BBA Honours Corporate and Business Strategy January 2020 PDF

Bachelor of Business
Administration
(Honours)
CORPOARATE AND BUSINESS STRATEGY
Module Guide
Copyright© 2020
MANAGEMENT COLLEGE OF SOUTHERN AFRICA
All rights reserved, no part of this book may be reproduced in any form or by any means, including photocopying machines,
without the written permission of the publisher. Please report all errors and omissions to the following
email address: modulefeedback@mancosa.co.za
Coporate and Business Strategy
Bachelor of Business
Administration
(Honours)
List of Contents ........................................................................................................................................... 1
Preface ....................................................................................................................................................... 2
Part 1: Strategy Development-Introduction and the Importance of Learning About Strategy

Development ............................................................................................................................. 14
Unit 1: The Strategic Management Process and Strategic Alignment ................................................... 15
Unit 2: Vision, Mission and Strategic Intent - The Starting Point of Strategy ......................................... 34
Unit 3: Evaluating a Company's External Environment........................................................................... 49
Unit 4: Evaluating a Company's Resources and Competitive Position ................................................ 73
Bibliography ............................................................................................................................................ 128
Part 2 : Strategy Implementation ........................................................................................................ 131
Unit 7: Building an Organisation Capable of Good Strategy Execution and Good Strategic
Alignment ................................................................................................................................................ 132
Unit 8: Leadership, Culture and Teamwork ........................................................................................ 150
Unit 9: Enterprise Performance Management ...................................................................................... 166
Unit 10: Corporate Governance and Ethics .......................................................................................... 178
Bibliography ............................................................................................................................................ 191
1 MANCOSA – Bachelor of Business Administration Honours

i
List of Contents
List of Tables
Table 10.1: Board Acitivities ........................................................................................................................... 187
List of Figures and Illustrations
Figure 1: Framework of the Strategy Development Module................................................................................ 5
Figure 1.1: A comprehensive, integrated strategic management process ........................................................ 23
Figure 1.2: Levels of strategy............................................................................................................................ 25
Figure 2.1: Vision and mission in strategy development. .................................................................................. 38
Figure 3.1Selected macro-environmental variables .......................................................................................... 56
Figure 3.2: Industry life-cycle ........................................................................................................................... 63
Figure 7.1: Strategy Implementation ............................................................................................................... 136
Figure 7.2: Differences between Crafting vs Executing Stragey ..................................................................... 137
Figure 7.3: The Eight Components of Strategy............................................................................................... 139
Figure 7.4 Gives a clear indication of these actions and, when executed proficiently, should largely ensure that
the organisation has the necessary competencies and capabilities for effective
strategy execution. ....................................................................................................................... 141
Figure 7.5: Line of sight .................................................................................................................................. 148
Figure 8.1: Shows that leadership is the driver of implementation. ................................................................ 153
Figure 8.2: Situational Leadership Model ....................................................................................................... 156
Figure 8.3: The Four Stages of Group Development ...................................................................................... 163
Figure 9.1: Levels of Performance Management ............................................................................................ 170
Figure 9.2: The Balanced Scorecard .............................................................................................................. 171
Figure 9.3: Personal Development Planning Process..................................................................................... 174
Figure 10.1: Ownership, Monitering, and Control ........................................................................................... 182

Preface
A. Welcome
Dear Student
It is a great pleasure to welcome you to Coperate and Business Strategy (CBS8). To make sure that you share
our passion about this area of study, we encourage you to read this overview thoroughly. Refer to it as often as
you need to, since it will certainly make studying this module a lot easier. The intention of this module is to develop
both your confidence and proficiency in this module.
The field of Coperate and Business Strategy is extremely dynamic and challenging. The learning content,
activities and self- study questions contained in this guide will therefore provide you with opportunities to explore
the latest developments in this field and help you to discover the field of Coperate and Business Strategy as it is
practiced today.
This is a distance-learning module. Since you do not have a tutor standing next to you while you study, you need
to apply self-discipline. You will have the opportunity to collaborate with each other via social media tools. Your
study skills will include self-direction and responsibility. However, you will gain a lot from the experience! These
study skills will contribute to your life skills, which will help you to succeed in all areas of life.
We hope you enjoy the module.
MANCOSA – Bachelor of Business Administration Honours 2

B. Module Overview
The module is a 15 credit module at NQF level 8.
Aims,Objectives and Outcomes of The Module

Aim of the Module
The aim of this module on Strategy Development is to introduce students to and create an awareness of the
strategic challenges facing leadership and management in guiding their organisations to success in an increasingly
dynamic, volatile and competitive business environment.
Objectives of the Module

The main objective of this module is to provide students with the opportunity to learn the art and science of strategy
through their own creative thinking and innovative application of theory in practice.
The specific objectives of this module are:
 Provide insight into strategic thinking – as the basis for innovative strategy development in an organisational
context
 Develop, through the acquisition of knowledge, the student's understanding of the various, often conflicting
schools of thought on strategy, strategy development, and strategic management
 Develop the student's ability and skills in defining and reflecting on strategic issues relevant to strategy
development, and applying theories and concepts where appropriate
 Instil in students a critical, analytical, flexible and creative mindset that challenges organisational, industry,
national and global paradigms as well as traditional problem-solving approaches in strategy development and
strategic management.
1. Context and Content of the Module

The relationship between strategy development and strategic management
Strategic management is seen as the process that links an organisation with its dynamic business environment.
Strategy development, essentially the formulation of competitive strategies, is part of the strategic management
process. The other part, strategy implementation, evaluation and control is dealt with in the second module.
Strategic management as well as strategy development decisions and actions are based on the concepts of
strategy and strategic thinking.
More specifically, strategy development involves the formulation and choice of strategies that will enable the
organisation to effectively align its capabilities and resources with the organisation’s long-term objectives, and
reconcile them with existing as well as potential opportunities and threats in the dynamic external business
environment.

Potential opportunities and threats may arise from dramatic technological breakthroughs, increasingly volatile
financial and foreign exchange markets, rapidly expanding e-commerce and e-business initiatives, the
establishment of cyber organisations, consumers turning to virtual shopping, more intense global, regional and
local competition, increasing regional integration and formation of free trade areas, changing demographics,
increasing geopolitical pressures regarding energy, ecological issues, uncertainty about the oil price and issues of
global warming, changing work ethics and new perspectives on corporate governance, to name but a few.
It is within this context, and the increasing complexity of the demands on strategic management and leadership,
that strategy development has become critically important.
However, notwithstanding the fact that the two important components of an integrated strategic management
process, strategy development and strategy implementation are presented in two separate modules, one should
not lose sight of the fact that strategic management remains an integrated and unified field of study. In this module,
we discuss the following topics with regard to strategy development:
● the concepts of strategy, strategic alignment and strategic management
● the vision, mission and strategic intent of organisations
● the constantly changing external business environment
● the organisation, its resources and competitive capabilities
● alignment of the organisation with the changing business environment through the development
of viable and appropriate competitive business strategies
The ability or inability of an organisation to be proactive and adapt to change in the environment can either make
or break the organisation. The focus of strategy development, therefore, is on the future, not on the past or the
present. Although an understanding of past developments and present concerns are important, long-term survival
depends on a view of the future – of getting actively involved in what the future holds for the organisation as it
shapes and adapts to the new realities.
Strategic management, including strategy development and strategy implementation, is a capstone module in the
study of business management, as it looks at the entire organisation – not just at divisional or functional segments
of the organisation. Accordingly, strategy development offers you something you will find nowhere else in your
programme: a study of business challenges which are not presupposed to be financial, research and development,
marketing, human resource, purchasing or operations issues. This means that you will have to break down barriers
caused by studying functional areas such as marketing, finance, human resources, operations, purchasing
management and supply chain management in isolation. You will have to consider the impact of management
decisions across all functional areas.
The framework for this module Strategy Development is illustrated in Figure 1.

Topic 1
The strategic management
Topic 3 Topic 4
Evaluating a company's Evaluating a company's
external environment resources and competitive
position
Topic 6
Tailoring strategy to fit
specific industry and
company situations
Figure 1: Framework of the Strategy Development Module
2. Why Learn About Strategy Development?

In the competitive business world of today, employers expect you to be functionally adept in marketing, human
resources, accounting, and some other areas of functional specialisation. But they also expect you to understand
the “big picture” – and strategic management gives you the tools and insight to understand the big picture which
will be an important aid for you early on in your career.
If you have to manage your own business, a sound understanding of strategy development or strategic planning
will allow you to scan the business environment in order to detect opportunities and threats. By being proactive,
you will be able to prepare your business for change, and develop viable strategies that you can implement in
order for the business to survive in the volatile environment.
In larger companies, top management should formulate the strategic plans for the entire organisation in a
participative way to ensure that the organisation will survive in a dynamic business environment. These strategic
plans are then cascaded down to middle-management level. Middle managers have to implement the strategic
plans in their respective divisional or functional areas (finance, research and development (R & D), marketing,
operations, human resources, and purchasing). Middle management’s plans are then cascaded further down to

lower-level management, where heads of departments and sections have to implement the action plans. In short,
top management formulates the strategic plans that middle and lower management have to implement.
Top management’s strategic plans can succeed only if properly supported and implemented by middle and lower
management. Whatever position you will occupy in a business one day, you will be involved in some aspect of
strategy development – either in formulating the strategies yourself, or being part of a team that has to formulate
strategy, or in implementing the chosen strategies.
Learning outcomes of the module

The content and structure of this module should enable students to acquire the relevant skills to demonstrate that
they are able do the following:
Learning outcome 1
●Define the concepts of strategy, strategy development and strategic management, and demonstrate the need for
and importance of competitive strategies and strategic alignment (topic 1).Learning outcome 2
●Explain and interpret the vision and mission statements as a basis for creating an exciting future for an
organisation (topic 2).
Learning outcome 3
●Analyse and interpret the results of an assessment of opportunities and threats in the external environment (topic
3).
Learning outcome 4
●Analyse and interpret the results of an assessment of the internal environment of an organisation in terms of its
resources and competitive capabilities (topic 4).
Learning outcome 5
●Explain, interpret and apply the generic competitive strategies (topic 5).
Learning outcome 6
●Defend the choice of strategy or strategies in given industry, competitive and company situations (topic 6).
Range Statements of This Module

There are many differences as far as organisations and the environments in which they have to operate are
concerned. The organisations themselves can vary from one-man concerns to multinational conglomerates, and
the environment in which organisations have to survive, can vary from stable to revolutionary. It is therefore
essential that we specify the type of organisation and environment relevant to this module.
Type of organisation: Multiple product/service or dominant product/service organisations, including diversified

companies and conglomerates.

Structure of the organisation: Hierarchy
Boundaries within which the organisation operates : Essentially national (but within a global context)
Type of environment: Unpredictable and turbule
CORE READING FOR THIS MODULE

This module has been designed to be read in conjunction with the following
textbook:
ESSENTIAL READING
Students are required to read ALL of the textbook chapters and journal articles listed
below.
The prescribed text for this module is:

Hough, J, Thompson, Arthur A. Jr., Strickland, A.J. III and Gamble JE. (2008). Crafting and
Executing Strategy. South African Edition. London: McGraw-Hill.
C. Exit Level Outcomes and Associated Assessment Criteria of the Programme
Exit level outcomes of the programme Associated Assessment Criteria
 Develop an understanding of a broad range of  Management functions and management practices

management functions and their integration, and are examined to understand key management
the critical examination of management practice; functions
 Develop key transferable skills with applications  Management application from a strategic
in management from a strategic perspective; perspective is discussed to develop key
management skills and its application
 Demonstrate the ability to apply conceptual and
analytical frameworks within different  Business related problems are analysed to
organisational management conditions; facilitate creative and critical thinking in solving
business related problems
 Apply creative and critical thinking in solving
business-related problems;  Personal and team goals are explored using
individual and interpersonal skills
 Attain personal and team goals using individual
and interpersonal skills  Ethical and global issues in business are
investigated to create an awareness of them
 Demonstrate awareness of ethical and global
issues in business

 Identify and solve problems in which responses  Problem and decision making initiatives are
display that responsible decisions using critical explored to enable responsible business
and creative thinking have been made decisions
 Develop business policies and strategies for  Business policies and strategies are discussed to
organisations to meet stakeholder requirements enable their development for organisations to meet
stakeholder requirements
 Organise and mobilise the resources of the
organisation to achieve strategic goals and  The resources within an organisation are explored
targets in order to enable organisation and mobilisation of
them to achieve strategic goals and targets
 Use science and technology effectively and
critically, showing ethical responsibility towards  The effective use of science and technology to
the environment and the health/well-being of facilitate ethical responsibility towards the
others environment and wellbeing of others is explored
 Develop conceptual and applied entrepreneurial  Entrepreneurial skills are evaluated to enhance
skills development of conceptual and applied
entrepreneurial skills
D. Learning Outcomes and Associated Assessment Criteria of the Module
LEARNING OUTCOMES OF THE MODULE ASSOCIATED ASSESSMENT CRITERIA OF

THE MODULE
 Critically apply the concepts of strategy, strategy  Concepts of strategy, strategy development
development and strategic management, and and strategic management are appraised and
demonstrate the need for and importance of competitive applied to demonstrate the need for and
and comparative strategies with regards to strategic importance of competitive and comparative
alignment strategies with regards to strategic alignment
 Analyse and interpret the results of an assessment of  Assessment results of the internal environment
the internal environment of an organisation in terms of of an organisation is categorised in terms of its
its resources and competitive and comparative resources, competitive and comparative
capabilities and provide creative solutions capabilities to provide creative solutions
 Analyse and interpret the results of an assessment of  The results of an assessment of opportunities
opportunities and threats in the external environment for and threats in the external environment is
a business discussed to differentiate the influence in
business
 Interpret and apply generic competitive strategies;

 Defend the choice of strategy or strategies in given  Generic competitive strategies are illustrated
industry, competitive, comparative and organisation and explained suitably to have a deeper
situations understanding of strategy formulation
processes
 Suggest ways to build an organisation capable of
effective strategy execution and sound strategic  Choice of strategy/strategies in a given
alignment industry can be evaluated using the
competitive and comparative organisation
 Explain the importance of leadership, culture and
situations
teamwork in strategy development and its
implementation  Effective Strategy execution and sound
strategic alignment is demonstrated through a
 Link and apply enterprise performance management as
design concept to understand ways to build an
integral to the development and implementation of
agile organisation
strategy
 Integration of Leadership, Culture and
 Critically understand the role of corporate governance
Teamwork and its implementation is analysed
and ethics in strategy development and implementation
to gain a deeper insight in Strategy
Development
 Enterprise performance Management is

illustrated to gain an understanding of the
development and integration of strategy
 Corporate Governance and Ethics in strategic

development and implementation is illustrated
to gain a deeper understanding of its roles in
Strategy Architecture
E. Learning Outcomes and the Associated Assessment Criteria of the Units

You will find the Unit Learning Outcomes and the Associated Assessment Criteria on the introductory pages of
each Unit in the Module Guide. The Unit Learning Outcomes and Associated Assessment Criteria lists an
overview of the areas you must demonstrate knowledge in and the practical skills you must be able to achieve at
the end of each Unit lesson in the Module Guide.

F. Notional Learning Hours

Notional Learning Hour Table for the Programme
Types of learning activities % Time
Lectures/Workshops (face to face) 15.0
Tutorials/Practical’s (smaller groups) 5.00
Syndicate groups 0
Practical workplace experience (experiential learning/work-based learning etc.) 0
Independent self-study of standard texts and references (study guides, books, journal articles) 20.0
Independent self-study of specially prepared materials (case studies, multi-media, etc.) 20.0
Assessment
Actual Examinations 2.0
Preparation for Examinations 20 .0
Preparation for Assignments 15.0
Online: Teaching and Learning Strategy
Webinar/Skype 0
Wikis 0
Videos 1.0
Discussion Forum 2.0
Other:
TOTAL 100
G. How to Use this Module

This Module Guide was compiled to help you work through your units and textbook for this module, by breaking
your studies into manageable parts. The Module Guide gives you extra theory and explanations where necessary,
and so enables you to get the most from your module.
The purpose of the Module Guide is to allow you the opportunity to integrate the theoretical concepts from the
prescribed textbook and recommended readings. We suggest that you briefly skim read through the entire guide
to get an overview of its contents. At the beginning of each Unit, you will find a list of Learning Outcomes and
Associated Assessment Criteria. This outlines the main points that you should understand when you have

completed the Unit/s. Do not attempt to read and study everything at once. Each study session should be 90
minutes without a break
This module should be studied using the prescribed and recommended textbooks/readings and the relevant
sections of this Module Guide. You must read about the topic that you intend to study in the appropriate section
before you start reading the textbook in detail. Ensure that you make your own notes as you work through both the
textbook and this module. In the event that you do not have the prescribed and recommended textbooks/readings,
you must make use of any other source that deals with the sections in this module. If you want to do further reading,
and want to obtain publications that were used as source documents when we wrote this guide, you should look at
the reference list and the bibliography at the end of the Module Guide. In addition, at the end of each Unit there
may be link to the PowerPoint presentation and other useful reading.
H. Study Material
The study material for this module includes tutorial letters, programme handbook, this Module Guide, a list of
prescribed and recommended textbooks/readings which may be supplemented by additional readings.
I. Prescribed and Recommended Textbook/Readings

There is at least one prescribed and recommended textbooks/readings allocated for the module.
The prescribed and recommended readings/textbooks presents a tremendous amount of material in a simple, easy-
to-learn format. You should read ahead during your course. Make a point of it to re-read the learning content in
your module textbook. This will increase your retention of important concepts and skills. You may wish to read more
widely than just the Module Guide and the prescribed and recommended textbooks/readings, the Bibliography and
Reference list provides you with additional reading.
The prescribed and recommended textbooks/readings for this module is:

 Crafting and Executing Strategy, Concepts and Cases, Hough, Thompson, Strickland and Gamble,(2008).
RSA, McGraw Hill

J Special Features
In the Module Guide, you will find the following icons together with a description. These are designed to help you
study. It is imperative that you work through them as they also provide guidelines for examination purposes.
Special Feature Icon Explanation
LEARNING The Learning Outcomes indicate what aspects of the

OUTCOMES particular Unit you have to master and demonstrate that you
have mastered them.
ASSOCIATED The Associated Assessment Criteria is the evaluation of

ASSESSMENT student understanding with respect to agreed-
CRITERIA upon outcomes. The Criteria set the standard for the
successful demonstration of the understanding of a concept
or skill.
THINK POINT A think point asks you to stop and think about an issue.
Sometimes you are asked to apply a concept to your own
experience or to think of an example.
ACTIVITY You may come across activities that ask you to carry out
specific tasks. In most cases, there are no right or wrong
answers to these activities. The aim of the activities is to give
you an opportunity to apply what you have learned.
READINGS At this point, you should read the reference supplied. If you
are unable to acquire the suggested readings, then you are
welcome to consult any current source that deals with the
subject. This constitutes research.
PRACTICAL Real examples or cases will be discussed to enhance

APPLICATION understanding of this Module Guide.
OR EXAMPLES
SELF-TEST You may come across self-test questions at the end of each
QUESTIONS Unit that will test your knowledge. You should refer to the
module for the answers or your textbook(s).

REVISION You may come across self-assessment questions that test

QUESTIONS your understanding of what you have learned so far. These
may be attempted with the aid of your textbooks, journal
articles and Module Guide.
CASE STUDY Case studies are included in different sections in this module
guide. This activity provides students with the opportunity to
apply theory to practice.

Part 1:
Strategy Development-Introduction and the
Importance of Learning About Strategy
Development

Unit
1: The Strategic Management
Process and Strategic Alignment

Unit Learning Outcomes and Associated Assessment Criteria
LEARNING OUTCOMES OF THIS UNIT: ASSOCIATED ASSESSMENT CRITERIA OF

THIS UNIT:
 Define and explain the concepts of strategy, strategic  Think Points, Activity and Self-Assessment
management and strategic intent. Questions needs to be done in order to gain a
coherent understanding of the strategic
 Recognise the various levels at which strategy
management process, recognise the various
operates.
levels at which strategy operates and the
 Describe the strategic management process and the various stages of strategy analysis,
various stages of strategy analysis, development, development, choice and implementation
choice and implementation.
 Explain the importance of sustainable competitive  Think Points, Activity and Self-Assessment
advantage in business strategy. Questions needs to be done in order to gain an
understanding of the importance of sustainable
competitive advantage in business strategy
 Be aware of the relationship between a company’s  Think Points, Activity and Self-Assessment
strategy and its business model. Questions needs to be done in order to gain an
understanding of the relationship between a
company’s strategy and its business model
 Explain the importance of sustainable competitive  Think Points, Activity and Self-Assessment
advantage in business strategy. Questions needs to be done in order to gain an
understanding of the importance of sustainable
competitive advantage in business strategy
 Define and explain the concept of a value chain.  Think Points, Activity and Self-Assessment
Questions needs to be done in order to gain an
understanding of the concept of a value chain
 Explain the meaning of strategic alignment and its  Think Points, Activity and Self-Assessment
importance in strategic management. Questions needs to be done in order to gain an
understanding of the strategic alignment and its
importance in strategic management


 Explain why strategy, strategy development and  Think Points, Activity and Self-Assessment
Questions needs to be done in order to gain an
 therefore, strategic management have become
understanding of the importance of strategy
increasingly important in recent times.
development and strategy and henceforth
strategic management have become
increasingly important in recent times

1.1 Introduction
1.2 Defining Strategy
1.3 Strategy And the Quest for Competitive Advantage
1.4 The Relationship Between A Company's Strategy And Its Business Model
1.5 Identifying Company Resources, Strengths And Competitive Capabilities
1.6 The Concept of A Company Value Chain
1.7 Principles of Creating A Strategy-Aligned Organisation
1.8 Killers Of Strategic Alignment And Fit
1.9 Managing Alignment: Different Views
1.10 Managing Alignment As A Strategy-Implementation Process
1.11 Good Strategy and Good Alignment and Good Strategy Execution = Good Management
1.12 Summary
Prescribed and Recommended Textbooks/Readings

Prescribed Textbook:
Crafting and Executing Strategy, Concepts and Cases, Hough, Thompson,

Strickland and Gamble,(2008). RSA, McGraw Hill
Recommended Reading:
 Hough, J. Thompson, AA, Strickland, AJ & Gamble, JE. 2008. Crafting
and Executing Strategy, South African Edition. London: McGraw-Hill,
Chapter 1.
Reading 1:
 Markides, C. 2004. What is Strategy and How Do You Know If You
Have One? Business Strategy Review. Vol. 15, Issue 2 (Summer),
pp.5-12 (In Hough et. al., pp.R3-R12).
Reading 2:
 Abraham, S. 2005. Stretching Strategic Thinking. Strategy &

Leadership. Vol. 33, No. 5, pp.5-12 (In Hough et. al., pp.R31-R40)

1.1 Introduction
(Pages 3 and 4 in Hough, Chapter 1.)
In the Introduction to this study guide you have undoubtedly gained some insight into the fascinating and
challenging world of strategic management in general, and strategy development in particular.
The aim of this topic is to help you understand and think critically about strategy, strategic management and
strategy development in a dynamic and ever-changing business environment. In these times of global change with
business environments far different than any previously experienced and with organisations taking on new and
flexible forms, it follows that traditional ways of developing and articulating strategy and practicing strategic
management have to give way to more innovative and creative alternatives.
Pietersen (2002: 9-12) states that running a business today is much harder than ever before. Why? Because of
the increasing speed and complexity of change in the so-called “new economy” that is still in the process of
unfolding - where this “new economy” is driven by a number of forces that include the Internet, globalisation, trade
liberalisation, deregulation and privatisation, convergence and disintermediation. Furthermore, this “new economy”
has also brought about new and changing rules of competition that are affecting everyone, everywhere, and there
is a real need among business leaders and managers for new and innovative insights and tools that will help them
to cope with change and transformation of their oganisations.
The most important challenge that businesses therefore face is how to create and sustain an adaptive, learning
organisation that is capable of continuous change in response to the ever-changing environment in pursuing
sustainable competitive advantage (Pietersen 2002:40). The next important challenge is: "How can this be
achieved?" The answer lies in sound strategic management, and essentially in innovative strategy development
that focuses on the future and provides answers to more detailed strategic questions such as: "What is the
company's present situation? How good are our competitive positions? What skills and capabilities underpin our
success? Where does the company need to go from here? How should it get there? How should we align our
strategies to ensure sustainable competitive advantage? Do we still compete all out, do we need to create strategic
alliances, or do we make the competition irrelevant?" (Hough, Thompson, Strickland & Gamble, 2008:3; Koch &
Nieuwenhuizen, 2006:7.)
Accordingly, managers need to develop a strategic outlook and a sense of strategic direction for their company,
executing a strategy or strategies capable of moving the company in the intended direction, and continually growing
their business. This involves constantly improving its financial, operational, marketing, customer and people
performance in striving to outcompete its rivals. Unfortunately, much of the business literature still offers advice on
what companies should do, without explaining how to go about doing it. This is what we endeavour to achieve in
this module in combination with the second part of the module on “Strategy Implementation”.

In Topic 1 of this module on "Strategy Development" we commence by defining strategy and strategic thinking as
well as a number of concepts relevant to our discussions in the remainder of this module, define and explain the
process of strategic management, identify the requirements for a winning strategy, and discuss the importance of
strategic alignment in this regard.
1.2 Defining Strategy

1.2.1 Introduction
Strategy essentially involves the interaction between an organisation and its dynamic, competitive external
environment, and constitutes the process through which actions to compete, survive and prosper are developed
and implemented - actions which are critical to the success of an organisation in its business context over time. In
this section, strategy and other relevant concepts are defined, and strategic management as an integrated process
explained.
1.2.2 Definition of concepts

Fundamentally, strategy should be soundly based on strategic thinking and involve strategic learning. It has
become imperative that in today's global, rapidly-changing environment of the "new economy", leaders and
managers need to adapt in innovative ways if their companies are to remain competitive. Because change never
really stops, the challenge that executives face is the struggle to repeatedly mobilise their companies and their
staff behind new ideas to proactively anticipate and manage change. The basic underlying reason for this challenge
is that sustainable competitive advantage cannot realistically come from any particular product or service, no
matter how good it may be! Even exceptionally superior products and services have a relatively short "shelf life" in
today's dynamic business environment. As Pietersen (2002:6) states: "In today's marketplace it is the
organisational capability to adapt that is the only sustainable competitive advantage". This, in turn, requires
strategic thinking, strategic learning, and the development and implementation of viable and innovative
competitive strategies.
 Strategic thinking, strategy and tactics

Strategy is fundamentally based on and embedded in strategic thinking. Abraham (2005:5-12) states that the
search for appropriate, viable strategies is actually strategic thinking in action, that strategy is about being different
from competitors, and implies competing and out-witting competitors in the market place. According to Abraham,
a company would not need a strategy if it did not have to compete – it could make do simply with a plan. Strategic
thinking can thus be defined as the process of finding innovative, alternative ways to compete, provide and
increase customer and stakeholder value.

In this module, we view strategy as an iterative process over time, and that all forms of strategic thinking and
strategic decision making – from conceptualisation through to analysis, development, and implementation – are
influenced by a combination of internal and external factors, take place in dynamic contexts, and face an uncertain
future (Segal-Horn, 2004:8-9).
The origins of “strategy” are found in military science and is derived from the Greek word “strategia”, meaning
“generalship”, and is essentially a combination of two words, “stratos”, meaning “army”, and “agein”, meaning “to
lead”, which exhibits an implicit connection between strategy and leadership. In military science, therefore, strategy
refers to the large-scale plan for how generals intend to fight and win a war (the term "tactics" which is explained
below refers to small-scale operations like the conduct of a single battle within the overall, large-scale plan)
(Pietersen 2002: 40-41). It therefore comes as no surprise that the Oxford Pocket Dictionary defines strategy as
follows in terms of both its military and business contexts:
Strategy: The art of war, especially the planning of movements of troops and ships, etcetera, into favourable
positionings; a plan of action or policy in business, etc.
According to Carpenter and Sanders (2009:10), the idea of strategy means different things to different people.
They define strategy as “the coordinated means by which an organisation pursues its goals and objectives”.
In the prescribed book by Hough et. al. (2008:4) strategy is defined as:
The competitive moves and business approaches that managers are employing to grow the business, attract and
please customers, compete successfully, conduct operations effectively and achieve the targeted levels of
organisational performance.
Pearce and Robinson (2005: 3-4) state that by strategy, managers mean their “large-scale, future-oriented plans
for interacting with the competitive environment to meet company objectives. Strategy reflects a company's
awareness of how, when, and where it should compete; against whom it should compete; and for what purpose it
should compete”.
Pietersen (2002: 44-47) sees strategy as:

The art of making the most intelligent choices - those that will help us to use our limited resources to win the
competition for value creation - greater value for your customers and greater profit for your company.
In his pioneering work, Mind of the Strategist, Kenichi Ohmae (1982) describes strategy as follows:
What business strategy is all about is, in a word, competitive advantage - the sole purpose of strategic planning
is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors, which implies
an attempt to alter a company's strength relative to that of its competitors in the most efficient way.
Johnson and Scholes (2002:10) provide the following comprehensive definition and view strategy as

the direction and scope of an organisation over the long term, which achieves advantage for the organisation
through its configuration of resources within a changing environment and to fulfil stakeholders’ expectations.
Despite the vast number of variations that we find in defining the concept of strategy, the common theme in all of
these definitions can reasonably be summarised as follows:
Strategy, based on strategic thinking, is a unique, innovative action plan to attain competitive advantage over rivals
in the process of value creation.
However, Markides (2004:5-12) contends that there is little agreement, especially among academics, as to what
strategy really is, and proposes a number of building blocks and parameters that characterise all successful
strategies (See Hough, Reading 1, pp. R3-R12).
In contrast to a strategy, a tactic is a plan for specific action (within the confines of a strategy), while strategy is the
overall scheme for leveraging resources and capabilities to obtain an organisation-wide competitive advantage.
Think Point
Consider what has been said about 'strategy' in this section, information on strategy
that you may have accessed from other sources, and the views of Markides (Reading
1 in Hough, pp. R3-R12). Write down your own definition of strategy.
 Strategic management
In this section we provide a variety of definitions and a brief overview of some issues and debates regarding
strategic management as a frame of reference for subsequent discussions in this module.
Strategic management essentially involves:

- managing the interaction between the firm and its external environment, and
- strategic alignment, a dynamic process whereby an organisation's strategy is calibrated with its culture,
leadership, organisational structure, and governance
An integrated strategic management process comprises of the following three phases:

(1) Strategy development or strategy formulation
(2) Strategy implementation or execution
(3) Strategy evaluation and control

For our purposes in this module, strategy development or formulation as the first stage of the overall strategic
management process includes:
- developing a company vision and mission
- identifying a company's external opportunities and threats
- determining a company's internal strengths and weaknesses
- generating alternative, viable competitive strategies
- selecting specific, optimal strategies to be implemented
Strategy execution, evaluation and control constitute the themes of the module, ‘Strategy Implementation’.
Figure 1.1: A comprehensive, integrated strategic management process

2
Source: Adapted from Pearce & Robinson (2005:2), Carpenter & Sanders (2009:11), and David (2009:46).
A typical comprehensive, integrated strategic management process or model is illustrated in Figure 1.1, indicating
the feedback loops for continuous monitoring, evaluation and control of the entire process, since strategic
management in a dynamic, changing environment is not a once-off event, but a challenging, dynamic and
continuous process.
David (2009:36) accordingly defines strategic management as “the art and science of formulating, implementing,
and evaluating cross-functional decisions that enable an organisation to achieve its objectives”.

According to Ireland, Hoskisson and Hitt (2009:6),

The strategic management process is the full set of commitments, decisions, and actions required for a firm to
achieve strategic competitiveness and earn above-average returns.
Pearce and Robinson (2005:3) view strategic management as the set of decisions and actions that result in the
formulation and implementation of action plans designed to achieve a company's objectives
According to Pearce and Robinson, strategic management comprises the following nine critical tasks which also
relate to the process illustrated in Figure 1.1 (p.15):
1. Formulating the company’s vision and mission, including broad statements about its purpose,
philosophy and goals.
2. Analysing the company’s external environment, including the competitive and market environments.
3. Analysing the company’s internal strengths and weaknesses in terms of its resources and capabilities.
4. Analysing the company’s strategic options by matching its resources and capabilities with the external
environment.
5. Identifying the most desirable strategic options by evaluating each option against the company's
mission.
6. Selecting a set of long-term objectives and strategies that will achieve these long-term objectives.
7. Developing annual objectives and short-term strategies and tactics that are compatible with the selected
set of long-term objectives and strategies.
8. Implementing the selected strategies by means of budgeted resource allocations and by matching and
aligning tasks, people, structures, technologies and reward systems within the organisation.
9. Evaluating the success of the strategic management process continuously as an input for future decision
making
Note that tasks 1 to 6 form part of strategy development, tasks 7 and 8 part of strategy implementation, while task
9 involves strategy evaluation and control.
Subsequent to the formulation of the vision and mission, and the external and internal analysis, long-term
objectives are formulated. Long-term objectives represent the results that are expected in the future from pursuing
selected competitive strategies. Long-term objectives should be quantitative, measurable, realistic,
understandable, hierarchical, challenging, attainable and congruent among organisational units. Long-term
objectives should be associated with a clear time horizon while providing direction, allow synergy, aid in evaluation,
establish priorities, reduce uncertainty and conflict, aid in the allocation of resources and stimulate productivity.
Lastly, long-term objectives must be clearly stated and communicated to everyone in the organisation.

