THE STRATEGIC

MANAGEMENT PROCESS
A SOUTH AFRICAN PERSPECTIVE
SECOND EDITION

J.A.A. (Kobus) Lazenby

EDITOR

Van Schaik
PUBLISHERS
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PREFACE

The second edition of this book would not have been possible without
the encouragement and assistance of a large number of people. It is
always dangerous to mention names for fear of leaving someone out. I
am, however, grateful to everyone who helped and encouraged me to
go forward with this project. I am eternally indebted to my wife,
Maretha, for her encouragement, love and patience during this project.
I want to thank each and every colleague who contributed by writing a
chapter or two to make this book a reality. I also have to mention
Claire Thornton of Van Schaik Publishers for her motivation and for
finalising this project.

The original rationale was to develop a book that would explain

strategy so that the reader will understand exactly what the strategic
management process entails. It is still the approach followed in this
second edition. The book is designed for use by people who will
become future managers of organisations and for managers in practice,
because all managers are “strategy makers and implementers”. The
content of each chapter is enriched with new and updated “strategy in
action” case studies that give examples of how the theory is applied in
practice. Each chapter from the first edition is concluded with an
updated or new case study to help the reader apply the theory in the
chapter.

Chapter 1 serves as an introduction to the strategic management

process and explains the importance and relevance of strategic
management to all organisations. The strategic management process is
detailed in Figure 1.2 and explains the four parts of the book
graphically.
Part I (chapters 2–7) deals with strategic direction and environmental
analysis. Chapter 2 deals with organisational vision, mission and
values and explains the strategic direction that management wants an
organisation to follow. Chapter 3 deals with the importance of ethical
strategic management and corporate social responsibility. This
emphasises the obligation of organisational decision makers to make
decisions and act in ways that recognise the interrelatedness of
business and society. The new Chapter 4 in this edition deals primarily
with risk management. The current business environment in which
organisations are operating varies significantly from the business
environment of five years ago, and these rapid changes lead to a higher
exposure of organisations to various types of risks than before. This
chapter aims to explore organisational risks and the management of
risk. The new King IV report is also discussed in more detail. Chapter
5 describes internal analysis as the process of identifying and
evaluating an organisation’s specific characteristics, including its
resources, capabilities and core competencies. Chapter 6 deals with
external environmental analysis. It is the process of scanning and
evaluating an organisation’s various external environmental sectors in
order to determine positive and negative trends that could affect
organisational performance. Chapter 7 is also new. Scenarios and
uncertainty are synonyms in the field of strategic management. To
enable an organisation to develop coherent strategies, a level of
predictability and stability is necessary, but very often the ability to
predict a political, economic or technological environment does not
exist. To enable the strategist to develop a coherent strategy where
predictability is not possible, it is necessary to use scenarios.

Part II (chapters 8–13) is about the development of strategy. The

outcome of the first part helps the organisation to develop its long-term
goals and the strategies to achieve its goals and to arrive at the desired
destination as stated in its vision. Chapter 8 deals with setting long-
term goals and developing business-level strategies to help the
organisation to achieve a competitive advantage. Chapter 9 describes
the grand or corporate strategies that the organisation can follow to
experience growth and that will support the business-level strategies to
achieve a competitive advantage. Chapter 10 examines the
consolidation and recovery strategies when organisations experience
financial and sustainability problems. The turnaround strategy is an
important recovery strategy. Chapter 11 deals with strategies in
different industry contexts. It is important in strategic planning that
strategy formulators understand that the industry context or life cycle
phase will influence the strategic options available to the organisation.
Chapter 12 is included to highlight the process of strategic
management in the public sector. This phase of the strategic
management process is concluded with Chapter 13, in which the
importance of strategy choice is discussed. After the available strategic
options have been identified, the most applicable strategic option must
be chosen for implementation.

Part III (chapters 14–17) is about strategy implementation or

execution. This is the make-or-break phase of strategy. It involves
putting the strategy into action and implies that things in the
organisation will change. This important aspect is discussed in Chapter
14. For successful strategy implementation, organisations make use of
various strategy implementation components. These components are
briefly introduced and explained in Chapter 15. Strategic leadership is
an important driver that enhances strategy implementation. The
importance of strategic leadership is discussed in Chapter 16.
Organisational culture, indicating the “way we are doing things around
here”, is an important strategy implementation driver. It can either be
an strong supporting driver for strategy implementation or it can be a
significant barrier to successful strategy implementation. This
important driver of strategy implementation is explained in Chapter
17.

Part IV (Chapter 18) is about the control and review of the strategic
management process. In the control process, it is important to review
whether what has been planned has actually been achieved. The long-
term goals that have been developed must be achieved through the
strategy implementation stage. The purpose of strategy review and
control is to identify whether the strategy has been realised. It is also
important during this control stage to implement approaches to
enhance continuous improvement in the organisation. This is discussed
in Chapter 18.

I believe and hope that this second edition will again contribute to
helping the reader understand the strategic management process. It is
the purpose of this book to explain strategy in understandable terms.
Strategic management is an exciting discipline and lies at the core of
organisational success.

Kobus Lazenby
July 2017
ABOUT THE EDITOR

Kobus Lazenby is a retired associate professor from the University of

the Free State. His focus in the Department of Business Management
was strategic management, project management and general
management at undergraduate and postgraduate level. He also lectured
on project and strategic management at the Business School of the
University of the Free State. He served on various professional bodies
and acts as facilitator for strategic planning for a number of
organisations. He is the editor of a textbook about general management
and co-editor of the first South African textbook on strategic
management. Currently he is the owner-manager of a dairy farm and
applies the principles of strategic management in practice.
ABOUT THE AUTHORS

Tienie Crous was the Dean of Economic and Management Sciences

for 11 years and professor of Strategic Management at the Business
School of the University of the Free State (UFS). He also acted as
Deputy Vice-Chancellor: Academic Operations at the same institution
for nearly two years (2008–2009). Tienie is currently visiting professor
to the Kufstein University of Applied Sciences, Austria, and the
Rosenheim University of Applied Sciences, Germany. Although he
was involved in organised business, his management experience is
mainly in the field of higher education, including seven years as the
head of an academic department and executive director of an
entrepreneurial unit.

Adri Drotskie has been the MBA Director of Henley Business School
South Africa since 1 February 2015. She has substantial corporate and
academic experience, which includes eight years at Transnet; ten years
at Absa, a member of the Barclays Group; and seven years as senior
lecturer and Head of the MCom (Business Management) Programme
at the University of Johannesburg (UJ). Adri is also a research
associate at UJ and an associate member and full-time faculty member
of the Unit for International Business and Strategy at Henley UK. Adri
is a strategist by profession, with skills in strategy development and
implementation, action learning, scenario planning and systemic
thinking. She has strong leadership and management skills and has
experience in managing large teams, but also lectured on postgraduate
programmes in contemporary management, history and philosophy of
management, international business, strategic marketing and strategic
management.
Annemarie Marx is a senior lecturer in psychiatric nursing science
and health services management at the North-West University (NWU),
Potchefstroom Campus. For a number of years, she has been involved
in telematic learning at the university, offering courses in working
conditions, working life and quality of life. She has also contributed to
several nursing publications in the field of health services
management.

Tshedi Naong is an associate professor of Business Administration

and currently Head of the Department of Business Management in the
Faculty of Management Sciences at the Central University of
Technology, Free State. His vast teaching and lecturing experience
spans 15 years, and includes lecturing at the University of Cape
Town’s Graduate School of Business and the University of Zululand’s
Faculty of Commerce and Administration. Tshedi’s teaching and
research interests are business strategy, general management, human
resources management and entrepreneurship. He is an editorial board
member for a number of academic journals, including the African
Journal of Business Management and Journal of Economics.

Carla Serfontein is a qualified chartered accountant and is currently a

lecturer at the University of the Free State. Her main subject is
management and cost accounting at second- and third-year and
honours levels. She has also lectured on project and relationship
management (as a CIMA-required subject at management level) and
strategy for students during their BAccHons year (final-year chartered
accounting students).

Shafeek Sha is a lecturer in the Department of Management, Rhodes

University, Grahamstown. He specialises in strategic management at
third-year level, and he has on occasion lectured on strategic
management at honours level, marketing management at second- and
third-year and honours levels, as well as principles of management at
first-year level. His research interests include entrepreneurship, small
business management, family business, knowledge management, and
various functional areas of management. In terms of industry
experience, Shafeek has owned and managed various businesses,
ranging from IT through to the food retail sector. He is currently
completing his PhD part-time, and has recently launched an import and
export business.

Elroy Smith is a full professor in the Department of Business

Management in the Faculty of Business and Economic Sciences at the
Nelson Mandela Metropolitan University (NMMU) in Port Elizabeth.
He has 24 years’ lecturing experience in various business
management-related subjects and is currently teaching advanced
strategic management and research methodology to honours students.
He also serves on the faculty’s and NMMU’s research committee.

Amandi van der Walt was previously a junior lecturer in strategic

management and business management at the University of the Free
State, and a lecturer in general business management at the Business
School of the University of the Free State. She has since relocated to
Durban, where she is working as a planner for a company in the retail
industry, and has completed her MCom in Business Management at the
University of KwaZulu-Natal.

Marike van Wyk is a junior lecturer in the Department of Business

Management at the University of the Free State. Her focus is strategic
management at third-year level and general management at first-year
level. In addition, Marike lectures on strategic management at third-
year level for working adult learners in the Bachelor of Management
Leadership Programme at the University of the Free State’s Business
School.

Theo Venter is a political and policy specialist at the NWU School of

Business and Corporate Management. He has lectured in comparative
politics, public management, futures research and strategic
management. Before moving to the NWU Business School, he was
special advisor to two vice-chancellors of the NWU from 2004 to
2016, specialising in strategic planning, scenario development and
policy analysis. He has been a political analyst and commentator on
South African politics on all media platforms for the last 30 years, and
has covered all national and local elections since 1987. He teaches the
development of strategy in the postgraduate diploma programme of the
NWU Business School.
TABLE OF CONTENTS

Chapter 1 The strategic management process

KOBUS LAZENBY

1.1 Introduction
1.2 What is strategic management?
1.2.1 Defining strategic management
1.2.2 Origins of strategy
1.2.3 Key elements of strategy
1.2.4 Levels of strategy
1.2.5 The people involved in the strategic management process
1.2.6 Why is strategy important?
1.2.7 Characteristics of strategic planning
1.3 The strategic management process
1.3.1 Organisational direction and environmental analysis
1.3.2 Strategy formulation
1.3.3 Strategy implementation
1.3.4 Strategic control and evaluation
1.4 Different approaches to the strategic management process
1.4.1 The prescriptive approach
1.4.2 The emergent strategic approach
1.5 Benefits of strategic management
1.6 Risks of strategic management
1.7 The drivers of the organisation’s environment
 1.7.1 The information revolution
1.7.2 Technological advances and breakthroughs
1.7.3 Globalisation
1.8 Ethics and strategy
1.9 Summary

PART I STRATEGIC DIRECTION AND ENVIRONMENTAL

ANALYSIS

Chapter 2 Strategic direction

TIENIE CROUS

2.1 Introduction
2.2 Strategic intent
2.3 Strategic vision
2.3.1 Reasons why vision is a valuable tool
2.3.2 Risks relating to strategic vision
2.3.3 Why a strategic vision?
2.3.4 The development of a strategic vision
2.4 Mission
2.4.1 What is a mission?
2.4.2 Why a mission statement?
2.4.3 Requirements for a good mission statement
2.4.4 The development of a mission statement
2.5 Core values
2.5.1 What is a core value?
2.5.2 The importance of core values
2.5.3 Preparing core value statements
2.6 Linking the vision, mission and core values
2.7 Summary
Chapter 3 Strategy, ethics and social responsibility
ELROY SMITH

3.1 Introduction
3.2 What is ethics?
3.3 Forces shaping ethical conduct
3.3.1 Individual forces
3.3.2 Organisational forces
3.3.3 Social norms and culture
3.3.4 Laws and regulations
3.4 Model of ethical decision making
3.5 Approaches to ethical decision making
3.5.1 Utilitarian approach
3.5.2 Individualism approach
3.5.3 Moral-rights approach
3.5.4 Justice approach
3.6 Mechanisms and structures for managing ethics
3.6.1 Ethical leadership
3.6.2 Ethical individuals
3.6.3 Code of ethics
3.6.4 Ethics committee
3.6.5 Chief ethics officer
3.6.6 Ethics training
3.6.7 Whistle-blowing
3.7 Organisational stakeholders
3.8 What is corporate social responsibility?
3.8.1 Sustainability
3.9 Strategy and ethical behaviour
3.10 Summary

Chapter 4 Risk management and corporate governance

CARLA SERFONTEIN

4.1 Introduction
4.2 The concept of risk
4.2.1 What is risk?
4.2.2 Types of risk
4.2.3 Risk appetite
4.2.4 Risk tolerance
4.2.5 Identifying and assessing risk
4.3 The risk management process
4.4 Evaluating the organisation’s risk management programme
4.5 Response to organisational risks
4.5.1 Avoidance
4.5.2 Transfer
4.5.3 Mitigation
4.5.4 Diversification
4.5.5 Acceptance
4.6 Corporate governance
4.6.1 Defining corporate governance
4.6.2 Stakeholders
4.6.3 The principal-agent problem
4.7 The King IV Report
4.7.1 The governing body
4.7.2 Audit committee
4.7.3 Committee responsible for nominations of members to the
governing body
4.7.4 Committee responsible for risk governance
4.7.5 Committee responsible for remuneration
4.7.6 Social and ethics committee
4.8 Strategy and corporate governance
 4.8.1 Shift in the focus of objectives
4.8.2 Stakeholder inclusive approach
4.8.3 The implementation of the business strategy
4.8.4 Strategic control
4.9 King IV Report and the risk management process
4.10 Summary

Chapter 5 Internal environmental analysis

KOBUS LAZENBY

5.1 Introduction
5.2 The importance and challenge of internal analysis
5.3 SWOT analysis
5.4 Internal analysis for effective strategy development
5.4.1 Resource-based view
5.4.2 Value chain analysis
5.4.3 Functional approach
5.5 The SWOT matrix
5.6 Summary

Chapter 6 External environmental analysis

KOBUS LAZENBY

6.1 Introduction
6.2 The external environment
6.2.1 The South African environmental context
6.3 The macroenvironment
6.3.1 Political environment
6.3.2 Economic environment
6.3.3 Sociocultural environment
6.3.4 Technological environment
6.3.5 Ecological environment
6.4 Industry or market environment
6.4.1 Threat of new entrants
6.4.2 Bargaining power of suppliers
6.4.3 Bargaining power of buyers
6.4.4 Threat of substitute products
6.4.5 Rivalry among competing organisations
6.4.6 Limitations of Porter’s Five Forces model
6.5 Key factors for success in the industry
6.6 Scenario development
6.7 Summary

Chapter 7 Scenario development

THEO VENTER

7.1 Introduction
7.2 Causality in the environment
7.3 Scenarios
7.3.1 Defining scenarios
7.3.2 When to use scenarios
7.3.3 Scenario elements
7.3.4 The scenario development process
7.3.5 Characteristics of poorly designed scenarios
7.3.6 Characteristics of well-designed scenarios
7.4 Scenario development in South Africa
7.4.1 A two-scenario design
7.4.2 A three-scenario design
7.4.3 A four-scenario design
7.5 Summary

PART II STRATEGY FORMULATION

Chapter 8 Business-level strategies
ADRI DROTSKIE
MARIKE VAN WYK

8.1 Introduction
8.2 Strategic goals
8.2.1 The importance of strategic goals
8.2.2 Types of strategic goals
8.2.3 Requirements for good strategic goals
8.3 What is business-level strategy?
8.4 Key contributions of a business-level strategy in an organisation
8.4.1 Sustainable competitive advantage
8.4.2 Value creation
8.5 Five generic business-level strategies
8.5.1 Cost Leadership or Low-Cost Provider strategy
8.5.2 Broad Differentiation strategy
8.5.3 Focused strategy (Cost Leadership and Differentiation)
8.5.4 Best Cost or Integrated Cost Leadership/Differentiation
strategy
8.6 Criticism of Porter’s generic business-level strategies
8.7 Summary

Chapter 9 Corporate-level strategies

ADRI DROTSKIE

9.1 Introduction
9.2 Defining corporate-level strategy
9.3 Purpose of corporate-level strategy
9.4 Four categories of corporate-level strategies
9.4.1 Growth strategies
9.4.2 Cooperative or combination strategies
9.4.3 Stability or turnaround strategies
 9.4.4 Exit or disinvestment strategies
9.5 Linking the generic business-level strategies with corporate-level
strategies
9.6 Summary

Chapter 10 Recovery strategies

SHAFEEK SHA

10.1 Introduction
10.2 Stages of organisational decline
10.3 Common causes and symptoms of organisational failure
10.3.1 Internal factors
10.3.2 External factors
10.3.3 Common symptoms of failure
10.4 Turnaround
10.4.1 Difference between turnaround and normal management
10.4.2 The turnaround process
10.5 Divestiture
10.6 Liquidation
10.7 Managing in an economic downturn
10.8 Summary

Chapter 11 Strategies in different industry contexts

KOBUS LAZENBY
ANNEMARIE MARX

11.1 Introduction
11.2 Industries in different phases of the industry life cycle
11.2.1 Industries in the introduction (emerging) life cycle phase
11.2.2 Industries in the growth life cycle phase
11.2.3 Industries in the maturity life cycle phase
11.2.4 Industries in the decline life cycle phase
11.3 Strategies for competing in fragmented industries
11.4 Alignment of strategy with a specific situation
11.5 Strategies for not-for-profit organisations
11.5.1 The strategic management concepts and techniques in
NFPs
11.5.2 Revenue sources for NFP organisations
11.5.3 Constraints on strategic management for NFP
organisations
11.5.4 Some useful strategies
11.6 Strategy in the health sector
11.6.1 Strategic impact of the HIV and AIDS epidemic
11.6.2 Health care in South Africa
11.6.3 Health strategic plan
11.7 Summary

Chapter 12 Strategy in the public sector

KOBUS LAZENBY

12.1 Introduction
12.2 Nature of strategic management in the public sector
12.2.1 Advantages and some shortcomings of applying strategic
management in the public sector
12.2.2 Nature of the environment of the public sector
12.3 Strategic plans
12.4 Planning concepts
12.4.1 Vision
12.4.2 Mission
12.4.3 Values
12.4.4 Situational analysis
12.4.5 Strategic outcomes-oriented goals
12.4.6 Budget programmes and purposes
 12.4.7 Strategic objectives
12.5 Strategy implementation
12.6 Strategic control
12.7 Summary

Chapter 13 Strategy choice

KOBUS LAZENBY

13.1 Introduction
13.2 Influence of culture and internal politics on strategy evaluation
and choice
13.3 Strategy evaluation criteria
13.3.1 Appropriateness
13.3.2 Feasibility
13.3.3 Desirability
13.3.4 Competitive advantage
13.4 Strategy evaluation tools and techniques
13.4.1 Contribution to the portfolio of the organisation
13.4.2 Investment appraisal
13.4.3 Cash flow forecasting
13.4.4 Cost-benefit analysis
13.4.5 Impact analysis
13.5 Strategic evaluation in the different strategic approaches
13.6 Summary

PART III STRATEGY IMPLEMENTATION

Chapter 14 Strategy implementation and change

management
KOBUS LAZENBY

14.1 Introduction
14.2 The significance of successful strategy implementation
14.2.1 What is strategy implementation?
14.2.2 Strategy implementation as a component of the strategic
management process
14.2.3 The performance gap
14.2.4 Strategy implementation and corporate governance
14.3 Change – a fundamental implementation issue
14.3.1 Strategic change
14.3.2 Kurt Lewin’s model of understanding change
14.3.3 A model of the strategic change process
14.4 Summary

Chapter 15 Components of successful strategy

implementation
AMANDI VAN DER WALT

15.1 Introduction
15.2 Implementation framework
15.3 Strategy implementation process – core components for strategy
implementation
15.3.1 Building an organisation that develops the necessary
competencies and capabilities
15.3.2 Strong strategic leadership to drive the implementation
process
15.3.3 Establishing and nurturing a strategy-enhancing corporate
culture
15.3.4 Linking rewards and incentives to the achievement of set
strategic targets and milestones
15.3.5 Establishing an organisational structure that fits the
strategy
15.3.6 Allocating the resources that are necessary for successful
strategy implementation
 15.3.7 Establishing policies, guidelines and procedures that
support the strategy implementation process
15.3.8 Developing action plans, short-term objectives and
functional tactics
15.3.9 Designing and incorporating information and operating
systems
15.3.10 Striving for continuous improvement by implementing
best practices
15.4 Strategy implementation and corporate governance
15.5 Summary

Chapter 16 Strategic leadership

KOBUS LAZENBY

16.1 Introduction
16.2 The role of leadership in strategy implementation
16.3 The characteristics of a strategic leader
16.3.1 Emotional intelligence
16.3.2 Strategic intelligence
16.4 Key actions and responsibilities of strategic leaders
16.4.1 Determining the organisation’s strategic direction
16.4.2 Effectively managing the organisation’s resource portfolio
16.4.3 Sustaining an effective organisational culture
16.4.4 Emphasising ethical practices
16.4.5 Establishing balanced organisational controls
16.5 Matching leadership styles with the chosen strategy
16.6 Leaders of transformation
16.7 Leadership and corporate governance
16.8 Summary

Chapter 17 Strategy and culture

TSHEDI NAONG

17.1 Introduction
17.2 The role of organisational culture in strategy implementation
17.3 Levels of culture
17.4 Aspects of culture (manifestations, people and culture)
17.5 Determinants of organisational culture
17.5.1 Leadership style
17.5.2 Organisational policies
17.5.3 Managerial values
17.5.4 Organisational structure
17.5.5 Characteristics of the workforce
17.5.6 Organisational size
17.6 Handy’s typology of organisations based on cultural differences
17.7 Types of organisational culture
17.8 Organisational culture and competitive advantage
17.9 Culture must fit the new strategy
17.9.1 Changing the organisational culture and restructuring
17.10 Summary

PART IV STRATEGY CONTROL AND EVALUATION

Chapter 18 Strategic control and improvement

KOBUS LAZENBY

18.1 Introduction
18.2 Nature of strategic control
18.2.1 Strategic control as a component of the strategic
management process
18.2.2 Types of strategic control
18.2.3 Criteria for evaluating a strategy
18.2.4 Designing an effective strategic control system
18.3 The balanced scorecard as strategic control
18.4 Sustaining competitive advantage through continuous
improvement
18.4.1 Comparison with past performance
18.4.2 Comparison with key success factors
18.4.3 Benchmarking
18.4.4 Total quality management
18.4.5 Six Sigma approach to continuous improvement
18.4.6 Re-engineering
18.5 ISO 9001
18.6 Strategy control and corporate governance
18.7 Summary

INDEX
 1 The strategic management
process
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the definition and explanation of strategic management

Differentiate between the key elements of strategy
Identify the people involved in strategic management
Understand the characteristics of strategic planning
Understand the strategic management process as well as why strategy is
important
Recognise the benefits of strategic management
Recognise the risks of strategic management
Understand all the drivers of the organisation’s environment
Perceive the link between strategy and ethics

1.1 Introduction

One of the most important questions in the business world and also in
not-for-profit organisations is why some organisations are successful
and others struggle or even fail. Why will a company like Woolworths
be successful, while another company will experience financial
distress? The question can also be asked whether intuition and luck
play a role. Not all managers have these and not all can utilise them
correctly. Often success is achieved through experience in an industry
or through other relevant management experience. An example where
intuition plays a role is in the case of Richard Branson. All his
successes with the Virgin Group were due mainly to strategic vision
and intuition. This phenomenon is often referred to as a manager’s
“gut feeling”.

Although luck and intuition may play a role, organisations are usually
successful because they plan for the future – they engage in strategic
planning and are able to manage their resources and capabilities
effectively and efficiently. In an environment where competition is
tough, managers of any organisation must ensure that they cope with
any challenges and be prepared for whatever the future holds. Strategic
management requires all organisations to plan for the future and
prepare themselves for any unforeseen circumstances.

In developing southern Africa, the practice of strategic management is

even more important. Here there are so many factors and complicated
environmental changes, including economic, social and political ones,
that strategic management should be seen as essential to the
management process of any organisation. Whether your organisation is
a public or private company, close corporation, partnership, sole
ownership, sports club, church or government organisation, you cannot
survive the volatile future without proper strategic management.

In this chapter, which is an introduction to strategic management, you

will get a feeling for what strategic management is. You will also learn
why it is important, and what the advantages and disadvantages of
strategic management are. There will also be a discussion of some
alternative perspectives on strategic management. This book will try to
enhance managers’ performance of strategic management and
introduce the student of strategic management to its possibilities. The
fact that you will work in an organisation one day means that it is
important to understand how and why strategic decisions are made.
This will help you to understand the important role you have to play in
helping your organisation to move to a better strategic position.
1.2 What is strategic management?

1.2.1 Defining strategic management

The ultimate objective of strategic management is to
position the organisation optimally for the future. There are
many different definitions of strategic management. In terms
of the different phases of strategic management, one can define
strategic management as the art and science of formulating,
implementing and evaluating strategic cross-functional decisions that
enable the organisation to achieve its goals and objectives (David,
2001). Harrison and St. John (2002) describe strategic management as
the process through which organisations analyse the internal and
external environment of the organisation to establish goals and create
strategies to achieve these goals to the satisfaction of the organisation’s
stakeholders. From these explanations of strategic management,
strategic management can be defined as a process whereby the
internal and external environments are analysed to identify strategic
goals and develop strategies in line with the organisation’s vision and
mission, and that must be implemented through a coordinated and
integrated effort of different functional areas to achieve the strategic
goals of the organisation with the ultimate purpose of gaining a
competitive advantage. Strategic management is concerned with the
decisions that organisations must make about their future direction.
Developing and implementing these strategies will enhance the
organisation’s competitiveness. This will add value to all the different
stakeholders. By looking at different definitions of strategic
management, it is obvious that different tasks can be identified:

Formulating a strategic vision, mission and values, indicating the

long-term direction of the organisation
Identifying resources and capabilities through internal
environmental analysis
Analysing the external environments to identify challenges and
opportunities for the organisation
 Identifying the long-term goals and the most applicable strategies to
deliver value to the stakeholders
Coordinating and integrating the efforts of people, structures,
technologies and allocated resources to implement the identified
strategies
Evaluating the success and implementation of the strategic choices
through strategic control and evaluation

When an organisation is successful in formulating and

implementing a value-creating strategy, it will achieve
strategic competitiveness. A strategy can therefore be
defined as an effort or deliberate action or a course of action that an
organisation must implement to outperform its rivals. In other words, it
can be regarded as a set of related actions that decision makers must
take to increase the organisation’s performance. It is concerned with
the organisation’s direction for the future – its fundamental sense of
purpose with the associated plans or actions to be developed to put the
purpose of the organisation into practice.

An important concept in strategic management is “competitive

advantage”. There is a story of two hunters who were walking in the
bush, when they saw a lion about to attack. One hunter immediately
put his backpack down and got out a pair of running shoes. The other
hunter looked at him and with a smile on his face told him that there
was no way of outrunning the lion. However, the hunter with the
running shoes responded, “Perhaps I can’t outrun the lion, but I can
definitely outrun you!”

This is what competitive advantage is – to have something

that your competitors do not have. Competitive advantage
is the edge that an organisation has over others. In the past, a
competitive advantage lasted much longer than it does today.
Competitors emulate your strategy and they also retaliate in such a
way that your competitive advantage is eroded, unless an effort is
made to improve the sustainability of the competitive advantage. The
concept of competitive advantage and associated strategies will be
discussed in more detail in Chapter 8.
1.2.2 Origins of strategy
The term “strategy” comes from the Greek word strategos – meaning a
military commander. It is clear that strategy has a military origin,
because the earliest strategic decision makers designed a battlefield in
such a way that they gained an edge over their enemy. In terms of this
military strategy, the idea was to identify the enemy’s weak points and
then you would use your own strengths to attack where the enemy was
most vulnerable. Military operations still work by developing a
strategy. There are many games that children play today on computers
and PlayStations that use strategy. Strategy is a common concept
involving the process of analysing the situation and then developing a
strategy (plan) for outsmarting your opponent.

In the early 20th century, managers started to explore and define

management tasks. Frederick Taylor and Henry Fayol were especially
concerned with a detailed analysis of organisational functions in order
to improve individual management tasks. Although this cannot be
directly related to strategic management, it formed the broad
perspective of how to perform better. It is only since the 1960s that
strategic management has really become a distinct academic field as
researchers began to study organisations, managers and strategies
(Coulter, 2008). These researchers tried to understand the relationship
between strategic decisions and organisational performance, because
organisational performance is a primary goal of the strategic
management process. In the 1970s, the world experienced major oil
price increases. The business environment was suddenly confronted
with an unpredicted change that caused organisations to reconsider the
value of prediction in corporate strategy. This is the time when
strategic management really took off as a separate discipline.

1.2.3 Key elements of strategy

It is clear from the above discussion that there are some key elements
of strategic decisions. The purpose of a strategy is to add value to its
stakeholders and to allow an organisation to compete successfully in
the market environment. The key elements are as follows:
 Sustainability: strategic decisions must be maintained over a long
time. Strategies take time to be implemented and for the benefits of
a strategic move to be seen. Organisations want to survive in the
long term and therefore strategies must be sustainable.
Competitive advantage: strategy takes place in a competitive
environment and the purpose of strategy is to outsmart the
competition. Achieving a competitive advantage is important, but
more important is achieving a sustainable competitive advantage.
Alignment with its environment: the internal environment of the
organisation must be aligned with the challenges and opportunities
from the external environment.
Process development to deliver the strategy: a strategy is about how
to outsmart the competition. It means that business processes must
be developed to answer the question of how to undertake this task.
Adding of value: the last important element of strategy is that it must
add value not only to the owners of the organisation, but also to all
the different stakeholders. Who are these stakeholders and what
stake do they have in the organisation?

– Shareholders – owners of the organisation will receive a higher

income.
– Employees and management – they will receive the added value
through their pay.
– Customers – they experience value for money if they buy a quality
product or service.
– Government – it receives part of the added value in the form of
taxes.
– Suppliers – they have to supply more stock because of customers
buying more.
– The community at large will experience the added value through
the social responsibility of the organisation.

1.2.4 Levels of strategy

Strategy development and implementation occur at different levels in
the organisation (see Figure 1.1).

Figure 1.1 Levels of strategy

At the top of the hierarchy, corporate strategy is typically concerned

with the overall direction, purpose and scope of the organisation.
Decisions on this level are usually complex in nature and will have a
dramatic influence on the organisation. Common strategic decisions at
this level will include the following:

Decisions on alliances, mergers, integration or the closure of some

business units
Decisions on new product development or entering new markets
Development of corporate policies and general employment
practices in the organisation

Business strategy is concerned with the operation of a strategic

business unit in the organisation. Its concern is with how a specific
market will be approached and it is responsible for winning over the
customer or client and beating the competition. A competitive strategy
(low cost, differentiation, focus or best cost) is decided on at this level.
It is vital to remember that this strategy must be followed within the
broad framework of the corporate strategy.

Functional strategies refer to the operational-level strategies within the

different business functions of an organisation. Functional strategies
must be taken in the financial, marketing, human resources,
production, and other business functions and must help the
organisation (business unit) achieve the goals of the corporate strategy.

It is clear that strategies at the different levels must be aligned in order

to achieve the ultimate purpose and strategic goals of the organisation.

1.2.5 The people involved in the strategic management

process
Human resources remain the most important factor in and asset of an
organisation. Human resources have to formulate the strategies of the
organisation and must implement them successfully. The drivers of
strategy implementation are the employees. The role of human
resources in the four stages of strategy – environmental analysis,
strategy formulation, strategy implementation and strategy review and
evaluation – will be discussed.

Environmental analysis is the responsibility of every manager

from top management level to middle management and down to the
supervisory level. Although top management will drive the process,
every manager must make inputs from all levels, because middle
managers and first-line managers are the specialists in certain areas
of the organisation and their assessments of the environment are not
only useful but also a necessity.
Strategy formulation is mainly the responsibility of top
management. These individuals must use the information from the
completed environmental analysis. This is also a very important
stage and needs as much input as possible from representatives from
all levels of management.
The implementation phase of the strategic management process is
quite often the most challenging one. Strategy implementation is the
 stage in which all the strategies that have been formulated in the
previous stages should now come to life. This is the make-or-break
phase of strategic management and can only be done through
effective communication with all the parties involved. All the
employees are important and they must realise the vital role they
play in implementing the strategy. Organisations cannot expect their
strategic plans to be successfully implemented if they do not have
the support of all employees.
The last phase is strategy review and evaluation. The question is:
is the strategy achieving what it is supposed to achieve? This review
and evaluation must be done by management. Top management
identifies the success or failure of a chosen strategy. They have to
exercise strategic control in order to establish shortcomings in the
strategic management process.

It is therefore quite obvious that it is not only top management who is

responsible for strategic management. The responsibility filters right
down to the lower levels of employment. The successful
implementation of strategy will never happen if all the employees of
the organisation do not understand their important role and the value of
their total motivation and dedication.

1.2.6 Why is strategy important?

Strategy is important because it deals with the fundamental issues that
will affect the future of the organisation. If organisations make a
mistake in their choices of strategy, the consequences will be felt for a
long time. This can actually put the organisation in danger of failure.
To answer the question on why strategy is important, the following
reasons can be provided:

The entire organisation is involved in the strategy process. All the

business’s functional areas and employees are involved and should
contribute to the strategic management process.
It helps the organisation not only to survive but also to add value to
stakeholders. Survival is not the only strategic objective of strategy.
 Strategy helps the organisation to develop a relationship with its
environment. By analysing the environment, the organisation is able
to adapt as it changes. This includes general forces in the
macroenvironment as well as customers and competitors in the task
environment. An organisation must have information on both the
internal and external environments to help it to predict likely
opportunities and threats.
An organisation can only develop a sustainable competitive
advantage through an appropriate strategy.
Good corporate governance requires an effective strategic
management process to be in place.

It is crucial to note at this stage that even successful organisations will

have strategic problems, despite the reasons mentioned above about
the importance of strategy. Organisations operate in ambiguous and
complex environments that make strategy not merely an optional
choice or “nice to have”, but actually a necessary “must have”.

1.2.7 Characteristics of strategic planning

To explain the concept of strategic management further, there are some
characteristics of the strategic planning process that explain its
effectiveness (Boulter, 1997; Khakee & Stromberg, 1993). A strategic
planning process

is a learning process that can provide an opportunity for

organisations to understand more clearly what they want to achieve,
and how and what they can do
is a discovery process because it can expose hidden opportunities
and unseen solutions
is a process in which openness to different perceptions and
understandings is fundamental in finding solutions to problems by
focusing on matters of strategic importance
requires the separation of strategy from other issues when decision
making has to be done to select a future course of action from
 various alternatives
is supported by priority-based resource allocations
informs efforts to implement decisions, taking into consideration
available organisational resources and capabilities
establishes goals and arranges them in a logical hierarchy, nesting
one or more goal(s) within other broader goal(s)
takes account of the need for “goal congruency”, which refers to
how well the goals combine with each other (e.g. does goal A
appear compatible with goal B? do they fit together to form a
unified strategy?) bearing in mind the need to sequence goals
logically over time
is responsive and innovative rather than reactive.

1.3 The strategic management process

As already mentioned, the four distinct phases of the strategic

management process comprise environmental analysis, strategy
formulation, strategy implementation and strategy control and
evaluation. Figure 1.2 illustrates a model of this process.
Figure 1.2 The strategic management process
1.3.1 Organisational direction and environmental analysis
Organisations must know where they are going. A vision, a mission
and the organisational values will guide the organisation into the
future. These statements indicate the direction of the organisation and
set the scene for environmental analysis. An inspiring vision will give
focus to the organisational members, and they will also understand
what the business is and on which values they are basing their
operations.

A organisation’s strategy must allow a good fit with its environment.

Environmental analysis is important to allow this fit. An organisation
environment analysis consists of an evaluation of the internal
environment for possible strengths and weaknesses and a further
analysis of the external environment for possible opportunities and
threats (SWOT analysis). The internal environment (also known as the
microenvironment) includes aspects or factors over which the
organisation has control. The external environment, on the other hand,
consists of the macro- and market environments, and includes factors
or aspects over which the organisation has no control. Environmental
analysis is perhaps the most important phase of the strategic
management process. Without it, it will be almost impossible to move
on effectively to the next phase of the process, namely strategy
formulation.

1.3.2 Strategy formulation

With the first phase completed, the organisation is in a position to
develop long-term goals and strategies. Strategies must be built on
what was identified in the environmental analysis phase. The skills and
internal competencies identified during the internal environmental
analysis and the special relationship it may develop with the external
environment make it possible to develop specific strategies. First the
organisation must decide how to develop advantages over its
competitors by choosing a specific generic strategy. Then it must work
out how to grow the organisation by deciding on a corporate strategy.
It is also important for an organisation to know its specific industry
setting, because this will also influence the strategic options available
to the organisation.

1.3.3 Strategy implementation

The selected strategic options must now be implemented. The strategy
sets the broad direction and identifies the methods the organisation
should apply to achieve its goals and objectives. None of these will
happen without a detailed process of implementation.

To implement the strategies, it is necessary to have detailed tactical

and operational plans, policies and other driving forces to make the
strategy happen.

1.3.4 Strategic control and evaluation

There should be a continuous process of evaluating and reviewing both
the suitability and the implementation of the strategy. Strategic control
and evaluation and the process of continuous improvement are seen as
the last phase in the strategic management process and should not be
neglected. Aspects such as total quality management and a balanced
scorecard are tools that can help to improve the manager’s task of
successfully controlling the strategic management process.

1.4 Different approaches to the strategic

management process

The four phases discussed previously must be seen as a cohesive

process. There is, however, disagreement among practitioners of
strategy with regard to the way that organisations arrive at corporate
strategy. Two main approaches to strategy development will be
discussed. They are the prescriptive approach (also called the systemic
approach) and the emergent approach (also called the process
approach).

1.4.1 The prescriptive approach

This approach is essentially a linear and rational process, where one
starts with the question “where are we now” and then develops the
strategy of “where are we going”. The prescriptive approach starts
with the organisation’s objective (actually the mission and vision), then
the environmental analysis. This is followed by a reconsideration of
the objective (mission) if the environment requires it, then the
development and selection of the strategy, and lastly the
implementation of the strategy. It is clear that the different phases are
linked sequentially. This is also known as a top-down approach to
strategy. Although the prescriptive strategic process is claimed to be a
logical and rational process that is capable of insights in the problems
of organisations, there are also numerous critics (especially Henry
Mintzberg, 1987) of the process. The formal prescriptive process is
criticised mainly because of the unpredictability of the real world and
the fact that many successful strategies are the result of accidental
events that help to push organisations in a new direction.

These critics point towards the basic assumptions of the prescriptive

approach, and these assumptions are not always correct. So, what are
some of the assumptions of the prescriptive approach and what are the
difficulties with these assumptions?

The future of an organisation can be accurately predicted. This is not

true; because the competitive environment is so volatile and because
change is inevitable, the whole strategic process may be invalid.
The strategies proposed are logical and capable of being managed in
the way proposed. However, as a result of political and economic
realities of organisations, there may be many management
difficulties in practice.
The long-term benefits are more important than the short-term
advantages. Yet can the long-term benefits really be determined?
 After the analysis phase, strategies are specified and need no further
development or change as a result of changing external situations.
This is sometimes but not always true.

Despite his criticisms, Mintzberg (1987) modified some of his views

and accepted that the prescriptive approach to strategic planning may
be beneficial to an organisation. The prescriptive approach may
present the following advantages:

It avoids behaviour focused only on the short term. Management

considers the long-term development of the organisation rather than
just the short-term results.
Environmental analysis encourages management to consider the
organisational environment in its plans and decisions.
The process of strategy development and implementation provides a
basis for strategic control and evaluation.
If an organisation is clear about where it is going, it enables
stakeholders to make plans for the future. Suppliers will feel that
they can rely on the organisation in terms of future orders.
Employees will experience higher morale, because they will
perceive the organisation as capable of meeting their career
expectations.
Goal congruency is improved, because the different business
functions will coordinate their efforts to work together to realise the
full potential of the organisation.

There are, however, also some drawbacks to the formal prescriptive

approach.

Most importantly, the organisational environment is uncertain. The

external organisational environment is more uncertain than ever
before.
It may be too complicated a process for the small-business owner.
The formal process may be too infrequent to allow the organisation
to be dynamic. If there is a formal planning process every three
 years, for example, the changing environment may result in the
strategy becoming inappropriate.

Despite what has been said about the prescriptive approach, it favours
a step-by-step method to achieve the organisation’s objectives.

1.4.2 The emergent strategic approach

According to this approach, the different phases of strategic
management are interrelated. The analysis phase is still the first phase,
but strategy development and implementation are closely linked and
involve a process of trial and error. Strategy implementation does not
follow strategy development, but is rather an integral part of strategy
development. Strategies actually emerge and are derived as a result of
trial, repeated experimentation and small steps forward. Management
plays an important role in this emerging strategy. This is actually what
Henry Mintzberg(1987) emphasised when he claimed that strategic
planning, as a systematic process of planning, should be replaced by
the concept of strategic thinking. Strategic thinking enables managers
to have an integrated perspective on the organisation and to
concentrate on the interrelationships between the different components
of strategic management, rather than the individual phases.
Management’s approach to strategy is to try a strategy and see what
happens. If it fails, they come up with ways to adjust it as the
organisation implements it.

The advantages of this emergent process are as follows:

It allows strategy to develop, as more is learnt about the strategic

situation.
Strategy implementation is redefined by being interrelated with and
an integral part of strategy development.
Organisational culture is more adaptable to the new strategy because
it develops with the process.
It provides more flexibility to respond to changes in the markets.

The drawbacks of this approach include the following:

 Board members at corporate level will not want to sit back and
allow operations to carry on haphazardly.
Allowing the development and implementation of strategy to be
integrated may be seen by management as an abdication of
responsibility, rather than taking a decision on a specific strategy.
For long-term projects, a long-term view is important, and therefore
perhaps a fixed strategy would be preferable.
Strategic control and evaluation will be simpler and clearer if the
strategic actions have been planned in advance.

It is not within the scope of this discussion to make a clear decision on

which approach is best. Rather, the aim is to introduce the different
approaches, each with its own benefits and drawbacks. The important
conclusion from these approaches is that the strategic management
process consists of different phases. Studies also conclude that
strategic planning has a positive impact on the performance of an
organisation and that strategic planning that includes both formal
planning methodologies (a prescriptive process) and emergent
approaches forms part of an effective strategy formulation process.

1.5 Benefits of strategic management

One of the most important advantages of the process of strategic

management is the fact that employees at different levels of the
organisation are interacting during the process of developing and
implementing the strategy. Through the process of strategic
management, all employees tend to understand the goals of the
organisation much better, and this leads directly to better and more
effective communication. In general, the benefits can be grouped as
financial and non-financial benefits. It is known that organisations that
use strategic management concepts experience an improvement in
their financial performance. With reference to the non-financial
benefits, some tangible advantages can be mentioned, like an increased
awareness of threats and opportunities in the external environment, an
increase in productivity, and reduced resistance from employees
because they have a clearer understanding of what is happening in the
organisation. The following specific benefits can be mentioned:

Problems are prevented. Strategy development enhances the

organisation’s ability to prevent problems by encouraging
employees to pay attention to planning and to flag potential
problems.
Group-based decisions are better than individual decisions.
Group interaction in the strategy development process generates a
greater variety of strategic alternatives. Group-based decisions can
result in the best alternative being chosen.
The organisation experiences higher productivity. The purpose of
an organisation is to transform inputs into outputs as effectively and
efficiently as possible. Strategic management ensures that inputs are
better utilised, thus delivering better outputs. Resource allocation is
improved by strategic management, because resources are allocated
and applied where they will contribute most.
Communication is improved across the different organisational
functions. The importance of communication in all kinds of
organisations cannot be overemphasised. Strategic management
decisions and goals that are communicated help employees to
understand what must be achieved. They will then work together to
achieve these strategic goals.
Gaps and overlaps in activities are reduced. This can be a direct
benefit of strategic management if it is managed correctly. It helps
individuals and groups to understand their roles in the strategic
management process, and this reduces the gaps and overlaps in their
day-to-day activities. Strategic management integrates the behaviour
of employees into a total effort.
Resistance to change is reduced. Employees understand the
direction in which the organisation is heading and they understand
why they have to do things in a specific way. A greater awareness of
 the parameters determining their decisions and actions helps to
reduce their resistance to change and to develop a more favourable
attitude towards change.
Commitment is improved. Effective strategic management leads
all employees to understand that everyone in the organisation plays
an important role in managing strategically.
Management is enabled to think forward. This is perhaps one of
the major benefits of strategic management, because it encourages
management to be more disciplined and formal in their approach
towards the future. It also helps to direct all decisions to support the
determined objectives.

1.6 Risks of strategic management

Managers should guard against the unintended negative consequences

of strategic management. If strategic management is executed in the
wrong way, the damage could be far-reaching and create a negative
attitude among employees towards future strategic management
processes. Furthermore, strategic planning is not a “readymade”
formula for success, because it is an unknown journey during which
challenges should be addressed and problems should be solved.
Management should be aware of the potential risks associated with
strategic management:

Poor time management. Managers spend too much time on the

strategic management process, which may have a negative influence
on their operational responsibilities. Proper time management is
essential and managers must make a deliberate decision to balance
their responsibility between strategic and operational activities.
Some managers also see planning as a waste of time.
Avoidance of responsibilities. A significant risk is posed when the
formulators of strategy are not directly involved in its
 implementation, or when managers do not support the strategic
planning process. They actually avoid their individual responsibility
for the planning done and the decisions taken. Linked to this is the
lack of will to put in the required effort to formulate and implement
a plan.
Unattained expectations. Not all expectations can be met. Several
ideas and strategic suggestions of employees will not be accepted,
which can lead to the demotivation of staff members. Strategic
managers should be trained to anticipate and understand this
disappointment.
Negative perception of strategic management. The
implementation of the strategy is the most difficult phases of
strategic management. Strategies fail because the implementation is
not as structured as the development phase. This leads to a negative
perception that strategic management is a waste of time and will not
deliver any positive results.
Success groove. Managers who experience the success of their
current strategies may become so overconfident and focused on their
current successes that they do not foresee any difficulties in the
future, and therefore do not see strategic management as necessary.
Good organisations that have gone bad are simply organisations that
have denied the reality of their strategy decay for too long.
Neglecting to involve key employees. Key employees throughout
the organisation must be involved in all the phases of strategic
management, especially during planning. If they are not part of the
process, the organisation runs the risk of not being successful in
implementing the strategy.

1.7 The drivers of the organisation’s environment

The environment in which the organisation operates will be discussed
in more detail in Chapters 5 and 6. However, it is important to note the
context of the environment in which an organisation has to be
managed. According to Coulter (2008), this actually establishes the
rules of the game. The drivers of organisations’ environments are
important for all types of organisations and set the scene for strategic
management. These drivers are as follows:

The information revolution

Technological advances and breakthroughs
Globalisation

1.7.1 The information revolution

The amount of information that is being created in digital format is
growing by more than 57 per cent per year. If the amount of
information available on the internet and in digital format were to be
transformed into hard-copy books, many new libraries would have to
be built. This new information is available to practically anyone who is
interested in obtaining and using it. The availability of this information
has changed the way we do business, as well as the context of strategic
management.

The ability to effectively and efficiently read, understand, interpret and

apply information and to transform it into knowledge has become an
important source of competitive advantage. When this knowledge is
used to achieve increased efficacy and efficiency, it becomes an
essential resource for production and is no longer seen as only a means
to an end. The implication for strategic management is that managers
should realise that information and knowledge are the keys to gaining
a competitive advantage. The search for and utilisation of information
is an essential driving force in the organisational environment.

1.7.2 Technological advances and breakthroughs

Technology refers to all the equipment, material, knowledge and
experience in an organisation that it requires to perform its tasks, and
technological diffusion refers to the rate at which technologies are
available and used. Technological diffusion has increased at a
tremendous rate; for example, while it took 35 years to get telephones
into 25 per cent of all homes in the USA, it took only seven years for
the internet. Obviously, some organisations rely more on technology
than others. For example, MTN and Vodacom rely more on technology
than a small supermarket in the suburbs does. Nonetheless, technology
is being used in all organisations – think about access to the internet, or
using your credit or debit card to pay for products and services. This is
explained in Strategy in action 1.1.

Strategy in action 1.1 Firms battle for slice of “mobile money”

Barcelona. Global financial groups battled on Monday to control the lucrative

future of “mobile money”, which will enable people to use a smartphone to go
shopping instead of cash and credit cards. MasterCard, Visa and online
payments service PayPal struggled for a slice of the industry as the world’s
biggest mobile fair, Mobile World Congress, opened in Barcelona, Spain.
MasterCard announced a new digital payment system that lets people use a
wide variety of devices, including smartphones. The system, known as
MasterPass, stores customers’ banking and personal information in a “secure
cloud” online, where it is available for the moment of payment, whether in a
store or when browsing the internet, the group said.
Banks and stores will be able to issue their customers with MasterPass-
connected “digital wallets”, which will accept credit and debit card information,
including cards other than MasterCards, the group said. Shoppers will be able
to use MasterPass on the web without having to key in their bank information
and delivery address for each purchase. But they could also make payments
with the new system in other ways, including by waving a smartphone equipped
with Near Field Communications (NFC) technology near a special reader.
On the same day, Visa unveiled a global alliance with smartphone leader
Samsung to let people make payments with NFC-equipped Samsung
smartphones. In terms of the deal, Samsung will equip the next generation of
its mobile devices with Visa payment technology, including preloading Visa’s
contactless payment system – Visa pay Wave – on its mobiles with a mini-
program known as an applet.
Samsung will let banks send payment account information over the airwaves to
a secure microchip embedded in its devices. Banks, in turn, will use a secure
system relying on Visa’s Mobile Provisioning Service and Samsung’s digital key
management system.
 Five days before the World Mobile Congress, PayPal announced it was
expanding its move into MasterCard’s and Visa’s territory. A new PayPal device
has been showcased which lets cash-based businesses accept PIN number-
based “smart” debit and credit cards.
Merchants will be able to download a Paypal Here application for their Android
or iPhone smartphone and then pair the handset with the new device, which
they have to buy. The device can accept secure payments and issue receipts.
For each transaction, whether by credit card, debit card or PayPal account,
PayPal receives a “small fee”.
Similar PayPal technology is already being used in the United States for
payment cards that are swiped, but it was unable to handle cards with
embedded microchips and PIN numbers.
Source: Adapted from http://www.fin24.com/Companies/Financial-
Services/Firms-battle-for-slice-of-mobile-money-20130225 (accessed
16 March 2013)

Innovation is an important technological trend. Innovation is the

process during which a creative new idea is turned into a product or
process that can be used to generate money. It is thus the process of
developing, making and marketing something that can generate
income. Perpetual innovation is a term that describes how fast and
consistently new technologies replace older ones. This has an
influence on the speed to market of new products that may be a source
of competitive advantage. Perpetual innovation actually leads to
disruptive technologies that destroy the value of an existing
technology. It is an important strategic driver for organisations in a
competitive market environment because it can create new markets.
Read Strategy in action 1.2 and see how innovation is used to increase
property sales. It is clear that information and knowledge are vital in
the process of innovation. The close relationship with the information
revolution is thus obvious.

Strategy in action 1.2 Digital disruption and the commercial real estate
market

The commercial real estate and industrial property markets lag behind in
innovation and are slow to adopt new technological innovations. They have
managed to escape the tides and tsunamis of technological disruption and
innovation, but this is coming to an end. The digital economy is catching up and
a key feature of this economy is the ability to generate, process and efficiently
 apply knowledge-based information. The influence of digital technology leads to
digital disruption. This change has an effect on how we do business, engage
and interact, and think. This process, although extremely uncomfortable at first,
is necessary to maintain the rhythm of profitability and wealth creation, to
increase productivity levels and ensure that a climate exists for competition and
innovation to drive market leadership.
Disruptive technology shatters business models, even renders them obsolete,
but it introduces innovation into the mix and offers alternatives to the status
quo. It is therefore both a threat and an opportunity. Technology disruptions can
make the estate agent obsolete as a result of the erosion of barriers between
tenants and property owners through cloud computing and social media. These
provide cost-effective ways to obtain property information and allow the
digitisation of transactions. This is an opportunity as well as a threat. Real
estate crowdfunding websites also create the opportunity for small investors to
pool their money to buy investment properties.
Source: Adapted from http://www.fin24.com/Opinion/digital-disruption-and-the-
commercial-real-estate-market-20160608 (accessed 2 March 2017)

It is clear that technology and innovation will influence the way an

organisation is managed strategically and will definitely have an
influence on its sustainable competitive advantage. The challenge for
organisations is to capture and exploit the unique advantages of
technology, and use innovation to create new valuable processes and
products to develop a competitive advantage.

1.7.3 Globalisation
Globalisation refers to the increasing economic interdependence
among countries, reflected in the flow of goods and services in
particular. It remains an important factor in and a dominant
characteristic of the organisational environment. It is common
knowledge that the products we purchase and consume are provided
by foreign organisations or local organisations doing business on a
global scale. Even small business organisations are influenced by
globalisation. If a global organisation’s products are better and of a
higher quality than those of the local business, customers are likely to
buy from the global business. Organisations can no longer remain
ignorant about globalisation when developing and implementing their
strategies. It is actually expected of an organisation engaging in
globalisation to make culturally sensitive decisions when they plan
their strategic management process. To create a competitive advantage,
an organisation may have to look for potential customers locally and
globally. There are also opportunities to identify financial, material and
human resources on a global scale.

Increased global competition poses a threat to organisations, which

creates a challenge. Globalisation has necessitated a new way of
thinking about the organisational environment. It is therefore also a
significant driving force in the organisational environment where
managers must manage the organisation strategically. It is imperative
that the implications of this driving force be taken into account and
incorporated in the strategic management of the organisation. Perhaps
the most important strategic implication is that organisations are
operating in an environment characterised by continuous turbulence
and change. The need to maintain a fast pace is more important than
ever before. Electronic mail and interactive websites deliver
information instantaneously. These changes in technology, for
example, have opened up new venues for organisations to do business,
as illustrated in Strategy in action 1.3.

Strategy in action 1.3 Kalahari.com and takealot.com

Kalahari.com and takealot.com, two of the leading general e-tailers in South

Africa, decided to merge their operations in 2014. The move was driven by the
fact that South African e-tailers simply cannot compete successfully against the
local brick-and-mortar retailers and foreign companies such as Amazon and
Alibaba. The fact that foreign operators do not pay tax in South Africa, and that
high broadband costs are impeding the growth rate of local online shoppers,
necessitated the companies to combine forces.
Takealot.com’s business is retail and they strive to have the widest range of
products and the best possible customer service on the African continent by
employing great people and developing innovative, cutting-edge technology.
Takealot.com’s mission is to be the most customer-centric online shopping
destination in Africa. The company is built around the simple concept that the
customer comes first. Their success is based on their ability to delight
customers with amazing customer service and a wonderful customer
experience.
Source: Adapted from http://www.takealot.com/company-news/kalahari-
merges-with-takealot-com and http://www.takealot.com/about/our-
journey (accessed 2 March 2017)
1.8 Ethics and strategy

The last important factor that should have an influence on strategic

management is ethics. Organisational ethics refers to the standards of
conduct the organisation must set for itself in its dealings with the
different stakeholders of the organisation. The code of ethics must
actually become part of the organisational culture, which determines
the behavioural norms according to which the organisation operates. It
is therefore important that the organisation has an ethical framework in
place to make it easier to choose the “right” behaviour and thus the
“right”’ strategy that will support the standards of conduct of the
organisation. Strategy and ethics will be discussed in more detail in
Chapter 3.

1.9 Summary

This chapter has provided an overview of strategy and of the aspects

that will be discussed in this book. A definition of strategic
management has been provided, and the origins, levels and key
elements of strategy, and the people involved in the strategic
management process, have been explained. The importance of
strategic management has also been discussed.

Different phases will be explained in the rest of this book. There are
two main approaches to strategy: the prescriptive and the emergent
approach. They differ in the sense that, according to the prescriptive
approach, the strategic phases follow sequentially; while in the case of
the emergent approach, the phases are part of an interrelated process.
There are advantages and disadvantages to both approaches.
The benefits and risks of strategic management have been discussed to
indicate that strategic management is not always a simple process. To
strengthen the notion that strategic management is beneficial to an
organisation, the drivers of strategic management in the organisational
environment have been explained. An overload of information, new
technological developments and globalisation make it difficult for an
organisation to be ignorant about strategic management.

A last comment in this chapter is about the importance of ethical

conduct in an organisation. Organisations should choose a strategy that
will strengthen and direct the “right” behaviour in the organisation.

At the end of every chapter, a case study will be provided. It will be

valuable to spend some time on reading and studying these cases, as
they serve as an application of the theoretical knowledge contained in
each chapter.

Exploring the web

Go to the website of Tony Manning at http://www.tonymanning.com for interesting

views on strategic management, as well as the newest trends and developments in
this field in South Africa.
Go to http://businessessays.net/strategic-management/strategic-analysis-on-sab-
miller-2/ and read about an analysis of strategic management in SAB.
The Five Stages of the Strategic Management Process:
http://smallbusiness.chron.com/five-stages-strategic-management-process-
18785.html
A model of the strategic management process: http://www.introduction-to-
management.24xls.com/en225
https://finance.mapsofworld.com/strategic-management/model.html
References and recommended reading

Boulter, D.E. 1997. Strategic planning and performance budgeting: a new approach to
managing Maine state government. Journal of the American Society of Legislative
Clerks and Secretaries, 3(2): 3–14.
Coulter, M. 2008. Strategic management in action, 4th ed. Upper Saddle River, NJ:
Prentice Hall.
David, F.R. 2001. Strategic management: concepts and cases, 8th ed. Upper Saddle
River: Prentice Hall.
Ehlers, T. & Lazenby, K. 2010. Strategic management: Southern African concepts and
cases, 3rd ed. Pretoria: Van Schaik.
Fleischer, C.S. & Bensoussan, B.E. 2003. Strategic and competitive analysis. New
Jersey: Prentice Hall.
Harrison, J.S. & St. John, C.H. 2002. Foundations in strategic management, 2nd ed.
Ohio: South-Western.
Innovation set to drive property sales. 2013. Fin24, 4 February. Available at:
http://www.fin24.com/Money/Property/Innovation-set-to-drive-property-sales-
20130204 (accessed 16 March 2013).
Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. 2013. The management of strategy:
concepts and cases, 10th ed. USA: South Western Cengage Learning.
Khakee, A. & Stromberg, K. 1993. Applying futures studies and the strategic choice
approach in urban planning. Journal of the Operational Research Society, 44(3): 213–
224.
Lynch, R. 2000. Corporate strategy, 2nd ed. Harlow: Prentice Hall.
Mintzberg, H. 1987. Crafting strategy. Harvard Business Review, Jul–Aug.
Norton, A. 2009. Integrated management. Oxford: Cima Publishing.
Pearce, J.A. & Robinson, R.B. 2003. Strategic management: formulation,
implementation and control, 8th ed. Boston: McGraw-Hill.
Takealot.com. 2014. Two of South Africa’s leading eCommerce businesses combine
to create a platform of scale, 7 October. Available at:
https://www.takealot.com/company-news/kalahari-merges-with-takealot-com
(accessed 2 March 2017).
Takealot.com. 2007. More about our journey. Available at:
http://www.takealot.com/about/our-journey (accessed on 2 March 2017).
Takealot.com. 2007. South African online retail leader formed with approval of
Takealot–Kalahari merger. Available at: https://www.takealot.com/company-
news/south-african-online-retail-leader-formed-with-approval-of-takealot-kalahari-
merger (accessed 2 March 2017).
Thomson, J. & Martin, F. 2010. Strategic management awareness and change, 6th
ed. Hampshire: South-Western Cengage Learning.

Case study

Takealot.com

Takealot.com is South Africa’s largest, most innovative ecommerce

retailer with over 800 employees. At the core of everything they do is
the customer. They are passionate about providing great customer
experiences, beginning with the moment a customer lands on their
website, until the product ordered is delivered safely into the
customer’s hands.

Takealot.com was officially launched in June 2011 after the successful

acquisition of an existing ecommerce business called Take2 by Kim
Reid and the US-based hedge fund, Tiger Global. The business started
with a simple vision in mind: to be the largest, simplest, most
customer-centric online shopping destination in Africa. They have
achieved this vision, and today takealot.com is one of the fastest-
growing, most innovative ecommerce retailers on the African
continent.

The business has evolved rapidly since its inception, and has opened
and expanded warehouses in Cape Town and Johannesburg, extending
category selection to 19 categories, including Electronics, Sport, Home
& Kitchen, Fashion and more, while also taking control over its own
logistics with the purchase of Mr. Delivery.

