy is a strategy aimed at producing products and services

considered unique across the industry and it is directed as consumers are relatively price-insensitive.

The uniqueness of products often lies in quality, technological superiority, design or the image of the product. Organisations that pursue differentiation as a generic strategy are able to increase revenues by charging premium prices in order to outperform their competitors and to earn above-average returns.

Differentiation as a generic strategy focuses on providing a product or service that is

considered to be unique.

When Differentiation is the best strategy to follow:

➢ Buyer’s 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 may buyers perceive differences as having value

➢ Technology changes frequently and competition often centres around changing product features

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

Advantages of Differentiation

➢ Difficult for competitors to imitate

➢ Differentiation yield a longer – lasting and more profitable competitive edge when it is based on product innovation, technical superiority, product quality and realibilty. Such differentiation attributes tend to be difficult for rivals to copy or offset profitability and buyers widely perceive them as having value

Potential Pitfalls

➢ Uniqueness that is not valuable

➢ Too much differentiation

➢ Charging too high a premium

➢ A Uniqueness that is easily imitated

➢ Dilution of brand identification through product line extensions

4.3 Focus strategy

Focus strategy means producing products and services that fulfil the needs of small groups of consumers.

Selecting a particular market and catering for the very specific needs of consumers

in this market is the basis of a focus strategy.

When focus is the best strategy to follow

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

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

➢ It is viable for larger organization to meet the specialized needs of the niche segment while still maintaining performance in their mainstream markets

➢ The industry has a variety of potentially profitable market segments and over- crowding by competitors is thus less of a risk

➢ Customers are willing to pay a high premium for the perceived value that they attach to a differentiated (customized) product of service

Potential Pitfalls

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

➢ Competitors could develop technologies or innovative products that may redefine the preferences of the niche that the organization has been concentrating on

➢ The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and eroding profits

4.4 Best cost strategy

This strategy offers products or services to a small range (niche group) of customers at the best lowest price available on the market.

A focus strategy based on lowest cost aims to fulfil the needs and desires of a broad target market that is price sensitive, if the organisation has sufficient size and growth potential for the long term. , a budget airline, for example pursues a focused lowest-cost strategy.

When best cost strategy is the best strategy to follow

➢ 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 customization becomes a possibility because of advanced technological , distribution and marketing capabilties

Potential Pitfalls

>Organisation that fail to create both competitive advantages simultaneously may end up with neither and become “stuck” in the middle”

> Organisations may underestimate the challenges and expenses associated with providing low prices and differentiating at the same time

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

5 THE GRAND STRATEGIES

Once strategic planners have decided on a generic strategy to attain their mission they need to determine more specifically how they will compete in the industry. Grand strategies, also referred to as business strategies, are the specific game plan that indicates how the organisation will compete.

Grand strategies provide the basic direction for strategic actions. A grand strategy

can be described as a comprehensive general approach that guides a firm's major

actions.

5.1 The interrelationship between Porter's generic strategies and the

grand strategies

It illustrates how the grand strategies can contribute to achieving cost leadership, differentiation and focus. Grand strategies are specific strategies that an organisation selects in order to achieve cost leadership, differentiation or focus.

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

5.2 Growth strategies

divided into internal and external growth strategies. The internal growth strategies focus on the internal environment of the organisation, while the external growth strategies are more focused on the market and task environment. The various internal and external growth grand strategies are listed below: Internal growth strategies:

> concentrated growth (also referred to as market penetration)

Is a strategy that seeks to increase the market share of an organization thru concentrated marketing efforts. The organization stays focused on its present market as well as present products and services. The challenge is to grow your market share thru the customization of products 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 your competitors do.

> market development

Expand the portfolio of markets that your organization serves, introduce your present products or services into new geographic areas such as other towns, region and countries

> product development

Improve and modify your products and services in order to increase sales

> innovation

If your organization has distinct technological competencies and capital reserves to invest in research and development you may find it profitable to make innovation your grand strategy. Instead of concentrating on extending the life cycle of your products or services through differentiation and product development, you can endeavour to create new product life cycles that will similar existing products or services obsolete

External growth strategies:

> related or concentric diversification

Add new but related product / services (related /concentrated diversification) or new unrelated products/services (unrelated/conglomerate diversification) to the product line of your organization in an effort to expand your market share , or alternatively to enter new markets

> unrelated or conglomerate diversification

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

> vertical integration (backward and forward vertical integration)

Backward vertical integration – involves gaining ownership or increased control of an organisations’s suppliers. This type of strategy is particularly common in industries where low cost and certainty of supply are vital to maintaining the competitive advantage of the organization in its market.

Forward Vertical Integration – entails gaining ownership over distributors or retailers. Establishing websites to sell products directly to consumers is also a form of forward integration as the organistion cuts out retailers and distributes its products directly to consumers.

> horizontal integration

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 economies of scale could provide costs 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.

5.3 Decline strategies

When an organisation finds itself in a vulnerable position it would consider decline strategies. Decline strategies are also referred to as defensive strategies.

1) Retrenchment or turnaround strategies

Retrenchment or turnaround: some organisations find themselves in a situation when their profits are declining .This can result from increased competition, products becoming outdated or obsolete and poor management.

A turnaround strategy focuses on strengthening the distinctive competencies of the organisation in order to break the downward spiral with regard to sales and profits. Emphasis is on TOTAL QUALITY MANAGEMENT programmes to increase the cost effectiveness of the organisation.Activites may include reducing assets, outsourcing of activities that are not the core competencies of the organisation.