● Levels of strategy
Strategy operates at different levels within an organisation since strategies are essentially unique in content and
execution. Strategy in the context of strategic management can be developed by an individual, or by a group, or
by groups, and requires the integration of multiple concepts, decisions and actions at different points in time.
The strategy literature makes a fundamental distinction on strategic issues at the following three levels in an
organisation:
● The corporate level – requiring the development of corporate strategies.
● The business or business unit level – requiring the development of business strategies.
● The functional level – requiring the development of functional strategies.
Corporate strategy
Business strategy
Functional strategy
Figure 1.2: Levels of strategy

3
Since each level focuses on different sets of issues, it is important that we understand what strategy means and
involves at each of these three levels. This is discussed in greater detail in Topic 5.
● Strategic alignment
Strategic alignment is a dynamic process that manifests itself at several levels, involving alignment between the
environment and the company's strategy, between its strategy and its organisation including the organisational
architecture (structure and systems) and organisational culture, between strategy and leadership, and between
strategy, leadership and other key people in the organisation. Although the words “matching” or “strategic fit” are
often encountered in the strategic management literature, strategic alignment is a relatively more comprehensive
concept as outlined above. As will become evident, strategic alignment permeates the entire strategic management
process. The strategic quest for competitive advantage and the concept of sustainable competitive advantage are
discussed in the next section.

1.3 Strategy And the Quest for Competitive Advantage

The nature of business, whether local, regional, international or global, is about competition, and competition in
business is about winning in the marketplace over the long term. It is generally accepted that sustainable
competitive advantage is achieved when an organisation successfully matches its internal strengths in terms of
resources and capabilities to its key industry and market factors. Competitive advantage thus occurs when an
attractive number of buyers prefer the company’s products or services over those of its competitors, when the
basis for these advantages are difficult to imitate or replicate, are non-tradable, and are durable over the long term.
Accordingly, a creative, distinctive, well executed strategy that is superior to that of the company’s rivals should
realistically yield a sustainable competitive advantage and above-average returns.
Think Point
Is there a connection between the approach to “competitive advantage”

described here and Pietersen's view (section 1.2.2) that “the organisation’s
ability to adapt is the only sustainable competitive advantage?” Are these two
views reconcilable? Why, or why not?
Given a sense of an ever-increasing push of competitive pressures in recent times, there has been a shift in
strategy to a search for dynamic theories of competition (Segal-Horn, 2004:7). In this regard, Ghemawat (2002:64)
has expressed this rather wryly as the dynamic question of how businesses might create and sustain competitive
advantage in the presence of competitors who could not be counted on to remain inert all the time.
In this section of the prescribed book by Hough students should note the following strategic approaches that could
be used to attain sustainable competitive advantage:
● A low-cost strategy
● A differentiation strategy
● A focus strategy, based on low cost or differentiation
● A best-cost provider strategy based on a company’s unique capabilities and resource strengths that
effectively combines the features of both a low-cost and a differentiation strategy.
These strategic approaches or competitive generic strategies are discussed in greater detail in topic 5 and in
chapter 5 of the prescribed book by Hough.
In the section that follows we briefly look at the relationship between a company’s strategy and its business model.

Group Activity 1.1

Critically evaluate the five approaches about different and better ways of competing,
delivering customer value, and growth proposed by Abraham (Hough, Reading 4, pp.R31-
R40). Refer to Abraham's article, other sources that you may wish to access, and your own
experience. Write a brief report on the concept of sustainable competitive advantage and
how a firm can best achieve sustainable competitive advantage.
1.4 The Relationship Between A Company's Strategy And Its Business Model
(Pages 6 to 9 in Hough, Chapter 1)
The concept of a company’s business model is closely related to the concept of strategy.
A company’s business model explains the rationale why its business approach and strategy will be profitable,
which is essential in proving the viability of its strategy and, as a result, largely ensure survival of the business in
the long term.
Given the strategy which it has adopted, the business model of a company:
● outlines the key components of the company's business approach
● indicates how (and why) revenues will be generated
● explains why the strategy should be successful in delivering value to customers in a profitable way
● confirms the appropriateness of the company's chosen strategy
The business model is more narrowly focused than the company’s business strategy, and essentially provides the
rationale why the strategy should be profitable. Stated differently, successful companies have a proven business
model which is evident from the numerous examples referred to in this section. However, it is interesting to note
that rival companies in the same industry/market can well adopt different business models as illustrated in the case
of Microsoft and Red Hat) (Hough, pp.8-9).
Reading
Study Illustration Capsule 1.1: Microsoft and Red Hat: Two Contrasting Business Models
(Hough, pp.8-9).
We now turn to the importance of analysing a company's resources and competitive position.

1.5 Identifying Company Resources, Strengths And Competitive Capabilities

(Pages 9 and 10 in Hough, Chapter 1)
Once the vision and mission of a company has been formulated, a situation analysis needs to be done (See Study
Guide, Figure 1.1, p.21). This involves identifying threats and opportunities in the external environment, and
determining the company's internal strengths and weaknesses in terms of its capabilities and resources, a process
that is known as a Strengths-Weaknesses-Opportunities-Threats analysis, popularly referred to as a SWOT
analysis.
The information derived from the SWOT analysis is indispensable for strategy development and ultimately the
choice of strategy. From Figure 1.1 in the Study Guide it is clear that the company's long-term objectives should
preferably be finalised only once information about the external environment and the company's internal resource
strengths and capabilities becomes available.
The importance of resource strengths and competitive capabilities in strategy development is discussed in detail
in topic 4 and in Chapter 4 of the prescribed book by Hough. However, note in this section that the seven possible
resource strengths listed here could well be potential sources of sustainable competitive advantage and improved
financial performance. We now look at the concept of a value chain.
1.6 The Concept of A Company Value Chain

All the activities that a company performs internally combine to form its value chain and is discussed in more detail
as a technique in internal analysis in topic 4 and in Chapter 4 of the prescribed book by Hough.
All that we need to note at this stage is that:
● a value chain comprises of primary activities and support activities;
● the combined costs of all the primary and supporting activities in a company's value chain define the
company's total cost structure;
● the cost of each activity and the resulting total cost, relative to that of the company's competitors, will
indicate whether these are favourable or unfavourable, thus affecting the cost competitiveness of the
company in the marketplace;
● value chain analysis indicates which activities are a source of cost advantage or cost disadvantage
As previously stated, viable strategies alone, while extremely important, will not ensure success, but that strategy
execution and strategy alignment or “fit” between the company's strategy and its internal business processes,
resource capabilities, key people, and customers are crucial in this regard. We now discuss a strategy-aligned
organisation.

1.7 Principles of Creating A Strategy-Aligned Organisation

(Page 11 in Hough, Chapter 1)
Strategic alignment or “fit” must be achieved within the organisation as well as with the external business
environment.
Leadership should encourage strategic learning and thus enable the organisation, through its people, to address
the tensions that could prevent or constrain effective alignment between strategy and the environment, strategy
and the organisation, leadership and the organisation, and between key people in the organisation.
In a rapidly-changing external environment, organisations must be able to adapt their strategies and alignment,
exhibitin “organisational fitness”, based on leadership-inspired strategic learning to “rejuvenate” the organisation
by reshaping its design, culture, and political landscape.
1.8 Killers Of Strategic Alignment And Fit

Six barriers to or "silent killers" of effective strategic alignment as illustrated in Figure 1.1 (Hough, p. 12) are:
● Unclear strategy and/or conflicting priorities;
● An ineffective top management team;
● A leadership style that is too top-down, or conversely, too laissez-faire;
● Poor coordination across functions, businesses, and geographic regions;
● Inadequate leadership skills and inadequate development of down-the-line leaders; and
● Poor vertical communication.
Note from Figure 1.1 (p.12) how these barriers interact in a way that makes them self-sealing and often difficult to
identify within an organisation.
However, poor managerial communication to and lack of common purpose and commitment at lower organisational
levels, together with poor leadership skills and a lack of coordination appear to be main deterrents in this regard.
The dangerous situation of "misalignment" can take several forms, including:
● unstated disagreement about how goals should be reached;

● warring camps within the organisation;
● members unconvinced of the need for the proposed action;
● people not knowing what the goals of the organisation are.

The results of "misalignment" include the following:

● new programmes running the risk of failure;
● employee commitment to quality deteriorates;
● individual objectives take precedence over organisational objectives; and
● morale and productivity diminishes over time.
Needless to say, leadership and management should be fully informed on these "killers" and how to resolve such
issues.
1.9 Managing Alignment: Different Views

While strategy is obviously important, alignment is necessary for the goals of the company to be taken seriously.
Employees need to understand the organisational goals and the means to achieve them.
Fonvielle and Carr (2001:4-14) propose the following six steps to achieve strategic organisational alignment:
1. Articulate the main strategic drivers of the business.
2. Define critical strategic goals.
3. Develop performance measures for each key goal.
4. Ensure that everyone understands the measures.
5. Link each of the measures to a formal feedback and recognition system.
6. Frequently review performance related to goals.
Two important prerequisites for alignment to succeed are:

● effective communication;
● appropriate rewards and recognition.
While this section thus far focused on the importance of effective alignment as such, Pietersen (2002: 53-54) takes
an extremely important but broader view, where he views alignment as one of the "killer competencies" required
for winning strategies, and where these competencies include the following:
● Insight - into the dynamic, changing environment;
● Focus - as a basis for choice of strategy;
● Alignment - of every element in the entire organisation;
● Execution - rapid, effective strategy implementation; and
● Renewal - exemplified by continuous strategic and organisational learning.
In closing, it is clear that alignment should involve strategy, leadership, culture and the organisation (structure,
systems, people and governance).

1.10 Managing Alignment As A Strategy-Implementation Process

This section also views the management of alignment as a key management process in strategy implementation,
which confirms the overall importance of alignment in both strategy development and strategy implementation.
Of importance is that there appears to be a high correlation between effective alignment and business success.
In Figure 1.2 (Hough,p.15), the relationship between managerial excellence and extent of the level of benefits to
the three groups (Hall of fame; High-benefit Balanced Scorecard (BSC) users; Low-benefit BSC users) is clearly
indicated. As a further strategic initiative, Figure 1.3 (p.15) illustrates how alignment can be built into the planning
process. Eight alignment checkpoints are provided to measure and manage the degree of alignment and synergy
achieved across the business. Note these steps with reference to Figure 1.3.
The following four alignment steps indicate what is necessary to create the alignment process through-out the
entire business:
● Classify and define corporate strategy and business unit strategy
● Align business units with corporate strategy
● Align support units with business units
● Create a governance process to maintain alignment, including the various initiatives of individuals
(illustrated in the Strategy Matrix in Hough, p. 16)
Note the benefits of the strategy matrix as an alignment tool to align the individual initiatives with the business unit
and the business unit with the strategic objectives of the company. These alignment relationships are illustrated in
Figure 1.4 (Hough,p.16).
Think Point
Based on the information provided thus far, give your own definition of "strategic
alignment". Why is strategic alignment important for an organisation from a perspective
of strategy?
1.11 Good Strategy and Good Alignment and Good Strategy Execution = Good Management
The core message in Topic 1 and in this section is that an excellent strategy and effective strategy execution,
including good alignment, should ensure that companies outperform their rivals and attain above-average returns
on their investment in the long term.

Self-Assessment Activity 1.1
Explain why strategic management has become increasingly important in recent times?
What are the benefits of strategic management? Why would some firms be reluctant to
adopt strategic management. (Refer to the textbook by Hough and other relevant sources,
including the Internet, that you may wish to consult.)? Summarise your findings in a brief
report
1.12 Summary
In this topic we introduced the concepts of strategy, strategic management, strategy formulation, business model
and strategic alignment as a frame of reference for the development of viable competitive business strategies.
As a result of ongoing globalisation and a dynamic, continuously-changing external environment, it has become
imperative that companies develop and implement winning strategies that will ensure sustainable competitive
advantage and survival in the long term. In this regard, an innovative strategy, an appropriate business model,
effective strategic alignment, and the efficient implementation, evaluation and control of strategy should largely
contribute to the attainment of these goals.
Activity 1.1
1. What exactly is strategy? What have you learned about the different perspectives
regarding strategies?
2. Contrast and compare the strategies and business models of Microsoft and Red Hat
outlined
in Illustration Capsule 1.1 in Hough, Chapter 1 (pp.8-9). Summarise and motivate
your findings in
this regard.
3. Explain what is meant by "sustainable competitive advantage" and substantiate its
importance in
the context of strategic management.
4. What are the key elements in the strategic management process?
5. Identify, analyse and discuss the relationship between strategy and strategic
alignment.
6. Why are strategy and strategic management becoming more and more important in
the increasingly dynamic and volatile global business environments facing
organisations today?

Guidelines For Self-Assessment Activity

The self-assessment activity relates to the importance of strategic management, the benefits of
strategic management, and the reluctance of firms to adopt strategic management.
● Strategic management provides an innovative, logical, future-oriented framework for conducting business in
a dynamic, competitive business environment, which allows for the creative development of alternative
strategies, selecting and implementing optimal strategies - a process which has been confirmed by research
to deliver better sustainable results compared to firms that do not use strategic management.
● Strategic management generally offers the following benefits:
- It allows for identification, prioritisation, and exploitation of opportunities
- It provides an objective view of management problems
- It presents a framework for improved coordination and control
- It minimises the effects of adverse conditions and changes
- It allows for major decisions to better support stated objectives
- It allows for more effective allocation of resources and time
- It creates an effective framework for internal communication
- It supports shared values and efforts
- It provides a basis for clarifying individual responsibilities
- It encourages forward and strategic thinking
- It encourages a favourable attitude to change
● Why some firms are reluctant to embark on strategic planning and management for the following reasons:
- poor reward structures
- seeing it as a waste of time
- regarding it as too expensive
- too lazy to do it
- content with the status quo and overconfidence
- fear of failure and fear of the unknown
- prior bad experiences
- Self-interest
- A sense of suspicion
- Insufficient knowledge or ignorance
Useful references: www.entarga.com/statplan/index.htm
www.des.calstate.edu/limitations.htm
www.mindtools.com/plfailpl.htm.

Unit
2: Vision, Mission and Strategic
Intent - The Starting Point of Strategy


THIS UNIT:
 Explain the business vision and its importance in  Think Points, Activities and Case Studies needs to
strategic planning. be done in order to gain an understanding of the
business vision and its importance in strategic
 Analyse and evaluate published business vision
planning as well as evaluate published vision
statements.
statements
 Explain the business mission and its importance in  Think Points, Review Activities and Case Studies
strategic planning. needs to be done in order to gain an understanding
of the importance in strategic planning
 Analyse and evaluate published business mission
statements.  and to analyse and evaluate published business
mission statements
 Describe and explain the importance of strategic  Think Points, Activities and Case Studies needs to
intent in strategy development be done in order to gain an understanding of
strategic intent in strategy development
2.1 Introduction
2.2 The Business Vision
2.3 The Business Mission
2.4 Strategic Intent
2.5 Summary
2.6 Guidelines For Self Assessment Activity

 Lipton, M. 2004. Walking the talk (Really!): Why visions fail. Ivey
Business Journal, Vol.68, No.3 (January/February), pp.358-364
(Reading 2 in Hough, pp.R13-R20).

2.1 Introduction
A typical strategic management process is illustrated in Topic 1 (see Figure 1.1 in the Study Guide). From this
illustration it is clear that strategy development and the strategic management process commence with the
formulation of a company's vision and mission statements that typically also reflect a company's philosophy, value
system, leadership styles, strategic intent and strategic direction in a dynamic and uncertain external business
environment.
The business vision and mission are closely related yet distinguishable in terms of the specific role of each in the
development and execution of competitive business strategies. We accordingly first focus on vision and its role in
strategy development and strategic management.
2.2 The Business Vision

2.2.1 Introduction
Vision and mission are perhaps best understood by looking at a business when it is first conceived. In the
beginning, a business is merely a collection of ideas. Starting a new business is typically based on a set of beliefs
that the new enterprise can offer some product or service in satisfying certain consumer needs, in some geographic
region, using some type of technology, at a competitive and profitable price. The new business owner is certain to
believe that the management philosophy of the new enterprise will result in a favourable public image that will find
acceptance among the firm's various stakeholder groups.
When these beliefs are first put into writing, the resulting document will more or less reflect the same basic ideas
that are to be found in vision and mission statements. As the business grows and becomes established over time,
the owners or managers generally find it necessary to refine their fundamental beliefs without changing the original
ideas in any meaningful way (David 2009:82).
2.2.2 The role of vision in strategy development

Research over the past decade has shown that a well-articulated vision, when effectively implemented throughout
an organisation, has a profoundly positive impact on organisational performance.
In this regard, two extremely important observations emerged from research by Lipton: First, superior
performance is not achieved by an organisation that just happens to have a vision statement – in fact, it is achieved
by people who are challenged by the vision, and remain focused on a clear, yet distant target. Such firms
consistently tend to have higher levels of productivity per employee, greater levels of employee commitment,
increased loyalty to the organisation, great esprit de corps, clear organisational and/or departmental values, and
a greater sense of pride in their organisation. Second, there is an irrefutable link between vision and leadership –
it has been found that leaders who create and implement visions that guide organisational growth know what they
want their organisations to become (Lipton, in Hough, pp.R12-R18).

To determine the future direction of an organisation, a leader must first have developed a mental image of a
possible and desirable future state of an organisation. This image, which we call a vision, may be as vague as a
dream or as precise as a mission statement or goal, but the critical argument is that a vision should articulate a
view of a realistic, credible, attractive future for the organisation, a condition that is better than what now exists
(Campbell & Yeung, 1991:145-147). However, Lipton (in Hough, p.R18) contends that “visions must describe the
desired long-term future of an organisation, a future that is typically not quite achievable, but also not so fantastic
as to seem like a ridiculous pipe dream”.
While it is argued that vision and mission can be one and the same, it is generally accepted that they are not fully
overlapping and are preferably seen as separate concepts. Vision normally refers to a future state, whereas
mission refers to the present. In certain ways, a vision is more associated with a goal, whereas a mission is more
associated with a way of behaving.
According to Lipton (in Hough, p.R17-R18), the vision development process is such an important leadership
balancing act because it requires imagination, a mental capacity for synthesis, a trust in intuition, and a deep
emotional commitment to that desired future. At the same time the vision needs to challenge people, evolve
feelings that draw people toward wan ting to be part of something special and mobilising them to determined action
toward the desired future.
While they concur with Lipton's views, Finkelstein, Harvey & Lawton (2008:15) are more specific when they state
that a vision statement must satisfy the following three essential conditions:
(1) It must be comprehensive, touching all aspects of the business – an incomplete vision is likely to result in
problems going unrecognised or unchallenged; (2) it must be inclusive, reaching both inside and outside the
organisation, engaging the agendas of all key stakeholders – vision is invariably a call for action, and all those
involved in creating a better future need to know what is expected of them; and (3) it must establish a dynamic
trajectory for change – essentially capturing what the enterprise must become if the right strategic moves are
made.
Thus clarifying a vision and communicating it to everyone can have powerful results, and leaders who succeed in
doing this skillfully can make a profound impact. A vision serves as a road map for companies as they move
through accelerated change, focusing on the future and serving as a foundation and an enduring promise.

Figure 2.1: Vision and mission in strategy development.

4
The critically important relationship between leadership and organisational vision is illustrated in Figure 2.1, which
shows how organisational philosophy and values, as well as standards of behaviour, together with leadership,
shape the vision as well as the resultant mission and long-term objectives of the organisation. Note that Figure 2.1
illustrates the strategy development phase of the integrated strategic management process in Figure 1.1 in the
Study Guide.
While our point of departure in this Module is that the strategic management process is based on strategic thinking
and commences with the formulation of a vision and a mission, it stands to reason that once the external and
internal environmental analyses have been completed, both the vision and the mission have to be reviewed in
terms of new information resulting from these analyses. Although this is not indicated as such in Figures 1.1 and
2.1 in the Study Guide, it is reflected in Figure 3.1 (Hough, p 53).
Research has shown that a vision:
- motivates people and facilitates the recruitment of talent
- when shared by members of an organisation energises people by connecting them to the purpose of the
organisation;
- enables people to see how their efforts contribute to the larger picture;
- causes employee motivation, pride and an increase in performance where it conveys clear managerial
values;
- provides focus and direction, often avoiding overemphasising the short term;
- provides a context for decision-making.

It has been found that a vision fulfils two useful functions:

(1) It provides a way for managers to integrate an amorphous collection of goals, dreams, challenges and
ideas
(2) It serves as a constitution, a public document that clarifies purpose to all stakeholders.
In reality, no two visions are alike, and vision pre-emptively communicates three inherent messages or principal
themes regarding an organisation: the mission or purpose, the strategy for achieving the mission, and the elements
of organisational culture that seem necessary to achieve the mission and support the strategy.
As previously stated, Snyder and Graves (1994) also observe a strong relationship between leadership and vision,
giving a leader purpose, reflecting a reality that has yet to come into existence, and compelling a leader into action.
Lipton (in Hough, p.R20) states that you are making progress when an organisation’s vision provides both
movement and direction for shaping the culture, people processes, organisational structure, and how top
management’s decisions will continually reinforce the strategic intent of the organisation.
Examples of vision statements include the following:

● Vodacom
To democratise the telephony market in Africa and to contribute to creating an information society by
offering access to information across various platforms and devices. Vodacom’s commitment to this
industry is driven by its passion for and dedication to its stakeholders, customers, employees, and
financial performance.
● Coca-Cola Sabco
We will be the best Coca-Cola bottler in the world.
● Basil Read
To be a R5B+ diversified construction group competing with the “Big 4” in the industry.
● Peugeot
To positively contribute to the Southern African economy in a responsible manner.
● Atlanta Web Printers

To be the first choice in the printed communications business. The first choice is the best choice, and being
the best is what Atlanta Web pledges to work hard at being - every day!
● California Energy Commission (CEC)

It is the vision of the CEC for Californians to have energy choices that are affordable, reliable, diverse,
safe, and environmentally acceptable.

Think Point
Use the approach of Finkelstein et al referred to above to evaluate these
examples of vision statements. What do you conclude?
2.3 The Business Mission

Introduction
Unlike vision that is conceptualised as a desired future state of an organisation, a mission statement is an "enduring
statement" of purpose that essentially distinguishes one business from other similar firms.
2.3.1 The role of mission in strategy development

The mission is critically important in strategy development and strategic management, and should answer the
following two fundamental questions:
"What is our business? And what should it be?"
A mission is an organisation's character, identity and reason for existence. Campbell and Yeung (1991:145-147)
divide mission into four inter-relating parts: purpose, sense of strategy, behavioural standards, and values:
● Purpose addresses why an organisation is in being.

● A sense of strategy considers the nature of the business and desired positioning versus other
competitive companies.
● Behavioural standards are the norms and rules of “the way we do things around here”.
● Values are the beliefs and moral principles that lie behind the behavioural standards.
Mission provides a rationale for action, but also explains the behaviour that will make the strategy successful and
the values that will bring about the desired behavioural standards.
According to Stone (1996:31-37), a mission statement is the starting point for an organisation's entire strategic
planning process. Formulating a mission requires top management to seriously consider where the company is
now, and where it should be in future.
Think Point
Is Stone combining vision and mission into a single statement of future orientation
and organisational purpose? If this is the case, could it be interpreted as
“confusing”? What are your views?

A mission statement provides a sense of direction, focus and unity. It contains both a strategic and a cultural
perspective. Strategically, it is a tool that defines the company's business and target market. Culturally, it serves
as the "glue" that binds the organisation together through shared values and behavioural standards. It can inspire
employees and "stretch" the organisation to achieve higher levels of performance.
There is no formula that prescribes what elements a mission statement should contain. However, research has
shown that effective mission statements should be:
● Clearly articulated
● Relevant
● Current
● Written in a positive and inspiring tone
● Unique to the organisation
● Enduring
● Adapted to the organisation's target audience.
Mission statements that have these features can challenge and energise all employees in the organisation and
ensure that “everyone is reading off the same page” (Stone, 1996:31-37).
A well-formulated mission statement is a prerequisite to the development of viable strategies, and should be based
on the following strategy-relevant elements proposed by Pearce and Robinson (2005: 27-30):
1. Customer-market: basic product or service; primary market(s) and customer group(s)
2. Company goals in terms of survival, growth and profitability
3. Company philosophy
4. Principal technology
5. Geographic domain
6. Concern for public image
7. Company self-concept
8. Concern for quality
9. Concern for employees
10. Differentiation from competition.
The company mission is thus a broadly framed but enduring statement of a firm’s strategic intent. It embodies the
business philosophy of the firm's strategic decision-makers, implies the image the firm seeks to project, reflects
the firm's self-concept, and indicates the firm's principal product or service areas, principal technology, and the
primary customer needs the firm will attempt to satisfy.

From a strategy development perspective, the mission statement is important because the company's long-term
objectives are derived from the mission, and the mission elements serve as guidelines in strategy formulation, as
confirmed by Drucker (1974:94) when he states:
Defining the purpose and mission of the business is difficult, painful and risky. But it alone enables a business to
set objectives, to develop strategies, to concentrate its resources and to do the work. It alone enables a business
to be managed for performance.
Think Point
Obtain the Annual Reports of two prominent companies listed on the JSE. Evaluate their
mission statements in terms of the elements of a mission proposed by Pearce and Robinson.
Summarise and explain your findings.
2.2.3 Characteristics of a mission statement

David (2009:88) identifies the following three characteristics of an effective and enduring mission statement:
● A declaration of attitude
● A customer orientation
● A declaration of social policy.
As a declaration of attitude and outlook, a mission statement is usually relatively broad in scope for at least two
reasons: (1) a good mission statement allows for the conception and generation of a number of feasible alternative
objectives and strategies without limiting and constraining leadership and management creativity. A realistically
broad mission statement should encourage the creative and innovative identification of new opportunities, but
should not be so broad as to include every possible alternative. An overly narrow mission statement could well
overemphasise focus to the extent that attractive alternative opportunities could be passed up.
Another reason for a relatively broader mission statement is to effectively reconcile the interests of and
differences among the organisation's various stakeholder groups. Although this balance between generality and
specificity is difficult to achieve, it is well worth the effort.
Lastly, in terms of being a declaration of attitude, an effective mission should not be too long since it should arouse
positive feelings and emotions about an organisation, be inspiring and motivate employees to action. An effective
mission statement should thus generate the impression that the firm is progressive, competitive and successful,
has direction and is worthy of time, support and investment – from all socio-economic groups of people (David
2009:88).

Customer orientation – recall that a good mission statement describes an organisation’s purpose, customers,
products or services, markets, philosophy, and basic technology. According to McGinnis (1981:41), a mission
statement should: (1) reflect what the organisation is and what the organisation aspires to be, (2) be narrow enough
to exclude some ventures but broad enough to allow for creative growth, (3) distinguish a given organisation from
all others, (4) serve as a framework for both current and prospective future activities, and (5) be stated in terms
that are sufficiently clear to be widely understood throughout the entire organisation.
In terms of customer orientation in particular, a good mission statement reflects what customers anticipate. As
David (2009:90) observes, rather than developing a product and then finding a market, the philosophy should be
to identify customers’ needs and then provide a product or service to fulfil those needs. More specifically, a good
mission statement should essentially identify the utility of a firm’s products or services to its customers. For example
AT & T’s mission statement focuses on communication rather than on telephones; Exxon-Mobil’s mission
statement focuses on energy rather than on oil and gas; and Universal Studio’s mission statement focuses on
entertainment rather than on the motion pictures it produces. The importance of relevant utility statements in
developing mission statements are eloquently described in the following quote from David (2009:90):
 Do not offer me things.
 Do not offer me clothes. Offer me attractive looks.
 Do not offer me shoes. Offer me comfort for my feet and the pleasure of walking.
 Do not offer me a house. Offer me security, comfort, and a clean and happy place.
 Do not offer me books. Offer me hours of pleasure and the benefit of knowledge.
 Do not offer me tools. Offer me the benefits and the pleasure that come from making beautiful things.
 Do not offer me furniture. Offer me comfort and the quietness of a cosy place.
 Do not over me records or CDs. Offer me leisure and the sound of music.
 Do not offer me things. Offer me ideas, emotions, ambience, feelings, and benefits. Please, do
not offer me things.
As David reiterates, it is the customer who determines what a business is. What the customer thinks he or she is
buying, what he or she considers as value, is decisive – that determines what a business is, what it should produce,
and whether it will prosper. What a customer buys and considers value is not a product or service, it is always
utility, and that is the foundation of a business and keeps it in existence (Drucker 1974:61).
Activity 2.1
Identify from company Annual Reports, advertisements or media reports companies whose
mission statements refer to or reflect utility. What are your views on the image that these
companies project, and the perceived success of such companies? Do you believe that
reflecting utility has a role in a mission statement? Explain your views.

As a declaration of social policy, mission statements should reveal that the organisation is socially responsible.
Social policy affects the way in which a mission statement is developed in that leadership and management should
not only consider what the organisation owes to its various stakeholders, but also what responsibilities the
organisation has to consumers, communities, environmentalists, minorities and other groups in general. It is
generally accepted that the impact of society on business, and business on society, is becoming increasingly
pronounced every year. As David states, an organisation’s social policy should be integrated into all strategic
management activities, much like the fundamentals of corporate governance (David 2009:91). Apart from
involvement in principle, firms should preferably engage.in.social activities that have economic benefits.
However, most strategists agree that the first social responsibility of any business must be to make enough profit
to cover the costs of the future, because if this is not achieved, no social responsibilities can be met.
The ultimate form and length of a mission statement will largely depend on how organisations define themselves,
but a key consideration in the process is to capture what the organisation truly believes what its guiding philosophy
should be, rather than emulating some other company when formulating a mission.
Some examples of mission statements include the following:

Basil Read
● Building the future.
Peugeot
● To adhere to the equity employment policies of this country in Peugeot’s quest to increase job creation,
import and distribute quality Peugeot vehicles, through strategically well-placed, highly trained dealers to
meet service expectations thereby creating a loyal customer base, and to invest in a social
responsibility programme that is sustainable and addresses the needs of the previously disadvantaged
people of South Africa.
Innovation Group
● To technologically enable every policy holder on the planet.
Pfizer
● To become the world’s most valued company to patients, customers, colleagues, investors, business
partners and the communities where we live and work locally. Pfizer’s aim is to retain its position as the
premier pharmaceutical business to be acknowledged as an employer of choice and a partner among its
customers, consumers, and communities in a dynamic healthcare environment.
Atlanta Web Printers

● To make our clients feel welcome, appreciated, worthy of our best efforts in everything we do – each and
every day.

● To be recognised as an exceptional leader in our industry and community.

● To conduct all our relationships with an emphasis on long-term mutual success and satisfaction, rather
than short-term gain.
● To earn the trust and respect of all we work with as being a company of honesty, integrity and responsibility.
● To provide an environment of positive attitude, train and motivate employees at all levels, and use our
resources, knowledge and experience to create win/win relationships for our clients, employees,
shareholders, and suppliers in terms of growing service and value.
California Energy Commission (CEC)

It is the California Energy Commission’s mission to assess, advocate, and act through public/private partnerships
to improve energy systems that promote a strong economy and a healthy environment.
Group Activity 2.1

This group activity is aimed at practical, interactive experiential learning about the way
organisations in the real world of business generally approach their long-term strategic
planning and strategy development.
Assignment:
1. Identify an organisation in your city or town that does strategic planning, and make an
appointment to visit the owner, managing director or person responsible for strategy
development
1. Find answers to the following questions during the interview:
● How does your firm formally do strategy development (or strategic planning)?
Who is involved in the process?
● Does your firm have a written vision statement? Mission statement? How were
these developed? When was it, or were they, last changed?
● What benefits are derived from doing strategy development (strategic

planning)? Are there costs involved in doing strategic planning?
● Do you anticipate changing your vision and/or mission and/or approach

to strategy development or strategic planning in the foreseeable future? If so,
what would activate or trigger such change?
2. Write a brief report on your findings, and indicate the extent to which these findings
agree within the theory in general as discussed in Topic 2.