A pivotal year in its history was 2014, when a $100 million investment
from Tiger Global was announced, quickly followed by the purchase
of Mr. Delivery. This gave them ownership of their own logistics
network. Furthermore, takealot.com successfully acquired
superbalist.com, a curated design and fashion website. The
competition authority also announced the approval of the merger
application of takealot.com and kalahari.com, two of South Africa’s
leading ecommerce players. This online retail merger became effective
in 2015.

Established in 1998, kalahari.com was one of SA’s largest online

retailers, selling millions of books, ebooks, ereaders, music, DVDs,
games, cameras and electronics. A pioneer in the South African
ecommerce industry, the company offered unequalled customer choice
and service, with top-selling products available on 24-hour delivery,
various payment options, door-to-door delivery, wishlist facilities,
vouchers and free delivery on orders over R250.

Takealot.com’s founder and co-CEO Kim Reid said at the time, “We
are super excited about the approval of the transaction. This will allow
us to build a significant retail entity in South Africa; one that continues
to be truly customer-focused.”

The retail market for consumer goods in South Africa is approximately

R800 billion, of which less than 2 per cent is online. Worldwide online
retail as a percentage of total retail is growing. China has an online
retail market share of 10 per cent, while in the US and the UK it is
already approaching 15 per cent. With the merger of the two
businesses, a single platform of scale is created to take advantage of
the significant growth opportunities in online retail in South Africa.
Sources: Adapted from the following websites, all accessed 2 March 2017:
http://www.takealot.com/company-news/south-african-online-retail-leader-formed-
with-approval-of-takealot-kalahari-merger
http://www.takealot.com/about/our-journey/
http://www.takealot.com/about/our-values

CASE STUDY QUESTIONS

1. How does takealot.com create value for its customers?

2. What are the characteristics of the online industry? What are the
drivers of the competitive landscape of the online industry?
 3. What role do you think strategic management plays at
takealot.com?

Strategy exercises

1. Go to the website of a South African organisation. Identify how

this organisation applies strategic management in its day-to-day
business operations.
2. What exactly is strategic management? Write a brief executive
summary of what strategic management is all about to the manager
of an organisation in order to convince him or her about the
necessity for strategic management.
 PART
I

STRATEGIC DIRECTION AND

ENVIRONMENTAL ANALYSIS

T he first phase of the strategic management process, namely

strategic direction and environmental analysis, begins with the
setting of a strategic direction for the organisation. As an organisation
is an open system, all its strategic decisions have a direct impact on the
various stakeholders of the organisation. An organisation needs to
consider both its internal and external stakeholders when formulating
strategies in order to align its interests with those of society. Such
strategic decisions also have an impact on the natural environment in
which the organisation’s operations and activities take place.

Chapter 2 deals with organisational vision, mission and values.

Organisational vision is a broad, comprehensive picture of what a
leader wants an organisation to become. It is a statement of what the
organisation stands for, what it believes in, and why it exists. The
vision provides a vibrant and compelling picture of the future. It
presents a view beyond what the organisation “is” to what the
organisation “could be”. The mission is a statement of what the
organisation will (must) do to be in alignment with the organisational
vision, while the values will guide the actions of organisational
members.

Chapter 3 deals with ethics and corporate social responsibility (CSR).

CSR is the obligation of organisational decision makers to make
decisions and act in ways that recognise the interrelatedness of
business and society. Ethics and CSR have an influence on the
strategic decisions of the organisation and must always be taken into
consideration.

Chapter 4 describes risk management and corporate governance with

specific reference to the King IV report. Organisations cannot be
managed without understanding the importance of risk management.
The current environment in which organisations are operating varies
significantly from the business environment of, for example, five years
ago and is still rapidly developing and changing. These rapid changes
lead to a higher exposure of entities to various types of risks than
before. The King IV report gives guidance on how organisations
should be managed to become citizens that practise CSR.

Chapter 5 describes internal analysis as the process of identifying and

evaluating an organisation’s specific characteristics, including its
resources, capabilities and core competencies. It is important to
determine the organisational strengths and weaknesses in order to
decide on the strategy.

Chapter 6 deals with external environmental analysis. It is the process

of scanning and evaluating an organisation’s various external
environmental sectors in order to determine positive and negative
trends that could affect organisational performance. This will influence
the strategy selection.

Chapter 7 explains the importance of scenario development. In

strategy development, it is important to identify different future
scenarios based on environmental analysis, and to develop strategy
accordingly.
The strategic management process
 2 Strategic direction
TIENIE CROUS

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Explain the meaning of strategic intent

Describe why it is important for managers to have a clear strategic vision of
where the organisation is heading
Be able to formulate a strategic vision for an organisation
Explain what a mission is and why it is an important management tool
Be able to use the information from this chapter to develop a mission statement
for an organisation
Discuss core values and their importance for modern-day organisations
Be able to use the information from this chapter to develop values for an
organisation
Explain the importance of an integrated statement of vision, mission and values

Action without vision is only passing time, vision without action is merely daydreaming, but
vision with action can change the world. – Nelson Mandela

2.1 Introduction

At the outset of any strategic positioning process, top management

needs to get and provide clarity about the future position, also referred
to as the purpose of an organisation. This ultimately means that they
have to grapple with critical questions about the directional path along
which they will be guiding the organisation. They also need to stand
back and think about why the organisation exists, who the current
customers are, and who they will be and eventually should be. Similar
considerations concerning competitors and other stakeholders must
also be addressed.

Although the environment in which organisations operate is turbulent,

and forecasting the future therefore difficult, no top manager can take
his or her leadership responsibility seriously without immediately
determining the optimal strategic direction head-on and beginning to
tackle it. For this, top management needs to ask the right questions.
These questions are not always aligned with personal preferences and
comfort zones, or can, in the minds of some of the participants, be
perceived to be provocative and even controversial. Rather, they are
aimed at rocking the thinking boat. It’s also crucial to abandon the
cliché to think outside the box. In the words of

Deepak Chopra: “It is time to get rid of the box.” Sometimes there is a
need to break out of the established and often successful patterns of
doing things. This process can often be disturbing and painful,
requiring sacrifice and constantly challenging existing boundaries. It is
time to be confronted by Abraham Maslow’s wisdom: I suppose it is
tempting, if the only tool you have is a hammer, to treat everything as if
it were a nail. The need for tools that can be used in a strategic
planning process resulted in the development of various models over
many years. Although different models present their own and
perceived unique solutions to the same challenge, namely strategic
planning, the fundamental elements are more or less similar.

That is why most contemporary models allow for identifying and

communicating strategic intent, inclusive of a clear vision and mission
statement, as well as a set of values. This comprehensive set of
strategic direction-supporting tools, at the disposal of managers, is
similar to what a Global Positioning System or GPS is for motorists
who are travelling in unknown areas. Because of the borderless
environment in which organisations are operating in this new
millennium, this set of tools can easily be called a Strategic Global
Positioning System (SGPS).
2.2 Strategic intent

Strategic intent plays a key role in contemporary strategic

management, and as such it expresses the position an organisation
wishes to take in the industry, along with the roadmap for achieving it.
Although Hamel and Prahalad in their book Competing for the future
(1994) not only support this viewpoint, and also state that strategic
intent must be both ambitious and compelling, they believe the road to
hell is still paved with good intentions in many modern-day
organisations. Too often strategic manoeuvring by CEOs and other
senior-level managers is nothing more than mere daydreaming or good
intentions, without substantial progress towards the realisation thereof.
Eventually the well-meant intentions culminate in maintaining the
status quo.

The complexity of contemporary internal and external environments

can never be underestimated or ignored. It is therefore extremely risky
to approach the challenge of defining an ambitious and compelling
strategic intent in a simplistic way, or even worse, to neglect to define
and properly communicate the strategic intent throughout the entire
organisation.

In its simplest form, a strategic intent is what an

organisation plans to strive for in future. It is, however,
common practice to use terminology like strategic planning,
a vision and even a mission statement as alternatives for strategic
intent, and vice versa. In Strategy in action 2.1, Nedbank’s vision is a
statement containing implicit elements of both a mission statement and
a strategic intent.

Strategy in action 2.1 Vision statement of Nedbank

Our vision: To be Africa’s most admired bank by all our stakeholders – our
staff, clients, shareholders, regulators and the communities that we live in. Our
vision statement implies that:
 We will continue to build our franchise in South Africa, while expanding into
the rest of Africa. Our strategic focus areas provide more insight into our
progress and outlook.
We want to be most admired by our stakeholders. Without passionate and
motivated staff members we will not be able to attract and retain the clients
that are key to the delivery of sustainable profits for our shareholders. As a
bank we operate in a regulated environment and we aim to be admired by
our regulators. Lastly, as a bank we can play a major part in our
communities and, as the green bank, we are a strong advocate and
influencer on environmental matters.

Our vision is supported by our Deep Green aspirations. These are to be a great
place to work; a great place to bank; a great place to invest; world-class at
managing risk; and a green and caring bank.
Source:
https://www.nedbank.co.za/content/nedbank/desktop/gt/en/aboutus/a
bout-nedbank-group/vision--values-and-strategy.html (accessed 8
March 2017)

Most organisations have a vision statement and strategic plan, but not
all of them have a strategic intent that is stable over time, providing for
the development of strategic plans that will eventually result in
realising the strategic vision. In brief, a strategic plan stresses the
means to an end, while strategic intent is focused on the end, and not
the nuts and bolts of the means. In Strategy in action 2.2, it is clear that
some organisations have a vision as well as a strategic intent.

Strategy in action 2.2 Illovo Sugar’s vision and strategic intent

The vision of the group is to be a world-class, low-cost and highly efficient

organisation, operating on the African continent, adding value to its core
products of fibre, sugar and molasses.
Its strategic intent is to

be the leading sugar and downstream products operation in Africa, an

increasing global supplier and a world-class organisation
be the lowest-cost producer in every country in which it operates and among
the lowest-cost producers in the world
optimise the return on every stick of cane by adding value to its core
commodity products – fibre, sugar and molasses. It will focus on its core
business and develop material niche operations that add value
 provide a safe working environment for all employees, contractors and
stakeholders
be the market leader, meeting and proactively anticipating customer needs
increase profits in real terms on a sustainable basis and maximise the return
on capital employed through cost leadership, the use of innovative
technology and the participation of all of its employees
be a moral, performance-focused organisation that people are proud to work
for, where they are challenged to “go the extra mile”, feel they can make a
difference and know that good performance is recognised
be welcomed in the communities in which it operates because of what it
does and how well it does it and be accepted as a progressive company by
all communities; aligning strategies to meet changing circumstances in the
various countries in which the group operates
be cognisant of the rural locations of the group’s operations and the impact
that it has on job creation and poverty alleviation in such areas.

Source: http://annualreport.illovo.co.za/downloads/illovo_iar_2015.pdf
(accessed 13 March 2017)

Xerox’s strategic intent “is to help people find better ways to do great
work – by constantly leading in document technologies, products and
services that improve our customers’ work processes and business
results”. In the case of Xerox, an integrated approach is followed, with
no distinction between strategic intent, the vision and mission
statement.

The story of Komatsu best explains the concept of strategic intent.

Komatsu was going through tough times, chasing a vision of being
among the top manufacturers of earth-moving equipment in the world.
They were challenging the American Caterpillar Tractor Company, the
world leader in the industry. Mitsubishi was the other major player in
the field. At the time Caterpillar aimed at monopolising the Japanese
market, and owing to the potential threat posed by Komatsu as the
second-largest competitor worldwide, Caterpillar entered into a joint
venture with Mitsubishi. However, Komatsu announced an aggressive
strategic intent: “To encircle Caterpillar.” It is important to note that no
details were included in the statement. It is effectively a two-word
statement, leaving no doubt about the intention. But, much more is
needed in order to arrive at a viable strategic intent. The intent needs to
be worked on and eventually supported by three critical elements that
together will form a holistic picture of the strategic direction: a
strategic vision, a mission statement and a set of organisational values.

2.3 Strategic vision

Where there is no vision, people will perish. – Proverbs 29:18 – King James Bible

A vision is a dream or a mental image of a desired future

and a leader’s responsibility is therefore not to see the
organisation as it is, but what it can become. Ample
examples exist of visions that were formulated by politicians, captains
of industry and leaders from all walks of life, to inspire followers to
commit themselves to a common cause from entering into bloody
wars, changing political landscapes, landing people on the moon,
sending spacecraft to Mars, making business acquisitions and mergers
work, to spectacular technological and medical innovations making
daily news headlines. Strategy in action 2.3 provides examples of
vision statements of some South African organisations.

Strategy in action 2.3 Vision statements

Department of Forestry and Fisheries

United and transformed agriculture, forestry and fisheries sector that ensures
food security for all and economic prosperity.
Source: http://www.daff.gov.za/daffweb3/About-Us/Vision-and-Mission/

Discovery Health
The scheme has one vision, to make people healthier and enhance their
lifestyle through comprehensive healthcare services.
Source: http://www.medicalaidsearch.co.za/medical-aid-schemes/discovery-
health-scheme/

South Africa Post Office (SAPO)

 A leading provider of postal, logistics and financial services to the South African
market.
Source: http://www.postoffice.co.za/about/missionvision.html

Small Enterprise Financing Agency (SEFA)

To be the leading catalyst for the development of sustainable Survivalist, Micro,
Small and Medium enterprises through the provision of finance.
Source: http://www.sefa.org.za/Admin/VMV.aspx

In May 1961 President Kennedy verbalised a vision: “I believe that this nation
should commit itself to achieving the goal, before this decade is out, of landing
a man on the moon and returning him safely to the earth.” Equally famous are
the words by Martin Luther King (Jr.): “Even though we face the difficulties of
today and tomorrow, I still have a dream.” Both were visions in action,
eventually realised and therefore very good examples of the power of visions.

Although a strategic vision is future oriented, it is not the result of a

spectacular dream or the power of an extreme imagination. It is rather
a case of honouring Mary Parker Follett’s law of the situation (1920).
Changing circumstances necessitate leaders and managers
reconceptualising the nature of the organisation, or rethinking a better
position for the organisation vis-à-vis the environment in general, but
for customers and competitors in particular. Owing to the reality of an
ever-changing environment, this reconceptualisation is a continual
process and can never be a once-off exercise, dealt with only during
the scheduled annual strategic planning.

Because a strategic vision is not something to be reserved for the

annual strategic overview and planning, it can also not be allocated a
fixed place within a strategic management framework. Any attempt to
plot the strategic vision, along with the mission statement,
environmental analysis, strategies and implementation issues within a
strategic management or planning model, will enforce the perception
that it is a once-off exercise. Limiting the vision to an allocated
position in a strategic planning process will also lead to top
management being tempted to introduce only minor or cosmetic
changes, instead of a distinctive and organisation-specific strategic
vision. It may eventually result in meaningless and vague vision
statements, e.g.: “We will become the first choice of customers in
every market segment we choose to enter into”; or Caterpillar’s vision:
“Be the global leader in customer value.” Visions like these could
apply to any national or international retail group, manufacturing
company, university and/or not-for-profit organisation.

Unfortunately not everybody is convinced about the powerful role a

vision can play in the strategic positioning of an organisation. Maybe it
is a situation of them seeing best what they know best, namely their
existing market environment. A general misconception also exists that
visions are reserved for the multinationals and conglomerates of the
world. This is especially true in the case of small and medium
businesses.

Clarifying the true meaning of a strategic vision, the reasons why it is

a valuable tool in modern-day organisations, and guidelines for a
vision, will assist in creating a vision sensitive to the management
environment.

2.3.1 Reasons why vision is a valuable tool

The strategic vision articulates the CEO’s and top management’s

strategic intent, because it focuses attention, available capacity and
energy on the ultimate purpose of the organisation. It is a description
of the organisation’s future direction, and encapsulates the customer
focus and market position it should have (see Strategy in action 2.1).
Although a good strategic vision is relatively simple, it must
encourage the organisation to stretch, and challenge established
practices and mindsets. Such an endeavour cannot take place in
isolation, but must be done against the background of the macro-
and market environment.
Organisations are operating in an open and global environment,
forcing leaders to move beyond social, geographical and other
existing boundaries. Amazon’s vision is “… to be earth’s most
customer-centric company; where customers can find and discover
anything they might want to buy online” (Gregory, 2017). A good
strategic vision like this is shaped by a careful analysis of the
 external environment, considering the potential future opportunities
and threats, as well as anticipating the internal skills and
competencies that will be needed to explore the opportunities or
defend against foreseen and unforeseen threats. In the process
organisations often use scenario analyses, or get involved in the
analysis of megatrends in an attempt to take a peep into the future.

2.3.2 Risks relating to strategic vision

Unfortunately, a strategic vision can also lead to strategic
stubbornness. The reason for this phenomenon is that top managers
are stuck, either in an unclear or unrealistic vision. This unfortunate
outcome could be the result of inaccurate and irrelevant assumptions
regarding future developments. The inability to implement the required
strategic plan, despite a clear and realistic vision, could also result in
stubbornness.

Another risk that needs to be highlighted is that of strategic

opportunism, the direct opposite of strategic vision. Strategic
opportunism is to be found in organisations where the future is
extrapolated from a contemporary perspective: What is currently
happening? Think about statements like the following:

The world economy is changing so intensely and so fast that it is no

use trying to anticipate the future.
We are harvesting whatever we can. Tomorrow will look after itself.
As long as my team is fighting fit we will be able to tackle any
problem that may occur.
The Euro crisis emphasised the futility of trying to predict future
prospects.

Strategic opportunism is therefore the equivalent of reactive

management. The focus is on strategies and approaches that currently
make sense. By formulating the best strategy for today’s challenges we
will ensure readiness and relevance for when storm clouds appear on
the horizon. The ultimate outcome of such an approach is that an
organisation will end up in a strategic desert, without an SGPS.

Strategic vision and strategic opportunism must be approached as

two extremes on a continuum. The best way to understand and
approach these two concepts is by recognising the difference and using
guiding questions. Examples of typical guiding questions are listed in
Table 2.1.

Table 2.1 Questions guiding strategic vision versus strategic opportunism

Strategic vision Strategic opportunism

1. What will future trends in the industry 1. What are the current trends in the
be? industry?

2. What will future driving forces in the 2. What are the driving forces in the
industry be? industry now?

3. What technological developments will 3. What technological developments

characterise the industry in the future? currently characterise the
industry?

4. What are the foreseen key success 4. What are the current key success
factors for the industry? factors of the industry?

5. Which key strategic changes in the 5. Which key strategic changes are
industry are visualised? currently shaping the industry?

2.3.3 Why a strategic vision?

Burger King’s vision statement “…to be the most profitable quick
service restaurant business, through a strong franchise system and
great people, serving the best burgers in the world” (Rowland, 2017)
presents a good reason why a strategic vision is so important. There is
no doubt about the industry that they are in and what they intend doing
within the industry boundaries. There is also no uncertainty among
management, staff and other stakeholders with regards to what is
needed to achieve their dream. This is evident from the following list
of reasons for a clear, simple, concise, but mind-stretching vision:

A strategic vision serves as the single most important guiding star

for future direction and positioning. The focus is directed towards
the markets to be served and the competencies, skills and capacity
that will be necessary.
A strategic vision is the driving force for effective communication
with all stakeholders of the organisation. It is also fundamental to
their participation and commitment, because of its challenging and
inspirational nature.
A strategic vision provides the basis for dealing with complex
challenges and problems. It is extremely difficult for managers to
practise anticipative management and proper contingent planning
effectively without a clear vision.
A strategic vision will assist managers on all levels not to fall into
the trap of strategic opportunism.
A strategic vision also plays a congruence and solidarity role within
the organisation, because if effectively communicated down to
lower levels, it will guide everybody towards a shared purpose.

2.3.4 The development of a strategic vision

When studying the vision statements of organisations, found in annual
reports and on websites, it is worth noting that a significant number of
them are vague, with little if any reference to future positioning vis-à-
vis the industry, product, market or technology. It seems that the vision
statement is often confused with a public relations exercise. In
developing a strategic vision, leaders should consider a number of
simple principles, discussed briefly below.

Strategic vision starts from the top because a true visionary leader
always leads by example. To do justice to this top-down principle, it is
important for managers to articulate the vision through open dialogue
and interaction with lower hierarchical levels. Many examples can be
listed from history where vision-driven leaders achieved success.
Think about military successes by Napoleon and Alexander the Great,
or the achievements of great political leaders like Abraham Lincoln,
Winston Churchill and Nelson Mandela. The importance of a clear and
well-communicated vision is not limited to the military and politics. In
more recent times, vision-driven business leaders include Steve Jobs,
Bill Gates, Richard Branson, Divine Ndhlukula, Koos Bekker and
Alhaji Aliko Dangote. What is common among all of these examples
is that whenever a strategic vision comes from the top, success results.

A strategic vision is focused enough so that people on all hierarchical

levels of the organisation will have clarity on its direction and
meaning. Take, for example, Kennedy’s May 1961 vision of “…
landing a man on the moon and returning him safely to earth”. This
vision was focused and specific enough regarding both goal and time
frame, and in July 1969 Armstrong and Aldrin stepped onto the moon
and three days later returned safely to earth.

However, the vision must never be so focused and specific that it

makes it difficult to adjust to changing circumstances.

Strategic vision should therefore be the result of a continuous

development process. It is crucial to note that a strategic vision cannot
be developed by following a blueprint from a textbook or a recipe, or
by copying another organisation’s vision, with a few cosmetic changes.
Although a vision must be enduring, it is not cast in stone; once the
strategic vision has been fulfilled an organisation may easily start
behaving like a rudderless ship in the ocean. If, for example, the vision
of product leadership is realised, imitation and innovation by
competitors will almost certainly erode the product leadership position,
and without an altered or new vision from the top the organisation will
have to rely on strategic opportunism for growth and survival.

Environmental scanning is a fundamental prerequisite in the

development of a strategic vision. It is, however, not enough. The
conventional method of environmental scanning, where the typical
economic, political, legal, social and other elements are under the
magnifying glass, is insufficient. It is crucial for strategic leaders to
study, anticipate and respond to megatrends because of the globalised
environment. Someone once said: “… trends, like horses, are easier to
ride in the direction they are already going.”

A strategic vision always states the desired end result, never the
starting block. It is therefore directional, forward looking and graphic
enough to paint a picture of the kind of organisation that the leadership
is trying to create, as in the case of Google: “To provide access to the
world’s information in one click.”

That said, the strategic vision must be separate and independent

from current strategies in order to enforce freshness in management
approaches and to create a challenging organisational culture. If one
approaches the future from what is happening at the moment and what
the current challenges are, the future will certainly be an extrapolation
of today. Every possible effort must be made to arrive at a mind-
stretching, innovative and differentiating strategic vision, because it
could potentially become an energising force for employee
participation, commitment and communication.

Finally, a strategic vision that is not effectively communicated has

little value. It is therefore critical that the vision be communicated
throughout the entire organisation. Management at all levels must
furthermore refrain from trying to inform stakeholders about the vision
and its meaning only via email, by posting it on the organisation’s
website, or in writing. Although these ways of conveying and
enforcing the strategic vision are pivotal, it is the responsibility of
every manager involved to personally explain the vision and its
meaning to as many individuals as possible. Because of the potential
motivational value of the strategic vision, it is wise to invest enough
time and energy into the communication process in order to achieve
optimal buy-in by all members of the organisation.

The first important step towards putting the strategic vision into action
is to translate it into a mission statement.
2.4 Mission

Although a mission statement is one of the best known and most

widely published parts of a strategic plan, managers, strategists and
authors of strategic management literature are not unanimous in their
understanding and description of what a mission statement actually is.
There is indeed no universally agreed definition for a mission, and the
considerable differences in interpretation are clearly illustrated by the
diverse statements that are written. For example, concise versus
lengthy mission statements; missions described in simple terms
compared to highly elaborate versions; mission statements developed
internally by management in contrast to grandiose statements created
by expensive consultants; and focused mission statements as opposed
to a statement containing a mixture of vision, mission, business
philosophy and values.

Impracticalities regarding missions do not contribute to the debate on

what a real mission statement is. It is often managers on lower
organisational levels who struggle to incorporate mission statements
into their day-to-day work environment. They perceive missions that
are developed by higher management as out of touch with reality;
difficult to understand; of little use in real life; and not worth the paper
they are written on. This unfortunate situation is often exacerbated by
the following phenomena:

Mission impossible
Mission ambiguity
Mission dissatisfaction
A mission with no influence over behaviour
Dissatisfaction with the mission development process – limited or
no participation

Despite the differences in opinion regarding the purpose and content of

mission statements, they still form a very popular part of most strategic
planning exercises, because they assist in aligning thought processes.
Although a universally agreed definition of a mission is not available,
a broad description is nevertheless needed to guide management
practitioners in addressing the underlying questions that will
eventually contribute to a clear and complete strategic intent.

2.4.1 What is a mission?

A mission is a direction-setting guideline, and serves as the
conscience of the organisation. As stated earlier, a vision is a
dream of a desired future and therefore top management’s
view of the future direction and market position of the organisation.
While visions are verbally articulated pictures of where the
organisation is heading and what it is intended to become, a mission
guides the organisation in terms of what needs to be done. The
mission must therefore be based on and integrated with the vision, and
developed as a tool to direct organisations towards realising the dream.
It is normally written by answering key questions such as the
following:

What business are we in and what purpose do we serve?

What business should we be in?
What are we doing – our products and services?
What customers are we targeting and what are their needs?
Why does this organisation exist?

In answering these questions, a mission statement will provide clarity

to all stakeholders about

the products and services the organisation delivers

the identified needs of customers and how to satisfy those needs
the markets the organisation will focus on
the organisation’s own identity.

Mission statements are more concrete than vision statements in

defining boundaries and explaining why a particular organisation
exists, however, not in terms of measurable outputs. A good mission
statement will therefore always reflect the belief system of an
organisation, making it obvious that outsiders will not be in a position
to capture the essence of what the organisation stands for. That is why
the development of a mission statement is the primary responsibility of
management and can therefore never be outsourced to consultants.

The mission represents the overriding purpose or raison d’être of the

organisation. The mission must also disclose the image the
organisation strives to portray and it should distinguish the
organisation from similar entities. In the process it will also identify
the scope of its market activities and the customer needs that the
organisation intends satisfying, as well as give an indication of the
products or services that will be delivered. See Strategy in action 2.4
for examples of mission statements from a few South African
organisations. Some do not meet the minimum requirements of what
should be part of a mission statement.

Strategy in action 2.4 Examples of mission statements

Grain South Africa

Grain SA provides commodity strategic support and services to South African
grain producers to support sustainability.
Source: http://www.grainsa.co.za/pages/about-grain-sa/overview/

Discovery Health
Its mission is “…to generate necessary change in the healthcare market by
providing members with quality services and healthcare products that adhere to
the public’s fundamental healthcare needs”.
Source: http://www.medicalaidsearch.co.za/medical-aid-schemes/discovery-
health-scheme/

SAPO
“We leverage our established infrastructure and link government, business and
customers with each other locally and abroad.”
Source: http://www.postoffice.co.za/about/missionvision.html

Department of Forestry and Fisheries

“Advancing food security and transformation of the sector through innovative,
inclusive and sustainable policies, legislation and programmes.”
 Source: http://www.daff.gov.za/daffweb3/About-Us/Vision-and-Mission/

South African National Parks

“To develop, expand, manage and promote a system of sustainable national
parks that represents biodiversity and heritage assets, through innovation and
best practice for the just and equitable benefit of current and future
generations.”
Source:
https://www.sanparks.org/assets/docs/about/5_year_strategic_plan_2
016-2017_2019-2020.pdf

2.4.2 Why a mission statement?

As with any dream, a vision is an imaginary picture of something to
be, not reality. This is the reason why top management often struggles
to convey it effectively to lower levels in the organisation, and to get
buy-in. The way to bridge this gap between top management’s dreams
and lower levels’ execution is to provide clarity about who we are,
what we do, who our customers are, and the way things are done.
This can be achieved through a good mission statement, spread around
the entire organisation and backed up by the actions of people at the
top, and not only through their words.

It has been said frequently that managers are responsible for melding
their subordinates into a united force that is productive, is able to serve
customers consistently, and honours the shared values of the
organisation. A mission statement like that of the Southern African
Institute of Steel Construction (SAISC) (Strategy in action 2.5) is a
clear way to ensure unanimity in behaviour towards the day-to-day
management of the organisation. One can easily sense that a mission is
about required behaviour, e.g. innovation and the development of
expertise.

Strategy in action 2.5 Mission statement of SAISC

The mission of the SAISC is to promote the holistic vigour and prosperity of the
people and companies in South Africa that provide steel-related products or
services to the building and construction industry.
Source: http://saisc.co.za/saisc/aboutus_mission.htm
A well-conceived and effectively communicated mission statement is
also necessary to align managerial decision making. It provides a basis
for making quick and effective decisions without having to start each
major decision from scratch, or being bogged down in an unnecessary
exchange of information. It therefore ensures optimal resource
allocation.

Goal conflict between departments is a common phenomenon, with

managers prioritising their own departments’ desired end results, often
in direct conflict with other entities. Situations like these are
undesirable in times of financial and other capacity constraints. A
well-embedded and commonly accepted mission statement will help
managers make important decisions about resource allocation towards
goal attainment.

Organisations need something that will symbolically hold everything

together in one unified entity. A well-phrased mission statement can
provide this cultural glue, as is best illustrated by the International
Committee of the Red Cross (ICRC): “… an impartial, neutral and
independent organisation whose exclusively humanitarian mission is to
protect the lives and dignity of victims of armed conflict and other
situations of violence and to provide them with assistance.”

2.4.3 Requirements for a good mission statement

Any mission statement must be inspirational. McDonald’s succeeded
in this regard by stating that being “… the best means providing
outstanding quality, service, cleanliness, and value, so that we make
every customer in every restaurant smile”. It can only be inspirational
if it is specific enough to have an impact on the behaviour of
individual employees. Apart from inspiring, the McDonald’s mission
is also relevant and fair towards all the stakeholders: customers,
employees, investors and environmentalists alike.

The case of Facebook needs to be mentioned when it comes to the use

of simple language: “Facebook’s mission is to give people the power
to share and make the world more open and connected.” This is
effective, clear and powerful, and specific enough to create a unique
personality for the business.

It must reflect the competitive advantage of the organisation. This

cannot be done in isolation, but with full cognisance of the
competencies and shortcomings of the organisation. It is once again
important to stress that a mission statement cannot be outsourced,
because only management is aware of the abilities of the organisation
vis-à-vis the industry and the market.

No mission statement should be cast in stone. The traditional approach

to strategic planning, where annual analyses and overall planning are
done for the coming year, is no longer appealing. The global
environment is too turbulent to stick to a mission statement, despite
major international economic changes, social upheaval, political-legal
challenges, labour unrest, technological innovations and natural
disasters. Flexibility in terms of the mission statement as a
management tool is crucial; to keep the organisation aligned with
industry, as well as relevant and sustainable regarding market
expectations.

The correct mix between breadth and focus is a primary prerequisite

when preparing a mission. Vague statements like “… we are in
communication”, or to “… provide high product quality” are too
broad, and may lead to fogginess with little or no focus on the targeted
customer groups, their needs and the way in which to satisfy them. The
old cliché of not being able to be everything to everybody comes to
mind. Equally undesirable are missions that are too narrow, e.g. “… to
design and manufacture state-of-the-art water heating systems powered
by electricity”. In this relatively narrowly focused approach, designers
are limited to one source of energy only, with no alternative like solar
or gas up for consideration, research and introduction. Capacity in a
case like this will be invested in the optimal design and production of
electric geysers only. Difficult as it may be, every attempt must be
made by management to strike a balance between a statement that is
too broad and one that is too narrow.
Linked to this is the general expectation that a mission should be
attainable and realistic. Although this expectation could be further
elaborated, its fundamental point is that the mission is not a pie-in-the-
sky intention that will be almost impossible to carry out.

2.4.4 The development of a mission statement

A mission statement is not developed because of legal requirements.
Neither must it be the result of outside pressures, nor to be fashionable.
It is an internally generated and driven process, intended to establish
trust and a common belief system in the organisation. The underlying
principle is that mission statements should give meaning to work,
motivate management and employees, and build consensus and
loyalty.

Over the years many procedural approaches to arriving at a mission

statement have been experimented with, ranging from a centralised
intellectual top management approach on the one hand to a
participative process on the other. The centralised intellectual process
involves top management breaking away for a couple of days to
deliberate about the key strategic issues underlying the mission
statement (see Figure 2.1). An external strategic planning expert often
facilitates the process, and is usually also asked to write the final
mission statement. This is without doubt a waste of time, energy and
resources because very few, if any, people in the organisation are
willing to take ownership of the result.
 Figure 2.1 Three basic components of
a mission statement

Another way to approach the mission is by staying away from

intellectual debates and rather focusing on particular key strategic
issues such as customers, their needs and how to address these.
Because no two organisations are identical in terms of ownership,
structure, resources, market position, location or environmental
circumstances, and the mission statement will be personal to each
organisation, it is impossible to propose a single approach as an
ultimate solution. Nevertheless, it makes business sense to allow
participation over a wider spectrum of management than just top
management. It is in any case crucial for eventual buy-in and
meaningful execution by everybody.

Formulating a good and inclusive mission statement is time-

consuming and requires commitment from top management. Even
though the development of a mission statement is the responsibility of
the CEO, he or she should neither do it alone, nor delegate the
responsibility to a consultant or committee. The golden rule is, as
always, to involve as many managers as is practically possible.
Because the development of a mission statement is also aimed at
creating an emotional bond and a sense of direction and mission
between participants, it is advisable to make the process as transparent
as possible. This could be achieved relatively easily by having group
discussions about the issues that determine the nature of the
organisation. This is to ensure inclusivity and eventually greater
ownership of the mission by all managers. The nature and contents of a
mission statement will automatically involve middle and lower
management, because it is at the operational level that issues like
market positioning and decisions pertaining to market share,
production, human resources and logistics must be guided towards
realising the vision.

Pearce and Robinson (2003) propose the idea that the best way to
approach the development of a mission statement is to think about the
organisation at its inception, namely, the beliefs, desires and
inspirations of the founding entrepreneur. They go further by listing
the specific considerations held by the founder(s) of an organisation,
e.g. the product or service to be offered, the satisfaction of the
customers’ needs, technology to be used in the production process or
in delivering services, sustainability, growth and profitability. By
percolating these considerations, three basic components in the form of
key questions evolve that, when answered, will result in a mission
statement. The three components are presented in Figure 2.1 to
illustrate the interrelatedness and integration thereof.

Who? Customers and customer groups determine what an

organisation really is.
What? Customers’ and customer groups’ needs are important,
because their willingness to pay for goods and services is directly
linked to the satisfaction of their needs. Customers therefore do not
pay for the goods or services, but for what those goods or services
are doing for them. The following statements are often used to
illustrate this truth:

– 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 books. Offer me hours of pleasure and the benefit
of reading.
– Do not offer me CDs and DVDs. Offer me leisure and the sound
of music.
– Do not offer me things. Offer me ideas, emotions, feelings and
benefits.

How? How will the customer’s needs be satisfied?

If these questions are formulated in the present tense, and dealt with
honestly, participants will be guided towards understanding the
current nature and position of the organisation. The power of this
exercise cannot be overemphasised. It is, however, not enough to think
about the organisation within its immediate environment only. The
minds of participants must be stretched beyond the current day-to-day
challenges. In simple terms, if the vision is a mental image of what the
organisation will look like in 2024, the map (mission) used to
undertake the journey cannot be dated 2018. What is needed is a tool
that will allow for adapting to new ways of travel and along possible
alternative routes. It is a fact of life that rapid changes occur always
and everywhere, and that these changes are escalating in nature,
frequency and quantity. This undeniably results in organisations
adapting to survive and grow, or dying owing to an inability to adapt to
changing environmental landscapes.

A different approach is therefore proposed and presented in Table 2.2.

Participants should be challenged to a better understanding of the
future nature and position of the organisation, by using the same key
questions, also in the future tense. However, visionary top
management might realise that unforeseen changes are no longer the
exception to the rule, but the rule itself. It is therefore important to note
that the future organisation will possibly be different from what is
envisaged in the vision statement, which will present an undefined
challenge that needs to be understood. One can never foresee and plan
for every possible scenario, which means that a mission should also
portray the potentially unforeseen occurrences in the environment.
 Table 2.2 Key questions towards a comprehensive mission statement

Current way of Future way of doing Future way of doing

doing business – business that will be the business that we can
status quo result of changes beyond co‑create in reaction to
our control our vision
Who are our Who will our Who should our
customers/customer customers/customer groups customers/customer
groups? be? groups be?
What are their What will their needs be? What should their needs
needs? be?
How are we How will we be satisfying How should we be
satisfying these those needs? satisfying those needs?
needs?

An answer to each of the three groups of questions, in order of

addressing it, will tell participants the following:

What business are we in? The now!

What business should we be in? The visionary future that we can
create ourselves by identifying new customer groups, predicting
their needs, planning new technologies and innovative marketing
strategies, and constructively planning our own future positioning
vis-à-vis competitors, and in relation to suppliers and other
stakeholders.
What business could we be in? A potential future we do not opt for
ourselves, but will explore if and when it happens. This is the
typical scenario one would try to avoid at all costs but might not be
in a position to escape. External forces stemming from economic
disasters, a changing political landscape or radical new
technological developments could render any current and planned
direction obsolete, demolishing customer loyalty, or endangering the
sustainability, market position and profitability of the organisation.
It is nevertheless important to consider potential changes that could
occur and timeously integrate solutions into strategic planning,
 especially the mission statement that will guide managerial decision
making.

In the end a mission statement must provide managers with a unity of

direction that transcends personal preferences and philosophies. By
seriously addressing the key questions, a sense of shared expectations
and solutions among all levels of management can be promoted.

2.5 Core values

The buzzword in the strategic management arena, especially within the

framework of strategic intent, is core values. Pick up any reputable
organisation’s annual report or marketing plan and a statement of core
values will form part of it. Unfortunately, core values are already
labelled in many circles as a waste of time, not worth the paper on
which they are written; just as meaningless as a written vision and
mission statement; or of no use or real value to the members of an
organisation that are actually doing the work.

Some of the reasons for this apathy towards the identification and
publication of core values are, among others, their ineffective
communication to people that matter, the seeming irrelevance of the
value statements to everyday operational activities in the organisation,
and the non-alignment with vision and mission statements. Add to
these the sometimes impractical and highly sophisticated language
used to describe the core values, and the picture of a perceived
window-dressing exercise becomes clear.

Are core values supposed to be window dressing only? Perhaps they

are just a fad that will eventually fade away, as some believe that core
values do not have a significant place in strategic management and its
execution. The core values can neither form part of a highly
sophisticated concept that is difficult to convey to the lowest levels in
the organisation, nor can they be just a nice-to-have.
2.5.1 What is a core value?
Simply put, a vision statement is a verbalised picture of where the
organisation is heading in future, while the mission guides the
organisation in terms of what needs to be done during this journey,
whereas the core values are important because they explain how things
will be done on a daily basis.

The seven core values of Walt Disney Resort (Strategy in action 2.6)
serve as a good illustration of this. What is also important to note is
that the personnel who are expected to follow these seven core values
are called Cast Members.

Strategy in action 2.6 Seven core values of Walt Disney Resort

Honesty: We deal with one another in a straightforward manner

Integrity: We act in a manner consistent with our words and beliefs
Respect: We treat others with care and consideration
Courage: We pursue our beliefs with strength and perseverance
Openness: We share information freely
Diversity: We seek, value, and respect differences among our fellow Cast
Members
Balance: We strive for stability and vitality in our lives

Source: Cockerell, 2008

These core values are simple, straightforward and understandable.

Although it is important not to complicate core values unnecessarily, a
working definition of the term is necessary to remind management
continuously about their real meaning and purpose.

Core values are described by a multitude of authors in many

different ways, stretching from a belief or ideal at the one
end, to behavioural norms and traits that members of staff
are expected to portray at the other. According to the Oxford
Dictionary a core value is a principle or standard of behaviour, or a
quality intrinsically valuable or desirable. It is evident that a core value
statement needs to display the beliefs that are true and fundamental to
the organisation as a whole, and not only to top management. Typical
beliefs to be found in core value statements include respect,
excellence, honesty, loyalty, accountability, embracing diversity,
commitment, integrity, creativity, customer orientation, reliability,
safety, consistency, passion, courtesy, teamwork, sustainability and
entrepreneurship, to name but a few. See Strategy in action 2.7 for the
values of Barclays Africa Group.

Strategy in action 2.7 Values of Barclays Africa Group

Respect: We respect and value those we work with, and the contribution that
they make.
Integrity: We act fairly, ethically and openly in all we do.
Service: We put our customers and clients at the centre of what we do.
Excellence: We use our energy, skills and resources to deliver the best,
sustainable results.
Stewardship: We are passionate about leaving things better than we found
them.
Source: https://www.barclaysafrica.com/about-us/who-we-are/our-purpose-
goal-and-values/ (accessed March 2017)

Core values are best described as deeply held beliefs that certain
qualities are desirable. Values define what is right or fundamentally
important to a person, and provide guidelines for a person’s choices
and actions. This is true in both personal and organisational life, and
without them management and the rest of the team will have difficulty
in making the right choices and following the right path. The corporate
values of the Small Enterprise Finance Agency (SEFA) must guide all
its employees to make the right choices (see Strategy in action 2.8).

Strategy in action 2.8 SEFA’s corporate values

Kuyasheshwa! – We act with speed and urgency

Passion for development – Solution-driven attitude, commitment to serve
 Integrity – Dealing with clients and stakeholders in an honest and ethical
manner
Transparency – Ensuring compliance with the best practice on the
dissemination and sharing of information with all stakeholders
Innovation – Continuously looking for better ways to serve our customers
Source: http://www.sefa.org.za/Admin/VMV.aspx (accessed 27 March 2017)

2.5.2 The importance of core values

Core values have a significant influence on behaviour and attitude,
and are therefore vitally important for guiding the day-to-day
behaviour and decision making of all members of the organisation. A
statement of core values is in fact a written declaration of how the
organisation will deal with the internal and external community, for
example staff, shareholders, customers, suppliers and competitors.

Think about a sports team with individual players, each with a set of
talents, experiences, expectations and values. Winning is important,
internally to the team and its management, but also to the sponsors,
supporters and the community. The coach must join these individuals,
given their respective competencies, into a united force that will be
ready and motivated to beat the competition, despite their individual
differences. A good coach will normally start by creating and
inculcating a set of shared values among individual team members.
Jake White, a former South African national rugby coach, is a good
example. He was expected to coach a Springbok rugby team that had
gone through a disastrous preceding three years, mainly as a result of
coaches who did not succeed in joining the individuals into a united
whole. Shortly after White took over as coach of the national rugby
team, he gathered the entire team together and each player had an
opportunity to say what he thought the problems were. This initiative
not only resulted in a better understanding of each person’s
interpretation of the same situation and challenges, but also led to a set
of mutual expectations, and an eventual set of shared values of which
White would become the custodian. They won the Rugby World Cup
shortly thereafter. If a coach does not succeed in clearly articulating
the core values from the beginning, and through that establishing a
sense of belonging and unity, the team will be pulled apart by the
diverse talents, experiences, expectations and values of the individual
players. Although the individual players are not expected to abandon
their personal values, it is important that while they are operating in
and on behalf of the team, the mutually agreed set of core values and
tactics and not individual personal values will dictate the execution of
strategy. The very same principle applies to every organisation.

Without a set of clearly defined and properly communicated core

values, individuals in the organisation will most probably act using
their own values when making decisions on behalf of the organisation.
It is obvious that a situation like that should be avoided at all costs,
because of the variation in core values and often disparity between
individuals regarding what is perceived as good or bad.

It is therefore safe to say that core values are essential to the

structural fibre of an organisation. This is especially important for
senior management when formulating strategy, because a multitude of
opportunities and threats will present themselves during the process.
Without a clear set of core values, decision makers will have difficulty
prioritising and allocating valuable resources like financial means,
time, equipment, energy and capacity in general.

All the values that are identified within an organisation are not equally
important. Prioritising the core values is therefore of the utmost
importance. People will be hired, promoted, rewarded and disciplined
in the organisation for either positive or negative working behaviour.
Clear and prioritised core values can be a guiding light to recruit
people whose outlook and actions are congruent with the core values
of the organisation.

A valuable lesson from various winning organisations is that of

consistency. Consistent behaviour in terms of ethical conduct, service
delivery, community engagement and reliability often distinguishes
these organisations from the rest. Shared core values help everybody
in the organisation to act consistently and according to a predetermined
set of guidelines. It helps members of an organisation to distinguish
right from wrong, and determine if the organisation is on the right path
towards achieving its goals and objectives within the spirit of the
vision and mission statements. When digging into the reason for
organisational consistency, a well-communicated and well-understood
set of clear, shared core values is almost always present.

It is thus obvious that the core value statement forms the basis of
every activity in an organisation. The core values of the CEO, top
management, middle and lower levels of management, as well as those
of workers, together with their experiences and background, filtered
through into one statement of core values for the entire organisation,
will have a real influence on the performance of the organisation and
its people. In other words, it is only valuable if the organisation and all
of its members live, decide and act by it, therefore resulting in
continuous consistency in approaching decision making and strategic
positioning and execution.

2.5.3 Preparing core value statements

A very basic prerequisite in preparing good core value statements is
absolute commitment and active buy-in from top management. Core
values can never be a bottom-up initiative, but should be initiated at
the highest level in the organisation. The reason for this is the fact that
core values may eventually put profitability, market position or cash
flow on a temporary back burner. For example, a tobacco company
that embarks on a new value-driven journey with honesty about the
underlying dangers of smoking as the leading value may soon witness
a significant drop in turnover and yield on investment. If honesty as a
core value were the brainchild of lower level managers or even the
public relations department, it would be difficult to get it passed by the
CEO, board of directors and investors.

The core values of top management are overarching and pivotal in the
creation of a healthy organisational and workplace culture. A word of
warning is necessary against accepting the CEO’s set of personal core
values as a template, and an easy way out for a statement of core
values for the organisation as such. It happens from time to time that
the core values of an organisation are unfortunately a carbon copy of
the core values of the leader, and not a set of commonly accepted core
values that will result in realising the organisation’s shared vision and
purpose. A clear distinction between organisational and personal
values is therefore extremely important, although the underlying
philosophy in their creation is basically the same.

It is also important to remember that there are no right or wrong, good

or bad values. What a right core value is to one organisation might be
wrong to the next, even within the same industry. Particular
circumstances, like economic pressures, environmental changes,
industry-specific challenges, a changing competitive landscape,
internal competencies or difficulties, and of course the leadership
profile will influence the identified core values of an organisation.
However, it is pivotal to keep the core set of values as stable as
possible. Because core values are not supposed to change frequently, if
at all, a clear differentiation needs to be established between a mere list
of nice values and core values.

Compiling long lists of values is easy, but not recommended. Merely

listing nice things to do will not activate value-driven management.
Furthermore, lists of socalled values are difficult to engrave on the
hearts and minds of every member of an organisation. If the values are
not translated into day-to-day guidelines for proper organisational
behaviour, people will, over the long term, feel fooled and misled
because they cannot see the reason for them or the impact these values
have on the success and well-being of the organisation.

A five-step process can be followed in preparing a core value

statement. Although the assistance of an experienced facilitator can be
obtained, it is not advisable because arriving at generally accepted core
values is not a job for either a consultant or a committee. It is rather a
participative and transparent endeavour, because buy-in is important
for such a statement to be subscribed to by everybody in the
organisation.

Step 1: Each member of top management proposes the five values

she or he deems crucial for the structural fibre of the organisation.
They then debate and integrate the proposed values into a first draft
of five values for the organisation. The draft value statement must
also include a translation of the proposed values into simple and
easy-to-understand language, with specific day-to-day meaning and
implications for middle management.
Step 2: Middle management discusses the first draft, carefully
considering the real meaning and practicalities of each value for
day-to-day use on their management level. Again, they also have to
translate each of the five values into understandable terms and
meaning for the next level, namely lower management. Middle
management must also have the opportunity to add new values to
the list, together with a description of their meanings for everyday
guidance on their own level of management, as well as on lower
level management.
Step 3: This updated list is handed to lower level management for
discussion, carefully considering the real meaning and practicalities
of each value for day-to-day use on their specific level, as well as
for their subordinates. They also have to translate each of the values
into understandable terms and meaning for their subordinates.
Lower management must also have the opportunity to add new
values to the list, together with a description of their meanings for
everyday guidance on their own level of management, as well as
their subordinates.
Step 4: This expanded list of values, with its explanations by top,
middle and lower management, is then evaluated, debated,
integrated and prioritised by top management to form the final
statement of core values for the organisation.
Step 5: A crucial stage in establishing a culture of value-driven
management is now reached, starting with a cascading of the
statement of core values from top management down through and to
the lowest-level worker in the organisation. The statement of core
values provides a benchmark against which all actions and
behaviour in the organisation will be evaluated. Because the core
values define how everybody must behave individually and
collectively, extreme effort must be invested by each manager
 during the communication and buy-in process. A two-phase
approach is recommended for Step 5:

– Communication of the core value statement and its meaning by

top management, trickling down to and through every
management layer until it reaches every subordinate in the
organisation: labour relations officers, accountants, computer
analysts, salespeople, receptionists, cleaners, messengers and
security guards.
– A structured process under the leadership of the relevant manager,
whereby core values should be discussed, internalised, accepted
and subscribed to by each person in the organisation, must be
followed. During this stage the real practical implications,
demands and rewards of each core value must be unpacked and
understood by everybody. Special attention should be paid to
workshop the reasons for, and implications of, the priority order
of the various core values. This is important, because should
something called value conflict arise, the involved manager or
subordinate will know what to focus on.

Only the active participation of all members of the organisation will

ensure a truly organisation-wide, value-based, shared culture. Values
are not for the attention or benefit of managers only, but are applicable
to everybody in the organisation.

2.6 Linking the vision, mission and core values

Although top management is primarily responsible for strategic

leadership and direction setting, the role of and inputs by lower levels
of management are pivotal. The best way to illustrate the underlying
philosophy to determine strategic direction and the definition of
strategic intent is by means of the hierarchy in Figure 2.2.
 Figure 2.2 Responsibility for direction setting
according to management levels

Strategic intent and the formulation of a vision statement are top

management functions and responsibilities. Although there is a
tendency to involve lower levels of management at this stage, real
strategic direction must come from the top. The participation by lower-
level managers can be ideally achieved during the design of the
mission and value statements. It is at these levels that the guiding role
of missions and values will play out, in the day-to-day implementation
of strategies and action plans.

It is, however, not good practice to present the different statements,

vision, mission and values separately. Top management should take
responsibility for integrating them into one document that can be
communicated, discussed and used by the different takeholders (see
Strategy in action 2.9).

Strategy in action 2.9 The University of the Free State’s vision, mission
and value statements

Vision
A university recognised across the world for excellence in academic
achievement and in human reconciliation.

Mission
The university will pursue this vision through its mission:
 Setting the highest standards for undergraduate and postgraduate
education.
Recruiting the best and most diverse students and professors into the
university.
Advancing excellence in the scholarship of research, teaching, and public
service.
Demonstrating in everyday practice the value of human togetherness and
solidarity across social and historical divides.
Advancing social justice by creating multiple opportunities for disadvantaged
students to access the university.
Promoting innovation, distinctiveness and leadership in both academic and
human pursuits.
Establishing transparent opportunities for lifelong learning for academic and
support staff.

Values
The following five core values represent deeply held commitments that inform
every policy and steer every action. These values underpin both the Academic
Project and the Human Project of this university.

Superior Scholarship
Human Embrace
Institutional Distinctiveness
Emergent Leadership
Public Service

Motto
IN VERITATE SAPIENTIAE LUX (In Truth is the Light of Wisdom)
Source: https://www.ufs.ac.za/about-the-ufs/ufs-in-focus/vision-mission-and-
values

Stakeholders who affect and who are affected by an organisation have

a key interest in the strategic direction of that particular organisation,
as it is publicly communicated through the vision, mission and value
statements. Because investors, management and the community might
base their decisions regarding the organisation on these statements,
CEOs and top management must ensure that the correct context and
contents are presented.

2.7 Summary

It is clear that organisations can use a vision statement, strategic intent

and/or a mission statement to set the organisation’s strategic direction.
It should, however, be unique and reflect the true culture of the
organisation. The strategic intent indicates the position an organisation
wishes to take in the industry. Not all organisations have a separate
strategic intent; it is rather formulated in the form of a vision
statement. A vision is a picture of what the organisation wants to be in
the future and what it ultimately wants to achieve. Flowing from the
vision, the mission specifies in what business the organisation intends
to compete and the customers it intends to serve. The core value
statement indicates the fundamental values (how) the organisation will
apply to guide its day-to-day activities. As mentioned, the strategic
direction statements should address stakeholder concerns and must be
communicated to all stakeholders, because stakeholders have
enforceable claims on the organisation’s performance. To ensure
successful strategy implementation, it is necessary for organisations to
set a strategic direction that can be implemented and achieved.

Exploring the web

http://blog.mycorporation.com/2012/07/four-kind-of-crummy-mission-statements/
http://www.brighthub.com/office/entrepreneurs/articles/98285.aspx
http://guides.wsj.com/management/strategy/what-is-blue-ocean-strategy/
http://www.diffen.com/difference/Mission_Statement_vs_Vision_Statement
http://www.nestle.co.za/aboutus/missionvision
http://www.psychologytoday.com/blog/smartwork/201004/vision-and-mission-whats-
the-difference-and-why-does-it-matter
http://www.samsung.com/us/aboutsamsung/corporateprofile/valuesphilosophy.html
http://www.sassa.gov.za/index.php/about-us/our-vision-mission-and-values

References and recommended reading

Bennis, W. & Nanus, B. 2007. Leaders: strategies for taking charge, 2nd ed. New
York: Harper Paperbacks, Collins Business Essentials.
Blanchard, K. & Stoner, J.L. 2011. Full steam ahead: unleash the power of vision in
your work and your life, 2nd ed. San Francisco, Berrett-Koehler.
Brand, C.G. 2010. A model for the formulation of strategic intent based on a
comparison of business and the military. Unpublished doctoral thesis, University of
South Africa.
Cauz, J. 2013. How I did It! Encyclopaedia Britannica’s president on killing off a 244-
year-old product. Harvard Business Review, 91(3): 39–42.
Cockerell, L. 2008. Creating magic. New York: Doubleday.
Ernst, C. & Chrobot-Mason, D. 2011. Boundary spanning leadership: six practices for
solving problems, driving innovation, and transforming organizations. New York:
McGraw-Hill.
Follett, M.P. 1920. The new state. London: Longman.
Gamble, J.E., Thompson, A.A. (Jr.) & Peteraf, M.A. 2013. Essentials of strategic
management: the quest for competitive advantage, 3rd ed. New York: McGraw-Hill.
Gregory, L. 2017. Amazon.com Inc.’s Vision Statement & Mission Statement – an
analysis. Available at: http://panmore.com/amazon-com-inc-vision-statement-mision-
statement-analysis (accessed on 16 December 2017)
Hamel, G. & Prahalad, C.K. 1994. Competing for the future. Boston, MA: Harvard
Business School Press.
Horovitz, J. & Ohlsson-Corboz, A.V. 2007. A dream with a deadline: turning strategy
into action. Upper Saddle River, New Jersey: FT Prentice Hall.
Hyde, P. & Williamson, B. 2000. The importance of organisational values – Part 1: Is
your organisation value congruent? Focus on Change Management, 66: 14–18.
Kim, W.C. & Mauborgne, R. 2005. Blue Ocean strategy: how to create uncontested
market space and make the competition irrelevant. Harvard: Harvard Business School
Publishing.
Kirkpatrick, S.A., Wofford, J.C. & Baum, J.R. 2002. Measuring motive imagery
contained in the vision statement. Leadership Quarterly, 13: 139–150.
Meyer, C. 2013. What does it take to redesign an industry? Harvard Business Review,
91(3): 36.
Murray, A. [n.d.]. What is Blue Ocean Strategy? The Wall Street Journal. Available at:
http://guides.wsj.com./management/strategy/what-is-blue-ocean-strategy/ (accessed
9 June 2013).
Pearce, J.A. & Robinson, R.B. 2003. Strategic management: formulation,
implementation and control, 8th ed. Boston: McGraw-Hill.
Rowland, C. 2017. Burger King’s vision statement and mission statement. Available
at: http://panmore.com/burger-king-vision-statement-mission-statement (accessed 16
December 2017)
Saloner, G., Shepard, A. & Podolny, J. 2001. Strategic management. Hoboken, New
Jersey: John Wiley & Sons.
Simerson, B.K. 2011. Strategic planning: a practical guide to strategy formulation and
execution. Santa Barbara, California: ABC-CLIO.
Topping, P.A. 2002. Managerial leadership. New York: McGraw-Hill.
Volberda, H.W., Morgan, R.E., Reinmoeller, P., Hitt, M.A., Ireland, R.D. & Hoskisson,
R.E. 2011. Strategic management concepts & cases: competitiveness & globalization.
Stamford, Connecticut: South-Western Cengage Learning.

Case study

The Cancer Association of South Africa (CANSA)

Every year 14 million people worldwide hear the words “you have
cancer”.

Fortunately, CANSA is still leading the fight against cancer in South

Africa.
A magnificent milestone was reached in August 2016 when CANSA
celebrated 85 years of providing care to more than 100 000 South
Africans annually, and simultaneously tackling the important task of
cancer-related education and research. The importance of CANSA’s
contribution towards a better informed society is clear if one considers
that 25 per cent of South Africans (1 in 4) will be affected by cancer in
their lifetime. A daunting task indeed.

Scientific findings and knowledge gained from CANSA’s research is

strengthening educational and service delivery. The approximate R12
million spent annually (R6 million on direct research costs) ensures
that the organisation is addressing the enormous challenge by offering
a unique and integrated service to the public, which involves holistic
cancer care and the support of all people affected by cancer. This is
particularly significant for a non-profit organisation, given the fact that
it is a big family of more than 350 permanent employees and
approximately 5000 caring volunteers. With these committed people,
CANSA is running more than 30 care centres countrywide. They are
therefore well placed to render their services to most communities in
South Africa. CANSA’s perseverance was recognised and honoured
when it was rated one of South Africa’s most trusted and admired non-
governmental organisations (NGOs) by the 2010 Ask Africa Trust
Barometer: a survey reporting on corporate trust and reputation, and
based on peer review.

The 12 CANSA Care Homes in South African metropolitan areas are

commonly known as homes away from home among cancer patients
and their families. Apart from the Care Homes, the organisation also
has one hospitium for out-of-town cancer patients undergoing cancer
treatment in Polokwane. CANSA’s Care Centres and Care Clinics
furthermore offer a wide range of health programmes, like screening
and cancer control, individual counselling and support groups for
cancer patients, especially children and their loved ones, and specialist
care and treatment, e.g. for stoma and lymphedema, wound care, and
medical equipment hire.
Prevention and education campaigns are part of everyday life at
CANSA, and the NGO strives to empower communities through, for
example, the provision of free Cancer Coping Kits in English, Sesotho,
isiZulu and Afrikaans.

CANSA offers a message of HOPE to all communities, and an

opportunity to get involved in the fight against cancer by providing
access to information and education. They also provide

all cancer survivors and all affected by cancer with solidarity,

support and care, as well as a sense of belonging by honouring and
empowering them, and providing a platform to spread a message of
HOPE
training for volunteers with regard to the cancer challenge, which
enables them to get involved and take ownership in the fight against
cancer, by sharing resources and talents in their own communities
an opportunity to partners to achieve their goals in respect of their
social responsibility
an opportunity to staff for learning and growth, thereby using their
talents, passions and competencies to make a difference in their
communities in the fight against cancer.

In CANSA’s annual report it is stated that working with cancer, the

disease and survivors for almost 85 years, the people in CANSA know
that all people diagnosed with cancer have the need for reliable and
credible information, a good support system, an organisation with a
reputable image and value system, as well as advice on patients’ rights
and how to stand up for these rights.
Source: http://www.cansa.org.za/files/2016/10/CANSA-Integrated-Report-2015-to-2016-Part-
1.pdf (accessed March 2017)

CASE STUDY QUESTION

You are the newly appointed CEO for CANSA, and your first task is to
provide the organisation with strategic direction.
 1. Prepare a statement of strategic intent, containing a vision, mission
and values, using the background presented in the case study.

Strategy exercises

In their book, Blue Ocean strategy: how to create uncontested market

space and make the competition irrelevant, Kim and Mauborgne
(2005) shed light on the fundamental difference between a so-called
Red Ocean versus a Blue Ocean strategic approach.

In today’s highly competitive and vastly overcrowded marketplace,

companies that are competing head-on with rivals are heading towards
a bloody confrontation – the Red Ocean. The sustainability of this
approach and achieving profitable future growth targets are getting
more unlikely by the day. Within the Red Ocean, companies compete
for customers.

In contrast to the Red Ocean approach, Blue Ocean companies create

new markets, or “invade” uncontested market space for future growth.
Through innovation, such companies create value for the firm and its
buyers that eventually could result in rendering rivals obsolete.