2) Diverstiture

- involves selling a division of part of the organization or part of the organization to raise capital for the further acquisitions 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.

3) Liquidation

- Entails selling all the assets of an organization in an attempt to avoid bankruptcy. Liquidation is usually pursued when effort to turn an organization around through retrenchment and divestiture have been unsuccessful, and ceasing operations is the only alternative to bankruptcy. Liquidation is a planned and orderly way of converting the assets of the organization into cash in an attempt to minimize losses for the shareholders or the organization

4) 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 rest of the debt of the organization is written off.

5.4 Corporate combination strategies

Organisations realise that their competitive powers could be increased by combining their efforts and working together to achieve their objectives. These strategies are especially appropriate for organisations that operate in global, dynamic and technologically driven industries.

1) Joint Ventures

- Temporary partnership formed by two or more organization for the purpose of capitalizing on a particular opportunity. Partners contribute their own proportional amounts of capital, distinctive skills, managers and technology to the specific ventures.

2) Strategic alliances

- Strategic alliances differ from joint ventures in the sense that the organizations involved do not share ownership of a specific business venture. Usually these organizations share skills and expertise for a defined period generally linked to the life cycle of a specific project.

3) Consortia

- Are large interlocking relationships between organizations in a particular industry. These relationships represent the most sophisticated form of atrategic alliance as they involve multi partner alliances and highly complex linkages between groups of organizations. Some of the linkages are financial , where by organizations own major equity stakes in one another. Other relationships , involve the complex sharing of technologies, resources or value – creating activities among different partners.

5.5 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 successfully.

The balanced scorecard can be used to clarify the organisation's strategies and to translate them into action. It enables managers to evaluate the success of the strategic choice.

3 PUTTING STRATEGIES IN CONTEXT

An organisation should have a core idea from which business strategies can be derived. According to Porter, the core idea could be one of the generic strategies.

3.1 Cost leadership

The overall cost leadership strategy emphasises the production or retailing of

standardised products at low per-unit costs for consumers who are price sensitive.The cost leader gears all its product/ market/distinctive competence choices to the single goal of squeezing out every cent of production in order to provide a competitive advantage. Pep Stores and the Formula 1 hotel group follow a cost leadership strategy. Business strategies that focus primarily on cost-leadership benefits are forward, backward and horizontal integration and concentric diversification. Taking over suppliers (backward integration) or distributors (forward integration) is the essence of the first two strategies.

Backward integration guarantees the organisation a constant supply of input, while forward integration secures a distribution channel for its products. Edgars used backward integration when it started its own clothing factory. The advantage was that it cut out the profit margin of suppliers and this improved its chances of realizing above-average returns for the organisation.

Horizontal integration refers to the strategy whereby one organisation takes over its competitor(s) in order to realise the benefits of scale operations. This is what happened with Checkers and Shoprite.

Concentric diversification involves the addition of a business related to the present business of an organisation. A typical example is Naspers which publishes newspapers and diversified into magazines and later into television (MNet).

3.2 Differentiation

The adoption of a differentiation strategy means that organisations produce or sell products or services that are perceived as unique throughout the industry and are directed at consumers who are relatively price-insensitive. Products or services can be differentiated in terms of quality, design, technology or any number of other attributes. The ability to increase revenues by charging premium prices (rather than by reducing costs like the cost leader) allows the differentiator to outperform its competitors and make above-average returns. Rolex watches do not cost much to manufacture; their design has not changed much for years; and their gold content is only a fraction of the watch price. Customers, however, buy the Rolex because of the unique quality they perceive in it status.

Business strategies that typically fall under this generic strategy are product

development, innovation and conglomerate diversification. Product development

involves modifying existing products, or developing new products, that will be

marketed to current customers.

3.3 Focus

With the third generic strategy, the focus strategy, an organisation focuses on a specific product line or a segment of the market that gives it a competitive advantage. This strategy differs from the other two mainly because it is directed at serving the needs of a limited customer group or segment. For example, a restaurant offering vegetarian food has settled for a focus strategy. Having chosen its market segment, an organisation may pursue a focus strategy by following either a differentiation or a low-cost approach.

Business strategies that typically fall into this category are market penetration and market development. When an organisation concentrates on expanding market share in its existing product markets, it is engaging in a strategy of market penetration. Eskom's decision to supply electricity to previously neglected rural areas is an example of this strategy. It used the same product to enter new geographic markets.

3.4 Decline strategies

To realise above-average returns and sustain a competitive advantage, organisations often have to choose decline strategies that is, strategies that will allow them to become ``smaller''. An organisation that faces a situation of ever-decreasing profits and turnover or everincreasing costs can use a decline strategy to turn the organisation around. Decline strategies include either cost reduction or asset reduction. This strategy should be planned with great caution, as it impacts on many stakeholders.

Divestiture is another decline strategy. It involves the sale of a business or a major part of the business as a logical consequence of the failure of the retrenchment or turnaround strategy.

Liquidation entails selling off the organisation's assets separately for their tangible asset value. This is done because the organisation is faced with bankruptcy. This is obviously not a popular strategy, as it means that management has failed.

3.5 Corporate combinations

Finally, management can choose a corporate combination if they feel that this will

enable them to sustain a competitive advantage or realise above-average returns. South African Airways formed strategic alliances with partners in the car-rental industry, other airlines, hotel groups and so on.Some organisations form joint ventures. A joint venture is a temporary partnership for the purpose of capitalising on some opportunity that is too complex for one organisation to exploit by itself.

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