2.4 Strategic Intent

Campbell and Yeung (1991:145-147) contend that strategic intent is another concept that overlaps with vision, but
more specifically with the element “purpose” in mission. Strategic intent comes close to mission in terms of the
questions we ask: "What business are we in, and what strategic position do we seek?"
In this regard, Carpenter and Sanders (2009:50) state that vision and mission statements provide all employees
with "strategic purpose", a concept not as strong as but related to strategic intent, which they describe as a
simplified, widely shared mental model of the organisation and its future, including anticipated changes in the
environment.
As an example, Matsushita, the Japanese parent company of Panasonic is preparing to "stretch out" form its
present position to become a "super manufacturing company". To pursue this strategic intent Matsushita envisages
the following changes:
● From providing goods to providing solutions

● From traditional capital investment to expansion of R & D, marketing, and investment in information
technology
● From internal management information systems to interactive and direct contact with customers from a
hierarchical to a flat and web-based organisation.
Hamel and Prahalad (1989) state that strategic intent envisions a desired leadership position for the company and
establishes the criterion the company will use to chart its progress. Examples of strategic intent are (1) Komatsu
setting out to "encircle Caterpillar", (2) and Cannon seeking to "beat Xerox". Strategic intent, or “purpose” according
to Carpenter and Sanders, however, is regarded as a less powerful concept than mission in the context of strategy
development.
In Topic 3 we take a closer look at all the facets of analysing the external environment as an important step in the
strategy development process illustrated in Figures 1.1 and 2.1 in the Study Guide.
Because of differences in size, state of development, organisational structure, resource

endowments, leadership styles, organisational culture, and various other dimensions it
is most unlikely if not impossible that two companies, even in the same industry or
industry sector will have the exact same mission statements. In fact, one of the
characteristic requirements of a good mission statement is that it should distinguish a
company from other similar firms.

Given this situation, explain how you would go about creating a mission statement for your
own organisation, or one that you are familiar with, assuming that no mission statement
currently exists? Explain and motivate the various steps that you would consider
2.5 Summary
Every organisation has a unique purpose and reason for being. This uniqueness should be reflected in the vision
and mission statements and could even contribute to the competitive advantage of an organisation. Conversely,
business organisations that do not live up to the values and beliefs reflected in their mission statements are bound
to lose credibility in the eyes of consumers and other stakeholders. Lastly, evidence has shown that well- designed
vision and mission statements are essential in developing, implementing and evaluating successful, sustainable
competitive strategies.
Activity 2.2
1. Can a vision and mission statement for a company be combined into a single future-
oriented purposeful statement? What are the potential benefits and drawbacks in such
a case? Explain.
2. Obtain an Annual Report of a public company and -
(a) ascertain whether the company has both a vision and a mission statement?
(b) evaluate the mission and/or vision statement(s) of the company in terms of the
guidelines provided in Topic 2.
(c) explain why vision and mission statements are important in strategic planning and
strategy development. Stated differently, can a viable strategy be developed in the
absence of vision and/or mission statements? Why? Or why not? Motivate your answer.
Obtain the vision and mission statements of ESKOM and compare them with the vision and
mission statements of the California Energy Commission provided in Topic 2. Do a critical
evaluation and summarise your findings.
Case Study
Read and analyse the case “Harley-Davidson in 2004” in Hough (pp.C159-C184), and
respond to the following questions or issues:
1. Describe Harley-Davidson's historical development in the context of the motorcycle

industry. What were the industry's dominant economic features?

2. Identify Harley-Davidson’s initial vision and/or mission in the early stages of its
development. Were they appropriate at the time? Why, or why not?
3. Determine whether Harley-Davidson changed its vision and/or mission statement in

recent decades. If so, what were these changes? What were the reasons for these
changes?
Did any changes in Harley-Davidson’s strategic posture (relating to all aspects of the
strategy formulation process) over time benefit the company? If so, how and in what way?
Motivate your answers in all cases.
2.6 Guidelines For Self Assessment Activity

It should be evident that various factors unique to an individual company could influence how a mission statement
is created. Even then, over time, several approaches to the development of mission statements have evolved.
However, there are a few fundamental steps that could generally guide this process, as indicated below.
● The first step is getting the full support of top management.
● The second step, which could at times coincide with the first step in writing or revising a mission statement is
get to know what the purpose of a mission statement is or should be.
● The third step is to produce a rough outline of the proposed mission statement.
● The fourth step is to circulate this draft mission statement to top and middle management as well as employees
at all levels. (Seeking meaningful employee input is critical – while management sets the strategy, employees
need to understand what the strategy is, if they are to implement it effectively? Involving employees in the
process of shaping the identity and direction of the firm provides the employees with a sense of ownership).
● The fifth step is to revise the mission statement in terms of relevant feedback (knowing that not all feedback
will be equally relevant or valuable). Revision here includes content, language, layout and format. (Recall that
a mission statement must be clear, unambiguous and understandable).
● The final step is getting the approval of management (should the mission at this stage still not be
acceptable, the above process is repeated. The mission should reflect the purpose and other aspects that the
company wishes to communicate to all stakeholders. Recall that creating a mission offers a chance for
management and employees to re-define and re-create their organisation.

Unit
3: Evaluating a Company's
External Environment


THIS UNIT:
 Identify the strategically relevant components of a  Think Points, Activities and Case Studies needs
company’s external environment to be done in order to gain an understanding of
the strategically relevant components of a
company’s external environment
 Define the concept “industry and competitive  Think Points, Activities and Case Studies needs
environment” to be done in order to gain an understanding of
the concept industry and competitive
environment
 Describe, evaluate and apply Porter’s five forces model  Think Points, Activities and Case Studies needs
for analysing industry competitiveness to be done in order to gain an understanding of
the importance of sustainable competitive
advantage in business strategy
 Identify, explain and apply the concept of industry  Think Points, Activities and Case Studies needs
driving forces to be done in order to gain an understanding of
identifying, explaining and applying the concept
of industry driving forces
 Describe, evaluate and apply strategic group maps in  Think Points, Activities and Case Studies needs
industry analysis to be done in order to gain an understanding for
describing, evaluating and applying strategic
group maps in industry analysis
 Be able to identify key factors for future competitive  Think Points, Activities and Case Studies needs
success. to be done in order to gain an understanding in
order to identify key factors for future
competitive success
 Be able to analyse whether the outlook for the industry  Think Points, Activities and Case Studies needs
present the company with an attractive opportunity. to be done in order to gain an understanding
whether the outlook for the industry of the
present company with an attractive opportunity
advantage in business strategy

3.1 Introduction
3.2 he Strategically Relevant Components of a Company's External Environment
3.3 Thinking Strategically About a Company's Industry and Competitive Environment
3.4 What Are The Industry's Dominant Economic Features?
3.5 What Kinds of Competitive Forces Are Industry Members Facing?
3.6 What Factors are Driving Industry Change and What Impacts Will They Have?
3.7 What Market Positions Do Rivals Occupy Who Is Strongly Positioned and Who Is Not?
3.8 What Strategic Moves Are Rivals Likely To Make Next?
3.9 What Are The Key Factors for Future Competitive Success?
3.10 Does The Outlook for the Industry Present the Company With an Attractive Opportunity?
3.11 Summary
 Hough, J, 2007. Crafting and Executing Strategy, South African

Edition. Boston: McGraw-Hill, Chapter 3.
 Morris, D. 2005. A new tool for strategy analysis: The opportunity
model. Journal of Business Strategy, Vol26, No.3, pp.50-56 (Reading
5 in Hough, pp.R41-R50).

3.1 Introduction
In Topic 1 we introduced the important concept of strategy and explained the process of strategy development as
part of the strategic management process. In Topic 2 the business vision and mission were discussed as the initial
steps in the above processes. With reference to Figure 1.1 in the Study Guide, we now turn to the next phase in
the strategy development process - evaluation and analysis of both the external business environment and the
internal environment of the organisation. Evaluation of the external business environment which focuses primarily
on the industry environment is discussed in this Topic. Evaluation of the internal organisational environment is the
subject of discussion in Topic 4.
3.2 The Strategically Relevant Components of a Company's External Environment

Once the vision and mission statements have been formulated, the task of developing competitive business
strategies should first involve an appraisal of a company's internal organisational and external business
environments.
Figure 3.1 in Hough (p.53) depicts the strategic planning process where it is assumed that the vision and mission
statements already exist, and that the vision be refined, should it be necessary, when the outcomes of the external
and internal analyses are known. The process then continues to include the development and selection of viable
strategies, which are discussed in Topic 5.
The relevant external environments for purposes of strategy development include:
- the business macro-environment
- the industry and competitive environment
- the firm's market environment and market position.
3.2.1 Globalisation and the macro-environment

1. Introduction
All businesses operate in the global environment and in the "macro-environment" (comprising the political,
economic, legal, socio-cultural environmental and technological environments as well as population
demographics) the latter which appears in the outer circle of Figure 3.2 in Hough (p.54). The global environment
which includes the macro-environment, is not indicated as such in Figure 3.2, but should be seen to encompass
the macro- environment and the industry environment. Our discussion in this section 3.2 will first focus on an
understanding of the concept and process of globalisation as a frame of reference for an analysis and evaluation
of the macro-environment as illustrated in Figure 3.2 (p.54). An overview of a company’s industry and competitive
environment follows in Section 3. As will become clear, strategically important information derived from analyses
of the macro- as well as the industry environment within which a company operates is indispensable for the
development of viable competitive strategies for a business.

2. Globalisation
Globalisation provides the context for an analysis and evaluation of the external business environment in the
process of strategy development for an organisation.
But first, what is globalisation? When searching for a definition of globalisation, one soon realises that globalisation
is an elusive concept to define, and that it means different things to different people. No wonder that in today’s
world the impact of globalisation is the source of endless, often adversarial, debate. One therefore needs to take
into account that globalisation could be defined from diverse perspectives (Venter & Neuland, 2004:4).
From the economic point of view, globalisation is a process associated with increasing economic openness,
growing economic interdependence, and the deepening of the integration of the global economy as reflected in
increasing cross-border flows of goods, services, capital and know-how. This creates a whole new world order for
business enterprises, including SMMEs (Govindarajan & Gupta 2001: 4; Nayyar 2003:1). According to Hill (2009:6)
globalisation refers to the shift toward a more integrated and interdependent world economy.
The scope of one’s focus when defining globalisation could also influence the definition. That is, whether one
considers globalisation from the perspective of the entire world, or of just a single country, or a specific industry,
or a specific company in that industry, or even a particular line of business or function within a company. Thus one
could say that, at the worldwide level, globalisation refers to the growing economic interdependence among
countries as reflected in increasing cross-border flows of goods, services, capital and know-how. At the specific
country level, globalisation refers to the extent of the interlinkages and networking between a country’s economy
and the economies of the rest of the world. Globalisation at the level of a specific company within a specific industry
then refers to the extent to which that company’s competitive position within that industry is interdependent on that
of the same industry in another country (Walker, Walker & Schmitz 2003:3).
On the other hand, the economic definition of globalisation could be expanded by giving it a political and a social
dimension (Woods 2000:2-3). In this case the argument is that globalisation constitutes an ongoing process of
integration of the world community into a system that comprises three interconnected core elements: the
transformation of global economic activity through the expansion of markets; political transformation of the state
and its institutions; and the emergence of new social and political movements. In similar vein, McDonald and
Burton (2002:12-160) see globalisation as comprising economic, cultural, geographical and political elements, all
of which are inherent in the economic and socio-political perspectives of Woods’s definition of globalisation.
Let us consider the three core elements of globalisation identified by Woods in more detail:
Most importantly, the transformation of global economic activity through the expansion of markets refers to the
establishment of transnational networks in production, trade and finance, giving rise to what is often referred to as
a “borderless world” (Ohmae 1990; Ohmae 1995; Greicher 1997). Globalisation is, therefore, spurred on by factors

such as growing worldwide interconnectedness, (Parker, 2005:6-90) the worldwide expansion of SMMEs,
increases in the quantity and speed of goods and services traded worldwide, advances in and increasing speed
of communication worldwide, the increasing volume, transaction speed, geographical spread and impact of
international financial services and the emergence of new financial instruments.
In a world of globalisation, do purely domestic or local firms have to be concerned about globalisation at all? The
brief answer to this important question is ‘yes’!
In the world of globalisation and increasing competition, purely domestic firms are not isolated entirely from the
effects of global, and even regional forces and trends such as rising oil and fuel prices, unexpected volatility in
exchange rates between trading countries, far-reaching political events as experienced in recent times in
Zimbabwe, and the precipitation of the global financial crisis in the United States in mid-2008.
As a further example, the ongoing expansion of multinational enterprises (MNEs) to emerging economies such as
South Africa means that new competitors with different cultures, strategic orientations, skills and business practices
invariably change the domestic competitive landscape in terms of the ‘rules of competition’ within a domestic
industry. This increasingly intensifies the competition for purely domestic firms. Examples in this regard are the
increasing number of East-Asian competitors in the South African fast foods and restaurant sectors, the Tata
Group from India which is active in the domestic steel, automobile and hospitality sectors (Hough & Neuland,
2007:205) and the recent appearance of Chery automobiles from China.
It is clear that the rapidly-changing global, networked environment has developed to a level where the
management and leadership of domestic firms face continuous change, disruptive technologies, and high levels
of uncertainty requiring new capabilities and insights.
Management and leadership should therefore understand the potential impact of globalisation forces and trends
on the industry or industries in which they are involved.
3. The macro-environment
The macro-environment refers to larger political, economic, legal social, technological, environmental and
demographic issues that confront business firms. A fundamental analysis and evaluation of the macro-
environment helps managers gain a better understanding of the opportunities and threats they face and
consequently helps them, first, in developing a realistic vision of the future competitive business landscape and,
second, provides useful guidelines for strategy development. The primary focus of this analysis is on the potential
future impact of macro-environmental factors (Carpenter & Sanders, 2009:109).
Typical macro-environmental factors and issues are presented in Table 3.1.

The list of macro-environmental variables in Table 3.1 is by no means exhaustive, and merely serves as typical
examples of possible events and trends. However, it should be kept in mind as in the case of globalisation, that
not all macro-environmental factors will affect all industries in the same way, to the same extent, and at the same
time.
The importance of the external analysis lies in the way management evaluates and interprets the relevant
information, where the macro-environmental variables identified in Table 3.1 could be opportunities or threats from
the point of view of an individual organisation.
Think Point
Investigate how Morris (in Hough, pp.R41-R50) views “opportunity” in the context of
strategy. Of what strategic value is Morris’s view?
The industry and competitive environment, as part of the macro-environment, is of more immediate interest to the
company in terms of the five industry forces in the inner circle that impact on the company as shown in Figure 3.2
in Hough (p.54). Several examples of strategically important effects of macro-environmental factors and trends are
provided in this section in Hough (p.53-54). Compare these examples of factors and trends with the opportunities
and threats in Table 4.2 in Hough (p.116).
Analysis of the "outer ring" macro-environmental components depicted in Figure 3.2 should be based on the
assumption that discontinuous change has become the norm in today's world, and that a conscious effort to
recognise, understand and respond to such change is a vital prerequisite to strategy development.
Political/Legal Economic
● Political stability ● Economic growth
● Regulation of industries ● Monetary and fiscal policy
● Competition policy ● Level of interest rates
● Tax laws ● Level of inflation
● Exchange controls ● Level of disposable income
● Labour legislation ● Labour Unions and productivity
● Intellectual.property.rights ● Tax rates
● Government bureaucracy ● Import/export factors
Social/Socio-economic Technological
● Per capita income ● Levels of infrastructure

● Level of disposable income ● Level of technology

● Social structures ● Extent of e-business
● Equal opportunity ● Extent of e-commerce
● Levels of saving ● Internet marketing
● Social security programs ● General ICT levels
● Levels of education ● Technological literacy
● Levels of crime and corruption ● Extent of mobile telephony
Environmental Demographic
● Levels of pollution ● Lifestyle and leisure
● Anti-pollution programs ● Age distribution
● Waste management ● Gender distribution
● Water recycling ● Religious orientation
● Deforestation ● Special groups
● Water pollution ● Consumer behaviour
● Air pollution ● Consumption patterns
● Carbon footprints ● Geographic factors
● Ozone depletion
Figure 3.1Selected macro-environmental variables

5
Pietersen (2002:70-72) therefore has a valid argument when he states that it is impossible to predict the future
with any precision. The challenge, according to him, is not to try and predict the future, but rather to try and
understand the future consequences of present realities. He proposes the following three "golden rules" for
situation analysis in general, and macro-environmental analysis in particular:
Produce a diagnoses, not a survey - a diagnosis allows you to dig beneath the surface of a problem and discover
the root causes and ultimate consequences.
1. Trends tell a story, snapshots never do - by mapping trends on critical issues, underlying drivers of
problems can be identified.
2. Simplicity is a virtue - reduce insights into clear, distilled and meaningful statements.
However, a company's immediate industry and competitive environment, while part of the macro-environment,
generally has a more pronounced strategy-shaping impact than the more "remote" global factors and macro-
environmental factors in the outer ring in Figure 3.2 in Hough (p.54). We now take a closer look at the industry and
competitive environment.

3.3 Thinking Strategically About a Company's Industry and Competitive Environment

(Study page 55 in Hough, Chapter 3)
For purposes of our discussion, ‘industry’ is defined as a firm or group of firms that produce or sell the same or
similar products to the same market.
Unlike the broader macro-environment, the industry and competitive environment presents a more focused field of
study. However, Hough suggests that industry analysis be approached by getting clear answers to the seven
questions posed in this section.
While finding answers to these questions may pose a real challenge, the purpose of obtaining this information is
for managers to better understand their industry in terms of its characteristics as well as the structure of competition
when developing their competitive strategies.
3.4 What Are The Industry's Dominant Economic Features?

(Study pages 55 to 57 in Hough, Chapter 3)
Analysis of a company's industry and competitive environment should begin by identifying the industry's
dominant economic features. The most important economic features, and relevant questions related to each
feature, is summarised in Table 3.1 in Hough (p.56).
Information obtained by answering these questions in Table 3.1 as well as other related questions must be relevant
to a company’s own unique situation in the process of strategy development. For example, it will become clear in
Chapter 5 that the stage in the industry life cycle in which the company finds itself, will in part determine the
strategic approach to be adopted (See "Market size and growth rate", second question, in Table 3.1 in this regard).
Similarly, firms in fragmented industries also need to adopt a strategic approach in line with that specific type of
industry (See "Number of rivals", first question, in Table 3.1 in this case).
Study the rest of this section, noting the implications of various dominant economic features in the examples that
are provided, which confirm the importance of this part of the information provided by industry and competitive
analysis for strategy development.
Activity 3.1
Based on the information in Table 3.1 in Hough (p.56), identify the most important
“dominant economic features” for the following industries: (1) software development, (2)
tourism, (3) gold mining, (4) coastal fishery companies, and (5) wine producers. Are the
dominant economic features the same in all cases? Explain.

3.5 What Kinds of Competitive Forces Are Industry Members Facing?

Industry competitive forces vary from one industry to the next. To analyse the impact of competitive forces in any
given industry, Porter's five-forces model of industry competition is by far the most widely-used approach in industry
and competitive analysis.
Porter's model, illustrated in Figure 3.3 in Hough (p.58), is based on a composite of five forces that in
combination determine the state and extent of competition in a given industry.
These five forces are:
● The extent of rivalry among industry members
● The threat of new entrants
● The bargaining power of buyers
● The bargaining power of suppliers
● The threat of substitute products
To determine the nature and strength of competitive pressures in a given industry requires that the model be
applied in three consecutive steps:
Step 1: Identify specific competitive pressures associated with each one of the five forces
Step 2: Evaluate the strength of each of the five forces
Step 3: Determine the collective strength of the five forces to determine the attractiveness or otherwise of an
industry
Study this section with reference to Figure 3.3. When all five factors are rated low, industry attractiveness is
indicated, and vice versa. We now consider each of the five industry competitive forces in greater detail.
3.5.1 Competitive pressures associated with the jockeying among rival sellers
This factor is by far the most significant (strongest) of the five forces, because this factor or force involves the
innovative competitive strategies, marketing initiatives and other means of obtaining customer patronage and
loyalty, relentlessly deployed by industry members. In most industries, competitive forces are extremely volatile,
and strategic positioning of firms rely strongly on their sustainable competitive advantage.
Study this section, noting the definition or core concept of "competitive jockeying", the competitive "weapons"
presented in Figure 3.4 in Hough (p.60) that firms could use in competing for industry market share, and the twelve
factors that influence the tempo or extent of rivalry among industry competitors described in this section. These
factors provide the rationale for increases or decreases in the intensity of rivalry, depending on prevailing
circumstances.

With reference to Figure 3.4 it is extremely important to understand the relationship between the twelve factors or
“weapons” and the circumstances under which rivalry is generally stronger or generally weaker (right side of Figure
3.4).
Think Point
When and under what circumstances can rivalry be considered strong or fierce,
moderate or normal, or weak. Is the information related to this distinction important
for the management of a company? Why, or why not?
3.5.2 Competitive pressures associated with the threat of new entrants

Both outsiders as well as current industry participants can pose a threat of entry, the latter often looking for growth
opportunities and/or locations in new geographical areas. Several factors determine whether potential new
entrants do pose a threat, and these are summarised in Figure 3.5 in Hough (p.64), indicating when entry threats
are weaker, and when they are stronger. This information is obviously of great importance to current industry
participants in assessing their own competitive positions.
An important issue is whether likely entry candidates face high or low entry barriers, the former reducing the threat
of entry, the latter making entry attractive. Study this section, focusing on the eight most widely encountered
hurdles to entry discussed in this section, and analyse Mango's entry into the South African commercial airline
industry against this background. (See Illustration Capsule 3.1 in Hough, p.66.)
Furthermore, companies with large financial resources and the requisite capabilities may find it easier to enter an
industry compared to a small, resource-poor organisation. From an incumbent point of view, evaluating whether
the threat of additional entry is weak or strong, management must look at (1) how formidable or daunting the entry
barriers are for each type of potential entrant, and (2) how attractive the growth and profit prospects are for new
entrants.
Note the "core concept" (p.68), warning that the high entry barriers/weak entry threats of today may very well not
be the same tomorrow. Lastly, the threat of entry changes as the industry's prospects grow brighter or dimmer,
and as entry barriers rise or fall. Ensure that you understand the implications of this important industry competitive
force.

3.5.3 Competitive pressures from the sellers of substitute products

In the introduction of Section 3.3 we defined an industry as a firm or a group of firms producing and selling the
same or similar products. Such products are referred to as "competing" or "competitive" products. Note that this is
not the same as "substitute" products that we discuss in the section.
Companies in one industry face competitive pressures when companies in closely-related industries provide
products or services regarded as substitutes. Some of the examples in this section include the threat of artificial
sweeteners for sugar, mobile phones for landlines, newspapers for electronic data, and DVDs for VCRs.
The following three factors determine the strength of competitive pressures arising from substitute products:
1. Whether substitutes are available and attractively priced.
2. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, or
other attributes.
3. Whether costs that buyers incur in switching to substitutes are high or low.
The conditions that determine whether competitive pressures from substitutes are strong, weak, or moderate are
summarised in Figure 3.6 in Hough (p.70).
As a rule: the lower the price of substitutes, the higher their quality and performance, and the lower the switching
costs of buyers, the greater the threat of substitute products. Study this section with special reference to Figure
3.6.
3.5.4 Competitive pressures stemming from supplier bargaining power and supplier-seller
collaboration
As point of departure, whether supplier-seller relationships represent a weak or strong competitive force depends
on the following:
(1) Whether major suppliers can exercise sufficient bargaining power to influence the terms and conditions of
supply in their favour, and
(2) The nature and extent of supplier-seller collaboration in the industry

1. How supplier bargaining power can create competitive pressure

Suppliers to an industry that have considerable leverage in determining the terms or conditions of supply will exert
much competitive pressure on rival sellers, a situation confirmed by the example of Microsoft and Intel. Note also
the influence of trade unions on labour costs and industry costs which also affect industry competitiveness
(Hough, p.71).
Study this section and the nine factors that determine whether any suppliers to an industry are in a position to exert
bargaining power, also with reference to Figure 3.7 in Hough (p.73).
2. How seller-supplier partnerships can create competitive pressures

Industry members are increasingly forging strategic partnerships with select suppliers with the purpose of (1)
reducing inventory and logistics costs, (2) speeding up the availability of next generation components, (3)
enhancing the quality of the parts and components being supplied, and (4) trying to attain important cost savings
for themselves and their suppliers.
These partnerships can be a source of competitive advantage where firms manage their supply chain
relationships effectively, as evidenced by Dell Computers.
3.5.5 Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration
The following will determine whether seller-buyer relationships represent a weak or a strong competitive force: (1)
whether some or many buyers have sufficient bargaining leverage to obtain price concessions and favourable
price conditions, and (2) the extent and competitive importance of buyer-seller partnerships.
1. How buyer bargaining power can create competitive pressures

As with suppliers, the leverage that certain types of buyers have in negotiating favourable terms can also range
from weak to strong. For most consumer goods, individual buyers have no bargaining leverage. Large retail chains
however, generally have much negotiating leverage.
Study this section with reference to Figure 3.8 in Hough (p.76).
2. How seller-buyer partnerships can crate competitive pressures

These partnerships are becoming increasingly important in business-to-business relationships, as exemplified by
the examples in this section.

3.5.6 Is the collective strength of the five competitive forces conducive to good profitability
Analysing the competitive impact of each one of the five forces, and then their combined impact, provide invaluable
information on industry competitiveness and industry profitability for industry members. The following broad
guidelines apply in this regard:
(1) As a rule, the stronger the collective impact of the five competitive forces, the lower the combined
profitability of industry participants.
(2) When the collective impact of the five competitive forces is moderate to weak, an industry is
competitively attractive and industry members can earn good to reasonable profits.
When matching company strategy to competitive conditions, it has been found that where a company's strategy
"protects" a company from the competitive pressures to some extent, and where company strategies produce
sustainable competitive advantage, they enjoy a favourable competitive position in their industry.
3.5.7 Summary
From the outline in this Section 3.5, it should be clear that industry characteristics and industry competitiveness
are of strategic importance to the long-term survival and growth of companies.
3.6 What Factors are Driving Industry Change and What Impacts Will They Have?
3.6.1 Introduction
Industry competitive analysis as discussed in the previous section provides a cross-section perspective at a certain
point in time, but do not reveal much as far as dynamic industry change and emerging industry trends over time
are concerned - all of which are extremely important in strategy development.
Industries are dynamic in nature and evolve over time passing through the identifiable, consecutive stages of
inception, rapid growth, maturity and decline as illustrated in Figure 3.1 in the Study Guide. The industry life- cycle
is a model that describes this evolution from the initial introduction of new products or services through to their
current market state and possible future states. The industry life-cycle as such is a powerful driver of industry
dynamics because of its inherent characteristic of change over time. Although it obviously does not provide all the
answers concerning industry change and growth, it does provide a valuable framework for analysing its dynamics
as such.

Size
Time
Inception Rapid growth Maturity Decline
Introduction Market expands beyond niche Proliferation of products Product/market

contraction
Niche market – and markets served
Selected product(s) for Growth accelerates

selected market(s) Declining profit
High profit margins Intense competition
margins
More competitors enter
Participants emphasise
Customers become better Market volatility and beginnings of
problem solving – product Further
informed industry consolidation
as “solution” consolidation and
industry
Technological and market
Lower profit margins regeneration
uncertainty
Aggressive customers Increasing

importance of cost
controls
Figure 3.2: Industry life-cycle

6
Source:Adapted from Carpenter & Sanders (2009:135), Pearce & Robinson (2005:169-171) and Lynch (1997:125-131).
In this section we consider the implications of the industry life-cycle and other causes of industry change that
management needs to understand.

3.6.2 The concept of driving forces

Driving forces that continually reshape the industry landscape can originate from global or "outer ring" macro-
environmental forces, but more readily from the more immediate industry environment of a company (See Figure
3,2 in Hough, p.54).
Driving forces-analysis requires (1) identifying the driving forces, (2) assessing how driving forces will impact on
industry competitiveness and attractiveness, and (3) determining how strategy needs to be adapted to cope with
expected impacts of the identified driving forces.
3.6.3 Identifying an industry's driving forces

Most drivers of industry and competitive change fall into one of the following categories:
1. Emerging new Internet capabilities and applications.
2. Increasing globalisation.
3. Changes in an industry's long-term growth rate.
4. Changes in who buys the product and how they use it.
5. Product innovation.
6. Technological change and manufacturing process innovation.
7. Marketing innovation.
8. Entry or exit of major firms.
9. Diffusion of technical know-how across more companies and more countries.
10. Changes in cost and efficiency.
11. Growing buyer preferences for differentiated products instead of commodity products.
12. Reductions in uncertainty and business risk.
13. Regulatory influences and government policy changes.
14. Changing societal concerns, attitudes and lifestyles.
Study and summarise the main aspect(s) of each of these 14 driving forces, also listed in Table 3.2 in Hough
(p.85), for future reference and revision of this section.
The existence of these potential industry driving forces confirms that it is not sufficient to just look at the stages of
the industry life-cycle. However, as Hough asserts (p.85), only three to four of these forces will be major driving
forces for any individual company. For strategic planning and strategy development, it is obviously important to
identify those few dominant driving forces in the case of an individual company in its industry environment.

South African issues or factors of particular importance in this regard include (pp.85-89):
● Black Economic Empowerment (BEE)
● Employment Equity (EE)
● Regulatory influences
Familiarise yourself on the tenets of BEE and EE (pp.86-89) with specific reference to Illustration Capsule 2.2,
"Black Economic Empowerment" and Illustration Capsule 3.3, "Implementing Employment Equity in De Beers".
Your own summary of these two important issues would be of benefit.
Concerning the third issue of "regulatory influences", note the government restrictions on the establishment of
private healthcare institutions.
Think Point
Would you consider the above as justified intervention in the healthcare market
system by the government, or is it simply undesirable government intervention in
the free market system characterised by supply and demand? What are the major
forces or issues in this case? Motivate and substantiate your viewpoint.
The effects of the potential and actual impact of such industry drivers on the operations of an individual company
are addressed in the following section.
3.6.4 Assessing the impact of the driving forces

(Pages 89 in Hough, Chapter 3)
Merely identifying driving forces is obviously not sufficient. More important is to determine whether the driving
forces make the industry more or less attractive. The following three questions are relevant in this case:
1. Is the collective impact of the driving forces increasing or decreasing the demand for the industry's
products?
2. Are the driving forces making industry competition more or less intense?
3. Will the combined impacts of the driving forces lead to higher or lower industry profitability?
The purpose of the analysis of driving-forces is to understand which external factors are causing industry change,
and what difference these factors will make.
3.6.5 Developing a strategy that takes the impacts of the driving forces into account
The third and probably most important step in driving-force analysis is to draw conclusions about what strategy
adjustments will be necessary to deal with the impact of the relevant driving forces on market demand,
competitive intensity, and industry profitability.

Group Activity 3.1

Identify four industries or industry sectors of your choice and (1) determine which of
the 14 driving forces discussed in Sections 3.6.3 and 3.6.4 above would be most
relevant to the four selected industries (and add relevant ones which may not appear
in the list of 14). (2) Prioritise the chosen driving forces, in each industry or industry
sector, from most important to least important. (3) Indicate whether the chosen
driving forces would make the industry more or less attractive by answering the three
questions in Section 3.6.3 (or in Hough, p. 89). (4) Of what importance are the results
of your overall evaluation and findings for strategy development of a company in
each of the four selected industries? (See Section 3.6.5). (5) Write a brief report on
your evaluation, findings and conclusions in this case.
3.7 What Market Positions Do Rivals Occupy Who Is Strongly Positioned and Who Is Not?
3.7.1 Introduction
Understanding which companies are strongly positioned and which are weakly positioned is important in
analysing industry competitive structure. "Strategic group mapping" is invaluable in comparing the market positions
of key industry members.
3.7.2 Using strategic group maps to assess the market positions of key competitors
(Pages 91 and 92 in Hough, Chapter 3).
A "strategic group" is defined as comprising of those industry members with similar competitive approaches and
positions in the market. Note the various criteria on which the concept of industry could be based.
Constructing a strategic group map involves the following steps:

1. Identify the competitive characteristics that differentiate firms in the industry
2. Plot the companies on a two-variable map using pairs of the identified differentiating characteristics
3. Assign companies that more or less fall into the same strategy space to the same strategic group
4. Draw circles around each strategic group, making the circle proportional to the size of the group's share in
total industry sales.
An example of a strategic group map for the retailing industry in the United States based on the two variables of
price/quality and geographic coverage appears in Figure 3.9 in Hough (p.92).
Note the cautionary observations that should be kept in mind when constructing a strategic group map.

3.7.3 What can be learned from strategic group maps?

Strategic group maps firstly reveal which companies are close competitors and which are more distant competitors.
As a general guideline, firms in the same strategic group are the closest competitors (Wal-Mart and Kmart), firms
in adjacent groups are the next closest competitors (Wal-Mart and Kmart versus Target), and firms in strategic
groups that are far apart hardly compete at all (Wal-Mart and Kmart versus Neiman Marcus and Saks Fifth Avenue).
Secondly, not all positions on the strategic group map are equally attractive, for the following two reasons:
1. Prevailing competitive pressures and industry driving forces favour some strategic groups and hurt others
2. The profit potential of different strategic groups varies relative to the strengths and weaknesses in each
group’s market position.
Again, summarise the main factors in support of both these reasons as well as the importance of the information
that strategic group analysis has for strategic planning and strategy development.
3.8 What Strategic Moves Are Rivals Likely To Make Next?