Kim and Mauborgne (2005) are of the opinion that leading companies
will succeed but by creating new markets and blurring industry
boundaries – resulting in Blue Oceans – and not by fighting
competitors.

It is evident that the authors are implicitly questioning the relevance of

Michael Porter’s well-known Five Forces Model. According to their
work, the Five Forces route will eventually result in remaining in the
Red Ocean. They also argue that the key to business success is not to
beat the competition head-on, but rather to make the competition
irrelevant. In order to achieve this, companies that opt for the Blue
Ocean strategic approach must stay focused during their drive towards
reconstructing market boundaries. They can achieve this by looking
across alternative industries and strategic groups within industries, as
well as at complementary product and service offerings, with an
emotional appeal to buyers.

One of the examples used by the creators of the Blue Ocean principle
is the Canadian company Cirque du Soleil that literally redefined the
circus industry. Animal rights groups were putting increased pressure
on circuses in the 1980s, especially regarding the treatment of animals.
Apart from this negative feedback from environmentalists, alternative
forms of entertainment were on the rise at the same time, e.g. home
entertainment which had become relatively inexpensive. According to
traditional strategic management approaches the circus industry was
on the brink of collapse.

However, the owners of Cirque du Soleil made a decision not to

compete with rivals, but to render them irrelevant! They did it by
eliminating the animal element and reducing the importance of
individual performers. By doing this they created a new form of
entertainment expressed through dance, music and acrobatic skill.
They also targeted adult audiences, a group that for a long time had
abandoned traditional circuses as a form of entertainment.

Instead of Porter’s Five Forces, Kim and Mauborgne (2005) proposed

Four Actions that are crucial in creating a Blue Ocean strategic
approach. By finding answers to the following questions, Cirque du
Soleil’s case illustrates how it can be done:

Which of the factors that the industry takes for granted should be
eliminated?
Which factors should be reduced well below the industry’s
standard?
Which factors should be raised well above the industry’s standard?
Which factors should be created that the industry has never offered
before?
 Sources: Kim, W.C. & Mauborgne, R. 2005. Blue Ocean strategy: how to create
uncontested market space and make the competition irrelevant. Harvard: Harvard
Business School Publishing.
Murray, A. [n.d.] Adaptation of “What is Blue Ocean Strategy?” The Wall Street
Journal. Available at: http://guides.wsj.com/management/strategy/what-is-blue-
ocean-strategy/ (accessed 9 June 2013).

Questions

1. Differentiate between the vision, mission and value statements of a

Red Ocean and a Blue Ocean strategic approach.
2. Do you think that the owners of Cirque du Soleil visualised their
strategy properly?
3. Use the example of Cirque du Soleil to illustrate the Four Actions
proposed by Kim and Mauborgne (2005).

2. Encyclopaedia Britannica

Encyclopaedia Britannica is a recognised brand name all over the

globe. It was established by the Society of Gentlemen in Edinburgh,
Scotland, with its first publication in 1768 and 1771 as three volumes.
Over the years it grew tremendously in both stature and size. By its
fourth edition in 1801 it had reached 20 volumes. Over the years no
less than 4 411 contributors, 110 Nobel Prize winners and five
American presidents were involved in making Britannica the most
scholarly of English language encyclopaedias.

However, Britannica changed ownership and management over the

centuries. In 1920, Sears Roebuck took over, and by 1943 it was the
William Benton Foundation in Chicago that took responsibility for this
international source of knowledge and reference. In March 2012,
Britannica announced it would no longer continue to publish its
printed editions, and a 32-volume final edition was printed.

In the Harvard Business Review of March 2013 the President of

Encyclopaedia Britannica, Jorge Cauz, wrote: “One year ago, my
announcement that Encyclopaedia Britannica would cease producing
bound volumes sent ripples through the media world. Despite the vast
migration of information from ink and paper to bits and screens, it
seemed remarkable that a set of books published for almost a quarter
of a millennium would go out of print. But in our Chicago offices this
wasn’t an occasion to mourn.”

When reading the story of Encyclopaedia Britannica, one is reminded

of the words of Tom Peters: “Today’s winners, and especially
tomorrow’s, will have a love for disorder, and even a willingness to
throw cherished core competencies out with the bathwater … again
and again.” It is therefore no surprise that the management team of
Britannica, under the leadership of Cauz, made radical changes to
position it at the pinnacle of online encyclopaedias. Their focus is now
on the online education market.

Much has changed in the day-to-day world of the world’s oldest

encyclopaedia, but one thing remained solid and intact – editorial
quality.
Source: Cauz, J. 2013. How I did it! Encyclopedia Britannica’s president on killing off a 244-
year-old product. Harvard Business Review, 91(3): 39–42.

Question

Groups, as arranged by the learning facilitator, should surf the internet

and gain information and insight to debate the changes in strategic
direction by Encyclopaedia Britannica over the years since its
inception.
 3 Strategy, ethics and social
responsibility
ELROY SMITH

LEARNING OUTCOMES

After studying this chapter you, should be able to do the following:

Understand the definition and explanation of ethics and social responsibility

Differentiate between the forces or factors that could shape ethical conduct in an
organisation
Explain how ethical decision making takes place using an appropriate model
Distinguish between four approaches to or viewpoints on ethical decision making
Discuss the mechanisms and structures that could be used to build an ethical
organisation
Understand what social responsibility entails and the role of stakeholders in
managing social responsibility
Briefly discuss what corporate sustainability entails
Describe the link between strategy and ethical behaviour in an organisation

3.1 Introduction

With today’s increasing technological development, consumers are

rapidly becoming more demanding than ever, and are quickly informed
of any questionable business practices. Corporate and business
watchdogs are more active than ever before and have certainly made a
full-time job of blowing the whistle on some of the world’s leading
organisations. The reality is that the damage done by unethical or
questionable social practices can be devastating to an organisation.
More and more of today’s organisations are adopting ethical policies
and social responsibility practices in order to stay competitive and
adhere to the demands of the community. In addition, the impact of
organisations and their production on the environment is more
important than ever before, and watchdogs as well as consumers seek
to identify organisations that take advantage of natural resources or
utilise materials that have a destructive effect on the environment.
Many business owners mistakenly believe that ethics means merely
not violating any laws. However, the reality is that ethics is so much
more than that, and entails having a set of moral standards among
employees that is in the best interests of everyone. Businesses have an
obligation to their communities as well, and philanthropy on the part
of businesses is key to maintaining good relations with all
stakeholders. It is a business imperative that the organisations of today
need to ensure the sustainability of the organisation in the long run so
as to be able to compete in the marketplace. Incorporating ethics into
the strategies of the organisation is paramount.

This chapter aims at highlighting the important role of ethics and

social responsibility in the organisation of today. Ethics and social
responsibility are important because they influence the way
organisations develop their strategies, as well as how strategies are
implemented. Aspects of ethics focused on in the first part of this
chapter include forces shaping ethical behaviour; models of and
approaches to ethical decision making; and mechanisms and structures
for building an ethical organisation. The next part of the chapter deals
with what social responsibility entails and also focuses on
sustainability. The last part addresses the relationship between strategy
and ethical behaviour.

3.2 What is ethics?

The word is derived from the Greek word “ethos”, meaning “character
or custom”, and a Latin word with roots in “mores” and “customs”,
 meaning values held by society. Ethics refers to moral
principles guiding individuals in terms of what is right or
wrong. It is thus concerned with what is good or right in
human interaction and revolves around three central concepts: self,
good and other. Business ethics involves the application of standards
of moral behaviour to business situations. Business ethics is the study
of business situations, activities and decisions while addressing the
issues of right and wrong in the activities and decisions so as to ensure
that stakeholder interests are respected. It thus applies to any and all
aspects of business conduct, from boardroom strategies and how
businesses treat their employees and suppliers to sales techniques and
accounting practices. Ethics goes beyond legal requirements and is
about discretionary decisions and behaviour guided by values,
providing a code of conduct for individual members of an
organisation.

Carroll and Buccholtz (2003) highlight the following two key branches
of ethics:

Descriptive ethics – describing, characterising and studying the

morality of people or a culture or society and learning what is
occurring in the realm of behaviour, decisions, policies and practices
of businesses.
Normative ethics – supplying and justifying a coherent moral
system of thinking and judging of what ought to be in terms of
business practices.

As ethics has to do with making the right choices, individuals are

sometimes faced with organisational choices that create tension
between ethics and profit or between private gain and public good,
resulting in an ethical dilemma, which involves an apparent mental
conflict between moral imperatives. For example, is it ethical to
conduct personal business during office hours or take credit for others’
work? See also the ethical dilemma in the workplace – Strategy in
action 3.1.

Strategy in action 3.1 Ethical dilemma in the workplace

 Employees often do not know what to do if they see one of their co-workers
harassing another employee, either mentally, sexually or physically. Employees
may fear losing their job if they attempt to report a superior for harassment.
They may feel that they will be labelled as troublemakers if they report co-
workers who display inappropriate behaviour towards other employees. The
best way to resolve this ethical dilemma is to outline appropriate behaviour in
the company’s employee handbook. It should spell out that employees will not
be punished for reporting the harassing behaviour or inappropriate actions of
their co-workers.

3.3 Forces shaping ethical conduct

Various factors can shape ethical conduct in the organisation. These

factors may be regarded as the main forces that determine the ethical
behaviour of managers and employees in an organisation. The four
main forces shaping ethical behaviour are discussed next.

3.3.1 Individual forces

The ethical values of executives and individual employees can
influence their decisions and actions. Individuals have their own
values and sense of what is right and wrong. Employees bring certain
traits and characteristics with them into the organisation, influencing
the way they think, behave and respond to ethical dilemmas. This
could explain why some people perceive certain actions as unethical
and others do not. Examples of these individual influences on ethical
decision making are age and gender; culture; education and
employment; personal values and integrity; and locus of control.
Individuals go through three stages of moral and ethical development
from early childhood to adulthood. During the preconventional stage
the individual is mainly concerned about his or her own interests and
rules are followed out of fear of punishment or in the hope of reward.
In the second stage, the conventional stage, individuals consider the
interests and expectations of others in making decisions and rules are
obeyed because of a sense of belonging to a group. In the last stage,
the postconventional stage, the individual follows personal principles
for resolving ethical dilemmas and considers group and societal
interests.

3.3.2 Organisational forces

No individual makes decisions in a vacuum. Choices are influenced by
standards of conduct established within the organisation.
Organisational practices and culture directly influence the ethical
behaviour of people in an organisation. Other examples of these
context-related or situational factors are the reward system, authority,
bureaucracy and work roles. Development of a corporate culture to
support ethics occurs on four different levels. If any of these factors
are missing it could weaken the ethical climate in the organisation.

Ethical awareness. Employees need help in identifying ethical

problems and guidance on how to respond. One way in which the
organisation could provide support is by developing a code of
conduct – a formal statement that defines how the organisation
expects employees to resolve ethical issues (a written set of ethical
standards).
Ethical reasoning. Organisations need to provide the tools
employees need to evaluate ethical dilemmas in order to arrive at
suitable solutions. Many organisations have instituted ethics training
programmes. These training programmes equip employees with
knowledge that could assist them in ethical reasoning.
Ethical action. Organisations also need to provide structures and
approaches that allow decisions to be turned into ethical actions.
Realistic goals need to be set for the organisation and individual
departments as this could affect ethical behaviour. Other tools that
could be used is to institute a hotline telephone number for
employees to report unethical conduct (whistle-blowing) or to
appoint ethics officers responsible for guiding employees through
ethical dilemmas (refer to section 3.6).
Ethical leadership. Executives should not only talk about ethics but
lead by example, thus acting as ethical role models. This aspect is
 especially true when talking about strategic leadership. When
leaders develop and implement strategies, ethical practices become
paramount. Strategic leaders are also encouraged and challenged to
behave in such a way that they can take actions that will increase the
probability of an ethical culture in the organisation. However, every
employee needs to take on the responsibility to be an ethical leader
and to report any misconduct or transgression of the code of
conduct.

3.3.3 Social norms and culture

Another force that shapes ethical conduct is the society, with its norms
and culture, within which the organisation operates. Organisations also
have a responsibility towards the society and this aspect of social
responsibility will be discussed later on in this chapter. Multinational
businesses operating in many different countries need to be aware of
the ethical standards applicable in each country. Some businesses
apply their ethical guidelines and code of conduct abroad, as practised
in their home country, while others tailor their approach so as to suit
the societal context in the foreign country. A typical example of the
influences of societal values and norms can be found in the tobacco
and alcohol industries. To protect the interests of society, these
industries are regulated by means of laws in terms of advertising,
promotion, distribution and packaging. The media often expose and
report on the unethical behaviour of businesses, which are then
publically judged by the general public and other interest groups.

3.3.4 Laws and regulations

Some businesses fail to regulate their own actions and ethical conduct,
which could harm consumers and other businesses. Because of this
threat, the state and local government need to step in to regulate
business activities. They can also offer incentives for socially
responsible behaviour. Aspects often regulated by government are the
competition in certain industries like electricity, fuel and aviation, and
consumer protection in terms of product safety and giving consumers
full and accurate information. Examples of South African legislation
pertaining to social responsibility issues are the Employment Equity
Act, the Labour Relations Act, the Occupational Health and Safety
Act, the Competition Act, the Consumer Protection Act and the Black
Economic Empowerment Act.

3.4 Model of ethical decision making

The importance of ethical decision making in strategic management is

crucial. It is known that the effectiveness of the different organisational
processes that are used to implement the organisation’s strategies will
increase if they are based on ethical practices and decisions. To
influence the behaviour and judgement of employees in the
organisation, ethical practices should be instrumental in the
organisation’s decision-making process and they should also be part
and parcel of the organisation’s culture. Various models of ethical
decision making have been presented in the literature. The most
commonly referred to model is presented in Figure 3.1.

Figure 3.1 Model of managing ethical decision making

Source: Crane & Matten (2007: 133). By permission of Oxford University Press.

Figure 3.1 clearly illustrates the steps an individual follows in making

an ethical decision. The model distinguishes between knowing what
the right thing to do is and actually doing something about it. For
example, a salesperson might know that lying to a customer is wrong
(moral judgement), but because of needing to meet sales targets might
not tell the truth (moral behaviour). This process is influenced by
unique individual characteristics such as age, education, personality
and attitudes, as well as by contextual factors such as job roles, reward
system and organisational culture. Weiss (2009), on the other hand,
proposes a key ethical model, describing three types of ethical
management found in organisations.

Immoral management – actions are selfish, aimed at personal gain

only and actively oppose what is regarded as ethical (making a
profit regardless of what it takes). For example, an executive of a
car manufacturer receives bribes and kickbacks from car dealers.
Moral management – conforms to the highest standards of ethical
behaviour or professional conduct (stresses profitability only within
the confines of legal obligations and sensitivity to ethical standards).
For example, a manufacturer phases out or stops producing a
product found to contain chemicals harmful to factory workers.
Amoral management – treating others without concern for the
consequences of their actions or viewing them as instruments for
realising the economic interests of the business (no wilful wrong
may be intended nor thought given to moral behaviour or
outcomes). For example, the gaming industry developing games that
glorify extreme violence or sexism without paying attention to the
impact on young people becoming addicted to it.

3.5 Approaches to ethical decision making

Managers and employees are faced with ethical dilemmas on a daily

basis. Based on a perspective guided by norms and values, four
approaches to or criteria for making ethical judgements can be
identified, namely, the utilitarian, individualism, moralrights and
justice approaches (Daft, 2008).

3.5.1 Utilitarian approach

This approach holds that moral behaviour should produce the greatest
good for the greatest number of people. The decision maker should
consider the effect of each decision on all parties and select the one
that optimises the benefits for the greatest number of people.
Individuals should thus consider the consequences of their decisions
and actions for the economic needs and financial well-being of the
organisation. All actions need to be assessed in terms of business
performance and employees should strive to use resources to increase
profits. An example of using this approach would be monitoring
employee use of the internet, alcohol and tobacco consumption or
excessive gambling, as these behaviours affect the entire workplace.

3.5.2 Individualism approach

Acts are regarded as moral when they promote the individual’s best
long-term interests. Individual self-direction is paramount.
Individualism is believed to lead to honesty and integrity in the long
run and behaviour towards others fits the standards of behaviour
people want for themselves. The aim is not immediate short-term gain,
as the top executives from WorldCom and Enron are testimony to.

3.5.3 Moral-rights approach

Human beings have fundamental rights and liberties that should not be
taken away by an individual or group decision. To be ethically correct,
the decision maker must maintain the rights of those affected by the
decision. Examples of moral rights to be considered during ethical
decision making are the right to free consent, privacy, free speech,
freedom of conscience, and life and safety. An employer who
eavesdrops on employees, violates the right to privacy, or does not stop
sexual harassment, violates the right to freedom of conscience.
3.5.4 Justice approach
Moral decisions must be based on standards of equity, fairness and
impartiality. This approach looks at how equitably benefits and costs
are being distributed among individuals and groups. Three types of
justice are of concern to managers. Distributive justice requires that
treatment of people should not be based on arbitrary characteristics
and individuals who are similar in relevant respects should be treated
similarly. For example, men and women doing similar work should not
receive different salaries, but people who differ substantially, such as
in terms of job skills or responsibility, can be treated differently in
proportion. Procedural justice requires that rules be administered
fairly, are clearly stated and impartially enforced. Compensatory
justice holds that individuals should be compensated for the costs of
their injuries by the party responsible.

3.6 Mechanisms and structures for managing ethics

Strategies must always be developed and implemented in such a way

that an ethical organisation is created and supported. There are various
mechanisms and structures that strategic managers could use, as
depicted in Figure 3.2. These elements, structures and mechanisms
will be discussed in more detail.
 Figure 3.2 Building an ethical organisation

3.6.1 Ethical leadership

Strategic managers are expected to be honest and trustworthy, fair in
their dealings with all stakeholders and to behave ethically in both a
personal and professional capacity. As mentioned in a previous
section, managers should act as ethical role models as they strongly
influence the ethical climate of the organisation. Specific actions that
strategic leaders can take to develop an ethical organisation include the
following (Hitt, Ireland & Hoskissen, 2005):

Establish and communicate specific goals to describe the

organisation’s ethical standards.
Continuously update, revise and disseminate the code of conduct
based on the inputs of all the stakeholders of the organisation.
Develop and implement structures and methods for ensuring that the
ethical standards are achieved.
Create an organisational environment in which all people are treated
with dignity.
3.6.2 Ethical individuals
Organisations need moral people making ethical decisions. It will be of
no use if organisations provide various structures and mechanisms to
support ethical behaviour, but individuals within the organisation have
low moral standards. Ethical individuals act with integrity, behave
honestly, inspire trust, treat people fairly and have higher levels of
moral development.

3.6.3 Code of ethics

This is a formal statement indicating the organisation’s
values regarding ethics and social responsibility issues, thus
communicating to employees what the organisation stands
for. (See Strategy in action 3.2.) A code of ethics states the desired
values or behaviours and those that will not be tolerated by the
organisation. These values might include, for example, respect for
people, relationships with customers and suppliers, handling of
confidential information, accepting gifts and favours from others, and
protection of the environment. Two types of codes of ethics can be
identified, namely principle-based and policy-based statements.
Principle-based statements define the fundamental values of the
organisation regarding responsibilities, quality of products and services
and treatment of employees (also referred to as corporate credos).
Policy-based statements refer to procedures to be used in specific
ethical situations, such as marketing practices, conflict of interest,
receiving of gifts, and proprietary information.

Strategy in action 3.2 Code of ethics/conduct at Samsung

Principle 1: We comply with all law and ethical standards.

We respect the dignity and diversity of individuals.

We compete in accordance with the law and business ethics.
We maintain transparency of accounts with accurate recording of
transactions.
We do not get involved in politics and maintain neutrality.
We protect information on individuals and business partners.
 Principle 2: We maintain a clean organisational culture.

We make a strict distinction between public and private affairs in our duties.
We protect and respect the intellectual properties of the company and
others.
We create a sound organisational atmosphere.
We maintain the dignity of Samsung Electronics in our external activities.

Principle 3: We respect customers, shareholders and employees.

We put priority on customer satisfaction in management activities.

We pursue management focused on shareholder value.
We endeavour to improve our employees’ quality of life.

Principle 4: We care for the environment, health, and safety.

We pursue environment-friendly management.

We value the health and safety of human beings.

Principle 5: We are a socially responsible corporate citizen.

We sincerely execute our basic responsibilities as a corporate citizen.

We respect the social and cultural values of local communities and practise
prosperous co-existence.
We build relationships of co-existence and co-prosperity with our business
partners.

Source: http://www.samsung.com (accessed March 2013)

3.6.4 Ethics committee

This usually consists of a group of executives responsible for
overseeing ethics in the organisation. This committee rules on
questionable ethical issues in the organisation and disciplines
wrongdoers. Based on the legal requirements in the new Companies
Act and its regulations for establishing an ethics committee, there is a
need for organisations to review their own viewpoints on corporate
governance. King IV states clearly that the governing body should
promote independent judgement and assist with the balance of power.
That is why a social and ethics committee is part of the recommended
practice of the King IV report. (Corporate governance and the King IV
report will be discussed in more detail in Chapter 4). Ethics
committees are mandated to observe not only compliance with
externally imposed legislation and regulations but also to oversee the
formulation of internal policies that guide the ethical conduct of the
organisation. Broadening the scope required by ethics committees is a
growing realisation that an organisation’s performance cannot only be
measured in terms of its financial impact – the emphasis on concepts
like the triple bottom line (people, planet and profits) and integrated
reporting is making organisational leadership more and more
challenging. Ethics committees will need to ensure that the
organisational agenda encompasses all these concepts and concerns.

3.6.5 Chief ethics officer

Many organisations set up ethics offices with full-time staff to ensure
compliance with a code of ethics and other ethical and legal standards.
These offices are then led by a chief ethics officer who oversees all
aspects of ethics and legal compliance in the organisation. The
responsibilities of these ethical specialists range from communicating
standards, to providing ethics training, to dealing with ethical
dilemmas and ensuring legal compliance. Many of these ethics offices
also act as counselling centres to assist employees to cope with ethical
issues in the workplace.

3.6.6 Ethics training

Ethics training programmes involve training in ethical reasoning, along
with mechanisms to encourage the reporting of misconduct. Such
programmes translate the values in the code of ethics into daily
behaviour. This training can take the form of online sessions,
workshops and weekly meetings to discuss ethical issues or dilemmas
in the workplace. It is also important that this training is not only
offered to new employees but also to employees with longer tenure on
a regular basis to refresh their memory.
3.6.7 Whistle-blowing
A whistle-blower is a person who reports workplace
wrongdoing to the appropriate authorities or to the media,
with the goal of putting an end to the wrongdoing. This
could mean, for example, filing a workplace health and safety
complaint, reporting inappropriate handling of hazardous waste, or
reporting unethical or even criminal business practices. A whistle-
blower is generally someone in a position to provide specific
information about exactly what sort of wrongdoing is taking place,
where and when it is happening, and who is involved. A whistle-
blower may only be able to describe what he or she has seen, or may
be able to provide concrete evidence. To be effective in the fight
against unethical behaviour in the workplace, a widespread
commitment to eradicate this behaviour is required. Organisations can
no longer rely exclusively on codes of conduct and ethical structures to
prevent all unethical behaviour, but have to depend to some degree on
individuals who are willing to blow the whistle if they detect illegal,
dangerous or unethical activities. Many organisations make use of a
“hotline” or toll-free number where whistle-blowers can report
misconduct or wrongdoing. There is sometimes a resistance to and fear
of blowing the whistle. Employees worry that if they do become
whistle-blowers, they will become a target for discrimination.

Ravishankar (2002) outlines the following steps for creating a whistle-

blowing culture in the organisation:

Step 1: Create a policy with formal mechanisms, clear lines of

communication and clear communication about bans on retaliation.
Step 2: Get endorsement from top management from the CEO to
line managers with an open-door policy regarding employee
complaints.
Step 3: Publicise the organisation’s commitment through
newsletters, memos and speeches acknowledging and rewarding
employees who report unethical issues.
Step 4: Investigate and follow up all investigations promptly and
thoroughly and report the origins and results to a higher authority.
 Step 5: Assess the organisation’s internal whistle-blowing system by
finding out employees’ opinions about the organisational culture and
commitment to ethics and values.

Organisations should thus view whistle-blowing as a benefit to the

organisation and make dedicated efforts to protect whistle-blowers. A
whistle-blowing framework in South Africa has developed over a
number of years. It is currently primarily located in the Constitution of
the Republic of South Africa, the Protected Disclosures Act 26 (2000),
the Labour Relations Act, the Companies Act 71 (2008) and the body
of jurisprudence that has been developed by the Labour, High and
Supreme Courts of South Africa.

Strategy in action 3.3 Whistle-blowing policy of Massmart

Massmart is committed to its Code of Ethical Conduct and its employees’

rights. Massmart will protect the whistle-blower by not tolerating any
harassment or victimisation (including informal pressure) as the whistle-blower
has raised the breach, or even the suspected breach, in good faith.
All concerns and breaches raised will be treated in the strictest confidence and
every effort will be made, subject to any legal constraints, not to reveal the
identity of the whistle-blower without their permission. Circumstances may,
however, dictate that in time it may be necessary for their identity to become
known as they may have to be called as a witness. This policy encourages that
all disclosures be kept confidential, and that the whistle-blower’s identity is
known only to the relevant parties; however, it does recognise that in certain
circumstances it may be the preference of the whistle-blower to report
anonymously. Concerns raised anonymously are not easily investigated owing
to the inability of the investigator to request additional information, and
accordingly they will need to be considered at the discretion of the ethics
officers.
Employees should be encouraged to raise breaches and concerns with their
immediate manager or their superior. This, however, depends on the
seriousness and sensitivity of the issues involved and who is suspected of the
breach. If you believe this avenue to be inappropriate then you should contact
the Massmart Ethics line using:

Freecall: 0800 20 32 46 or +27 31 508 6488 (outside South Africa)

Freefax: 0800 00 77 88
Email: Massmart@ethics-line.com
Free post: Free Post, KZN 138, Umhlanga Rocks, 4320
 SMS: “Please call me” to 32846 (charged @ R1.00 per SMS)

Massmart ethics officers and the ethics office will respond to all concerns raised
in good faith. Where appropriate, matters raised may be investigated by
management, internal audit, or through the disciplinary process, and in certain
circumstances will be referred to other investigating authorities. Within ten
working days of a concern being raised, the ethics officer involved will either
institute the necessary plans for an investigation or, where more information is
required after an assessment of the availability of that information, either defer
or close the case. Subject to any legal constraints, the whistle-blower will be
kept informed of the progress and outcome of an investigation. Massmart will
take steps to minimise any difficulties that a whistle-blower may experience as
a result of raising a concern. For example, if required to give evidence in
criminal or disciplinary proceedings, Massmart will provide the necessary time
and resources and will ensure that adequate advice is provided with regard to
the proceedings.
Source: http://www.massmart.co.za (accessed March 2013)

3.7 Organisational stakeholders

The King IV report clearly states that the social and ethics
committee must report on stakeholder relationships. That is
why it is important for an organisation to understand and
know its stakeholders. A stakeholder is any group or person within or
outside the organisation that has a stake in the organisation’s
performance. Each stakeholder has a different interest in the
organisation. Investors, shareholders, employees, customers and
suppliers are regarded as primary stakeholders and without them the
organisation cannot survive. There are also secondary stakeholders,
which include the government, the community and special interest
groups like trade associations, pressure groups and unions. These
stakeholder groups can benefit from an organisation’s success or can
be harmed by its failures and mistakes. The important issue is,
however, that the interests of all stakeholders must be considered when
developing and implementing strategy. Table 3.1 outlines some of the
concerns of stakeholders.
 Table 3.1 Examples of stakeholder concerns when evaluating corporate
performance

Stakeholder group Examples of concerns

Owners and Financial soundness
investors Sustained profitability
Average return on investment
Timely and accurate disclosure of financial information
Customers Product/service quality, innovativeness and availability
Responsible management of defective or harmful
products/services
Pricing policies and practices
Honest, accurate and responsible advertising
Employees Non-discriminatory, merit-based hiring and firing
Workforce diversity
Wage and salary levels
Availability of training and development
Workplace safety and privacy
Community Environmental sensitivity in product design and packaging
Recycling of products
Pollution prevention
Philanthropic efforts
Donations
Availability of facilities for community use

Source: Adapted from Hellriegel et al. (2008: 124)

To assist organisations in identifying stakeholders and their concerns,

they can make use of a stakeholder analysis or mapping. This is a way
of determining which stakeholders can have the most positive or
negative influence on performance. The goal of stakeholder mapping
is to give an organisation a more objective measure of the various
claims of its stakeholders, indicating which stakeholders require the
most consideration (Bowie & Schneider, 2011). Figure 3.3 illustrates
that stakeholders can be divided into one of four groups when mapping
them.

Figure 3.3 Mapping of stakeholder groups

The four stakeholder groups are discussed below.

Promoters – have great interest in the organisation and the power to

make it successful or to derail it.
Defenders – have a vested interest and can voice their opinion in
the community, but have little power to influence in any way.
Latents – have no particular interest or involvement but have the
power to influence greatly if they become interested.
Apathetics – have little interest and power and may not even know
of your existence.

This map could thus be a useful tool to illustrate visually the various
stakeholders of the organisation and their position with regard to
various attributes such as importance, influence and time horizon.

3.8 What is corporate social responsibility?

Each of the stakeholders identified has justifiable reasons to expect
that the organisation will meet their demands and needs in a
responsible way. It is also one of the most important tasks of strategic
leaders to develop the mission of the organisation in such a way that
the organisation’s responsibility towards all stakeholders is clear. In
developing the mission statement, it is important that managers
identify all the stakeholders to weigh their claims and rights, as these
will affect the success of the organisation.

What is corporate social responsibility? Corporate social

responsibility (CSR) involves organisations behaving
ethically and contributing to economic development while
improving the quality of life of all their stakeholders. This includes the
employees and their families and the community in which they
operate. The organisation thus assesses the impact of its actions on
society and aims at improving the welfare of society.

Carroll and Buchholtz (2003) provide a four-part definition of CSR by

identifying the following types of social responsibilities:

Economic responsibilities (be profitable) – produce goods and

services that society wants to maximise profits for owners and
shareholders (profit maximisation).
Legal responsibilities (obey the law) – refer to what society deems
important in terms of appropriate behaviour and fair practices as
established by lawmakers and organisations needing to comply with
these laws and regulations.
Ethical responsibilities (be ethical) – embrace those activities and
practices expected or prohibited by society even if they are not
codified into laws (e.g. to be fair, just and act morally).
Philanthropic or discretionary responsibilities (be a good
corporate citizen) – purely voluntary and guided by a desire to make
social contributions not mandated by laws or ethics (e.g.
sponsorships, humanitarian programmes).
These responsibilities could be arranged in a hierarchy from making a
profit (economic responsibilities) at the bottom to making voluntary
contributions (discretionary responsibilities) at the top. Examples of
social responsibility activities include making contributions to
charitable organisations, providing benefits to employees and
improving the quality of life in the workplace, and using resources to
operate a programme to address certain social problems like poverty,
unemployment or HIV and AIDS.

Some other terms in literature used interchangeably with CSR are

corporate social performance, responsiveness and citizenship.

Corporate social performance. Corporate social performance

(CSP) is an organisation’s configuration of principles of social
responsibility, processes of social responsiveness, and policies,
programmes and observable outcomes as they relate to the
organisation’s societal relationships (Orlitzky, 2000). It also refers to
the identification of the domains of an organisation’s social
responsibility, the development of processes to evaluate
environmental and stakeholder demands and the implementation of
programmes to manage social issues (Simerly, 2003). It thus refers
to the measurement of the organisation’s overall performance in
improving and protecting social welfare as compared to leading
competitors in the industry.
Corporate social responsiveness. An important aspect of social
responsibility is the responsiveness of organisations, that is, their
ability to respond in a socially responsible manner to new
challenges or social pressures. The focus is on the process or
readiness to respond and not on the content of the response
(Boatright, 2009). The socially responsive organisation uses its
resources to anticipate social issues and develop means to deal with
them.
Corporate citizenship. Corporate citizenship can be defined as the
extent to which the economic, legal, ethical and discretionary
responsibilities imposed by their members are met by the
organisation (Hemphill, 2004). Corporate citizenship is about a new
 contract between organisations and society, which aligns profitable
organisations with healthy communities, because what happens to
societies happens to businesses. As a citizen in the community,
organisations must consider the interests of all stakeholders. They
must take responsibility for the impact of their activities on
customers, suppliers, employees, shareholders, the community, as
well as the environment. This obligation to their customers,
employees, the communities in which they are located, and society
in general, is far greater than simply creating wealth for
shareholders.

The question one should ask at this point is whether the organisation
should behave in a socially responsible manner. The answer is a
definite yes! The organisation is responsible not only for the financial
well-being of its shareholders, but also for the well-being of all its
stakeholders. A good reason to behave in a socially responsible
manner is that it is the right and ethical thing to do and will
contribute to the wealth of the organisation. Reporting on the social
responsibility of an entity forms part of the social and ethics committee
report, as recommended by King IV. This will have a positive effect on
the long-term profitability of the organisation. In developing and
implementing the organisation’s strategies, social responsibility must
always be considered.

3.8.1 Sustainability
One of the key principles promoted by King IV is the need
for a board of directors to appreciate that strategy, the
business model and sustainability are, among others,
inseparable components in an organisation. This insight will force
organisations to ensure that their strategic planning is truly future
orientated. Sustainability is defined as humanity having the ability to
make development sustainable to ensure that it meets the needs of the
present without compromising the ability of future generations to meet
their own needs. It also focuses on the measurement of intangible
assets. It is commonly understood to require the balanced pursuit of
three goals: ecological health, social equity and economic welfare
(Kibert, Thiele, Peterson & Monroe, 2012). Sustainability is now the
primary moral and economic imperative and it is one of the most
important sources of both opportunities and risks for businesses (see
Strategy in action 3.4).

Strategy in action 3.4: Sustainability at Coca-Cola

At Coca-Cola, sustainability is a critical component of the business strategy.

The report follows the organisation’s sustainability framework – “Me, We,
World”.
Through the Coca-Cola Foundation, the organisation’s global philanthropic arm,
it invested $101.6 million (1 per cent of its operating income) in grants to
support sustainable community initiatives in 2012. The company continues
applying its supply chain and logistics expertise to help deliver essential
medicines to communities that need them through Project Last Mile. Under
climate protection, it established an ambitious new goal to reduce the carbon
footprint of “the drink in your hand” by 25 per cent by 2020, against the baseline
year of 2010. It also set an ambitious new goal to sustainably source key
agricultural ingredients by 2020. The 2012–2013 Sustainability Report
demonstrates the Coca-Cola Company’s commitment to continuous
improvement, increased disclosure, risk assessment and expanded stakeholder
engagement.

Me: Enhancing personal well-being

Since the first Coca-Cola was served in 1886, consumers’ well-being has been
an integral part of its values and vision to provide safe, delicious and refreshing
beverages to people from all walks of life. Strategies and commitments to
enhancing personal well-being include safe, quality and innovative beverages;
inspiring the world to come together to help address obesity; offering low- or
no-calorie beverage options in every market; providing transparent nutrition
information; helping to get more people moving by supporting physical activity
programmes in every country where it does business and marketing
responsibly.

We: Building strong communities

Inside every bottle of Coca-Cola is the story of a business that has, from its
earliest days, been a driving force in the ongoing effort to make communities
stronger. It helps strengthen communities and provides for community well-
being by empowering women, providing aid and relief during disasters,
investing in education and respecting human rights.

World: Protecting the environment

Inside every bottle of Coca-Cola is the commitment of a company that is deeply
concerned about climate change and is doing its part to help protect the
environment. Coca-Cola has made a commitment to give back to communities
the same amount of water used to produce beverages, it pursues a vision of
 zero packaging waste, and is promoting sustainable agriculture and innovation
to reduce greenhouse gas emissions even as it grows its business. Focus
areas include clean and accessible water; sustainable packaging; climate
protection; sustainable agriculture; access to critical medicines; and disaster
relief.
Source: Adapted from
http://www.sustainablebrands.com/news_and_views/communications/
mike-hower/coca-cola-improves-water-efficiency-21-2004 and
http://www.coca-
colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/20
15/05/2014-year-in-review-pdf.pdf (accessed 24 February 2017)

Ethics provides a framework for societies and organisations and is at

the heart of a sustainable strategy. An ethical climate enables
organisations to pursue best practices, which are key to a sustainable
strategy. Organisations cannot act independently from the society and
the environment in which they operate, and investors require more
information about future prospects, opportunities and risks in addition
to financial information. The rationale for sustainability is highlighted
by the following factors:

Increased population growth and consumption rates

Climate changes and their impact on the earth and food supplies
Mineral resource depletion
Loss of biodiversity (number and variety of living organisms and
ecosystems)
Overfishing
Destruction of natural vegetation cover resulting in desert formation
Destruction of environmental amenities and services
Poverty and maldistribution of wealth

The main aim of sustainability in the long run is to ensure productive

work and a better quality of life for all people through proactive risk
management measures. Sustainability is fast becoming a major
business performance dimension and imperative that is shaping the
competitive landscape for many industries and organisations. This has
led to the integration of integrated assessment in terms of economic,
social and environmental impacts. Table 3.2 indicates the main
elements of sustainability.

Table 3.2 Elements of sustainability

Three Ps Triple bottom line Triple E What it is

People Social Equity Human capital
Planet Nature Environment Natural capital
Profit Profitability Economics Economic capital

Source: Adapted from Swallow (2009)

Although literature gives some advice on how to follow a

sustainability strategy, only a limited amount of empirical research
highlights the specific factors that enable the implementation of
sustainable strategies. A study by Wirtenberg, Harmon, Russell and
Fairfield (2007) involved interviews with executives at nine of the
world’s most sustainable organisations and identified a “pyramid” of
seven core qualities commonly associated with successfully
implementing sustainability strategies, as indicated in Figure 3.4
below.
 Figure 3.4 Sustainability enablers

Source: Wirtenberg et al. (2007)

Pojasek (2007: 856) identified the following drivers or principles of

successful business sustainability:

Leadership – leaders must lead by example, provide clear direction,

build organisational alignment and focus on the sustainable
achievement of goals.
Stakeholders – it is important to understand what stakeholders value
and to use this knowledge to drive organisational design, strategy,
products and services.
Systems thinking – organisations must continuously improve
business and operational systems.
People – organisations must develop and value employees’
capability by using their skills, resourcefulness and creativity to
change and improve the organisation.
Continuous improvement – develop adaptability and responsiveness
based on a culture of continuous improvement, innovation and
learning.
 Information and knowledge – improve organisational performance
by using data, information and knowledge to understand variability
and improve strategic and operational decision making.
Business responsibility – behave in an ethically, socially, financially
and environmentally responsible manner.
Sustainable results – focus on sustainable results, value and
outcomes.

Table 3.3 outlines five enabling conditions for integrated sustainability.

Table 3.3 Enabling conditions for integrated sustainability

Enabling conditions Business actions

1. Consumers demanding Improving communication with
sustainable products and consumers
services Providing incentives for purchasing
and delivering environmental and
social benefits
Building sustainability principles into
product development

2. Educational reforms creating Upgrading corporate training in

sustainability skills and mindsets
sustainability
Partnering with academic institutions
and shaping formal educational
curricula
Attracting and engaging employees
by communicating progress on
sustainability

3. Financial reforms creating a Tracking the impact of sustainability

valued investment environment activities on metrics e.g. revenue
growth
Communicate progress to investors
on a proactive and regular basis
 Enabling conditions Business actions
4. Embedding new concepts of Ensuring governance and reporting
value and performance at various structures are in place
levels Devising mechanisms to measure
both positive and negative impacts
on society
Including sustainability issues in the
performance requirements and
remuneration of top executives

5. Creating a clear and positive Adopting collaborative approaches to

regulatory and cooperative
environment for sustainability
shaping regulation (e.g. joint working
groups)
Setting expectations regarding limits
of business responsibility (e.g.
developing industry standards)

Source: Adapted from Lacy, Cooper, Hayward and Neuberger (2010: 48)

The King IV Report has a dedicated section on integrated sustainable

reporting. Statutory financial information and sustainability
information should be integrated into the annual report. The report
should include both positive and negative aspects of how the
organisation has affected the economic life of the community and the
environment. This is a proactive approach to governance aimed at
creating future value. Read Strategy in action 3.5 as a case of
sustainability.

Strategy in action 3.5 Gold Fields’ Cerro Corona Mine – A business case
for sustainability

In a mere five years, Gold Fields’ state-of-the-art Cerro Corona Mine in Peru
has become one of the star performers in the company’s suite of assets.
Currently producing about 90 000 ounces of gold a quarter, this mine has
become a model of operational and financial viability. But it is also a role model
for cradle-to-grave sustainable development. Considering its humble
beginnings as a derelict mine site, the successful development of Cerro Corona
can be attributed to a large extent to applying best sustainable development
practice from the early exploration stage to the ramp-up to full production. Early
on, significant investments were made to ensure the sustainability of the
proposed operation. These investments took many forms, from engaging the
local communities to best practice with regard to environmental management.
This was underpinned by a commitment to sound governance principles. Even
before the mine reached its prefeasibility stage, extensive engagement with
local communities and providing early job opportunities created the basis for
sound development. Many hours were spent discussing the plans for the mine
with local community members, leading to long-term agreements that prioritised
local suppliers and employees, socioeconomic and enterprise development, as
well as a focus on best environmental management practice. Today Cerro
Corona is a working model for sustainable development and a mine that lives
the company’s credo of being the global leader in sustainable gold mining. Its
successes over the past five years include the following:

An outstanding safety performance confirmed by Occupational Health and

Safety Assessment Series (OHSAS) 18001 certification and a number of
local and national safety awards.
International Orginazation for Standardization (ISO) 14001 certification for its
environmental management system; again the mine has achieved awards
for its environmental performance.
The establishment of a range of socioeconomic investments ranging from
the provision of education facilities to the development of alternative
livelihood projects. Investments in agricultural projects in the area stand out.
These projects have seen, among others, a 50 per cent rise in farmers’ meat
production, a considerably higher yield from pasture land, an artificial cattle
insemination programme and the construction of a dairy plant.
Employment has been created for local community members either through
direct employment or by supporting the use of local suppliers and
contractors. Many of the company’s suppliers have used their Gold Fields
contracts to grow their operations to provide services to other companies in
the area and increase their employment of local labour.
Permanent engagement structures have been established to ensure
ongoing positive relations with stakeholders.
Best practice governance policies and systems.
A comprehensive risk management system, which evaluates potential risks
and ensures that mitigatory actions are in place.
The Gold Fields code of ethics is entrenched and anonymous tip-off service
providers have been established.
A human rights training toolkit has been developed and is being integrated
into training processes. Associated grievance mechanisms have been
implemented that cater for disputes with external as well as internal parties.

Source: www.http://www.goldfields.co.za/pdf/sustainability_reports/sustainability
(accessed March 2013)
3.9 Strategy and ethical behaviour

Ethics is not integrated into strategy by proclamation. Ethics should be

part of the organisation’s mission statement, long-term strategic plans,
public pronouncements, and codes of conduct. However, unless it is a
cornerstone of the organisational culture, it will not be effectively
integrated into the business strategy. To incorporate ethics into
strategies of the organisation, Schulman (2012) offers the following
guidelines:

Don’t be in an unethical business in the first place (e.g. selling

harmful products to customers).
Obey the law and the spirit of the law everywhere you do business.
Articulate a complete strategy, including its purpose.
Explicitly articulate real values as a key component of the strategy.
Don’t rely on auditors, ethics officers, compliance officers,
regulations, manuals, and audits as the vehicle to insert ethics into
the strategy.
Emphasise principles more than rules.
Individual ethical responsibility and accountability should never be
trumped by some corporate or organisational imperative.
Be totally transparent with your stakeholders and make that part of
the strategy.
Have a framework and process for the resolution of ethical issues
and dilemmas.
Have the right organisational structure.
Make employee development part of strategy and make ethics
training part of employee development.
Encourage all employees to be challenging and demanding in the
ethical domain.
It is thus clear that ethics must be embedded in the business models,
strategies and decision-making processes of the organisation. Top
management and business leaders must demonstrate an ethical
approach by example. This will indicate that middle and lower level
managers will be rewarded for taking an ethical stance and will create
the appropriate organisational culture. It is further important that
governance structures should include people with appropriate skills to
scrutinise performance and strategy across social, ethical and
environmental issues. Managers should approach problems with a
mindset of how an organisation can benefit from an ethical approach
rather than one that relies narrowly on cost cutting or compliance. The
finance professionals employed by the organisation must play an
active role as ethical champions by challenging the assumptions upon
which business decisions are made, while upholding their valued
reputation for impartiality and independence. It is imperative that
organisational leaders should use the skills of the finance team to
evaluate and quantify reputational and other ethical risks. Finance
professionals need to take social, environmental and ethical factors
into account when allocating capital, so that sustainable innovation is
encouraged. These actions can demonstrate that the organisation has
attempted to include ethics in the strategies of the organisation.

3.10 Summary

Organisations work in a wider social environment in which they have a

responsibility to a range of stakeholders including the wider
community. Corporate social responsibility refers to the responsibility
that modern business organisations have to create a healthy and
prosperous society. The organisation also has a responsibility to protect
the natural environment. Responsible businesses are thus responsible
citizens. This responsibility is reflected through ethical practices. This
has led to the triple bottom line where organisations need not only
report on their financial performance but also on their social and
environmental performance. Ethical practice involves doing the right
thing rather than the wrong one – and is based on operating in a moral
way. There is a need to include ethics in the strategy making and
implementation efforts of the organisation.

Exploring the web

Institute of Business Ethics:

http://www.ibe.org.uk/index.asp?upid=71&msid=12
Ethics at work:
http://smallbusiness.chron.com/common-ethical-workplace-dilemmmas-748.html
http://cws.cengage.co.uk/knightswillmott/students/chapter_aims/a&och14.pdf
Ethics World:
http://www.ethicsworld.org/corporatesocialresponsibility/corporatecsrreports.php
Ethics Institute of South Africa:
http://www.ethicsa.org/index.php?page=who_are_we
Linking business strategy and ethics:
http://www.ashgate.com/isbn/9780754626091

References and recommended reading

Boatright, J.R. 2009. Ethics and conduct of business. Chicago: Pearson Higher
Education.
Boone, L.E. & Kurtz, D.L. 2003. Contemporary business, brief edition. USA: South-
Western.
Bowie, N.E. & Schneider, M. 2011. Business ethics for dummies. New York: Wiley.
Carroll, A.B. & Buchholtz, C. 2003. Business & society: ethics and stakeholder
management. Mason, OH: Thomson South-Western.
Crane, A. & Matten, D. 2007. Business ethics, 2nd ed. Oxford: Oxford University
Press.
Daft, R.L. 2008. The new era of management. USA: South-Western Cengage
Learning.
Ghillyer, A.W. 2010. Business ethics: a real world approach. Boston: McGraw-Hill.
Grosslight, K. 2010. Minimize risk by maximizing accountability. Available at:
http://www.csoonline.com/article/516063/minimize-risk-by-maximizing-accountability
(accessed 29 July 2013).
Hellriegel, D., Jackson, S.E., Slocum, J., Staude, G., Amos, T., Klopper, H.B., Louw,
L. & Oosthuizen, T. 2008. Management. Cape Town: Oxford University Press.
Hemphill. M. 2004. Monitoring global corporate citizenship: industry self-regulation at
a crossroads. Journal of Corporate Citizenship, 14: 81–95.
Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2005. Strategic management:
competitiveness and globalization, 6th ed. Mason, Ohio: Thomson Learning.
Hough, J., Thompson, A.A., Strickland, A.J. & Gamble, J.E. 2011. Crafting and
executing strategy: creating sustainable high performance in South Africa – text,
readings and cases, 2nd ed. Berkshire: McGraw-Hill.
Kibert, C.J., Thiele, L., Peterson, A. & Monroe, M. 2012. The ethics of sustainability.
Rio de Janeiro: Rio+20 Portal.
Lacy, P., Cooper, T., Hayward, R. P., Neuberger, L. 2010. A new era of sustainability -
UN Global Compact - Accenture CEO Study. Available at:
http://web2.fit.edu/sustainability/documents/UNGC%20&%20Accenture.%202010.%2
0CEO%20study.pdf (accessed on 16 December 2017).
Martin, P. 2010. The status of whistleblowing in South Africa: taking stock. Cape
Town: Open Democracy Advice Centre, 1–136.
Moores Stephens Chartered Accountants (CA). King III explained. Available at:
http://www.moorestephens.co.za/images/uploads/MS-Kings_III_–_explained.pdf
(accessed 29 July 2013).
Orlitzky, M. 2000. Corporate social performance: developing effective strategies.
Sydney: Centre for Corporate Change.
Pearce, J.A. & Robinson, R.B. 2003. Strategic management: formulation,
implementation and control, 8th ed. Boston, MA: McGraw-Hill.
Pojasek, R.B. 2007. A framework for business sustainability. Environmental Quality
management, 17:81-88.
Practice notes. A guide to the application of King III: remuneration. Available at:
http://c.ymcdn.com/sites/www.iodsa.co.za/resource/collection/24CB4885-33FA-4D34-
BB84-E559E336FF4E/King_III_Remuneration_practice_note_April_2013.pdf
(accessed 29 July 2013).
PricewaterhouseCoopers. 2008. A practical guide to risk assessment. Available at:
http://www.pwc.com/en_us/us/issues/enterprise-risk-
management/assets/risk_assessment_guide.pdf (accessed 29 July 2013).
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at: http://www.scu.edu/ethics/p;ublications/submitted/whistleblowing.html (accessed
16 September 2007).
Schulman, M. 2012. Incorporating ethics into the organization’s strategy. Available at:
http://www.scu.edu/ethics/practicing/focusareas/business/strategic-plan.html
Simerly, R.L. 2003. An empirical examination of the relationship between
management and corporate social performance. International Journal of
Management, 20(3): 353–359.
Swallow, L. 2009. Green business practices for dummies. New Jersey: Wiley.
Weiss, J.W. 2009. Business ethics: a stakeholder and issues management approach.
Canada: Cengage Learning.
Wirtenberg, J., Harmon, J., Russell, W.G., Fairfield, K. 2007. HR’s role in building a
sustainable enterprise. Human Resource Planning, 30 (1): 10-20.

Case study

Strategy, sustainability and ethics at British Petroleum (BP)

BP aims to create value for investors and benefits for the communities
and societies where it operates. The company is pursuing its strategy
by setting clear priorities, actively managing a quality portfolio and
employing its distinctive capabilities. BP prioritises value over volume
by actively managing a high-value upstream and downstream
portfolio. It aims to create shareholder value by growing sustainable
free cash flow and distributions over the long term. BP believes that
the best way for the company to achieve sustainable success is by
acting in the long-term interests of shareholders, partners and society
by helping to meet the growing energy demand in a safe and
responsible way. It strives to be a world-class operator, a responsible
corporate citizen and a good employer.
By supplying energy, it supports economic development and helps to
improve millions of people’s quality of life. The company’s activities
also generate jobs, investment, infrastructure and revenues for
governments and local communities. Keeping a relentless focus on
safety is the top priority. BP continues to enhance its systems,
processes and standards, including how it manages the risks that can
be created by the actions of its contractors and the operators of joint
ventures in which the company participates. Strong financial
performance is vital, because it enables BP to make the investments
necessary to produce the energy that society requires, while rewarding
and maintaining the support of shareholders. It monitors its
performance closely and aims to report in a transparent way.

Effectively engaging with stakeholders (the many individuals and

organisations that are affected in some way by BP’s activities) is an
important and everyday part of its business. The input and feedback
received from the company’s stakeholders throughout the years help
inform its approach to reporting. The company assesses the issues
raised by stakeholders, which often have different priorities from BP.

BP defines its commitment to high ethical standards in its code of

conduct, which is based on values, and which clarifies the principles
and expectations of working at BP. The company’s code of conduct
specifies ways of operating safely, responsibly and reliably; respecting
and valuing people; working with partners and suppliers; protecting
BP’s assets; and working with governments and communities,
including the company’s commitment to human rights. Its code applies
to all employees, officers and members of the board. BP provides its
employees with training and communication on how to apply the
code’s principles. Managers are responsible for helping their teams
understand how the code guides the way they work and are expected to
have conversations with their teams throughout the year. Each year,
employees should certify that they understand the code, have abided
by their responsibilities and have reported any breaches of which they
were aware. BP’s values express its stakeholders’ shared
understanding of what the company believes, how it aims to behave
and what it aspires to be as an organisation.
Speaking up

BP is committed to providing an open environment where employees,

contractors and other third parties are comfortable speaking up
whenever they have a question about the company’s code of conduct
or see something they regard as unsafe, unethical or potentially
harmful. Employees are encouraged to discuss their questions or
concerns with their managers, relevant support teams or BP’s
confidential helpline, OpenTalk. The company looks for opportunities
to reinforce a culture of speaking up. It delivered more than 100
training sessions to employees, contractors and suppliers. The sessions
reinforced the importance of ethical behaviour, explained how to raise
concerns and outlined BP’s policy of zero tolerance towards
retaliation. Since the programme began in 2013, the number of
concerns raised in the region had increased from 37 to 58 in 2015.

Employee dismissals

Consequences for misconduct or retaliation range from coaching and

performance management to dismissal.

Anti-bribery and corruption

BP operates in some of the world’s highest risk countries from an anti-

bribery and corruption perspective, as measured by Transparency
International’s Corruption Perceptions Index. The company’s code of
conduct explicitly prohibits engaging in bribery and corruption in any
form. It has a responsibility to employees, shareholders and to the
countries and communities in which it does business to be ethical and
lawful in all dealings. Before working with suppliers, BP conducts
assessments in order to determine the degree of bribery and corruption
risk posed. This helps to put mitigation plans in place when needed.

Lobbying and political donations

The company does not use BP funds or resources to support any

political candidate or party. It recognises the rights of employees to
participate in the political process, provided they make it clear that
they do not represent BP and do not use BP’s time, property or
equipment. Employees’ rights to participate in political activities are
governed by the applicable laws of the countries in which the company
operates. The way in which it interacts with governments depends on
the legal and regulatory framework in each country.
Source: Adapted from http://www.bp.com/en/global/corporate/about-bp/our-strategy.html

CASE STUDY QUESTIONS

1. By considering BP and its industry, briefly discuss four factors that

could shape ethical behaviour at this company.
2. Discuss what stakeholder engagement entails and provide relevant
examples of stakeholders of BP.
3. Visit BP’s website and investigate to what extent its sustainability
report is based on the triple bottom line. Support your answer with
relevant examples from this report.

Strategy exercises

1. Briefly discuss three types of ethical management that could be

found in an organisation and provide your own examples of each.
2. The following information is provided regarding the stakeholders
of Company XYZ:

Stakeholder A’s influence (how powerful) is high/medium and

its importance to the success of a project is also high/medium.
Stakeholder B’s influence (how powerful) is high/medium and
its importance to the success of the project is low/not known.
Stakeholder C’s influence (how powerful) is low/not known and
its importance to the success of the project is high/medium.
Stakeholder D’s influence (how powerful) is low/not known and
its importance to the success of the project is also low/unknown.
Based on the above information from a stakeholder analysis, draw a
stakeholder map.
 4 Risk management and
corporate governance
CARLA SERFONTEIN

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Explain the process of risk management

Evaluate an organisation’s risk management programme
Identify actions an organisation can implement to manage risks
Explain the role of corporate governance with specific reference to the King IV
Report
Describe the relationship between strategy and corporate governance
Explain how the King IV Report can assist in the risk management process

4.1 Introduction

Warren Buffet once said: “Risk comes from not knowing what you are
doing.” This implies that there is a certain level of knowledge required
to sufficiently manage the risks an organisation is exposed to in the
normal course of business. The current business environment in which
organisations are operating varies significantly from the business
environment of five years ago, and is still rapidly developing and
changing. These rapid changes lead to a higher exposure of
organisations to various types of risks than before. Some risks flow
from the internal environment of an organisation and others from its
external environment. Some risks are easier and others more difficult
to manage, while some fall outside the control of the organisation
entirely.

This chapter aims to explore organisational risks and the management

of risk. It is important to note that even though it is possible to mitigate
the risks an organisation faces, it is not always possible to completely
eliminate them. The purpose of risk mitigation is primarily to reduce
the risks an organisation faces to a level the organisation will be
comfortable with and that is acceptable.

“Corporate governance” is a term that has only recently become

popular in board discussions. Its popularity can be attributed to the
easy access any organisation or person has to an expansive range of
information today. The high-level development of information
technology forces organisations to implement various kinds of
communication channels to enable them to compete globally. This
increases the necessity for corporate governance. The second part of
this chapter will focus on corporate governance and how corporate
governance principles can be applied in the risk management process.
The South African King IV Report on corporate governance plays a
substantial role in assisting organisations with mitigating the risks to
which they are exposed. The last part of this chapter will discuss the
link between the principles of corporate governance and the strategy of
an organisation.

4.2 The concept of risk

To understand the process of risk management in an organisation, it is

important to understand the concept of risk. Once risks have been
identified, they can be managed. The risk management process will
differ from organisation to organisation, and is based on each
individual organisation’s risk appetite and risk tolerance (refer to
section 4.2.3).
4.2.1 What is risk?
No two individuals’ conceptions will be the same when the word
“risk” is mentioned. This means that “risk” is a broad term, and is used
to describe various business situations. As a result, an all-inclusive
definition of risk does not exist. The word “risk” in the English
language originated from the Spanish word riesgo. The German word
was borrowed from Italian risico, risco, rischio, and in both languages
(Spanish and German) the word was confirmed in the 18th century and
later adopted in the French language as risqué. The Latin words
resicum, risicum, riscus are the direct formal origin for Italian. The
Latin word originates from the terms rhizikon and rhiza, which is the
Greek navigation terms that mean “difficulty to avoid at sea”
(Sandoval, 2016).

Over the centuries the word “risk” had developed as a well-known

concept in the business world. The following are some modern
definitions of “risk” in the business environment by well-known
management accounting institutions. According to CIMA Official
Terminology (2005), “risk is a condition in which there exists a
quantifiable dispersion in the possible outcomes from any activity”.

The International Federation of Accountants (1999) defines

risk as: “Uncertain future events which could influence the
achievement of the organisation’s strategic, operational and
financial objectives.” The King IV Report explains that risk is about
the uncertainty of events, as well as the likelihood that such events will
occur. Included in this definition of risk is the effect of the risk, both
positive and negative, on the achievement of the organisation’s
objectives. The explanation of risk should also include uncertain
events with a potentially positive effect on the organisation (i.e.
opportunities) that are not being captured or are not materialising.

4.2.2 Types of risk

The previous paragraph defined risk in a very broad sense. However, it
is important to focus specifically on the risks organisations face. These
risks may be classified as either internal or external risks. Internal
risks are inherent to the business environment an organisation creates
itself. These risks can be reduced by internal controls implemented by
the organisation. External risks are independent of the business and
outside the control of the organisation. These exist in the industry
environment in which the organisation operates, as well as in the
macroenvironment, for example the overall economic climate in which
the organisation operates or even the global economic climate. The
very nature of external risks means that the implementation of internal
controls will not necessarily reduce or mitigate these risks.

Organisational risk is made up of the following five main types of

risks:

Strategic risk. This is external and entails the risk that an

organisation’s business plan becomes outdated, resulting in the
business not being able to achieve its goals. This could be due to a
number of factors, such as changes in technology, new competitors
or even changes in customer preferences.
Compliance risk. This is also external and entails the risk that an
organisation does not comply with all the applicable laws and
regulations. Non-compliance could lead to penalties, or have more
severe consequences that could even mean closing down the
organisation. Although the extent of consequences will differ, all
non-compliance will have a negative impact on the business.
Operational risk. This is a form of internal risk, which an
organisation faces as a result of an unexpected failure in its day-to-
day activities. This could, for example, be due to a technical failure
or human error.
Financial risk. This can be classified as either an internal or
external risk. Almost all of the abovementioned risks will have a
financial impact. Financial risk, however, specifically affects the
flow of money to and from the organisation. Financial risk thus
refers to the risk that an organisation may suffer significant financial
loss.
Reputational risk. This is an external risk, since it is dependent on
the public’s view of the organisation. Reputational risk is the risk an
 organisation faces that its reputation might be damaged, which could
lead to a loss of customer goodwill, demoralised employees and
eventually great financial loss for the organisation. In today’s
business environment, specifically in this age of social media and
the internet, an organisation’s reputation is of the utmost importance
and can be damaged very quickly.

In the subsequent discussion of risk, the term “risk” will refer to

organisational risk and it will include all five types of risk.

4.2.3 Risk appetite

According to the King IV Report, risk appetite is the
organisation’s tendency to take appropriate levels of risk.
Risk appetite can be further explained as the amount and
type of risk an organisation will be willing to take. Risk appetite is
dependent on the organisation’s strategic objectives. Risk appetite will
differ between organisations, and is mainly based on the sector, culture
and objectives of each organisation. This risk appetite will be clearly
stated in an organisation’s risk appetite statement in its enterprise risk
management (ERM) framework.

4.2.4 Risk tolerance

While the risk appetite of an organisation relates to the risk
that an organisation is willing to take, risk tolerance is the
amount of risk that the organisation can actually cope with.
Risk tolerance specifically includes the amount of potential loss that
the organisation can suffer and still keep on functioning as it should.

4.2.5 Identifying and assessing risk

In order to identify the risks an organisation is exposed to, the industry
in which the organisation operates has to be fully understood and
analysed, and the different types of risk must be kept in mind. By
analysing the industry in which an organisation operates, the external
risks of the organisation can be identified. Once the external risks have
been identified, the internal business environment and the
organisation’s operations should be analysed. This analysis will
identify possible internal risks the organisation may face.

As already explained, a risk is any situation the organisation is exposed

to, action the organisation is involved in, or even possible situations
that an organisation might be exposed to in the future that could lead to
the organisation incurring a loss. It is not only important to identify
risks – they should also be assessed. After identifying risks, the impact
of the loss of each has to be assessed. The assessment will be based on
the severity of the loss and the impact of this loss on the liquidity and
solvency of the business. The loss could be purely financial, such as
unnecessary expenses incurred or loss of income due to fraudulent
behaviour. The loss could also be due to penalties a business is liable
to pay because it failed to adhere to the law or regulations. The
ultimate loss would be to close down the business as a result of actions
that lead to the legal prohibition of the further operation of the
organisation.

The organisation’s risk appetite will determine whether it will regard a

risk as acceptable, as well as the extent of actions it will take in
reaction to the risk. If the organisation is a risk taker, less action will
be taken to mitigate the identified risks and they will be tolerated in
order to achieve potentially higher returns. The possible assessed loss
that might occur as a result of risks will be measured against the risk
tolerance of an organisation to determine whether it can continue with
the planned action or has to take significant measures to reduce these
risks.

4.3 The risk management process

It is clear from the discussion above that risk is not necessarily a

negative situation for an organisation. An organisation’s risk
management process forms part of its risk management programme.
Depending on an organisation’s risk appetite, risks might even provide
opportunities for that organisation. What is important to note, however,
is that all risks an organisation is exposed to should be managed
efficiently. The risk management process is illustrated in Figure 4.1.

Figure 4.1 The risk management process

The steps in the risk management process may differ from organisation
to organisation, but the steps identified in Figure 4.1 should all be
addressed in some way during an organisation’s risk management
process.
Step 1: Identify the risks

The five different types of organisational risk should be kept in mind

when the possible outcomes and scenarios of an organisational activity
are considered. Once these aspects have been analysed, the potential
occurrences that might lead to a loss should be identified and
registered in the organisation’s risk register.
Step 2: Analyse the risks identified
The entry into the risk register should describe the likelihood of each
risk occurring, as well as the consequences of each possible risk. In
this step it is important that the nature of each risk is fully understood
and the potential each risk has to affect the operations or the cash flow
of an organisation.
Step 3: Evaluate the risks
The likelihood and consequence of each risk are measured against the
organisation’s risk appetite and risk tolerance. In evaluating the risk, it
is important to evaluate its impact – what will be the loss to the
organisation? Once the risks have been evaluated, they can be ranked
in the risk register.
Step 4: Respond to the risks
In this step the highest ranked risks should be considered and a plan
should be formulated to mitigate these risks to an acceptable level.
This plan must include ways of minimising the negative impact of the
risks on the business, as well as ways in which the possible
opportunities arising from these risks can be optimised. The plan of
action for the highest ranked risks must be added to the risk register.
Step 5: Monitor the risks and review the outcomes

This is the last step in the risk management process. The risk register
that was prepared during the first four steps is applied to monitor the
risks that are occurring and to review the outcome of each risk.

This process can be repeated each time the possibility of a new risk
arises; even for risks arising from the monitoring of recently identified
risks. Refer to Strategy in action 4.1 for an illustration of the risk
management process at MTN.

Strategy in action 4.1 The risk management process at MTN

 Source: http://www.mtn-investor.com/mtn_ar2013/det-
process.php (accessed 17 March 2017

4.4 Evaluating the organisation’s risk management

programme

Although the risk management process is the most significant part of

the risk management programme, the process should be supported by
sufficient policies, procedures, processes and reporting mechanisms to
enable the organisation to apply the process effectively.

One of the skills this chapter aims to develop is the ability to evaluate
all the elements of an organisation’s risk management programme. An
effective programme requires that each aspect is designed to
strengthen the organisation’s ability to respond effectively and
timeously to any significant change in an organisation’s business
environment.

The policies and procedures of the risk management programme have

to be consistent with the organisation’s stated mission and objectives,
which form part of its strategy. This consistency is one of the aspects
that should be considered in the evaluation of the organisation’s risk
management programme.

The final measure of the effectiveness of an organisation’s risk

management programme lies in the effectiveness with which an
organisation’s risks are managed. Methods to manage the risks
identified by an organisation are discussed below.

4.5 Response to organisational risks

This section discusses various methods an organisation can implement

to manage the risks identified in step 1 of the risk management
process. The management of risks is step 4 of the risk management
process. It is important to note that although it is possible to decrease
the impact of a risk on an organisation, it is not always possible to
eliminate the risk entirely. The risk management options organisations
can use are discussed below.

4.5.1 Avoidance
Once a risk has been identified, one method for managing the risk is to
avoid it. Avoiding the risk could mean not taking on a new project or
expansion, or even not implementing a new strategy. This would also
mean that the organisation would forego the opportunity associated
with the risk.
However, it is not possible to avoid all risks. External risks such as an
economic recession or a new competitor entering the industry in which
the organisation operates are risks that cannot always be avoided.
Therefore it is important to apply other methods to manage these risks.

4.5.2 Transfer
An organisation may transfer the responsibility for the risk to another
party. This could be a complete or partial transfer of responsibility.
Examples of such transfers include taking out an insurance policy,
outsourcing the function, engaging in a joint venture, or even entering
into a partnership with another party.

4.5.3 Mitigation
Mitigating a risk is either trying to reduce the likelihood of the risk
occurring or reducing the impact if the risk does occur. The likelihood
of a risk occurring could be reduced by applying quality control
procedures, auditing, training and keeping a tight maintenance
schedule. Reducing the impact of the risk could be accomplished
through off-site back-up, adequate management of public relations and
proper emergency procedures.

4.5.4 Diversification
Diversification means “not keeping all your eggs in one basket”. This
means that an organisation invests in various markets in different
segments of the economy. These investments could be in ventures of
different sizes and across borders. Diversification applies not only to
the investments of an organisation, but also to diversifying its business
activities.

4.5.5 Acceptance
If a risk cannot be avoided, transferred or mitigated, the risk can be
accepted. It is possible that some risks are simply too unlikely to occur
for the organisation to spend any money on addressing them. There
should still, however, be an incident response plan or recovery plan to
prepare the organisation for dealing with the consequences should
those risks occur.

One of the ways in which an organisation can manage risks is by

having strong corporate governance principles in place. This is why
corporate governance is so important for an organisation. The next part
will provide more insight into the ways in which an organisation can
employ good corporate governance.

4.6 Corporate governance

4.6.1 Defining corporate governance

The economic climate has changed significantly to one where the
effective use of every opportunity is of key importance. In general,
opportunity means that every person fights for his or her own survival.
This principle can be applied to the organisational environment, where
every organisation wants to establish itself as the best in its industry.
The competitive environment is no longer restricted by borders. Global
competition is a way of life, and this has led to organisations
competing for a boost in capital to ensure that they can expand to a
competitive level in the global industry.

These changes in the organisational environment, as well as access to

the internet, have created more opportunities and motivation for
fraudulent behaviour in the business world than stakeholders are
comfortable with. This tendency towards fraudulent behaviour –
accompanied by the increased focus on corporate responsibility and
sustainability, as demanded by various stakeholders – has enhanced the
emphasis on corporate governance.

According to Hough et al. (2011), the word “governance” is derived

from the Latin word gubernare, which means “to steer”, thus referring
to the process of running a government or an organisation. Corporate
governance refers to the method by which an organisation is being
governed, directed, and administered or controlled in order to achieve
its goals. It is therefore concerned with the roles, rights and
accountability of stakeholders such as owners, the board of directors,
managers and employees. Governance thus consists of the mechanisms
and institutions through which an organisation articulates its interests,
exercises legal rights, meets obligations and mediates differences.

Corporate governance is defined in the King IV Report as

the exercising of ethical and effective leadership by the
governing body towards the achievement of an ethical
culture, good performance, effective control and legitimacy as
important governance outcomes. The term “corporate” refers to
organisations that are incorporated to form legal organisations separate
from their founders and therefore applies to all forms of incorporation,
whether as company, voluntary association, retirement fund, trust,
legislated organisation or others.

Corporate governance is employed in the triple context of the

economic, social and physical environmental impacts – the so-called
triple bottom line. The way in which organisations behave, and
perhaps increase their capital reserves, has an impact on all three of
these elements. The purpose of corporate governance is to show how it
can be applied to possibly reduce the fraud risk in an organisation and
therefore sufficiently promote all stakeholders’ interests.

4.6.2 Stakeholders
To understand the function of corporate governance, it is
important to understand the role players involved in the
application of corporate governance. The term
“stakeholders” refers to all parties that are affected or can be expected
to be affected by the organisation’s activities. These parties can either
be directly or indirectly affected by the business activities. Parties who
are directly affected by the activities of an organisation are known as
internal stakeholders. Internal stakeholders include an organisation’s
governing body, management, employees and shareholders. External
stakeholders are indirectly affected by an organisation’s activities,
although they mostly have no directly noticeable interest in an
organisation. External stakeholders may be trade unions, creditors,
government, customers, and so forth.

The abovementioned stakeholders and the flow of control between

them is illustrated in Figure 4.2.

Figure 4.2 Stakeholders and their governance role

Although different organisations have different unique goals as their

main purpose, which might not always be related to profit
maximisation, it is important to note that for purposes of this book, the
main purpose of a business will be seen as the maximisation of its
shareholder wealth and ensuring that the needs of all stakeholders are
met. However, this leads to another problem – the principal-agent
problem. Corporate ownership and control are being divided between
two parties, namely, shareholders and management. It is thus important
to ensure that the principal-agent problem is resolved at an acceptable
level.
4.6.3 The principal-agent problem
The principal-agent problem is created by the split between the
ownership and the management of the business. The owners
(shareholders) own the business, but as the business continues to grow,
they are less and less involved in its management. The management
function is left primarily to managers, who have no ownership value in
the business. Ownership also becomes dispersed between a great
number of shareholders. Conflict develops between the organisation’s
objectives and the interests of the parties responsible for overseeing
the assets of the business. The possible cause of this conflict is the fact
that the principal (owner) has created an environment where the
agent’s (manager’s) incentive leads to decision making that is not in
the best interests of the principal. Managers thus lead the business
towards a scenario that proves to be the most advantageous to them,
but which might not necessarily mean the highest return for the owners
(shareholders). This happens, for example, when the manager takes a
decision that will enhance short-term profits (the manager’s bonus
depends on the size of the profit), but the decision is not in the long-
term interests of the owners.

Read Strategy in action 4.2 for an illustration of the principal-agent

issue at Standard Bank that flows from their corporate governance
structure.

Strategy in action 4.2 Corporate governance overview, Standard Bank

Group South Africa

Governance can contribute to value creation through enhanced accountability,

more effective risk management, clear performance management, greater
transparency and effective leadership. Ultimately, this is about holistic decision
making that takes into account long-term and shorter-term outcomes.
The Standard Bank Group (SBG) board is accountable to its stakeholders for
providing value-generating governance. The board is constituted in terms of the
company’s Memorandum of Incorporation (MOI) and in line with the provisions
of the King Code of Governance Principles. Most members of the board are
independent non-executive directors who contribute diverse perspectives to
board deliberations and constructively challenge management. The board is
regarded as effective and is considered to be of an appropriate size for the
group.
 The role of chairman is distinct and separate from that of the group chief
executives and there is thus a clear division of responsibilities. The board’s in-
depth interactions with management strengthen the group’s decision making
and ensure an appropriate balance of power. A clear division of responsibilities
at board level ensures that no director has unencumbered powers in decision
making.
The board has a formal and transparent process and policy in place for the
appointment of directors. While the board as a whole considers appointments,
the authority to oversee nominations and carry out interview processes is
delegated to the directors’ affairs committee. Apart from a candidate’s
experience, availability and likely fit, the candidate’s integrity is also considered,
as well as other directorships and commitments, to ensure that he or she will
have sufficient time to discharge his or her role effectively. The committee also
considers race and gender diversity in its assessment. In addition, candidates
must meet the fit and proper test, as required by the Banks Act.
The board members’ collective experience provides a balanced mix of
attributes to fulfil the board’s duties and responsibilities. The breadth of
experience on the board should include retail and investment banking, risk
management, legal and regulatory, finance and accounting, marketing, public
sector, remuneration and overall business, with several directors having chief
executive experience.
Source: Adapted from http://annualreport2015.standardbank.com/index.html
(accessed 17 March 2017)

4.7 The King IV Report

The Institute of Directors Southern Africa and the King Committee on

Corporate Governance in South Africa developed the King IV Report
on Corporate Governance, which was launched on 1 November 2016.
The application of King IV is effective for the financial years starting
on or after 1 April 2017.

The 21st century was met with various fundamental changes not only
in business, but also in society in general. Financial instability and
worldwide financial crises are some of the drivers of these changes.
These crises have a direct impact on the manner in which organisations
are managed, and a review of the King Report on corporate
governance was inevitable.

It is important that the King IV Report is applicable to all

organisations, regardless of their manner of incorporation. What
should be noted, however, is that the King IV Report, as with all
previous versions of the King Report, is a set of voluntary principles
and leading practices. This means that there are no statutory
consequences for non-compliance. The primary audience for the King
IV Report is the governing body, as any code of corporate governance
is concerned with the role and responsibilities of the governing body,
as well as the way in which the governing body and management
should interact.

The first important update to the King III Report is that the King IV
Report works on the principle of “apply AND explain”, versus the
King III principle of “apply OR explain”. This change was made to
shed a positive light on the implementation of King IV, where
organisations are not seen as “penalised” if they do not apply all the
principles of King IV, but rather encouraged to explain how they
incorporate good governance into their organisations.

The following seven primary characteristics of good governance were

specified for the first time in the King II Report. They continued being
a focus point in the King III Report and are still important and
applicable in the King IV Report:

Discipline – commitment to acting appropriately and properly.

Transparency – acting in a way that is accessible and observable to
all.
Independence – acting independently, free of conflict of interest and
in the best interests of the organisation.
Accountability – being held to account for specifically assigned
responsibilities.
Responsibility – accepting the outcome and consequences of
actions.
 Fairness – ensuring that the rights of all stakeholders are equally met
and respected.
Social responsibility – acting as a responsible, ethical citizen in all
respects, including the environment, economy and community.

Although these characteristics are not specifically identified in the

King IV Report, they are intertwined with the 17 principles that serve
as the building blocks for this report. According to the King IV Report,
these principles embody the aspirations of the organisation’s journey
towards good corporate governance. It provides a guide on what
organisations should aim to achieve by applying governance practices.
These principles build on and reinforce one another and they are
phrased in such a way that they are fundamental to good corporate
governance and hold true across all organisations. The principles of the
King IV Report are presented in Table 4.1.

Table 4.1 Principles on which the King IV Report is based (Institute for Directors
Southern Africa, 2016)

Principle 1 – The governing body should lead ethically and effectively

Principle 2 – The governing body should govern the ethics of the organisation in a
way that supports the establishment of an ethical culture
Principle 3 – The governing body should ensure that the organisation is and is
seen to be a responsible corporate citizen
Principle 4 – The governing body should appreciate that the organisation’s core
purpose, its risks and opportunities, strategy, business model, performance and
sustainable development are all inseparable elements of the value creation
process
Principle 5 – The governing body should ensure that reports issued by the
organisation enable stakeholders to make informed assessments of the
organisation’s performance and its short, medium and long-term prospects
Principle 6 – The governing body should serve as the focal point and custodian of
corporate governance in the organisation
Principle 7 – The governing body should have the appropriate balance of
knowledge, skills, experience, diversity and independence for it to discharge its
governance role and responsibilities objectively and effectively
Principle 8 – The governing body should ensure that its arrangements for
delegation within its own structures promote independent judgement, and assist
 with the balance of power and the effective discharge of its duties
Principle 9 – The governing body should ensure that the evaluation of its own
performance and that of its committees, its chair and its individual members
supports continued improvement in its performance and effectiveness
Principles 10 – The governing body should ensure that the appointment of, and
delegation to, management contribute to role clarity and the effective exercise of
authority and responsibilities
Principle 11 – The governing body should govern risk in a way that supports the
organisation in setting and achieving its strategic objectives
Principle 12 – The governing body should govern technology and information in a
way that supports the organisation setting and achieving its strategic objectives
Principles 13 – The governing body should govern compliance with applicable
laws and adopted, non-binding rules, codes and standards in a way that supports
the organisation to be ethical and to be a good corporate citizen
Principle 14 – The governing body should ensure that the organisation
remunerates fairly, responsibly and transparently so as to promote the
achievement of strategic objectives and positive outcomes in the short, medium
and long term
Principle 15 – The governing body should ensure that assurance services and
functions enable an effective control environment, and that these support the
integrity of information for internal decision making and of the organisation’s
external report
Principle 16 – In the execution of its governance role, the governing body should
adopt a stakeholder-inclusive approach that balances the needs, interests and
expectations of material stakeholders in the best interests of the organisation over
time
Principle 17 – The governing body of an institutional investor organisation should
ensure that responsible investment is practised by the organisation to promote
good governance and the creation of value by the companies in which they invest

Some of the other highlights from the King IV Report are outlined in
Table 4.2. These highlights can be seen as some of the components in
the King IV Report as compared to the King III Report. This table also
highlights how emerging issues and corporate governance
developments since the launch of the King III Report have been
addressed in the King IV Report.
Table 4.2 Some highlights of the King IV Report (Institute for Directors Southern
Africa, 2016)

Integrated The notion of integrated reporting was introduced in King III, but
reporting the understanding of this concept has evolved significantly since
then. Integrated reporting is an outcome of integrated thinking
and is presented as such in King IV. Reporting, including
integrated reporting, is dealt with in Part 5.2 of the code, where it
is positioned as the culmination of a series of leadership
responsibilities executed by the governing body. The governing
body steers and sets the direction of the organisation, approves
policy and planning, oversees and monitors management, and
finally provides for accountability for organisational performance
through, among other things, reporting and disclosure.
In order to clarify the standing of the integrated report in relation
to other reports, King IV deals with it as one of the many reports
that may be issued by the organisation, when necessary, to
comply with legal requirements and/or to meet the particular
information needs of material stakeholders. Other reports include
the financial statements, the sustainability report, the social and
ethics committee report, and other online or printed information or
reports.
An integrated report could be a stand-alone report that connects
the more detailed information in other reports and addresses, at a
high level and in a complete and concise way, the matters that
could significantly affect the organisation’s ability to create value.
It could also be a distinguishable, prominent and accessible part
of another report that also includes the financial statements and
other reports issued in compliance with legal requirements.
When drafting King IV, reliance was placed on the International
Framework issued by the International Integrated Reporting
Council. The Integrated Reporting Committee of South Africa has
endorsed the International Framework as good practice on how
to prepare an integrated report. The committee’s further guidance
on integrated reporting should be followed.

Balanced Having members on the governing body who are independent in

composition appearance is an essential element in most governance codes.
of governing King IV seeks to contextualise the relevance of independence
bodies and correctly as follows:
independence All members of the governing body, whether they are
categorised as executive, non-executive or independent non-
executive, have, as a matter of law, a duty to act with
independence of mind in the best interests of the organisation.
 Although important, independence in appearance is but one
consideration in achieving balance in the composition of the
governing body.
The overriding concern (as reflected by Principle 7, which deals
with the composition of the governing body) is whether the
governing body is knowledgeable, skilled, experienced, diverse
and independent enough to fully discharge its governance role
and responsibilities.
The need for the governing body to set targets for race and
gender diversity and disclose progress on these targets has been
specifically included in the King IV Code.

Delegation to The King IV Code provides for the governing body to delegate
management the implementation and execution of the approved strategy,
through policy and operational plans, to management via the
chief executive officer (CEO). Rather than dealing with the
establishment of specific management positions for functional
areas, as was done in King III, the practices mentioned in the
King IV Code contain recommendations for the governing body to
oversee that key functional areas are headed by competent
individuals and are adequately resourced.
Delegation to King IV, like King III, deals with delegation by the governing body
committees within its own structures. Principle 8 of King IV clarifies the
objectives for these delegation arrangements, which are to
promote independent judgement, to assist with the balance of
power, and to assist with the effective discharge of duties by the
governing body.
In accordance with the drafting convention adopted for King IV,
the recommended practices do not prescribe which committees
should be established by the governing body – the governing
body should judge what is appropriate for the organisation. The
practices furthermore recommend that the allocation of roles and
responsibilities, and the composition of committees, should be
considered holistically. The aim is to promote effective
collaboration among committees with minimal overlap and
fragmentation of duties, as well as a balanced distribution of
power.

Corporate Rather than dealing with the office of the company secretary in
governance isolation, the premise of the King IV Code is that the governing
services to body should ensure that it has access to professional and
the governing independent guidance on corporate governance. For most
body companies, this will be provided by the company secretary. The
code recommends that even companies and other organisations
that do not appoint company secretaries should, as a matter of
 leading practice, consider appointing a company secretary or
other professional to provide such services to the governing body.
Performance King III recommended that an evaluation of the governing body,
evaluations of its committees and its individual members be conducted every
the governing year. To allow sufficient time to respond appropriately to the
body results of such performance evaluations, the King IV Code
recommends that a formal evaluation process be conducted at
least every two years. Every alternate year, the governing body
should schedule an opportunity for reflection on and
consideration and discussion of its performance.
Social and Regulation 43 of the Companies Act was issued after King III and
ethics does not address the ethics role of the social and ethics
committees committee beyond mentioning ethics in the name of the
committee. King IV seeks to expand on this, and the role of the
social and ethics committee is that of oversight and reporting on
organisational ethics, responsible corporate citizenship,
sustainable development and stakeholder relationships.
This role includes organisational ethics and covers the statutory
duties, but the intent is to encourage leading practice by having
the social and ethics committee progress beyond mere
compliance towards contributing to the creation of value. King IV
urges organisations that are not legally required to establish
social and ethics committees to nevertheless consider creating
structures that would achieve the aims of such a committee.

The King IV Report promotes practices in an organisation that

strengthen its corporate governance. Good governance cannot be
achieved without the existence of democracy and public participation.
It remains an important goal of organisations to be responsible
citizens. Governance in the organisation must therefore also be guided
by settling the public concerns of the citizens of a country. The King
IV Report assists organisations with achieving responsible citizenship.

A few important concepts from the King IV Report are discussed

below.

4.7.1 The governing body

According to the King IV Report on Corporate Governance, the
governing body is the party charged with the governance and
performance of an organisation. The governing body can consist of the
board of directors of a company, the board of a retirement fund, the
accounting authority of a state-owned organisation and even a
municipal council. The members of the governing body are thus the
individuals serving on the governing body or its related committees.

Principle 7 of the King IV Report states that the governing body

should comprise an appropriate balance of knowledge, skills,
experience, diversity and independence for it to discharge its
governance role and responsibilities objectively and effectively. This
means that the governing body should be composed of an appropriate
mix of executive, non-executive and independent non-executive
members. The majority of the members of the governing body should
be non-executive members, with most of them (non-executive
members) being independent. The minimum requirement is that the
CEO of the organisation and at least one other executive must be
members of the governing body. The chairperson of the governing
body should be an independent non-executive member.

The roles and responsibilities of the governing body are described in

Figure 4.3. They form the foundation of all the recommended practices
for all governance areas described in the King IV Report.
 Figure 4.3 Governing body’s roles and responsibilities

Source: Adapted from Institute for Directors Southern Africa (2016)

It is clear from Figure 4.3 that the governing body is responsible for
providing direction for the approach and conduct of each governance
area. Management uses the direction provided by the governing body
to develop frameworks and policies that the governing body approves,
after which management implements these plans under the oversight of
the governing body. However, the governing body retains
accountability for the performance of each governance area through
reporting and disclosure.

Principle 8 of the King IV Report clarifies the delegation arrangements

of the role and responsibilities of the governing body within its own
structures. This principle states that the governing body should ensure
that its arrangements for delegation within its own structures promote
independent judgement, and that they assist with the balance of power
and the effective discharge of its duties. It is, however, important to
note that although the King IV Report recommends the delegation of
the governing body’s responsibilities to committees within its
structure, the report does not specify which committees should be
established; only that the governing body should determine what is
appropriate for the organisation. The delegation to the committees
must be recorded in formal terms of reference, and the governing body
should review and approve these terms of reference on an annual basis.
Principle 8 further states that each committee should have a minimum
of three members, and that the governing body should ensure that each
committee in its entirety has the necessary skills, knowledge, capacity
and experience to ensure that it is able to execute its assigned duties
effectively.

The King IV Report does, however, mention a few specific

committees:

4.7.2 Audit committee

The King IV Report highlights that the establishment of an Audit
Committee is a statutory requirement for some organisations. From a
principle perspective, it means that every organisation that is required
to submit audited financial statements should establish an audit
committee. An organisation’s audit committee should consist of
independent, non-executive members of the governing body. The role
of the audit committee is to provide independent oversight of the
effectiveness of an organisation’s assurance functions and services.

4.7.3 Committee responsible for nominations of members

to the governing body
This committee should consist of non-executive governing body
members, with a majority of the members being independent. It will be
responsible for the nomination and election process of the governing
body, planning the succession of the governing body members and the
performance evaluation of the governing body.

4.7.4 Committee responsible for risk governance

The committee should have executive and non-executive governing
body members, with the majority being non-executive. This committee
has the responsibility of governing and overseeing the risk
management process of the organisation. If the organisation chooses to
have separate audit and risk committees, at least one member of the
governing body should have joint membership of both committees.

4.7.5 Committee responsible for remuneration

The responsibility for overseeing the remuneration process can be
delegated by the governing body to a separate committee, or it can be
added to the role of another committee. All members of such a
committee must be non-executive members of the governing body,
with the majority being independent. The chairperson of this
committee should be an independent, non-executive member of the
governing body.

4.7.6 Social and ethics committee

As in the case of the audit committee, the establishment of this
committee might be a statutory requirement for some organisations.
Unless statutory requirements state otherwise, the members of this
committee should be a mixture of executive and non-executive
governing body members, with a majority of non-executive members.

The social and ethics committee will be responsible for the oversight
of and reporting on organisational ethics, responsible corporate
citizenship, sustainable development and stakeholder relationships.
This will be added to its statutory duties, as well as any other
responsibilities as designated by the governing body. The
responsibilities of this committee can either be delegated to a
specifically nominated committee or added to the responsibilities of
another committee. Read Strategy in action 4.3 for an illustration of
the implementation of the governing body’s responsibilities as
implemented at PepsiCo.

Strategy in action 4.3 Corporate Governance at PepsiCo

 PepsiCo’s Articles of Incorporation provide a legal declaration of its structure
and purpose as a corporation, as mandated by North Carolina law. The
company has adopted comprehensive corporate standards and policies to
govern its operations in order to ensure accountability for its actions.

By-laws
PepsiCo’s by-laws spell out the rules and procedures according to which it
operates, as well as the rights and powers of company shareholders, directors
and officers.

Corporate Governance Guidelines

Its Corporate Governance Principles were adopted to establish a common set
of expectations to assist the board and its committees in performing their duties
in compliance with the applicable requirements.

Audit Committee Charter

The Audit Committee is composed entirely of independent directors with the
financial literacy to provide oversight of PepsiCo accounting policies and
financial reporting.

Compensation Committee Charter

The Compensation Committee is composed entirely of independent directors
responsible for overseeing policies on executive compensation.

Nominating and Corporate Governance Committee Charter

The Nominating and Corporate Governance Committee is composed entirely of
independent directors responsible for nominating new members to the board
and providing policy recommendations regarding corporate governance.

Public Policy and Sustainability Committee Charter

The Public Policy and Sustainability Committee is composed entirely of
independent directors responsible for overseeing policies, programmes and
related risks concerning key public policy and sustainability matters.
Source: Adapted from http://www.pepsico.com/company/Corporate-
Governance (accessed 17 March 2017)

4.8 Strategy and corporate governance

The current world economic climate and recent developments in the
modern business environment have led to “corporate governance”
becoming the latest buzzword. It affects all aspects of an organisation,
including its strategy. Although the concept of strategy has already
been defined and explained in Chapter 1, it should be emphasised
again that strategy is about setting the organisation’s short-, medium-
and long-term direction for realising its core purpose and values.

The two approaches to developing this strategic direction have been

discussed in Chapter 1. The rational approach to strategy explains the
strategic approach as a logical, step-by-step approach. Each of these
steps should be influenced by the responsibility of an organisation to
be a responsible corporate citizen. The role of corporate governance in
strategy development is discussed in detail below.

4.8.1 Shift in the focus of objectives

The modern organisational environment has shifted the focus of an
organisation’s objectives from having a primary goal of maximising
shareholders’ wealth, to ensuring that an organisation acts as a
responsible corporate citizen. This means that sustainability and
stakeholder inclusivity are interwoven into every aspect of the strategic
direction of an organisation. Sustainability and stakeholder inclusivity
go hand in hand, as some stakeholders of a business will ensure that an
organisation remains accountable for sustainability inside and outside
the organisational environment. This brings the term “responsible
corporate citizen” to the forefront, which means that the organisation
should at all times act as would be expected from a responsible citizen.

4.8.2 Stakeholder inclusive approach

The strategy of an organisation must ensure that the needs of all
stakeholders are met. The term “stakeholder inclusivity” is an aspect
of the principles on which the King IV Report is based. This approach
means that the needs of all stakeholders are taken into account when
an organisation sets its objectives. As discussed earlier in this chapter,
an organisation has stakeholders that are indirectly affected (external
stakeholders) and stakeholders that are directly affected by the
organisation (internal stakeholders). The strategic direction of an
organisation is naturally set so that the organisation’s objectives are
fully achieved and thus strategy used to focus on the needs of the
internal stakeholders of the business. The recent increased focus on
corporate governance in the modern organisational environment has
resulted in organisations broadening their focus to include the needs of
external stakeholders.

The shift in focus has led organisations to broaden their strategic

direction. They cannot focus only on objectives that increase
shareholder wealth, but their objectives should also include ways of
contributing to sustainability and behaving like a responsible corporate
citizen. The strategic direction is aimed at taking the objectives of all
stakeholders into account, while effectively managing the
organisation’s relationships with all the stakeholders.

4.8.3 The implementation of the business strategy

Corporate governance firstly affects the strategic direction of an
organisation in the form of objectives that focus on more than merely
maximising shareholder wealth. When the plan of action to achieve
these objectives is considered, corporate governance again influences
the different options at the disposal of an organisation. This is due to
the fact that certain governance principles (in the King IV Report)
should be taken into account when the different approaches to
achieving an organisation’s objectives are considered.

4.8.4 Strategic control

The last step of the rational approach to strategy development is
focused on the control aspect of an organisation. This process consists
of an evaluation of the chosen approach, based on whether the
organisation’s objectives have indeed been met. If this is not the case,
the organisation should choose a different plan to implement. Again,
corporate governance will affect the choice of the strategic plan to
implement, since the newly chosen plan should still comply with the
policies and procedures set in place to ensure that an organisation
retains its corporate governance responsibility.
Strategy in action 4.4 illustrates the broad strategic perspective of
Imperial Holdings, which focuses on a broader spectrum than just the
maximisation of shareholder wealth.

Strategy in action 4.4 Extract from Imperial Holdings’ strategic objectives

Imperial’s overriding strategy is to generate higher returns on capital for

shareholders, and to drive growth in profitability. These are balanced by the
company’s sustainability ethos, which takes into account the strategic
importance of other non-financial areas of the business. These include building
a robust internal skills pipeline, investing in future skills through education
initiatives and positioning itself as a leading corporate citizen in the industries in
which it operates.
Imperial places strategic emphasis on establishing itself as a leading corporate
citizen, particularly in the transport industry. While good corporate citizenship is
an important governance and social issue, it is equally a business issue and
one that directly affects the value and perception of its brand.
The company makes strategic investments in projects that serve this purpose.
The Imperial I-Pledge campaign promotes safer, friendlier roads by
encouraging South Africans to commit to safer driving practices. While the
campaign has important brand positioning impacts, it also delivers benefits that
directly affect Imperial’s transport businesses. Fewer road accidents are a key
goal in logistics operations, and will lead to fewer insurance claims and lower
costs in the car rental businesses.
Imperial is involved in a broad spectrum of corporate social investment
initiatives that benefit the communities in which they operate. A good example
of this is Imperial Health Sciences. In this endeavour, communities are uplifted
daily through the Unjani Clinic-in-a-Box project. The main aim of the Unjani
project is to provide access to affordable primary health care in low-income
communities. Currently patients have limited access to basic medicines and
may have to travel long distances to reach hospitals and clinics. An entire clinic
and dispensary in a self-contained unit can be sent to any location and set up
quickly to provide community access to primary health care services.
Imperial’s recognition for responsible environmental stewardship is seen in its
pursuit of ways to reduce its carbon footprint and consumption of scarce natural
resources. The company’s initiatives include a reduction of its energy and
carbon footprint, extensive water and waste recycling projects and the
implementation of green, sustainable building practices in dealerships and
other facilities.
Source: Adapted from http://www.imperial.co.za/reports/ar_2013/integrated/ovr-
strategic.php (accessed 27 March 2017)
4.9 King IV Report and the risk management process

Principle 8 in the King IV Report mentions that one of the

recommended committees to which the governing body could delegate
some of its responsibilities is a committee responsible for risk
governance. The King IV Report discusses the principle of risk
governance even further in principle 11, which states that the
governing body should govern risk in a way that supports the
organisation in setting and achieving its strategic objectives. This
principle is further explained by recommending that the governing
body set the direction for the way in which risks should be approached
and addressed in the organisation by determining the opportunities and
risks that should be considered when its strategy is planned. It is also
the governing body’s responsibility to determine what the possible
effects of these risks would be on the objectives of an organisation.

Risk management entails the process set out in the King IV Report.
The organisation should identify possible risks, determine their impact
on the organisation’s goals and then try and mitigate these risks
according to the risk appetite and the level of toleration of loss of the
organisation. The responsibility for determining the risk appetite and
incurring a possible loss is part of the governing body’s responsibilities
set out in the King IV Report. The report further specifies that the
execution of effective risk management should be delegated by the
governing body to the management team of an organisation.

The role of all the recommended practices in the King IV report must
be considered as a whole in the risk management process. External risk
factors cannot necessarily be mitigated purely as a result of the
composition of the organisation’s management team, the governing
body or governing principles, but internal risk factors can significantly
decrease if an organisation implements effective corporate governance.

Internal risk factors that can be avoided, or at the very least reduced to
what is acceptable for the organisation, are risks where the opportunity
for fraud is involved. This is because all the recommended practices in
the King IV Report are built on the philosophies of sustainable
development that are reiterated by the concepts of integrated thinking,
corporate citizenship, the organisation as an integral part of society and
stakeholder inclusivity. The integrated reporting requirement ensures
that all these concepts are dealt with in the form of policies and
procedures to ensure that internal risks are managed effectively.
External risk factors will be managed by the risk governance policies
implemented by the governing body.

4.10 Summary

This chapter dealt with risk management and the King IV Report on
Corporate Governance. As a result of the ever-changing and
challenging organisational environment, organisations cannot develop
a strategy if the importance of risk management is not considered. To
do business in this challenging environment poses many risks and
opportunities. Dealing with them is important and these risks and
opportunities should be taken into consideration when the
organisational strategy is being developed.

The King IV Report on Corporate Governance addresses fundamental

principles of good financial, social and environmental practices. This
report not only highlights and emphasises the financial and regulatory
aspects of corporate governance but also emphasises an integrated
approach to good governance in the interests of all stakeholders. This
implies that the organisation must behave as a good corporate citizen
in the interests of all stakeholders.

The chapter concluded with an explanation of the role between

strategy and good corporate governance, based on the King IV Report.
Exploring the web

The Institute of Risk Management South Africa

http://www.irmsa.org.za/?page=reading
Institute of Directors Southern Africa
http://www.iodsa.co.za/?page=AboutKingIV
Chartered Institute of Management Accountants
http://www.cimaglobal.com/Studying/study-and-resources/exam-preparation-
materials/
Continuing Professional Development
http://continuingprofessionaldevelopment.org/risk-management-steps-in-risk-
management-process/

References and recommended reading

Barnard, J., Fouche, B., Bartlett, G., Beech, G., De Hart, F., De Jager, P. et al. 2014.
Financial management: turning theory into practice. South Africa: Oxford University
Press.
Blackman, A. 2014. The main types of business risk. Available at:
https://business.tutsplus.com/tutorials/the-main-types-of-business-risk--cms-22693
(accessed 20 April 2017).
CIMA Official Terminology. 2005. Available at: www.cimaglobal.com (accessed 17
February 2017).
Harvey, J. & Technical Information Service, CIMA. 2008. Introduction to risk
management. Available at:
http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_intro_to_managin
g_rist.apr07.pdf (accessed 17 February 2017).
Hough, J., Thompson, J.R., Strickland, A.J. & Gamble, J.E. 2011. Crafting and
executive strategy – creating sustainable high performance in South Africa: Text,
readings and cases, 2nd edition. London: McGraw Hill.
Institute for Directors Southern Africa. 2016. King IV Report on Corporate
Governance for South Africa 2016. Available at: https://c.ymcdn.com/sites/iodsa.site-
ym.com/resource/collection/684B68A7-B768-465C-8214-
E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf (accessed 15 June
2017).
International Federation of Accountants. 1999. Available at: www.cimaglobal.com
(accessed 17 February 2017).
Sandoval, V. 2016. The origins of the word risk (etymology). Available at:
https://vicentesandoval.wordpress.com/2016/02/23/the-origins-of-the-word-risk-
etymology/ (accessed 15 February 2017).
Standard Bank Annual Integrated Report. 2015. Available at:
http://annualreport2015.standardbank.com/index.html (accessed 17 March 2017).
Szekely, C.S. 2014. Good governance in the contemporary society. Buna Guvernare
in Societatea Contemporana, 65(2): 17–22.

Case study

Vodacom: Report of the Audit, Risk and Compliance Committee for the year
ended 31 March 2016

Mandate and terms of reference

The Group’s Audit, Risk and Compliance Committee (ARC

Committee) operates within a board-approved mandate and terms of
reference.

The ARC Committee’s responsibilities include the following:

Reviewing the group’s consolidated interim results, preliminary

results, integrated report and annual financial statements
Monitoring compliance with statutory and JSE listing requirements
Reporting to the board on the quality and acceptability of the
group’s accounting policies and practices, including, but not limited
to, critical accounting policies and practices
Providing oversight of the integrated reporting process
 Considering the appointment and/or termination of external
auditors, including their audit fee, independence and objectivity, and
determining the nature and extent of any non-audit services
Approving the internal audit plan for the year
Receiving and dealing appropriately with any complaints, internally
and externally, relating either to the accounting practices and
internal auditing or to the content or auditing of the annual financial
statements or related matters of all organisations in the group
Reviewing and monitoring the management and reporting of tax-
related matters
Monitoring the risk management function and processes and
assessing the group’s most significant risks
Monitoring the technology governance framework and associated
risks
Monitoring the effectiveness of the processes to create awareness
and develop an understanding of relevant legislation and regulation
to ensure compliance by management

Membership

The chief executive officer and chief financial officer, as well as the
head of internal audit, the chief risk officer and the external auditors,
attend ARC Committee meetings by invitation. The primary role of the
ARC Committee is to ensure the integrity of the financial reporting
and auditing process, and that a sound risk management and internal
control system is maintained. In pursuing these objectives, the ARC
Committee oversees relations with the external auditors and reviews
the effectiveness of the internal audit function.

The internal and external auditors have unlimited access to the

chairman of the ARC Committee. The internal audit department
reports directly to the ARC Committee and is also responsible to the
chief financial officer on day-to-day administrative matters.

Internal control
Internal controls comprise systematic measures, policies, procedures
and business rules adopted by management to provide reasonable
assurance in safeguarding assets, preventing and detecting errors, the
accuracy and completeness of accounting records, and the reliability of
annual financial statements of all organisations in the group. In
addition, the Vodafone Group Plc (Vodafone) is required to comply
with Section 404 of the Sarbanes-Oxley Act (SOX) due to its listing on
the NASDAQ stock exchange. With the combined efforts of the group
and Vodafone, specific processes were identified that had to be brought
in line with SOX requirements as part of the group’s South African
SOX compliance efforts.

The internal audit function is governed by the internal audit charter, as

approved by the ARC Committee. The internal audit function serves
management and the board by performing independent evaluations of
the adequacy and effectiveness of the group’s internal controls,
financial reporting mechanisms and records, information systems and
operations.

Risk management

Reviews of the group’s risk management, enterprise risk management

programmes, business continuity and forensic services are performed
by the group’s Risk Management Committee, which reports to the
ARC Committee through the chief risk officer. Critical and high
strategic risks, which are ranked on a scale from catastrophic to
negligible, are presented annually to the ARC Committee and are then
reported to and considered by the board. Further details of the group’s
key risks are reported in the risk management report included in
Vodacom’s integrated report.

Combined assurance

The integrated assurance model aims to optimise the assurance

coverage attained from management (first line of defence), internal
assurance providers (second line of defence) and independent
assurance providers (third line of defence) in mitigating the risk areas
affecting the group. The group has adopted an integrated assurance
model, which identifies the key risk areas affecting the group, and
maps the level of assurance being provided by the different lines of
defence to mitigate these risks.

Effectiveness of the finance function

The ARC Committee has concluded that the finance function is

adequately resourced with technically competent individuals, and that
it is effective.

Effectiveness of the risk management function

The ARC Committee has satisfied itself that the following areas have
been appropriately addressed:

Financial reporting risk

Internal financial controls
Fraud risk as it relates to financial reporting
Information technology risk as it relates to financial reporting

Integrated report

The ARC Committee has overseen the integrated reporting process,

reviewed the report and has recommended the 2016 integrated report
and consolidated annual financial statements for approval by the board
on 3 June 2016.

Chairman

Audit, Risk and Compliance Committee

Source: http://www.vodacom-reports.co.za/integrated-reports/ir-2016/afs-report-
committee.php (accessed 28 March 2017)

CASE STUDY QUESTIONS

1. Identify possible relevant stakeholders of Vodacom.

 2. Summarise the requirements for the governing body as set out in
the King IV Report and discuss in as much detail as possible
whether or not the governing body of Vodacom is constituted in
line with the King IV Report requirements by analysing the audit
and risk report, as well as Vodacom’s integrated report for the most
recent financial year.
3. Briefly discuss Vodacom’s risk management programme as can be
seen from its audit and risk report.
4. Visit Vodacom’s website and inspect its integrated report for the
most recent financial year. Use the audit and risk report, as well as
the integrated report, to provide examples of where Vodacom has
situated its report on the triple bottom line.
5. Describe the impact of strategy on Vodacom’s audit and risk report
in your own words.

Strategy exercises

1. Visit an organisation’s website or study its annual report and

analyse the extent to which the board of directors functions
according to the principles prescribed in the King IV Report.
2. Choose any listed organisation and inspect the strategy part of its
annual report. List all the instances where corporate governance
notably influenced the organisation’s strategy.
 5 Internal environmental
analysis
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter you, should be able to do the following:

Discuss the importance and challenge of internal environmental analysis

Apply SWOT analysis and explain its importance in environmental analysis
Identify all the important resources and capabilities in an organisation and
discuss their importance in the resource-based view with regard to internal
environmental analysis
Describe value chain analysis as a method for performing internal environmental
analysis
Apply the functional approach in internal environmental analysis
Understand and apply the SWOT matrix to identify strategic goals

5.1 Introduction

One of the critical factors for an organisation’s success is that a

strategy must place realistic requirements on the organisation’s
resources. The pursuit of opportunities in the external environment
depends on the competitive advantage that organisations experience
from their key resources and capabilities. Actually strategy is about the
relationship between organisational performance and its resources and
capabilities. Many organisations try to build their competitive capacity
through their resources and capabilities. In order to do so, it is
important for them to identify and evaluate their strengths and
weaknesses in all their functional areas. The stronger an organisation’s
overall performance, the less need there will be for radical changes in
strategy. Organisations that have built a competitive advantage through
their capacity include Coca-Cola, Nike and Pick n Pay.

Although many managers can do the internal analysis

subjectively using intuition and “gut feeling”, this reliance
on past experience may cause near-sightedness on the part of
management. Emotional and subjective decisions are not conducive to
successful strategy development and implementation. There are
numerous examples of this that have led to organisational failure.
Internal analysis is the process in which management identifies what
is good and what is lacking or perhaps not so good in the organisation
by evaluating the organisation’s assets, skills and work activities. As
such, internal analysis can be regarded as a critical underpinning to
effective strategic management.

In Chapter 6 the external environment will be discussed in detail. The

rapid developments and changes in the components of the external
environment make it difficult for organisations to keep up their
competitive advantage and reputation if they do not also understand
the internal environment of the organisation. The well-known SWOT
analysis technique will be explained in terms of its value and
limitations for environmental analysis, both internally and externally.
We shall then examine the different methods of internal analysis: the
resource-based view, in which the organisation is analysed as a
collection of tangible and intangible resources and organisational
capabilities, and a value chain analysis. Emphasis will be placed on the
individual activities of the organisation that add value to its products or
services and thus create value for the organisation. This chapter will
conclude with a mention of the functional approach and the SWOT
matrix.
5.2 The importance and challenge of internal
analysis

An organisation cannot pursue a specific strategic direction if it does

not know what it can and cannot do, and what assets it has and does
not have. When an organisation is able to match what it can do with
what it might do, this allows it to pursue its vision or strategic intent,
its strategic mission, and to select and implement its strategies. It is,
however, important to stress that the link between the organisation’s
vision of what it wants to become and the internal environmental
situation cannot be disregarded. Even if the results of an internal
assessment are favourable, if there is no challenging and exciting
vision, the organisation will not achieve strategic excellence. The
vision of what the organisation wants to become must actually set a
challenge to its internal resources. The outcome resulting from internal
analysis will determine what an organisation can do, while the
outcome of external environmental analysis will identify what the
organisation may choose to do.

In the past, factors such as low labour costs, access to financial

resources and protected markets were regarded as the only sources of
competitive advantage. This is no longer the case, because the
demands facing 21st-century organisations require more than
excellence in these factors. It is important for organisations to develop
the ability to change, and to foster an organisational setting in which
organisational learning is expected and promoted, so that they are able
to make the most effective strategic decisions. In order to devise the
most effective and efficient strategy, it is important to know what the
organisation can do particularly well and what resources and skills it
has.

It is not only the organisation’s ability to change that will make it

successful; it is also critical that managers should view the
organisation as a bundle of resources, capabilities and core
competencies that can be used to create an exclusive position in the
market. This implies that the organisation has some resources and
management capabilities that other organisations do not have. The
presence of these resources and capabilities leads to strategic
competitiveness when an organisation is able to use them to satisfy the
demands of its external environment. The relationship between
resources and organisational capabilities, value chain analysis and the
functional approach, leading to strategic competitiveness, is illustrated
in Figure 5.1.

Figure 5.1 The relationship between the components of internal analysis and
strategic competitiveness

The task of identifying, developing and deploying resources and

capabilities is as difficult and challenging as any other strategic
management task. A value-creating capability in the organisation that
enables the organisation to do what it is supposed to do and that may
serve as a competitive advantage to the organisation, becomes a core
competency. The recognition of core competencies is essential before
any strategic management decision can be taken. Some managers may
select as the organisation’s core competencies some resources and
capabilities that do not really create competitive advantage. This
stresses the importance of the challenge of identifying the resources
and capabilities that really contribute to the competitive advantage of
the organisation.
5.3 SWOT analysis

SWOT is one of the best-known techniques for doing an

environmental analysis. Although SWOT applies to both
external and internal environmental analysis, it will be
discussed here as an introduction to, as well as the end result of,
environmental analysis. SWOT is an acronym for strengths,
weaknesses, opportunities and threats, and provides a framework for
analysing these elements in the organisation’s internal and external
environment. A SWOT analysis highlights the specific conditions in
the organisation’s environment for environmental analysis.

Environmental analysis is about the internal and external assessment of

the organisation – what the organisation has or does not have in terms
of resources and capabilities, and what is happening in the external
environment. The success of a new strategy for the organisation
depends on the strategic fit between the internal situation of the
organisation and the external conditions. The objective of a good
strategy is to increase the strengths and optimise the opportunities, and
to decrease the influence of internal weaknesses and external threats.

What is a strength? It is a resource or a capability that the

organisation has, which is an advantage relative to what
competitors have. This is an important issue, as a resource or
capability can only be a strength if it offers a distinctive competence
that gives the organisation a competitive advantage. There may,
however, be other resources and capabilities that do not necessarily
give the organisation a competitive advantage but contribute to its
sustainability, and should therefore be nurtured and reinforced. Skilful
employees, large financial reserves, a quality product or service, a
strong reputation and economies of scale can be strengths of the
organisation. The strength of the assurer, African Life, for example, is
the fact that FirstRand is the anchor shareholder. This ensures large
financial reserves for the organisation.
 What is a weakness? This term refers to the lack or
deficiency of a resource that represents a relative
disadvantage to an organisation in comparison to what
competitors have. Limited financial resources, poor marketing skills,
poor after-sales service and negative organisational culture are
examples of weaknesses. These deficiencies prevent the organisation
from developing a competitive position in the market (industry). The
greatest weakness of African Life may be its relatively small size and
therefore its potential vulnerability to deterioration in the market
environment.

As stated above, a SWOT analysis includes both the external and

internal environment. While the strengths and weaknesses relate to the
internal or microenvironment, the opportunities and threats are the
identified external factors in the market (industry) and
macroenvironment. This is illustrated in Figure 5.2.

Figure 5.2 The components of a SWOT analysis

What is an opportunity? This term refers to a favourable situation in

the organisation’s external environment (market and
macroenvironment). A decrease in the interest rate (the low interest
rates a country may have) can be seen as an opportunity for an
organisation that still has a loan obligation. The closing down of one of
its major competitors is also a favourable condition in the market
environment of the organisation and is seen as a possible opportunity.

What is a threat? This is an unfavourable situation in the

organisation’s external environment. Again, the organisation
does not have any control over what is happening in the
external environment but, for instance, an increase in the interest rate
(economic macroenvironment) is a major threat to the cash flow of an
organisation with a big loan. If a new competitor is about to enter the
market as a result of low entry barriers, it is seen as a threat.

A SWOT analysis consists, then, of a careful listing of the

abovementioned aspects. Although managers rely on a SWOT analysis
to stimulate discussion on how to improve their organisations and how
to position them for success, it has its limitations. A SWOT analysis is
a static approach and is also sometimes focused only on a single
dimension. A SWOT analysis cannot show the organisation how to
achieve a competitive advantage. More in-depth analysis is needed. A
SWOT analysis cannot therefore be an end in itself – it actually only
stimulates self-perception and the discussion about important issues in
the organisation. The limitations of a SWOT analysis are therefore as
follows:

The focus on the external environment may be too narrow. More

detailed analysis may reveal different perspectives.
It is perhaps a static assessment – a one-shot view of a moving
target. Strengths today are not necessarily strengths tomorrow.
The strengths that are identified may perhaps not lead to an
advantage. Competent employees may not lead to a competitive
advantage if not exploited effectively and efficiently.
It may lead to an overemphasis on a single feature or strength and to
disregarding other important factors that may lead to competitive
success.
Looking at Ocean Basket (Strategy in action 5.1), it is clear that a
number of strengths can be identified that may help the company to
grow even more.

Strategy in action 5.1 Ocean Basket

According to the latest South African Customer Satisfaction Index (SAcsi) for
Restaurants (2016), South African consumers are highly satisfied with their
overall sit-down restaurant experience.
SAcsi reveals that Ocean Basket’s customers are the most satisfied, with a
score of 78.6% in the rankings, followed by Wimpy on 77.8%.
Restaurants have ever higher standards to live up to as consumers have
become far more knowledgeable about food through shows like MasterChef,
popular cooking and food blogs, and social media.
It is also true that South African restaurant-goers have high expectations for the
franchise restaurants they visit. Excellent value for money, top-quality food,
quick service and a great overall experience are usually on the menu of
demands. Ocean Basket customers have the highest customer anticipation of
the quality of the company’s products and services, with an overall expectation
of 80.4 out of 100.
The rise of social media and greater access to online news and information
have made customers more aware of food and service trends globally, leading
to higher customer expectations. Ocean Basket has tapped into these popular
trends, offering new menu items such as tapas-style food, more grilled options,
and salad and vegetable sides, while its new Mediterranean sushi menu offers
broad family appeal. Ocean Basket’s consistency over the last three years
yielded great results for the brand in 2016. In terms of measuring customers’
expectations of service quality, Ocean Basket again led the pack as number
one.
Perceived value directly influences customers’ satisfaction and whether they
will return to a particular brand in the future. In addition to the above-mentioned
rankings, Ocean Basket is perceived to offer the greatest value. It is important
to note that perceived value is especially important for an initial purchase
decision. Customers also indicated that they were likely to recommend an
Ocean Basket to their family and friends.
Source: Adapted from http://sacsi.consulta.co.za/viewarticle.aspx?
id=1549&type=1&cat=60 (accessed 6 March 2017)
5.4 Internal analysis for effective strategy
development

In order, then, to develop the most effective and efficient strategy, it is

important to analyse the organisation internally. This means that one
has to look more closely at the organisation’s resources, capabilities
and core competencies in order to gain an informed understanding of
its current situation. Methods for carrying out internal analysis will
now be discussed. These techniques help to identify the strengths and
the weaknesses in the SWOT analysis. These techniques should not be
seen as exclusive as they may also be complementary and all of them
may be applied to identify the strengths and the weaknesses during a
SWOT analysis.

5.4.1 Resource-based view

As stated in the introduction to this chapter, resources, organisational
capabilities and competencies must be seen as the foundation
characteristics that make up the competitive advantage of an
organisation. As illustrated in Figure 5.1, organisational resources have
a cooperative impact on the capabilities of the organisation, which in
turn are the sources of core competencies that may ultimately lead to a
competitive advantage.

It is a well-known fact that Pepsi was not very successful when trying
to enter the South African market after years of absence. Coca-Cola
remains the clear world leader. Many analysts agree that the
superiority of Coke in terms of its tangible and intangible assets makes
it difficult for Pepsi. Intangible assets, such as Coke’s reputation and
brand name awareness, were major reasons why it was initially
difficult for Pepsi to be successful in South Africa. Coke also has some
capabilities that make it easier to manage these assets more effectively.
The sigmificance of capabilities and assets (resources) helps to explain
the concepts of the resource-based view (RBV).
The RBV holds that an organisation’s resources are more important
than the industry structure in gaining and keeping its competitive
advantage. It also sees organisations as very different in terms of their
collections of assets and organisational capabilities – no two
organisations will be the same, because they have different
experiences, different resources and capabilities, and different
organisational cultures. The argument is that it is the resources and
capabilities in a specific organisation’s cultural environment that will
determine how efficiently and effectively the organisation is
functioning. The resources and capabilities will determine how
efficiently and effectively an organisation will sell hamburgers, deliver
plumbing services, educate learners, repair motor vehicles, and so on.
The main concerns for competitive advantage, according to the RBV,
are therefore organisational resources and capabilities. If management
wants to manage strategically, as a useful starting point for internal
analysis is to understand what exactly “resources” are and what
characteristics make them unique.

5.4.1.1 Resources
Resources are, in simple terms, those assets an organisation needs to
do whatever it is in business to do. This term can also be explained as
the inputs into the orginasation’s production process that are
transformed into products and services. Central to the RBV is the fact
that there are three elements of resources that will lead to core
competencies and therefore to a competitive advantage. These three
broad categories of resources are as follows:

Tangible assets
Intangible assets
Organisational capabilities

Resources may include all the financial, physical, human and

intangible assets that are used by an organisation to develop,
manufacture and deliver products and/or services to its customers or
clients. Resources alone cannot create value for customers – they have
to be combined with capabilities to deliver value to customers.
Examples of these resources are illustrated in Table 5.1.

Table 5.1 Examples of different resources

Resource Examples Indicator

Tangible What is the organisation’s financial Cash flow
resources situation? Profitability
Financial What is the organisation’s situation
Solvency
with regard to its size, location,
Physical Liquidity
physical appearance of buildings
Technological and infrastructure and its reserves of Market value of fixed
Human raw materials? assets
resources What is the situation with regard to Capital equipment
the stock of technology such as
Coca-Cola’s formula or KFC’s secret Market value of
recipe? tangible technology
(if the “secret recipe”
Skills of employees is available on the
market)
Service levels

Intangible Does the organisation have any Income from patents

resources intellectual property such as and copyrights
Technological copyrights and trademarks? Brand recognition
What innovative ideas exist in the
Human Measuring
organisation?
resources customers’
Innovation What is the level of skills and satisfaction with
and knowledge of employees? regard to service
reputation What are customers’ perceptions of levels experienced
resources the reputation of the organisation? from employees
Measuring corporate
reputation

Tangible assets are the easiest to identify because an

organisation’s location and the status of its building and
equipment are visible. The value of many tangible resources
can be determined by looking at the financial statements, especially
the balance sheet, and evaluated as a strength or weakness. It is,
however, important to remember that these statements do not
account for the real value of the assets, because they do not reflect
market value. A good location is a tangible asset or resource, but the
real value is only visible if an organisation is successful at that
specific location. A good aircraft is a tangible asset for Kulula
Airlines or South African Airways, but it is only of value to the
organisation if it is fully booked and uses routes that are in demand.

Intangible assets are assets that one cannot touch, but they
are often the critical assets that create the real competitive
advantage. The reputation and brand name of Coca-Cola is
the reason it has a competitive advantage over Pepsi. KFC also has a
good reputation. It is thus fair to say that intangible resources are a
superior and more potent source of core competencies. Customers’
perception of the organisation’s product and the delivery of quality
service is perhaps more critical than its tangible assets, and there is
also evidence that it is growing in importance relative to tangible
assets. Bidvest is also successful in earning the trust of its clients
because of its reputation and track record (see Strategy in action
5.2).

Strategy in action 5.2 Reputation and track record vital

Payment volumes across corporate foreign exchange platforms run into billions
every week. In this high-volume environment, competitive rates are vital, but so
are reliability and reputation. The stakes are too high for slip-ups. Trust is the
key issue and is earned over time. A business has to trust its foreign exchange
provider to execute every transaction on time, at the optimum rate, while
complying with every regulatory requirement. Trust in robust reporting is also
essential. Reporting protocols must be scrupulously observed, ensuring both
the client and the authorities receive a complete transaction history.
Bidvest Bank‘s heritage in this challenging specialisation goes back more than
150 years via its predecessor, Rennies Foreign Exchange – a leader in the field
familiar to generations of South Africans. Bidvest Bank holds a rating of
A3.za/P-2.za with a stable outlook from Moody’s, the international ratings
agency. It is known for strong capitalisation and its solid equity-to-assets ratio.
Bidvest is consistently rated one of South Africa’s most admired businesses
while achieving international recognition as one of the world’s leading
companies.
 A corporate client should also trust its foreign exchange partner to provide a
host of related services, thereby ensuring one-stop convenience. Bidvest Bank
also complements its positioning as South Africa’s foreign exchange specialist
with a wide range of banking services, including deposit-taking, loans and fleet
and asset-based finance. It has held a full banking licence since 2000.
Source: Adapted from http://www.fin24.com/Special-
Reports/Bidvest/Reputation-and-track-record-vital-20120611
(accessed 24 January 2013)

The advantage of intangible assets is that they are less visible and thus
more difficult for competitors to understand, purchase, imitate or
replace. This is the reason why organisations rely more on intangible
resources for creating core competencies and competitive advantage.

5.4.1.2 Capabilities
There is no competitive advantage for an organisation if
resources are available but there is no capacity to deploy
them through a complex process of interaction with the
tangible and intangible resources. Capabilities are actually the glue
that emerges over time and binds the organisation together, and can be
defined as the capacity of resources to perform activities in an
integrative way. We can say then that organisational strategic
capabilities are the complex network of processes and skills that
determines how efficiently and effectively the inputs in the
organisation will be transformed into outputs. It is sometimes argued
that strategic success is only possible if the organisation has the
necessary capabilities in place. By themselves resources are not
productive – they must be processed or used in some way to draw out
their value. The interrelationship between resources and capabilities is
illustrated in Figure 5.1. Coke’s formula is not valuable unless
someone knows how to use it and produce Coke. A database is not
useful to the Glomail Company if it does not have someone to use it to
make decisions.