Introduction
Competitive intelligence about rivals' strategies, resource strengths and weaknesses, their leadership styles and
strategic thinking is imperative for any attempt to predict and anticipate the competitive moves competitors are
likely to make. Timely information allows a firm to revamp its existing strategy to capitalise on opportunities or to
develop effective countermoves.
3.8.1 Identifying competitors' strategies and resource strengths and weaknesses

Recall that the Section "Defining strategy" in chapter 1 in Hough (pp.4-5) outlines what to look for when identifying
a company's strategy. These are the aspects and issues on which to gather competitive intelligence about a
competitor's strategy, and which need to be updated on a regular basis.
In this regard, three assessments are required:
(1) Which competitor has the best strategy? Which the weakest?
(2) Which competitors are on the verge of gaining market share? Which are expected to lose ground?
(3) Which competitors are expected to rank among the industry leaders in five years? Are some
competitors geared to overtake current industry leaders?
In attempts to answer these questions and identify the underlying reasons for these questions, the information
obtained from strategic group analysis should be factored into the overall assessment.

3.8.3 Predicting competitors' next moves

To avoid being caught unawares, management should be alert to competitors' strategic moves. Of importance in
this regard are (1) competitors' views on the future of the industry (which might reveal something about their own
thinking), and (2) competitors' possible strategic moves. The latter could include the following:
(1) Which rivals seriously need to increase their market share, and what strategic options are they likely to
pursue?
(2) Which rivals have the resources and incentives to make strategic changes?
(3) Which rivals are good candidates for acquisition? And which rivals are looking to possible acquisitions?
(4) Which rivals are likely to enter new geographic markets?
(5) Which rivals are expected to expand their product lines to enter new, previously uncontested market
segments?
It is obvious that the above information is indispensable for a firm to pre-empt the strategic moves of competitors.
3.9 What Are The Key Factors for Future Competitive Success?
Industry key success factors (KSFs) are those competitive factors - product attributes, competencies, competitive
capabilities and market achievements - with the greatest impact on future competitiveness in the marketplace.
Identifying KSFs and distinguishing between more important and less important KSFs is a top strategic priority for
every company. Note the three illustrative industry examples in this regard (p.97) and the summary of KSFs in
Table 3.3 in Hough (p.98).
The informational outcomes of all the preceding industry analyses described in this topic so far, including the
analysis of driving forces, are invaluable in identifying the industry KSFs.
Now, in addition to the above, answers to the following three questions are also required to effectively identify
KSFs:
(1) On what basis do buyers choose between competing brands?
(2) What resources and capabilities do a company need to compete successfully?
(3) What shortcomings are certain to put companies at a severe competitive disadvantage?
In most cases, only a few KSFs will be of critical importance to a company, and identifying these correctly will
greatly contribute to formulating the correct competitive strategy to achieve competitive advantage.

3.10 Does The Outlook for the Industry Present the Company With an Attractive Opportunity?
The final step in evaluating the industry competitive environment is to use all available information to decide
whether the industry presents a company with a sufficiently attractive opportunity.
This conclusion could be based on the following factors:
1. The industry's growth potential
2. How competitiveness will affect industry profitability
3. How prevailing driving forces will affect industry profitability
4. The extent of risk and uncertainty in the industry future
5. Whether the industry faces any serious problems
6. The company's competitive position in the industry with regard to rivals
7. The company's ability to capitalise on rivals' weaknesses and create new opportunities
8. Whether the company can counteract industry-unattractive factors
9. Whether a company will be able to transfer its expertise to other industries in which it may have interests
To conclude, the following two considerations are of critical importance:

An industry will not be attractive or unattractive to the same degree for all industry participants
(1) The ability of a company to capitalise on attractive opportunities presented by an industry will largely
depend on the resource and competitive capabilities of the company to do so.
Surprisingly, only the first five factors relate to the external industry environment, while the remaining four refer to
the situation of the company as such.
3.11 Summary
Topic 3 has focused on industry competitiveness. The attractiveness of the industry for a company largely depends
on fundamental answers to the following seven questions:
1. What are the industry's dominant economic features?
2. What kinds of competitive forces are industry members facing?
3. What factors are driving industry change?
4. What market positions do rivals occupy?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for future competitive success?
7. Does the industry present attractive future prospects?
In conclusion we can safely state that there is no substitute for sound, comprehensive industry analysis to assess
this important element of a company's external environment. And, regrettably, there are no short-cuts either!

This concluding section summarises and provides a holistic and integrated summary of the industry environment
and the importance of industry competitiveness for strategy development. Ensure that you understand all these
important relationships.
Activity 3.2
1. For your own organisation, or an organisation that you are familiar with, use Porter’s
five-forces model to identify key industry threats and opportunities for the
organisation in its industry environment. Summarise and substantiate your findings.
Of what importance is this information for management?
2. Assume that you have been asked by your organisation – or an organisation that
you are familiar with – to do a presentation to a group of newly-appointed
management trainees in your organisation (or in the one that you are familiar with)
on how to analyse the industry environment.
(a) Construct a brief outline in terms of which you plan to do the presentation (purpose
of the presentation, its structure, the various aspects/issues to be included,
conclusions and recommendations).
(b) Write down the questions that you anticipate the newly-appointed management
trainees will ask you regarding Porter's five-forces analysis during the presentation.
(c) Write your responses to these anticipated questions.
Construct a “strategic group map” for the large retail sector in South Africa comprising
Pick ‘n Pay, Shoprite Checkers, Spar and Woolworths. Write a brief motivated report
on (1) the nature and importance of “strategic group maps” as an aid in industry
analysis and, (2) on your findings relating to the large retail sector in South Africa..
In Topic 3 we will focus on assessment of a company's internal environment.
Case Study
Read the case "New Balance South Africa" in Hough (pp.C101-C121) and answer the following
questions:
1. Evaluate the external business environment relevant to New Balance, and its internal
organisational environment, do a SWOT analysis for New Balance, and summarise your
findings.

2. Conduct a Porter's five-forces industry competitive analysis, and summarise your

findings on the attractiveness of the industry in which New Balance operates.
Based on the case information, describe and briefly explain the main competitive advantages of
New Balance. To what extent do these identified competitive advantages comply with the
generally-accepted requirements for sustainable competitive advantages?
GUIDELINES FOR THE SELF ASSESSMENT ACTIVITY

The point of departure for this activity is the specific South African industry or industry sector involved - commercial
passenger airline services, which also represents the core business of industry members. Following are brief
guidelines to answering the questions:
1. The common types of industry key success factors (KSFs) in the above industry include (Hough, pp. 96- 99):
(i) Technology-related KSFs
(ii) Manufacturing related KSFs
(iii) Distribution-related KSFs
(iv) Marketing-related KSFs
(v) Skills and capability-related KSFs
(vi) Other types of KSFs: cost structure and overall low costs; convenient locations; ability to provide fast,
convenient after-sales repairs and services; a strong financial structure and access to capital, especially
in capital intensive and/or high-risk industries; and patent protection)
It is immediately evident that manufacturing, and, to a large degree, distribution-related KSFs are not relevant, as
is patent protection. In the first answer, each of the relevant KSFs should be briefly described in terms of their
relevance to the commercial passenger air services.
2. Importance of the relevant KSFs:
● Technology-related KSFs - aircraft, maintenance and handling, air traffic control; other infrastructural
and navigational technology.
● Marketing-related KSFs - advertising, promotion, incentives (frequent-flyer and loyalty programmes;
online bookings; holiday packages)
● Skills and capability-related KSFs - pilots, navigators flight engineers; technicians, cabin crew, and IT
specialists.
● Other types of KSFs - cost control and low-cost structure to remain competitive; convenient locations in
terms of routes and destinations (highly regulated in South Africa); ability to provide fast, convenient
booking, baggage handling, passenger and administrative services; and being capital intensive, with
excellent financial backing)

In closing, although the above are industry key success factors, it means that the execution of and/or compliance
with these factors, especially when exceeding expectations, are potential sources of competitive advantage.
Of interest is the fact that in terms of an organisation's value chain, some of the above KSFs are core or primary
activities, and some support activities. Can you distinguish between them? Of what value would such a distinction
be for the management of Mango?

Unit
4: Evaluating a Company's
Resources and Competitive Position

LEARNING OUTCOMES OF THIS UNIT: ASSOCIATED ASSESSMENT CRITERIA OF THIS

UNIT:
 Explain the purpose and importance of internal  Think Points, Activities and Case Studies needs to be
analysis in strategic planning done in order to gain an understanding of the purpose
and importance of internal analysis in strategic
planning
 Explain the role of SWOT analyses in the  Think Points, Activities and Case Studies needs to be
internal analysis of a company done in order to gain an understanding of the role of
SWOT analyses in the internal analysis of a
 Explain and demonstrate the use of
company, explain and demonstrate the use of
competitive strength assessment
competitive strength assessment and identify and
 Identify and describe an organisation’s describe an organisation’s resource strengths and
resource strengths and competitive capabilities competitive capabilities
 Explain how value-chain analysis is used in  Think Points, Activities and Case Studies needs to be
assessing a company’s internal strengths and done in order to gain an understanding of the value-
weaknesses. chain analysis is used in assessing a company’s
internal strengths and weaknesses and the use of
 Describe the use of benchmarking in
benchmarking in assessing a company’s internal
assessing a company’s internal strengths and
strengths and weaknesses
weaknesses.
 Explain how an organisation’s resource  Think Points, Activities and Case Studies needs to be
strengths and competitive capabilities are done in order to gain an understanding of the
assessed to determine internal strengths and utilization of an organisation’s resource strengths and
weaknesses competitive capabilities to determine internal
strengths and weaknesses
 Explain the strategic issue and problems that  Think Points, Activities and Case Studies needs to be
merit front-burner attention. done in order to gain an understanding of the
strategic issue and problems that merit front-burner
attention

4.1 Introduction
4.2 How Well Is The Company’s Present Strategy Working?
4.3 What Are The Company’s Resource Strengths And Weaknesses And Its ExternalOpportunities
And Threats?
4.4 Are The Company’s Prices And Costs Competitive?
4.5 Is The Company Competitively Stronger or Weaker than Key Rivals?
4.6 What Strategic Issue and Problems Merit Front-Burner Managerial Attention?
4.7 Summary

 Hough, J, Thompson, AA, Strickland, AJ & Camble, JE. 2007. Crafting and
Executing Strategy, South African Edition. Boston: McGraw-Hill, Chapter 4.

4.1 Introduction
In Topic 3 we analysed the firm’s external environment, with emphasis on the industry competitive environment.
This topic deals with analysing a company’s internal environment to determine
how well the present strategy is working
- what the company’s resource strengths and weaknesses, and its external opportunities and threats are
- whether the company’s prices and costs are competitive
- whether the company is competitively stronger or weaker than its rivals
- which strategic issues and problems merit managerial attention
To address and identify the importance of these issues, we will employ SWOT and value-chain analyses as well
as benchmarking and competitive strength assessment.
4.2 How Well Is The Company’s Present Strategy Working?

The components of a single-business or business level strategy is illustrated in Figure 4.1. Note that the "Business
Strategy" at the centre of Figure 4.1 is the outcome of an assessment of the five surrounding sets of factors: (1)
Efforts to build competitive advantage, (2) planned proactive moves to outcompete rivals, (3) moves to respond
and react to changing environmental conditions, (4) scope of geographical coverage of activities, and (5)
collaborative partnerships.
Deciding on a business level strategy thus requires that the company’s competitive approach needs to be
qualitatively established in terms of factors such as cost leadership or differentiation, broad market or niche market,
geographic scope, whether vertically integrated or not, or involved in strategic partnerships or alliances.
However, while qualitative information is useful, analysis based on quantitative evidence and actual results in terms
of (1) strategic, financial and industry performance compared to the organisation’s stated objectives, and (2) the
performance of rivals, is preferable. Study the nine indicators (p.106) that could be used for this purpose.
THINK POINT
Are all nine indicators of how well a company’s strategy is working (Hough, p.106) related
to factors within the control of the individual firm, or are some of them external to the firm,
and thus not controllable by the firm itself. If so, is this distinction of any value to
management? Why? Or why not?

Strong strategic performance by a company generally does not require extensive changes in strategy, whereas
weak performance could be a sign of weak strategy and/or weak strategy execution. Table 4.1 (pp.107-108)
contains a summary of financial ratios generally used for analysing a company’s financial performance. (Ensure
that you know these ratios and are able to apply them in terms of income statement and balance sheet data.)
4.3 What Are The Company’s Resource Strengths And Weaknesses And Its External Opportunities
And Threats?
(Pages 108 to 119 in Hough, Chapter 4, and the Reading by Morris in Hough (pp.R41-R50))
4.3.1 Introduction
A company’s overall resource strengths and weaknesses as well as its external opportunities and threats are
assessed by way of a SWOT analysis, defined in the Core Concept (p.109), which provides invaluable
information for strategy formulation.
4.3.2 Identifying company resource strengths and competitive capabilities

A resource strength is something the company is exceptional at doing, or some attribute that enhances its
competitiveness in the industry/market. These resource strengths are often critically important assets and
determinants of the company’s competitiveness and ability to succeed in the marketplace. In this regard, study the
seven forms that could represent resource strengths (pp.109-110), and compile your own summary of these
various forms.
1. Assessing a company’s competencies and capabilities – what activities does it perform well?
A company’s resources and its competence in performing key activities – marketing, sales and customer
service; production operations; logistics and distribution; supply chain management; and R & D – could be
competitive strengths, especially if any one or more of these are performed far better compared to
competitors.
Note and study the distinction between the concepts "competence", "core competence" and "distinctive
competence". This distinction implies that a company’s resources and competencies are not all of equal
value. However, distinctive competencies in relation to a company’s rivals that do not possess them are
typically important sources of sustainable competitive advantage.
2. What is the competitive power of a resource strength? (Pages 112 to 114 in Hough, Chapter 4)
Resource strengths must be powerful in the marketplace to make a difference! The following tests are applied to
measure resource strengths:

1. Is the resource strength hard to copy?

2. Is the resource strength durable – does it have staying power?
3. Is the resource really competitively superior?
4. Can the resource strength be trumped by the different resource strengths and competitive capabilities
of rivals?
Most companies do not have many distinctive competencies – of the more successful companies may have one
or two at most, supported by sound core competencies.
4.3.3 Identifying company resource weaknesses and competitive deficiencies

A company’s resource strengths represent competitive assets, its resource weaknesses competitive liabilities. A
resource weakness, therefore, is something a company lacks compared to its rivals, and could result from
(1) inferior or unproven skills, including management and leadership skills, expertise or intellectual capital
(2) deficiencies in competitively important physical, organisational and other intangible assets, and
(3) missing or competitively inferior capabilities in key areas
Study Table 4.2 in Hough (p.115) which includes examples of potential resource strengths and competitive
capabilities as well as potential resource weaknesses and competitive deficiencies. Ideally, resource strengths and
competitive competencies should outweigh the weaknesses and deficiencies.
4.3.4 Identifying a company’s market opportunities

Market opportunity – especially in terms of growth and profit potential – is an important factor in influencing a
company’s strategy. A list which includes a number of potential market opportunities are presented in Table 4.2
(p.116).
Good market opportunities are more difficult to spot ahead of rivals in volatile markets than in relatively stable
markets. However, market opportunities considered by a company should match its financial and resource
capabilities, present competitive advantage, growth potential and profit potential. Where adequate resources and
capabilities are lacking, companies should let even attractive opportunities pass by.
Think Point
Identify what you consider to be “market opportunities” in the right hand column in Table
4.2 (p.116) and compare these with the views of Morris (in Hough, pp.R41-R50) regarding
the meaning of "opportunity”. Are the views of Morris of importance to management?

4.3.5 Identifying the external threats to a company’s future profitability

Threats from the external environment to a company’s competitive well-being and profitability could come from:
- emergence of cheaper or better technologies
- introduction of new products by rivals
- entry of lower-cost foreign competitors
- new regulations that are more burdensome to the company than to its competitors
- vulnarability to a rise in interest rates
- the potential of a hostile takeover
- unfavourable demographic shifts
- adverse changes in foreign exchange rates
- political instability or upheaval in a foreign country where the company has operations.
A list of potential external threats to a company’s future prospects appears in Table 4.2 (p.116). Macro-
environmental threats could be general (affecting all industry participants in more or less the same way), or more
specific, affecting certain types of companies within the industry more than others. See the example of the
implications of the September 11, 2001 terrorist attacks in the United States on various sectors of the
commercial airline industry and other related industries.
In the South African context, major power disruptions were experienced throughout South Africa between the latter
part of 2007 and into 2008. Where firms in a certain industry have the flexibility and choice of being either labour
intensive or capital intensive, major power disruptions are bound to impact differently on these two types of firms.
As Hough (p.117) states, it is management’s responsibility to identify threats to a company’s future, and to evaluate
what strategic actions could be taken pre-emptively to either (1) neutralise the impact of such threats, or (2)
possibly capitalise on opportunities that may be present in certain situations.
4.3.6 What do the SWOT listings reveal?

SWOT analysis allows managers to (1) draw conclusions from the information provided by the analysis, and (2)
translate these conclusions into strategic actions. Study the four steps in SWOT analysis that appear in Figure
4.2 (p.118).
As Hough states, the outcomes of SWOT analyses - the SWOT listings - are often revealed in the answers to the
following sets of questions:
(1) Does the company have an attractive set of resource strengths?
(2) How serious are the company’s weaknesses and competitive deficiencies?

(3) Do the overall strengths and competitive capabilities outweigh the company’s weaknesses and competitive
deficiencies?
(4) Does the company have attractive market opportunities that suit its resource strengths and competitive
capabilities?
(5) Are the threats alarming, or will the company be able to deal with them?
(6) All things considered, how strong is the company’s overall competitive situation? Where would the company
be ranked on a scale of 1 to 10? For what reasons? What aspects of the company’s situation are particularly
attractive? What aspects are of the most concern?
The final step in the SWOT analysis is to translate the information obtained from the diagnosis and evaluation of
the company’s situation into viable strategic actions. Hough (p.119) lists a number of questions that point to the
implications of SWOT listings for strategic actions:
(1) Which competitive capabilities need to be strengthened immediately? How should it be done?
(2) What actions should be taken to reduce the company’s competitive liabilities? How urgent are they?
(3) Which market opportunities should be top priority in future strategic initiatives? Why?
(4) What should a company do to guard against threats? How should it be done?
Study the intent of these questions as they relate to capitalising on opportunities based on strengths and resources,
and toward correcting deficiencies in resources and capabilities to improve competitiveness.
4.4 Are The Company’s Prices And Costs Competitive?

Introduction
The higher a company’s costs are compared to those of its closest competitors, the more vulnerable the company
becomes. This is the case in a relatively stable competitive environment. However, a greater challenge for
management in this regard emerges, where general cost increases affect industries across the board as happened
in South Africa during 2008. Companies within industries that manage to curtail costs under these conditions will
be better off than competitors that accept such increases as unavoidable.
While price-cost comparisons are particularly important in commodity-type markets where competition generally is
not based on product value, but on price, it also holds for industries with differentiated products to a certain extent.
In this regard, value-chain analysis and benchmarking are useful in determining whether prices and costs are
competitive.

4.4.1 The concept of company’s value chain

The business operations of every company consists of a number of related activities that combine to form a
company’s value chain. The value chain also includes an allowance for profit which forms part of the price the
customer will pay.
A company’s value chain comprises the primary activities as well as the supporting activities required to create
customer value as illustrated in Figure 4.3 (p.121).
The primary activities are the main value-creating activities while the support activities are necessary to enhance
the primary activities, as explained in the examples of companies competing in various industries (pp.121-122).
Of critical importance is that a company’s primary and support activities identify the major components of its cost
structure, and form the basis for the process of “activity-based cost accounting”. The cost of each activity in the
value chain, as well as the overall cost, should be compared to that of the company’s rivals, where the technique
of “benchmarking” becomes invaluable. The company’s relative, overall cost position should thus be compared to
those of its competitors.
4.4.3 Why the value chains of rival companies often differ

Because the manner in which companies perform their activities, and for a number of other important reasons, the
value chains of competing firms in an industry often differ substantially, which complicates attempts at neat
comparisons of companies‘ value chains.
Study and summarise the various reasons that could result in vastly differing value chains cited in this section with
specific reference to tyre manufacturers (pp.122-123).
4.4.4 The value-chain system for an entire industry

It is evident that the value chain of an individual company is “embedded” in a larger system of industry-related
activities where the latter could include the value chains of suppliers, and - the value chains of distributors
The value chains and cost structures of suppliers and or distributors, where they are involved, will obviously impact
on a company’s overall value chain and cost structure as indicated in Figure 4.4 (p.124). This creates a great
incentive for companies to work closely with its suppliers and distributors, as illustrated by the various industry
examples referred to in this section.

It is therefore imperative that managers understand the concept of industry value chain and the entire industry
value chain of which their companies are part. Illustration Capsule 4.1, “Estimated value-chain costs for recording
and distributing music CDs through traditional music retailers” confirms these implications in the case of a specific
industry sector. Ensure that you understand how company value chains ‘fit’ into industry value chains and why
company value chains within an industry could differ.
Activity 4.1
Construct a value chain for a company that has its own vineyards and cellars,
and produces, distributes and markets its wine locally as well as overseas.
4.4.5 Activity-based costing: A tool for assessing a company’s cost competitiveness

Activity-based costing is used to determine the costs of all value-chain activities once they have been identified.
Table 4.3 (p.126) illustrates the difference between traditional cost accounting and activity-based costing.
Company specific situations will dictate how broad or how narrow (amount of detail) the cost comparisons in value-
chain analysis should be.
Once realistic cost estimates have been developed for a company’s activities, the costs for the various activities
should be compared with those of the company’s competitors. This comparison leads to the concept of
benchmarking.
4.4.6 Benchmarking: A tool for assessing whether a company’s value-chain cost are in line (Pages 126 to
129 in Hough, Chapter 4)
Benchmarking first of all provides hard evidence of whether a company is cost-competitive when comparing the
costs of its activities against those of its rivals.
Benchmarking is also an effective tool for learning which companies are best at certain activities, and then using
their techniques or so-called “best practices” to improve the cost and effectiveness of the company’s own internal
activities.
Combining benchmarking and best practices takes both costs and effectiveness of operations into account. Study
this section (p.127) to determine what benchmarking and its use in identifying best practices involve, with specific
reference to the examples of Xerox and Toyota in this regard.

The difficult part is obtaining the relevant outside information on which to base benchmarking. Various
information sources and initiatives could be used and adopted, but an effective approach that has become
desirable is to use the “anonymous” benchmarking information published by international consulting firms. Since
ethical conduct remains important at all times, guidelines for “Benchmarking and ethical conduct” is provided in
Illustration Capsule 4.2 (p.128-129).
4.4.7 Strategic options for remedying a cost disadvantage

(Pages 129 to 131 in Hough, Chapter 4).
1. Introduction
Value-chain analysis and benchmarking can show how much of a cost advantage or disadvantage a company has
over its rivals, and which cost components are responsible in each case. The three areas in a value chain where
important cost differences could occur include: (1) a company’s own activity segments, (2) suppliers’ part of the
industry value chain, and (3) the distribution channel part of the industry value chain. This information is critical to
adapt or review a company’s current strategies. A key element here is: the efficiency of value-chain management
compared to that of competitors.
2. Remedying an internal cost disadvantage

When value-chain activity costs are higher than those of rivals, management can use any of the eight
approaches listed in this section (p.130) to restore cost efficiency. Study and summarise these approaches.
3. Remedying a supplier-related cost disadvantage

Suppliers could be enticed to lower their prices, switching to lower-priced substitute products, and collaborating
with suppliers to find mutual cost-saving opportunities, for example switching to just-in-time deliveries. Where cost
reduction on the supplier side is not possible or difficult to achieve, the company should look to the distribution
channel for such opportunities.
4. Remedying a cost disadvantage associated with activities performed by forward channel allies
Three ways to combat cost disadvantages in the forward channel or distribution side of the industry value chain
include:
1. Pressure dealer-distributors and other forward channel allies to reduce costs
2. Work closely with forward channel allies to identify win-win opportunities to reduce costs
3. Change to a more economical distribution strategy

Should such efforts fail, focus on greater overall efficiency and/or manage the disadvantage as effectively as
possible.
i Translating proficient performance of value-chain activities into competitive advantage

(Study pages 131 and 132 in Hough, Chapter 4)
A company that manages its value-chain activities better than its competitors has a good chance of achieving a
sustainable competitive advantage. This is exactly what is shown in Figure 4.5 (p.131), involving two alternative
approaches:
1. Beat rivals in performing value-chain activities more proficiently
2. Beat rivals by performing value-chain activities more cheaply.
In the first alternative, core competencies and maybe distinctive competencies that rivals do not have are exploited.
In the second alternative, simply executing activities more efficiently, resulting in lower costs than rivals.
Summarise the rest of this section, identifying the main aspects related to each one of the above approaches and
explaining why they present viable options to a company.
4.5 Is The Company Competitively Stronger or Weaker than Key Rivals?

4.5.1 Overview
(Pages 132 to 135 in Hough, chapter 4)
Despite the importance of value-chain analysis and benchmarking, a more comprehensive assessment of a
company’s overall competitive strength needs to be made. The answers to the following two questions are critically
important in this regard:
1. How does the company rank relative to competitors on each of the important factors that determine market
success?
2. All things considered, does the company have a net competitive advantage or disadvantage
compared to its major competitors?
These two questions can be answered by developing a “competitive strength assessment” involving quantitative
strength ratings for the company and its key competitors in terms of
each industry key success factor (KSF), and
- each competitive resource capability required
Most of the required information for this purpose comes from the previous analyses that we have discussed thus
far.
The following steps are required for a competitive strength assessment:

Step 1: Make a list of the industry’s key success factors and most important measures of a competitive strength
or weakness (6 to 10 measures) Step 2: Rate the company and its rivals on each factor, preferably
using numerical rating scales (eg 1 to 10)
Step 3: Sum the strength ratings on each factor to obtain an overall measure of competitive strength for each
company being rated
Step 4: Use the overall strength ratings to draw conclusions about size and extent of the company’s net
competitive advantage (or disadvantage), and note specific areas of strength or weakness
A hypothetical example of competitive strength assessment is illustrated in Table 4.5 (p.134), which includes an
“unweighted” and a “weighted” competitive strength assessment. Study this example with reference to Table 4.5
thoroughly, making sure that you understand the premises on which this approach is based, and how to apply this
approach in a practical situation.
The following need to be observed regarding competitive strength assessments:
● The bigger the difference between a company’s overall rating and the scores of lower-rated rivals, the
greater the implied net competitive advantage, and vice versa.
● The weighted rating system is far superior compared to the unweighted rating system because different
measures of competitive strength are highly unlikely to be of equal importance – it is obvious that the
determinants of competitive strength will be different for firms competing on the basis of low cost compared
to firms competing on the basis of product differentiation
● Assigned weights to factors can differ, but their sum must equal 1,0.
● Comparisons of the overall strength scores indicate which companies are in the strongest and weakest
competitive positions, and who has how big a net competitive advantage over whom.
4.5.2 Interpreting the competitive strength assessments

Competitive strength assessments provide useful conclusions about a company’s competitive situation in its
industry. This assessment also reveals the strengths and weaknesses of the company as well as of its
competitors. Also, the overall strength ratings provide a useful basis for designing or revising the company’s
strategies. This aspect in particular is discussed in detail in the rest of this section (Hough, pp.135-136), and must
be summarised for your own purposes.
Group Activity 4.1

Conduct a “competitive strength assessment” involving quantitative, weighted
strength ratings to compare Mercedes-Benz with its main competitors, BMW,
Lexus, Volvo, Cadillac and Rover in the luxury car segment in South Africa by
identifying relevant industry key success factors (KSFs), and

- each representative company’s competitive resource capabilities
Follow the four steps explained in Hough (p.133-135) and do the following:
1. Construct a “Weighted Competitive Strength Assessment” as illustrated in

Table 4.5 (p.134) in Hough.
2. Compare the calculated “Weighted overall strength rating” for each of the
companies, and interpret the results of your findings.
Given that this technique combines industry key success factors and firm
resource capabilities, describe and summarise the “potential market
opportunities” (Hough, p.116) for each of these companies.
4.6 What Strategic Issue and Problems Merit Front-Burner Managerial Attention?
The final, important step is to identify exactly what strategic issues managers need to address and resolve to be
competitive and profitable in the long term. This requires using the results and other relevant information obtained
from all the preceding analyses. Pinpointing the strategic issues that need attention will enable management
to decide what actions to take to maintain or extend the company’s competitiveness and profitability in the
long term viz-a-viz its competitors.
Study this important section, paying particular attention to the three “Core Concepts” listed here.
In closing, if the information and conclusions point to minor problems, the existing strategy possibly only needs to
be fine-tuned. If these problems are serious, the challenge for management is to formulate and decide on improved
strategies to ensure sustainable competitive advantage.
Explain the purpose and importance of internal analysis of a company’s strengths

and weakness in strategy development and strategic management.
4.7 Summary
Good internal company situation analysis, like good macro-environmental and good industry and competitive
analyses are imperative for good strategy development. However, the above analyses are in effect only a means
to an end. The next logical step is to formulate viable sustainable strategies to ensure that the company’s long-
term objectives are realised. This is the challenge that will be addressed in Chapter

Activity 4.2
(a)Obtain the most recent Annual Report of a company listed on the Johannesburg
Securities Exchange (JSE) and perform a financial ratio analysis using data from
the Company’s Annual Financial Statements and the framework in Hough (p.107).
What do you conclude regarding the company’s financial performance? Explain.
(b) Is it possible to arrive at a conclusive answer in the absence of industry averages

as a basis of comparison? Why or why not?
Construct a framework to conduct a weighted competitive strength assessment for

the large commercial bank sector in South Africa comprising ABSA, Standard Bank,
Nedbank and First National Bank (FNB). (It may be necessary to obtain the Annual
Reports of their Holding companies in the case of FNB and Standard Bank as part of
your informational inputs.) Complete a “Key success Factor/Strength Measure”
column, and indicate the weights and scores that you would use to complete the
weighted competitive strength assessment table. Explain the process on which your
assessment is based. Analyse, evaluate, interpret and compare your results, and
briefly summarise your findings
Case Study
Read the case "Southwest Airlines: Culture, Values and Operating Practices",
and answer the following questions:
1. What were Southwest's internal resource strengths and competitive capabilities?
2. Did Southwest have any resource weaknesses and competitive deficiencies?
3. Operating in a highly regulated industry, how did Southwest identify market

opportunities? Did Southwest capitalise on these opportunities better than its
competitors?
What are the future prospects for Southwest Airlines? Motivate your answers.

Guidelines For Self Assessment Activity
Figure 4.1 in Hough (p.105) serves as a broad frame of reference for this activity. As Hough states (p.105-106),
"the best quantitative evidence of how well a company's strategy is working comes from its results". Basically, this
means (1) whether the company is achieving its stated financial and strategic objectives, and (2) whether the
company is an above-average industry performer. To meet these requirements, the company must have adequate
and appropriate internal resources and possess superior capabilities, which should enable the company to
capitalise on external opportunities and counter external threats better than competitors do. The purpose of the
internal analysis of a company's strengths and weaknesses (as explained in Hough, pp.108-114) is essentially to
assess the resource and capability endowments of the company to be competitive in its industry and market(s). In
aligning its internal operations, culture, leadership, organisational structure and governance with its strategy and
external environment better than competitors do will undoubtedly increase the organisation's chances of success.