The foundation of many organisations’ capabilities therefore lies in the

skills and knowledge of the employees and often in their functional
expertise. The essence of capabilities is the human capital of the
organisation. As employees do their work, combining the tangible and
intangible resources within the structure of the organisational
processes, they actually accumulate knowledge and experience about
how to create value from the resources for the organisation and turn
them into possible core competencies or distinctive organisational
capabilities.

What are the distinguishing aspects between capabilities and

core competencies? A core competency is only possessed
by an organisation that performs superior to the industry
average. Although all organisations have some capabilities, a core
competency makes a significant contribution to the perceived benefits
of the product or service and is difficult for competitors to imitate.
This actually leads to competitive advantage. Core competencies add
greater value than general competencies or capabilities, and are based
on superior organisational skills and knowledge. In the motor industry,
all motor manufacturers have the necessary competencies or
capabilities and resources to build motor vehicles, but a company such
as BMW has core competencies in design and engine technology that
are the basis of its reputation for high-quality and high-performance
cars.

The potential of turning human capital into a core competency is the

reason why organisations should invest in their employees’ continuous
development. That is why Capitec was named the best bank in South
Africa in 2015 and experienced high customer loyalty (Strategy in
action 5.3).

Organisational leaders all over the world support the view that their
employees’ knowledge, also known as human capital, is one of the
most significant capabilities and resources of the organisation and may
contribute, together with other resources, to competitive advantage.
This implies that an organisation must use the knowledge in the
organisation. This knowledge should be transferred during the
organisation’s operations, otherwise it is useless. The challenge to the
organisation is to create an organisational environment that allows
employees to fit all their knowledge together to the organisation’s
advantage.

Strategy in action 5.3 Capitec

According to the SAcsi results, Capitec Bank received the highest customer
satisfaction score of 83.8 per cent, which puts it 8.9 percentage points above
the industry average for services rendered in 2015. Capitec Bank has
increased its client base by over a million new customers to 7.3 million people,
and has been ranked the best bank in South Africa for the fourth consecutive
year.
The bank also made positive strides in a number of areas that contribute to
overall customer satisfaction, including quality, perceived value, customer
loyalty, levels of complaints and rates of complaint resolution. Capitec had the
least complaints and the highest rate of resolving complaints. The bank now
has the responsibility to maintain this level of support for its clients.
Source: Adapted from https://www.fin24.com/Companies/Financial-
Services/capitec-is-sas-favourite-bank-poll-20160406 (accessed 7
March 2017)

The majority of capabilities are developed in specific functional areas,

such as effective motivation and empowerment skills in the human
resources department, effective promotion of brand names and
customer service in the marketing department, product and design
quality in the production department and the ability to envisage the
future as a general management capability. It is, however, important to
state at the outset that capabilities must also be developed at top
management level and not only at the functional level.

The organisation is confronted with a dynamic and complex

environment and therefore the competencies that are capable
of leading the organisation to a competitive advantage
position today may not continue to do so as conditions and competitors
change. Therefore it is better to think in terms of dynamic capabilities
– the organisation’s ability to build, integrate and restructure
capabilities to address the rapidly changing environment. To be a
successful organisation requires demonstrating timely responsiveness,
rapid and flexible product innovation and also management expertise
in coordinating and deploying organisational resources and
capabilities. Strategy in action 5.4 illustrates the important role human
resources can play in helping the organisation to cope with the
competitive business environment.

Strategy in action 5.4 Importance of human resources

Organisations have become more aware of the value that able and committed
staff members add to help them excel in a competitive business environment.
The challenge for companies is to retain talented staff as they have become
more mobile, and for staff to compete more effectively in this changing and
competitive business environment. “That’s why AFGRI has a clearly defined
policy to create an environment that allows its almost 4000 employees to
develop and grow,” says Mulco Manyama, AFGRI’s group human resources
director. “That’s also the reason why AFGRI has prioritised the development of
its people.”
Manyama says AFGRI has to compete with several listed and unlisted
companies and even cooperatives for the farmers’ business and has to rely on
the skills of its employees to offer an attractive business proposition. “Not to
mention the financial gains motivated and skilful staff add to the company.” Staff
development is regarded as a catalyst for change and a competitive advantage.
As a result, it’s done at all levels, says Manyama. All staff participate in the
company’s development programmes. Some courses are done in-house on a
continuous basis. “Leadership development programmes are equally important.
They’re designed to equip managers for each level of responsibility from junior
managerial positions through to middle manager positions. These programmes
bring together a unique blend of critical knowledge, skills and behaviour to
develop breadth in AFGRI leaders.”
Regarding the company culture, Manyama compares it with one big family: “We
follow the open-door route and even the CEO regularly makes time to hear
what AFGRI employees have on their minds.”
The health and safety of employees are also promoted. “A proper and fair
grievance procedure is also in place, and I’m personally not aware of any racial
tension,” says Manyama. “I have no doubt in my mind that AFGRI qualifies for
the super-boss league.”
Source: Adapted from http://www.fin24.com/Special-Reports/Featured-In-
Finweek/AFGRI/People-prioritised-20111014 (accessed 25 January
2013)

For a resource or capability to become a real source of competitive

advantage, it must be truly distinctive and also contribute to the
development of the organisation’s core competencies – this actually
lies at the heart of competitive advantage. A core competency has to
develop into a unique capability that should actually distinguish an
organisation from its competitors. This is known as a distinctive
capability or a distinctive core competency. A distinctive capability
of McDonald’s is its organisational processes and routines seen, for
instance, in quick product delivery. It is clear that organisational
capabilities can make an excellent source of sustainable competitive
advantage. That is why it is so important to identify the distinctive
capabilities of organisations and then to develop and leverage them.

A tool that can be used to determine whether resources will lead to

competitive advantage is the VRIO framework. The VRIO analysis
stands for four questions that one can ask: Is the resource valuable?
Rare? Costly to imitate? And is an organisation organised to capture
the value of the resources?

Resources must be difficult to create, buy, replace or imitate; in other

words, they must have the quality of inimitability. This requirement is
actually fundamental to the arguments of the RBV. If it is possible for
a competitor to copy a specific resource, then there is no way that an
organisation can develop a sustainable competitive advantage. A
resource should be of real value or actually superior to be able to add
to the competitive advantage. If one answers yes to the questions in the
VRIO framework, and the organisation has the ability to apply
(exploit) it, the resource becomes a distinctive or core competency that
may lead to a competitive advantage. The conditions that may lead to
competitive advantage are explained in more detail below. The VRIO
framework is illustrated in Figure 5.3.
Figure 5.3 The VRIO framework with the characteristics of the resources that
will lead to a competitive advantage

Value. An organisational resource is valuable if it adds value and

thus helps the organisation to increase the perceived customer value.
A resource is valuable if it helps the organisation to exploit the
external opportunities or if it can be used to cope with and neutralise
negative external threats. If the resource is superior to those of the
competitor, and if it fulfils a customer’s needs better, then the
resource is superior and valuable. Skilled employees are an example
of an organisational resource that fulfils both of these requirements.
Another example is where two supermarkets offer the same range of
products, they have the same pricing structure, and they are equal in
size. The one supermarket is, however, more successful than the
other. Why? The only valuable and superior resource of the more
successful supermarket is its more convenient location in the
neighbourhood.
Rarity or scarcity. If a resource is in short supply and ideally no
other organisation or only a few possess it, it is unique and becomes
a distinctive competence for the organisation. The important thing,
however, is that the resource should be sustainable. Another
 important characteristic is that the resource must be valuable in the
sense that it fulfils the needs of the customers.
Inimitability. A resource is costly to imitate if other organisations
that don’t have it cannot imitate, buy or substitute it at a reasonable
price. If a resource is hard to imitate, it is likely to offer a long-term
competitive advantage for the organisation. Organisations are
looking for resources that are hard to imitate because they generate
revenues that will probably continue to flow in. Imitation by
competitor organisations can happen in at least two ways:
duplication and substitution. There is a clear difference between the
two. Duplicating a resource is where the same kind of resource is
built, whereas substitution of a resource involves replacing it with
an alternative resource that achieves the same results. Difficult-to-
imitate resources include, for example, reputation (goodwill), a good
location, a patented product and organisational culture. KFC’s
difficult-to-imitate recipe is a good example.

Capacity organised to exploit the resource. An

organisation must organise its management systems,
processes, policies, organisational structure and culture to be
able to fully realise the potential of its valuable, rare and costly-to-
imitate resources and capabilities. If an organisation does not have
the capacity or ability to exploit the resource, the organisation will
not be able to use the resource to create a competitive advantage.
Some resources may need large capital investments to be exploited.
This will enhance the inimitability of a resource, thus making it
more valuable.

The characteristics or requirements just mentioned are important

indicators of the chances of a specific resource becoming a source of
competitive advantage.

Financial and business magazines are filled with stories of

organisations that have unique and valuable resources that help them to
gain a competitive advantage. These issues are the essential elements
of the RBV approach to internal environmental analysis. The unique
resources identified through the RBV must, however, be sustainable in
order to give a sustained competitive advantage to an organisation.

5.4.2 Value chain analysis

Organisations exist to serve their customers or clients. The
assumption behind the value chain approach is that
customers want, and actually demand, value when they buy
products or services. Every organisation has a chain of activities
through which the inputs are transformed into the outputs. Michael
Porter developed this approach, which allows the organisation to
systematically identify and evaluate all the value-adding activities of
the organisation. When the value chain is examined as a method of
internal analysis, the chain of activities is looked at to determine where
value is really added to the product or service. In simple terms, value
added to a product or service is the difference in the monetary value of
the finished product compared to the monetary value of the inputs. For
example, one ton of metal as an input in vehicle manufacturing is less
valuable than the finished vehicle. It is important for customers to
receive value when they buy a product or service, since they actually
demand some type of value. What do customers need or demand when
they buy a product or service? It is important in this analysis of value-
adding activities to identify which activities add value to customers or
to work out when customers really experience receiving value.
Strategy in action 5.5 clearly shows that Shoprite adds value to the
shopping experience of its customers.

Strategy in action 5.5 Shoprite adds value to customers

Shoprite is the largest supermarket retailer on the African continent. The

Shoprite Group has a turnover of R130 billion, with over 143 000 employees.
With over 500 outlets and 22 million shoppers, they continue to provide their
customers with a variety of food products, household goods and small
appliances at the lowest possible prices. The ultimate goal of Shoprite is to
make shopping as quick and easy as it can be for customers. They serve local
communities with the lowest price promise and with exceptional service, and
make sure that customers leave their stores satisfied.
How do they add value to the customer? They not only provide traditional
supermarket services and products but, thanks to their Money Market services,
a customer can pay accounts, send money, book bus tickets and even take
 care of insurance in-store. There are also growing numbers of bottle stores in
close proximity and MediRite pharmacies, which are pharmacies in selected
Shoprite stores. A qualified pharmacist is available in all their pharmacies to
attend to prescriptions, and offer advice on managing chronic medication,
medication use, the prevention and treatment of HIV and AIDS and other
health-related matters. Customers can drop off their prescription at the
pharmacy when they arrive at the store and it will be ready and waiting for them
by the time they have finished shopping.
Their state-of-the-art distribution centres and supply line infrastructure give
them greater control over their product inventory, which supplies 15 African
countries. This has empowered Shoprite to introduce a number of cost-saving
efficiencies without decreasing margins or compromising on quality. They strive
for efficiency in everything they do. By streamlining the supply chain and
upgrading their operations to drive costs down, they are able to deliver the
lowest prices in a first-world shopping environment to consumers across Africa.
They continue to pursue a strategic lead in supply chain management by
investing substantially in the creation of a network of advanced distribution
centres, with their accompanying transport operations supported by
sophisticated information management systems.
Shoprite contributes to the well-being of communities by becoming actively
involved in helping those in need. Beyond everyday low prices, they support
projects that are aimed at community upliftment and enrichment, like hunger
relief, women empowerment and skills development.
With its promise of lower prices, Shoprite has attracted millions of shoppers in
South Africa. By buying in bulk, it will continue to pass the savings on to its
customers, because millions of shoppers cannot be wrong.
Source: Adapted from https://www.shoprite.co.za/about-us.html;
https://www.shopriteholdings.co.za/group/drivers-success.html;
https://www.shopriteholdings.co.za/ (accessed 8 March 2017)

There are three things in particular that really create value for
customers and orginisations must keep these in mind when developing
a strategy. These elements will be discussed in subsequent chapters,
but are also relevant here. They are as follows:

The product is unique and/or different.

The product is cheaper than that of competitors. For example, Game
is committed to providing value-for-money shopping to consumers
across the continent of Africa to ensure its position as Africa’s most
dynamic discount group.
 The organisation has the ability to respond to the customer’s needs
very quickly.

Value chain analysis (VCA) is thus a systematic method for

determining how the organisation’s various activities can
contribute to creating value for the customer by delivering a
unique product, or an acceptable quality product at a lower price or
being able to respond to the customer’s needs very quickly. When
Michael Porter developed the concept of the value chain, he was
concerned with how to create more value for the customer, and how
the different organisational routines and processes (the different work
activities of employees in an organisation) contribute to the ultimate
value that the customer experiences. The central point to VCA is the
organisational routines and processes. This means that VCA views the
organisation as a sequential process, which includes all the value-
creating activities in the organisation.

During the process from inputs to outputs, different activities have to

be performed. It is important to understand all the activities that occur
in the organisation. This actually involves disaggregating all the
activities in the organisation to determine the costs of each and where
differentiation takes place, or where the cost advantages are. These are
two of the aspects listed previously as factors that create value for the
customer.

Value chain analysis helps to identify where the most value is added,
especially where there is the potential to add more value. In an analysis
of the chain of activities, one can identify where the organisation is
doing things well and really adding value to the customer (this will be
its strengths) and where there is potential for improvement, something
not being done very well (perhaps weaknesses). If an activity is to be
regarded as a source of competitive advantage, the organisation must
be able to perform that activity in a manner that is superior to the way
in which competitors are performing it (then it is a strength), and in
such a way that it is difficult for competitors to imitate.

What is the meaning of value in VCA? Value can be described as the

amount of money that customers are willing to pay for what the
 organisation is supplying. The more value they perceive they
are experiencing from the organisation, the higher the
amount they are willing to pay. In competitive terms, then, it
can be said that an organisation is profitable if this amount exceeds the
total costs involved in creating the product or service. It is important to
understand that the organisation will only receive high returns if it is
successful in creating value. It is clear that the activities in VCA are
actually the building blocks of competitive advantage.

The activities in VCA can be grouped into two categories, namely,

primary activities and support activities (see Figure 5.4). Primary
activities are those that create the physical product or service and
customer value if carried out effectively and efficiently, whereas the
support activities provide support and thus add value throughout the
process. It must be remembered that the value chain as illustrated in
Figure 5.4 is a generic chain. Every organisation has its own chain of
activities and organisations should identify their specific value chain to
establish where value is added to the final product or service.

Figure 5.4 The primary and support activities of the value chain

5.4.2.1 Primary activities

Some of the different components of the primary activities in an
organisation that should be studied are as follows:
 Input logistics. This activity, which Porter originally called
“inbound” logistics, is associated with the receiving, storing and
distributing of inputs to the product. Is there a materials control
system? How, and how effectively and efficiently, are the raw
materials handled and warehoused?
Operations. These activities include all those that are associated
with the transformation of the inputs into the final product.
Questions to answer in this regard are: How efficient is the layout of
the manufacturing plant? Is a production control system in place and
how effective and efficient is it? What is the level of automation?
Output logistics. This activity, which Porter originally called
“outbound” logistics, refers to all the issues related to the
distribution of the product or service to the customers. How
effectively and efficiently are products and services delivered to
customers? How, and how effectively and efficiently, are the
finished products handled and warehoused?
Marketing. Customers must buy the final products and services.
This activity refers to the inducements used to get customers to
make the purchases. What is the level of marketing and competency
in terms of sales? Is market research effective in identifying the
customers’ needs? What is the situation regarding, and the
effectiveness of, the marketing strategy in terms of the four Ps,
namely, product, promotion, place and price? How successful is the
organisation in creating brand loyalty in customers?
Customer service. There are some basic activities that the
organisation must undertake to make sure that the value of the
product is maintained, such as installation, repair, training, the
supply of parts and perhaps product adjustment. How effective and
efficient are the customer services that the organisation provides?
What guarantees and warranties are offered to the customers? Does
the organisation listen to customers’ complaints and then act on
them?

5.4.2.2 Support activities

In any organisation and industry there are support activities that add
value by themselves or through the important relationships they have
with all the other activities in the organisation. The performance of the
primary activities depends on the support activities. Human resources
play an important role, for example, in customer services. If an
organisation does not have competent and motivated employees,
quality customer services cannot be rendered. Effective marketing
cannot take place without competent and motivated employees. The
support activities also have some important value aspects that should
be in place to add value to the customer. Support activities include the
following:

Procurement. This activity refers to the function of purchasing

inputs. There is an overlap between this activity and the primary
activity known as input logistics. This support activity, however,
refers to the actions that can be taken to optimise the quality and
speed of the procurement of inputs, and not to the inputs themselves.
Questions that should be answered include: Are the resources
procured at the lowest possible cost and acceptable quality levels?
Are sound relationships being established with suppliers?
Technological development. Technology is important for all
activities, and includes the different processes and equipment used
throughout the entire value chain. Questions that should be
answered include: What is the level and quality of technological
development? To what extent can the technological activities meet
the critical deadlines? Does the organisation have a culture of
enhancing creativity and innovation?
Human resources management. The importance of this activity
cannot be overemphasised, because the recruitment, selection,
training and remuneration of employees will affect all levels of the
organisation. The aspects that are important for this activity include
the following: How effective are the human resources management
procedures? What is the level of employee motivation? What can be
done to ensure a quality working environment?
General administration and infrastructure. It is important for the
organisation to achieve its overall goals. That is why there must be a
 general administration and organisational infrastructure in place, for
example effective and efficient planning systems. The issues that
should be addressed are: Are all the value chain activities
coordinated and integrated throughout the organisational value
chain? What are the relationships with all the stakeholders of the
organisation? What systems are in place to ensure a good public
image and reputation?
Financial management. Porter did not originally include this
activity in the value chain. It is, however, important that sound
financial practices should be in place throughout the value chain. All
activities must adhere to effective financial recording and control.
The issues that should be addressed are: Are all the value activities
recorded according to sound financial principles as described in
GAAP (Generally Accepted Accounting Practices)? What systems
are in place to ensure effective financial recording?

If there are no efficient management systems in place with regard to all

the activities in the value chain, an organisation will quickly
experience problems such as inventory shortages, ineffective
marketing and sales, slow response to competitors’ actions and
perhaps also inefficiency in its operations. All of these activities are
important and if every activity is viewed as part of an interconnected
process in the organisation, it will be possible for the organisation to
optimise value and profit. This is the advantage of this approach,
because it emphasises the importance of customer value.

However, it is important to remember that each organisation will have

its own unique primary and support activities and should be analysed
to identify strengths and weaknesses. This is, however, something that
makes the approach somewhat confusing and complex, because it is
sometimes difficult to fit the organisation’s work activities neatly into
this primary and support activities framework. The important issues
are to identify the organisation’s own unique chain of activities and for
it to do everything in its power to optimise value for the customer.

It is very important to emphasise the extent to which value chain

activities support the current strategy of the organisation. If the
organisation is following a low-cost strategy, then the activities in the
value chain must be organised in such a way as to support the strategy
of minimising costs. If the strategy of the organisation is based on high
quality, then all activities must be configured to ensure the high quality
of products or services. The strategic alignment between the value
chain activities and the strategy cannot be overstressed.

5.4.3 Functional approach

An effective and simple approach to internal environmental analysis
and to identifying strengths and weaknesses is to conduct an internal
audit using a functional approach. The usual business functions in
almost all organisations are finance and accounting, marketing,
production, purchasing, corporate communications (public relations),
human resources and administration. Research and development may
also be added. It is, however, important to remember that individual
organisations are likely to have their own unique functions that may
not be covered by the functions just listed. The premise of the internal
audit is that it can be conducted by analysing the organisation’s
functional activities. In the same way as the value chain approach
assumes that the organisation needs customers and that the customers
expect value in order for the organisation to achieve a competitive
advantage, the premise of the internal audit is that every organisation
has specific functions that it must perform in order for the organisation
to deliver the final product or service. Therefore an internal audit can
be regarded as an assessment of the various functional areas of the
organisation.

What are the issues in the functional areas that should be included in
an internal audit? Table 5.2 lists some of the internal audit questions
that can be asked to assess the strengths and weaknesses of each of the
functional areas. This is, of course, not a comprehensive list and it
remains the responsibility of every organisation to determine its own
internal audit questions.

Table 5.2 Some internal audit questions regarding the functional areas
Financing What is the organisation’s position with regard to profitability?
and What is the organisation’s position with regard to its solvency?
accounting
What is the organisation’s position with regard to its liquidity?
What is the organisation’s position with regard to its cash-flow
situation?
What is the organisation’s position with regard to its working
capital position?
Is the organisation able to raise long-term and short-term
capital?

Marketing What is the organisation’s position with regard to its overall

marketing strategy?
What is the organisation’s position with regard to its pricing
strategy?
What is the organisation’s position with regard to its promotion
strategy?
What is the organisation’s position with regard to its distribution
strategy?
What is the organisation’s position with regard to new products
and services?
What is the organisation’s position with regard to its marketing,
planning and control techniques and tools?

Production What is the organisation’s position with regard to its facilities,

offices, machinery and equipment?
What is the organisation’s position with regard to its quality
assessment of products and services?
What is the organisation’s position with regard to effective and
efficient inventory control policies and procedures?
What are the specific competencies in the area of production?
What is the organisation’s position with regard to its production
capacity?

Research What is the organisation’s position with regard to its research

and and development facilities?
development What is the organisation’s position with regard to its culture of
creativity and innovativeness?
What is the organisation’s position with regard to its inclination
towards new products?
What is the organisation’s position with regard to the
appropriateness of research and development tools and
 techniques?

Human What is the organisation’s position with regard to the

resources competency levels of its employees?
What is the organisation’s position with regard to its overall
human resources management (recruitment, selection, training,
etc.) procedures and policies?
What is the organisation’s position with regard to the morale of
its employees?
What is the organisation’s position with regard to the level of
employee turnover?
What is the organisation’s position with regard to applying self-
managing work teams?

Source: Adapted from Coulter (2002: 137–139)

The major objective of the internal audit is to determine how well or

poorly these functions are being performed and what resources these
functional areas actually need to perform effectively. The disadvantage
of this approach is, however, that the attention is focused entirely on
the functional areas, while there is no determination of whether a
specific functional area makes an important contribution to the
organisation’s competitive advantage.

5.5 The SWOT matrix

The question can now be asked as to how to use the information

gained from the internal analysis. After the completion of a SWOT
analysis the organisation knows what the strengths and weaknesses of
the internal environment and what the opportunities and weaknesses
from the external environment are (Chapter 6). The strategic decision
makers in the organisation are now armed with enough information
about the positive and negative aspects from the environmental
analysis. Obviously a matrix can be developed where one includes the
lists of the different strengths, weaknesses, opportunities and threats
that one has identified during the environmental analysis. A SWOT
matrix is composed of nine cells, the left top of which is always left
blank. The SWOT matrix is schematically represented in Figure 5.5:

Figure 5.5 Components of a SWOT matrix

The internal strengths are matched with the external opportunities and
possible strategic goals are recorded in the cell SO strategic goals. One
of the strengths of an organisation might be that there are adequate
financial resources. This can be used to open a new branch in another
town because the market opportunity exists. Next the internal
weaknesses are matched with the external opportunities and recorded
as possible WO strategic goals. It is sometimes difficult to match an
external opportunity with a weakness. It is, however, important to
remember that an opportunity should not be pursued if the organisation
does not have the corresponding strength to support it.

Match the internal strengths with the external threats and record the
outcomes as possible ST strategic goals. The threat may be that a new
competitor is entering the market (a threat), but because of competent
employees (strength) it is possible to develop a strategic goal of
delivering an outstanding customer service to protect the organisation
against the new competitor. Next the internal weaknesses are matched
with the external threats and WT strategic goals are recorded. These
types of strategic goals are defensive in nature. A typical approach that
must be followed by the organisation is to stay away from “tempting”
(risky) decisions that can harm the organisation.

After the completion of this matrix one ends up with four sets of
strategic goals, namely SO, WO, ST and WT goals. It is very
important to apply good judgement in developing them. They should
be carefully analysed and evaluated as alternative strategic options. It
is of course also possible to develop strategic goals to strengthen and
maintain the strengths and to turn around the weaknesses.

It is important to remember the following:

SO strategic goals use the organisation’s internal strengths to take

advantage of the external opportunities that exist.
WO strategic goals are trying to improve the organisation’s
weaknesses by taking advantage of the external opportunities.
ST strategic goals use the organisation’s internal strengths to try to
avoid the possible external threats.
WT strategic goals are defensive by nature and try to reduce the
internal weaknesses and also avoid the external threats to the
organisation.

Note that the different strategic goals chosen in the different cells
provide feasible strategic goals that can be pursued with a given
strategy (see Chapters 8 and 9). It helps the organisation to identify
some viable options available to the organisation. These goals give the
organisation an idea of what resources are going to be involved and
what other implications there are. It is obvious that the SO strategic
goals are commonly associated with growth strategies, while the WT
strategic goals are more defensive in nature. The other two strategic
goals (WO and ST) may be associated with aggressive or defensive
strategies, depending on the specific factors chosen.

5.6 Summary

It is important for any organisation to carry out an internal

environmental analysis before any strategic decisions are taken. The
traditional approach to an internal environmental analysis is the SWOT
analysis. The approaches discussed in this chapter help with the
identification of the strengths and weaknesses in the SWOT analysis.

The RBV and the value chain analysis perhaps provide better and more
useful frameworks for an internal analysis. In the resource-based
approach the organisation is considered as a combination of tangible
and intangible resources and organisational capabilities. An
organisation can gain a sustainable competitive advantage if it has
scarce resources, or resources and capabilities that would be difficult
to imitate. When using the value chain analysis, the activities of the
organisation must be divided into the categories of primary and
support activities. All the activities performed by the organisation must
then be analysed in terms of the value that the specific activity will add
for the customers. Instead of simply determining the strengths and
weaknesses of the organisation, the value chain of activities is
analysed to determine which activities contribute to a competitive
advantage.

The internal environment of the organisation can also be assessed by

using a functional approach when doing an internal audit. This is a
useful approach if it is also possible to determine which functional area
really contributes to a sustainable competitive advantage position for
the organisation. This chapter concluded with the SWOT matrix, a
useful method for evaluating the strengths, weaknesses, opportunities
and threats and identifying some strategic goals.

Exploring the web

Explore some of the websites of South African companies and try to identify their
internal strengths and weaknesses:
http://www.picknpay.co.za
http://www.sab.co.za
http://www.shoprite.co.za
http://www.toyota.co.za

References and recommended reading

Campbell, D., Stonehouse, G. & Houston, B. 2002. Business strategy: an

introduction, 2nd ed. Oxford: Butterworth Heinemann.
Coulter, M. 2002. Strategic management in action, 2nd ed. Upper Saddle River, New
Jersey: Prentice Hall. (Electronically reproduced by permission of Pearson Education,
Inc.).
David, F.R. 2001. Strategic management, 8th ed. Upper Saddle River, New Jersey:
Prentice Hall.
Dess, G.G. & Lumpkin, G.T. 2003. Strategic management: creating competitive
advantages. New York: McGraw-Hill.
Ehlers, T. & Lazenby, K. 2010. Strategic management, Southern African concepts and
cases, 3rd ed. Pretoria: Van Schaik.
Fin24. 2016. Capitec is SA’s favourite bank – poll. Available at
http://www.fin24.com/Companies/Financial-Services/capitec-is-sas-favourite-bank-
poll-20160406 (accessed 7 March 2017).
Fin24. 2011. People prioritised. Available at: http://www.fin24.com/Special-
Reports/Featured-In-Finweek/AFGRI/People-prioritised-20111014 (accessed 25
January 2013).
Fin24. 2012. Reputation and track record vital. Available at:
http://www.fin24.com/Special-Reports/Bidvest/Reputation-and-track-record-vital-
20120611 (accessed 24 January 2013).
Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2003. Strategic management:
competitiveness and globalization, 5th ed. Mason, Ohio: Thomson Learning.
Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. 2013. The management of strategy:
concepts and cases, 10th ed. Canada: South-Western.
Ocean Basket comes out tops in the South African Customer Satisfaction Index for
Restaurants. 2016. Available at: http://sacsi.consulta.co.za/viewarticle.aspx?
id=1549&type=1&cat=60 (accessed 6 March 2017).
Pearce, J.A. & Robinson, R.B. 2003. Strategic management: formulation,
implementation and control, 8th ed. Boston: McGraw-Hill.
Rayport, J.F. & Sviokla, J.J. 1995. Exploiting the virtual value chain. Harvard Business
Review, 73(6): 75–85.
Shoprite. 2017. Available at: https://www.shoprite.co.za/about-us.html;
https://www.shopriteholdings.co.za/group/drivers-success.html;
https://www.shopriteholdings.co.za/;
http://www.shoprite.co.za/pages/127416071/About.asp (accessed 8 March 2017).
Thompson, A.A. & Strickland, A.J. 2003. Strategic management: concepts and cases,
13th ed. New York: McGraw-Hill.

Case study

McDonald’s

Where did McDonald’s begin? In Des Plaines, Illinois, America. Ray

Kroc opened the Des Plaines restaurant in 1955. The first day’s
revenues were only $366.12. A big idea called the “Big Mac” was
introduced across the franchise in 1968. This was the brainchild of Jim
Delligatti, one of Ray Kroc’s earliest franchisees, who by the late
1960s operated a dozen stores in Pittsburgh.

In the 1990s and early 2000s, McDonald’s transformed its corporate

image by launching the “Fast and Convenient” campaign that involved
the radical adjustment of the company’s product portfolio to emerging
food industry trends. McDonald’s restaurants were refurbished to
achieve a more natural dining environment. The “fast” and
“convenient” elements of the McDonald’s concept were later
supplemented by the “healthy” and “more natural” element, by adding
salads, fruit and carrot sticks to the menu. In America, Mexican
burgers were also beginning to make inroads to satisfy the needs of the
large Hispanic population.

Nowadays, McDonald’s continues to broaden its product portfolio by

offering high-quality coffee and healthy drinks (either through its
traditional restaurants or the cafés), competing head to head with some
coffee shops. In America the McCafe’s are competing with Starbucks.
McDonald’s further benefited from a sound franchise business model –
a form of collective entrepreneurship that allows its franchisee
members, management and shareholders to share the risks and rewards
from the discovery and exploitation of new business opportunities.
McDonald’s model has become the norm for other franchise
organisations.

The franchise utilises an excellent operations strategy to gain a larger

market share and to increase value for the shareholders. The
corporation specifically focuses on speed, standardisation, quality and
affordability. McDonald’s has moved ahead of the competition by
focusing on the three main bases – speed, affordability and
standardisation – to make their customers happy. Through extensive
market research and surveys, the organisation discovered that the top
priority of its customers was speed. Speed is a key factor in
McDonald’s operation strategy – from the moment a customer places
an order until he or she leaves. To reduce the amount of time it takes to
provide services, the company uses standardised training processes for
its employees and new drive-though layouts.

McDonald’s also competes by offering low prices. To offer quality

products at low cost requires efficient processes throughout the entire
organisation. Once again, this goal links to its vision statement
claiming that the franchise will be the most efficient provider by
offering the best value to the most people. McDonald’s incorporates
several avenues to provide great value to its customers. One example
that the company has employed for many years is the value meal.
Globally, McDonald’s is fighting declines in customer traffic, a result
of weak consumer spending worldwide. According to the
organisation’s CEO, Don Thompson, the value-driven strategy is an
effort to compete for budget-minded consumers. Value is critical,
because the consumer is still financially weak, facing higher petrol
prices, increased taxes and high unemployment. Value is the number
one driver of customer traffic.

McDonald’s opened its first restaurant in South Africa in November

1995. Today, it operates 170 restaurants in all nine provinces of South
Africa.

South Africa is now one of the most successful markets in the

franchise’s international history. A record was set when South Africa
opened 30 restaurants in only 23 months, at one stage opening 10
restaurants in 78 days. McDonald’s has already invested more than
R750 million directly in the South African economy and is committed
to the success of the South African market.

McDonald’s is renowned for its training throughout the world. South

African crew members receive comprehensive training in restaurants
across the country. The company has trained and employed over 7500
South Africans at various levels, including franchisees, restaurant
managers and crew. In 2011, it was voted as the best company to work
for in South Africa for the third consecutive year.

More than 97 per cent of all food served in McDonald’s restaurants is

produced by local South African suppliers to meet the organisation’s
highest quality standards. All the South African McDonald’s
restaurants are approved by the Muslim Judicial Council Halaal Trust.
The franchise is also absolutely committed to preserving and
protecting the environment. McDonald’s is focused on taking a total
“life cycle” approach to solid waste. When it comes to protecting
endangered tropical rainforests, McDonald’s maintains a strict policy
against buying beef from rainforest lands. These are only some of the
initiatives McDonald’s takes in helping to protect the environment.
Source: Adapted from the following websites, all accessed 25 April 2013:
http://www.forbes.com/sites/panosmourdoukoutas/2013/04/25/starbucks-and-
mcdonaldswinning-strategy/
http://www.studymode.com/essays/Mcdonalds-Operation-Strategy-439189.html
http://www.mcdonalds.co.za/
http://www.nacsonline.com/News/Daily/Pages/ND0416132.aspx

CASE STUDY QUESTIONS

1. How does McDonald’s create value for its customers?

 2. What are the important competencies and capabilities of
McDonald’s?
3. Using a value chain approach, determine which activities can be
identified that really add value to McDonald’s.

Strategy exercises

1. Visit an organisation of your choice. Ask the manager or owner

what he or she regards as the most important strengths and
weaknesses of his or her organisation.
2. An organisation has zero debt on its balance sheet. This can be
regarded as a positive issue. Explain why it can be regarded as a
strength, but may also be seen as a weakness.
3. Value chain analysis has become a popular way to do an internal
environmental analysis. Explain why.
 6 External environmental
analysis
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Describe all the elements of the external environment

Apply all the elements of the macroenvironment in the environmental analysis of
an organisation
Describe and identify what an industry is and how to do an industry-competitive
analysis by using Porter’s model
Construct a strategic group diagram for an organisation
Analyse the importance of key success factors for an organisation

6.1 Introduction

It is inevitable that the organisation and the environment in which it

operates influence each other as parts of an open system. The
organisation cannot be successful if it is not in step and aligned with its
external environment. The fact that the organisation interacts with its
environment means that it will both affect and be affected by the
environment. This means that the organisation draws its inputs, such as
human, physical, financial and informational resources, from the
external environment and distributes its products and services back
into the environment. If, at a given moment, the organisation is in
touch with its environment (meaning that the organisation, with its
available resources, can take full advantage of the available
opportunities, and there are few or no threats), it does not mean this
relationship will continue unruffled. The underlying challenge for the
successful survival of an organisation is the realisation by the
orginasation that the environment usually changes faster than the
organisation can adjust to it.

The experience and research of organisations suggest that their growth

and profitability are affected by what is happening in the external
environment. Because of the increasing turbulence and continuous
changes in markets and industries around the world, external
environmental analysis has become an explicit and vital part of the
strategic management process.

External environmental analysis focuses attention on identifying and

evaluating trends and events beyond the control of a single
organisation, and also reveals key opportunities and threats
confronting the organisation that could have a major influence on the
firm’s strategic actions. If this external environmental analysis is done
thoroughly, it enables managers to formulate strategies to take
advantage of opportunities and avoid or reduce the impact of threats.
The concepts of opportunity and threat have been explained in Chapter
5 as follows:

An opportunity is a favourable condition in the external

environment. If an opportunity is seized by the organisation
to its advantage, strategic competitiveness can be achieved.
An example of an opportunity for an organisation with a big loan is
a decrease in the interest rate by the Reserve Bank.

A threat is an unfavourable condition in the external

environment that may hinder an organisation’s efforts to
achieve strategic competitiveness. An example of a threat for
an organisation with a big loan is when the Reserve Bank increases
the interest rate.

After external opportunities and threats have been identified, evaluated

and matched with knowledge about the internal environment (the
organisation’s strengths and weaknesses), it will be easier for the
organisation to pursue its vision and mission, to design strategies to
achieve its long-term goals, to respond either offensively or
defensively to the factors, and to develop policies to achieve the goals
that will result in strategic competitiveness and above-average returns.

To build their knowledge and capabilities and to take actions that

buffer or build bridges to external stakeholders, organisations must
effectively analyse the external environment. Technological
improvement, economic fluctuations, changing social values, political
changes, aggressive international competition and the like continually
change the environment in which an organisation exists in such a way
that it has to adapt to ensure survival. If one looks at the environment
that confronted the retail sector (see Strategy in action 6.1), it is clear
that the external business environment plays an important role in the
strategic decisions of organisations.

Strategy in action 6.1 The retail environment

The business environment during the past two years presented many
challenges to the retail sector. Although buffered against the worst of the
international fallout by its prudent fiscal policies, South Africa’s growth has
slowed down. This is the result not only of the problems experienced by its
major trading partners, but also because of the strength of the rand and
structural problems in the economy itself.
The competition among food retailers in the South African market remained
fierce. Against the background of the low performance of the economy as a
whole, the disposable income of consumers, particularly those in the lower-
income groups, came under increased pressure. Factors such as high
household debt and the increasing cost of essential services like electricity and
transport eroded their income and resulted in a lower spending power. Although
a strong rand has partially shielded local consumers from the full effect of
international food and energy costs, the stronger rand has hampered exports
from South Africa and inhibited job creation.
Although the sale of durable goods such as motor vehicles saw a resurgence
as more affluent consumers took advantage of low interest rates, spending on
fast-moving consumer goods (typical products in a supermarket) remained
depressed with few factors present that indicate an improvement. Management
is growing increasingly concerned over the ability of many smaller local
suppliers to survive, because high input costs and rigid labour regulations make
it increasingly difficult for them to remain competitive in relation to imports.
Their failure and departure would not only increase unemployment in some of
the sectors in which the major supermarkets do business, but would also
jeopardise supplies of certain product categories.
 Source: Adapted from http://www.fastmoving.co.za/retailers/shoprite-holdings-
ltd-2 (accessed 14 January 2013)

A continuous process of external environmental analysis is therefore

very important and includes four interrelated activities, namely,
scanning, monitoring, forecasting and assessing:

Activity 1: Scanning – to identify early signals of any

environmental changes and trends.
Activity 2: Monitoring – through ongoing observation, the
meaning of these environmental changes and trends are detected.
Activity 3: Forecasting – based on the monitored changes and
trends, some projections and anticipated outcomes are developed.
Activity 4: Assessing – the environmental changes and trends are
assessed in order to determine their influence and effects on the
organisation’s strategy. The strategic implication of the importance
of these changes and trends is determined.

Several sources can be used to analyse the external environment,

including a wide variety of printed material and trade shows.
Suppliers, customers and external network contacts can be particularly
rich sources of information. Salespeople, purchasing managers and
customer service representatives are also examples of information
sources. It is important that as many sources as possible should be
analysed to obtain the information needed to determine the relevant
external issues for the organisation.

6.2 The external environment

For organisations to be able to understand the present and predict the

future, an integrated understanding of the external and internal
environments is essential. An organisation’s external environment is
divided into three major areas – the global, macro- and industry or
market environments (see Figure 6.1).

Figure 6.1 The different environments of an organisation

The external environment is composed of all the dimensions in the

broader society that influence an industry and the organisation within
it. For organisations to achieve strategic competitiveness, they must be
aware of, and understand, all the dimensions of the external
environment. It is also important to understand that the elements of the
external environment not only influence the organisation and the
decision making of managers of organisations, but also one another. It
is common knowledge that a political decision can have a major
influence on a country’s economic climate and vice versa (see Strategy
in action 6.2).

Strategy in action 6.2 How government can turbo-charge South Africa’s

growth

The government has the opportunity to boost much-needed economic growth in

South Africa by creating a stable political environment and the right policies for
small businesses. This is the message from Anton van Heerden, managing
director and executive vice-president at Sage for Africa and the Middle East.
“By listening to small business owners and supporting them with a stable
 political environment and the right policies, government has the opportunity to
turbo-charge South Africa’s growth.”
A global research report published by Sage ahead of the World Economic
Forum indicates that almost half (46%) of the respondents singled out export
opportunities and grants as being the most important things that government
could do to help small entrepreneurs. Improvements around political stability
(45%) were highlighted as the second most important, while creating a stable
regulatory environment ranked third (38%). Van Heerden explained that it is
promising to see the South African government putting the small and medium
business sector at the centre of its economic policies.
Source: Adapted from http://www.fin24.com/Entrepreneurs/News/how-govt-can-
turbo-charge-sas-growth-20170118 (accessed 6 March 2017)

Continuous changes are taking place in the external environment in

which organisations have to operate and compete. For example, the
South African community, with its different cultures and values,
decided in 1994 to send the ANC to parliament as the ruling party. The
ANC government now decides what the new political structure is and
this structure in turn marshals the social and economic activities of the
community. Politics and economics are intertwined. Economics is
influenced by the trend of the policies that are to be followed. The
result of this is a set standard of living for the community, thus having
an influence on the social environment, which in turn will influence
organisations.

An important principle is that organisations cannot directly control the

external environment’s segments and elements, but these elements and
changes in the external environment have a major influence on
organisations.

The following are some examples of how the external environment

will influence an organisation:

Consumer demand for both industrial and consumer products and

services will be influenced by changing economic and social
conditions.
Types of products needed by customers may result from changes in
the social environment and must be developed by organisations.
 Tough economic situations may require different types of services
(e.g. new and improved financial services) for customers and these
need to be rendered by organisations.
The economic climate can influence the choice of businesses an
organisation will choose to acquire or sell.
Competitors’ actions and reactions in the market environment.
The selection of suppliers and distributors.
Government regulations and laws and their influence on
organisations.

Organisations need to anticipate, mobilise and empower their

managers and employees to identify, monitor, forecast and evaluate
key external forces, otherwise they may fail to anticipate emerging
opportunities and threats. In Strategy in action 6.3, the changing trends
in the South African business environment are evident. Apart from a
tough business climate, the world of technology, connectivity and
communication will continue to advance relentlessly. As technological
connectivity increases, more options, sources and layers of information
will become available. Even though ecommerce is still in its infancy in
South Africa, it is clear that information is, and will be, increasing to
change the way we consume in South Africa. Read Strategy in action
6.3.

Strategy in action 6.3 Changing trends in South Africa

Facebook and Twitter are forever changing the face of communication. It is also
evident that ecommerce is picking up in South Africa, as people search for
better value, while more international offerings gear up to deliver locally and
local offerings mature. Perceptions of Asian brands are strengthening as
manufacturers like Hyundai continue to close the quality gap on Western
brands while at the same time offering much better value in terms of
affordability and quality. “Made in China” is also becoming an indicator of good
value.
More local retailers are also adopting loyalty and value programmes like Pick n
Pay’s Smart Shopper, as well as other tricks learnt from retailers in more
developed markets.
Source: Adapted from
http://www.bizcommunity.com/Article/196/467/69269.html (accessed 6
 December 2012)

6.2.1 The South African environmental context

It is relevant to briefly consider the sociopolitical context of the South
African economy. It must be stressed at the outset that the challenges
and the complexities that are facing South Africa cannot be separated
from the broader international environment. South African
organisations will have to put in a lot of effort to survive against
international competition.

The “new” South Africa since the democratic elections in 1994 still
has a long way to go in terms of economic and social transformation.
The major threat and challenge for South African organisations is to
manage the problem of inequality. Inequality is measured by the Gini
coefficient, which normally varies from 0 (perfect equality) to 1,00
(perfect inequality). The economic inequality in South African society
at the beginning of this century was estimated at 0,69. It has remained
virtually unchanged. The impact of income and status inequalities in
South African society undermines social cohesion, efficiency and
economic growth. This definitely also has a negative influence on
family life and individuals. It also influences the economic
environment in the country. The distortion of resource allocation in the
labour market, the difference in the levels of savings and investments
and the high unemployment levels in South Africa are but a few of the
factors that can be attributed directly or indirectly to the inequality
problem.

Some of the characteristics of the external environment of

organisations in the South African context include the high
expectations of some citizens of a decrease in this level of inequality,
their growing impatience for a dramatic improvement in their quality
of life, the fear of losing everything, and high rates of violence and
crime. It is also true that feelings of uncertainty and mistrust between
different groups continue to exist in South Africa.
These are but a few issues that contribute to the external environment
of South African organisations. There are many more elements in the
complex and dynamic economic and social environment that play an
important role. It is, however, important for South African
organisations to understand this in order to compete in a global
environment.

6.3 The macroenvironment

The different dimensions of the macroenvironment are grouped into

five environmental segments, which will be discussed in more detail.
One must never forget that these five segments operate in the broader
context of the global environment. The trends in these segments can
have a positive (opportunity) or a negative (threat) impact on an
organisation. There are, however, changes that occur in the different
environmental segments that will not have an effect on an
organisation. A change in one of these sectors may pose a threat for
one organisation, but for another organisation it can be an opportunity.
For an organisation with high outstanding debt, a decrease in the
interest rate will be an opportunity (advantage), but for an organisation
with interest-bearing investments, it is a threat (disadvantage). While
the effects of these influences cannot be controlled, they do have
serious consequences for the organisation. The elements of the
macroenvironment, also known as PESTE factors, or SPENT factors,
include the following:

Political, governmental and legal forces

Economic forces
Social, cultural and demographic forces
Technological forces
Ecological or physical (natural) forces
The elements that should be analysed in external environmental
analyses are shown in Figure 6.2.

Figure 6.2 Elements of the macroenvironment

6.3.1 Political environment

The political environment includes the parameters within which
organisations and interest groups compete for attention, resources and
a voice in overseeing the body of laws and regulations that guide the
interactions between organisations and the environment. Essentially,
this aspect represents how organisations try to influence government
and how government influences them. Political decisions by
government can have a tremendous influence on the economy and the
social structure of a country – events in Zimbabwe are a good
example. Organisations throughout that country have been severely
affected by the decisions of the government.

Any government is a major regulator, deregulator and subsidiser, and

may also be an employer and customer of an organisation. In this
respect the South African government has certain aims that will
definitely have a positive influence on organisations, if achieved. If
these aims are not achieved, the result will be a threat to the existence
of some organisations. These aims are to

enhance the process of social and economic transformation

emphasise the effectiveness and efficiency of delivery in respect of
government actions and initiatives
stimulate job creation in partnership with the private sector
be seen as serious in its approach to dealing with law and order.

Political, governmental and legal factors can represent key

opportunities or threats for both small and large organisations. Local,
provincial and national laws and regulations and special interest
groups can have a major impact on the strategies of all organisations.
Changes in tax laws, changes in patent laws, legislation on equal
employment, antitrust legislation, the level of government spending
and any other government regulations and deregulations can have a
major impact on an organisation. The deregulation of fuel prices could
pose a serious threat for small filling stations, but at the same time it
could be a tremendous opportunity for the Shell Ultra City
organisation, because they would decrease the price of petrol to attract
more customers. They would try to get a competitive advantage by
offering lower prices. Another example would be the laws about
smoking, which clearly also have an influence on organisations (see
Strategy in action 6.4).

Strategy in action 6.4 Tough new smoking law looms

Health authorities are working on tightening South Africa’s anti-smoking laws,

proposing a total ban on indoor smoking and even making it illegal to puff away
in open spaces such as beaches. Stadiums, zoos, parks, outdoor eateries and
beer gardens would all be affected. On beaches, smoking would only be
allowed at least 50 metres from the closest person.
It is the second time in five years that South Africa has tried to amend its
legislation to make it even harder for smokers to indulge in their habit. Even
before the regulations are debated and final decisions made, however, many
smokers are fuming, labelling the plans as “extreme”, “shameless” and an
 intrusion on people’s rights. If the regulations went through, they could
constitute a breach of freedom and even result in job losses, the Free Market
Foundation suggests. Since the 2007 regulations, no one smokes in shopping
malls anymore.
Hoteliers appear unfazed by the pending changes. “There may be certain
discomfort for restaurants and pubs, but for the hotels, I don’t think there will be
an impact from a revenue point of view,” said Eddie Khosa of the Federated
Hospitality Association of Southern Africa. If the changes are adopted, South
Africa would become the first African country to go smoke-free.
Source: Adapted from http://www.iol.co.za/news/south-africa/tough-new-
smoking-law-looms-1.1326090 (accessed 10 December 2012)

The direction and stability of political factors in a country are major

considerations for managers when they have to formulate strategy for
their organisations. Managers of large organisations are spending more
time anticipating and influencing public policy actions, and meeting
with government officials, trade groups and industry associations,
because they know what the influence of political and legal issues will
be on their organisations.

There are a number of political constraints that are being placed on

organisations. These include company tax and other tax-related
decisions and laws by the government, and minimum wage legislation
with regard to domestic and farm workers. The pressure to increase the
minimum wage of farm workers disproportionately will influence
farmers’ decision making because it will affect their cash flow and
profit potential. Although tax laws and regulations tend to reduce the
profit potential of organisations, some political actions are designed to
benefit and protect them. Pricing policies, such as the regulation of
fuel prices mentioned previously, also influence organisations.

It is imperative for organisations to consider the possible impact of

political variables on the formulation and implementation of
competitive strategies because of the increasing global
interdependence among economies, markets, governments and
organisations. Increasing global competition accentuates the need for
accurate environmental forecasts, and before starting or expanding
international operations, strategists need a good understanding of the
political and decision-making processes in countries where their
organisations may conduct business.

6.3.2 Economic environment

The health of a nation’s economy affects individual organisations and
industries because economic factors affect the nature and direction of
the economy in which an organisation operates. This is why
organisations have to study the economic environment to identify
changes and trends, and their strategic implications. Economic factors
have a direct impact on the potential attractiveness of various
strategies and consumption patterns in the economy, and have
significant and unequal effects on organisations in different industries
and in different locations. Inflation, recession, interest rates and so on
influence the demand for goods and services because consumers are
forced to reconsider their consumption priorities. An inflation
expectations survey in South Africa has also sent a worrying message:
business and trade unions, which are the main price setters in the
economy, see that inflation is on the increase and believe it will be
difficult to keep it within the South African Reserve Bank limits of
between three and six per cent.

It is important for organisations to be aware of the economic situation

in a country. Managers have to consider the unemployment rate, the
level of disposable income, the availability and cost of credit, and the
trends in the gross domestic product (GDP) – the total value of goods
and services produced in a country in one year. If the growth rate in the
GDP is lower that the growth rate of the population, it is logical that
there will be a decline in the standard of living. This knowledge is
important on both a national and an international level.

The monetary policy of the government, especially that of the South

African Reserve Bank, influences the flow of foreign capital into
South Africa. High interest rates favour capital inflow, but are less
advantageous for South African consumers, while lower interest rates
will have a negative impact on capital inflow in South Africa. The
lower interest rates over the past few years have had a favourable
influence on the spending of consumers in the South African market.
The sharp decline in the value of the South African currency in 2002
and its subsequent recovery in 2017 also have an influence on the
strategic planning of South African organisations. Read Strategy in
action 6.5.

Strategy in action 6.5 Why the South African Reserve Bank will not cut
rates until 2019

Emerging markets economist Peter Montalto of Nomura believes the South

African Reserve Bank (SARB) will not cut its repo rate of 7 per cent until 2019.
He based his argument on the context of a downgrade and political risk, a dual
deficit and structural issues in the government as a key driver for growth. He
argued, however, that the SARB is opportunistic and will look for any excuse to
cut the interest rate. Good news for South Africa is, however, that the rand
gained 5,2 per cent to the dollar in 2017, the best start to a year since 2012.
The drought ended and inflation eased to 6,6 per cent in January 2017, the first
slowdown in five months. GDP growth in the fourth quarter of 2016 was 0,3 per
cent, which is lower than the 1,3 per cent reported in 2015. Data also shows
that there is little momentum in the economy and still negative per-capita
income growth.
Source: Adapted from http://www.fin24.com/Economy/why-sa-reserve-bank-
wont-cut-rates-until-2019-20170308 (accessed 8 March 2017)

6.3.3 Sociocultural environment

The sociocultural environment is concerned with a society’s attitudes
and cultural values. Small and large profit-making and not-for-profit
organisations in all industries are challenged by the opportunities and
threats arising from changes in social, cultural and demographic
variables. These variables shape the way people live, work, produce
and consume (see Strategy in action 6.6).

Strategy in action 6.6 Pressures in the social environment

In South Africa the fertility rate is declining in both urban and rural areas,
although the overall fertility rate is still high. Reduced fertility rates are
coincident with increased development, industrialisation, economic growth and
urbanisation, changing social structures and social mobility.
The composition of the South African population has changed. Declining infant
mortality rates and increasing life expectancy (both through improved health
care) mean that both the younger and the older sectors of the population have
 grown relative to the middle-age group. The size of the middle-age group of the
population is important, as a proportionately smaller middle-age group means
fewer productive workers, and hence reduced national productivity. This results
in stagnation or a reduction in GDP. The greater proportion of the population
not contributing to production may act as a drain on resources such as health
care, education and service provision, although in many cases the elderly
perform services in the household such as child care.
The population has also become more mobile. Improved communication and
transport infrastructure have facilitated the movement of people. In South
Africa, as elsewhere in the world, the major trend has been movement from
rural to urban areas. Growth of urban areas puts pressure on the immediate
environment by concentrating the demand for resources and the generation of
waste products. Many urban areas are experiencing problems such as a lack of
suitable landfill sites. Where migration is towards informal settlements or
unplanned developments (where there are inadequate sanitation and waste
disposal facilities), problems of pollution threaten environmental integrity and
human health.
Source: Adapted from
http://www.ngo.grida.no/soesa/nsoer/issues/social/pressure.htm
(accessed 10 December 2012)

The growing consumer demand for healthy food products, for instance,
poses an opportunity for organisations. In Strategy in action 6.7 it is
also argued that consumers are influenced by the high prices of
agricultural products. This of course poses a threat to some
organisations, but at the same time the busy lifestyle of some
consumers favours the convenience of the fast-food industry.

Strategy in action 6.7 Price and availability of healthy food

The availability of healthier food choices and whether a healthier diet costs
more than a diet commonly eaten by low-income families in South Africa were
investigated. The price and availability of 66 food items were recorded,
including both commonly consumed foods and healthy options. The prices of
six commonly consumed foods with healthier versions of those foods (e.g.,
whole-wheat bread instead of white bread) were compared. Healthier foods
typically cost between 10 per cent and 60 per cent more when compared on a
weight basis (rand per 100 g), and between 30 per cent and 110 per cent more
when compared based on the cost of food energy (rand per 100 kJ). On
average, for an adult male, the healthier diet costs R10,20 per day more (69
per cent more). For a household with five occupants, the increased expenditure
on food by eating a healthier diet would be approximately R1 090,00 per month.
Healthier food choices are, in general, considerably more expensive than
 commonly consumed foods. As a result, a healthy diet is unaffordable for the
large majority of the South African population.
Source: http://www.hsrc.ac.za/en/research-outputs/view/5302 (accessed 27
April 2013)

Culture in South Africa is not homogeneous. Different subcultures are

not only based on population groups, but also on religion and
geographic location. These subcultures influence organisations and
have implications for management. New trends in the sociocultural
environment are creating a different type of consumer and thus a need
for different products, different services and consequently different
strategies for organisations. There are significant trends in the 2000s
that organisations should be aware of. These trends include consumers
who are more educated, some populations that are ageing, minorities
who are becoming more influential, a higher incidence of single
parenthood, and consumers who are more inclined to buy local
products. If you have a business in a location where a larger group of
elderly people live, you have to realise that they are customers who are
constrained by a fixed monthly income (pension). Single parents also
have the constraints of only one income per household. Such aspects
will definitely have an influence on the strategy of an organisation.
Read Strategy in action 6.8 on the reasons why customers become
more demanding.

Strategy in action 6.8 Ten reasons why consumers are more demanding

According to a new report by Euromonitor International, consumers are now

more demanding of products, services and brands than ever before.
Consumers have become harder to characterise. They are using digital tools to
articulate and fulfil their needs, the research found. As a result of a volatile and
perceived unsafe environment, customers want safety and look to tech tools as
aids in their shopping. On top of that they want to shop faster and with the most
convenience.
The report names the ten top global consumer trends for 2017:

1. Ageing – in 2017 almost a quarter of everyone on the planet will be over

the age of 50. These customers have different lifestyles and are more
demanding in their consumption needs. They need health, beauty and
fashion-forward products and are receptive to tech developments.
 2. Young consumers in training – family and work demands have “forced”
young people into consumption at an earlier stage, according to the report.
Children often stay at home into their 20s and beyond and this gives them
a greater influence on what the family consumes and also turns them into
what is now termed as “consumers in training”.
3. Extraordinary – mass-produced items seem to have lost some of their
shine. So-called “extraordinary consumers” are becoming more outspoken
when their needs are underserved in areas like travel, hotel
accommodation, furniture design and medical care, as well as fashion.
Obese and taller consumers increasingly voice their frustrations regarding
travel challenges and complain when they feel discriminated against by
airlines, especially if asked to pay for two seats.
4. Faster shopping – the digital world has made consumers impatient,
impulsive and in pursuit of immediate gratification.
5. Authenticity – this is a standout consumer value in 2017, like food trends,
particularly green-tinged ones, which are useful indicators of the focus on
authenticity.
6. Personalise it – personalisation of products is a trend as customers
demand that brands fulfil or even predict their needs.
7. Post-purchase – shoppers will be paying more attention to their post-
purchase experience, increasingly an important part of the value offer of a
product or service.
8. Privacy and security – for consumers, personal safety extends to the
need for protection from the elements and environmental threats.
9. Wellness as status symbol – healthy living is becoming a status symbol.
10. Identity in flux – brands are being forced to rethink just who their
audiences really are, within countries and in different countries, and how
they interact with each other. Many consumers aspire to be global in their
purchases.

Source: Adapted from http://www.fin24.com/Economy/ten-reasons-why-

consumers-are-more-demanding-20170118 (accessed 6 March 2017)

Translating all the social and cultural changes in a society into

forecasts for organisations is a difficult process. It remains, however,
important for an organisation to make some estimates in order to be
successful in its strategic planning.

6.3.4 Technological environment

Technological changes affect many aspects of society. These effects
occur primarily through new products, processes and materials, and to
avoid obsolescence and promote innovation, an organisation must be
aware of technological changes that might influence its industry.

Revolutionary technological discoveries and innovations such as

superconductivity, computer engineering, robotics, miracle drugs,
space communications, space manufacturing, lasers, cloning, satellite
networks, fibre optics, biometrics and electronic funds transfers are
having a dramatic impact on organisations, because they create not
only opportunities for some organisations, but also threats for others.

The technological environment includes all the activities involved in

creating new knowledge, and translating that knowledge into new
outputs, products, processes and materials. Given the rapid pace of
technological change (50 per cent of all the products we know today
have been developed in the last 20–30 years), it is vital for
organisations to study thoroughly the technological environment and
the major opportunities and threats that it represents when they
formulate their strategies.

The implications of technological innovation and advancements are as

follows:

They dramatically affect organisations’ products, services, markets,

suppliers, distributors, competitors, customers, manufacturing
processes, marketing practices and competitive position.
They create new markets.
They result in the proliferation of new and improved products.
They change the relative cost positions in an industry.
They make existing products and services obsolete.
They reduce or eliminate cost barriers between businesses.
They create shorter production runs.
They create shortages in technical skills.
 They create new competitive advantages that are more powerful
than existing ones.

No company or industry today is insulated against emerging

technological developments, and the managers of all organisations
need to study the technological environment and to take it into
consideration when doing strategic planning. No organisation can
afford to be left behind when it comes to technological developments.
In Strategy in action 6.9 it is clear that the financial sector is
experiencing a lot of technological innovation.

Strategy in action 6.9 Banks need to brace for digital disruption

The financial sector (fintech) experiences increasing digital innovation, which

will result in the same disruption to the banking sector that Uber has brought to
the taxi industry. This is worrying for established banking institutions, because
they have archaic systems and cannot evolve quickly enough. It is, however,
good news for their customers, as fintech development will provide cheaper,
more efficient services that can be tailored to individual needs.
This glimpse into the future of financial services was presented by a number of
speakers – backed up by numerous start-ups already affecting the sector – at
the recent eCommerce MoneyAfrica Confex in Cape Town. Merchant Capital,
for example, provides upfront business loans paid off through an agreed
percentage of each transaction rather than the traditional model of a fixed
monthly payment. This is one such shift towards customer-centred solutions.
Banks want to get involved but are struggling to find a way to plug in efficiently
and they are highly regulated, while customers are desperate for solutions. This
is the opinion of Paul Feenan, Africa director of Jumo, a tech company that
facilitates financial access through mobile wallets. He said it is not enough for
banks to continue to simply supply loan, insurance or credit products, but they
need to work on an individual level at which the customer could, for instance,
choose the rate at which a loan would be paid back. This will empower the
individual and give him or her choices. This is definitely not the traditional
banking model.
The future would see mobile operators, banks and new entrants trying to grab
the opportunities in the market. There will be a wider range of clients being
offered a wider range of services. For new start-ups and big tech companies,
switching on a little button to transfer money – on WhatsApp, WeChat and so
on – will be the normal way of doing business.
Source: Adapted from http://www.fin24.com/Companies/Financial-
Services/banks-need-to-brace-for-digital-disruption-20170305-2
(accessed 6 March 2017)
There is a close link between the drive to “go green” and technological
developments. In the attempt to be more environmentally friendly,
there is always a search for ways to do things differently and in a more
eco-friendly manner. Industries have to take this into consideration and
must try everything to produce environmentally products and services.