Unit
5: The Five Generic Competitive
Strategies


UNIT:
 Assess the advantages, disadvantages and risk  Think Points, Activities and Case Studies needs to
of each of the generic strategies in certain be done in order to gain an understanding of the
circumstances advantages, disadvantages and risk of each of the
generic strategies in certain circumstances
 Discuss and explain the characteristics of a  Think Points, Activities and Case Studies needs to
focused low-cost strategy be done in order to gain an understanding of the
characteristics of a focused low-cost strategy and
 Discuss and explain the characteristics of a low-
the characteristics of a low-cost provider strategy.
cost provider strategy
 Discuss and explain the characteristics of a  Think Points, Activities and Case Studies needs to
broad differentiation strategy be done in order to gain an understanding of the
characteristics of a differentiation strategy and the
 Discuss and explain the characteristics of a
characteristics of a focussed differentiation strategy.
focused differentiation strategy
 Discuss and explain the characteristics of a best  Think Points, Activities and Case Studies needs to
cost provider strategy be done in order to gain an understanding of the
characteristics of a best cost provider strategy.
 Think Points, Activities and Case Studies needs to

be done in order to gain an understanding of the
characteristics of a best cost provider strategy
 Explain the situation(s) in which each of the  Think Points, Activities and Case Studies needs to
generic competitive strategies would be be done in order to gain an understanding of the.
appropriate. situation(s) in which each of the generic competitive
strategies would be appropriate

5.1 Introduction
5.2 The Five Generic Competitive Strategies

5.3 Low-Cost Provider Strategies
5.4 Broad Differentiation Strategies
5.5 Best Cost Provider Strategies
5.6 Focused (or Market Niche) Strategies
5.7 The Contrasting Features Of The Five Generic Competitive Strategies: A Summary
5.8 Summary

 Hough, J, Thompson, AA, Strickland AJ & Gamble, JE. 2007. Crafting and Executing
Strategy, South African edition, Boston: McGraw-Hill, Chapter 5.
 Markides, C. 2004. What is strategy and how do I know I have one? Business Strategy
Review. Vol.15, No.2 (Summer). (Reading 1 in Hough, pp.R3-R12).
 Kim, WC & Mauborgne, R, 2005. Value Innovation: a leap into the blue ocean. Journal
of Business Strategy,
 Vol.26, No.4. (Reading in Hough, pp.R51-R58

5.1 Introduction
In Topic 1 the concept of 'strategy' was broadly defined as a unique, innovative action plan to attain competitive
advantage over rivals in the process of value creation.
As Hough states:
There are many routes to competitive advantage, but they all involve giving buyers what they perceive as superior
value compared to the offerings of rival sellers (p.140).
Superior value can mean a lot of things, but whatever form it takes, it nearly always requires capitalising on a
company's competitive resources and capabilities better than its rivals do.
We accordingly describe the five basic competitive strategies that firms can deploy in their quest for sustainable
competitive advantage and provide guidelines for the selection of appropriate strategies to suit unique company
requirements.
5.2 The Five Generic Competitive Strategies

No two companies are bound to have the exact same strategies. The countless variations of competitive strategies
that we find, even within the same industry, are mainly due to differences in leadership style, in the strategic
approaches that companies adopt, and to their own unique circumstances. However, when it gets down to basics,
the most important differences between competitive strategies depend on (1) whether a company's market target
is broad or narrow, and (2) whether the company is pursuing a strategy based on low costs or on product
differentiation.
The five generic competitive strategies are:

1. A low-cost provider strategy
2. A broad differentiation strategy
3. A best-cost provider strategy
4. A focused (or market niche) strategy based on low costs
5. A focused (or market niche) strategy based on differentiation
Each of these five generic strategies relates to a different market position as indicated in Figure 5.1 in Hough
(p.142). These competitive strategies are now discussed in more detail in the sections that follow.

5.3 Low-Cost Provider Strategies

5.3.1 Introduction
A low-cost provider's strategic aim is significantly lower costs than competitors, while still ensuring to include
product features and services that buyers consider essential. The key, however, is to achieve sustainable cost
advantages that rivals find difficult to copy, imitate or match.
A company has the following two options to achieve low costs over rivals and still retain profitability: (1) To use the
lower cost base to underprice competitors and attract cost-sensitive buyers in greater volume. (2) To maintain
present price and market share, and use lower cost to earn a higher profit margin on units sold. Study Illustration
Capsule 5.1, "Nucor Corporation’s low-cost provider strategy", for the approach to gaining low-cost leadership.
5.3.2 The two major avenues for achieving a cost advantage (Pages
144 to 150 in Hough, Chapter 5)
Two ways of achieving a low-cost advantage over rivals exist:
1. Do a better job than rivals of performing value-chain activities more cost-effectively
2. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities.
1. Cost-efficient management of value-chain activities (Pages

145 to 147 in Hough, chapter 5)
The first approach, to outcompete rivals on cost, could involve the following actions:
1. Attempting to capture all possible economies of scale
2. Taking full advantage of learning/experience effects
3. Trying to operate facilities at full capacity
4. Pursuing efforts to boost sales volumes
5. Improving supply chain efficiency
6. Substituting the use of low-cost for high-cost raw materials and component parts
7. Using online systems and sophisticated software to achieve operating efficiencies
8. Adopting labour-saving operating methods
9. Using the company’s bargaining power vis-a-viz suppliers to gain concessions
10. Being alert to the cost advantages of outsourcing and vertical integration
Apart from the above, further actions to reduce cost levels could include:

● Having lower specifications for purchased materials, parts, and components compared to rivals
● Using only low-cost distribution channels, and avoiding high-cost distribution channels
● Deciding to use the most economical delivery methods for customer orders.
These possible actions are of extreme importance when pursuing a low-cost strategy, and you should therefore
summarise the main aspects of each of the above actions for your own purposes.
2. Revamping the value chain to curb or eliminate unnecessary activities

Cost advantages can be achieved by reconfiguring the value chain in the following six ways:
1. Cutting out distributors and dealers by selling directly to customers
2. Replacing certain value-chain activities with faster and cheaper online technologies
3. Streamlining operations by eliminating low value-added or unnecessary work
4. Relocating facilities so as to reduce the need for shipping and handling activities
5. Offering a frills-free product
6. Offering a limited product line as opposed to a full product line
Unlike the first approach of cost-saving, reconfiguring the value chain in any of the above ways could well eliminate
costs, but also require some cost to execute. Any such action(s) should thus have a net advantage to be beneficial
from a competitiveness point of view, and managers would be advised to conduct a cost-benefit analysis before
implementing any of the above action plans.
You are once again advised to summarise the six actions outlined above, as well as their implications, as ways of
eliminating value-chain activities and thus reducing costs.
3. Examples of companies that revamped their value chains to reduce costs

Study and summarise these extremely relevant examples, indicating in each case the main factor(s) that were
employed to eliminate value-chain activities and/or reduce costs. It is encouraging to observe that the
‘theoretical’ proposals suggested in the previous two sections do have practical value for business enterprises.
5.3.3 The keys to success in achieving low-cost leadership

The "Core Concept" in this section states that “success in achieving a low-cost edge over rivals comes from
outmanaging rivals in figuring out how to perform value-chain activities most cost-effectively and eliminating or
curbing non-essential value chain activities”.

Apart from the requirement of a thorough analysis of all the company’s value chain activities, key words in the
above quotation are “outmanaging” and “figuring out”. To be effective in a strategy context, “figuring out” should
imply “strategic thinking”, and “outmanaging” the exceptional execution of unique, winning strategies by
management.
Note in this discussion the importance of pro-active restructuring of the value chain, and the quest for continuous
improvement. The example of Wal-Mart’s achievements confirm the extent of the advantages to be gained when
management focuses on the keys to success in achieving low-cost leadership.
5.3.4 When a low-cost provider strategy works best

According to Hough, a low-cost provider strategy is particularly powerful when:
1. Price competition among rival sellers is particularly vigorous
2. The products of rival sellers are essentially identical and suppliers are readily available from any of several
eager sellers
3. There are few ways to achieve product differentiation that have value to buyers
4. Most buyers use the product in the same ways
5. Buyers incur low costs in switching their purchases from one seller to another
6. Buyer numbers are large and they have significant power to bargain down prices
7. Industry newcomers use introductory low prices to attract buyers and build a customer base (recall the
entrance of Mango into the South African commercial airline industry).
The importance of the above factors should not be underestimated – they reflect the conditions for success when
pursuing a low-cost provider strategy. In closing, the more price sensitive the buyers are the more appealing a
low-cost provider strategy becomes, and companies basically compete on the basis of cost and price – not product
differentiation. The key here is for the company to remain competitive and profitable within these parameters.
5.3.5 The pitfalls of a low-cost provider strategy

The major danger of a low-cost provider strategy is over-eager price-cutting that will lower overall profitability. A
low-cost provider strategy will only lead to higher profitability when
(1) price-cuts are less than the size of the cost advantage, and
(2) the gain in sales volume is large enough to generate a bigger total profit despite lower profit margins
per unit sold.
A second danger is not emphasising possibilities of cost-advantages that are unique and difficult for rivals to imitate
or match – cost advantages should preferably be sustainable.

A third danger is becoming too fixated on cost reduction. There must be a balance between low costs and prices
on the one hand, and products that have sufficient attributes to make them attractive to buyers.
Even if these dangers are avoided, there still is risk. Unexpected technological break-throughs or reconfigured
industry value chains could neutralise a low-cost provider’s cost advantages and profitability. Continuous
environmental scanning and an alert management will go a long way in ensuring that companies are not totally
caught off guard.
Think Point
With reference to Illustration Capsule 3.1, “Can Mango Give Low-Cost Rivals the Pip?”
(in Hough, pp.66-67), explain why Mango and Kulula.com have adopted low-cost
providers strategy. Are these the right strategic choices for the two airlines? Explain.
5.3.6 Summary
The low-cost provider strategy, one of the five generic competitive strategies, was discussed in detail in this section.
We explained the strategy in detail, outlined the major ways for achieving cost advantage, identified the key
success factors for this strategy, explained when this strategy would be most appropriate, and cautioned about
potential pitfalls regarding this strategy.
5.4 Broad Differentiation Strategies

5.4.1 Introduction
Differentiation of products become necessary when buyers’ preferences and needs for certain types of products
are too diverse to be satisfied by standardised products with minimal differentiating features or attributes.
The essence of a broad differentiation strategy is to be unique in ways that are valuable to and satisfy the varying
needs of a wide range of customers while providing a sustainable competitive advantage over the product offerings
of rivals.
As Hough (p.152) states, successful differentiation allows a firm to
● command a premium price for its product, and/or
● increase unit sales based on product differentiating features that will attract new buyers away from rivals,
and/or
● gain buyer loyalty to the firm’s brand (based on some buyers bonding with the company and its products)

Differentiation enhances profitability when the added product price due to differentiation is greater than the cost of
achieving the differentiation, and especially where rivals cannot easily copy or match the differentiating features.
We now discuss this important strategy in greater detail.
5.4.2 Types of differentiation themes

Study the various avenues for pursuing differentiation, and the extremely relevant illustrative examples provided
in this section.
Whatever differentiation theme is ultimately adopted, the differentiation features should either be too costly or too
difficult for rivals to imitate or copy. This is where unique product innovation and technical as well as quality
superiority could play a major role in attaining a sustainable competitive advantage (Dobni, 2008:43-50).
5.4.3 Where along the value chain to create the differentiating attributes
Differentiating opportunities can occur in activities along the entire value chain of the company, and include the
following:
1. Supply chain activities that spill over and affect the performance or quality of the company’s products.
2. Product R & D activities that aim at improved product designs and performance features, wider product
selections, and expanded end-use applications.
3. Production R & D and technology-related activities that permit custom-order manufacturing at efficient cost
levels.
4. Manufacturing activities that reduce product defects, prevent premature product failure and extend
product life.
5. Distribution and shipping activities that allow for fewer warehouse and on-the-shelf stockouts
6. Marketing, sales and customer service activities that result in superior technical assistance to buyers, and
more efficient maintenance, repair services, and dissemination of information to customers.
In closing, management should be acutely aware of all potential sources of differentiation that could generate
sustainable competitive advantage.
5.4.4 The four best routes to competitive advantage via a broad differentiation strategy
A broad differentiation strategy can deliver unique buyer value in four basic ways:
1. By incorporating product attributes and user features that lower the buyer’s overall costs
2. By incorporating features that increase product performance

3. By incorporating features that enhance buyer satisfaction in non-economic or intangible ways.

4. By delivering value to customers through product differentiation on the basis of competencies and
competitive capabilities that rivals do not have, or find too costly or difficult to match, or cannot match.
Summarise the essence of these four routes noting the illustrative examples that are provided in this section.
Think Point
Can you identify South African companies that have pursued one or more of
these four ways to create and deliver values through differentiation? .
5.4.5 The importance of perceived value and signalling value (Pages 155 in Hough, Chapter 5)
The relatively higher prices of differentiated products reflect the value actually delivered to the buyer and the value
perceived by the buyer. However, a variety of factors exist that signal price to the consumer. Hough states that
such signals of value may be as important as actual value in cases where (1) buyers are first-time purchasers, (2)
repurchases are infrequent, and (3) buyers are unsophisticated. Recall our comments regarding the importance
of utility that customers see in and expect from products as discussed in Section 2.2.3. of the Study guide.
5.4.6 When a differentiation strategy works best (Pages 156 and 157 in Hough, Chapter 5)
Broad differentiation strategies work best where:
1. Buyer needs and the uses of the product are diverse.
2. There are many ways to differentiate the product or service, and many buyers perceive these differences as
having value.
3. Few rival firms are following a similar differentiation approach.
4. Technological change is fast-paced and competition revolves around rapidly-introduced product features.
Summarise the main tenets of the circumstances that favour broad differentiation strategies.
5.4.7 The pitfalls of a differentiation strategy

(Page 157 and 158 in Hough, Chapter 5)
Major reasons why differentiation strategies can fail include the following:
1. When competitors are able to copy most or all the appealing features or attributes quickly
2. The company’s differentiation strategy produces a “so what?” market reception because buyers see little
value in the unique attributes of a company’s product.
3. Overspending on efforts to differentiate the company’s product offering, thus eroding profitability.

In addition, other dangers or mistakes can include:

● Overdifferentiating so that product quality or service levels actually exceed buyer’s needs and
expectations
● Attempting to charge too high a price, where the premium for differentiation is too high.
● Being too conservative (timid) and not striving to open up meaningful gaps of quality or service
performance compared to rivals.
Once again, management should be informed on and be sensitive to these potential pitfalls in order to pre-empt
their potential disadvantages and devise strategies to eliminate or overcome such deficiencies.
5.5 Best Cost Provider Strategies

5.5.1 Introduction
Best-cost provider strategies aim at giving customers relatively more value for money than with low-cost provider
strategies.
A company achieves best-cost status through an ability to incorporate attractive or upmarket attributes and features
at a lower cost than rivals can – it is essentially the low-cost provider of relatively upmarket products.
The competitive advantage of a best-cost provider is based on lower cost than rivals in incorporating upmarket
attributes, and underpricing rivals whose products have similar upmarket attributes. Refer to Figure 5.1 (p.142)
where the best-cost provider operates in the middle ground between low-cost and broad differentiation
strategies, as well as between broad market and narrow market niche strategies. Best-cost provider strategies are
accordingly seen as a type of hybrid strategy. Study and summarise the remainder of this section (p.159) to capture
the nature and characteristics of a best-cost provider strategy as a means of serving value-conscious buyers at
prices lower than competitors can.
5.5.2 When a best-cost provider strategy works best

Hough states that a best-cost provider strategy works best in markets where buyer diversity makes product
differentiation the norm, and where many buyers are also sensitive to price and value, the strategic options being:
medium quality product at a below-average price, or
- a high quality product at an average or slightly higher price

Recall that a winning strategy, even in this case, must always be matched to a company’s resource strengths and
capabilities. Study Illustration Capsule 5.2 “Toyota’s best-cost producer strategy for its Lexus line in the USA”
which provides an excellent example in this regard.

5.5.3 The big risk of a best-cost provider strategy

The biggest danger of a best-cost provider is becoming trapped between firms pursuing low-cost provider
strategies and differentiation strategies. The optimal balance between low or affordable costs and value
attributes is therefore critical for a best-cost provider to remain competitive and profitable.
5.6 Focused (or Market Niche) Strategies

5.6.1 Introduction
Concentrated attention on a narrow segment of the total market distinguishes focused strategies from broad low-
cost leadership or broad differentiation strategies. The target market segment, or niche, can be based on
geographic uniqueness, specialised requirements, or special product attributes. Some examples are Google,
DSTV’s History Channel, microbreweries, local bakeries, and local owner-managed retail boutique stores.
5.6.2 A focused low-cost strategy

A focused strategy based on low cost aims at securing competitive advantage by serving buyers in target markets
or niche markets at a lower cost and price than competitors.
The methods and ways of achieving cost advantage are very similar to those for low-cost leadership – keeping the
costs of value chain activities lower than rivals do, and eliminating or bypassing certain value chain activities to
lower costs better than rivals can do. The real difference between a low-cost provider strategy and a focused low-
cost strategy is the size of the buyer group.
Study the type of firms providing distinctive products or services to small market groups outlined in this section, as
well as Illustration Capsule 5.3, ”Formula 1 Hotels’ focused low-cost strategy” as an extremely relevant example
in this regard.
5.6.3 A focused differentiation strategy

A focused differentiation strategy aims at securing a competitive advantage with a product offering carefully
designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to
a broad differentiation strategy aimed at many buyers). To attain competitive advantage, the company must
perform better than its rivals in serving the needs of small buyer groups looking for special product attributes.

Study the characteristics of and requirements for a successful focused differentiation strategy, based on the
examples provided in this section as well as Illustration Capsule 5.4, “1st for Women places women’s insurance
first”.
5.6.4 When a focused low-cost or focused differentiation strategy is attractive

These two focused strategies are appropriate when one or more of the following conditions are met:
1. The target market niche is big enough to be profitable and offers good growth potential.
2. Industry leaders do not see that having a presence in the niche is crucial to their own success.
3. It is costly or difficult for multi-segment competitors to make resources and capabilities available to meet
the specialised needs of a small group of buyers while at the same time having to satisfy the
expectations of their mainstream customers.
4. The industry has many different niches and segments, allowing firms with focused strategies to
selectively pick lucrative, small market niches for themselves, and the more uncontested these market
segments, the better.
5. Few, if any, other rivals are attempting to specialise in the same market segment or niche.
6. The firm with a focused strategy has a reservoir of customer goodwill and loyalty.
The advantages of focusing all energy and efforts on a single market niche can be considerable, especially where
smaller firms cannot compete with large firms on their terms in the broader markets they serve. However, firms
with a focused strategy are vulnerable and at risk if anything goes wrong in the small market segment they serve.
5.6.5 The risks of a focused low-cost or focused differentiation strategy

Focused strategies involve a number of risks, which include the following:
1. The chance that competitors will find effective ways to match the focused firm’s capabilities in serving the
niche market. Study this danger to focused firms with reference to the examples in the hotel and
accommodation industry where multi-brand offerings are prevalent.
2. Employing a focus strategy runs the risk that preferences and needs of niche members can shift over time
to other product or service attributes.
3. The market segment or niche may become so attractive that it draws competitors, intensifying the rivalry
and splintering the segment profits.
In considering focused strategies, much attention should be given to the possible advantages as well as the
potential disadvantages and risks of these particular strategies.

5.7 The Contrasting Features Of The Five Generic Competitive Strategies: A Summary
(Pages 165 to 168 in Hough, chapter 5, and the Reading by Markides in Hough (pp.R3-R13))
Out of the five possible competitive generic strategies, the specific strategy that a company pursues
● positions the company differently in its market and competitive environment
● establishes the central theme and basis according to which the company will outcompete its rivals
● serves as the framework and guideline for the rest of the company’s strategy or strategies
● points to different ways of experimenting and adapting the basic strategy
● involves different means of sustaining strategy as illustrated in Table 5.1 (p.166), which clearly outlines the
distinguishing features of the five generic strategies in terms of criteria such as:
● Strategic target
● Basis of competitive advantage
● Product line
● Production emphasis
● Marketing emphasis
● Keys to sustaining the strategy
Activity 5.1
It is stated above that out of the five possible competitive generic strategies, the specific
strategy that a company pursues inter alia "positions the company differently in its
market and competitive environment”. Evaluate this statement in terms of the views of
Kim and Mauborgne in ‘Blue Ocean’ strategy? Explain your findings.
Furthermore, the choice of strategy also determines

● how the business will be operated, and
● how value-chain activities must be managed (for example in terms of a low-cost provider strategy as
compared to a differentiation strategy)
Thus the most important decision for management is which generic competitive strategy to choose, because it will
drive the rest of the strategic actions of the firm.
The greatest danger in choosing a competitive strategy is that managers will be undecided on which generic
strategy – in terms of its product offering and the industry in which it is involved – to select, and opt for middle-
ground strategy or “stuck-in-the-middle” strategy that is a poor compromise between a low-cost and a
differentiation strategy, and not a best-cost provider strategy in the true sense of the word.

“Each of the five generic competitive strategies positions the company differently in
its market and competitive environment” (Hough, p.155).
With reference to this statement, briefly compare the five generic strategies on the
basis of their (i) strategic target, (ii) competitive advantage, and (iii) market emphasis.
What are your observations in this regard? Explain.
Group Activity 5.1

Read and critically evaluate the Reading by Markides, “What is strategy and how do
you know you have one?” (Hough, pp R3-R12). Based on this approach of Markides,
explain:
(1) What he means by ‘strategy must decide on a few parameters’
(2) How to create a reinforcing strategic mosaic by putting all relevant strategic choices
together
(3) The importance of strategic fit and supportive organisational environment
(4) Why no strategy remains unique forever
Summarise your findings in a brief report that will convey the essence of this approach
to the management of a company.
5.8 Summary
Managers have to decide which one of the five generic competitive strategies they want to pursue. This decision,
however, should be based on the industry characteristics and the particular product offerings of the company
(whether standardised or differentiated products), taking into account the characteristics of each one of the generic
strategies, and the appropriateness of the chosen strategy in the specific circumstances of the company.
Only if the appropriate strategy in the company’s specific circumstances is chosen, effectively implemented and
executed will the company achieve competitive advantage over its rivals. Conversely, selecting and
implementing an inappropriate strategy could turn out to be unprofitable, and even a disaster. Refer to the reading
by Markides in this regard (Hough, pp. R3-R12).
In this topic we discussed the five generic competitive strategies and their characteristics, when they would be
most appropriate, and the potential pitfalls of each of these strategies. Based on selected criteria, the distinguishing
features of each one of the five generic strategies are summarised in Table 5.1 in Hough (p.166).

Activity 5.2
1. Contrast and compare a low-cost provider strategy and a best-cost provider
strategy in terms of the following:
(a) Main characteristics of each strategy
(b) The circumstances in which each one of the strategies would be most
appropriate
(c) The advantages, disadvantages and risks of each of these strategies
Compile a brief, motivated report on your findings.

2. Critically discuss the advantages, disadvantages and risks of focused low-
cost and focused differentiation strategies.
3. Obtain the Annual Report of a company listed on the JSE and determine the
following:
(a) The industry or industries in which it is involved
(b) The type(s) of products or services it markets
(c) The strategy or strategies it appears to pursue
(d) The extent to which the company appears to have attained its strategic
and financial objectives
What do you conclude regarding the long-term prospects of this company?

Motivate your answers to the above issues.
Case Study
Read the case, “New Balance South Africa: Outrunning the Opposition” (in
Hough, pp.C101-C120) and answer the following questions:
1. Looking back, and based on Porter’s ‘generic strategies’, describe the generic
strategy of New Balance in the period leading up to 2006. (Justify your answer by
explaining the characteristics of and general requirements for this generic
strategy as well as when such a strategy would be most appropriate)
2.
3. Based on the case information as well as information on the case from Topic 3 in
the Study Guide, describe and briefly explain the main competitive advantages of
New Balance. To what extent do these identified competitive advantages comply
with the generally accepted requirements for sustainable competitive advantage?

4. “If the company did not go the branded retail route, "Van Rooyen asked
himself", what else should it
5.
do? Should it look at expanding to other African countries, or should it rather
concentrate on other segments of the market which the company had not yet
explored?” (Case, p.118)
Based on your evaluation and findings in the preceding questions, what

would you recommend to Gary van Rooyen with regard to the future
strategic direction of New Balance and, more specifically, the possible
competitive strategies that he could consider for New Balance.
Guideline For The Self Assessment Activity

The five generic strategies are compared on the basis of (1) strategic target, (2) competitive advantage, and (3)
market emphasis.
Strategic target
● Low-cost provider (LCP) – A broad cross-section of the market
● Broad differentiation (BD) – A broad cross-section of the market
● Best-cost provider (BCP) – Value-conscious buyers
● Focused low-cost provider (FLCP) – A narrow market niche where buyer needs and preferences are
distinctively different
● Focused differentiations (FD) – A narrow market niche where buyer needs and preferences are
distinctively different
●
Basis of competitive advantage
● LCP – Lower overall cost than competitors
● BD – Ability to offer buyers something attractively different from competitors
● BCP – Ability to give customers more value for the money
● FLCP – Lower overall costs than rivals in serving niche markets
● FD – Attributes that appeal specifically to niche members/buyers

Marketing emphasis
● LCP – Try to make a virtue out of product features that lead to low cost
● BD – Tout differentiating features; charge a premium price to cover the extra costs of incorporating differentiating
features
● BCP – Tout delivery of best value; either deliver comparable features at a lower price than rivals or else match
rivals on prices and provide better features
● FLCP – Communicate attractive features of a budget-priced product offering that fit niche buyers’ expectations
● FD – Communicate how product offering does the best job of meeting niche buyers’ expectations
●
Explanation
The question is about each of the five strategies positioning the company differently in its competitive
environment.
LCP and FLCP both concentrate on largely standardised products in terms of low/lower costs, but on broad and
narrow markets respectively, where buyers are price sensitive BD and FD both concentrate on products with
unique product features, but in broad and narrow markets respectively, where buyers are not price sensitive and
willing to pay extra for unique differentiating features.
BCP adds value to a limited extent through some degree of differentiating features while still keeping costs low,
and preferably lower than competitors, while providing more value than competitors.
It is important that buyer needs and the type of industry that supplies the products that satisfy the various buyer
needs largely dictate the type of generic strategy to be employed. These considerations are critical in selecting
the correct generic strategy for the firm’s unique competitive, industry and market circumstances.

Unit
6: Tailoring Strategy to Fit Specific
Industry and Company Situations


THIS UNIT:
 Explain strategies for competing in emerging  Think Points, Activities and Case Studies needs to
industries be done in order to gain an understanding of the
strategies for competing in emerging industries.
 Explain strategies for competing in rapidly  Think Points, Activities and Case Studies needs to
growing markets be done in order to gain an understanding of the
strategies for competing in rapidly growing
markets
 Explain strategies for competing in maturing  Think Points, Activities and Case Studies needs to
markets be done in order to gain an understanding of the
strategies for competing in maturing markets
 Explain strategies for competing in stagnant or  Think Points, Activities and Case Studies needs to
declining industries be done in order to gain an understanding of the
strategies for competing in stagnant or declining
industries
 Explain strategies for competing in turbulent,  Think Points, Activities and Case Studies needs to
high-velocity markets be done in order to gain an understanding of the
strategies for competing in turbulent, high-velocity
markets
 Explain strategies for competing in fragmented  Think Points, Activities and Case Studies needs to
markets be done in order to gain an understanding of the
strategies for competing in fragmented markets
 Explain strategies for sustaining rapid company  Think Points, Activities and Case Studies needs to
growth be done in order to gain an understanding of the
strategies for sustaining rapid company growth
 Explain strategies for industry leaders  Think Points, Activities and Case Studies needs to
strategies for industry leaders

 Explain strategies for runner-up firms  Think Points, Activities and Case Studies needs to
strategies for runner-up firms
 Explain strategies for weak and crisis-ridden  Think Points, Activities and Case Studies needs to
businesses. be done in order to gain an understanding of the
strategies for weak and crisis-ridden businesses
 Explain the ten commandments for crafting  Think Points, Activities and Case Studies needs to
successful business strategies. be done in order to gain an understanding of the
ten commandments for crafting successful
business strategies

6.1 Introduction
6.2 Strategies for Competing In Emerging Industries
6.3 Strategies for Competing In Rapidly Growing Markets
6.4 Strategies for Competing In Maturing Industries
6.5 Strategies for Competing In Stagnant Or Declining Industries
6.6 Strategies for Competing In Turbulent, High-Velocity Markets
6.7 Strategies for Competing In Fragmented Industries
6.8 Strategies for Sustaining Rapid Company Growth
6.9 Strategies for Industry Leaders
6.10 Other strategic approaches for runner-up companies
6.11 Strategies for Weak And Crisis-Ridden Businesses
6.12 Ten Commandments for Crafting Successful Business Strategies
6.13 Summary

Prescribed Textbook
 Hough, J, Thompson, AA, Strickland, AJ & Gamble, JE. 2007.

Crafting and Executing Strategy, South African Edition. Boston:
McGraw-Hill, Chapter 8.
 Abraham, S. 2005. Stretching strategic thinking. Strategy &
Leadership. Vol.33, No.5, pp.5-12 (Reading 4 in Hough, pp.R31-
R40.
 Kim, WC & Mauborgne, R. 2005. Value innovation: a leap into the
blue ocean. Journal of Business Strategy. Vol.26, No.4, pp.22-26
(Reading 6 in Hough, pp.R51-R58).
 Markides, C & Geroski, PA. 2004. Racing to be 2nd: conquering the
industries of the future. Business Strategy Review, Vol.15, No.3
(Winter), pp.25-31 (Reading 7 in Hough, pp.R59-R67).

6.1 Introduction
(Pages 219 and 220 in Hough, Chapter 8, and the Reading by Abraham in Hough (pp.R31-R40))
In previous topics we focused on various types of analysis and discussed the generic competitive strategies that
companies can adopt. The ultimate choice of strategy in the specific circumstances of a company to achieve the
firm’s long-term objectives requires the strategy to match or align (1) opportunities and threats in the macro-
environment and in the industry environment, to (2) the company’s own resource strengths and weaknesses,
competitive capabilities, and market position.
But what do we mean by the “specific circumstances” of a company? Based on all the information we have gleaned
thus far, we now take a closer look at management’s strategy-making task in ten commonly encountered
situations, including the phases of industry development within the industry life-cycle, since all firms do not face
the same industry and environmental circumstances at the same time, in the same way, and to the same extent.
In your review of the first four types of strategies discussed in Sections 6.2 to 6.5 – strategies for competing in
emerging industries, rapidly growing industries, maturing industries, and declining industries – refer to the
discussion, and illustration of the industry life cycle in Section 3.6.1. of the Study Guide.
6.2 Strategies for Competing In Emerging Industries

6.2.1 Introduction
Emerging industries find themselves in the formative stage and have very specific characteristics. Within these
parameters, firms in emerging industries require a specific approach to strategy development and choice.
6.2.2 The unique characteristics of an emerging industry

The characteristics of and challenges presented by emerging industries include the following:
1. Because the industry and market are in their infancy, there is generally much uncertainty and
speculation about how it will continue to function, how fast it will grow, and how big it will become.
2. In many cases, the technological and other know-how related to products of firms in emerging industries
are proprietary and closely guarded.
3. Despite uncertainties about technology, there is also no certainty that product attributes will win buyer
favour.
4. All buyers in emerging industries are first-time users, and initial purchases must be induced by
extensive marketing efforts.

5. Many potential buyers expect first-generation products to be improved, and are thus inclined to delay
purchases.
6. Entry barriers are typically very low, even for entrepreneurial start-up companies, and large companies
will enter on the basis of good industry prospects and if the new ventures could harm their existing
business.
7. Strong experience/learning curve effects may be present, which could result in price reductions, but this
is rather unlikely in the early stages.
8. Firms often have problems in securing supplies and raw materials.
9. Undercapitalised companies are typically short of funds for R & D, and end up merging with or being
taken over by competitors that see the industry as a growth market.
6.2.3 Strategy options for emerging industries

Companies in an emerging industry have wide latitude in experimenting with different strategic approaches.
Emerging industries are generally characterised by
- a lack of established industry rules
- considerable freedom for industry participants to experiment with a wide variety of different strategic
options and approaches.
Note and summarise the various options discussed in this section.

In addition to choosing a competitive strategy, companies in an emerging industry need to consider one or more
of the following actions in their approach to strategy:
1. Attempt to perfect technology, improve product quality and develop additional attractive features.
2. Consider merging with or acquiring another firm.
3. Try to capture first-mover advantages by adopting emerging, dominant technologies quickly.
4. Acquire or form alliances with companies that have related or complementary technological expertise.
5. Pressure new customer groups, new user applications, and consider entry into new geographical areas.
6. Make it easy and cheap for first-time buyers to try the industry’s first-generation products.
7. Shift advertising emphasis from creating product awareness to increasing product use and building brand
loyalty as the product becomes more familiar.
8. Use price-cuts to attract the neat layer of price-sensitive buyers into the market.
9. Form strategic alliances with key suppliers to enhance the supply chain and increase competitiveness.
Hough (p.222) mentions that firms in emerging industries face the following four strategic hurdles:
1. Raising the capital to finance initial operations until sales increase to the point where profits are realised
and cash flows are positive.

2. Developing a strategy to ride the wave in industry growth.

3. Managing the rapid expansion of facilities and sales towards a position of industry leadership.
4. Defending against competitors trying to home in on their success.
Firms in emerging industries require entrepreneurial managers, solid resource capabilities, a viable business
model, and an effective strategy. Study the implications as well as some of the dangers for firms in emerging
industries intent on growing and gradually working towards a leadership position in the industry.
6.3 Strategies for Competing In Rapidly Growing Markets

In rapidly growing markets, a company needs a strategy that will enable it to achieve market growth in excess of
average industry market growth to expand its market share and improve its competitiveness and profitability.
To achieve this in a rapidly-growing industry, a company’s strategy should include one or more of the following:
1. Driving down costs per unit to enable price reductions that attract numerous new customers.
2. Striving for rapid product innovation to distinguish the company’s products from those of its competitors,
and to include attributes that will attract growing numbers of customers.
3. Gaining access to additional distribution channels and sales outlets.
4. Expanding the company’s geographic coverage.
5. Expanding the product line to add models/styles that will appeal to and attract a wider range of buyers.
6.4 Strategies for Competing In Maturing Industries

(Page 224 to 227 in Hough, Chapter 8)
6.4.1 Introduction
(Study page 224 in Hough, Chapter 8)
A maturing industry is one where rapid growth tapers off to significantly slower growth. Characteristics of a maturing
industry are reflected in the following:
- nearly all potential buyers are already users of an industry’s products
- growth in market demand is more or less the same as the overall population growth
- demand mainly comprises replacement sales to existing users
- growth depends on the ability of the industry to increase product use and sales of existing buyers as well as
attracting some new buyers
6.4.2 How slowing growth alters market conditions

The emergence of new technologies, product innovations and other regenerating factors can stall the movement
to full industry maturity for a while, but not indefinitely.