6.3.5 Ecological environment

The ecological or physical environment refers to the relationship
between human beings – and thus organisations – and the air, soil and
water in the physical environment. In analysing the physical
environment, one should consider the potential and actual changes in
this environment and the influence these will have on the business
practices of organisations that are intended to deal with these changes.
It also refers to the limited natural resources from which an
organisation obtains its raw materials. The physical environment is
also the dustbin for waste materials, referred to as various forms of
pollution – air, water and soil pollution. Since the 1960s, protest has
grown against all forms of pollution and the destruction of the physical
environment, because of a growing awareness of the need to conserve
the limited resources of the natural environment.

The global climate is changing and there is enough evidence to show

that human activities are accelerating this change. In South Africa too,
these global climatic changes will have a severe effect on
organisations. If global warming continues, food production will be
affected and may even lead to shortages of some resources. These
aspects will present both opportunities and threats to organisations, and
management must take the influence of the physical environment on
their organisation into serious consideration. Energy consumption is an
important component of the physical environment and should be a
concern for organisations.

Organisations are also severely influenced by the uncontrollable

ecological environment. The drought southern Africa experienced
from 2015 to 2017 is evidence of the influence of the physical
environment on organisations. The invasion of the fall armyworm on
farms is also a threat to food production (see Strategy in action 6.10).
 Strategy in action 6.10 “Pest group” to tackle armyworm invasion –
government

The Department of Agriculture, Forestry and Fisheries (DAFF) has founded a

pest action group and has launched a number of awareness campaigns to
provide farmers with accurate technical information and control options to help
combat the spread of the fall armyworm, which threatens to severely affect food
crops, especially maize. The fall armyworm has invaded many farms across
South Africa and will in all likelihood eat into the profits of maize farmers who
now have to spend thousands of rand on pesticides to fight the invasion. The
arrival of this worm threatens to hurt maize output as Southern Africa is
recovering from its worst drought in over 35 years, even as rainfall improves.
Zambia, Malawi and Zimbabwe have already suffered extensive damage to
tens of thousands of hectares of mainly maize fields because of the armyworm
invasion.
Source: Adapted from http://www.fin24.com/Companies/Agribusiness/pest-
group-to-tackle-armyworm-invasion-govt-20170302 (accessed 6
March 2017)

It is, however, also important that organisations should be aware of

their influence on the ecological environment. There are some
important questions that organisations should answer with regard to
the ecological environment:

Does the organisation have a physical environmental policy?

What is the organisation’s environmental performance so far and
how does it compare with that of other organisations? (What is its
environmental history?)
What will the potential impact of environmental issues be on the
future demand for the organisation’s products or services?
Do environmental issues form part of the organisation’s agenda at
management meetings?
Does the organisation engage objective third-party assessments of
the effectiveness of its environmental management strategy?

These are important questions to answer because any detrimental

effects that the organisation may have on the environment should be
avoided as far as possible out of concern for the environment and to
prevent unfavourable attitudes towards the organisation.

As already mentioned earlier, the analysis of the abovementioned

factors is sometimes referred to as the PESTE (political, economic,
social, technological and ecological factors) analysis. Another
important macroenvironmental aspect that should be analysed is the
global environment. All the factors relevant to the PESTE analysis can
also be applied to an analysis of the global environment. In fact, the
international political, economic, social, technological and ecological
factors must be considered if an organisation is doing business on a
global scale.

6.4 Industry or market environment

A group of organisations that produces products that are

close substitutes for one another, or that customers perceive
to be substitutable for one another and which influence one
another in the course of competition, is known as an industry.

Before an organisation can do an industry environmental analysis, it is

important to find some answers that will help to determine which
strategy is appropriate for, and available to, the organisation. An
organisation needs to know in which industry it is competing, what the
structure of that industry is, what the major determinants of
competition are and which organisations are competitors. In terms of
identifying the industry, the following questions can be asked:

Which organisations have the same type of goals as our organisation

has?
In which industry are these organisations competing?
What are the key ingredients for success in this industry?
It is also important to understand the structure of the industry. Industry
structure depends on certain traits that give the industry its distinctive
character and can be identified by examining four variables:

Concentration. This is the extent to which industry sales are

dominated by only a few organisations. An industry is thus
concentrated if there are only a few dominant organisations. This
may be a threat to potential customers as they do not have many
choices.
Economies of scale. These are the savings that companies achieve
within an industry as a result of increased volume. This may result
in a reduction of prices to capture a greater market share.
Product differentiation. This is the extent to which customers
perceive goods and services offered by organisations in an industry
as different from one another.
Barriers to entry. These are the obstacles or barriers that an
organisation must overcome in order to enter an industry.

In order to perform an industry analysis it is also important to identify

the competitors in that specific industry. To do so, organisations have
to look at the similarity of benefits that customers derive from the
products and services they offer. The higher the similarity of benefits,
the higher the substitutability between them and thus the higher the
competition is between these organisations. An organisation’s industry
environment is also known as the market or task environment and it
comprises the suppliers, intermediaries, customers and competitors.

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

organisation, and they influence management decisions on a daily
basis, because they may affect an organisation’s ability to obtain inputs
or dispose of its outputs. It is clear that the industry or market
environment has a more direct effect than the macroenvironment on an
organisation’s strategic competitiveness and its ability to earn profits.
As in the case of the macroenvironment, management has no control
over these variables, but can influence their effect through changes in
the organisation’s strategy.
The most important task of management in capitalising on the market
environment is to identify, evaluate and exploit opportunities that exist
in the market and to develop the strategy of the organisation in such a
way that competitors and the other variables of this external
environment do not pose a threat to the organisation.

Michael Porter (1980) (of the Harvard Business School, Harvard

University, USA) identified five forces that influence the intensity of
competition in an industry and determine the industry’s profit
potential. This model is more concerned about the structure of the
industry that will influence the average profitability of the industry.
Porter’s Five Forces model consists of the threats posed by new
entrants; the bargaining power of suppliers; the bargaining power of
buyers; product substitutes; and the intensity of rivalry among
competitors. These five forces are illustrated in Figure 6.3. The
collective strengths of these forces determine the ultimate profit
potential of an industry. The model should be applied with this in mind
when determining possible opportunities and threats. The components
of the model can, however, also be used to determine in general what
the opportunities and threats posed by suppliers, customers and
competitors are. There are people who feel that a sixth force should be
added, namely the government, because the government plays an
important role in influencing the profitability of an organisation. This
influence of the government is, however, covered by the PESTE
analysis where its role is identified and analysed when the different
environments are evaluated.
 Figure 6.3 The Five Forces model for industry analysis

In order to deal with these forces, an organisation needs to know how

they work in the industry and how they affect the organisation in a
given situation. Knowledge of these forces also helps to provide the
basis for a strategic plan of action. This model is also important
because it expands competitive analysis, from merely looking at the
closest or known competitors, to a focus where current and potential
competitors must be identified. The issue is that organisations must
identify potential customers as well as the organisations serving them.
The communications industry is a broadly defined industry consisting
of media companies, entertainment companies, telecoms and
organisations with technology-based capabilities that may produce a
product that can be seen as a competitive offering. This illustrates the
point that markets must be defined by customers and their needs rather
than by specific industry boundaries.

6.4.1 Threat of new entrants

Analysing current competitors is not enough. It is also important to
identify new entrants as they can threaten the market share of existing
competitors by bringing additional production capacity to the industry.
This force refers to the possibility that the profits of established
organisations in the industry may be reduced by the entrance of new
competitor organisations. In Strategy in action 6.9 it was pointed out
that the future will see mobile operators, banks and new entrants trying
to grab opportunities in the financial sector.

The sole purpose of a new entrant is to gain sufficient market share in

the industry. Competition will thus be fiercer and this will lead to a
decrease in revenue and lower returns for competing organisations,
unless there is the possibility that the demand for a product or service
will increase.

Two factors influence whether new organisations will enter an

industry. These factors are the barriers to enter the industry and
whether the new entrant will experience or expect fierce retaliation
from current industry participants. If it is difficult to enter due to high
entry barriers, and if an organisation that intends to enter the market
expects fierce reaction from current competitors, it may lead to a low
threat of entry for new entrants. Let us look at these two factors.

6.4.1.1 Barriers to entry

If high entry barriers exist, they make it difficult for new organisations
to enter the industry and thereby diminish the competitive threat these
organisations could have posed. Examples of entry barriers are as
follows:

Economies of scale. Economies of scale are achieved when

production is increased during a given period of time. This results in
lower manufacturing costs because of the spreading of costs over a
larger number of units. In simple terms it means that an organisation
will experience cost savings as volume increases. The advantages of
economies of scale are that they enhance an organisation’s
flexibility, may keep the price constant or even decrease the price of
products and increase profits through volume sales. South African
Breweries is a good example of an organisation with advantages
based on economies of scale. It will be difficult for a new entrant in
the beer industry to operate on the same scale as SAB from the start.
New entrants functioning on a smaller scale do not have these cost
advantages when entering the industry. They also risk strong
competitive retaliation if they manufacture large volumes of a
product to gain economies of scale. For example, a new entrant in
the South African beer market will experience strong retaliation
from SAB. Economies of scale can also refer to effectiveness and
efficiency in distribution, utilisation of the sales force, financing,
and almost any other part of the business.
Product differentiation. Over time an organisation’s service to the
customer, effective advertising campaigns or being the first to
market a product or service leads customers to believe that an
organisation’s product is unique, and they tend to become loyal to
the organisation (see Strategy in action 6.11). Organisations actually
work very hard and spend large sums of money on establishing a
specific identification with their customers. Organisations
sometimes also couple brand identification with economies of scale
in production, distribution and marketing in order to create high
barriers to entry. SAB and Coca-Cola are masters at achieving these
advantages. If a new entrant in the cola industry wants to change the
idea of the uniqueness of Coca-Cola, it will have to offer products
and services at lower prices. However, this will result in lower
profits or even losses, so it will not always result in success.

Strategy in action 6.11 The food industry

The food industry, especially with regard to fast-food restaurants, is thriving.

The industry is largely controlled by the so-called quick service restaurants
(drive-throughs), which are responsible for a large percentage of the total
industry’s revenues. McDonald’s is the industry leader (in the USA), with
revenues that are more than double the next contender on the list. McDonald’s
has concentrated on low prices and quick service to get customers in the door.
Also, marketing is heavily directed at children and families as a fun, safe place
to eat.
The fast-food industry reveals common trends among the big players: toys for
kids, playgrounds, low prices or a value menu. More recently, restaurants have
begun to offer healthier choices on their menus. Entering the “health food”
markets was risky but has been paying off for these restaurants. Another trend
among the industry leaders is the consistency of the products that you buy.
Every outlet of that restaurant will have the same core menus, which can
become monotonous.
Source: Adapted from http://group5wiki.wikidot.com/competitive (accessed 8
January 2013)

Capital requirements. To compete in a new industry, an

organisation needs considerable resources. Capital to buy physical
facilities and inventories, and capital to carry out marketing
activities, bridge customer credit and absorb all the start-up costs
should be available. New entrants will think twice if high levels of
capital investment are necessary to compete successfully.
Switching costs. Switching costs are once-off costs customers incur
when they switch from one supplier’s product or service to another.
For example, when a customer switches to a different toothpaste, the
switching costs are low, but airlines that award frequent flyer miles
impose high switching costs. This makes it difficult for a customer
to “lose” the benefits he or she has already accrued. New entrants
can overcome these high switching costs by offering either a
substantially lower price or a much better product or service to
attract customers.
Access to distribution channels. New entrants have to persuade
distributors to carry their products. This process of securing
distribution for their products may reduce the new entrants’ profit
potential because they have to do so by offering price breaks and
competitive advertising allowances. The more limited the wholesale
or retail channels and the more that existing competitors have these
tied up, the tougher entry into the industry will be. Some
supermarkets expect suppliers to manage the shelf space and also to
carry the financial losses if a product is not selling. This makes it
difficult for a new entrant to the industry to establish this
relationship and get access to the distribution channels.
Cost disadvantages independent of scale. Some existing
competitors may have cost advantages independent of their size or
economies of scale, such as favourable access to raw materials,
proprietary technology, favourable locations and perhaps
 government subsidies such as those that businesses experienced
during the time of “separate economic development” in South
Africa in the 1970s and 1980s. It may be difficult for new entrants to
duplicate these cost advantages. In order to compete successfully,
they have to reduce the relevance of these factors, and that may be
difficult.
Government policy. It is possible that the government may make it
difficult for new entrants into an industry. There may be specific
licence requirements, or limits to access to raw materials. For
example, the government issues only a limited number of licences in
the fishing and mining industry. In addition, some regulations in
terms of pollution and safety standards can make it difficult for new
entrants to enter an industry.

6.4.1.2 Expected retaliation

Organisations entering a new market should keep in mind that existing
organisations in the industry might retaliate. If existing organisations
can retaliate swiftly and vigorously, the likelihood of new
organisations entering is reduced. Fierce retaliation can be expected
when the existing organisation has a major share in the industry and
has substantial resources, especially when the industry growth is low
or constrained and there is actually no room for another competitor.

The question can thus be asked: How will it be possible for a new
organisation to enter the industry? One possible way is to locate
market segments that are not adequately served by existing
organisations. This will avoid stepping on the toes of existing
organisations and thus risking retaliation from them. Despite the
barriers to entry, new entrants are sometimes successful in entering
industries with higher-quality products and lower prices. It is thus the
job of organisational leaders to identify the potential threat of new
entrants, to monitor their strategies and to develop a counterstrategy if
necessary. It is important that organisations also capitalise on their
existing strengths and seize the opportunities presented in the market.
6.4.2 Bargaining power of suppliers
An organisation acquires inputs to resell them. It has to obtain the
inputs from reliable suppliers. A good relationship between the
organisation and its suppliers is thus essential for the organisation’s
long-term survival and growth.

Suppliers are the individuals and companies that provide an

organisation with the input resources (raw materials,
component parts, or labour) that the organisation needs to
produce goods and services. It is very important that a manager should
secure a reliable supply of input resources. If an organisation is not
successful in obtaining the required input resources in the correct
quantity and quality at the right price to achieve its goals, it will not be
successful in competing in the market environment. For their
organisations to prosper, managers also have to respond to
opportunities and threats that result from changes in the nature,
number or type of any supplier. A threat arises when a supplier’s
bargaining position becomes so strong that it can raise the prices of the
input resources it supplies to the organisation.

It is important for an organisation to assess its relationships with its

suppliers and therefore several factors have to be considered. The
following questions need to be answered to evaluate suppliers:

How competitive are the suppliers’ prices?

How competitive are suppliers in terms of their production standards
and the quality of their products?
How competitive are the suppliers in terms of their ability to deliver
speedily and reliably?
What are the reputations of suppliers?
How efficient and effective are suppliers in terms of after-sales
service delivery?

Suppliers can exercise power over competing organisations by

increasing their prices and/or reducing the quality of their product.
This would reduce the profitability of an organisation, which might not
be able to recover the cost increases of its own prices. It is thus
possible for suppliers to squeeze the profitability of organisations in an
industry to such an extent that they will be unable to recover the cost
of the raw material.

A group of suppliers to an industry are powerful when

it is dominated by a few large supplier organisations – in this case

suppliers can exercise considerable influence on the prices and
quality of products – see Strategy in action 6.12
no satisfactory substitutes are available for customers to buy
industry organisations are not important customers for the suppliers,
because they sell to several industries
suppliers’ goods are critical to buyers’ organisations: these products
are essential for the success of the buyer’s manufacturing process,
so the buyer has no other option than to buy the products from the
supplier
the costs for industry organisations to switch to another product or
supplier are high, because of the supplier’s effectiveness and good
supplier relationship or perhaps because of the differentiated
products
it poses a credible threat of forward vertical integration (a grand
strategy that will be discussed in Chapter 7), whereby suppliers
become their own buyers, and therefore other buyers are not
important for the success of the suppliers.

Strategy in action 6.12 Telkom fined R449 million

The Competition Tribunal fined Telkom R449 million for abusing its dominance
in the telecommunications market between 1999 and 2004. The fine followed a
decade-long investigation into the telecommunications company’s practices.
The case began in 2002, with internet service providers alleging Telkom
charged its competitors high prices for using its services, while charging much
lower fees to its subsidiaries and its customers.
The company, with operations in other African nations, has had financial
troubles in recent years. Subscribers have also increasingly dropped fixed
 telephone lines, the backbone of Telkom’s business, for mobile phones.
Half of the penalty is to be paid within six months of the tribunal’s decision,
while the balance is payable within 12 months thereafter.
Source: Adapted from http://www.fin24.com//Companies/ICT/Telkom-fined-
R449m-20120807 (accessed 8 January 2013)

It is important to investigate the bargaining power of suppliers,

because this knowledge is valuable for an organisation’s strategy
development.

6.4.3 Bargaining power of buyers

The market for an organisation’s products and services
consists of people who have needs and who have the
financial means to satisfy these needs. Customers are the
people, individuals and groups that buy the goods and services that an
organisation produces. This is perhaps the most important and
vulnerable variable of the market environment and the most difficult to
understand. Opportunities and threats arise from changes in the
number and type of customers and/or changes in customers’ tastes and
needs, and an organisation’s success depends on its response to these
changes.

When the management of an organisation is able to develop a profile

of present and prospective customers, it improves the ability of the
organisation to plan successfully for the needs of the market.
Identifying an organisation’s main customers and producing the
products and services they want is thus a key factor affecting the
organisation’s success. Information about the target markets and
consumers’ needs, their purchasing power and purchasing behaviour is
important. It is also important to realise that all the aspects of the
market environment, especially customers’ behaviour, are directly
influenced by variables in the macroenvironment. For example,
demographic trends, as a social environmental issue, affect the number
of consumers, while inflation and interest rates, as economic
environmental aspects, determine their disposable income.
There is always a conflict between the goals of customers and those of
organisations. Organisations want to maximise their sales and profit,
whereas buyers want to buy products and services at the lowest
possible prices. Buyers bargain for higher quality, lower prices and
better services to reduce their costs. If buyers do have a large amount
of bargaining power, they can force the prices of products and services
down. They can then also bargain for higher quality, and they have the
power to play competitors off against one another in their attempt to
see who will give them the best deal.

When are customers powerful? They have bargaining power and will
pose a threat to an organisation in the following cases:

They purchase a large quantity of a seller organisation’s products or

services. The effect of this situation is that the customer is more
important to the seller than the seller is to the customer. Pick n Pay
and Shoprite Checkers can be very powerful as customers of
suppliers and wholesalers.
The sales of the product account for a large proportion of the seller’s
revenue. It is thus important to get the product at the lowest possible
price.
Few, if any, costs are incurred when customers switch to another
product. The customers are not “married” to a specific supplier and
can shop around for the best and lowest prices without incurring
high costs.
The concept of shopping for low prices is applicable if the customer
or buyer earns low profits.
The products or services purchased by the customer account for a
large portion of the customer’s costs. The customer will again shop
around for lower prices in order to reduce these costs.
The industry’s products are undifferentiated or standardised. This is
an ideal opportunity for customers to play competitors off against
one another in an attempt to see who will give them the best deal.
The quality of the products that the buyer purchases is not very
important for the buyer’s products, and this will also allow the buyer
 to exert some bargaining power.
Customers have access to a lot of information about the market
conditions, which can give them some bargaining power.
There is a credible threat of backward integration. In backward
integration the buyer becomes his own supplier, therefore other
suppliers are not important for the buyer’s success.

6.4.4 Threat of substitute products

What is a substitute product? If a product or service from
another industry can be used to perform similar functions to
the product or service in the industry, it is considered to be a
substitute product or service. Another way to put it is: “Are other
organisations in other industries capable of satisfying the same needs
of our customers as we do?” An example of a substitute product is
when a generic medicine is dispensed rather than the original
manufacturer’s medicine (see Strategy in action 6.13). Cellphone
services (MTN, Vodacom and Cell C) also pose a threat to the services
that Telkom (fixed line) provides. Other examples are eyeglasses
versus contact lenses, sugar versus artificial sweeteners and plastic
containers versus glass containers.

Strategy in action 6.13 Generic medicine market to continue growth trend

in 2017

South Africa’s pharmaceutical industry has continued to weather the storm

amid tough economic conditions, and while originators have steadily lost
market share due to fierce competition, the generic market boasted double-digit
growth, said Erik Roos, CEO of generic medicine company Pharma Dynamics.
He actually expects more growth in the generics market in 2017.
The launch of the South African Health Products Regulatory Authority
(SAHPRA) – the new regulatory authority set to take over from the Medicines
Control Council (MCC) in April this year – will see products being fast-tracked
and brought to market much sooner than before. Alleviating this backlog could
see hundreds of new generic products flood the market.
Since the introduction of generics in South Africa, medicine prices have been
slashed by 80 per cent – making medicines more affordable and accessible to
all people. There is also a growing demand for medicines, mainly driven by
South Africa’s ageing population.
 Patients are increasingly being empowered to take a proactive role in
maintaining good health, which has spurred a surge in over-the-counter (OTC)
medicine sales, particularly in schedule 2 products, which are primarily a
generics-dominated category. Unscheduled medicines (those that do not
require a prescription) have experienced the fastest unit sales growth at 5 per
cent in the past year.
Source: Adapted from http://www.fin24.com/Companies/Health/generic-
medicine-market-to-continue-growth-trend-in-2017-20170111
(accessed 6 March 2017)

There are many examples from industrial history where a substitute

product has completely wiped out industries. A fairly classic example
to illustrate this is in transportation, where the early mode of
transportation was either stage coach or canal. Both of these appear to
have been severely damaged if not wiped out by rail and in particular
the steam locomotive.

When do substitutes pose a threat? Substitute products and services

pose a strong threat to an organisation when the switching costs for
customers (if any) are low (it costs nothing in money or effort to
switch brands of coffee or washing powder), the substitute product has
a lower price, or its quality and performance are equal to or superior to
those of the competing product. To withstand the threat of product and
service substitution, an organisation can differentiate in areas that
customers perceive as creating more value, such as price, quality, after-
sales services or speed of delivery.

There are a number of different situations where substitute products

can cause indirect competition. For example, when products could:

Fulfil the exact same purpose – Coke versus Fanta. Coke is facing
not only direct competition from Pepsi Cola, but also substitute
threats from other soft drinks, such as Fanta and Cream Soda. This
is because other soft drinks could give buyers the very same benefits
as Coke. When people get thirsty they can buy either Coke or Fanta
or Cream Soda. Therefore, Fanta and Cream Soda, for example,
present a strong threat of substitution to Coke.
 Be partial substitutes for each other – cinema versus theatre.
People have the choice of going to the cinema or a theatre for
entertainment. They are not exactly the same; often people who like
watching movies don’t like to go to the theatre to see a play, and
vice versa. However, there are people who like both, therefore the
cinema and theatre will create a competition of substitution, but the
threat is weak.
Financial limitations result in a choice – for example, a woman
has received one month’s salary (R10 000) and is going to do some
shopping. She already knows that she wants a beautiful diamond
necklace and a luxury Gucci handbag. Both items have a similar
price tag (e.g. R8 000), but sadly she has only enough money to
allow her to purchase one of the items this month. She therefore has
to choose between the necklace and the bag.

If there are no substitutes, the threat will not be high and the industry
will actually create an opportunity in the market, but if there are
substitutes there will of course be a threat.

6.4.5 Rivalry among competing organisations

This is the strongest of all the forces. Competitors are
organisations that produce goods and services similar to a
particular organisation’s goods and services and compete for
the patronage of the same customers. It is one of the most important
and potentially most threatening forces that an organisation can
confront in its industry (market) environment. Competition boils down
to organisations serving the same customers and being able to find a
market share big enough to survive financially. Examples of direct
competitors are found in all industries, but the food and beverages
industry provides good examples. There are many competitors of the
original Coca-Cola. In the fast-food industry, Nando’s and Chicken
Licken are direct competitors of Kentucky Fried Chicken. Every
organisation that endeavours to market a service or product is
constantly up against competition.
Competition between organisations has never been greater than it is
today, because many organisations offer both quality products and
outstanding service at competitive prices. As competition is fierce,
aspects such as competing by pleasing the customer, competing
through speedy delivery and competing by meeting the community’s
needs must also be taken into consideration when evaluating
competitors.

High levels of competition often result in price competition. The

resultant falling prices reduce access to resources and lower the profit
potential. It is often competitors and not consumers who determine the
actual quantity of a particular product to be marketed and what price
should be asked for it. Organisations not only compete for market
share, but also for labour, capital and materials.

It is important to identify all the major competitors and their specific

strengths and weaknesses in relation to the organisation’s strategic
position. Coca-Cola and Pepsi, or Pick n Pay and Shoprite Checkers,
are certainly interested in understanding each other’s goals, strategies,
assumptions and capabilities. The more intense the competition
between competitors, the more important it is for an organisation to
understand its competitors. In a competitor analysis it is thus important
for the organisation to understand the following:

The future goals of the competitor and how they compare with the
organisation’s goals
The competitor’s current strategies and how the organisation’s
strategies compare with those of the competitor
The competitor’s beliefs about the industry – what its assumptions
are
What the competitor’s capabilities are.

Competitor analysis plays an important role in strategic planning. It

helps the organisation to
 understand its competitive advantages/disadvantages relative to
those of its competitors
generate understanding of competitors’ past, present and (most
importantly) future strategies
provide an informed basis for developing strategies to achieve
competitive advantage in the future
help forecast the returns that may be made from future investments,
e.g. how competitors will respond to a new product or pricing
strategy.

The rivalry between competitors intensifies when one competitor’s

actions challenge the others’ actions, or when an opportunity to
improve the market position is recognised. In Strategy in action 6.14, it
is clear that manufacturers of smartphones are facing tough times and
that they will be jockeying for a strong competitive position.

Strategy in action 6.14 Top 5 smartphones for streaming ShowMax,

Netflix

South Africans are spoilt for choice when choosing how to consume video
content after the launch of numerous multimedia streaming sites and apps.
Many factors should be considered if one wants to stream content from a
smartphone, and these factors will ultimately lead to certain brands that will
deliver the best streaming experience.
One of the factors to consider is the processor of the smartphone. Today, a
range of smartphones from various manufacturers have the processor built in,
making it a factor to consider when considering the best device for watching
streaming content. Anyone serious about streaming video will agree that bigger
is always better when displaying high-quality content, but screen size will
always be dependent on the comfort of the user. Another important factor is
battery life. Manufacturers have taken heed of this and more smartphones are
being developed with extended battery life, faster charging time and of course
the not-so-wireless wireless charging methods. Competition is tough in this
industry and is making the choice difficult for the customer.
Source: Adapted from http://www.fin24.com/Tech/Gadgets/top-5-smartphones-
to-stream-showmax-netflix-20160811 (accessed 8 March 2017)

The only way to create a competitive advantage is for an organisation

to differentiate its products from competitors’ offerings in ways that
consumers will perceive as adding value. Rivalry is usually based on
visible aspects such as price, quality and innovation. The following
specific conditions will influence the intensity of rivalry between
competitors:

Numerous or equally balanced competitors. Intense competition

is common in industries with many organisations. Rivalries in
industries with only a few organisations of equivalent size and
power are also not uncommon, because these organisations are
constantly jockeying for position.
Slow industry growth. If markets are still growing, pressure to
attract customers away from competitors is reduced. Competition in
static or slow-growth markets is, however, intense, because
organisations battle to increase their market share by attracting
competitors’ customers, and to protect their own market share.
High fixed or storage costs. Organisations try to maximise the use
of their productive capacity when their fixed costs are high, and this
could create excess capacity on an industry-wide basis. The result is
that they cut the price of their products and offer rebates and other
special discounts to reduce their inventories and thus lower storage
costs.
Lack of differentiation or low switching costs. If organisations
successfully differentiate their products, there is less rivalry; but
when buyers view products as similar, competition intensifies.
Customers’ buying decisions for undifferentiated products are based
primarily on price and the service they receive. This leads to an
intense form of competition between organisations. When buyers’
switching costs from one product to another are low, it is easier for
competitors to steal customers through price and service offerings.
If, however, the switching cost for the buyer is high, an organisation
is at least partially protected from its rivals’ efforts to attract
customers.
High exit barriers. What are exit barriers? They include economic,
strategic and emotional factors that force organisations to continue
competing in an industry even though the profitability of doing so is
 doubtful. It is thus difficult for them to exit the industry because
some factors keep them in it.

Common exit barriers include highly specialised assets (this refers to

assets with values linked to a particular business or even location),
fixed costs of exit (such as labour agreements), strategic
interrelationships (such as strategic alliances where facilities or
markets may perhaps be shared), emotional barriers (such as fear for
one’s own career and loyalty to employees), and government and
social restrictions (such as government’s concern for job losses and the
effect on the regional economic situation). SAB may be an
organisation in South Africa with high exit barriers, as it has, for
example, highly specialised assets.

6.4.5.1 Identifying competitors within an industry

It is important for an organisation to identify its competitors. There are
several variables that an organisation has to consider when identifying
current and potential competitors. These include the following:

The similarity of the definition of the scope (what business are we

in?) of the organisations determines whether they see each other as
competitors. The more similar the definition, the more likely the
organisations are to view each other as competitors.
The similarity of the benefits customers derive from the products
and services that other organisations offer is important. The greater
the similarity, the greater the substitutability of the products or
services and thus the greater the competition.
How committed the organisations are to the industry must be
determined, because it sheds light on their long-term goals and
intentions. If organisations are very committed to a specific industry,
they will be more committed to being strong competitors.

One method that an organisation can use to identify its

competitors is strategic group mapping. A strategic group
consists of the clustering of a group of organisations that are
similar to one another, offering similar goods to similar customers and
possibly also making similar decisions about production technology
and other organisational aspects. They are thus direct competitors in
the same industry. The classification of an industry into various
strategic groups involves deciding what characteristics to use to map
the organisations into strategic groups. The characteristics that can be
used in a graph include breadth of product, geographic scope, price,
quality and type of distribution.

What is the value of strategic grouping as an analytical tool for

identifying competitors? It helps an organisation to identify the
competitors at different competitive positions in the industry. The
competition among the organisations within the same strategic group is
intense because they offer similar products or services to the same
customers. The more intense this competition, the greater the threat to
each organisation’s profitability. It also helps chart the future direction
of an organisation’s strategy or in what direction it seems to move. If
all the competitors move in the same direction, a higher intensity of
competition is indicated.

Looking at Figure 6.4, the characteristics for identifying competitors

are price and distribution. A small supermarket in a particular
neighbourhood is usually limited to that neighbourhood and you will
not find it in other towns or cities. This supermarket is perhaps only in
competition with a supermarket in another neighbourhood, whereas
Spar and Pick n Pay outlets are found in many neighbourhoods, towns
and cities. They will form a separate strategic group. In evaluating
competitors, Spar will look at what Shoprite, Checkers and Pick n Pay
are doing. If all the strategic groups in Figure 6.4 move to the lower
end of the price dimension, that is, their products become cheaper, the
intensity of competition will increase.
 Figure 6.4 A strategic group in the supermarket industry

6.4.5.2 Common mistakes in identifying competitors

Identifying competitors is a very important milestone in strategy
development, but it is also a process characterised by uncertainty and
risk and in which expensive mistakes can be made. Examples of such
mistakes include overemphasising current and known competitors and
ignoring the threat of potential new entrants or international
competitors; focusing only on large competitors and overlooking the
possible threat of small competitors; and assuming that competitors
will continue to behave in the same way as they have in the past.

At this point one should have a firm idea of how to analyse the
industry environment by using Porter’s model. In Table 6.1 there is an
example of how to apply current rivalry among competing
organisations as a competitive force in order to identify whether it is an
opportunity or a threat.

Table 6.1 Evaluating current rivalry among competing organisations

Threat Opportunity
Numerous competitors √
Few competitors √
Competitors are almost the same in size √
 There are one or two strong competitors √
Sales growth is very slow √
Sales growth is strong √
High fixed costs √
Low fixed costs √
No differentiation in products or services √
There is differentiation in the products √
There are some exit barriers √
There are no exit barriers √
Similar competitors √
Diverse competitors √

A similar table can be developed for the other four forces of industry
analysis and can be completed to indicate whether the specific force is
an opportunity or a threat. In summary, a checklist can be used for
industry analysis. As a minimum, the questions below should be
answered to determine the opportunities and threats in the industry.

How many organisations are there in the specific industry?

What is the size of these organisations?
Are there products that are close substitutes or can a customer easily
switch between the different organisations?
What is the growth rate in this industry?
What is the relative power of the suppliers?
What is the relative power of the customers?
What is the relative power of the competitors?
Are there any entry and exit barriers?
What factors will affect competition?

6.4.6 Limitations of Porter’s Five Forces model

It is obvious that Porter’s model has great value as a tool for managers
to analyse the external environment. There are, however, a few
limitations to the model, which can be summarised as follows:

The model claims to assess the profitability of the industry. Porter’s

idea was that the model would help an organisation to determine the
attractiveness of the industry by referring to its profitability. There
is, however, strong evidence that organisation-specific factors (such
as specific organisational competencies) are more important to the
individual organisation’s success than industry factors. Industry
attractiveness alone will not determine the profitability of an
organisation.
The model implies that the five forces apply equally to all
competitors in an industry. The truth may be that the strength of the
forces differs from organisation to organisation. The model implies,
for example, that if the bargaining power of buyers is strong, this
will apply to all the organisations in the industry. The truth might be
that buyers’ power may differ from organisation to organisation.
The same argument applies to the bargaining power of suppliers.
Larger organisations face less of a threat from suppliers than smaller
organisations. In the retail industry Pick n Pay faces less threat from
suppliers than does a small neighbourhood supermarket.
Product and resource markets are not adequately covered by the
model. Buyer and supplier power relates to the product and resource
markets respectively. In both these markets the conditions are more
complex than Porter’s model implies. The markets in which
products are sold (buyer power) need more in-depth analysis when
determining their strength. Think about the differences between
organisations in terms of their marketing success in market
segmentation and applying a successful marketing strategy.
The model can never be applied in isolation. Porter accepted that the
outcomes of the application of the model were only relevant while
the macroenvironment remained constant and stable. However, it is
a well-known fact that organisations function in complex and
dynamic environments.
 The model assumes that the relationship between competitors in an
industry is always hostile, but it is more complex than the model
suggests. Competitors often see “fair play” or a “give-and-take”
relationship as an important quality of their interactions. In this way,
they can work together to attract more customers.

6.5 Key factors for success in the industry

Porter’s Five Forces model enables an organisation to determine the

attractiveness of the organisation’s industry and, by implication, the
potential for profitability and growth. It was, however, stated earlier
that it is vital to understand the ingredients for success in an industry if
an organisation wishes to align its strategy with the external
environment. An organisation must supply high and consistent quality
to meet its delivery promises to its customers. In this effort they also
rely on their suppliers to make quick deliveries when this is asked of
them. Without support systems in place, this demand will not be met.
The requirements from external stakeholders, such as quality products,
quick deliveries, good services, etc., are the things that organisations
must do well in order to be an effective competitor and to thrive in the
industry. These requirements are known as key success factors (KSFs).

An industry’s key success factors are those factors in the

industry that contribute to the organisation’s and its
competitors’ success. It is important to understand the
specific product or service attributes, resources, competencies and
capabilities that will significantly affect the overall competitive
position of all the organisations in a specific industry. KSFs obviously
vary from one industry to another, and apply to the entire industry.
Table 6.2 provides a list of the most common types of KSF in an
industry.
 Table 6.2 Examples of industry key success factors

Marketing- Excellent customer service

related KSFs Good advertising skills
Good after-sales service
Good customer guarantees and warranties
Sales of a variety of quality products (breadth of product line)
Development of distribution networks

Human skills- Competent employees

related KSFs Expertise in applying technology
Product innovation skills
Excellent capabilities to control quality

Distribution- A well-developed network of wholesale distributors

related KSFs Ability to keep distribution costs low
Ability to secure enough space on retailers’ shelves for
products

Technology- Ability to make innovative improvements in the production

related KSFs process
Ability to apply scientific research in the fields of high-speed
internet access, space exploration, etc.
Technological expertise in a given field

Manufacturing- Efficiency in low-cost production

related KSFs Ability to manufacture products that are customised to buyer
preferences or that are unique
Ability to maximise labour productivity
Ability to optimise the utilisation of fixed assets

Other types of Favourable image

KSFs Good location
Achieving overall low costs
Positive financial position

Source: Adapted from Thompson & Strickland (2005: 81)

It is important for an organisation to identify the KSFs in its industry
before deciding on a specific strategy. The question actually is: “What
is the secret to success in our industry?” The answer to this question is
not always straightforward, but to survive and prosper in an industry,
an organisation must obviously answer two important questions:

What do our customers want?

What must we do to survive the tough competition?

In identifying the KSFs for a supermarket, for example, it is clear that

customers want low prices, convenient store locations, a wide range of
quality products, good service and ease of parking. To survive the
competition and to meet the needs of customers, supermarkets must
identify the important factors on which they need to focus, namely,
operational efficiency, scale-efficient stores, convenient locations, and
large aggregate purchases to maximise their buying power and reduce
their overall costs to provide lower prices.

If organisations want to satisfy their stakeholders, and especially their

customers, and survive and outperform their competitors, their
competitive offering must consist of the following important elements:

They must have the ability to recognise the KSFs for their specific
industry.
They must make sure that they have the distinctive competencies
and capabilities that will help them to gain a competitive advantage.
They must have the ability and willingness to use these
competencies and capabilities to meet the KSFs and thereby satisfy
the needs of their customers in a way that actually surprises them.

These identified KSFs can be measured by key performance indicators

(KPIs). This means that if the KSF is, for example, excellent customer
service, the performance of this KSF can be measured through a
customer service survey. The result of this measurement is the KPI,
which is actually a quantification of the “qualitative” KSF. It is thus
important not only to identify the KSFs for a specific organisation, but
also the KPIs. This will help the organisation to decide on its strategic
goals for increasing the performance on these key success factors for
an organisation.

6.6 Scenario development

After all the issues from the external environment have been evaluated,
the organisation can identify the key strategic issues that will affect the
future of the organisation. As a result of the dynamic, turbulent and
uncertain environment of the organisation, managers want to anticipate
the future possibilities to be better placed to deal with the
unpredictable challenges that may come. Usually managers have an
idea of what the future will hold, but this is sometimes only a partial
rather than a comprehensive view. The development of scenarios will
be discussed in more detail in Chapter 7.

6.7 Summary

The external environment of an organisation is complex and

challenging. The increasing turbulence in this environment also makes
it important for an organisation to do an external environmental
analysis by auditing all the factors that pose opportunities and threats.
As many managers and employees as possible must be involved in the
process of external environmental analysis, because involvement in the
strategic management process can lead to an understanding of the
organisation’s situation and a commitment from its members to the
process and implementation of the strategy.

The importance of the macroenvironmental factors was discussed.

These elements provide many opportunities as well as threats to an
organisation. Organisations have to understand that they do not have
any control over these aspects, but that these factors do have an
important influence on the organisation. The PESTE analysis is the
most important analysis because it affects the industry analysis
(Porter’s Five Forces). Industry analysis in the task environment, using
Porter’s model, remains an important method for understanding the
external environment in which the organisation is operating. The
elements of the task or market environment are also uncontrollable
influencing factors. Management is responsible for analysing these
elements in order to identify the important opportunities and threats.

The identification of key success factors remains important. It helps

the organisation to determine whether it is meeting the requirements of
the key success factors.

Exploring the web

An important website from which to obtain information about South African statistics
is: http://www.statssa.gov.za
For important economic data, the website of the South African Reserve Bank may be
useful: http://www.resbank.co.za/Pages/default.aspx
Websites with useful articles, interviews and strategic management issues:
http://www.strategy-business.com http://www.wisegeek.com/what-is-an-external-
environmental-analysis.htm
Graphic representations of concepts discussed in this chapter:
http://www.google.co.za/search?
q=external+environmental+analysis&rlz=1T4ADRA_enZA487ZA488&tbm=isch&tbo=u
&source=univ&sa=X&ei=JZp8UZjqMoqw0AXMzoH4DA&ved=0CEQQsAQ&biw=1280
&bih=588

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Case study

A shoe business with a different beat

“To manufacture shoes is an extremely complex process. It is far more

complex than the clothing industry,” says Peter Maree, owner of
Corrida Shoes and Tsonga. Product development requires engineering,
shoemaking skills and fashion knowledge. The challenge facing the
industry is a diminishing pool of skilled designers and product
engineers. This is a trend in most industries.

How did Maree start this business? He went for job interviews at
various companies after finishing his BEcon degree at Stellenbosch
University. Panther shoe company offered him a two-year management
trainee programme and after finishing the trainee programme, he went
to the UK to gain overseas experience in the field. This was in the
1970s and very few people were travelling or working abroad back
then. He was not paid to work in the factories, but he saw it as a
valuable opportunity to acquire design and development experience
and see how other countries were operating. This exposure gave him
insight into and experience of all the processes and factors involved in
making good-quality shoes.

He started Corrida Shoes in Pietermaritzburg in 1983. The name came

from Quincy Jones’s 1980s song Ai No Corrida, Corrida, meaning
“bullring” in Spanish. The business was built from a combination of
personal savings, goodwill from material suppliers built up during his
career and, ultimately, assistance from the banks. Banking was much
more personal in those days. Bankers were involved with their clients,
with bank managers being able to use their personal assessment of
clients’ potential as motivation to grant credit. Were it not for the bank
manager seeing the potential, Corrida would probably not have existed
today.

Tsonga’s journey began in the late 1990s when cheap imported

footwear flooded the South African market, forcing many shoe
manufacturers to close their doors. Peter Maree, who at the time
already had two decades of experience in the industry, embraced the
challenge. He saw an opportunity for a niche market in high-quality
leather footwear with a uniquely African style and the comfort that
only hand-stitching can provide. The name was inspired by the African
legend that the Tsonga people were the first to make shoes to improve
their hunting skills. This was the seed for the brand name – he wanted
a uniquely African name that could be registered internationally. The
plan was to make beautiful, soft, flexible hand-stitched shoes with
leather lining.

With a team of top international designers and skilled technicians

already in place, Peter set out to find the unique hand-stitching skills
that would be the signature of Tsonga Footwear for years to come. “I
wanted to create a range of shoes and handbags, inspired by Africa.
The hand-stitching skills of the women of the village of Lidgetton,
close to my home in South Africa, are renowned. I thought that
together we could create something quite unique and wonderful.”
Today, in the heart of the kingdom of the Zulu in South Africa, there
are inspiring stories of success to be told. Transformed from an old
abandoned school building, the Thread of Hope farm became the
training centre where many people from the local rural community
were given the opportunity to learn skills in the manufacture of leather
footwear. For many years, it was a place where women gathered and
conversation flowed to the rhythm of the work.
To grow the brand locally, Tsonga opened its own retail stores aimed
primarily at the tourist trade. The first store opened in Constantia
around 2002. It was a big shift to go from manufacturing into retail as
well. Tsonga is also involved in community empowerment. It has
bought a smallholding in Lidgetton, about 40 km from
Pietermaritzburg, where the company makes handbags and teaches the
community to hand-stitch shoes. Participants may take the shoes home
and are then paid when they return the shoes.

In the mid-1980s, South African Breweries, through their subsidiary

Coshu, bought up most of the men’s shoe factories in South Africa in
an attempt to capture the men’s market. Maree realised that this offered
an opportunity to create a dynamic, flexible competitor to compete
with a large, slow-moving corporate. This was when he opened the
men’s shoe division, which today represents 70% of his business.

The greatest challenge to the business is the influx of cheap imports

from China. Maree has managed to overcome these challenges by
building strong brands and not being a commodity broker reliant on
house brand business from the large retailers. In addition, Tsonga has
developed an export market in Australia and has opened its own retail
stores in South Africa.

Competition is fierce and comes from both local and international

sources. The biggest challenge comes from India and China. They
have the ability to mass-produce shoes at very competitive prices
owing to their labour costs, which are significantly lower than those in
South Africa. However, the weakening of the rand against major
currencies has helped Tsonga to some extent.
Source: Adapted from https://www.tsonga.com/pages/about-us; and
http://www.fin24.com/Finweek/Entrepreneurs/a-shoe-business-with-a-different-
beat-20170216 (accessed 6 March 2017)

CASE STUDY QUESTIONS

1. Conduct an industry analysis in the shoe industry.

2. What is Tsonga’s competitive position in the industry?
 3. Apply a PESTE analysis to Tsonga.

Strategy exercises

1. The internet is changing the nature of competition. Research this

topic and write a paper summarising your findings and explaining
the implications for strategic decision makers in organisations.
2. Cellphones and their applications are developing at a very fast
pace. These technological developments have major influences,
posing both opportunities and threats to organisations. What are
the social, economic and technological influences of the cellphone
industry on organisations?
3. Draw a diagram and include all the environmental influences on a
restaurant of your choice. From this evaluation develop a SWOT
analysis and consider the strategic implications for this restaurant.
 7 Scenario development
THEO VENTER

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Explain the link between scenarios and environmental scanning

Explain the role of scenarios in strategic management and planning
Demonstrate a thorough understanding of the scenario concept and its origins
Apply the use of scenarios in strategic management
Demonstrate a thorough understanding and use of the concepts, trends, trend
breaks and structural change
Demonstrate competence in defining a scenario
Identify uses for scenarios
Describe different types of scenarios and their uses and different applications

7.1 Introduction

In 1985, the authoritative Harvard Business Review published a series

of articles that questioned traditional forecasting techniques and
pointed out that long-term forecasts no longer satisfied the demands of
a highly competitive and fast-changing world. This competitive
environment was characterised by dramatic changes, global
developments and snap decisions. It was also pointed out in these
articles that businesses could no longer afford the expense of erroneous
forecasts (Wack, 1985: 73). This did not, however, mean that
traditional forecasting techniques were useless; it really meant that a
better understanding had to be developed of the relationship between
forecasts and scenarios.

This was the beginning of a new era in the approach to environmental

scanning and the use of scenarios in strategic management, because it
combined the factual dimension (environmental scanning and
forecasting) with the perceptual dimension (scenarios) in strategic
planning and management. This new era in strategic planning has also
been referred to as “the art of strategic interaction with the future”
because the focus of strategic planning and management has moved to
a proactive process – where a sustainable competitive advantage could
only be reached before the change actually took place. The new era has
thus established a causal relationship (cause and effect) between
environmental scanning, scenarios and strategic planning and
management.

Environmental scanning and scenario development are inextricable

components of any strategic management process in a highly
competitive management environment. Both environmental scanning
and scenario development are advanced and sophisticated management
instruments, but the most important characteristic of both are that they
are part of the strategic management process and must be used as such.
Chapter 6 dealt with external environmental analysis in greater detail,
and in this chapter a few extra points will be added that pertain to the
development of scenarios.

Scenarios and uncertainty are synonymous in the field of strategic

management. To enable an organisation to develop coherent strategies,
a level of predictability and stability is necessary for strategic
management, but very often the ability to predict a political, economic
or technological environment does not exist. To enable the strategist to
develop a coherent strategy, it is necessary to use scenarios if
prediction is not possible. The dilemma of strategic forecasting and
trend analysis is explained in Figure 7.1 on two axes, i.e. the level of
uncertainty versus the impact of a trend or development. When a
strategic issue is both low on uncertainty and its impact, it falls in the
predictable zone and we refer to it as insignificant. When an event is
higher on the uncertainty level, but it has a low impact, it stays
insignificant. However, if the impact is high and the uncertainty is low,
we refer to it as inevitable and the strategic manager can plan
effectively for such an event. However, a strategic challenge arises
when uncertainty is very high and the event may have a huge impact.
In cases like these, it is important to use scenarios in strategic
planning, because there is a lack of predictability and conventional
forecasting techniques become unreliable. Scenarios will then provide
the strategic manager with several options or outcomes to work with.

Figure 7.1 The scenario territory

Two concepts have recently emerged to refer to these highly

unpredictable environments. The first is VUCA (Volatile, Uncertain,
Complex and Ambiguous), which was borrowed from military
applications, and the second is TUNA (Turbulence, Uncertainty,
Novelty and Ambiguity), developed by Ramirez and Wilkinson (2016)
of the Oxford Scenario Planning Approach. In this chapter, the VUCA
explanation will be used for very uncertain environments, of which
South Africa may be a very good example from 1992 to 1994 and
again from 2015. The key characteristics are the following:
 Volatility is the rate, amount and magnitude of change. Drastic,
rapid shifts can bring about instability for organisations and leaders,
but even minor or innocuous shifts that occur daily, such as new and
“immediate” priorities that disrupt plans, or the increasing need to
“multitask,” are changes that increase volatility.
Uncertainty is the amount of unpredictability inherent in issues and
events. Strategic managers cannot predict because they lack clarity
about the challenges and their current and future environments.
Uncertainty can result in an overreliance on past experiences and
yesterday’s solutions, or decision paralysis as more and more data
adds to uncertainty.
Complexity is the amount of dependency and the interactive effect
of multiple factors and drivers. Complex interactivity requires
strategic managers to think in more creative, innovative and non-
linear ways (therefore also the use of novelty), and they must be
able to deal with a spectrum of grey areas rather than clear-cut
solutions.
Ambiguity is the degree to which information, situations and events
can be interpreted in multiple ways. Ambiguity increases doubt,
slows decision making, and results in missed opportunities (and
threats). It also adds to the image of contradictory strategic
challenges and requires strategic managers to approach challenges
in a diversified way and with multiple perspectives.

Good examples of the VUCA environment are phenomena such as

Uber challenging conventional taxis, Tesla electric cars competing
with conventional motorcars, global economic growth shifting from
the West to the East, changing geopolitical issues with names like
Brexit, the Trump effect and ISIS.

Scenario development emerged, among others, from the general fields

of futures research, change management and human perception. A
fundamental aspect of these approaches is that the strategic manager
not only has to cope with his or her own personal and strategic
paradigms, but with both a future and a past that is widening with
multiple outcomes in front of, and behind him or her, as is illustrated
in Figure 7.2.

Figure 7.2 The cone of possibilities

In the field of strategy there is often a lack of ability to timeously

gather knowledge on the environment and competitors. Some of the
greatest competitive advantages were achieved in times when trends
were unclear and stability was low. A good example of this was during
the 1973 oil crisis and in the period immediately after it, when Royal
Dutch/Shell developed into one of the major oil companies through
environmental scanning and good scenario planning, while
competitors became the victims of a turbulent environment.
Environmental scanning is a strategic lever and can create a
competitive advantage in the strategic management process of
organisations. Different studies of successful organisations have
shown, however, that it is not always being utilised in the normal
management process of an organisation.

Organisations that wish to create a competitive strategic advantage

through environmental scanning and scenario development have to ask
the following key questions with regard to their environmental
sensitivity:

Does management have a clear and common perception of what the

industry in which the company operates will look like in ten years’
 time?
Is management’s vision focused further into the future than those of
its competitors?
How influential is the organisation in the industry regarding the new
game rules of competition? Does it only follow the rules of others?
Is the organisation continuously defining new ways of doing
business, developing its capacity and establishing new standards of
client satisfaction?
Is the organisation more inclined to challenge the industry it
operates in, or does it only protect the status quo?
How often does management lift itself from the groove of daily
crisis handling, and does it consider new environmental horizons?

7.2 Causality in the environment

In the search of causality in the environment, it is necessary to do

environmental scanning with a wide-angle lens. Thorough research
and a comprehensive study of the business environment is a crucial
element of scenario development. Three levels of knowledge of the
environment can be distinguished that will assist the strategic manager
to interpret the events in the organisational environment. These three
levels are illustrated as an iceberg in Figure 7.3.

The first level is the monitoring of general events and issues, also
referred to as surface indicators or the “tip of the iceberg”. A surface
indicator is usually only a symptom of a much deeper-seated
phenomenon in society, such as the “political noise” of deep-seated
political divisions. An issue should not be confused with trends or
trend-breaks, which are second-level phenomena and indicators
measured over a period of time. The most important characteristic of
 an issue is that it has a self-correcting nature, it will have an origin,
and it will reach a peak and then disappear.

Figure 7.3 Three levels of knowledge creating the “iceberg” effect

Source: Adapted from Van der Heijden (1997: 98)

All events on the first level are factual in nature and can be studied
empirically. The daily news is a very good example of this first level
of knowledge – it can become very confusing and may increase
uncertainty, unless a deeper understanding is developed of the
political, economic, societal, technological and ecological
environment. At the first level of environmental awareness,
perceptions play a major role and may obstruct an individual’s
understanding of what really happens.

Environmental events on the second level are not as easy to

identify as those on the first level, because they are “under
the surface”. A number of unrelated matters may emerge on
the first level, but only once they have been accurately studied is it
possible to discern certain trends such as economic growth rates,
inflation or demographic patterns. Trends usually emerge when
events and issues reflect causal relationships, such as rising prices
that have a causal relationship with an economic decline. A trend
points to the structural character of a phenomenon in the
 environment, while an issue points to the dynamic nature of a
similar phenomenon. When a trend changes or when there is a
sudden discontinuity in a trend (known as a trend-break), it has
major implications for strategy and strategic planning because it
influences the stability in the environment, creates uncertainty and
also changes the rules of causality (cause and effect) for the
organisation. Government policy is a good example of a trend. A
very good example was the sudden instability in power generation
and provision by Eskom in 2008, following years of very stable and
cheap electricity generation. Scenarios cannot be developed without
studying trends and searching for trend-breaks, also referred to as
key uncertainties.
Structural and societal phenomena are the third level of the
“iceberg” underpinning trends and issues. This is the level of
interpretation, philosophies and theories. On this level, there will be
a search for value shifts in the community, and changes on this level
will determine a new direction for the “iceberg” over time.
Developments at this level usually occur very slowly and cannot be
observed directly, except through long periods of research.

The FeesMustFall campaign at South African universities (2015–2017)

represents a very good example of all three levels. At level 1, everyone
saw the burning of buildings and campus violence; at level 2, a lack of
government policy and funding was evident; and at level 3, the
question of values in society and what we want our universities to be
became evident.

Five steps are necessary to determine a causal structure in the

environmental scanning process:

Important events and issues must be specified.

Trends should be identified over time in order to conceptualise key
variables.
Possible trend-breaks should be identified by monitoring trends.
A relevant structure for the organisation has to be created, based on
the internal and external environmental scanning process, to bring
 the organisation in line with the environment in which it operates.
This structure becomes the basis on which forecasting techniques
are built. If forecasting is not possible, then scenarios must be
developed.

7.3 Scenarios

The scenario development process has become part of the strategic

management process since World War II, when it became clear that
conventional models, methods and techniques of forecasting could not
be used to forecast complex economic, political, social and
technological developments.

Scenarios are not forecasts, because forecasts assume that it is possible

to forecast or predict the future. Scenarios differ fundamentally from
forecasts, because they are more process-driven and accept the fact
that the future cannot be forecast. Because the future cannot be
forecast, the scenario development process should translate the
uncertainty about the future into strategic management. This is done
through the scenario question formulated as “what if …”. To answer
the scenario question, the focus should be on four issues, namely,
driving forces, trends, key uncertainties, and rules for interaction (see
Figure 7.4).
 Figure 7.4 Building blocks of scenarios

The first three cornerstones of scenario development are based on

careful and thorough environmental scanning. The driving forces of
change can be described as the existing theme in an industry or
business sector, such as reliance on big data or new technologies.
These forces may also include changing customer expectations or
dominant fashion statements. Politically and administratively, the so-
called service delivery issue has represented such a dominant theme in
South Africa since 2014.

The second building block, basic trends, is also based on

environmental scanning, and represents the issues that formed a
pattern of developments over a period of time (historical data), such as
GDP per capita. The third cornerstone of scenario development is the
key uncertainties in the environment. A key uncertainty is something
that does not present a clear outcome or something that has too little
historical data to develop any trend. A very good example of a key
uncertainty is the Brexit decision of Great Britain in 2016, when a
referendum determined that the UK should withdraw from the
European Union after being a member for more than 30 years. The
Brexit decision was generally unexpected, but the outcome of the UK
withdrawing from the EU has created tremendous uncertainty,
impacting negatively on, for instance, the British monetary unit, the
pound sterling.

The fourth cornerstone, the rules for interaction, will be illustrated in

the phases and steps in developing a scenario in sections 7.3.1 to 7.3.6.
The most important element of this process is to generate the scenario
matrix. Most scenarios are developed by first developing a matrix with
two key uncertainties as independent variables. In simple terms, it
means that each of the two key uncertainties can exist on its own, and
that one does not depend on the other for its future trajectory. A good
example of two such key uncertainties can be found in Figure 7.7, the
Dinokeng scenarios. The scenario matrix will become the scenario
logic through the developing process and is plotted as a 2 × 2 matrix.
By combining two critical uncertainties, the themes of the four
scenarios will become apparent.

7.3.1 Defining scenarios

The scenario concept has many meanings that extend from the theatre
world, through the film industry, to organisational forecasting. Almost
half of the available definitions have been developed from 1997 until
now. It seems that scenario planning is increasingly used as a strategic
tool. Of interest is that the first available definition of scenario
planning was offered in 1985, but the process had been applied in
practice since the 1960s. The increase in recent scholarly literature on
scenario planning suggests that the process is developing and maturing
with the help of professionals who are concerned that scenario
planning should not have the same inadequacies and be exposed to the
same criticism that has been levelled against general strategic planning
processes.

Scenarios can be defined as possible futures, visualised as

stories of the future that help the strategic manager to
conceptualise the conditions with which the organisation
will be confronted in the future and that fall outside the scope of
statistical forecasting. A scenario can be described as a conceptual
description, verbal or written, of the future, based on a specific process
and with the incorporation of cause and effect. Peter Schwartz (1996),
one of the foremost global scenario practitioners, simply defines a
scenario as a tool that orders one’s perceptions about alternative future
environments in which one’s decisions might be played out. A scenario
is thus a set of organised ways to dream effectively about the future.

However, it is significant that none of the available definitions of

scenario planning includes an outcome or performance improvement
for the organisation as part of the definition. The depth of expertise
and high costs that are usually associated with the practice of scenario
planning actually make it surprising that performance improvement
has not been an explicit outcome of this strategic process.

7.3.2 When to use scenarios

Using scenarios is only relevant if they can be applied in the
organisation. The following examples illustrate conditions where
scenarios can be utilised in organisations as part of the strategic
management process:

If an organisation wants to develop a common vision or framework

without stifling diversity
When uncertainty in the organisation is very high relative to the
ability of management to forecast or to adapt
When the organisation has had too many unpleasant or costly
surprises in the past
To enhance the creative ability of the organisation if not enough
opportunities are generated in the organisation and if scenarios can
be the source of new and undiscovered business opportunities
If the quality of strategic thinking in the organisation should be
improved or if the organisation is too routined or bureaucratic
To manage change by developing several new outcomes
If the industry in which the organisation finds itself experiences
fundamental changes, or is expecting major changes
7.3.3 Scenario elements
The development of scenarios became possible in strategic
management as a result of the contribution of several academic
disciplines and management approaches. There is no single scenario
philosophy, but rather a compilation of several fields of study. In this
sense, scenario development can be called an eclectic field of study.
Figure 7.5 is a good illustration of the different contributions to
scenario development. Scenario development builds on a thorough
study of the organisational environment, both internal and external to
the organisation, that feeds into developing the scenario logics. The
use of systems analysis and thinking, the utilisation of futures research
techniques, a deep analysis of data and trends, and the extrapolation of
trends into sense-making, are important for developing the scenario
structure. Scenarios cannot be developed unless good and mature
leadership is available and the organisation understands the need for
change management in some form or other.

Figure 7.5 Elements of scenario development

A very important element of scenario development involves
challenging existing mental models and management paradigms. Some
scenario specialists are of the opinion that unless existing mental
models in management are challenged, scenarios will be of little
worth. Scenarios are usually developed through facilitation by
knowledgeable people, and deciding what to include and what to
exclude becomes an important part of the process. Towards the end of
the scenario development process, scenarios become a form of
simulating the future so that back-casting becomes possible, also
referred to as “developing a future history”. The scenarios must be so
relevant that a strategic manager may recognise events as the strategic
management process unfolds, although he or she may not have
experienced them yet. With back-casting, the strategic manager may
ask what should have happened five years before if scenario X or Y
were the preferred organisational scenario.