Slowing growth, however, produces fundamental changes in an industry’s competitive environment:

1. Slowing growth in buyer demand generates more head-on competition for market share.
2. Buyers become more sophisticated, often driving hard bargains on repeat purchases.
3. Competition often results in a greater emphasis on cost and service
4. Firms have a “topping-out” problem in adding new facilities as a result of a slow-down in industry capacity
utilisation.
5. Product innovation and new-end-use applications are harder to come by.
6. International competition increases.
7. Industry profitability falls temporarily or even permanently.
8. Intensifying competition induces a number of mergers and acquisitions among former competitors,
consolidating the industry into a smaller number of meaningful players.
6.4.3 Strategies that fit conditions in maturing industries

Strategic moves that can strengthen a company’s competitive position in a maturing industry include the
following:
1. Pruning marginal products
2. Improving value-chain efficiency
3. Trimming costs
4. Increasing sales to present customers
5. Acquiring rival firms at bargain prices
6. Expanding internationally
7. Building new or more flexible capabilities
Summarise these issues which reflect ways and means of improving the competitiveness of a company in a
maturing industry, ways and means primarily based on increased efficiency, market expansion and cost-cutting.
6.4.4 Strategic pitfalls in maturing industries

According to Hough (p.227), the biggest mistake a company in a maturing industry can make is to steer a middle
course between low cost, differentiation, and focusing. This strategy will be unclear, and management would not
be able to determine the sources of success or failure effectively.
Other strategic pitfalls include slow defence against competitive pressures, focusing more on short-term rather
than long-term issues, waiting too long to respond to price cutting by rivals, overexpanding capacity in times of
slow growth, overspending on advertising and sales promotion, and failing to pursue cost reductions early enough
and/or aggressively enough.

6.5 Strategies for Competing In Stagnant Or Declining Industries

6.5.1 Introduction
Strange as it may sound, companies in declining industries are not necessarily doomed to declining revenues and
profits.
In declining industries, demand is growing at a slower rate than the economy overall. Reasons for the decline in
demand for an industry’s products include: (1) advancing technology resulting in better-performing substitute
products or lower costs, (2) a shrinking customer group, (3) changing life-styles and buyer tastes, and (4) rising
costs of complimentary products. Study the examples as well as the implications that are explained in this section.
Businesses in stagnant or declining industries have to make the following fundamental strategic choice:
 whether to remain committed to the industry for the long term despite its dim prospects, or
 to pursue an end-game strategy to withdraw from the market, either gradually or quickly.
Study the consequences and implications of each of these two alternatives in this section. However, where a
company decides to ‘stick it out’, the following present the three best strategic alternatives in such a case:
1. Pursue a focused strategy aimed at the fastest-growing or slowest-decaying market segment within the
stagnant or declining industry.
2. Stress differentiation based on quality improvement and product innovation.
3. Strive to decrease costs and become the industry’s low-cost leader.
Study these three options, noting that they are not mutually exclusive, and are actually based on the five
generic competitive strategies, adapted to fit this specific industry situation.
6.5.2 End-game strategies for declining industries

There are two alternative routes with an end-game strategy:
A slow-exit strategy, involving a gradual phase-down of operations.
1. A fast exit or sell-out-quickly strategy to leave during the early stages of decline and recover as much as
possible of the company’s investment

Activity 6.1
Study these two alternative end-game strategies referred to above, summarising the
advantages and disadvantages of each one, and explain the circumstances in which
each alternative would be most appropriate. Identify at least two South African
Companies that recently faced or are still operating in a declining industry. What have
these companies done or are still in the process of doing, to counter the industry
circumstances. Do they seem to be successful? Explain.
6.6 Strategies for Competing In Turbulent, High-Velocity Markets

Introduction
In the era of the “new economy”, companies are increasingly operating in industries characterised by rapid
technological change, short product life cycles, entry of important new rivals, more intense competition, and
rapidly evolving customer expectations.
High-velocity change has become commonplace in the information technology (IT), telecommunications and
biotechnology industries as well as in online retailing and virtual shopping, to name but a few.
6.6.1 Ways to cope with rapid change

Managing change has become the central, critical strategy development challenge in a turbulent, high velocity
industry. The three important strategic postures that a company can assume in dealing with high-velocity change
are illustrated in Figure 8.1 (p.231).
These three strategic postures,

- reacting to change,
- anticipating change, or
- leading change
are of vital importance to management in configuring their strategic approaches to effectively compete in this type
of industry.
Study these three postures in terms of their strategic intent, noting that a company could selectively incorporate all
three of these approaches in their strategies.

Effectively dealing with turbulent market conditions requires leading change with proactive strategic moves while
at the same time trying to anticipate and prepare for upcoming changes and unexpected developments.
6.6.3 Strategy options for fast-changing markets

Competitive success in fast-changing markets primarily depend on a company’s ability to innovate and adapt as
market-conditions change, which in turn requires that it reshape its strategy constantly.
The following five strategic moves seem to offer the best results:
Invest aggressively in R & D to stay at the leading edge of technological know-how.
1. Keep the company’s products and services fresh and exciting enough to stand out amidst the change.
2. Develop quick-response capability.
3. Rely on strategic partnerships with outside suppliers and with companies making complementary products.
4. Initiate fresh actions every few months, not only when a competitive response is needed.
State-of-the-art know-how and first-mover advantages are valuable competitive assets in rapidly-changing
markets.
Study these strategic moves and their implications to determine why companies need to be open, flexible and
innovative in a fast-changing environment.
Think Point
Considering the strategy options for fast-changing markets discussed in Section 6.6.3 above,
do you believe that a company's organisational culture will readily accommodate the actions
recommended in this section? What are the pros and cons? What is important in this regard?
6.7 Strategies for Competing In Fragmented Industries

Introduction
The outstanding feature of a fragmented industry is the absence of market leaders with large market shares or a
wide buyer recognition. Some examples are book publishing, property development, computer software
development, car repair services, restaurants, hotels and motels, and beer breweries, especially microbreweries.
We now look at the reasons for fragmentation and the most appropriate strategies for firms operating in fragmented
industries.
Reasons for supply-side fragmentation (Pages 234 and 235 in Hough, Chapter 8)

Industry fragmentation occurs for a number of reasons:

1. The product or service is delivered at neighbourhood locations so as to be conveniently accessible to
local residents.
2. Buyer preferences and requirements are so diverse that very large numbers of firms can easily coexist
trying to accommodate different buyer tastes and expectations.
3. Low entry barriers allow small firms to enter quickly and cheaply.
4. An absence of scale economies permits small companies to compete on an equal cost basis with larger
firms.
5. The scope of the geographic market for the industry’s product or service is changing from national to
global.
6. The technologies embedded in the industry’s value chain are exploding into so many new areas along
different paths that specialisation becomes imperative.
7. The industry is young and crowded with aspiring contenders.
Summarise and study these reasons as a frame of reference for the development and selection of appropriate
strategies in this type of industry.
6.7.3 Competitive conditions in a fragmented industry

Competition in fragmented industries can vary from moderately strong to intense, in part due to the low barriers to
entry. Substitute products may or may not be a factor, but due to small size, firms are at a disadvantage as far as
bargaining power of suppliers are concerned.
Some fragmented industries consolidate over time, but most remain part of the fragmented structure of the industry.
6.7.4 Strategy options for competing in a fragmented industry

Companies in fragmented industries generally have the freedom to pursue broad or narrow target markets, and
low-cost or differentiation strategies. Fragmented markets, however, are also ideal for focusing on narrow market
niches.
Suitable options for competing in a fragmented industry could include the following:
1. Constructing and operating “formula” facilities
2. Becoming a low-cost operator
3. Specialising by product type
4. Specialising by customer type
5. Focusing on a limited geographic area

Study and summarise these strategic options for your own convenience, with reference to Illustration Capsule 8.1,
“Exertris’s focus strategy in the fragmented exercise equipment industry” as an example.
6.8 Strategies for Sustaining Rapid Company Growth

6.8.1 Introduction
Companies that want to grow faster than the industry average and thus gain market share faster than their
competitors have to develop a portfolio of strategies covering three horizons.
 Horizon 1: “Short-jump” strategic initiatives to fortify and extend the company’s position in existing businesses
 Horizon 2: “Medium-jump” strategic initiatives to leverage existing resources and capabilities by entering new
businesses with promising growth potential
 Horizon 3: “Long-jump” strategic initiatives to plant the seeds for ventures in businesses that do not yet exist.
Study and summarise these three strategy horizons for sustaining rapid growth with reference to Figure 8.2 (p.240).
Managing such a portfolio of strategies is complex, but does provide some diversification as protection against
unexpected risks or adversity in the industry.
6.8.2 The risks of pursuing multiple-strategy horizons

Pursuing a portfolio of diverse strategies is bound to entail risk. Companies cannot accept all opportunities that
come their way, and an overemphasis on short-jump and medium-jump strategies while neglecting long-jump
strategies could jeopardise the long-term competitiveness, growth and profitability of the company.
6.9 Strategies for Industry Leaders

Industry leaders are concerned with defending or extending their leadership positions. Hough (p.341) states that
three contrasting strategic postures are open to industry leaders:
1. Stay-on-the-offensive strategy
This requires the company to be a dynamic action-oriented first-mover, proactive market leader, and impatient
with the status quo. This strategy must result in growing sales and revenues faster than the industry as a whole,
and outcompeting rivals in terms of market share. Study illustration Capsule 8.2, “ESPN’s strategy to dominate
sports entertainment” as a practical example of this important strategic posture.

2. Fortify-and-defend strategy
The aim with this posture is to make it more difficult for rivals to gain ground, or for new firms to enter.
Thus, a company needs strong defence to hold on to present market share, strengthen current position and protect
existing competitive advantage.
Specific defensive actions could include
1. Attempt to raise a few hurdles for challengers and new entrants.
2. Introduce more product versions or brands.
3. Adding personalised services and other extras that boost customer loyalty and making it harder for
customers to switch products.
4. Keeping prices reasonable and quality attractive.
5. Building new capacity ahead of market demand to discourage smaller competitors.
6. Investing enough to remain cost-competitive and technologically progressive.
7. Patenting feasible alternative technologies.
8. Signing exclusive contracts with the best suppliers and distributors.
3. Muscle-flexing strategy
Here the dominant leader adopts an aggressive role. Some specific responses to rivals posing a challenge to the
company could include:
- quickly matching or exceeding challengers’ price cuts
- using large promotional campaigns to counter the moves of challengers
- offering better deals to major customers
- establish sound relationships with distributors
Study the implications of this strategic posture in the rest of this section. Identify and summarise the main
advantages and disadvantages (dangers) in this regard.
6.10 Strategies for Runner-Up Firms

6.10.1 Introduction
Runner-up firms have smaller market shares than industry leaders. Some runner-up firms could be challengers,
others destined to remain runner-up firms due to a lack of resources, and others as a result of a deliberate decision
to remain in that position.
6.10.2 Obstacles for firms with small market shares

Big firms pose barriers to challengers for industry leadership. Firms with small market shares face four obstacles:

1. Less economies of scale in production, distribution, marketing, and sales promotion.

2. Difficulty in gaining customer recognition.
3. Less money to spend on mass-media advertising.
4. Limited funds for capital expansion or making acquisitions. Note that smaller firms are basically bound to
be at a disadvantage compared to large, industry leaders.
6.10.3 Offensive strategies to build market share

Runner-up firms wanting to improve their industry positions must really come up with distinctive strategic initiatives
– it won’t help to imitate the strategies of industry leaders. Hough (p.245) refers to “mover-and-shaker” offensives
for second-tier challengers aiming to join the leadership ranks, which usually involves one of the following five
approaches:
Making a series of acquisitions of smaller rivals to expand the company’s market reach and presence. Finding
innovative ways to decrease costs, and then use the lower prices to win customers from high- cost, high-priced
rivals.
1. Developing an attractive differentiation strategy based on premium quality, technological superiority,
outstanding customer service, rapid product innovation, or online shopping opportunities.
2. Pioneering a leapfrog technological breakthrough.
3. Being first to market with new or better products, and building a reputation for product leadership.
Other offensive initiatives are discussed, but unless they have a really good strategy to capture added market
share quickly, runner-up firms need to be effective and patient, building sales and market share at a moderate
rate. Some important alternative approaches are discussed in the next section.
6.11 Other strategic approaches for runner-up companies

Runner-up companies can employ five other strategies:
● Vacant–niche strategy
● Specialist strategy
● Superior product strategy
● Distinctive–image strategy
● Content follower strategy
Study and summarise these alternative strategies for runner-up firms.

6.12 Strategies for Weak And Crisis-Ridden Businesses

6.12.1 Introduction
Weak or crisis-ridden firms have four basic strategic options at their disposal:
1. A turnaround strategy based either on “low-cost” or “new” differentiation themes, if the company has
adequate financial and other resources.
2. A “fortify-and-defend” strategy using variations of its present strategy to protect sales.
3. A fast-exit strategy, and get out of the business.
4. An end-game or slow-exit strategy, with subsequent, orderly withdrawal.
6.12.2. Turnaround strategies for businesses in crises

Turnaround strategies are needed to rescue firms in crisis that are worth rescuing. This is achieved by reversing
financial and other competitive weaknesses as quickly as possible. As an example, this was the case in November
2008 when the United States Government rescued Citibank, America’s largest banking institution, financially.
The diagnosis of such a crisis situation should identify the root cause and determine the seriousness of the situation
before it can be decided that it would be worthwhile putting an appropriate turnaround strategy in place.
Typical reasons for such crises are taking on too much debt, an overestimation of potential growth in sales,
overdoing price-cuts to increase market share, underutilisation of capacity, lack of new product innovation,
misjudging expected technological impacts, being overoptimistic about market share increase, making frequent
changes to strategy, and being severely outcompeted by rivals – the latter indicating a serious need for a concerted
intervention. A weak strategy and/or weak leadership could also be contributory factors in such situations.
A business turnaround strategy can involve any of the following four actions:
1. Selling off assets to raise cash to save the remainder of the business. This option includes selling some
of the physical, non-core business assets as well as the retrenchment of people.
2. Revising the existing strategy when weak strategy is a root cause. The problem can be approached in
several ways: (1) shifting to a new competitive approach, (2) overhauling internal operations and functional
strategies, (3) merging with another firm in the industry and (4) retrenching into a reduced core of products
and customers.
3. Launching efforts to boost revenues. These turnaround efforts aim at increasing sales volume. Any
number of actions could be appropriate here including price-cuts, increased advertising, bigger sales
force, added customer services and rapid product improvements. These attempts are necessary when
there is little chance of further reducing costs, and a key consideration is increasing the use of existing
capacity.

4. Pursuing cost reduction. This should work well when the value chain of the firm is flexible enough to permit
revision, and there are several ways in which this could be achieved: eliminating some overheads
and non-essential low-value-added activities from the value chain, modernising the existing plant to
increase productivity, delaying of non-essential capital expenditures, and debt restructuring to reduce
interest cost.
5. Using a combination of these efforts. Evidently, the greater the crisis, the more likely it is that multiple
strategic initiatives will have to be used.
Study and summarise these strategic actions, with reference to the practical illustration of a turnaround strategy in
Illustration Capsule 8.3, “Sony’s turnaround strategy – will it work?” Assess and summarise the implications of this
example in terms of our foregoing discussion.
Lastly, turnaround strategies tend to be high-risk initiatives, with low prospects of success, for a number of reasons.
While the overall success picture is dim, the relatively few successful turnaround efforts could primarily be traced
to companys selling of non-core assets, acquiring assets that support their resource strengths which helped to
strengthen their position in their core markets.
6.12.3 Harvest strategies for weak businesses

When prospects for a successful turnaround strategy are poor, a harvesting strategy to generate the largest
possible cash flows for as long as possible is probably all that remains. The main objective of a harvesting strategy
is to maximise short-term cash flows from operations.
Study the implications of a harvesting strategy in this section. Note the following conditions that make a harvesting
strategy attractive:
1. When industry demand is stagnant or declining and there is little hope either that market conditions will
improve.
2. When rejuvenating the business would be too costly or at best marginally profitable.
3. When trying to maintain or grow the company’s present sales is becoming increasingly costly.
4. When reduced levels of competitive effort will not trigger an immediate or rapid decrease in sales.
5. When the company can redeploy the freed resources in higher-opportunity areas.
6. When the business is not a crucial or core component of a diversified company’s overall line-up of
businesses.
The more of these conditions that exist, the more ideal the business is for harvesting.

6.12.4 Liquidation: the strategy of last resort

When companies have deteriorated to the extent that they cannot be rescued, and that even a harvesting strategy
is no longer appropriate, liquidation is the only option that remains – no matter how devastating and painful it might
be. A strategically difficult decision involves deciding when a company has deteriorated beyond the point where a
turnaround strategy could still be considered.
6.13 Ten Commandments for Crafting Successful Business Strategies

(Pages 252 to 255 in Hough, Chapter 8, and the Readings by Kim and Mauborgne (pp.R51-R58) and by Markides
and Geroski (pp.R59-R67) in Hough.)
There is no substitute for sound competitive strategies if businesses are to grow and prosper in the “new economy”.
Based on research as well as experience, the following ten guidelines are proposed as a basis for the development
of sound and viable business strategies:
1. Place top priority on crafting and executing strategic moves that enhance the company’s competitive
position for the long term.
2. Be prompt in adapting to changing market conditions, unrealised customer needs, buyer wishes for
something better, emerging technological alternatives, and new initiatives of competitors.
3. Invest in creating a sustainable competitive advantage.
4. Avoid strategies capable of succeeding only in the most optimistic circumstances.
5. Consider that attacking competitive weakness is usually more profitable and less risky than attacking
competitive strength.
6. Strive to open up very meaningful gaps in quality or service or performance features when pursuing a
differentiation strategy.
7. Be wary of cutting prices without an established cost advantage.
8. Do not underestimate the reactions and the commitment of rival firms.
9. Avoid stuck-in-the-middle strategies that represent compromises between lower costs and greater
differentiation and between broad and narrow market appeal.
10. Be judicious in employing aggressive moves to wrest market share away from rivals. This often provokes
retaliation in the form of escalating marketing and sales promotion, a furious race to be first-to- market
with next-generation products or a price war – to the detriment of everyone’s profits.
Study these ten “commandments” and establish to what extent you can trace each one of these back to the issues
in strategy development that we addressed and discussed in this module thus far. Critically compare these
“commandments” with the views of Markides on strategy (See Topic 5, pp.122-123 in the Study Guide). In closing,
refer to Table 8.1, “Sample format for a strategic action plan” (p.255), that neatly encapsulates the intended
“outcome” of the process of strategy development.


The mobile (cellular) phone industry is seen as a generally maturing industry.
1. Identify, evaluate and discuss the most relevant market conditions in this
industry within the context of South Africa.
2. Critically discuss and prioritise the strategies or strategic moves that

the three cellular phone companies in South Africa could consider.
6.14 Summary
In this topic we learnt that the macro-environmental, industry, competitive and individual firm circumstances
become part of the strategy development and strategic management processes. Strategic thinking and a
strategic awareness of the environments that matter will ensure that strategies will be developed that match the
company’s competitive resources and capabilities to its environment in pursuing sustainable competitive
advantage, growth and prosperity.
Activity 6.2
1. 1. Briefly discuss how industry and firm situations affect the development and
formulation of a company’s competitive strategy and why these situations should
be considered in strategy development.
2.
3. The managing director of your organisation has to address the shareholders of the
company on the strategy that has been developed to face new challenges in the
future.
4.
The managing director asks you to accompany him to the meeting, and also requests
you to compile an ‘Executive Summary’ that he could use as a basis for his
presentation.
● Which topics would you recommend be included in the managing director’s
document?
● In what order?
● Given that your organisation is in the high-velocity environment of the IT
industry, what specific issues would you consider in your outline? Motivate
your answers.

5. Scrutinise the Annual Reports of two organisations in the same industry.

(a) List the strategies that they have
(b) Compare their strategies and attempt to identify the reasons for any
differences in their respective strategies.
(c) Identify and discuss the industry key success factors on which their
strategies are based.
Write a brief report on your findings.
Case Study
Read the case "Harley-Davidson in 2004" in Hough (pp.C159-C184).
1. Evaluate and discuss Harley-Davidson's competitive profile in the motor cycle

industry over the past four decades leading up to 2004. What were the main
characteristics of this competitive profile during that time?
2. Identify the challenges confronting Harley-Davidson as it entered the New

Millennium. Going beyond 2004, how would an overall financial crisis as
experienced by the United States, and for that matter the rest of the world, in
2008, affect Harley-Davidson's future prospects? (Access additional sources
where necessary).
What strategies or strategic moves should Harley-Davidson consider from

2008 onwards? Motivate your answer.

Guidelines For Self-Assessment Activity
From its inception in the early 1990s, the mobile or cellular phone industry experienced phenomenal
growth. This has started to even out in recent years, and the industry is nearing or entering the phase in industry
maturity.
1. Students need to identify which of the following market conditions apply to the maturing mobile phone industry, and
why.
● Slowing growth in buyer demand generates more head-to-head competition for market share ●
Buyers become more sophisticated/have more experience with the product
● Greater emphasis on cost and service
● Firms have "topping-out" problem in adding new facilities
● Product innovations and new end-use applications are harder to come by
● International competition increases
● Industry profitability falls
● Increasing competition induces a number of mergers and acquisitions
2. The strategic options or moves that mobile phone companies could consider include:
● Pruning/eliminating marginal products and models (i.e. wide selection of models, product options and
features)
● Improving value-chain efficiency across the board
● Trimming costs (unit costs)
● Increase sales to present/existing customers
● Acquire rival firm(s) at bargain prices
● Expand internationally
● Building/developing new or more flexible capabilities
Identify the options relevant to the three mobile phone companies, prioritise the selected options, and motivate your
choice of options.

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Part 2 :
Strategy Implementation

Unit
7: Building an Organisation Capable
of Good Strategy Execution and
Good Strategic Alignment


UNIT:
 Describe a framework for executing  Activities needs to be done in order to gain an

strategy understanding of the framework for executing strategy
 Define strategy implementation and  Identify a framework for strategy implementation and
execution in a strategic management execution in a strategic management context
context
 Explain the principal components of the  Activities needs to be done in order to gain an
strategy execution process understanding of the principal components of the
strategy execution process
 Explain how an organisation to support  Activities needs to be done in order to gain an

strategy execution can be built understanding of the support of strategy execution by an
organisation.
 Explain how to staff an organisation  Activities needs to be done in order to gain an

understanding of the staffing in an organisation
 Explain how core competencies and  Activities needs to be done in order to gain an
capabilities are developed understanding of the core competencies and capabilities
are developed
 Valuate the merits of centralised versus  Activities needs to be done in order to gain an
decentralised decision-making understanding of the merits of centralised versus
decentralised decision-making
 Describe emerging organisational trends of  Activities needs to be done in order to gain an

importance to management understanding of the emerging organisational trends of
importance to management

7.1 Introduction and Why Learning About Strategy Implementation Is Important

7.2 Framework for Executing Strategy
7.3 The Principal Managerial Components of the Strategy Execution Process
7.4 Building an Organisation Capable of Good Strategy Execution
7.5 Staffing the Organisation
7.6 Building Core Competencies and Competitive Capabilities
7.7 Execution-Related Aspects of Organising The Work Effort
7.8 Current Organisational Trends\
7.9 Summary

 Hough, J, Thompson, Arthur A. Jr., Strickland, A.J. III and Gamble JE.
2008. Crafting and Executing Strategy. South African Edition. London:
Irwin McGraw – Hill.
 Montgomery, CA. 2008. Putting Leadership Back into
Strategy.Harvard Business Review.
http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.

7.1 Introduction and Why Learning About Strategy Implementation Is Important

In the (previous) part of this module on Strategy Development we saw that the ability of an organisation to be
proactive and adapt to changes in the environment can make or break the organisation. The focus of strategic
planning is therefore on the future, not on the past or the present. In this module we explore how strategic plans
are implemented and executed.
This part of the module has been designed to introduce participants to the challenges faced by top management
to ensure that the organisation survives in a volatile business environment. In short, in this module, the following
is discussed:
● building an organisation capable of good strategy execution
● the role of leadership, culture and teamwork in strategy implementation and execution
● the importance of enterprise performance management
● the role of corporate governance and ethics in the context of strategic management
If you have to manage your own business, a sound understanding of strategic planning will allow you to scan
the business environment in order to detect opportunities and threats. By being proactive, you will be able to
prepare your business for change, and strategic planning will expose you to various alternative strategies that
you can implement in order for the business to survive in our current volatile environment. In this part of the
module we focus on the effective implementation and execution of the firm's chosen strategies.
In a larger company top management formulates the strategic plans for the entire organisation to ensure that
the organisation will survive in the volatile business environment. These strategic plans are then cascaded down
to middle-management level. Middle managers have to implement the strategic plans in their respective
functional or divisional areas (finance, research and development (R & D), marketing, operations, human
resources, purchasing, etc). Middle management’s plans are then cascaded further down to lower-level
management, where heads of departments and sections have to implement the action plans. In short, top
management formulates the strategic plans that middle and lower management have to implement. Top
management’s strategic plans can only succeed if properly supported and implemented by middle and lower
management. Developing or crafting a strategy is largely a market-driven activity whereas implementing and
executing strategy is primarily an operations–driven one. It revolves around leadership, creating the necessary
culture, management of people and business processes. The introductory states that good strategy execution
requires a team effort, that all managers have strategy executing responsibilities in their areas of authority, and
that all employees are participants in the strategy execution process. We support this statement.
The format of this part of the module guide essentially follows that of the prescribed text. The contents of the
guide are intended to be supplementary to the relevant chapter in the textbook. The best way to learn strategy
is through practical case studies, of which the textbook has many. At the end of some sections, you are asked

to study the cases that are relevant to that section. There is no correct or model answer to a case study; more
important is for you to identify pertinent issues that need to be addressed.
The framework for this part of the module in “Strategy Implementation” is illustrated below:
Corporate governance and ethics
Figure 7.1: Strategy Implementation
7.2 Framework for Executing Strategy

Firstly, we need to understand the core difference between developing a strategy and executing or implementing
a strategy. The biggest difference is that markets or the market-environment in a specific industry drive the
development of strategies while internal and external operations drive the execution of the chosen strategies.
Figure 7.2 briefly spells out the other differences.

Fig 1.1: Differences between Crafting vs. EXECUTING THE STRATEGY

Executing CRAFTING THE STRATEGY Primarily an operations-driven activity
Primarily a market-driven activity Successful strategy execution depends on
Successful strategy making depends on – Doing a good job of working through others
– Business vision – Good organisation-building
– Perceptive analysis of market conditions and – Building competitive capabilities

company capabilities
– Creating a strategy- supportive culture
– Attracting and pleasing customers
– Getting things done and delivering good results
– Outcompeting rivals
– Using company capabilities to forge a

competitive advantage
CRAFTING AND EXECUTING STRATEGY: South African Edition Hough | Thompson | Strickland |
Gamble
Figure 7.2: Differences between Crafting vs Executing Stragey

8
More importantly is the fact that managers are responsible for strategy implementation, and therefore face the
following issues and challenges: What is the best way to organise the firm so as to support the chosen
strategies? What should the organisation and people look like? Where should the leadership to guide the
strategy implementation process come from? What role does organisational culture play in the implementation
process, and how should the organisation's strategy, culture, leadership and structures be aligned to enhance
the strategy implementation process? How important is effective teamwork in achieving the strategy
implementation objectives? How important is performance management in pursuing and achieving strategic
objectives? How should the organisation align itself to increasingly environmental change and mounting
pressures for effective corporate governance and ethics? It is difficult to address the above questions and
challenges without a clear framework that is conducive for the execution of the chosen strategy or strategies,
and obviously, an organisation capable of good strategy execution will add value to this activity.
Strategy implementation involves identifying all the tools, techniques processes (systems and structures that we
need to use and have in place to ensure a smooth strategy – supportive operation that will deliver the desired
results. While the principal components are highlighted in the next topic, it is important to note at this point in
time that how a specific organisation's strategy is executed always have to be customised to fit the particular
situation of that organisation, for example:

● The strategy implementation requirements for a low-cost strategy will differ from those for a broad
differentiation strategy.
● Implementing and executing a new strategy for a struggling company will require different attributes than
those for merely improving the strategy of an already successful company.
● Leadership styles and managerial capabilities are different, which means that the approach to strategy
implementation and execution will obviously be different in different organisations.
There is no fixed managerial recipe for successful strategy implementation that cuts across all company
situations and all types of strategies, or that works for all types of managers.
7.3 The Principal Managerial Components of the Strategy Execution Process

Notwithstanding the fact that a company's strategy execution approach should be in line with its specific situation,
there are eight generic managerial tasks that are necessary for effective strategy implementation and execution.
These tasks are illustrated in figure 1.2.

Figure 7.3: The Eight Components of Strategy

9
CRAFTING AND EXECUTING STRATEGY: South African Edition Hough | Thompson | Strickland
| Gamble
Figure 7.3 comprises the following:
1. Building a competent, capable organisation with the necessary resource strengths.

2. Ensuring that sufficient money and people are available.
3. Instituting implementation enhancing policies and procedures.
4. Adopting best practices and ensuring continuous improvement in all value-chain activities.
5. Installing effective information and operating systems to ensure the efficient execution of the strategic roles
of personnel.
6. Tying rewards directly to the achievement of strategic and financial organisational goals.

7. Installing an organisational culture that enhances effective strategy execution.

8. Exercising strong leadership to drive effective execution to achieve operating excellence as quickly as
possible.
The starting point of strategy implementation, based on the preceding phase of strategic planning, is
communicating the reasons for change to the entire organisation. How well managers perform in
implementing tasks will then have a direct impact on the success of the company. The managers
responsible for strategy implementation should diagnose the organisational needs for successful strategy
implementation and devise the best plans of how to get it done.
It is important to understand that there are differences between smaller and bigger organisations in terms of
strategy execution. But whether implementation involves sweeping or minor changes, the most important
leadership traits are a strong, confident sense of what to do and how to do it.
Having a strong grip on these two things comes from understanding the circumstances of the organization and
the requirements for effective strategy execution. Then it remains for those managers and company personnel
in strategy-critical areas to step up to the plate and produce the desired results.
7.4 Building an Organisation Capable of Good Strategy Execution

Effective strategy execution requires an appropriate strategy-supporting internal organisation (structure), highly
competent people and better-than-average competitive capabilities (resources). The following three
indispensable types of organisation-building actions are illustrated.
1. Staffing the organisation
2. Building core competencies and competitive capabilities
3. Structuring the organisation and work effort while matching the organisation structure to strategy

Figure 107.4 Gives a clear indication of these actions and, when executed proficiently, should largely
ensure that the organisation has the necessary competencies and capabilities for effective strategy
execution.
| Gamble
These three actions will now be discussed separately with the aim to indicate the importance of the integration of
these three components to ensure a sustainable strategy-focussed organization.
7.5 Staffing the Organisation

The strategic management process in general and the strategy implementation process in particular require
talented managers and employees with suitable skills and intellectual capital.
7.5.1 Putting together a strong management team

Assembling a capable management team is the cornerstone of the organisation-building task. This means
gathering smart people who are clear thinkers and know how to "make things happen" and deliver good results.
Insightful, results-oriented managers are good at getting things done through others, typically by making sure
they also have the right people in the right jobs under them. The aim is to assemble a critical mass of talented
managers who can function as agents of change and successfully follow through on the organisation's strategic
decisions.