7.3.4 The scenario development process

The scenario development process consists of phases and steps. Six
phases can be identified (see Figure 7.6), and within those six phases
10 or more steps are possible. Not all the steps are required; some of
them will be optional, depending on the type of scenario developed.
There is no single scenario development method, but rather the
combination of methods and approaches in scenario planning already
explained in Figure 7.5. Before scenario development can start, a few
decisions must be taken as part of the scenario mandate.
 Figure 7.6 Phases in the scenario process

What kind of scenario should be developed?

Two types of scenarios are possible and they are explained in Table
7.1. The role scenarios will play in the planning process will determine
the type of scenario that will be used. A scenario can be a static image
or end-state scenario, describing how a situation will be in five or ten
years. This kind of scenario is very popular in the technological and
economic disciplines. It is also referred to as a normative scenario
and focuses very strongly on strategic outcomes over a period of time
or against a planning horizon.

Table 7.1 Explorative vs normative scenarios

Explorative
Procedure Explores possible future
developments with the present
as a point of departure
Function Explorative and/or knowledge
function
Normative
Identifies desirable futures or
investigates how to arrive at
future conditions
Target-building function and/or
strategy development function
 Explorative Normative
Implementation Study of factors and Definition and concretisation
unpredictabilities, test of of goals and/or, if appropriate,
possible actions to be taken identification of possible ways
and/or decision-making to reach a goal
processes
Central What? How?
question – What if? – How is it to come about?
– How do we get there?

Inclusion of Possible Indirect, part of plausible

probabilities shaping and planning

Process or explorative scenarios are very useful for describing, for

example, the contours of political development. The exploratory
approach will start with the current state of affairs in the organisation
and will then track development over a period of time. Normative
scenarios will not track any developments but rather paint a picture of
a 20-year horizon. The danger of explorative scenarios is that they may
keep the scenario developers captured by current events, while
normative scenarios typically escape that intellectual challenge.

How many scenarios should be developed?

As a general rule, scenarios will always be used in the plural due to the
inherent multiplicity of outcomes, but the nature and intensity of the
problem will determine the number of scenarios generated. The
literature indicates that two scenarios simplify decision making by the
manager, but they do not enhance creative thinking, and establish a
polarised view of the future. Three scenarios overcome the polarised
image of the future found in the two-scenario design, but in practice it
seems as if management usually decides on the middle scenario. Four
scenarios, especially if in matrix form, are better than two or three
scenarios, but it often happens that some of the scenarios become very
artificial.

How should scenarios be named?

It is important to develop a scenario narrative. There are two
approaches to the naming of scenarios, the optimistic-pessimistic
approach (e.g. high road–low road) or the thematic approach (e.g.
armageddon, siege or checkmate). The disadvantage of these names is
that each of them carries a specific bias that may be detrimental to the
function of scenarios. Another approach may be to simply refer to
scenarios as scenario A, B or C, or 1, 2 or 3, following the sequence in
which they were created. The creativity of a scenario planning group
will typically resolve these issues fairly easily, but care should be
taken not to choose names of politicians, countries or any offensive
references. References to animals, geography, music and seasons are
often preferred.

In practice there are a number of steps in the process of generating

scenarios, as well as a general consensus about the steps that should be
followed. These steps are all related and serve as the scenario logic,
but should never be followed dogmatically. They should rather be
regarded as general guidelines for developing scenarios.

Scenario experts agree that 10 to 15 steps, divided into six major

phases, would be enough to generate scenarios (see Figure 7.6). These
phases present a basic framework, but the process of scenario
development is often more important than the final product. These
phases do not present a recipe for successful scenarios in themselves,
because scenarios are an intellectual leap from the current reality to the
future, and that remains an intuitive skill that gets better the more you
repeat it.

7.3.4.1 Phase 1: Scenario inputs

The first phase of scenario development is really the orientation of the
scenario project in that it deals with the scenario mandate, the
stakeholder needs and the framing of the problem in a proper strategic
management narrative. It is very important that this phase consider the
organisational culture in framing the problem.

7.3.4.2 Phase 2: Scenario preparation

Once the decision has been made to develop scenarios, a series of
important steps will follow, such as articulating the purpose of
developing scenarios, defining the scope and timeframes and
composing a scenario team. The scenario team composition is a crucial
decision: any team should be a diverse group of people who represent
the organisation as a whole, as well as specialists and outsiders. An
independent facilitator is a crucial and unavoidable part of the team. If
the team were to consist of top management only, there would be very
little legitimacy to the end product. People would necessarily refer to it
as “official scenarios” and this would constitute a waste of money and
time. By the end of this phase, the scenario project will be a formal
management proposal with the necessary top management mandate
and buy-in.

7.3.4.3 Phase 3: Scenario exploration

Once the scenario team has been composed and the problem has been
formulated within its scope and timeframes, the serious work of
scenario development is ready to start with an analysis of the external
and internal organisational environments. Several processes and
techniques may be used, such as a SWOT analysis, Delphi techniques
and other decision-making models to analyse the PESTE environment.
Survey research among key decision makers may also be very useful.
The purpose of this phase is to get all the information and data together
for the next phase and to dig deeper into the organisational
environment.

7.3.4.4 Phase 4: Scenario development

In this phase, the scenario team usually isolates itself to hold several
brainstorming sessions based on the inputs of the previous phase. The
scenario team will develop the following aspects by brainstorming the
issues, trends and key uncertainties:

Prioritised issues and trends according to their impact on the

organisation
Prioritised uncertainties
 Scenario logics (by developing a scenario matrix)
Definition of a scenario plot and title
A scenario story or narrative

7.3.4.5 Phase 5: Scenario implementation

This phase aims to put the developed scenarios to good use in the
organisation. This would include a professional presentation of the
scenarios and a clear answer to the original mandate and requirements.
The scenarios may be tested in the organisation and with external
stakeholders. If the scenarios are to be put to good use, a
communication strategy (to communicate the essence of the scenario)
should also be developed and made available.

7.3.4.6 Phase 6: Scenario assessment

The last phase of scenario development is the proper documentation of
the process, the findings and the recommendations made. From this
phase the need for further research will emanate, and new business
opportunities and even changes to the organisational strategy may
follow. A scenario development process may follow in the next
financial year, or it may only be revisited for relevance and updating if
the current scenario project was done thoroughly.

The scenario process can thus be summarised in the following way:

It tries to put a great volume of information in a causal context and

create a better understanding of cause and effect.
It develops a structure that cannot be verified or falsified, because
scenarios present the best knowledge of a situation and contribute to
better strategies.
It develops a “feeling” for the future among management members
by using, for example, computer simulations that enhance the
interface between knowledge of the environment and strategic
management.
 It develops perceptual skills among management members to enable
them to not only focus on outcomes, but also on driving forces and
key uncertainties.
It develops the ability of management to manage complexity,
continuous change, a magnitude of possible outcomes and
uncertainty as normal strategic management phenomena.

7.3.5 Characteristics of poorly designed scenarios

It is important that scenarios are properly constructed. The
characteristics of poorly constructed scenarios are as follows:

In poorly designed scenarios the key assumptions made about the

organisational environment were not comprehensively evaluated by
the scenario team.
If not enough expertise was used, especially when external
facilitators were used, the quality of the scenarios is substandard.
In poorly designed scenarios there is a lack of creativity and
imagination in the scenario process.
Scenarios may be biased in a specific way due to either excessive
optimism or pessimism in the scenario team.
The mere mechanistic extrapolation of trends that should lead to
scenarios will create selective and poor scenarios.
Overspecification of the scenario development process or
management manipulation will lead to poor scenarios.

7.3.6 Characteristics of well-designed scenarios

It is important that scenarios are well constructed and designed. The
characteristics of well-designed scenarios are as follows:

Well-designed scenarios are relevant and make an impact on the

strategic framework of the organisation.
 Well-designed scenarios inhibit tunnel vision among strategic
managers and also enhance strategic thinking.
The use of process facilitators in the scenario development process
is a sign of an effective process and the probability of good
scenarios.
Well-designed scenarios reflect internal consistency and are
perceived by users to be internally consistent.
Well-designed scenarios describe different futures, rather than
variations on a theme.
Well-designed scenarios describe futures that would be possible for
a substantial period of time, rather than highly temporary ones.
Well-designed scenarios keep key uncertainties on the strategic
planning and management agenda.
Well-designed scenarios are the source of new and undiscovered
business opportunities.
Well-designed scenarios are part of change management in the
organisation.
Well-designed scenarios are useful in creative problem solving.
Well-designed scenarios cover a wide range of possibilities and
pinpoint competitive situations.

7.4 Scenario development in South Africa

Although scenario development can be traced back to the early 1940s

and 1950s in South Africa, it seems as if the use of scenarios only
really started in the late 1970s. During this period, there was a major
resurgence in the literature on scenario development. One of the
reasons for the growth in scenario development in South Africa was
probably the fundamental uncertainty about the economic and political
future of South Africa prior to 1994.

Three scenario designs are presented in this section to demonstrate

how scenarios were utilised by different organisations. All these
scenarios had a major impact on strategic thinking in South Africa, but
more importantly they were different windows on possible futures for
South Africa.

7.4.1 A two-scenario design

The high road–low road scenarios have become a frame of reference in
the development of the scenario technique in South Africa. The
advantages of these scenarios were that they not only looked at the
South African organisational future, but also positioned South African
organisations in a global context. Sunter (1987; 1992) contrasted the
high road scenario so strongly with the low road scenario that he
created a polarised vision of South Africa’s future. He never indicated
the negative implications of the high road scenario, nor the positive
outcomes linked to the low road scenario. In that sense, he neglected
the realities of multiple outcomes. This scenario design was a very
good example of a comprehensive environmental scanning project as
part of the scenario process.

7.4.2 A three-scenario design

In 1997, the trade union federation COSATU developed three
scenarios to explore seven key uncertainties. These key uncertainties
included aspects such as the nature and scope of economic
development, the nature and scope of labour dynamics, the
fragmentation of social values in South Africa and the prospects of
socialism. The September Commission (1997) developed the
following three scenarios:

The desert and the promised land. In this scenario there was no
economic or social development in South Africa and the country
found itself in a desert. The question that this scenario put forward is
whether socialism presented a solution to this crisis.
 Skorokoro (zigzag). This was a low economic growth scenario with
limited social development and social fragmentation. There was,
however, growth in the number of black entrepreneurs and black
empowerment, which created a new middle-class. South Africa had
no clear vision but muddled through from one problem to another.
Pap, vleis and gravy. This was an economic growth scenario with
social development and job creation. Most of the people had “pap
and vleis”, but they were misguided by the gravy.

These scenarios presented a good overview of possible developments

in South Africa, but in the Commission’s selection of the Skorokoro
scenario as the possible planning scenario, it fell victim to the
vulnerability of the three-scenario design.

The Dinokeng Scenarios (2008) also represented a scenario design

with three scenario outcomes, despite developing a very promising
scenario matrix that could accommodate four scenarios (see Figure
7.7). The three scenarios they decided upon were called Walk Apart,
Walk Behind and Walk Together. The choice of scenario themes made
it quite obvious that every reader would choose to follow the “Walk
Together” road. (Read also the case study at the end of the chapter.)
 Figure 7.7 The Dinokeng Scenarios matrix

7.4.3 A four-scenario design

The Mont Fleur scenarios were normative scenarios that attempted to
point out which political and economic end-states were possible in
South Africa’s political transformation to democracy (Le Roux, 1992).
The scenario development process included representatives of all
communities in the scenario team. The Mont Fleur scenarios
developed a very effective scenario matrix and developed a good
scenario narrative for their time. Their scenarios were called the Lame
Duck Scenario, the Ostrich Scenario, the Icarus Scenario and the
Flight of the Flamingoes Scenario.

7.5 Summary
Timely information about changes in the environment in which the
organisation operates is one of the competitive advantages in which
any organisation should invest. To establish a system of continuous
environmental scanning, to invest in good techniques and methods of
environmental scanning and to integrate scenario planning with the
strategic management process is the recipe for any organisation that
would like to manage the dramatic changes that characterise the
current volatile environment. Environmental scanning and scenarios
are intimately linked: environmental scanning monitors the facts and
realities of the organisation’s environment, and scenarios develop
perceptions about the environment into strategic thinking. However,
environmental scanning and scenario development only become useful
tools in the hands of strategic managers if used continuously and once
they are integrated into an organisational management philosophy,
which promotes their use in strategic thinking.

Exploring the web

http://www.dinokengscenarios.co.za/
http://www.montfleur.co.za/about/scenarios.html
https://en.wikipedia.org/wiki/Scenario_planning
http://www.scenarioplanning.eu/fileadmin/user_upload/_imported/fileadmin/user_uplo
ad/Tool_Description_Scenario_Matrix.pdf
http://sloanreview.mit.edu/article/scenario-planning-a-tool-for-strategic-thinking/
https://www.inc.com/paul-schoemaker/7-keys-to-scenario-planning.html
https://www.linkedin.com/pulse/12-steps-successful-scenario-planning-project-freija-
van-duijne

References and recommended reading

Bishop, P. & Hines, A. 2013. Thinking about the future: guidelines for strategic
foresight. Hinesight [Kindle Edition].
Chermack, T.J. 2011. Scenario planning in organisations: how to create, use, and
assess scenarios. San Francisco: Brett-Koehler.
De Geus, A. 1997. The living company. Boston: Harvard Business School Press.
Fahay, L. & Randall, R. 1998. Learning from the future. John Wiley and Son.
Godet, M. 2001. Creating futures: scenario planning as a strategic management tool.
London: Economica.
Hamel, G. & Prahalad, C.K. 1994. Competing for the future. Boston: Harvard
Business School Press.
Kahane, A. & Van der Heijden, K. 2012. Transformative scenario planning: working
together to change the future. [Kindle Edition].
Le Roux, P. 1992. The Mont Fleur Scenarios: South Africa, 1992–2002. UWK:
Bellville.
Lindgren, M. & Bandhold, H. 2009. Scenario planning: the link between the future and
strategy. New York: Palgrave McMillan.
Marcus, A. 2009. Strategic foresight: a new look at scenarios. New York: Palgrave
MacMillan.
Martelli, A. 2014. Models of scenario building and planning. New York: Palgrave
Macmillan.
Ogilvy, J.A. 2002. Creating better futures: scenario planning as a tool for a better
tomorrow. Oxford: University Press. [Kindle Edition].
Ramirez, R. & Wilkinson, A. 2016. Strategic reframing: the Oxford scenario planning
approach. Oxford: Oxford University Press.
Schoemaker, P.J.H. 1993. Multiple scenario development: its conceptual and
behavioural foundation. Strategic Management Journal, 14 March: 193–213.
Schoemaker, P.J.H. 1995. Scenario planning: a tool for strategic thinking. Sloan
Management Review, 36(2): 25–40.
Schwartz, P. 1996. The art of the long view. London: Century.
Schwenker, B. & Wulf, T. 2013. Scenario-based strategic planning: developing
strategies in an uncertain world. Wiesbaden: Springer Gabler.
Sunter, C. 1987. The world and South Africa in the 1990s. Cape Town: Human &
Rousseau/Tafelberg.
Sunter C. 1992. The new century: quest for the high road. Cape Town: Human &
Rousseau/Tafelberg.
Van Der Heijden, K. 1997. Scenarios: The art of strategic conversation. New York:
Wiley.
Van Notten, P.W.F. 2005. Writing on the wall: scenario development in times of
discontinuity. Dissertation, Boca Raton.
Wack. P. 1985. Scenarios: uncharted waters ahead. Harvard Business Review, 63(1):
73–89.
Wilkinson, A. & Kupers, R. 2014. The essence of scenarios: learning from the Shell
experience. Amsterdam: Amsterdam University Press.
Wright, G. & Cairns, G. 2011. Scenario thinking: practical approaches to the future.
New York: Palgrave MacMillan.

Case study

Dinokeng Scenarios

(When reading this case study, refer to Figure 7.7 and the website
http://www.dinokengscenarios.co.za/ for further information.)

The Dinokeng Scenarios were developed in 2008/2009 by a very

diverse and well-educated scenario team. The scenario narrative began
like this: Where do we go from here? Which path will we choose?

The Dinokeng Scenario Team came together to take stock of where

South Africa stood and to consider possible futures for the country.
The team’s diagnosis of the then situation was that the South African
honeymoon was over. The Mandela and liberation dividend had been
fully settled. The heart of our challenges was that we had failed to
appreciate or understand the imperatives of running a modern
democratic state. Leadership across all sectors lacked clarity of
purpose and was increasingly self-interested, unethical and
unaccountable. We had a weak state with declining capacity to address
our critical challenges. In addition, our citizenry had been largely
disengaged or co-opted into government or party structures since 1994,
and had demonstrated a growing dependence on the state to provide
everything. The scenario team posed the following critical questions
about the future of our country:

1. How could we, as South Africans, address our critical challenges

before they would become time bombs that destroy our
accomplishments?
2. What could each one of us do – in our homes, communities and
workplaces – to help build a future that lives up to the promise of
1994?

The team’s scenarios offered three possible ways to answer this

question: three ways in which we might walk into and so create our
future. The first scenario was we Walk Apart. In this scenario, the
state would become increasingly weak and ineffective. A disengaged
and self-protective citizenry would eventually lose patience and erupt
into protest and unrest. The state, driven by its inability to meet
citizens’ demands and expectations, would respond brutally and a
spiral of resistance and repression would be unleashed.

The second scenario was we Walk Behind. In this scenario, the state
would become increasingly strong and directive, both enabled by and
enabling a civil society that would be increasingly dependent and
compliant. The state would grow in its confidence to lead and direct
development. However, it would not by itself have the capacity to
address our critical challenges effectively. The demands of
socioeconomic development and redistributive justice amid a global
and domestic economic crisis would place strain on the state’s capacity
to deliver to all and to be all. These strains would be most evident in
the declining ratio between revenue and expenditure. In the worst case,
the state would overreach itself and would be forced to borrow from
multilateral financial institutions. As a result, South Africa would lose
the ability to determine its own social spending agenda.

The third scenario was we Walk Together. This scenario told the story
of a state that would become increasingly catalytic and collaborative;
of an enabling state that would listen to its citizens and leaders from
different sectors; a state that would engage with critical voices, and
that would consult with its citizens and share authority in the interest
of long-term sustainability. This was also a story of an engaged
citizenry that would take leadership and hold government accountable;
a citizenry that would share responsibility for policy outcomes and
development. This would not be an easy path: the outcomes would be
open and vulnerable to manipulation by stronger actors, and the
alliances, pacts and partnerships required to address our challenges
could be too slow and weak to be effective.

CASE STUDY QUESTIONS

1. Identify the two key uncertainties used in the Dinokeng Scenarios

design.
2. Explain the essence of the three scenarios. What is the message of
each?
3. Would you consider developing a fourth scenario in the existing
scenario matrix?
4. What would you name the fourth scenario, following the existing
theme of the Dinokeng Scenarios, i.e. “walking”?

Strategy exercises

1. Briefly discuss the VUCA concept and make a presentation to an

organisation explaining each of the four components of VUCA.
2. Differentiate and explain the notions “issue”, “trend” and “key
uncertainty”.
3. What are the key scenario questions that any organisations should
ask itself?
4. Explain the conditions under which an organisation would use
scenarios.
5. Explain the scenario logic and the relevance of the scenario matrix
in the scenario logic to the owner or manager of an organisation.
6. Visit an owner or a manager of an organisation of your choice. Ask
him or her whether they engage in scenario development for the
organisation. If so, what are the scenarios?If not, explain to him or
her what the process of scenario development entails.
 PART
II

STRATEGY FORMULATION

A fter completing the part on environmental analysis, it is time to

develop the strategies. Strategy formulation will guide the
organisation in terms of the means to achieve its long-term goals and
objectives. Taking into consideration the outcome of the SWOT
analysis, the organisation is now ready to develop its long-term goals
and the competitive plan of action to achieve its goals and to arrive at
the envisaged vision set in the previous phase.

Chapter 8 deals with the setting of the long-term goals and developing
business-level strategies to help the organisation to achieve a
competitive advantage. Chapter 9 describes the grand or corporate
strategies that the organisation can follow to experience growth and
that will support the business-level strategies to achieve competitive
advantage. Chapter 10 examines the recovery strategies for when
organisations experience financial and sustainability problems. The
turnaround strategy specifically is an important recovery strategy.
Chapter 11 deals with strategies in different industry contexts. It is
important that in strategic planning, strategy formulators understand
that the industry context or life cycle phase will influence the strategic
option available to the organisation. Chapter 12 is included to highlight
the process of strategic management in the public sector.

This phase of the strategic management process is concluded with

Chapter 13, in which the importance of strategy choice is discussed.
After the available strategic options have been identified, the most
applicable strategic option must be chosen for implementation.
The strategic management process
 8 Business-level strategies
ADRI DROTSKIE
MARIKE VAN WYK

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Explain the importance of strategic goals in formulating strategies

Understand what a business-level strategy is
Discuss sustainable competitive advantage
Discuss the value creation element of strategy
Describe and implement the five generic business-level strategies
Critically evaluate the generic strategies

8.1 Introduction

It was stated earlier in this book that strategy is about positioning the
organisation optimally for long-term survival and sustainable
competitiveness. In order to arrive at this better future position, the
organisation has to develop strategic goals and formulate strategies to
achieve these goals. After the organisation has gained a clear idea and
understanding of the outcome of the SWOT analysis, it can determine
the strategic goals based on what the organisation is capable of
achieving. These strategic long-term goals will be achieved if the
organisation develops an appropriate strategy.

In Chapter 1 the different levels of strategy in an organisation were

described. In this chapter the focus is on developing long-term
strategic goals for the organisation and the business-level strategies to
help achieve these strategic goals. Organisations keep themselves busy
with strategy on a business level to obtain a sustainable competitive
advantage over their competitors in a specific industry or marketplace.
Business-level strategy also leads to value creation for both the
customer and the organisation.

This chapter will describe the five generic business-level strategies as

developed by Michael Porter (1980), including criticism of these
generic strategies. The strategy developed by Mintzberg (1994) will
also be discussed.

8.2 Strategic goals

The vision, mission and value statements provide direction and

guidance to all employees in the organisation by identifying the
organisation’s customers, markets, products and services, values and
beliefs. They also indicate which competitive advantage the
organisation would like to achieve. However, the mission statement is
broad in scope and therefore does not specifically state how it will be
pursued in the organisation. In order to provide more specific direction
with regard to each element of the mission statement, long-term goals
have to be formulated.

8.2.1 The importance of strategic goals

Strategic goals specify what the organisation wants to
achieve over the next few years and should meet certain
requirements to ensure that they contribute effectively to the
strategic management of the organisation. They are the focus points
when strategies are developed for the organisation, as they describe
what should be achieved by the strategies that are identified and
implemented. Long-term (strategic) goals are necessary because they
are translated into short-term objectives. If the strategic goal is to
increase the market share of the organisation, it is translated by the
marketing department into short-term goals that will focus on
increased sales to customers.

At least one of the long-term goals of the organisation will revolve

around the idea of competitive advantage. That is why business-level
strategies must be formulated. To survive, grow and prosper, an
organisation has to distinguish itself from its competitors. This means
that one or two strengths have to be identified within the organisation,
on which its competitive strategy can be based and which will make
the organisation’s products and services more attractive than those of
its competitors.

Strategic goals represent management’s commitment to achieving

certain performance goals within a specific time. The importance of
strategic goals is that organisations that have specific strategic goals
typically outperform organisations that do not have them and who try
hard, hoping for success. Valuable strategic goals must therefore be
measurable and linked to a particular time horizon. To formulate
proper goals and then trust a manager to achieve them in a specific
time has two strategic advantages in particular that further emphasise
the importance of strategic goals:

They replace aimless roaming with purposeful strategic decision

making.
They provide a set of benchmarks for the evaluation of the
organisation’s performance.

8.2.2 Types of strategic goals

Strategic goals are usually formulated for the following areas in the
organisation in order to take it to the next level:

Profitability. This refers to the organisation’s ability to survive over

the long term. This depends on its ability to generate sustainable
profits. Therefore, strategic goals are needed in terms of profit
margins and profitability.
 Productivity. The optimal positioning of the organisation requires
that attempts must constantly be made to improve the organisation
over a broad spectrum of its activities. In order to achieve this, the
organisation must constantly attempt to improve its productivity,
since resources are limited.
Competitive position. Strategic management involves the
positioning of the organisation relative to other organisations and
interest groups in the industry. Therefore, the organisation should
have specific goals with regard to its future position.
Human resources. The development of the organisation and the
extension of competitive advantage require that employees must
also develop accordingly. As mentioned in Chapter 5, human
resources and the accompanying competencies can really distinguish
one organisation from another. It is also of the utmost importance
that the organisation has a strategic perspective with regard to
relations with its employees. Strategic goals for these relations can
be helpful in creating a healthier work relationship and culture.
Technological leadership. One of the critical decisions that an
organisation must make is whether it wants to be a leader in the
market. This decision implies that the organisation must take a
critical look at its technology in order to determine what the
appropriate technology is that a certain leadership position requires.
Therefore, by creating strategic goals with regard to technology, the
organisation can ensure that the right technology is acquired and
developed in order to achieve its mission and vision.
Public responsibility. The organisation is inextricably part of its
environment. The organisation takes input from the environment
and, in return, gives output to it. Therefore, the organisation must
ensure that it behaves responsibly towards the environment. Well-
formulated strategic goals with regard to public responsibility are
important to meet the requirements of corporate governance.

8.2.3 Requirements for good strategic goals

Strategic long-term goals as well as the accompanying short-term
objectives must meet certain requirements. Normally one would say
that they must be SMART – specific, measurable, achievable
(acceptable), realistic and time bound. However, possibly one of the
most important considerations when formulating strategic goals is that
they must be appropriate. This implies that strategic goals bring about
activities that fall within the framework of the organisation’s mission
and that there must be congruence between goals and mission. Some
other considerations that must be taken into account when formulating
strategic goals are the following:

They must be acceptable and understandable. Managers and

other employees are more inclined to strive towards goals that are
acceptable to them and with which they can identify. Acceptable
goals result in managers and employees taking ownership of the
goals. Strategic managers at all levels of the organisation must have
a clear and uniform understanding of the goals. Top management
should therefore do everything in its power to ensure that other
managers understand these goals.
They must be flexible. Organisations do not operate in static
markets and environmental circumstances. The external
environment changes constantly and the organisation’s strategic
goals must thus be flexible enough to adapt to changes in the
markets.
They must be measurable. Strategic goals must be clear in terms
of what they should achieve and when they should be achieved.
Sometimes it is difficult to quantify certain strategic goals, but it is
important that the organisation develops methods according to
which these goals can be measured. If goals cannot be measured,
they cannot be achieved.
They must be achievable. The successful achievement of goals
leads to further success. We can thus say: “Success creates success.”
By ensuring that strategic goals are achievable, the organisation
plans to be successful, and success is built into the strategic
approach of the organisation.
 They must be motivational. Strategic goals must have a motivating
effect on the organisation. Goals must therefore be set “high”
enough so that it will be a challenge for managers and employees to
achieve them. This matter is debatable since people’s perception of
how “high” goals must be may vary. It is therefore important to
follow a participatory process when setting goals to ensure that
goals are experienced as a challenge and are motivational by nature.
Strategic goals must also take competition into account. Goals must
thus be aimed at depriving the best competitor in the market of its
competitive advantage.

It is a known fact that managers are sometimes inclined to exchange

long-term strategic goals for short-term financial gains. This approach
may be dangerous and will not necessarily ensure long-term
sustainability. It may be attractive when the organisation suffers
financially, but one must keep in mind that the development of a long-
term competitive position has more long-term advantages for
shareholders and other stakeholders than just short-term profitability.

Strategic goals indicate the strategic direction of the organisation. They

help the organisation to establish its strategic priorities, reduce
uncertainties about the way forward and clearly assist with the
allocation of resources. They set the way for formulating the
organisation’s strategy.

8.3 What is business-level strategy?

Business-level strategy is the plan that an organisation

develops to assist it in competing in the marketplace on a
day-to-day basis and is an expression of how it intends to
“do things right”. This is also known as the generic strategies or the
competitive strategies. One advantage of a business-level strategy is
that it consistently provides products and services to customers that
create more value than the products and services of the competitors.
The organisation utilises its resources and distinctive competencies to
gain a competitive advantage over its rivals.

Organisations adopt a suitable business-level strategy with the purpose

of maximising their sustainable competitive advantage and
profitability in an industry or market segment. Business-level
strategies also indicate the choices that an organisation has made about
how it intends to compete in a specific market segment or product
market.

All types of organisations develop and use a business-level strategy.

An organisation competing in a single-product target market in a single
geographical location does not necessarily need a corporate-level
strategy, but it does need a business-level strategy. A large diversified
organisation, on the other hand, will use a corporate-level strategy as
well as separate business-level strategies for the different market
segments or product lines.

Customers are the foundation of successful business-level strategies

and should never be taken for granted. When selecting a business-level
strategy an organisation needs to determine who it will serve, what the
needs and expectations of the targeted customers are and how these
needs and expectations will be satisfied. These are challenging tasks in
any organisation and it is therefore important that the organisation
understands the industry, the market, the customers and the broader
macroenvironment and its drivers, as described in Chapter 6.

A business-level strategy should be developed in such a manner that it

will lead to a sustainable competitive advantage as well as create value
for the customer and “of the customer” as described in Figure 8.2.

8.4 Key contributions of a business-level strategy in

an organisation
The question can be asked why organisations focus on a business-level
strategy. Two key contributions of business-level strategy to an
organisation are the development of a sustainable competitive
advantage and value creation. These two contributions will now be
described in more detail.

8.4.1 Sustainable competitive advantage

According to Michael Porter (1985), competitive strategy is all about
the activities organisations undertake to gain a competitive advantage
in a particular industry. Porter is known as the “father of competitive
strategy” as the generic strategies that he developed in the 1980s are
still seen as the most appropriate competitive business-level strategies
today.

Sustainable competitive advantage is the result of

implementing a strategic differentiator. It is the effect of an
organisation doing something different in terms of its
strategy or strategic approach. Competitive advantage is to have
something that your competitors do not have – it is the edge that an
organisation has over others. This something makes the organisation
unique and differentiates it from other organisations. The outcome of
this differentiation through competitiveness leads to a change in
performance, and the critical prerequisite for this outcome is
sustainability. “The fundamental basis of above-average performance
in the long run is sustainable competitive advantage. Though an
organisation can have a myriad of strengths and weaknesses vis-à-vis
its competitors, there are two basic types of competitive advantage an
organisation can possess: low cost or differentiation” (Porter, 1985: 5).

According to Thompson, Strickland and Gamble (2007), there is a

close link between competitive advantage and profitability. This means
that the quest for sustainable competitive advantage is of paramount
importance when crafting a strategy. According to them, the key to
successful strategy making is to create one or more differentiating
strategy elements that act as magnets to draw customers and that will
yield a lasting competitive edge for the organisation. They also state
that there is a strong relationship between strategy and competitive
advantage. Corporate strategies can build and protect competitive
advantage, but only a competitive strategy forms the basis for creating
a competitive advantage.

It is very important that a competitive advantage is

sustainable. Organisations can develop strategies that give
them a competitive advantage, but if it is not sustainable, in
other words it cannot be maintained over time, it is of little value to the
organisation. If the strategy is not sustainable, the competitors of the
organisation can easily obtain the same competitive advantage. A
sustainable competitive strategy, therefore, is a strategy that cannot
be imitated easily by competitors. A sustainable competitive strategy
should be based on the organisation’s resources, strengths and
distinctive competencies relative to its competitors.

Organisations should identify the windows of opportunity when

implementing a competitive strategy in the growth and maturity phase
of the organisation. When an organisation reaches the end of a growth
curve and needs to move into the next growth opportunity, sustainable
competitive advantages give it a sustainable position in the
marketplace, as demonstrated in Figure 8.1.

Figure 8.1 Role of competitive strategies in the growth

phase of the organisation

An organisation has a sustainable competitive advantage when it

implements a strategy that competitors are not able to duplicate or find
too expansive to imitate. An organisation can be confident that its
strategy has resulted in a competitive advantage only after
competitors’ efforts to duplicate or imitate the strategy have failed.
Organisations must remember that no competitive advantage is
permanent. The speed at which competitors are able to acquire the
skills needed to duplicate the advantages of the value-creating strategy
determines how long the competitive advantage will last.

8.4.2 Value creation

Other than ensuring a sustainable competitive advantage, a competitive
business-level strategy in an organisation also creates and adds value
to the customer and the organisation. When value is created in an
organisation, the optimal value is created when value is added to both
the customer and the organisation. As depicted in Figure 8.2, value is
added to the customer through a trade-off between the benefits and the
costs as seen by the customer, and (+) the value that is added by the
customer to the organisation through the trade-off between benefits
and costs as seen by the organisation.

Figure 8.2 Optimal value creation

An example of value creation through a successful business-level

strategy is Woolworths (see Strategy in action 8.1).

Strategy in action 8.1 Woolworths

Creating a sound business strategy that allows an organisation to experience

consistent growth, as well as an increase in market share, along with an
adequate return on investment can be a daunting task. The fluctuating global
economic climate, combined with the unique challenges of South Africa’s
economy, makes developing a successful business strategy increasingly
difficult.
Woolworths sells homeware and clothing and has also been well received by
their target market as a grocery store. It therefore serves as the perfect
 example of a company with a strong business-level strategy. Its aggressive
strategy, which incorporates weekly promotions at a substantially reduced cost
along with the benchmarking of product prices to ensure that it remains
competitive, indicates that Woolworths is fully aware of how important it is to
provide customers with value. Its substantial effort towards value creation
resulted in Woolworths experiencing an increase in shoppers from lower Living
Standards Measure (LSM) groups, as well as its traditional high LSM
customers.
Woolworths has not only managed to increase its market share, but has also
experienced a sudden upswing in turnover. In addition, the company has
enlarged the brand’s footprint across South Africa and beyond. Ian Moir,
Woolworths’ former CEO, witnessed decreased costs and increased profitably
during his time as the company’s strategic leader. Consumers everywhere are
searching for the best deal. Businesses need to realise that if they do not want
to risk losing a client, delivering exceptional value is of the essence.
Source: Adapted from http://www.seartec.co.za/3-sa-companies-with-winning-
business-strategy (accessed 11 March 2017)

An organisation may decide on a differentiation, a focus or a low-cost

strategy to create value for its customers. A differentiation strategy
would imply providing a product or service that is completely different
from any other. Customers would then feel that they had bought a
unique product, thereby experiencing a sense of value. A focused
strategy would mean that the organisation serves only a small segment
of the population and in this way provides exclusive value to its
customers. A low-cost strategy would add value because customers
pay less for the product than they expected or would have paid
elsewhere.

Creating value for customers implies

greater effectiveness through differentiated treatment according to

the needs, value, risk, vulnerability and potential of customers
being right the first time – implying efficient and effective
processes/transactions
better margins – value is created through lower prices for the
customer
more relevant/timely treatment based on key events.
Part of the strategic intent of an organisation is to obtain and sustain a
competitive advantage in the industry in which its operates. This
sustainable competitive advantage is realised through a strategic
differentiator. In various organisations interacting with customers, their
experience is seen as the strategic differentiator. Research, as well as
practical examples, is showing that organisations are currently moving
towards customer value as being a sustainable differentiator in the
business environment. The key driving force behind this shift from
experience to value is the tight economic situation globally. Customers
and organisations need value for money.

To realise customer value in an organisation, the following aspects

need to be taken into consideration:

What is customer value? A thorough understanding of the concept

and its consequences is necessary.
What are the value of customers and the value to customers?
Determine the current value and the ideal value of customers for
organisation, as well as the value proposition offered to the
customers.
How does customer value become a reality in the organisation? The
role of value propositions and offerings comes into play here.
How does customer experience lead to customer value in an
organisation? The role of employees in delivering good customer
service is important.
How can customer value management be established and
entrenched in an organisation? The organisation’s strategy, structure
and culture will contribute to this.

8.5 Five generic business-level strategies

The five business-level strategies described in this section are often
referred to as the “generic” business-level strategies because they are
used in all industries and by all types of organisations. These strategies
imply different organisational arrangements, control procedures and
incentive schemes. The type of industry, the size of the organisation
and the nature of competition will determine the type of business
strategy to apply.

The first four generic business-level strategies were developed by

Porter during the 1980s, while Mintzberg later added the fifth. They
are the following:

Cost Leadership, also known as Low-Cost Provider strategy

Differentiation or Broad Differentiation strategy
Focused Cost Leadership strategy
Focused Differentiation strategy
Best Cost, or Integrated Cost Leadership/Differentiation strategy

As depicted in Figure 8.3, the five generic strategies have two key
dimensions, namely, the market targeted and the type of competitive
advantage being pursued. If an organisation has a broad cross-section
of customers as its target market, its strategy should be focused on an
overall low-cost provider strategy or broad differentiation.
Organisations with a narrow customer focus or niche market focus
should focus on focused strategies. In combination with this
dimension, organisations should also distinguish between the types of
competitive advantage being pursued. The positioning of an
organisation according to a combination of these two dimensions will
lead to an indication of which one of the five generic strategies to
pursue.
 Figure 8.3 Five generic business-level strategies

Source: Thompson, Strickland & Gamble (2007: 134)

These generic business-level strategies will now be described in detail.

8.5.1 Cost Leadership or Low-Cost Provider strategy

The various authors on strategic management refer to this generic
strategy as either Cost Leadership or Low-Cost Provider strategy or
sometimes just Low-Cost strategy. In this chapter, the term Cost
Leadership strategy will be used.

An organisation following a Cost Leadership strategy strives to

achieve a lower overall cost than its competitors. Focusing on this
strategy also implies that the organisation’s products and services
consistently appeal to a broad spectrum of customers, usually by
underpricing competitors. This strategy is predominantly utilised by
organisations that focus on mass production of products. To achieve a
competitive advantage through cost implies that the organisation’s
cumulative costs across the total value chain of the organisation are
lower than the cumulative costs of the competitors. This means that
value chain activities must be managed with great care to drive costs
down. Effective use of the Cost Leadership strategy positions the
organisation in the marketplace in a way that enables it to create value
for customers, especially through lower prices.
There are also some other cost drivers in an organisation that must be
managed. One of these cost drivers is the ability to achieve economies
of scale. This happens when activities can be performed more cheaply
at larger volumes than smaller volumes. A large, established retail
chain such as Shoprite Checkers has much more bargaining power
with the suppliers of fast-moving consumer goods than a small
supermarket in a suburb. As such, the prices that Shoprite can
negotiate with suppliers will be much lower than those that the small
supermarket will be able to negotiate. Another cost driver is learning
and experience effects. An organisation’s costs can decline as
employee experience increases, because it will lead to higher
productivity and better (smarter) ways of doing things. Improved skills
through learning can lead to the organisational goals being achieved
more effectively and efficiently. Investment in cost-saving
technologies can also reduce the costs in an organisation. The
scanning system that Pick n Pay invested in to scan the prices of
groceries at till points will decrease the time per transaction. This may
lead to fewer cashiers at till points. Another advantage of this is that
stock levels are updated automatically and this will reduce Pick n
Pay’s stock management costs.

8.5.1.1 Distinguishing features of the Cost Leadership

strategy
The unique features of a Cost Leadership strategy are presented in
Table 8.1.

Table 8.1 The unique features of a Cost Leadership strategy

Cost Leadership
Target market A broad cross-section of the target market
Sustainable Lower overall costs than competitors
competitive
advantage
Products and Provides a good basic product or service with few frills
services
Production Searches continuously for cost reduction without sacrificing
 approach acceptable quality and essential features
Marketing approach The focus is on those product features that will lead to low
cost and ultimately to a lower price
How to sustain this Low prices/good value for customers Manage costs down
strategy in the total value chain of the organisation

Source: Adapted from Thompson et al. (2007: 157)

8.5.1.2 When is Cost Leadership the best strategy to

follow?
There are a few good reasons to follow this strategy. These reasons
include the following:

Organisations have the ability to reduce costs across the value chain.
If this is done, organisations can lower the price of their goods and
services.
Price competition among competitors is strong. If one organisation
introduces a sale with lower prices, its competitors may retaliate.
The customer market is price sensitive. There are some industries in
which a small price change (lower price) will result in a higher
demand for its products. Think about the introduction of Mango
airlines with its cheaper tickets.
The product offerings of competitors are similar and there is a great
degree of product standardisation. A customer can get the same
product from various organisations. Customers can “shop” for lower
prices.
Brand loyalty does not play a big role among customers. In the case
of standardised products customers support the organisation with the
lowest prices.
New entrants to the industry use introductory low prices to attract
buyers and build a strong customer base. Dis-Chem entered the
pharmaceutical market with an aggressive low-cost strategy,
catering for a broad market that is price sensitive.
 Buyers have high bargaining power because of higher concentration
in the broad market. Customers have the power to negotiate lower
prices.
Buyers incur low switching costs. Switching occurs when a
customer changes from one brand to another, for example changing
from one bank to another. Switching will be triggered by lower
prices.
The market is large enough to provide the organisation with
economies-of-scale advantages.

8.5.1.3 Advantages and disadvantages of a Cost Leadership

strategy
Pursuing a low-cost strategy increases the potential of an organisation
to increase its market share and profitability. The following are
advantages within the context of Porter’s Five Forces model, as
described in Chapter 6.

The cost leader is able to charge a lower price than its competitors
and yet make the same level of profit as a result of the lower costs
and perhaps also as a result of higher turnover.
If rivalry within the industry increases and organisations start
competing on price, the cost leader will be able to withstand
competition better than the other companies because of its lower
costs.
The cost leader experiences more protection from industry
competitors by its cost advantage. Customers who are familiar with
the products and services of low-cost leaders are unlikely to switch
to a competing brand, unless the competing brand has something
very different or unique to offer.
The focus on lower cost leads to an organisation being less affected
than its competitors (that do not follow a low-cost strategy) by
increases in the price of inputs if there are powerful suppliers.
 They are also less affected by powerful buyers, because they already
have lower prices than competitors that do not follow the same low-
cost strategy.
Because Cost Leadership usually requires a big market share, the
cost leader purchases in relatively large quantities, thus increasing
its buying power over suppliers.
If substitute products start to come into the market, the cost leader
can reduce its price to compete and retain its market share.
The cost leader’s cost advantage constitutes a barrier to entry
because competitors cannot match the leader’s costs or prices in the
industry.

There are, however, also some disadvantages to Cost Leadership

strategies. They are as follows:

Competitors do sometimes have the ability to find ways to produce

at lower cost and beat the low-cost provider at its own game.
Competitors may have the ability to imitate the cost leader’s
methods of product or service development and production.
The cost leader can, in its single-minded desire to reduce costs, lose
sight of changes in customers’ tastes and expectations. Mr Price
cannot, for example, just focus on lower costs, without keeping up
with the latest trends in fashion. Sometimes a degree of
differentiation is still needed – lowest price is not always enough.
Read Strategy in action 8.2 to see how Shoprite adapted to
customers’ needs during times of ever-increasing food prices.

Strategy in action 8.2 Shoprite Holdings

The South African business environment is difficult. The year 2016 was
characterised by increasing inflation rates, the worst drought since 1904, which
led food prices to skyrocket, an unemployment rate of 27 per cent and the
slowest economic growth in seven years. Shoprite has managed to outperform
higher-end department store chains through its Cost Leadership strategy. In
2016, consumers with limited spending money unapologetically avoided more
expensive grocery products in favour of cheaper options. South African
shoppers have been hurt by an inflation rate, which reached a 10-month high of
 6,8 per cent in December 2016, with an increase in food costs. With consumers
holding back and not spending as easily, Shoprite realised the importance of
not letting the quality levels of its products – especially foodstuffs – drop, while
emphasising lower costs through its marketing initiatives.
Source: Adapted from http://www.fin24.com/Companies/Retail/shoprite-wins-
as-consumers-seek-cheap-food-to-beat-inflation-20170119 (accessed
11 March 2017)

8.5.2 Broad Differentiation strategy

The second generic strategy that can be developed and implemented in
an organisation is a Differentiation strategy. In the model of the five
generic business-level strategies as depicted in Figure 8.2, this strategy
is described as a Broad Differentiation strategy to distinguish it from
the Focused Differentiation strategy.

An organisation focusing on a Differentiation strategy produces

products and services that customers perceive as being unique in ways
that are important to them. The “uniqueness” that is provided through
a Differentiation strategy can be physical or psychological. For
example, a product’s appeal to customers’ psychological desires can be
the source of differentiation, such as the prestige and status linked to
BMW or Rolex watches. Another example of a differentiator is KFC.
The secret recipe of KFC is difficult to imitate and customers are
willing to pay a higher price for KFC products.

Organisations can differentiate in every activity of the value chain, for

example in procurement activities by purchasing the highest quality
replacement parts, or in human resource management by developing
compensation programmes to encourage staff to be creative and
productive. Through a Differentiation strategy an organisation
produces unique products for customers who value differentiated
features more than they value low cost (price). Continuous success
with a Differentiation strategy results when the organisation
consistently upgrades differentiated features that its customers value
and creates new ones through innovation without significant cost
increases.
Successful differentiation allows an organisation to do one or more of
the following:

Command a premium price for its products and services

Increase its unit sales because of the experience of a unique product
Gain buyer loyalty to its unique brand

A Differentiation strategy can be pursued from various angles, for

example differentiating multiple features (Microsoft), one-stop
shopping (Amazon, Pick n Pay home shopping), engineering design
and performance (Mercedes, BMW), product reliability (Johnson &
Johnson) and prestige and distinction (Rolex). Seattle Coffee Co. is an
organisation that has successfully implemented a differentiation
strategy (see Strategy in action 8.3).

Strategy in action 8.3 Seattle Coffee Co.

Seattle Coffee Co. works hard to maintain the craft element of coffee. Through
their Broad Differentiation strategy, the owners of Seattle Coffee Co. make sure
their coffee is delicately preserved and nurtured as it moves through the
process from bean to cup. As the coffee industry has matured, it has become
evident that quality often gets lost along the way.
Numerous producers make use of poor-grade, mass-sourced green coffee that
is often difficult to trace back to its original farm or cooperative. Mass roasting,
along with operating off a limited foundation of roasting knowledge, reduces the
overall quality to a great extent. The sad reality is that in many instances in the
coffee industry in South Africa, the will to operate against the abovementioned
status quo is lacking and this ultimately results in poor-quality coffee that is
continually produced on a large scale.
Seattle Coffee Co. therefore consistently tries to recapture the artisanal
approach behind this caffeinated craft. Differentiation in terms of quality
assurance through the traceability of crops, handpicked harvesting, hand
roasting and manual espresso production is what forms the foundation of the
organisation’s quality-at-all-costs attitude. To further strengthen its Broad
Differentiation strategy, Seattle Coffee Co. has decided that it will never grow at
a rate where quality would become a casualty, and this mindset enables it to
provide products and services of premium quality at all times.
Source: Adapted from http://www.seattlecoffeecompany.co.za/who-we-are/
(accessed 11 March 2017)
8.5.2.1 Distinguishing features of the Differentiation
strategy
The unique features of a Differentiation strategy are presented in Table
8.2.

Table 8.2 The unique features of a Differentiation strategy

Broad Differentiation strategy

Target market A broad cross-section of the market
Sustainable Offers buyers products and services that are attractively
competitive different from competitors
advantage
Products and Product and service variations; wide selection; emphasis is
services on differentiating features
Production Strives for product superiority and builds in differentiating
approach features that buyers are willing to pay for
Marketing approach Focuses on differentiating features
Charges a premium price to cover the extra costs of the
differentiating features

How to sustain this Focuses constantly on innovation to stay ahead of

strategy competitor imitations
Focuses only on a few key differentiating features

Source: Adapted from Thompson et al. (2007: 157)

8.5.2.2 When is Differentiation the best strategy to follow?

A Differentiation strategy will be the best competitive strategy to
follow in the following cases:

Brand loyalty exists and therefore customers will have a lower

tendency to switch to a competing brand.
Differentiated products and services can be designed in such a way
that they have wide appeal to various industry sectors.
 Buyers perceive the differences in products and services as added
value.
Only a few competitors follow the same differentiation approach in
a specific industry.
Buyers’ preferences are diverse and different offerings are available
to different customer segments.

8.5.2.3 Advantages and disadvantages of a Differentiation

strategy
The advantages present good reasons why Differentiation will be a
good strategy:

Differentiation safeguards an organisation against competitors to the

degree that customers develop brand loyalty for its unique and
differentiated products and services.
Differentiators are unlikely to experience problems with powerful
buyers as the differentiator offers the buyer a unique product that
will be difficult to find elsewhere.
Differentiation and brand loyalty create a barrier to entry for other
organisations planning to enter the industry.
The threat of substitute products and services is dependent on the
competitor’s products meeting the same customer needs.

Despite these benefits, the following disadvantages of pursuing a

Differentiation strategy should be mentioned:

An organisation may not really succeed in maintaining its perceived

uniqueness in the eyes of the customer.
First-mover advantage lasts only so long, and as the overall quality
of products and services made by all organisations increases, brand
loyalty declines.
Profit declines can occur because of differentiation of one product or
product line at the expense of another.
 Too much differentiation can lead to very high prices. The key to
successful differentiation is providing an appropriate level of high
quality at a price that is perceived as good value for money.
Overspending on efforts to differentiate the organisation’s product
and service offering may erode profitability.

8.5.3 Focused strategy (Cost Leadership and

Differentiation)
The third business-level generic strategy is a Focused strategy. Porter
distinguished between a Focused Cost Leadership strategy and a
Focused Differentiation strategy as depicted in Figure 8.2. Focused
strategy will be described as a holistic concept, while emphasising the
unique features of the Focused Cost Leadership and Focused
Differentiation strategies.

A Focused strategy differs from the previous two strategies mainly in

that it is directed towards serving the needs of a limited customer
group or segment. A Focused strategy concentrates on serving a
particular market niche, which can be defined geographically
(Gauteng, a specific area), by region or locality (a specific city), by
customer type (the youth market) or by market segment (LSM 9 and
10). In following a Focused strategy an organisation is specialising in
some way. A focused organisation is a specialised differentiator or a
cost leader. A focused organisation competes with a differentiator in
one segment; for example Porsche, a focused organisation, competes
against GM in the sports car and luxury SUV segment of the auto
market, not in other segments.

Organisations applying a Focused strategy utilise their core

competencies to serve the needs of a particular industry segment or
niche to the exclusion of others, leading to a sustainable competitive
advantage in the industry.

Organisations can create value for customers (see Figure 8.2) in

specific and unique market segments by utilising the Focused Cost
Leadership or the Focused Differentiation strategies. Focused strategy
is strongly related to brand loyalty. Organisations that can create brand
loyalty for their products and services develop a very strong niche with
customers who will not easily switch to a competitor.

With a Focused strategy, an organisation such as Giorgio Armani must

be able to complete various primary and support activities of the value
chain in a competitively superior manner to develop and sustain a
competitive advantage and earn above-average returns. The activities
are very similar to those found in an organisation applying a Cost
Leadership or Differentiation strategy, but the difference is competitive
scope. Armani focuses on a narrow industry segment.

8.5.3.1 Unique features of a Focused strategy

The distinguishing features of the Focused Cost and Differentiation
strategies are presented in Table 8.3.

Table 8.3 The unique features of the two Focused strategies

Focused Cost Leadership Focused Differentiation

Target A narrow market niche where
market buyer needs and preferences are
distinctively different
Sustainable Lower overall cost than rivals in
competitive serving niche members
advantage
Products Features and attributes tailored
and to the tastes and requirements of
services niche members
Production A continuous search for cost
approach reduction while incorporating
features and attributes matched
to niche member preferences
Marketing Communicates attractive
approach features of a budget-priced
product offering that fits niche
buyers’ expectations
A narrow market niche where
buyer needs and preferences
are distinctively different
Distinguishing attributes that
appeal specifically to niche
members
Features and attributes tailored
to the tastes and requirements
of niche members
Custom-made (differentiated)
products and services that
match the tastes and
requirements of niche market
segments
Communicates how the
differentiated product or service
offering does the best job of
meeting niche buyers’
expectations
 How to Commitment to serving a niche
sustain this market at lowest overall cost; not
strategy blurring the organisation’s image
by entering other market
segments or adding products
Commitment to serving a niche
market better than rivals; not
blurring the organisation’s
image by entering other market
segments or adding products

Source: Adapted from Thompson et al. (2007: 157)

8.5.3.2 When is a Focused strategy the best strategy to

follow?
The following reasons are given for an organisation to follow a
Focused strategy as the best generic strategy:

In the case of Focused Differentiated strategy, customers are brand

loyal and are unlikely to shift their loyalty to a competing brand,
regardless of price. In a Focused Low-Cost strategy, brand loyalty
does not play that important a role.
Customers are willing to pay a high premium for the perceived
value that they attach to a customised product or service in a
Focused Differentiated strategy.
The target market niche that the organisation has identified is large
enough to be profitable and offers growth potential.
It gives a smaller organisation an opportunity to compete without
direct competition from large organisations, which deem the
segment an unimportant one in which to compete.
It is viable for larger organisations to meet the specialised needs of a
niche segment while maintaining performance in their mainstream
market segments.

8.5.3.3 Advantages and disadvantages of a Focused

strategy
There are advantages as well as disadvantages in following the
Focused strategy in general. The advantages are as follows:
 A focused organisation’s competitive advantage stems from the
source of its distinctive competence, for example efficiency, quality,
innovation or responsiveness to the specific customers they serve.
The organisation is protected from competitors to the extent that it
can provide products and services the competitor cannot deliver.
A focused strategy gives the organisation power over its buyers,
because they cannot get the same products and services from
anybody else.
Potential new market entrants have to overcome the customer
loyalty the focused organisation has generated, which reduces the
threat from substitute products.

What are the disadvantages of a Focused strategy? The following are

some of the disadvantages:

Focused organisations are at a disadvantage because they buy inputs

in small volumes and therefore suppliers have some bargaining
power.
A competitor can learn how to “out-focus” a focused organisation
by gaining some exclusive skills and competencies.
The high costs associated with research and development and
innovation can reduce the profitability of a focused organisation,
leading to a reduced cost advantage.
Differentiators compete for a focused niche by offering products
that can satisfy the needs of focused customers, for example GM
and Ford’s new luxury cars are aimed at Lexus, BMW and
Mercedes-Benz buyers.
The needs of the market niche customers may gradually shift. The
organisation could find itself in a position where the profit potential
of the market niche is no longer attractive.

Read Strategy in action 8.4 about Varsity Vibe as an example of an

organisation focusing on a specific market segment.
 Strategy in action 8.4 Varsity Vibe

Being a student can be tough and money is always tight. The Varsity Vibe team
has come up with a solution focused on this market segment – South Africa’s
first student discount mobile application that allows students to receive
discounts.
Varsity Vibe is focused on a very specific target market and offers instant
access to substantial student deals for members only. Anyone can download
the app and see the deals, but only a student (ANY student) can become a
member and get the deals. Varsity Vibe helps South African students enjoy the
perks of student life by organising student deals with the coolest brands in
South Africa, such as Tiger’s Milk, Hudsons – The Burger Joint, Uber, Cotton
On, Claire’s, Protea Bookshop, Studio88, Food Lover’s Market, Factorie, Cipla
Nutrition, Refinery, Kauai, Flight Centre, Virgin Active, Puma, Typo and KFC.
These deals are available all year round – not only once-off. The membership
fee is an extremely low, a once-off R200 for twelve months from the date of
purchase. The app is designed exclusively to get students deals and discounts,
and includes handy features such as geographically pinpointing all the deals in
close proximity so that they never miss out on an opportunity to save a few
bucks. The app is available for download from the iPhone App Store as well as
Google Play and consists of an easy three-step sign-up process.
Varsity Vibe has a focused product offering and uses low costs as the basis of
its competitive advantage to strengthen its appeal to its target market.
Source: Adapted from http://info.varsityvibe.co.za/about/ (accessed 11 March
2017)

8.5.4 Best Cost or Integrated Cost

Leadership/Differentiation strategy
The next generic business-level strategy is the Best Cost strategy, also
described by other authors as the Integrated Cost
Leadership/Differentiation strategy. A Best Cost strategy is a plan
that integrates the features of Cost Leadership and Differentiation into
one strategy. This strategy can be utilised to serve a broad or narrow
target market. McDonald’s is an example of an organisation that
utilises this strategy in a broad target market (see Strategy in action
8.5).

The objective of using this strategy is to produce products and services

efficiently (lower input costs) with some differentiated features.
Efficient production is the source of maintaining low costs, while
differentiation is the source of creating unique value for the customers
and the organisation. Originally Porter called this type of strategy a
“middle-of-the-road” strategy.

Strategy in action 8.5 McDonald’s

McDonald’s has been very successful in pursuing Differentiation and Low Cost
together. Through highly automated operations and efficiency, it pursues a low-
cost position, but also achieves high levels of consistency over time and place.
This feature creates customer value, especially for those who travel
internationally. The comment “a McDonald’s burger is a McDonald’s burger, no
matter where you are” illustrates its effective Differentiation strategy. The
success of its Cost Leadership strategy is illustrated by the fact that the tourist
also knows that, no matter where you travel in the world, a McDonald’s burger
will always be relatively affordable.
Source: http://www.mcdonalds.com (accessed 28 March 2013)

8.5.4.1 Unique features of a Best Cost strategy

The distinguishing features of the Best Cost strategy are presented in
Table 8.4.

Table 8.4 The unique features of the Best Cost strategy

Best Cost strategy

Target Customers are value-conscious buyers
market
Sustainable Ability to give customers more value for their money
competitive
advantage
Products Items have appealing attributes; various upscale features
and
services
Production Incorporates upscale features and appealing attributes at a lower
approach cost than competitors
Marketing Focuses on delivery of best value – either delivers features at a
approach lower price than competitors or else matches competitors on prices,
but provides better features than competitors
How to Unique expertise in simultaneously managing costs down while
 sustain this incorporating upscale features and attributes
strategy

Source: Adapted from Thompson et al. (2007: 157)

8.5.4.2 When is Best Cost the most appropriate strategy to

follow?
When and where is Best Cost strategy the best generic strategy to
follow?

In markets where buyer diversity makes product differentiation the

norm and where buyers at the same time are also sensitive to price
and value.
Customer demands, expectations and needs provide sufficient
reasons for the organisation to invest in enhanced efficiencies and
cost savings as well as in differentiation.
Competition is tough in this type of value-conscience market and at
the same time there are not really barriers of entry.
Customers are both price and quality sensitive, because they
demand value for their money.

8.5.4.3 Advantages and disadvantages of a Best Cost

strategy
There are both advantages and disadvantages for organisations when
following a Best Cost strategy. The advantages are as follows:

Organisations that successfully integrate Cost Leadership and

Differentiation strategies find that their competitive advantage is
often more difficult for competitors to imitate.
This integrated strategy has a positive relationship with above-
average return and profitability.
 The Best Cost strategy assists organisations in providing value in
terms of differentiated attributes as well as lower prices.

The disadvantages of a Best Cost strategy are the following:

The organisation’s biggest vulnerability in applying this strategy is

getting squeezed between the strategies of organisations utilising
either a Cost Leadership or a Differentiation strategy.
Organisations may miscalculate the real sources of revenue and the
needs of customers within the industry and fail to achieve the
expected profitability and profit growth.
Organisations may fail to create both differentiation and low cost
simultaneously and may end up with neither and become “stuck in
the middle”.
It is difficult to provide low prices and differentiate at the same
time. Organisations may underestimate the challenges and expenses
associated with this effort and may end up with lower profitability.

8.6 Criticism of Porter’s generic business-level

strategies

Porter’s generic business-level strategies were developed during the

1980s and are still implemented globally by organisations in all
industries and organisation types. Over time, various authors have
critiqued these strategies, but they are still applied successfully,
leading to a sustainable competitive advantage.

The following are criticisms levelled at Porter’s strategies as debated at

a conference at Oxford University in 2009 (Datta, 2009):

Porter suggests a low-cost position that often requires high market

share. How does an organisation get to that position? Market share
 leaders often get to this position through a strategy of differentiation
and not necessarily through a Low-cost strategy.
Porter lists GM as a successful practitioner of Cost Leadership
strategy. However, quality data pertaining to 1976 to 1982 shows
that higher quality and differentiation played a key role in its
success.
Mintzberg (1994), also known as one of the “fathers of strategic
management theory”, argues that Porter’s Low-cost strategy is
actually a Differentiation strategy based on low price.
Contrary to Porter’s view, Differentiation strategies are more
profitable than Cost Leadership strategies, because market share
leaders prefer to compete on the basis of differentiation than low
cost.
Research shows that Differentiation and Cost Leadership can
coexist. Porter, however, insists that each generic strategy requires a
different culture and a totally different philosophy.
The flaw is not in Porter’s logic, but in his basic premise that
associates differentiation with uniqueness and premium prices. This
situation is generally not compatible with organisations with a high
market share.