Reading
Study Illustration Capsule 9.1: 'How General Electric Develops a Talented and
Deep Management Team' (pp. 263- 64). The capsule explains how General
Electric are using the same principles to ensure that they recruit and retain the
right people. Make sure that you know what is meant by “workout”.
7.5.2 Recruiting and retaining capable employees

Apart from assembling an excellent top management team, staffing the organisation with the right kinds of people
in positions along the entire value chain is equally important and an essential ingredient of successful strategy
execution and, ultimately, operational excellence. Examples of companies in this regard are the Virgin Group,
Microsoft, Nike, Kulula.com, Discovery Health and Sasol.
The two key issues here are:
1. Recruiting, appointing and retaining the right people
2. Providing appropriate training commensurate with contemporary as well as envisaged knowledge and
skills requirements
It has become increasingly clear in recent decades that apart from managerial, tactical and technical skills, people
skills constitute one of the most important employee attributes in any organisation.
In the topic that follows, study the following eight practices aimed at staffing jobs with the best available people:
1. Being meticulous about screening and evaluating job applicants.
2. Putting employees through career-enhancing training programmes.
3. Providing employees with challenging assignments.
4. Using job rotation to provide people with opportunities to gain multi-disciplinary experience.
5. Encouraging employees to challenge existing ways of doing things.
1. Making the work environment stimulating and engaging to capture the interest and creativity of employees.
2. Striving to retain talented, high performing employees through various reward systems and incentives.
3. Coaching average performers to increase their skills and capabilities.
The objective of recruiting, appointing and training employees is to make the company's entire workforce a
genuine resource strength.

7.6 Building Core Competencies and Competitive Capabilities

Strengthening competitively valuable core competencies and organisational capabilities are extremely important
in the organisation – building the strategy implementation process. Over time, successful companies have
developed their unique core competencies and capabilities, for example
 Intel at designing and mass producing complex computer chips
 General Electric developing professional managers with strategic problem-solving skills
 Disney in the design and operation of theme parks and unique family entertainment
 Toyota in designing and producing high quality, affordable cars
 Dell Computers designing and producing low-cost customised personal computers, ensuring phenomenal
delivery times
 Sasol at exploring and producing oil from coal
 SABMiller at producing and distributing quality beer in international markets competitively.
7.6.1 Three-stage process of developing and strengthening competencies and capabilities

Building core competencies and capabilities is both time-consuming and challenging. The capability building
process involves the following three stages:
Stage 1 – the organisation must develop requisite skills in its people and upgrading individual abilities geared
towards achieving overall organisational ability.
Stage 2 – As experience among employees grows and performance becomes consistently high, true
competence and capabilities are established.
Stage 3 – At this stage competencies and capabilities are at distinctive levels that exceed those of the firm's
competitors, resulting in sustainable competitive advantage
1. Managing the process

Four traits involving core competencies and competitive capabilities are important in managing the organisation–
building process:
a) Core competencies and competitive capabilities are bundles of skills and know-how derived from combined
cross-functional efforts executed at different points along the value chain.
b) Typically core competencies and capabilities emerge incrementally out of company activities and efforts, often
emanating from successful earlier efforts, new market opportunities, and even the competitive moves of rivals.
c) The key to raising the levels of existing core competencies and capabilities is concentrating more effort than
rivals on strengthening and deepening these competencies and capabilities.
d) Evolving changes in customers' needs and competitive conditions often require adjusting and improving a
company's portfolio of competencies and capabilities – especially in terms of its intellectual capital.

Efforts to further develop core competencies and capabilities can be achieved by (1) strengthening the firm's
base skills, knowledge and know-how, or (2) networking the efforts of various work groups and departments.
Also, organisation-building competencies and capabilities can be developed internally, or outsourced by forming
strategic alliances with key suppliers – the decision being based on the company's specific situation.
Competencies and capabilities can be obtained relatively quickly by acquiring another company that already has
the requisite attributes – again depending on what is important to the company at a specific point in time. If
viable, internal efforts are more desirable from a long-term perspective.
2. Updating and remodelling competencies and capabilities as external conditions and company
strategy change
It is important to note that company competencies and capabilities that are allowed to stagnate can seriously
impair the competitiveness of firms in a rapidly changing competitive business environment. An excellent
example in this regard is Toyota, aspiring to overtake General Motors as the global leader in motor vehicles, has
been aggressively upgrading its capabilities in fuel-efficient hybrid technology, and continually fine-tuning its
already superior capabilities in manufacturing top-quality cars at competitive and affordable prices.
Reading
Study Illustration Capsule 9.2: 'Toyota's Legendary Production System: A
Capability that Translates into
Competitive Advantage'
7.6.2 The strategic role of employee training

The moment a company's new or revised strategy requires different skills, competitive capabilities, managerial
approaches and operating methods, training and retraining becomes indispensable – this is especially true in
high-technology and other similar rapidly-changing industries. Training must accordingly focus on existing and
envisaged strategic and operational needs as well as continuous organisational learning.
7.6.3 From competencies and capabilities to competitive advantage

Recall that core competencies and capabilities are largely a means to an end – the end being effective strategy
implementation to gain a sustainable competitive advantage over rivals.
Sustainable advantage comes from building competencies and capabilities that

(1) are difficult, costly or time-consuming for rivals to imitate, (2) outperforming rivals along each activity of
the value chain, and (3) resulting in superior strategy execution and above-average company performance.

Toyota's superior production and marketing competencies and capabilities are once again appropriate here.
Activity
Read Reading 9. According to Mankins and Steele (2005) companies on average “deliver only 63% of the financial
performance their strategies promise. Even worse, the causes of this strategy-to-performance gap are all but visible
to top management”.
Discuss this statement with regard to performance gaps and give a detailed account on how to close this “strategy-
to-performance” gap.
Activity 7.1
Activities ask you to carry out specific tasks. In most cases there is no right or
wrong answers to the Activities. The aim of the Activities is to give you an
opportunity to apply what you have learned.
7.7. Execution-Related Aspects of Organising The Work Effort

As Hough (p. 273) states, there are few hard-and-fast rules for organising the work effort to support good strategy
execution. If we keep in mind that companies, their environments and specific situations differ, it is obvious that
every strategy is "grounded in its own set of key success factors and value chain activities" (p. 273). However,
some organisational considerations, summarised in Figure 9.3 (p. 273) are common to all companies.
7.7.1 Deciding which value-chain activities to perform internally and which to outsource
Outsourcing in strategy execution could have the following benefits:
 Outsiders may perform certain value-chain activities more cheaply
 Outsourcing may have organisation-related benefits, like outsourcing some administrative support
functions, leaving more time for management to focus on strategic issues of importance and enhancing
strategic decision-making.
When outsourcing is used to increase performance, the following three benefits may be derived:
1. The company improves its chances for outclassing rivals in the performance of strategy-critical activities,
turning a core competency into a distinctive competency.
2. The streamlining of internal operations that flows from outsourcing often acts to decrease internal
bureaucracies, shortening the time it takes to respond to changing market conditions.
3. Outsourcing the execution of certain value-chain activities to competent suppliers can add to a company's
portfolio of capabilities and contribute to better strategy execution.

Companies generally refrain from outsourcing those value-chain activities over which they need direct control,
whereas many non-critical activities such as technical support, security services, maintaining fleet vehicles and
conducting employee training can be outsourced to the benefit of the company. However, it is not uncommon
for companies to outsource some core activities to outsiders in locations where manufacturing and other factor
costs are extremely low. For example, Nike focuses on design, marketing and distribution of its products, while
virtually all production of products are outsourced to firms in Asian countries where factor costs are lower.
However, there are dangers in excessive outsourcing, especially if technology and other core information are
transferred to outsiders unintentionally. Risks such as these can be mitigated by doing research on and
screening suppliers, as well as using multiple suppliers with each one involved in just a part of a process or
product. In summary, outsourcing can be most beneficial if used in a manner that increases a company's
competitiveness.
7.7.2 Making strategy-critical activities the main building blocks of the organisation structure
It is critical for management to build the firm's organisation structure around the effective performance of critical
activities such as
 A chocolate manufacturer purchasing quality cocoa beans at the best possible price
 In speciality chemicals, R & D, product innovation, and getting new products on the market quickly.
These critical activities also need the necessary resources apart from the organisation structure considerations.
Another question in this regard is: What types of organisation structures fit which strategies? It appears that
some type of functional structure is the best for a company in just one particular business, irrespective of which
of the five competitive strategies it pursues. The primary building blocks in such an organisation are usually
functional departments and process departments. Refer to the various examples that are provided when
studying this topic.
1.7.3 Determining the degree of authority and independence to give each unit and each employee
In their ongoing operations, management must decide how much authority to delegate to the managers of each
organisation unit. The latter could be business subsidiaries, strategic business units, functional and process
departments, plants, distribution centres, sales offices and other operating units. Also, how much decision-
making latitude can be given to individual employees. The two extremes in this regard are centralised and
decentralised decision-making.

The advantages and disadvantages of centralised versus decentralised decision-making are summarised in Table
9.1 (p. 278) and discussed in more detail in the topics that follow.
1. Centralised decision-making: Pros and Cons
Hough (p. 278-79) states that in highly centralised organisations, top executives retain authority for most
strategic and operating decisions and keep tight control over business-unit heads, department heads, and the
managers of key operating units, with little discretionary authority granted to frontline supervisors and rank-and-
file employees. This approach has more disadvantages than advantages as shown in Table 9.1 (p. 278).
2. Decentralised decision-making: Pros and Cons

According to Hough (p. 279), decision-making authority is pushed down to the lowest organisational level capable
of making timely, informed and competent decisions in a decentralised organisation.
The objective is to put decision-making authority in the hands of the people closest to the strategic or operational
levels where they are involved.
Research has shown that decentralised decision-making can shorten organisational response times, spur new
ideas, encourage creativity and innovation, and lead to greater involvement of subordinates and employees.
This latter approach generally holds more advantages than disadvantages which is evident form Table 9.1 (p. 278).
3. Maintaining control in a decentralised organisation structure

Maintaining adequate organisational control over empowered employees is achieved by placing realistic limits
on the authority that these employees can exercise, holding them accountable for their decisions, and linking
good performance to motivational reward systems and incentives. Thus creating an organisational culture of
accountability, responsibility and mutual trust.
4. Capturing strategic fit in a decentralised structure

Especially in diversified companies, cross-business strategic fits have to be captured either by enforcing close
cross-business collaboration, or by centralising performance of functions that have strategic fits at the corporate
level. Often, decision-making authority must be retained at high levels in the organisation based on ample
cross- unit coordination.
5. Ensuring 100% line of sight(not discussed in the prescribed book)

Line of sight means that everybody in the organisation should be able to see her or his contribution to the
strategic objectives of the business. This would enable line managers to cascade the corporate objectives to
their business units or divisions or departments.
It would also enable cascading to individual scorecards where these scorecards should be aligned to the objectives
of their business units or divisions or departments. This would create 100% line of sight.

Figure 1.4:
Figure 7.5: Line of sight

11
7.7.4 Providing for internal cross-unit coordination

To coordinate the activities of organisational units they need to be positioned in the hierarchy so that the most
closely related ones report to a single person, a functional department head, a process manager, or a senior
executive, mainly because of their position of authority over the unit concerned.
However, some strategy critical activities cut across different functions. In this regard note the six types of activities
mentioned by Hough (p. 282).
7.7.5 Providing for collaboration with outside suppliers and strategic allies
(Pages 283 and 284 in Hough, chapter 9)
In any organisation, someone or some group must be authorised to collaborate as needed with each major
outsider involved in strategy execution. In some cases, "relationship managers" can be appointed with the
responsibility for making particular strategic partnership or alliances generate the envisaged benefits.
7.8 Current Organisational Trends

In the continuously changing business environment, it has become imperative in many industries to be closer to
the customer in order to identify changing needs and consumption patterns as early as possible, and preferably
before rivals do. The trend has increasingly been towards flatter organisation structures and decentralised

decision-making. Reengineering and downsizing of organisations during the 1990s in particular were
instrumental in weeding our many organisational and structural inefficiencies. Also, as product life cycles were
growing shorter, it became necessary to make companies leaner, flatter, and more responsive to change.
According to Hough (p. 284) many companies are now drawing on five tools of organisational design:
 managers and workers empowered to act on their own judgements
 work process redesign to achieve greater streamlining and tighter cohesion
 self-directed work teams
 rapid introduction of Internet technology applications
 networking with outsiders to improve existing organisational capabilities and create new ones
Out-competing rivals on the basis of superior resource strengths and capabilities, especially those based on
intellectual capital and collaboration have increased in importance. Other emerging organisational
characteristics include
● Extensive use of the Internet and e-commerce
● Fewer barriers between vertical as well as geographically dispersed business units
● Rapid dissemination of information and continuous learning
● Increasing collaborative efforts between people in different functional specialities and geographical
locations with the aim to improve competencies and capabilities
Organisational renewal is an ongoing process spurred by innovative management developments and increasing
competitive pressures worldwide.
Activity 7.2
1. What are the biggest differences between strategy development and strategy
execution?
2. Why is strategy execution crucial for sustainable organizational success?
3. Why is strategy execution so “tough”? Explain with examples from the South African
business environment.
4. Explain why organisational structure is so important in strategy implementation with

reference to the organisation structure of your own organisation or one that you are
familiar with. Substantiate your findings.
5. Define and discuss the principal managerial components of the strategy execution
process with reference to your own organisation or one that you are familiar with. Are
these components present in the case of the organisation that you are evaluating?

Unit
8: Leadership, Culture and Teamwork


UNIT:
 Position the role of leadership in strategy  Think Points and Activities needs to be done in order to
implementation gain an understanding of the role of leadership in strategy
implementation.
 Identify and discuss the components and  Think Points and Activities needs to be done in order to
levels of leadership gain an understanding of the discuss the components and
levels of leadership
 Describe and evaluate situational  Think Points and Activities needs to be done in order to
leadership and four leadership styles gain an understanding of the situational leadership and
four leadership styles
 Describe and evaluate situational
leadership and four leadership styles
 Distinguish between leadership and  Think Points and Activities needs to be done in order to
management gain an understanding of the differentiation between
leadership and management
 Position the role of leadership in strategy  Think Points and Activities needs to be done in order to
implementation gain an understanding of the role of leadership in strategy
implementation.
 Describe and evaluate culture strategy  Think Points and Activities needs to be done in order to
gain an understanding of the culture and its evaluation
 Define and map organisational culture  Think Points and Activities needs to be done in order to
gain an understanding of organisational culture
 Define and map organisational culture  Think Points and Activities needs to be done in order to
gain an understanding of organisational culture
 Measure organisational culture and  Think Points and Activities needs to be done in order to
discuss the culture process gain an understanding of the organisational culture and its
process.
 Define teams and effective teamwork  Think Points and Activities needs to be done in order to
gain an understanding of the teams and effective

teamwork and the stages of team development and design

 Discuss the stages of team development
of effective teams.
and how effective teams can be created
 Define teams and effective teamwork  Think Points and Activities needs to be done in order to
gain an understanding of the teams and effective
 Discuss the stages of team development
teamwork and the stages of team development and the
and how effective teams can be created
design of effective teams.
8.1 What Is Leadership and the Role of Leadership In Strategy Implementation
8.2 Components of Leadership

8.3 Adjusting Your Approach According
8.4 Four Leadership Styles
8.5 Becoming A More Effective Leader – Leadership Behaviours And Skills
8.6 Specific Task-Oriented Behaviours
8.7 Leadership With Management
8.8 Putting Leadership Back Into Strategy
8.9 Culture
8.10 What Is Organisational Culture?
8.11 Mapping Culture – The Culture Strategy
8.12 Shaping Your Organisation's Culture – The Culture Process
8.13 Effective Teamwork and Qualities Of Teams
8.14 Stages of Team Development
8.15 Building Effective Teams
8.16 Summary

Prescribed Textbook
 Hough, J, Thompson, Arthur A. Jr., Strickland, A.J. III and Gamble JE
(2008). Crafting and Executing Strategy. South African Edition. London:
McGraw – Hill. Refer to Chapter 10
 Montgomery, CA. 2008. Putting Leadership Back into Strategy.
 http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.

8.1 What Is Leadership and the Role of Leadership In Strategy Implementation

Leadership is an elusive concept, but essentially entails articulating visions, embodying values, and creating and
environment in which individuals' objectives are aligned with those of the organisation in achieving the
organisation's goals. Ireland, et al. (2009: 340) define strategic leadership as the ability to anticipate, envision,
maintain flexibility, and empower others to create strategic change as necessary. This implies that strategic
leadership means managing through others, managing the entire process of strategy formulation and strategy
implementation, managing an entire organisation rather than a division or functional subunit, and coping with
change that continues to increase in the global economy.
The position of leadership as means of executing strategy is aptly illustrated in Figure 8.1 below.
Figure 8.1 shows that leadership is the driver of implementation. It puts the responsibility for creating
12
the right culture, efficient systems, enabling governance and to attract the right people on leadership.
As previously stated, leaders are involved in and guide the entire strategic management process,
including the strategy implementation phase.
READING
Study Illustration Capsule 10.1.
The vision and flexibility required from leaders are clearly evident from Illustration Capsule
10.1: "Leadership Challenges in Global Organisations". One of the main challenges for
leaders have become leading, guiding and motivating a diverse, multicultural workforce.
The achievement of strategic alignment requires that leaders influence people in such a way that their efforts
contribute to achievement of their role objectives, the objectives of their business units or departments and

ultimately the objectives of the organisation as a whole. Ensure that you understand what strategic leadership
means and the new realities that leadership face in the global economy.
8.2 Components of Leadership

John Maxwell (2002) believes that success is within reach of every organisation but the extent of success is
dependent on the leadership ability reflected in the organisation (Hough, p. 289). It is evident from research that
leadership is generally determined from the inside out at the following four different levels shown in Figure 10.1
(p. 290):
 Personal
 Interpersonal
 Managerial
 Organisational
8.2.1 Personal level

At the personal level leadership is determined by trustworthiness which, in turn, is dependent on the following:
 Leadership character
 Leadership competence
These two characteristics largely relate to the trustworthiness, value systems and skills, including the
motivational skills, of the leader.
8.2.2 Interpersonal level

At this level, leadership is determined by an individual's ability to
 Build mutual respect trust and cooperation
 Interpret the meaning of events and complex situations
 Obtain the necessary resources and support
Note that the interpersonal level builds on the characteristics, values and skills inherent at the personal level,
but now involves the way in which these leadership characteristics manifest themselves in relation to others in
pursuing a common vision and objectives.
8.2.3 Managerial level

A number of factors determine effective leadership at this level. These factors entail the ability to:
 Develop and empower people
 Build task commitment and optimism
 Organise and coordinate activities effectively

At this level, leadership is required to move beyond relationships by initiating and directing change and
empowering and motivating people for a common cause.
8.2.4 Organisational level

From a business perspective, leadership becomes most important at the organisational level where the leader
should demonstrate the ability to:
 Create alignment of objectives and strategies
 Strengthen collective identity
 Encourage and facilitate collective learning
 Promote social justice and morality
At the organisational level, leadership takes on a strategic perspective and has to deal effectively with the internal
alignment of objectives, strategies and people, with external alignment between the organisation and its rapidly-
changing environment, and balance the quest for sustainable long-term profitability with good corporate
governance and ethics.
8.3 Adjusting Your Approach According

The Situational Leadership Model
(Page 292 in Hough, chapter 10)
Hersey and Blanchard (1982) developed the Situational Leadership Model based on the interrelationships
between:
 The amount of socio-emotional support (relationship behaviour) a leader provides
 The amount of guidance and direction (task behaviour) a leader provides
 The readiness (maturity) level that followers exhibit in performing a specific task, function or objective
The motive for this model is to improve leadership skills in various situations and with employees or followers at
various levels of maturity, the latter which will largely determine the most appropriate leadership style at any
point in time.
Maturity of followers is defined us the ability and willingness of people to take responsibility for directing their
own behaviour and Figure 8.2 illustrates the relationship between task-relevant maturity and the appropriate
leadership style that should be applied as the maturity of followers increase over time.

Figure 2.2
Figure 8.2: Situational Leadership Model

8
| Gamble
The above figure also illustrates the importance of different leadership styles that are needed to create the right
“environment” in different situations.
Topic 8.5 will address these different styles with the relevant but different task/relationship impact in the
organisation.
8.4 Four Leadership Styles

Given the relationship between task-oriented guidance and direction, relationship-oriented support, and the
maturity of followers, the following four leadership styles can be distinguished:
● Telling – associated with low maturity where clear direction, guidance and supervision are required.
Involves high task but low relationship behaviour.
● Selling – where maturity is low to moderate, still involves some direction and guidance but support
becomes more important – thus where high task and high relationship behaviour is involved.

● Participating – associated with moderate to high maturity, where leader and follower start to share in
decision-making. A supportive but non-directive style is best since relationship behaviour is high, but task
behaviour low.
● Delegating – associated with high maturity, with followers both willing and able to take responsibility of
tasks with little direction and support required from the leader. This style includes low relationship and
task behaviour.
Fig 8.2 summarises the above discussion. It is of critical importance for leaders to realise which style would be
most appropriate in the various stages of strategy implementation for the best results overall for the organisation.
8.5 Becoming A More Effective Leader – Leadership Behaviours And Skills

Leaders need to exhibit certain behaviours and skills to be effective and ensure organisational success.
The following specific types of leadership concerns and objectives should be explored in more detail:
 Task-oriented – primarily involved with accomplishing specific tasks
 Relationship-oriented – primarily concerned with relationships and helping people
 Change-oriented – primarily concerned with improving strategic decisions and effectively managing change
Note that these three types of behaviours interact to determine overall financial and non-financial performance.
8.6 Specific Task-Oriented Behaviours

In strategic leadership, the following three specific types of task-oriented behaviours are relevant:
● Plan work activities
● Clarify roles and objectives
● Monitor operations – apart from monitoring progress and measuring performance, this type of task-
behaviour also helps in planning and problem-solving.
Make sure that you understand the role of each of these task-oriented behaviours, and why they are important for
effective strategy implementation from a perspective of leadership.
8.7 Leadership With Management

It is asserted that there is a valid distinction between leadership and management:
● The key function of a leader is to establish the vision, mission, long-term goal(s) and strategic agenda of the
organisation as well as its strategy.
● The key function of a manager is to implement the vision, mission and strategy – how to achieve the intended
strategic goals and objectives.

However, in practice, these two roles are not clearly demarcated, and there is some overlap between these two
important roles. Assess the importance of these two roles from a perspective of strategy.
8.8 Putting Leadership Back Into Strategy

Study the 2008 article by Cynthia Montgomery and confirm the following:
● The importance of added value in terms of modern leadership
● The missing dimension between strategy as a set solution and strategy as a dynamic process according to
Montgomery
● The difference between a strategist and every individual in the company as far as the organization’s long-
term competitive advantage is concerned
In topics 8.2 to 8.9, we explored the importance of leadership in guiding and directing an organisation
strategically, especially with reference to effective strategy implementation. In the topics that follow we will look
at the importance of organisational culture, and then conclude our discussions in this topic by looking at the role
and importance of teams and effective teamwork.
Think Point
How would you describe the leadership style in your organization at the moment? Do
you think leadership are busy with telling, selling, delegating or participating?
Do you think there are good reasons for your answer to the above question?
8.9 Culture
Organisational culture cannot really be separated from the behaviour and style of organisational leaders,
because leaders influence culture, especially where people strongly relate to the behaviour they observe in
leaders. The position of leadership as means of executing strategy is again aptly illustrated in Figure 2.1. If the
organisation does not have a culture conducive to attractive competent people or to create the necessary
business processes and structures it will not be able to successfully implement their chosen strategies.

Culture is important because it largely controls the way in which individual members behave, makes decisions,
and controls activities. Understanding culture can mean the difference between success and failure, which is
the reason why leaders have to nurture and sustain the type of culture that will enhance performance and
produce superior results.
8.10 What Is Organisational Culture?

Culture is defined as shared values and beliefs that interact with an organisation's structures and control systems
to produce behavioural norms – "the way things are done in the organisation". Essentially, culture forms the
foundation for human activity in any organisation. Hough (p. 296) states that "culture is measurable and capable
of change, and should not be viewed as invisible or untouchable".
An effective culture and enhancing climate serves the following functions in an organisation:
● Culture serves the vision and strategy of the organisation.
● Culture serves the means through which to attain strategic objectives.
● Culture serves an individual's role orientation.
● Culture serves quality assurance.
● Culture serves corrective actions/interventions.
● Culture serves common language and conceptual considerations.
● Culture serves power and status
As stated (p. 297), culture provides an opportunity for the development of identity and a sense of belonging for
all.

8.11 Mapping Culture – The Culture Strategy

Vision provides a clear indication of where an organisation is and of where it would like to be in future. Strategy
provides the means by which to pursue the organisation's visions. The organisation's values should be
communicated and embedded through the design and implementation of an appropriate culture strategy.
A culture strategy describes the organisation's desired culture by means of the values that should be in place and
upheld by all employees.
To determine an organisation's culture strategy, the following need to be established:

 What type of culture is conducive to the organisation's performance?
 What type of values drive employee satisfaction?
 What type of culture will ensure customer retention and financial growth?
The benefits of a culture strategy are the following:

 Managers give priority to what is emphasised in the culture strategy which in turn supports the priorities
necessary for superior results.
 All employees generally make better decisions because they are guided by and subscribe to the shared
values.
 Employees are more likely to recognise their own importance in the organisation.
Note that the organisation's strategy is the basis of the culture model, from which the organisation's Workplace
Values and Brand Values are derived.
8.11.1 Brand Values

Brand Values are important because:
 They guide all employees to live out the organisation's brand every day.
 Brands are at the heart of marketing and business strategy.
 The objective for brand values is to assist in the creation of a distinct preference fo the organisation's products
or services.
8.11.2 Workplace Values

The role and importance of Workplace Values involve the following:
 They define the acceptable behaviour of individuals in achieving organisational objectives.
 They provide a framework for common norms of behaviour to support achievement of goals.
 All employees should know and be committed to the organisation's workplace values.

 The objective of workplace values is to have all employees sharing a clear philosophy of how to behave to
achieve organisational objectives.
Reading
Illustration Capsule 10.2: "Leadership and Entrepreneurial Mindset Contributing to

Value system" (pp. 298- 99) emphasised the effect of leadership to create an
entrepreneurial minded value system at First Rand.
What can one learn from the First Rand experience? What can be improved in
their approach?
8.11.3 Why should you measure organisational culture?

It has been shown that satisfied employees due to a positive culture perform better than employees who are not
satisfied with their work environment and the organisational culture. A positive and enhancing organisational
culture can improve performance measures such as:
● Profitability
● Quality
● Motivation
● Market share
● Sales growth
Culture assessments are important because they identify areas in employee satisfaction that could be
improved, ultimately also to the benefit of the consumers and thus the organisation's profitability, as illustrated
in Figure 10.3 (p. 300).
8.12 Shaping Your Organisation's Culture – The Culture Process

The culture process allows organisations to create conditions that will enhance a change in employee beliefs
and values, creating a culture that will support the strategy, leadership structures and systems of the
organisation. The culture process entails the following four phases, as illustrated in Figure 10.4 (p. 301):
 Phase 1: Design (PLAN) ● Phase 3: Review (CHECK)
 Phase 2: Assessment (DO) ● Phase 4: Refine (ACT)
In Phase 1 leadership and executives plan the culture strategy, disseminate the strategy to employees, followed
up with a questionnaire to assess the progress made in the design phase.

In Phase 2 of the culture process, the questionnaire that was developed in the design phase is distributed to
survey perceptions and beliefs of employees about the values regarding a number of factors that include clients,
services, products, and business processes.
Phase 3. Once the survey has been completed the information gathered in a post-survey audit is analysed and
applied during phase four.
Phase 4. In this phase all information obtained in previous phases, and especially in phase three, is refined and
implemented to initiate culture change in the organisation.
Think Point
Do you think the “right organizational culture” is more important than the “right leadership”?
Do you think that one can start with he right culture first and develop the necessary
leadership or are these processes interrelated and intertwined?
8.13 Effective Teamwork and Qualities Of Teams

Effective teamwork will always be one of the important challenges for leaders, especially in large organisations.
Changing circumstances in the business environment increasingly require the use of expert and
multidisciplinary teams to solve complex problems or, for example, to imitate and launch new product
developments. As leader, you might be involved as a member of a team, at other times you might be the team
leader. As member your expertise and professional knowledge will be required. As team leader, your role will
be to develop, motivate and manage the team to ensure the effective execution of tasks.
It has been found that successful teams
carry out their tasks competently and efficiently
● have members working agreeably together and enjoying a positive atmosphere
● provide a satisfying and rewarding experience for their members
The success of teams, however, are influence by qualities such as the following:
● communication within the team
● calibre of team leadership
● clarity about goals and objectives
● level of commitment and involvement of team members
● support and help given to individual team members .

8.14 Stages of Team Development

One of the more serious problems of teams is that team members are more concerned about their individual goals
than those of the team. The following four stages of group or team development is generally recognised:
(see figure 8.3)
 Forming – anxiety, uncertainty, dependence on the leader, discovering the situation and identifying the
appropriate behaviour.
 Storming – characterised by conflict, emotional resistance, resistance towards control and even rebellion
against the leader
 Norming – when group cohesion develops, norms emerge, mutual support and cooperation increase with the
team finding a sense of identity.
 Performing – where interpersonal problems are solved, roles become flexible and functional, and attempts to
complete the tasks are constructive
Figure 8.3: The Four Stages of Group Development

13
Gamble
These four stages are clearly illustrated in Figure 2.3 but at most only serve as guidelines for possible team
development. For example, team members may shift between stages, while some members may proceed to a
new stage, leaving other members behind. The potential for conflict and the challenge for team leadership are
obvious when forming teams and guiding them towards their objectives.

8.15 Building Effective Teams

Hough states that a team's ultimate goal is to be effective (p. 309). Based on Figure 10.7, 'A model for building an
effective team', effective teams can be formed according to the following steps:
Establish a clear purpose
● Create a proactive climate/open communications
● Create an environment of participation/commitment
● Establish rules
● Create a climate for civilized disagreement and consensus decisions
● Lead effectively
● Establish external relations
● Celebrate style, diversity and creativity
● Assess team effectiveness.
While all of these steps are extremely important in building effective teams, the last step 'Assess team
effectiveness', will indicate to what extent a team was successful in attaining the goal for which was originally
established.
Think Point
What do you think about the importance to work in organizational groups or teams versus
working as individuals? Do you think teams can be more innovative or creative than an
individual?
8.16 Summary
In this topic we explored the importance of leadership, organisational culture, and the role of teams in strategy
implementation, and especially the role of leadership in establishing a supporting culture and building effective
work teams.
As in Topic 1, the purpose of the discussion of these important issues was to determine how they could influence
and enhance the organisation's strategy and strategy implementation actions. In the topics that follow we took
a closer look at performance management, and corporate governance and ethics.

Activity 8.1
1. Define a “strategic issue” for top management. What is “strategic” in strategic leadership?
In what ways are top executives considered as “strategy implementers” of an
organisation?
2. With reference to Figure 10.3 (Hough, p. 306) develop a culture assessment framework
for your own organisation or an organisation that you are familiar with, and briefly report
your findings. Also submit practical recommendations to further enhance the culture.
3. You are the Human Capital manager of a multinational company. Your CEO has requested
you to compile a brief report on the status of teams in your organisation. For this purpose
discuss the stages of team development and the requirements for building effective teams.

Unit
9: Enterprise Performance
Management

Learning Outcomes Assessment Criteria
The student will be able to:
 Explain why vision and strategy constitute the driving  Activities needs to be done in order to gain an
force for performance management understanding of the vision and strategy and its
importance as a driving force for performance
management
 Explain the concept and process of performance  Activities needs to be done in order to gain an
management understanding of the concept and process of
performance management and analyse
 Explain what is meant by performance and
performance and development management
development management
 Discuss and explain the annual performance and  Activities needs to be done in order to gain an
development management cycle understanding of the annual performance and
development management cycle
 Describe good people management  Activities needs to be done in order to gain an

understanding of good people management and
 Explain the role of good people management in
the role of good people management in
achieving strategic objectives
achieving strategic objectives
 Discuss how return on investment from good people  Activities needs to be done in order to gain an
understanding of the estimate of return on
management is determined
investment from good people management

9.1 Vision and Strategy – The Driving Force For Performance Management
9.2 Performance and Development Management – The Core Integration Method
9.3 Managing Performance
9.4 Good People Management – Key to the Achievement of Strategic Objectives
9.5 Determine Return on Investment (Roi) from People Management Processes

 Hough, J, Thompson, Arthur A. Jr., Strickland, A.J. III and Gamble JE

(2008). Crafting and Executing Strategy. South African Edition.
London: McGraw – Hill.
 Refer to Chapter 7

9.1 Vision and Strategy – The Driving Force For Performance Management
(Pages 193 to 195 in Hough, Chapter 7. Reading 9 by Mankins and Steel (pp. R76 – R87) in Hough)
“Few factors are as important to the performance of an organisation as measurement, and measurement is among
the weakest areas of management today”. Hough, p. 192.
Effective control requires that appropriate corrective action be taken once deviations from the firm’s intended
strategic direction is identified. These actions could lead to changes in strategy formulation, including changes to
the strategic assumptions on which the strategy is based, to strategy-implementation changes, both formulation
and implementation changes, or no changes at all.
The abovementioned developments over the last few decades have accordingly been combined and integrated
into an approach of ‘enterprise performance management’ with the aim of achieving sustainable competitive
advantage through sustained organisational performance (Hough: 132). This means that performance
management, both as an approach and a process, has over the past years developed to a systemic approach that
leads, manages, and articulates performance at three levels: (1) the organisation (2) the business unit, and (3) the
individual.
This topic explores the concept, process and importance of effective enterprise performance management, well
knowing that the vision and strategy of an organisation have a major influence on any performance
measurement and/or management model. However, to achieve ultimate success, the following three levels of the
organisation have to work together towards achieving the same goal(see figure 9.1):
● Organisational level – there should be clarity as to where the organisation currently is and where it wants
to be in the future.
● Business unit level – the organisation’s objectives are translated into the work that the business unit should
accomplish within its tactical and competitive environment
● Individual level – the individual needs to be clear regarding his or her purpose, the desired outputs to be
achieved to ensure success for the business unit as well as the organisation as a whole.

Figure 9.1: Levels of Performance Management

14
P erformance management
takes place at three different levels:
Organisation Level
Departmental Level
Individual Level
The cascading process is used to integrate the organisation’s objectives with the individual performance
requirements.
This ensures that every individual and business unit has a direct impact on the success of the organisation
9.1.1 The cascading process

In the cascading process, the performance efforts of the entire organisation are aligned and integrated, which
forms the basis of the Balanced Scorecard. More specifically, the firm’s vision and strategy are cascaded down
into performance measures that gauge the organisation’s success. As illustrated in Figures 3.1 and 7.1 (p. 194),
the cascading process requires that the business units or departments interpret the organisation’s balanced
scorecard, from which they formulate their tactical plans, and individuals interpret these tactical plans as a basis
for their personal performance contracts that stipulate (1) results to be achieved (KRA/KPI) and (2) objectives and
competencies required.
9.1.2 Mapping the strategy for success

(Pages 193 to 195 in Hough, Chapter 7, Reading 3 by Hendricks et. al. in Hough (pp. R21-R30)
A set of balanced performance measures is used to map the ways in which the firm intends to achieve success.
These measures and means are combined to form a Balanced Scorecard, which also serves to align the various

levels of performance in the organisation. The balanced scorecard provides leaders with the following four
perspectives to measure organisational success:
● Financial – if successful, how will we look to our stakeholders?
● Customer – in achieving our vision, and how our customers should perceive our organisation?
● Internal processes – to satisfy our customers, what management and other business processes should we
excel at?
● People/innovation – to achieve our vision, what culture, learning and growth opportunities will our people
need?
As shown in Figure 9.2 (p. 195), each of the four perspectives of the balanced scorecard is interpreted in an
integrated way using different components. Let us have a look at these components.
Figure 9.2: The Balanced Scorecard

15
Gamble
Figure 9.2 identify the following components:

● Objectives – all actions that are needed to implement the strategy effectively
● Measures – to determine progress in achieving objectives
● Targets – specifying the exact performance level for each objective
● Initiatives – programmes, activities, or actions that should be implemented to meet or exceed
performance targets.

9.2 Performance and Development Management – The Core Integration Method

The key process that provides the link between the vision and strategy and the integration of people
management processes is ‘performance and development management’. However, the vision and strategy define
the roles as well as the accountability of individuals within the organisation, and the performance and develop
management programme aligns individual objectives with the overall business objectives, and enhances both
capacity-building and continuous improvement.
Performance and development management is a people management process that:
● links performance to vision and strategy
● brings focus when planning and reviewing performance
● encourages mentoring and coaching to achieve performance objectives
● is motivational in terms of individuals’ understanding of what is expected from them, and feedback on
their progress
● applies the principles of continuous improvement
9.2.1 Standardised performance terminology: The use of role profiles

A ‘role profile’ identifies exactly what each person’s role/position in the organisation entails, what is expected from
him/her in that role/position, and is used as a standard for the alignment of the organisation’s strategy and
performance objectives. These relationships appear in Figure 7.3 (p. 197).
From Figure 7.3 it is clear that each role profile consists of the following:
● Position description
● Key Result Area (KRA) profiles
● Key Performance Indicator (KPI) profiles
● Competency profile
● Compliance profile
● Contribution profile
Review and summarise the above components of a role profile as discussed by Hough (pp 196-98) for your own
purposes, noting the following:
 The KRAs/KPIs are derived from and are aligned with the four perspectives of the balanced scorecard
(financial, customer, internal and people/innovation)
 The contribution profile lists the measurable tasks (inputs) that the individual should perform according to the
KRAs and KPIs.
 The role profiles of each individual can be monitored on a continuous basis, since it provides clarity of
individual performance requirements.

9.2.2 Defining the relationship between competencies and results

(Page 198 in Hough, chapter 7)
Performance management requires that both inputs (behaviour) and outputs (results) be considered. It is
important for management to know that there is a direct relationship between competencies and results, as a
clearly evident form Figure 7.4 (p. 199). What are the overall benefits (strategic and operational) to the
organisation where this relationship is positive? What are the consequences where this relationship is not optimal?
9.3 Managing Performance –

The Annual Performance And Development Management Cycle
The annual performance and development management cycle is a continuous process. These cycles follow each
other, each time learning from experiences during the preceding cycle, leading to continuous improvement in
performance over time. The way in which this process manifests itself could result in a sustainable competitive
advantage for the organisation, all other things being equal.
The performance and development management process comprises four distinct phases that are applied during
the annual performance and development management cycle as well as on a daily basis:
Phase 1: Plan (performance contracting)
● Phase 2: Do (implement the performance contract)
● Phase 3: Check (review performance)
● Phase 4: Act (performance recontracting)
9.3.1 Performance and development management: the annual cycle

Phase 1: Performance contracting

This contract is derived from an individual’s role profile. In this phase, targets regarding KRAs and KPIs are
negotiated with the individual.
Phase 2: Implementing the performance contract

During this phase, the individual implements the contract by achieving the results (KRAs), contribution and
compliance, demonstrating required competencies. Implementation of the results contract takes place on a daily
basis, within a timeframe of quarters.
Phase 3: Reviewing performance

The individual’s performance is reviewed against set standards in his/her performance contract. During formal
results reviews, all results achieved during quarterly review meetings will be evaluated. In addition, during the
formal development reviews, the individual’s progress towards developing the competencies in his/her Personal
Development Plan (PDP) will also be reviewed. Figure 7.7 gives a clear indication of the various steps involved.

Figure: 7.7
Gamble
Figure 9.3: Personal Development Planning Process

16
Phase 4: Performance recontracting

This involves agreeing on new or revised performance contract, based on the individual’s performance during the
previous cycle.
The Annual Performance and Development management cycle is graphically illustrated in Figure 7.5 (p. 200).
Hough (p. 200) states that in order for an organisation to reach its goals, it is vital that its strategy is implemented
within each business unit, and is cascaded down to individual roles. To achieve this, it is imperative that the
requirements for implementation in each of the four phases are spelled out in great detail. This detail for each
stage is provided in the pages to follow (Hough, pp. 200-209). In your own interest, summarise the most important
aspects with regard to the implementation detail for the four phases of the Annual Performance and Development
Management Cycle.
9.4 Good People Management – Key to the Achievement of Strategic Objectives

According to Hough (p. 210), the following people management processes are essential to achieve organisational,
business unit and individual objectives in an organisation:
 Recruitment and selection
 Orientation and induction
 Learning and development
 Career and talent management
 Remuneration and rewards

The Core Concept (p. 210) states the following: “People management processes are not ‘stand alone’
processes. Each people management process links with the next process and therefore forms a value chain for
the organisation.”
9.4.1 Recruitment and selection

Recruitment and selection must ensure that the organisation hires the best people (capabilities and competencies)
in the market relevant to the business needs and strategies of the organisation. Summarise this section for your
own purposes, noting that a firm needs skilled employees with the right capabilities and competencies to achieve
its objectives. Of importance is that a firm can measure the success of the recruitment and selection process by
determining whether there is
 a decrease in staff turnover and absenteeism of new employees or not
 whether there is an increase in profits, quality and quantity of production or not
 an improvement in employees' attitudes, productivity and overall work performance or not and
 an increase in customer satisfaction or not
Understanding the problems and gaps that may result enables the firm to improve its recruitment and selection
processes.
9.4.2 Orientation and induction

Starting a job with a company can be complex, challenging and stressful. Newly-appointed employees are affected
by initial socialisation experiences in ways that will affect their perceptions, behaviours, and attitudes for the rest
of their time in the organisation concerned.
Once again summarise the main tenets of this section. Note that the aim of the orientation and induction process
is to transform the "new" employee into an effective and motivated employee in the shortest possible time. While
orientation typically aims at familiarising the new employee with their colleagues and the work environment, the
aim of induction, which is more division-and-position-specific, is to communicate the plans, operating procedures,
physically layout, and managerial hierarchy to "new" employees. Induction could involve training for new
employees.
Performance and development management perspectives as well as opportunities for development and
advancement are important in this regard. Ensure that you know the possible indications of insufficient
orientation and induction (p. 212). This knowledge will help management to improve future processes.
9.4.3 Learning and development

The shift from a traditional to a knowledge economy has lead to an increasing recognition that the firm's wealth is
inherent in intellectual (human) capacity. A challenge for all organisations is to identify and devise innovative

learning programmes and experiences as part of an organisation's experiential learning philosophy to meet both
current as well as future knowledge and skill requirements.
Individuals subjected to appropriate training and skills development programmes should be assessed on their
outcomes (performance) in those programmes in terms of
 Improvement in performance
 Improvement in knowledge, skills and abilities.
9.4.4 Career and talent management

Career and talent management is the process of ensuring that the organisation attracts, retains, motivates and
develops the talented people that it requires to remain competitive (Hough, p. 213).
The 'career and talent management process' enables an organisation to be successful, while encouraging the
development of skills. This process uses performance as criteria for decisions regarding the promotion of staff and,
in addition, helps the individual to plan and manage his/her career in terms of career goals that he or she may
have.
9.4.5 Remuneration and rewards

Remuneration and rewards describes the process through which employees' efforts towards the achievement of
the organisation's success are recognised. Note the disfunction made between remuneration and rewards in this
section, and the criteria that could be used to assess the appropriateness of the remuneration and rewards. Also,
remuneration and reward should be directly linked to performance. The need for an efficient electronic system to
drive the above processes is presented in Illustration Capsule 7.1: "The need for a seamless technology solution".

Hough (p. 215) states that the following criteria can be used during the performance evaluation process:
 Individual metrics
 These concern the individual's performance within the organisation and their perceptions about performance
management
 Culture surveys
 Culture governs how a firm allocates resources, the systems it uses, the results it expects, recognises and
rewards, and the sanctions available to managers that they can use. All organisations should maintain a
clear fit and alignment between strategies, practices, and culture to achieve success.
 Performance data
 Apart from all the performance management processes and systems discussed previously, it is important that
individuals' performance in their current positions be measured regularly.
 Process metrics

 Process metrics involve determining the effectiveness of the people and performance and development
management processes by identifying the gaps or problems experienced during these processes to improve
future processes.
 Diversity metrics
 This requires that the equal opportunity (employment opportunity) situation within an organisation should also
be assessed on an ongoing basis.
 Organisational metrics
 The impact of all of the above performance measurement processes in accordance with the above-mentioned
criteria/metrics should also be determined.
In summary, return on investment (ROI) can be determined from factors such as the following:
a decrease in costs, accidents, staff turnover, absenteeism, and
- an increase in profits, quality and quantity of production, customer satisfaction and an improvement in
employee attitudes and performance
Activity 9.1
1. Study the Reading in the prescribed book by Hough, "Turning great strategy into great
performance" (pp. R76-R88). Compile a brief motivated report on the following:
2. Explain the term "Strategy-to-performance gap" and the value of this approach to the
executive management of an organisation.
3. Critically discuss and evaluate the seven rules that could be applied to strategic planning
and strategy execution to close the strategy-to-performance gap.
"Performance and Development Management" is the key process in providing the link
between the vision and strategy and the integration of people management processes"
(Hough: 196). Critically discuss this statement and explain the management of performance
in terms of the annual performance and development management cycle. Motivate your
answer.
“The Balanced Scorecard is a management system that enables organisations to clarify
their vision and strategy and translate them into action. It provides feedback around both
the internal business processes and external outcomes in order to continuously improve
strategic performance and
results.”
4. Describe the Balanced Scorecard (BSC) as a strategy implementation and alignment
tool.
Diagnose the benefits of using the BSC
Indicate the process of achieving 100% line-of-sight in any business by using the BSC..

Unit
10: Corporate Governance and Ethics


UNIT:
 Explain the separation of ownership and control in  Activities needs to be done in order to gain an
public companies understanding of the importance of separation of
ownership and control in public companies.
 Define corporate governance  Activities needs to be done in order to gain an

understanding of the importance of corporate
governance.
 Explain the purpose and scope of the King Report  Activities needs to be done in order to gain an
II (2002) understanding of the purpose and scope of the King
Report II (2002) and discuss the implications of triple
 Explain the meaning and implications of triple
bottom line sustainability
bottom line sustainability
 Explain the roles, functions and responsibilities of  Activities needs to be done in order to gain an
boards, directors and committees understanding of the roles, functions and
responsibilities of boards, directors and committees,
 Explain what effective board leadership means
discuss effective board leadership and the role of the
 Explain the role of the chair and of non-executive chair and of non-executive directors
directors
 Compare the King Report II and the Sarbanes-  Activities needs to be done in order to illustrate the
Oxley Act King Report II and the Sarbanes-Oxley Act
 Define the concepts of risk and risk management  Activities needs to be done in order to gain an
understanding of the concepts of risk and risk
management
 Define ethics and discuss its importance from  Activities needs to be done in order to gain an
business perspective understanding of the ethics and interpret its
importance from business perspective

10.1 Public Companies

10.2 Corporate Governance
10.3 The King Report Ii (2002) On Corporate Governance For South Africa
10.4 Directors, Boards And Committees
10.5 Comparison of King Ii (2002) and the Sarbanes–Oxley Act Of 2002
10.6 Risk and Risk Management
10.7 Ethics

 Hough, J, Thompson, Arthur A. Jr., Strickland, A.J. III and Gamble
JE (2008). Crafting and Executing Strategy.
 South African Edition. London: McGraw – Hill. Refer to Chapter 6

10.1 Public Companies

In this topic we look at corporate governance and ethics within the context of strategic management. The
importance of ethics in business becomes clear from the various examples referred to in this section – Enron,
Worldcom, Athur Andersen, and, in South Africa, ABSA/Unifer Bank Ltd, Regal Treasury Bank Ltd, and Macmed
– all of which are seen to be corporate governance transgressions. In the discussions that follow, corporate
governance and business ethics will provide an ongoing theme that should be inherent in both the strategic
planning and strategy implementation iniatives of businesses. But let us start explaining the various types of
companies, main role players and the separation of ownership and control.
Among the various possible forms of business, public companies are important in any economy:
 Public companies raise funds by issuing shares to investors who become shareholders and owners of the
public company
 These shareholders receive value that is created by the company
 There is a risk involved, since shareholders can lose their money if the company goes bankrupt
However, Hough (p. 170) states that apart from bankruptcy, companies can also suffer from potentially serious
governance problems.
The main role players in a public company are:
 shareholders
 directors
 managers
 employees
● Shareholders own the firm, and share in the wealth creation as well as the losses that could be incurred.
● Directors hire, oversee, evaluate and fire the managers of the company – all of which should be in the
interest of the shareholders.
● The managers, such as the chief executive officer (CEO) constitute the company's top level of decision-
making and are responsible for the company's day-to-day operations.
● Employees at various levels within the company execute the strategic, tactical and operational activities of
the company.
● The company's stakeholders usually comprise the following four categories:
- shareholders/owners
- employees, customers and suppliers
- local communities, the media and special interest groups - the state.

10.1.1 Separation of ownership and control

Corporate ownership and corporate control are divided between two parties or groups – shareholders and
management. The shareholders own the company, and management controls the company. Many companies
have failed as a result of the conflict between the objectives of the company, and those who act as custodians of
the company's assets – the directors and senior executives.
The "principal-agent" or "agency" problem arises because of the separation of ownership and control. Why would
management act in the best interests of the owners, and not in their own best interests?
The shareholders of the company are the principals, and the managers who run the company, their agents.
Agency problems thus occur when the shareholders (principals) lack the information or power to monitor and
control their agent (managers/directors).
Solutions to this problem fall into two categories – incentives and monitoring.
 Incentives to link the wealth of the management to the wealth of the shareholders, so that
executives/managers and shareholders want the same thing.
 Monitors. Meaning to setting up mechanisms to monitor the behaviour of managers.
The separation of ownership and control between shareholders and managers is illustrated in Figure 10.1 (p. 173).
This also shows that monitors and controllers exist within and external to the company.
Figure 10.1: Ownership, Monitering, and Control

17
Adapted from Kim K A & Nofsinger J R (2004:4) Corporate Governance, International Edition
CRAFTING AND EXECUTING STRATEGY: South African Edition Hough | Thompson |

Strickland | Gamble

Separation of ownership and control typically leads to a conflict of interests. Note the duty of the board of directors
of a company in this regard (p. 172). Research has shown that managers do not always act in the interests of the
company and hence its owners, which points to a need for measures to close the gap between the interests of
managers and shareholders.
Corporate governance, however, provides an appropriate mechanism with suitable measures to address the
agency problem, given that the corporate governance system is integrated and complex. These aspects are
discussed in the next section.
10.2 Corporate Governance

10.2.1 Defining governance

The word governance is derived from the Latin "gubernare", which means "to steer". The concept of 'governance'
refers to the process of running a government or an organisation. 'Governance' furthermore represents the means
by which direction and control are applied to the stewardship of a company's assets – tangible and intangible,
financial and non-financial – to deliver the primary objectives of sustainable value creation.
The King Report II (2002) describes corporate governance simply as "the system by which companies are directed
and controlled" (p. 173).
Summarise the rest of this section (pp 174-176), noting specifically that
● Corporate governance is concerned with holding the balance between economic and social goals, and
between individual and communal goals
● Corporate governance addresses the interests of a wide range of stakeholders
● Corporate governance refers to the entire system by which companies are managed and monitored.
● Corporate governance is related to how companies and governments are run, and is closely related to
the way a business is directed – where the latter includes issues on strategies, policies, and organisational
procedures that impact on company performance.
● Governance consists of decisions and actions linked to defining the organisation's mission, policies and
the controls used to allocate power.
● For effective relationships with shareholders, directors, management and other stakeholders, corporate
and business governance needs to be a goal of the organisation.
● As stated in the Core Concept (p. 174), "Directors and management need some guiding principles to
optimise returns and minimise risks and the abuse of power by leaders". Corporate governance
effectively provides these guidelines for both public and other types of organisations.
● Corporate governance is important on all organisational levels since it affects attitudes to business,
responsibilities, leadership, honesty and integrity.

● Lastly, good governance is the foundation of good business, and serves to align shareholder objectives
and managerial incentives.
In closing, integrate the information contained in Table 6.1, "Benefits of business governance" and Table 6.2,
"Reasons for good corporate/business governance" into your summary of the preceding issues outlined above.
10.2.2 Governance test

The following governance tests can be applied by public entities and non-profit organisations to see if good
governance principles are in place (Table 6.3, p. 176):
● Existence test
● Activity test
● Relationship test
● Responsibility test
10.3 The King Report Ii (2002) On Corporate Governance For South Africa
The King Report II (2002) was issued in 1994 by the King Committee following an initiative of the Institute of
Directors (IoD) in South Africa and the Johannesburg Securities Exchange (JSE). King II follows an inclusive
approach that considers all stakeholders and sets out to address social, economic and environmental issues.
King II is regarded as one of the most progressive models on corporate governance in the world, and definitely as
far as emerging economies are concerned. In no small way has it contributed to the confidence of
international investors to invest in South Africa.
The King Report II opted for an inclusive approach based on two additional considerations:
 A value system underlies the South African society (for example Ubuntu (African humanism, which signifies
a commitment to co-existence, consensus and consultation).
 Corporations have a great influence in society, and to varying degrees often determine the quality of
individual and community life.
Importantly, corporate governance and business ethics undoubtedly contribute to a country's ongoing
development.
King II strikes a balance between 'performance' and 'conformance', which broadly means that while managerial
initiatives in creating shareholder value are encouraged, they should also be subject to appropriate checks and
balances that allow a board of directors to ensure that management is at all times acting in the interests of the
organisation and its shareholders.

The following seven primary characteristics of good governance are identified in the King Report II:
 Discipline
 Transparency
 Independence
 Accountability
 Responsibility
 Fairness
 Social responsibility
However, corporate governance is seen to hinge mainly on the following four cardinal values:
● Fairness
● Accountability
● Responsibility
● Transparency
Summarise the seven characteristics including the four core values for your own purposes.
Hough (p. 178) states that the 'rule of law' is the foundation for good governance. Corruption and other devious
activities erode national cultures and is detrimental to good governance.
Apart from the rule of law, accountability and internal control are important considerations in this regard. All of the
above means that the true spirit of corporate governance only emerges when an organisation adheres to the
cardinal and core values discussed above. As stated, summarise the main aspects of this section for your own
purposes. Study the example in Illustration Capsule 6.2: "Regal Treasury Private Bank Ltd".
10.3.1 The Triple Bottom Line (sustainability)

It is increasingly accepted that companies can no longer act independently of the societies and the environment in
which they operate. Apart from financial information, investors now increasingly value and request information
concerning the company's future prospects, opportunities, risks, and information on intangible and environmental
factors.
The concept of sustainability in business means the achievement of balanced and integrated social, economic and
environmental performance, referred to as the "triple bottom line", within a corporate governance framework.

Boards of directors should ensure that companies adopt an appropriate focus on social and business-related
issues in order to contribute positively towards improving the quality of life of the South African population.
Summarise the main aspects in this section for your own purposes.
10.4 Directors, Boards And Committees

The role of the board of directors is to
● govern
● make decisions
● delegate decision-making authority to board committees which include audit, remuneration, and
nomination, and which should be chaired by non-executive directors.
Board committees have been extended to include strategic, risk, and governance committees in recent years.
10.4.1 Effective board leadership

The responsibilities of the board of directors are the following:
 To hire, evaluate and even fire top management, with the position of CEO being the most crucial
 To vote on major financial decisions
 To vote on major operating proposals
 To offer expert advice to management
Ensure that you understand how boards should be constituted in terms of balance of diversity, skills and expertise
among others, and the requirements for non-executive directors and chairpersons of boards. Many factors
influence board performance, as indicated in figure 6.2 (p. 182). Two main inputs of the board are skills and time.
Four processes for an effective board of directors are:
 A thoughtful nomination and recruitment process
 An executive committee that facilitates decision-making
 Establishment of a committee structure
 Periodic evaluation of board performance
The above processes and structures lay the groundwork for board effectiveness, which is summarised in Table
6.4 (p. 182).
Boards will follow their own approaches to the execution of their duties for a number of reasons, the most important
of these being the ownership structure of the company and shareholder expectations regarding governance. Table

6.5 (p. 183) differentiates board activities between long term and short term performance and external and internal
focus. We insert the table below to draw your attention to these activities and policy development.
Table 10.1: Board Acitivities
Source: Tricker, R.I. (1994). International Corporate Governance,

1st Edition. Singapore: Simon & Schuster Pty Ltd Sunday Times
22nd January 2005
CRAFTING AND EXECUTING STRATEGY: South African Edition
Hough | Thompson | Strickland | Gamble
Board leadership is crucial for board success, especially in terms of performance and conformance. Table 10.1 (p.
184) presents the roles and responsibilities of the philanthropic board.
10.4.2 The role of the chair and the non-executive director

The chairman of the board plays major roles in different companies while there are situations where it has been
difficult to separate the roles of the chairperson and the CEO. However, recall that agency theory argues for a
clear distinction of roles between the two.
Non-executive directors also have a key role in a board of directors. They are not involved in day-to-day
management and are not full-time employees. According to the Institute of Directors, non-executive directors
 are not representatives, shareholders or stakeholders
 are not employed by the company in the last three years
 are not immediate family of an employee
 are not a professional adviser to the company

 are not a significant supplier or customer

 have no significant contractual relationship
 suffer no interference with their independence
For sustainable business success, a balance is needed between the board, the non-executive directors, the
executive management and the shareholders.
10.4.3 Board failure

The following reasons have been listed for the ineffective functioning of boards:
 Micro-managing the organisation
 An ineffective nominating committee
 Size of the board
 Non-functioning committee structure
 No strategic plan
 No orientation plan
 No rotation plan
By identifying those problems unique to a specific company will greatly help to improve board effectiveness and
prospects of the company.
10.5 Comparison of King Ii (2002) and the Sarbanes–Oxley Act Of 2002

In this introduction to the section, note the basic differences between King II and the Sarbanes-Oxley Act in the
United States, as well as the reasons for developing and implementing the two approaches to corporate
governance and business ethics.
10.5.1 Board of directors and Audit Committee

While further highlighting the differences between the two approaches, this section clearly states the ten main
areas of responsibility of boards according to King II (pp. 186-87). Ensure that you understand these areas in the
context of corporate governance from a perspective of strategy and sustainable success. What are the risks and
implications for a company in a highly competitive business world where these areas are not effectively
addressed, or not addressed at all.

10.5.2 Audit Committee and Board of Directors (Pages 187 and 188 in Hough, Chapter 6)
Once again identify the main differences between the King Report II and the Sarbanes-Oxley Act as far as the
purpose, duties, and composition of audit committees are concerned. In this regard, critically compare the eight
main areas of audit committee responsibility according to King II with the four areas stipulated by the Sarbanes-
Oxley Act. Are these differences significant? If so, in what sense are they important?
10.6 Risk and Risk Management

Hough (p. 188) defines risk management as

"The identification and evaluation of actual and potential risk areas pertaining to a business and the subsequent
and continuous development of programmes that are aimed at reducing any loss before it occurs, either by controls
and assurance measures or by financing and insurance measures."
Modern risk management seeks to optimise the relationship between the two main methods of managing risk,
namely risk control and risk financing.
King II places great emphasis on risk management as one of the priority responsibility areas of boards. As stated
in the Core Concept (p. 188): "The boards of listed JSE companies are tasked with the overall responsibility for
risk management and control within an organisation on an ongoing basis."
Identifying, managing and controlling risk should be linked to the 'triple bottom line' and should address risks in the
following areas:
 Physical and operational risks
 Compliance risks
 Credit and market risks
 Business continuity and disaster recovery
 Technology risks
 Human resource risks
Most important is that risk should be managed proactively, with the board taking full responsibility for initiatives
regarding risk management and control. Study this section and assess the role of the board in effective risk
management and control.

10.7 Ethics
Hough (p. 189) defines ethics as "the science of using moral criteria to guide human conduct", and morals as
"accepted values and standards of human behaviour."
In this section, study the seven shortcomings on ethical issues identified by research on South African
companies (p. 189). Ethical standards and ethics in business constitute the foundation of corporate governance.
As Hough (p. 190) concludes, "an ethical climate enables business to develop a strong link to best practices which
are key to a sustainable strategy."
In this topic we defined and discussed the concept of corporate governance within a context of strategy. The driving
mechanism for promoting corporate governance in South Africa is the King Report II (2002) which provides
guidelines for the effective functioning of boards of directors in South Africa. Corporate governance is closely linked
to business ethics which together provide a foundation and framework for sustainable ethical business practices
in South Africa.
Activity 10.1
1. What is corporate governance and how do you see its role in South Africa companies
today? What do leadership and top management focus more and more on corporate
governance during the last five years or so? Do you think corporate governance is
necessary to give direction to strategic business decisions?
2. List the seven shortcomings on ethical issues identified by research on South African
companies. We raised the issue of “ethical business climate”. List the attributes of any
company that you consider to have a ethical business climate. Is this climate tangible or
intangible? Please discuss

Bibliography
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Developing fit and alignment through a disciplined process. Long Range Planning nr 38
David, FR. 2007. Strategic management. 11th ed. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Decoene, V. & Bruggeman, W. 2006. Strategic alignment and middle-level managers’ motivation in a balanced
scorecard setting. International Journal of Operations and Production management. Vol 26 nr 4
Fonvielle, W & Carr, T. 2001. Gaining strategic alignment. Management Accounting quarterly. Fall 2001. p4-14.
Hendricks, KB, Wiedman, C & Menor, L. The Balanced Scorecard: To adopt or not to adopt? Ivey Business Journal,
Vol 69 (12), Reading 3 in Hough et. al., op. cit., pp. R21-R30.
Hough, J. 2006. High performance Balanced Scorecards as a tool to instill sustainable and high performance
cultures in South African businesses. Business Day. March
Hough, J, Thomson, AA, Strickland, AJ & Gamble, JE. 2008. Crafting and Executing Strategy. South African ed.,
London. McGraw-Hill.
Ireland, RD, Hokinsson, RE & Hitt, MA. 2009. The Management of Strategy, 8th ed. United States: South- Western
Learning.
Kaplan, RS & Norton, DP. 2006. Alignment. Using the Balanced Scorecard to create corporate synergies. Boston:
Harvard Business School Press
Mankins, MC & Steele R. 2005. Turning great strategy into great performance. Harvard Business Review.
July/August, Reading 9 in Hough, et. al., op. cit., pp. R76-R87.
Maxwell, JC. 2002. The 21 Irrefutable Laws of Leadership: follow them and people will follow you. Nashville,
Tennessee: Thomas Nelson, in Hough, et. al., p. 289.
Montgomery, CA. 2008. Putting Leadership Back into Strategy. Harvard Business Review.
http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article. Accessed on 29
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Yip, G & Johnson, G. 2007. Transforming Strategy. 2007. Business Strategy Review, London Business School.


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Bachelor of Business

CORPOARATE AND BUSINESS STRATEGY

List of Contents ........................................................................................................................................... 1

Part 1: Strategy Development-Introduction and the Importance of Learning About Strategy

Unit 1: The Strategic Management Process and Strategic Alignment ................................................... 15

Unit 3: Evaluating a Company's External Environment........................................................................... 49

Unit 4: Evaluating a Company's Resources and Competitive Position ................................................ 73

Bibliography ............................................................................................................................................ 128

Part 2 : Strategy Implementation ........................................................................................................ 131

Unit 8: Leadership, Culture and Teamwork ........................................................................................ 150

Unit 9: Enterprise Performance Management ...................................................................................... 166

Unit 10: Corporate Governance and Ethics .......................................................................................... 178

Bibliography ............................................................................................................................................ 191

1 MANCOSA – Bachelor of Business Administration Honours

Table 10.1: Board Acitivities ........................................................................................................................... 187

List of Figures and Illustrations

Figure 1: Framework of the Strategy Development Module................................................................................ 5

Figure 1.1: A comprehensive, integrated strategic management process ........................................................ 23

Figure 1.2: Levels of strategy............................................................................................................................ 25

Figure 2.1: Vision and mission in strategy development. .................................................................................. 38

Figure 3.1Selected macro-environmental variables .......................................................................................... 56

Figure 3.2: Industry life-cycle ........................................................................................................................... 63

Figure 7.1: Strategy Implementation ............................................................................................................... 136

Figure 7.2: Differences between Crafting vs Executing Stragey ..................................................................... 137

Figure 7.3: The Eight Components of Strategy............................................................................................... 139

Figure 7.5: Line of sight .................................................................................................................................. 148

Figure 8.2: Situational Leadership Model ....................................................................................................... 156

Figure 8.3: The Four Stages of Group Development ...................................................................................... 163

Figure 9.1: Levels of Performance Management ............................................................................................ 170

Figure 9.2: The Balanced Scorecard .............................................................................................................. 171

Figure 9.3: Personal Development Planning Process..................................................................................... 174

Figure 10.1: Ownership, Monitering, and Control ........................................................................................... 182

1 MANCOSA – Bachelor of Business Administration Honours

We hope you enjoy the module.

MANCOSA – Bachelor of Business Administration Honours 2

Aims,Objectives and Outcomes of The Module

Objectives of the Module

1. Context and Content of the Module

3 MANCOSA – Bachelor of Business Administration Honours

The framework for this module Strategy Development is illustrated in Figure 1.

MANCOSA – Bachelor of Business Administration Honours 4

Figure 1: Framework of the Strategy Development Module

2. Why Learn About Strategy Development?

5 MANCOSA – Bachelor of Business Administration Honours

Learning outcomes of the module

Range Statements of This Module

Type of organisation: Multiple product/service or dominant product/service organisations, including diversified

MANCOSA – Bachelor of Business Administration Honours 6

Structure of the organisation: Hierarchy

CORE READING FOR THIS MODULE

The prescribed text for this module is:

C. Exit Level Outcomes and Associated Assessment Criteria of the Programme

Exit level outcomes of the programme Associated Assessment Criteria

 Develop an understanding of a broad range of  Management functions and management practices

7 MANCOSA – Bachelor of Business Administration Honours

D. Learning Outcomes and Associated Assessment Criteria of the Module

LEARNING OUTCOMES OF THE MODULE ASSOCIATED ASSESSMENT CRITERIA OF

MANCOSA – Bachelor of Business Administration Honours 8

 Enterprise performance Management is

 Corporate Governance and Ethics in strategic

E. Learning Outcomes and the Associated Assessment Criteria of the Units

9 MANCOSA – Bachelor of Business Administration Honours

F. Notional Learning Hours