8.7 Summary

This chapter focused on business-level strategies and it is clear that all

types and sizes of organisations need a business-level strategy. The
successful implementation of a business-level strategy leads to a
sustainable competitive advantage and value creation, which includes
value to customers and value of customers (profitability). There are
five generic business-level strategies, namely, Cost leadership,
Differentiation, Focus in Cost Leadership or Differentiation and Best
Cost strategy. The unique features, advantages and disadvantages of
each of these strategies were described in detail in this chapter. Since
the strategies were developed by Porter, other authors have critiqued
the strategies and their criticism was also described in this chapter. The
five generic strategies are still applied successfully in various
organisations worldwide, leading to a sustainable competitive
advantage over competitors and rivals.

Exploring the web

Information on Porter’s view on competitive strategy:

http://www.isc.hbs.edu/Strategy/Pages/default.aspx
http://smallbusiness.chron.com/four-generic-strategies-strategic-business-units-use-
496.html

References and recommended reading

3 SA Companies with winning business strategy. 2015. Available at:

http://www.seartec.co.za/3-sa-companies-with-winning-business-strategy (accessed
11 March 2017).
Datta, Y. 2009. A critique of Porter’s cost leadership and differentiation strategies.
Oxford: Oxford Business and Economics Conference.
Drotskie, A. 2009. Customer experience as a strategic differentiator in retail banking.
Stellenbosch: University of Stellenbosch Business School.
Ehlers, T. & Lazenby, K. 2010. Strategic management: Southern African concepts and
cases, 3rd ed. Pretoria: Van Schaik.
Female entrepreneurs: A recipe for success. Available at:
http://jozistyle.joburg/recipe-for-success-ucooksa/ (accessed 11 March 2017).
Hoskisson, R.E., Hitt, M.A. & Ireland, R.D. 2009. Business strategy theory, 2nd ed.
US: South-Western Cengage Learning.
Jones, G.R. & Hill, C.W.L. 2009. Strategic management essentials. New York: South-
Western Cengage Learning.
Kew, J. 2017. Shoprite wins as consumers seek cheap food to beat inflation.
Available at: http://www.fin24.com/Companies/Retail/shopritewins-as-consumers-
seek-cheap-food-to-beat-inflation-20170119 (accessed 11 March 2017).
McDonald’s. 2013. Available at: http://www.mcdonalds.com (accessed 27 March
2013).
Mintzberg, H. 1994. The fall and rise of strategic planning. Harvard Business Review,
January 1994. Available at: http://harvardbusinessonline.hbsp.harvard.edu (accessed
28 April 2008).
Porter, M.E. 1980. Competitive strategy: techniques for analysing industries and
competitors. New York: The Free Press.
Porter, M.E. 1985. Competitive advantage: creating and sustaining superior
performance. New York: The Free Press.
SA’s 1st student discount app is here! 2016. Available at:
http://info.varsityvibe.co.za/about/ (accessed 11 March 2017).
Seattle Coffee Co. [n.d.]. Available at: http://www.seattlecoffeecompany.co.za/who-
we-are/ (accessed 11 March 2017).
Thompson, A.A. Jr, Strickland, A.J. III & Gamble, J.E. 2007. Crafting and executing
strategy, 15th ed. Boston, MA: McGraw-Hill Irwin.
Volberda, H.W., Morgan, R.E., Reinmoeller, P., Hitt, M.A., Ireland, R.D. & Hoskisson,
R.E. 2011. Strategic management: competitiveness and globalisation. New York:
South-Western Cengage Learning.
Woolworths. 2015. 3 SA companies with a business strategy. Available at:
http://www.seartec.co.za/3-sa/companies-with-winning-business-strategy (accessed
11 March 2017).

Case study

UCOOK: A recipe for success

As the daughter of entrepreneurial parents, Klaudia Wiexelbaumer –

one of the masterminds behind the dinner kit delivery service UCOOK
– had witnessed first-hand the challenges and rewards related to being
an entrepreneur. Eager for a career just as absorbing and rewarding as
those of her parents, Klaudia tried to convert her lifelong love and
passion for food into a culinary career. She worked in different
restaurants, both locally and abroad, but it soon dawned on her that
being a chef – either in a restaurant or privately – was not exactly what
she initially pictured it to be.

Not only had Klaudia always been passionate about creating food and
recipes, but she also had the knowledge and a keen understanding to
back her passion. Attempting to create a platform where she could
combine her passion for all things culinary with her entrepreneurial
mentality, she seized the opportunity to partner with fellow food lovers
Christopher Verster Cohen and David Torr to create UCOOK in 2014.
UCOOK is an online dinner kit delivery service that enables its
customers to cook restaurant quality meals in the comfort of their own
home.

UCOOK clients browse the website, select the dishes they would like
to cook from one of three menus designed and carefully developed by
some of the top chefs in the country and then they pick their desired
portion size. Organic ingredients are sourced, accurately measured and
delivered to the clients’ doors by the UCOOK team, along with the
corresponding recipe cards. The best part is that consumers pay less
for the UCOOK service than they would pay for their own groceries at
their local supermarket.

UCOOK clients have a weekly choice between nine seasonally

inspired recipes. Three meals per week for one person will cost a total
of R308. The same offering for two people will amount to R594, while
three meals for three individuals will cost a weekly R815. All prices
also include the delivery fee. All the UCOOK ingredients are 100%
organic and sourced in a sustainable, environmentally friendly manner.
This enables the company to deliver a premium-quality service while
keeping the environment in mind. This is achieved by keeping its
menus seasonal, and only buying from small local suppliers and urban
sustainable farming projects.

UCOOK has managed to increase its customer base by 200% in the

last six months. In addition to enabling the people of Cape Town to
cook healthy gourmet meals in the comfort of their own homes over
the past two years, UCOOK Johannesburg has recently been launched.
Plans to expand across South Africa and beyond are also on the table.
Klaudia attributes UCOOK’s success to having a premium-quality
product that is good enough to be used by herself as the owner,
dynamic enough that it has the power to succeed, and having an online
platform that is stylish, informative and easy for the customer to use.

Since the birth of this enterprise, Klaudia has learnt a number of

valuable managerial lessons, the most important one being that getting
the everyday details right and being right the first time are what sets
you apart from your competitors. In addition, she also realised that as
the owner and a manager, when working with others she has to be
open to their ideas and visions even on the days she does not
necessarily agree with them.

UCOOK receives regular compliments such as “each recipe is more

tasty than the one before; how do you do it?”, “you have turned me
into the best housewife with your delicious meals, thank you” and
“UCOOK’s success is seriously important to me, I won’t be able to
live without it”. As an entrepreneur, it is the positive feedback from
customers on both the recipes and the service that fuels Klaudia to
continue to be innovative, to grow her business and provide this
unique service.
Source: Adapted from http://jozistyle.joburg/recipe-for-success-ucooksa/ (accessed 11 March
2017)

CASE STUDY QUESTIONS

1. What business-level strategy does UCOOK currently pursue?

2. How will UCOOK’s business-level strategy change the nature of
industry competition?
3. What factors contribute to UCOOK’s sustainable competitive
advantage?
Strategy exercises

1. Visit the store of a telecommunications organisation, e.g.

Vodacom, MTN, Cell C or Telkom. Observe the approach that they
follow when dealing with customers. Determine the range and
scope of product lines offered. Who is the target market? After this
observation, determine which business-level strategy is followed
by this organisation.
2. What is your preferred clothing brand? Visit the website of that
organisation and determine what business-level strategy is
followed by this organisation.
3. Find an organisation that has sustained a competitive advantage
over their competitors over the last five years. What determined
the competitive advantage?
 9 Corporate-level strategies
ADRI DROTSKIE

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Define what a corporate-level strategy is

Describe the purpose of developing corporate-level strategies
Describe the four categories and their related strategies on a corporate level
Link the business-level strategies to corporate-level strategies

9.1 Introduction

This chapter focuses on corporate-level strategy. These strategies are

also referred to as grand strategies. The focus is on defining corporate-
level strategy as a very important master or grand strategy of an
organisation. The purpose of focusing on corporate-level strategy is
mainly to improve shareholder value and the profitability of the
organisation. The main purpose of a corporate-level strategy is the
focus on profit growth. This issue will be discussed in detail in this
chapter. There are four categories of corporate-level strategy, namely,
growth strategies, cooperative or combination strategies, stability or
turnaround strategies, and exit or disinvestment strategies. These four
categories and all their specific strategies will be discussed in detail in
this chapter. The chapter concludes by linking the business-level
strategies as described in Chapter 8 with the corporate-level strategies.
9.2 Defining corporate-level strategy

Corporate-level strategy is about identifying the industry or

industries in which an organisation should participate to
maximise its long-term profitability. Corporate-level
strategy is also known as the master strategy or the grand strategy of
the organisation. This strategy provides the organisation with a road
map to the future. It can also be described as the comprehensive
general strategy that will guide the organisation’s actions – what are
the intentions of the organisation in terms of profitability and value
creation? Corporate-level strategy looks at the organisation as a whole
and it can be regarded as the overarching strategy that is implemented
in the organisation – in all businesses/business units/product
lines/geographical representation of the organisation.

On the corporate level of strategy, the organisation deals with the

questions of how many and in which industries they want to operate
and how to build synergy and a competitive advantage within and
among the different businesses or industries. Corporate-level strategy
also has to do with diversification of a single business into several
businesses or product lines. It therefore defines the organisation’s
operating terrain and provides the organisation with strategic
alternatives for the future.

Corporate-level strategy can be defined as actions that an organisation

can take to support the competitive strategy and help it gain a
competitive advantage by selecting and managing a group of different
businesses competing in different product markets. It is about the
selection of a new strategic position that will help the organisation to
add value to the organisation.

9.3 Purpose of corporate-level strategy

Why do organisations focus on and apply corporate-level strategies?
The reason is two-fold. Firstly it leads to the creation of shareholder
value, and secondly it has to do with maximising long-term
profitability and value. The purpose of any organisation is to position it
optimally by creating more value for all its stakeholders. As depicted
in Figure 9.1, value is created in organisations through a balanced
focus on profitability and profit growth. This can be depicted as a
scale, which must always be in balance. To obtain sustainable value
creation, the organisation must be profitable, but also grow its profit.
Profitability is also gained through a balanced focus on cost efficiency
and value-adding. Profit growth, on the other hand, is also achieved by
achieving a balance between selling more products and services in
existing markets while entering new ones. Many organisations are so
busy with creating and entering new markets that they forget about the
existing markets and almost assume that the existing ones will
maintain themselves. Again, a balance must be maintained between the
two sides of the scale.

Figure 9.1 Balance between profitability and profit growth

Source: Adapted from Hill (2007)

Shareholder value is the value that the shareholders of the organisation

cannot capture on their own by purchasing shares in the organisation.
Organisations that diversify into other industries or new businesses
create shareholder value through profit growth. In a multibusiness
organisation the whole is greater than the sum of the parts, thus
creating synergy. Organisations have several options when choosing in
which industries to compete:

An organisation can choose one industry and focus on that industry

through internal growth strategies and business-level strategies to
improve its competitive position.
An organisation can enter the same or new industries in adjacent
stages of its value chain through vertical integration.
An organisation can choose to enter new industries through
diversification.
An organisation can choose to exit some of the businesses or
industries in which it currently operates by restructuring or
downsizing.
Organisations in a specific industry may also have a need for a
stability or turnaround strategy in the case of a recession,
inefficiencies and non-competitiveness.

Corporate-level strategies offer organisations the ability to address two

very important strategic questions:

In which and how many businesses and industries should it operate?

This question has to do with “corporate scope”, which is defined as
vertical, horizontal and geographical scope, and “corporate
distribution”, which is defined as its dominance in each business
area.
How can the organisation build synergy and competitive advantage
among businesses or industries? This question has to do with adding
value in a sustainable and synergistic manner.

Corporate-level strategies assist organisations to select new strategic

positions that are expected to increase the organisation’s value. The
decision to pursue growth in order to create value is never a risk-free
choice. An effective corporate-level strategy across all businesses and
industries in which the organisation operates leads to profits that
exceed the profit that would have been achieved without the strategy in
place, therefore profit growth is experienced. This contributes to the
organisation’s competitiveness and its ability to earn above-average
profits.

9.4 Four categories of corporate-level strategies

There are four main categories of grand strategies that organisations

can pursue on a corporate level, leading to creation of shareholder
value through profitability and profit growth, namely, growth
strategies, cooperative and combination strategies, stability or
turnaround strategies, and exit or disinvestment strategies. The
categories and strategies are depicted in Figure 9.2.

Figure 9.2 Categories of corporate-level strategies

These categories with their associated strategies will now be discussed

in detail.
9.4.1 Growth strategies
The first category of corporate-level strategies is growth strategies.
Organisations seek growth to increase their profitability and profit
growth and thereby create shareholder value. The growth strategies are
internal or external to the organisation. Internal growth strategies
include market development, market penetration and product
development. Innovation as a management approach plays an integral
role in internal growth strategies as new markets and products need to
be developed and new markets identified. External growth strategies
include diversification and integration horizontally and vertically. In
the case of external growth strategies, growth can be within the same
industry or in a different industry. These strategies will now be
discussed in detail.

9.4.1.1 Internal growth

Internal growth strategies are also known as organic growth
(growth from within) or intensive growth. Internal growth
strategies focus on the existing products, services and
markets of the organisation as well as obtaining new (modified,
improved) products, services and markets (with reference to Strategy
in action 9.1). These strategies lead to growth in the existing
organisation from within. Innovation as a strategic approach plays a
critical part in internal growth strategies. Organisations that invest in
research and development (R&D) have the ability through
technologies, skills and competences to differentiate themselves
through innovation.

Strategy in action 9.1 Cell C

Since Cell C entered the South African cellphone market in 2001, it has
embarked on a concentrated internal growth strategy. Its advertising focuses on
the benefits and additional value that it offers customers. The drive is to attract
non-users to buy its products and convince customers of Vodacom and MTN to
switch to Cell C. Cell C states in its mission statement that it is “a provider of
possibilities”. It offers simple, innovative, value-for-money products, exceptional
customer service and the promise of something even better to come. In 2010,
Cell C rebranded and repositioned as the possibilities provider that really puts
the customer at the centre of everything that it does. With the aim of taking the
 lead in the mobile communications race, it is making a tremendous effort to
transform positively the lifestyle and livelihood of its customers.
So in an industry where innovation is key, it was the first to operate on a dual
band network. And right now, it is working on even more firsts, like building the
first HSPA+ network in South Africa, which already covers close to 92 per cent
of the population of South Africa with a network that provides customers with a
stronger signal both indoors and outdoors.
Cell C looks to the future to bring the customer the technology of tomorrow,
today. That’s why, above all, Cell C is a provider of possibilities. Every day,
more South Africans turn to Cell C for simple, innovative, value-for-money
products, exceptional customer service, and the promise of something even
better to come.
In the age of the internet the only constant is change. Cell C sees change as
opportunity. It is connecting with its customers on Facebook, Twitter and
Instagram. It wants to harness the power of the internet to serve customers
better.
Source: http://www.cellc.co.za/explore/additionalinfo/vision-and-mission
(accessed 1 May 2013)

Internal growth strategies include market penetration, market

development and product development.

MARKET PENETRATION
A market penetration strategy is also known as a
concentrated growth strategy. With this strategy, an
organisation seeks to increase its market share through
concentrated or focused marketing efforts. The focus is on the existing
products, services and market segments. The purpose of a market
penetration strategy is to attract possible non-users of the product or
service in the market, to increase the usage rate of the product for
existing customers, and perhaps to attract customers from the
competitors. The aim is to meet the needs and expectations of the
organisation’s customers better than the competitors.

A market penetration strategy is effective under the following

conditions:

Competitors do not serve the market that well and there is a decline
in their market share, while total sales remain constant or even
 increase.
There is still growth potential in the market for a specific product or
service, indicating that the market is not saturated.
There is a possibility of increasing the usage rate of present
customers.
Organisations have the ability to apply economies of scale because
these will provide them with cost benefits.
The availability, price and quality of the raw material and other
resources utilised to provide the products and services do not
fluctuate.

A market penetration strategy offers two main advantages. Firstly, it is

a low-risk approach as proven products, skills and resources are
utilised. Secondly, marketing an existing product line in the existing
market is less expensive than launching a new one. Also known as a
concentrated growth strategy, this strategy directs an organisation’s
resources to the profitable growth of a single product in a single
market with a single dominant technology. Examples of successful
concentrated growth strategies are McDonald’s, Goodyear and Apple.
All these organisations have utilised first-hand knowledge and deep
involvement with specific product segments to become powerful
competitors in their specific markets.

MARKET DEVELOPMENT
A market development strategy is about expanding the
organisation’s offering of existing products and services in
non-traditional locations, for example using creative formats
to reach new customers. Mugg & Bean On the Move stores at Total
petrol-stations, offering a new “express” location, are a good example
of this kind of market development (see Strategy in action 9.2).

Strategy in action 9.2 Famous Brands and Total South Africa

JSE-listed Famous Brands expanded its relationship with strategic alliance

partner, Total South Africa, in an attempt to make a new addition to upper-end
metropolitan service stations. Total South Africa approached Famous Brands to
 join forces with them in creating a brand new business model for its higher LSM
service stations that would have premium quality grocery offerings at its core.
This came as a result of Total recently embarking on a retail network and brand
renovation journey that incorporates a fresh, modern look and feel in their
current service. The partnership with Famous Brands allows for the proverbial
cherry to be put on top of Total’s plans. Mugg & Bean On the Move coffee
offerings, with seating areas for customers, now complement the rejuvenated
Total brand offering. Free Wi-Fi and charging facilities for electronic devices in a
stylish environment provide added value and an aesthetically pleasing
experience. Additionally, Famous Brands’ current strategic alliance with Total
South Africa will be strengthened by this new addition. It not only offers an
additional source of income for Famous Brands, but it also strengthens its
strategic ability to perhaps expand its business units into South Africa’s broader
retail market.
Source: http://www.fin24.com/companies/retail/famous-brands-and-total-sa-
extend-partnership-20140917 (accessed 11 March 2017)

Market development therefore has to do with new customers and

existing services. A market development strategy is seen as one of the
least costly and least risky strategies to pursue. Market development
allows organisations to implement a type of concentrated growth
through the identification of new uses for existing products and
services and new demographically, psychologically and geographically
defined market segments.

A market development strategy will be effective when the organisation

has access to reliable and affordable distribution channels in the new
area it wishes to enter. Sometimes it is necessary to develop a strategic
partnership with an organisation to enter the new market. If this option
is available, it makes sense to pursue market development as a
strategy. Mugg and Bean On the Move at Total filling stations is an
example of this.

PRODUCT DEVELOPMENT
A product or service development strategy is where current customers
are offered substantially modified and improved products and
services. Woolworths Food is a good example of this type of
development with the modified and improved food items constantly
offered in its stores. It understands the needs of customers and offers
new flavours and new meals daily. Product development therefore has
to do with existing customers and a “new” modified product or
service.

In a product development strategy, existing products and

services are substantially modified and marketed to existing
customers through established delivery channels. Examples
of product development strategies are a revised edition of a textbook, a
new car design and a new formula of shampoo for oily hair. This
strategy is often an attempt to prolong the product life cycle. The 1980
Toyota Corolla model does not look like the 2013 model. This is a
typical example of a product development strategy. This strategy is
usually customer driven – to meet the changing needs of the customer
with regard to a specific product.

This strategy will be effective in the following conditions:

Rapid technological developments are inherent in the industry and

competitors keep up with these new developments. In order to stay
competitive, organisations need to modify their products.
An important requirement is that capital must be available to invest
in R&D and technology and for acquiring the human capabilities
and competencies required.

9.4.1.2 External growth

External growth strategies include diversification strategies and
integration strategies. External growth strategies are focused on
expanding the organisation externally by, for example, adding new
business units and/or products to the organisation’s portfolio.

DIVERSIFICATION STRATEGIES
The typical notion about diversification is “not to put all
your eggs in one basket”. Diversification is “the process of
entering one or more industries that are distinct or different
from an organisation’s core or original industry to find ways to use the
(organisation’s) distinctive competences to increase value to
(customers of) products it offers in those industries” (Jones & Hill,
2009) (see Strategy in action 9.3).

Strategy in action 9.3 Mooo (merino wool blankets)

Mooo is a local company in the heart of the Free State that specialises in
manufacturing modern, stylish 100 per cent merino wool luxury knitted blankets
and throws that are sold online by the company itself and other online retailers.
One hundred per cent merino wool is not only a renewable and sustainable
resource, considering that the sheep will produce wool again the following year,
but it is also regarded as one of the softest fibres in the world.
Merino wool has the contradictory ability to keep you warm when you are cold
and to cool you down when you happen to be warm. Its natural elasticity allows
it to retain its form, which makes it the ideal material for gigantic knitted
blankets and throws.
Reaching more than 3000 likes on Facebook and Instagram in less than two
months, the Mooo brand, with its unique and stylish products, appeals to a wide
range of target markets for several different reasons, such as the ultrafine fibres
of 100 per cent merino wool being hypoallergenic, antibacterial and even
having the ability to soothe certain chronic skin conditions.
With its huge, chunky knits and throws gaining such wide acceptance, Mooo
seized the opportunity to expand its business by successfully implementing a
related diversification strategy. The addition of baby changing mats, bath mats
and room rugs, all made from 100 per cent merino wool, are only the beginning
for Mooo. The company is looking to expand internationally and will also be
adding Mooo starter packs to its list of product offerings soon. These starter
packs will include a set of gigantic knitting needles, a ball of 100 per cent
merino wool and a pattern, enabling consumers to take up knitting themselves.
Mooo has experienced incredible success in the three months since its start-up
and this speaks to the value of having sound business and corporate-level
strategies in place.
Source: Adapted from https://www.facebook.com/pg/mooowool/about/?
ref=page_internal (accessed 14 March 2017)

A diversification strategy leads to an organisation growing by adding

new businesses or markets to its existing operations. A diversified
organisation is also known as a multibusiness organisation operating in
more than one industry or market. In a diversified organisation synergy
plays a very important role. The whole diversified organisation must
create more value than the sum of the individual parts. A
diversification strategy can include the development of a global
strategy if the organisation expands across borders into new businesses
or markets. There are also different levels of diversification, ranging
from low levels of diversification, where a large percentage of total
sales still comes from the dominant business or product market, to
moderate to high levels of diversification.

Related or concentric diversification is the strategy of

operating a business in a new industry that is related to the
organisation’s existing businesses through the activities of
the value chain. Any form of diversification uses as its point of
departure the existing products and markets. The new products and
services relate to the existing products and services through technology
or marketing. A typical example of related diversification is when a
manufacturer of ski clothing diversifies into summer leisure clothing to
offset the seasonal sales of its products. A business just selling ice
cream can also start to sell coffee to offset the seasonal sales of ice
cream. Related diversification creates more value than unrelated
diversification, because synergy is better achieved.

Unrelated or conglomerate diversification is the strategy of

diversifying into a new business or industry that has no
value chain link with any of the businesses or industries in
which the organisation currently operates. There is no relationship
between the existing and the new products, services and markets.
Value is usually created through unrelated diversification if an
acquisition in a different industry or a restructuring strategy is applied.
The main reason for unrelated diversification is usually the financial
benefits (see Strategy in action 9.4).

This type of strategy is also linked to portfolio analysis, which results

in an organisation looking for another organisation that might remedy
any of its own perceived strategic weaknesses. One of the main ways
of following an unrelated strategy is to buy an organisation with
growth potential. The critical issue here is to make sure that the long-
term return on the investment will exceed alternative uses of the
capital.
 Strategy in action 9.4 Virgin

An example of an organisation successfully implementing an unrelated

diversification strategy is Virgin. Virgin was established by Richard Branson as
a record company. The organisation diversified into the transport industry and
established an airline (Virgin Atlantic), then diversified into the leisure industry
and established gyms (Virgin Active), then diversified into the financial services
industry (Virgin Money), etc. Each of the new businesses was established in a
new industry and is therefore totally unrelated.

An unrelated diversification strategy is also a high-risk strategy. These

are the reasons why it is regarded as a high risk:

The new technologies, skills and markets are unknown and

uncertain. As a result of these uncertainties and challenges, it may
be tempting for the organisation to apply more of its resources and
efforts to the new unrelated organisation. This will put the existing
organisation in a disadvantageous position.
As a result of inadequate knowledge about the new market and the
customers’ needs, the organisation may become inefficient and
ineffective.

Why do organisations diversify? A diversification strategy is applied

to create value, but it is also applied for value-neutral and value-
reducing reasons. Reasons for value-creating diversifications include
economies of scale (sharing activities or transferring core
competencies), market power (blocking competitors or vertical
integration) and financial economies (efficient internal capital
allocation or business restructuring). Reasons for value-neutral
diversification are, for example, antitrust regulations, tax laws, poor
performance or risk reduction. Reasons for value-reducing
diversification are mainly to diversify managerial employment risk or
increase managerial compensation.

When is diversification the best strategy for an organisation to pursue?

When a single business organisation encounters a decline in market

opportunities and stagnating sales in its core business.
 When there are opportunities to expand into industries with
complementary technologies and products.
When the organisation can leverage core competences and
capabilities and these resources become the key success factors in
the new business.
When diversifying into related businesses leads to reducing costs.
When the organisation has a powerful brand that can be transferred
to the other businesses.
When an organisation diversifies to build a bigger organisation to
reduce the likelihood of being acquired by an unwelcome outsider.

INTEGRATION STRATEGIES
The second group of strategies in the external growth strategy category
is integration strategies. Integration strategies are about enhancing the
organisation’s efficiency and effectiveness by obtaining control over
suppliers, distributors and competitors in an industry. The integration
happens through acquisition and amalgamation (mergers) of
competitors (horizontal integration) and suppliers or distributors
(vertical integration). Vertical integration is implemented in the value
chain of the organisation. If an organisation expands into the input side
of the value chain, it is called backward vertical integration. If the
expansion is in the output side of the value chain, it is called forward
vertical integration. Study Figure 9.3 to understand how integration
strategies work.
 Figure 9.3 Integration strategies

Source: Ehlers & Lazenby (2010: 209)

There are risks associated with both horizontal and vertical integration.
With a horizontal integration strategy, the risk is associated with
increased commitment to one type of business in the same industry. A
vertical integration strategy is associated with the risk of the
organisation’s expansion into areas requiring strategic managers to
broadenthe base of their competences and assume additional
responsibilities. Another risk is the overcommitment of resources to a
given technology or production process that may become obsolete in a
specific industry. Linking to this is the risk of overcommitting scarce
financial resources, thus making the organisation vulnerable in an
economic or industry downturn. Integration strategies actually increase
the idea of “putting all your eggs in one basket”. Horizontal and
vertical integration will now be discussed in detail.
Horizontal integration
Horizontal integration takes place when organisations want to gain
ownership or increase control over the competitor’s value chain and its
activities at the same stage of the production-marketing chain. It is
achieved through mergers, acquisitions and takeovers. A horizontal
integration strategy is attractive when an organisation competes in a
growing market or industry. The acquisition of a competitor makes
economic sense and the achievement of economies of scale could lead
to cost efficiency and a competitive advantage.
The merger between Disney and Pixar is an example of horizontal
integration (see Strategy in action 9.5). The challenges of the merger
and post-merger periods are differences in organisational culture,
skills, management styles and values.

Strategy in action 9.5 Disney-Pixar

Upon Disney’s acquisition of its biggest rival, Pixar, in 2006, it was widely
speculated that this strategic move would take a turn for the worse. However, a
few years into the integration, things are looking rather positive. Indeed, in an
industry where integrations such as this often create internal warfare on a large
scale (consider, for example, Paramount and DreamWorks SKG), Disney and
Pixar seemed to have found a way to prove the masses wrong.
The new chief executive of Disney, Robert A. Iger, made a valuable statement
when he noted that one can accomplish a lot more as one individual company
than when you are part of a joint venture. According to Iger, contrary to forming
a joint venture, working for the same group of shareholders ultimately makes a
big difference.
Organisations in general can learn a lot from the way in which Disney and Pixar
made the integration work and united two different organisational cultures.
Effectively communicating all the changes to their employees was of the utmost
importance throughout the process. In an attempt to provide a certain sense of
comfort, Disney also deemed it necessary to make a visual presentation of the
elements of Pixar that would remain unchanged. Walt Disney Studios
chairman, Richard Cook, acknowledged that this was not an easy process for
any of the parties involved and that it took about a year before people not only
opened up to the change, but also to one another. What contributed to their
success story is the fact that everyone had tremendous respect for one another
– both on a personal and a professional level.
Mr Iger mentioned in an interview that one very valuable lesson he learnt from
this endeavour is that, contrary to the corporate assumption, integration should
happen slowly and steadily with respect and patience, giving people the
comfort and guidance they need to accept the change.
Source: Adapted from
http://www.nytimes.com/2008/06/01/business/media/01pixar.html
(accessed 11 March 2017)

The benefits of horizontal integration are cost reduction, adding value

through “critical mass” against competitors, managing industry rivalry
and boosting market power. Horizontal integration also has limitations
when implemented in an organisation. The main limitations are the
dangers of post-merger or post-acquisition. Research shows that the
majority of mergers and acquisitions do not always lead to value
creation owing to conflicting cultures challenging the merger,
managers underestimating the costs of integration, and the differences
in management skills, values and styles.
Vertical integration
A vertical integration strategy increases an organisation’s
competitive and operating scope within the same industry or
market by expanding the organisation’s value chain activities
backwards into sources of supply (backward vertical integration)
and/or forward towards its end users (forward vertical integration).

Backward vertical integration is explained by the simple example of

an ice cream business that buys a dairy farm. The company requires
milk to make ice cream and can either buy milk from a dairy farm or
from other milk suppliers or it could own the dairy farm itself. This
ensures that it will have a steady supply of milk at its disposal and that
it will pay a reasonable price. This can protect the ice cream maker in
the event that there are several other buyers vying for the same milk
supply.

ABC Company, which manufactures frozen French fries (chips), wants

to vertically integrate. By purchasing a potato farm and a potato
processing plant, ABC could engage in upstream integration or
backward vertical integration. This enables ABC to control the
quantity, cost and quality of the product’s raw materials. In these
examples the advantages of backward vertical integration is evident. It
ensures the reliability of suppliers, increases the profit margin of the
organisation through reasonable prices and decreases the bargaining
power of suppliers (see also Strategy in action 9.6).

Strategy in action 9.6 Famous Brands buys tomato paste factory

JSE-listed Famous Brands picked up a bargain when they bought a bankrupt,

but very modern tomato paste manufacturing plant in the Eastern Cape at a
significantly reduced purchase price. It bought the plant out of liquidation for
R200 million and it fits well with its vision to eventually own its entire supply
chain. The company owns several restaurant and fast-food brands such as
 Wimpy, Milky Lane, Steers, Mugg & Bean, Fishaways, Europa and Debonairs
Pizza.
This acquisition will not only enhance Famous Brands’ capability to
manufacture licensed products for its own franchise network through successful
backward vertical integration, but it will also provide a sense of security in terms
of a significant manufacturing ingredient, considering that until the acquisition,
Famous Brands annually imported approximately 1500 to 2000 tons of tomato
paste, owing to a shortage of tomato paste in the South African market.
Source: http://www.fin24.com/Companies/Retail/steers-owners-score-their-own-
tomato-paste-factory-at-a-bargain-20160704 (accessed 11 March
2017)

In the case of forward vertical integration a farmer sells his or her

crops at the local market rather than to a distribution centre (middle
man). In the example of ABC Company, it can engage in downstream
integration or forward vertical integration to control the distribution of
the company’s products by purchasing a packaging plant and a fleet of
delivery trucks.

Of course if ABC incorporates both backward and forward vertical

integration, it is known as balanced integration, in which they control
the cost and quality of the entire production and distribution process
(see also Strategy in action 9.7).

The most important advantages of vertical integration are as follows:

It strengthens the organisation’s competitive position.

It often creates economies of scale and lowers production costs
because it eliminates many of the price mark-ups in each production
step. It thus increases its profitability.
Vertically integrated companies also achieve cost efficiencies by
controlling quality at each step, which reduces repair costs, returns
and downtime.
Vertically integrated organisations do not have to allocate resources
to pricing, contracting, paying and coordinating with third-party
vendors. They do it themselves.
 Vertical integration can ultimately create barriers to entry for
potential competitors, especially if the company controls access to
some or all of a scarce resources involved in production.

These are the disadvantages of vertical integration:

While improving the organisation’s investment in the industry,

business risk is increased substantially. The investment in
infrastructure can be very expensive and limit the company’s
flexibility.
By controlling the value chain, the company also becomes
responsible for innovation and product variety.
Integrating forward or backward locks an organisation into relying
heavily on its in-house activities and resources, resulting in less
flexibility in accommodating changes in buyer preferences.
Vertical integration poses capacity matching problems in the value
chain, leading to a challenge in cost efficiency.
Integrating forward or backward leads to radical changes in skills
and business capabilities. The organisation will need to modify its
infrastructure significantly to accommodate technological changes
and other industry innovations.
Integrating backward into parts and components can place strain on
an organisation’s operations when changing the use of, or designing
out, a component as it is done in-house.

Strategy in action 9.7 IBM

IBM is a highly vertically integrated organisation. It integrated backward and

entered the microprocessor and disk drive industries to produce the major
components that go into its computers. It also integrated forward and
established the value chain functions necessary to compete in the computer
software and IT consulting services industries.
Source: Jones & Hill (2009)

9.4.2 Cooperative or combination strategies

 The second category of corporate-level strategies is
cooperative or combination strategies. Cooperative
strategies are applied in situations where organisations join
competitive powers with their rivals or competitors for mutual
benefits. A cooperative strategy is applied when organisations work
together to achieve a shared objective or goal. Cooperative strategies
are used by an organisation to create value for the customer that
exceeds the cost of providing that value. By implementing the strategy
it also establishes a favourable position relative to its competitors.
Cooperative or combination strategies are successful in organisations
that operate in global, dynamic and technologically driven industries.

Outsourcing is one approach in implementing a cooperative strategy. It

is about a conscious decision that the organisation makes to abandon
the performance of certain value chain activities internally and rather
source them out to outside vendors. In the past, outsourcing used to be
a key component of the organisation’s overall strategy in its approach
to supply chain activities in the value chain.

The three strategies that will be discussed in this section under the
category of cooperative or combination strategies are joint ventures,
strategic alliances and consortia.

9.4.2.1 Joint ventures

A joint venture is a separate corporate entity in which two
or more organisations have an ownership stake. The most
typical form of joint venture is a fifty-fifty venture, in which
each partner has a 50 per cent ownership stake and the operating
control is shared by the managers of the two organisations. A joint
venture strategy is a temporary partnership formed by two or more
organisations for the purpose of capitalising on an opportunity.

Why do organisations enter into joint ventures? Organisations usually

enter into joint ventures to obtain a degree of vertical integration and
therefore cost benefits, or to acquire a partnering organisation’s unique
competence or skill in a value-creating activity, or to develop new
technologies that may influence an industry’s future direction. A joint
venture extends the supplier-consumer relationship and has strategic
advantages for both partners. Total South Africa and Famous Brands
have lately entered into a joint venture strategy. Famous Brands
opened its Mugg & Bean On the Move coffee offerings at all Total’s
upper-end metropolitan service stations. The benefit of this joint
venture is to share infrastructure and to attract potential mutual
customers (see Strategy in action 9.2).

The advantages of joint ventures include the following:

An organisation can benefit from the joint venture partner’s

knowledge of a country’s competitive conditions, culture, language,
political system and business systems if the venture is across
borders, for example China’s companies into Africa.
The development costs and risks of entering a new market are
shared by the joint venture partners.
In some countries, political considerations make joint ventures the
only feasible entry mode.

The disadvantages of joint ventures are as follows:

Organisations entering into a joint venture strategy run the risk of

losing control over their technology to their joint venture partner.
A joint venture strategy does not give an organisation the tight
control over its subsidiaries that it might need to realise economies
of scale or location economies.

9.4.2.2 Strategic alliances

A strategic alliance as a cooperative strategy can be defined
as an endeavour in which organisations combine some of
their resources and capabilities to create a competitive
advantage. Organisations can achieve this by sharing resources,
information, capabilities and risks. Strategic alliances give
organisations the opportunity to leverage their existing resources and
capabilities, while working with partners to develop additional
resources and capabilities as a foundation for new competitive
advantages. Strategic alliances are currently a cornerstone of many
organisations’ competitive strategies (see Strategy in action 9.8).

Strategic alliance as a strategy differs from a joint venture strategy

because the organisations involved do not take an equity position in
one another. In America, Starbucks partnered with Barnes and Nobles
bookstores in 1993 to provide in-house coffee shops, benefiting both
retailers. A strategic alliance can, in some instances, be synonymous
with a licensing agreement. Licensing involves the transfer of rights
from one organisation to another.

Strategy in action 9.8 Clicks and Shell South Africa

JSE-listed pharmacy, health and beauty retailer, Clicks, recently partnered with
Shell South Africa to offer its customers rewards when they fill up with fuel.
Based on the original principle of the Clicks ClubCard, customers earn points
every time they swipe their card at participating Shell service stations
nationwide. They earn one point for every litre of fuel they buy. Thus, the more
litres of fuel customers purchase, the more points they will earn and the greater
their cashback will ultimately be. Cashback is loaded onto customers’ Club-
Cards six times a year and they can then use their cashback amounts to obtain
discounts from any Clicks, GNC or Claire’s stores across South Africa.
Source: https://businesstech.co.za/news/business/144857/clicks-partners-with-
shell-for-rewards-when-customers-fill-up-with-petrol/ (accessed 11
March 2017)

Advantages of strategic alliances:

Strategic alliances facilitate an organisation’s entry into a foreign

market. They can be an effective tool for gaining access to new
markets with limited cash commitment, while generating a positive
impact on revenues and relevant cost optimisation.
They allow organisations to share the fixed costs and risks of
developing new products, services or processes.
They bring together complementary skills and assets that neither
partner could develop easily on its own.
 They assist organisations to establish technological standards for the
industry that will benefit the organisations.
Value created by strategic alliances can be substantial.

A disadvantage of a strategic alliance is that an organisation can give

away more than it receives. A successful strategic alliance is built on
the selection of a good partner, a fair but concise structure in terms of
technology transfer, contractual safeguards and skills swaps, and the
manner in which the alliance is managed.

9.4.2.3 Consortia
A consortium is an association of two or more individuals,
companies, organisations or governments (or any
combination of these entities) with the primary objective of
participating in a common activity or pooling their resources for
achieving a common goal. Consortia are large interlocking
relationships between organisations in a specific industry. These
relationships represent the most sophisticated form of strategic alliance
as they involve multipartner alliances and highly complex linkages
between groups of organisations. The relationships include the
complex sharing of technologies, resources or value-creating activities
and financial linkages such as owning equity stakes in each other.

In Europe, consortia are increasing in number and success rates. An

example of a consortium in Japan is a group of 50 different
organisations, including Mitsubishi (which is a known brand in South
Africa), joined around a large trading organisation or bank and
coordinated through interlocking directories and stock exchanges.

9.4.3 Stability or turnaround strategies

The third category of corporate-level strategies is stability or
turnaround strategies. Stability in this context refers to a
situation where stability is sought, because the organisation
cannot afford any further growth as a result of organisational
problems. Turnaround strategies are aimed at transforming
organisations into more significant competitors. Recession,
inefficiencies and non-competitiveness are some of the external and
internal factors leading to the need for a stability or turnaround
strategy. In the complex, highly competitive and challenging
environment that organisations operate in today, this category of
corporate-level strategies is a harsh reality and is applied by an
increasing number of organisations.

Stability or turnaround strategies can also be implemented in

organisations to reduce the scope of the organisation by exiting certain
business areas. The aim of implementing these strategies is to improve
efficiency and effectiveness.

9.4.3.1 Turnaround strategy

This strategy is implemented in an organisation where deterioration in
the businesses or business units is leading to a decrease in profitability
and the organisation is losing its competitive advantage. In such an
organisation value is no longer being created and the shareholders are
starting to question the existence of the organisation. South African
Airways (SAA) has, for example, submitted its long-term turnaround
strategy to the Public Enterprises Minister in compliance with a
ministerial directive issued in October 2012 (see Strategy in action
9.9).

Strategy in action 9.9 SAA’s turnaround strategy

Notorious national carrier South African Airways will most likely keep on making
a loss until 2021. However, the nature of its losses are likely to decline. SAA
reported a loss of R1,5 billion in the 2015/2016 financial year, following a loss of
R5,6 billion in 2014/2015.
SAA’s then chairperson, Dudu Myeni, stressed the fact that the turnaround of
the airline, along with its return to financial sustainability, remains the highest
priority for the newly appointed board. The South African government has
issued a R19,1 billion guarantee facility to the troublesome airline over the
years, without which the airline would have been declared insolvent long ago.
The short-, medium- and long-term components of the turnaround strategy,
which may include the addition of a strategic equity partner along with the
realignment of all government’s airline assets, are now to be finalised. The
strategy will contain a route review, as well as plans for cost containment and
enhancing staff morale, considering that 27 pilots have recently resigned from
 the airline. According to SAA’s corporate plan, it is only expected to break even
or perhaps even show a small profit in 2021.
Source: http://www.engineeringnews.co.za/article/saa-to-continue-to-post-
losses-until-2021-despite-new-turnaround-promise-2016-10-28
(accessed 11 March 2017)

Implementing this strategy implies two core activities, namely, cost

cutting and reducing non-core assets. This stage in turnaround is
known as retrenchment or downsizing. In applying these activities,
the organisation downsizes or restructures its total architecture, which
includes the people, the infrastructure, the processes, the number of
businesses or number of product lines. Organisations that are not in a
severe situation can achieve stability by applying cost retrenchment.
Reasons why organisations sometimes have to restructure include the
following:

In an intensively diversified organisation, a lack of return on

investment and creation of shareholder value can force the
organisation to split its business into a number of parts.
Many investors have learnt that organisations implement growth
strategies for the wrong reasons, such as growth for its own sake,
rather than pursuing increased profitability.
Restructuring can also be the response to a failed acquisition. This
can happen in the context of horizontal integration, vertical
integration or diversification strategies.
Innovations in management processes and strategy have diminished
the advantages of vertical integration and diversification.

The next stage in the turnaround strategy is the recovery response.

This follows the stabilisation of the organisation through restructuring
and downsizing during the retrenchment stage. The problems that an
organisation encounters, leading to downsizing or restructuring, can be
externally or internally induced. If problems are externally induced
organisations tend to bring “new blood” into the organisation with new
innovation and new ideas. The challenge in such an organisation is to
turn the focus back to the external environment. Organisations that
encounter problems leading to downsizing and restructuring tend to
turn their focus internally and get so entangled in the internal
challenges that they lose focus on the external environment and the
stakeholders of the organisation. The turnaround strategy as a grand
strategy has become an important strategy for organisations
experiencing financial stress and will be discussed in more detail in
Chapter 10.

9.4.4 Exit or disinvestment strategies

The fourth and final category of corporate-level strategies is exit or
disinvestment strategies. These strategies are so-called “end game”
strategies and imply withdrawal from the market. Strategies in this
category are liquidation, harvesting and bankruptcy. These strategies
are implemented through disinvestment, harvest or liquidation. A
disinvestment strategy involves the selling of (or simply divesting in)
a business or business unit of the organisation to the highest bidder
(see Strategy in action 9.10). A harvest strategy involves investing in
a business unit to maximise short to medium-term cash flow. A
liquidation strategy involves shutting down the operations of a
business unit and selling its assets for their tangible worth. Although
these strategies are not really recovery strategies, they will also be
discussed in Chapter 10.

Strategy in action 9.10 Virgin Cola

Sir Richard Branson had a clear vision when he launched Virgin Cola in 1994:
he wanted a carbonated beverage brand equal to the international market
leader, Coca-Cola. However, experts in the beverage industry deemed this
strategic mission a rather impossible one right from the start.
The Virgin brand, which is well known for often succeeding by means of
exploiting its competitors’ weaknesses, initially experienced some success with
its Virgin Cola, but soon started struggling to compete with Coca-Cola and
Pepsi. Problems with and insufficient access to distribution channels also made
things increasingly difficult for Virgin Cola. It soon became evident that
Branson’s vision for Virgin to become a key player in the carbonated beverage
market would not be realised. Branson’s decision to disinvest the product
resulted in the quiet death of the Virgin Cola brand.
Source: https://marcussteaduk.wordpress.com/2011/02/20/virgin-cola/
(accessed 11 March 2017)
9.5 Linking the generic business-level strategies with
corporate-level strategies

Figure 9.4 illustrates an interrelationship between the business-level

strategies (Chapter 8) and the corporate-level strategies as described in
this chapter. The corporate-level strategies can contribute towards the
successful implementation of a cost leadership, differentiation or focus
strategy, leading to a sustainable competitive advantage for the
organisation. Any combination of strategies is, however, possible. The
interrelationships shown in this figure are just a guideline, and the
main purpose of it is to show that a corporate level strategy can
support the implementation of a business-level strategy.

Figure 9.4 The interrelationship between the business-level and corporate-level

strategies

Source: Adapted from Ehlers & Lazenby (2010: 200)

9.6 Summary

This chapter focused on corporate-level strategies that organisations

pursue to enhance their shareholder value through profit growth and
profitability. Four categories of corporate-level strategies were
discussed, namely, growth strategies, cooperative and combination
strategies, stability or turnaround strategies and exit or disinvestment
strategies. Each category consists of a number of specific strategies
that an organisation can implement as grand or master strategies.

The chapter also included a link between the corporate-level and

business-level strategies and how the corporate-level strategies lead to
certain business-level strategies, thus leading to a sustainable
competitive advantage.

Exploring the web

Some useful websites:

http://www.bain.com/index.aspx
http://www.businessmate.org/home.php
http://www.corporatestrategies.net
http://www.fao.org/docrep/x3550e/x3550e04.htm
http://www.hbs.edu/coursecatalog/1230.html
http://www.quickmba.com/strategy/

References and recommended reading

Barnes, B. 2008. Disney and Pixar: the power of the prenup. New York Times, 1
June. Available at: http://www.nytimes.com/2008/06/01/business/media/01pixar.html
(accessed 11 March 2017).
BusinessTech. 2016. Clicks partners with Shell for rewards when customers fill up
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tomato-paste-factory-at-a-bargain-20160704 (accessed 11 March 2017).
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Case study

Takealot.com

Kalahari.com and takealot.com, the two leading online retailers in the

South African landscape, decided to join forces. The leaders of the two
brands have, however, made the decision to keep “Takealot” as the
name of the brand for the integrated organisation. It was with an
element of sadness that consumers bid farewell to the white, orange
and black colours of Kalahari, which was South Africa’s first major
etailer. The motive behind this strategic move was the fact that South
African online retailers did not have the economies of scale to compete
successfully against traditional retailers and international online
organisations such as Amazon and Alibaba.

After many failed attempts, both Kalahari and Takealot realised that
they were going to have to work together to survive and succeed. The
unfair advantage of foreign operators not having to pay tax in South
Africa, combined with ever-increasing data costs obstructing the
positive growth rate in local online shoppers, led to the two
organisations joining forces in an attempt to increase their collective
chance of success.

Currently online retail in South Africa only accounts for roughly 1,3
per cent of the total market for consumer goods in South Africa.
Taking into account that in first-world countries, online retail amounts
to approximately 14 per cent of total retail of consumer goods, the
channel may yield a lot of potential in the South African context. More
often than not mergers of this calibre are thought of to be messy, high-
powered and ultimately damaging processes for brands. However,
when carried out with care and consideration and with the brands’ best
interests at heart – as in the case of Disney and Pixar (see Strategy in
action 9.5) – mergers can sometimes be a helpful stepping stone to get
a brand from one level to the next.

The merger between Kalahari and Takealot was conducted with high
levels of professionalism and sensitivity. All the stakeholders were
consistently informed about the intentions and implications of the
merger, as well as its individual impact on every staff member. The
merger not only brought online consumers the benefit of having access
to a wider selection of products and product categories, but also
resulted in a more extensive delivery service. After the merger, the
main focus of both companies remained their customers, considering
that no organisation can survive without its customers.
Source: http://www.takealot.com/company-news/kalahari-merges-with-takealot-com (accessed
11 March 2017)

CASE STUDY QUESTIONS

1. Which corporate-level strategy did Takealot and Kalahari pursue?

2. What benefits can Takealot and Kalahari obtain through the
implementation of this strategy?
3. What competitive advantage was obtained in the industry they
operate in?
Strategy exercises

1. Go to http://www.bidvest.co.za and review the organisation’s

various business activities. Answer the following questions:

– To what extent is Bidvest vertically integrated?

– How diversified is Bidvest? Does the organisation pursue a
related or unrelated diversification strategy?
2. In a group of two to four people, choose organisations in the
following industries: one in the technology hardware provider
industry and one in the car rental industry. Half of the group
represents Organisation 1 and the other half Organisation 2.
Establish a joint venture between the two organisations. What are
the benefits for each?
3. Organisation X has experienced a decline in its revenue and profit
growth over the past two years. During the past year, the
organisation diversified into three product lines. Huge investments
were made to develop the new products. Give organisation X
advice on how to recover its profitability and how it can create
value.
 10 Recovery strategies
SHAFEEK SHA

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the meaning and definition of the term “turnaround”

Understand the differences between small and large organisations in terms of
organisational distress
Identify the stages of organisational decline
Identify the common causes and symptoms of a failing business
Understand the turnaround strategies
Apply the turnaround process to a given situation
Distinguish between divestiture and liquidation
Apply various turnaround strategies such as divestiture and liquidation
Understand the importance of managing an economic downturn

A turnaround is to produce a noticeable and durable improvement in performance, to

turnaround a trend of results from down to up, from not good enough to clearly better, from
underachieving to acceptable, from losing to winning. – Stanley J. Goodman

10.1 Introduction

Strategy is about the performance and the effective

management of organisational resources and capabilities.
However, it happens that organisations are not always
successful in achieving this. In Chapter 9, corporate or grand strategies
were discussed and the focus was primarily on growth strategies.
Although the turnaround strategy was introduced as the corporate-level
strategy category known as the stability or turnaround strategy, it will
be discussed in more detail in this chapter as a recovery strategy.
Turnaround is a grand strategy that is aimed at transforming
organisations into more significant competitors. This chapter will
provide various definitions of the turnaround concept.

When is an organisation failing? In general it can be said that

organisations fail when they do not meet the objectives set for them by
their stakeholders. The organisation’s performance is not what it is
supposed to be. Statistics and research have indicated that
organisations fail more often than they succeed. However, it is worth
noting that organisations very rarely go under without the presence of
some early-warning signals of imminent failure. Unfortunately, the
management of these organisations is caught up in the day-to-day
running of the organisation so that leaders fail to read the early
warning signals. When they do, it is usually when the organisation has
hit rock bottom. There is also a tendency among managers to ignore
early warning signals. It is only fair to mention that some of the signals
may be subtle while others may be quite overt. The subtle signals that
occur well in advance of the failure are important to detect and then,
more importantly, to actually take some form of action to avert any
negative consequences.

Should the management of an organisation detect any early warning

signs but realise that it is not in a position to fix the situation, it should
be bold enough to enlist the services of a professional who is skilled
enough to assist. Turnaround specialists or managers are individuals
trained and experienced in the art and science of rescuing organisations
from disastrous situations and returning them to a state of sustained
profitability.

Organisations in distress will require various degrees of intervention

depending on the nature and complexity of the organisation as well as
its size. It is important to distinguish between small and large
organisations. The characteristics of the two vary greatly and if one is
not aware of the differences, one may run the risk of prescribing the
incorrect “solutions” for a situation. There are, however, also some
characteristics shared by both small and large organisations. The
differences between small and larger organisations are the following:

In the case of smaller organisations, one needs to approach the crisis

more quickly.
Small organisations usually have fewer resources (usually in the
area of finance) to assist them in the case of an economic downturn.
Smaller organisations typically face simpler strategic and
organisational issues.
Smaller organisations are generally too insignificant for any outside
agency or government agency to qualify them for significant
financial assistance. Read Strategy in action 10.1.

Strategy in action 10.1 Small business failure

Small business failure rates are as high as 63 per cent in the first two years of
trading, Absa said at a Small Business Roundtable discussion in
Johannesburg. “The biggest challenge that the country faces is creating
employment through building a culture of entrepreneurship, but this has been
difficult. Entrepreneurs have a certain set of skills and don’t have the funds to
employ the other sets to run a successful business,” Nico Jacobs, head of Absa
Small Business said.
Jacobs highlighted the importance of small business to the economy. “Small
businesses have moved from employing 18 per cent of the South African
employable population in 1998 to more than 60 per cent today.” Reasons why
businesses fail included poor management as well as lack of structure and
infrastructure. However, the lack of financial know-how was the biggest reason.
“But this has not stopped new entrepreneurs from entering the market,” Jacobs
said. “Currently the new entrants mainly range from people who are
unemployed or retrenched to retirees who realise they cannot survive on their
pension. They are then forced to start their own business, but are not equipped
to handle the rigours, and do not have the financial support or knowledge.”
Jacobs added that in order to tackle this issue, Absa Small Business had
developed a classroom-based mentoring programme – the Enterprise Growth
Programme (EGP). “One of the key highlights of this programme is that it will
help develop entrepreneurial skills, teach participants how to effectively
implement their business plans, understand the various aspects of a business
and how they all tie in together.”
Source: http://www.fin24.com/Entrepreneurs/63-of-small-businesses-fail-
20101111 (accessed 4 May 2013)
The common symptoms and causes of organisational failure will be
identified after which the concept of turnaround will be discussed. The
turnaround process will be discussed in detail to explain the various
steps involved in a turnaround strategy. Various grand strategies such
as divestiture and liquidation are also explored, and the chapter ends
by looking at what it takes to manage an organisation during an
economic downturn.

10.2 Stages of organisational decline

Organisations will go through various stages of decline, which

necessitate different types of interventions. The extent of the decline is
evidenced in the financial position of the organisation. The complexity
of the intervention would depend on the stage of decline in which the
organisation finds itself. Obviously the earlier stages of decline may
require less drastic steps or interventions to be taken. Van der Walt
(2007) presents three distinct phases of organisational decline:

Phase 1 – the hidden phase. This phase requires a pre-emptive

turnaround. A pre-emptive turnaround strategy is applicable to
organisations that have either stagnated, are facing a major
transition, or are underperforming. In most cases the organisation is
faced with major operational, financial, organisational, and
technological or market challenges where management has been
unable to quantify the problems, identify their cause, and/or resolve
them. The four steps to follow during the pre-emptive turnaround
process are as follows:

– An assessment of the true condition of the business

– Identification of the root causes of the major problems
– Establishing corrective action
– Monitoring to assure that the desired results are achieved
 Phase 2 – the subtle phase. This phase requires organisational
correction. It actually corresponds with the third step in the previous
stage, in which the organisation must establish organisational
corrective action.
Phase 3 – the overt phase. This phase requires the classic
turnaround strategy. This will be discussed in more detail in this
chapter.

In a case where an organisation is unable to pay its debts because of its

financial position, the court (according to Section 344 of the
Companies Act) may grant an order to liquidate the organisation where
it deems that such an order is fair and equitable.

10.3 Common causes and symptoms of

organisational failure

The causes and signals of organisational decline/failure are generally

more easily recognised by outsiders than insiders, because the insiders
are usually part of the problem. Common causes for failure fall into
two broad categories, namely internal and external factors:

10.3.1 Internal factors

It is important to realise that the internal factors can be directly
controlled by the management of the organisation. Identifying the
troublesome factor(s) would provide the organisation’s management
team with immediate insights into what needs to be rectified.

Research indicates that the single most important cause of the decline
of organisations is poor management. According to research
conducted by Scherrer (2004), 80 per cent of organisations that fail do
so due to internal factors. The internal factors may be listed as follows:
poor financial control; negative cash flow; an underperforming board
of directors; inadequate or poor marketing capability; poor product or
service; poor pricing structure; insufficient communication with
stakeholders; poor management; bad customer service; high cost
structure; lack of or outdated technology; and inadequate information
systems.

Perhaps the most important signal that something is wrong is

inadequate strategic leadership. At the same time, this can be a
major cause of organisational failure. If a strategic leader’s personal
interests and objectives dominate those of the organisation, it spells
problems. Poor strategic leadership will result in not building an
effective organisation. This means that key success factors are not
identified or are ignored and this will result in failing to identify what
is happening with the customer market and the competition. There is
also a tendency among some strategic leaders and managers to take
risks that are not to the benefit of the organisation and these leaders
rely on not being caught. Dishonesty is therefore an important cause
of organisational failure. Corporate scandals are often caused by
strategic leaders who behave unethically.

Poor management is perhaps the most frequently mentioned cause of

failure. So are poor financial control and poor budgeting practices.
In economic downturns, it is of the utmost importance that proper
financial planning and control happen. Organisations with poor debt
ratios will be especially vulnerable. Poor management of costs and an
increase in labour costs in an organisation can result in the
organisation being less competitive.

10.3.2 External factors

External factors are very difficult to control as these are forces from
the external environment and will have an impact on all organisations
operating in the same industry or sector of the economy. Opportunities
are identified from the external environment. However, the focus
should be on the threats from the external environment that will have a
negative impact on organisations, unless the organisation takes the
necessary steps to minimise the effects of the threat. Typical external
factors include economic recession/downturn; changes in government
policies; political instability; high inflation; interest rate changes;
competition; entry of new competitors; changes in technology;
changes in customer preferences; shifts in the demographics of
customers and other environmental forces.

Applying Porter’s Five Forces model can tell a lot in terms of

profitability in an industry. If suppliers have strong bargaining power
they influence the competitiveness of an organisation. The threat of
new entrants and substitute products will increase competition, thus
increasing the effect of rivalry among competitors. If an organisation
follows a differentiation strategy, customers must know that.
Inadequate marketing may lead to inadequate sales while the
organisation has spent more money to create the differentiation. The
incremental costs are not covered by sales and that may lead to failure.
This may have an influence on the overall competitiveness of the
organisation. Customers’ bargaining power will also influence the
organisation’s profitability. In addition, cost problems will affect the
organisation’s competitiveness and increase the threat of competitors.

It is important for organisations to be able to adjust to shifts in the

external environment; however, these shifts are rarely the only reasons
for an organisation’s failure. Should any particular industry be affected
by environmental threats, then all the organisations within that industry
will be affected. Not all organisations in that industry will fail as a
result of economic downturn for example – some will survive and still
prosper. This indicates clearly that the external factors in combination
with the internal factors (like poor management) play an important role
in organisational failure.

10.3.3 Common symptoms of failure

In different studies it was found that there are common symptoms
experienced by organisations that fail. The majority of these symptoms
relate to finance. If any of these symptoms are identified, then the
organisation has to identify the specific underlying causes in order to
implement remedial action. These are some of the general symptoms
of failing organisations:
 Decreasing profitability
Increasing debt
Decreasing sales and revenue
Declining market share
High turnover of managers
Lack of strategic planning

The common signals indicating that something is wrong will come to

the fore as symptoms. The following common signals apply mainly to
small organisations:

There is a lack of commitment to do something different.

Although the start-up of a small business went well, management
lacks the ability to take the organisation to the next level. There may
be a lack of funding or the entrepreneur is not willing to delegate
and share responsibilities.
The organisation depends to a large extent on people outside the
organisation.
The organisation is undercapitalised. Insufficient attention is given
to doing things correctly for customers.
The ego of the manager is at stake. He or she always knows best and
will not accept outside views and advice.
New technology costs money and the organisation needs this new
technology, but it does not have the financial means. Read Strategy
in action 10.2.
The manager or owner of the organisation is a crisis manager. He or
she relies on the ability to deal with setbacks and crises as they arise
and does not rely on proactive strategies.

Strategy in action 10.2 The Video Hut

Mr Simpson owned the only video store in a small city. At the time he
established the business, called The Video Hut, most households had video
 cassette recorders. The city did not have franchised movie theatres so the local
residents relied on Mr Simpson to stock the latest movie releases when they
became available in video format. His business thrived for a period of about 15
years. Given the growth of the sector as a whole, small independently owned
video stores soon attracted competition from franchise video outlets that
established themselves in the city where Mr Simpson operated. The
introduction of the DVD format also affected Mr Simpson’s business. At no
stage did Mr Simpson ever believe that the big franchise video stores would
pose such a threat to his business. He could not compete against the might of
the new stores and from a financial perspective was unable to stock the range
of movies, let alone the DVD formats, that the competition stocked. His
customers switched to the competition and despite many efforts to lure them
back through massive price reductions, Mr Simpson’s business rapidly slipped
into decline. It was a mere few months before his expenses outstripped his
revenue and the business fell into a major debt trap. He was unable to pay his
suppliers and his customer base was minute. Suppliers threatened legal action
against him for failing to pay them. What were Mr Simpson’s options?

10.4 Turnaround

Experience has taught me that there is one chief reason why some people succeed and
others fail. The difference is not one of knowing, but of doing. The successful man is not so
superior in ability as in action. So far as success can be reduced to a formula, it consists of
this: doing what you know you should do. – Roger W. Babson (Financier, Educator,
Entrepreneur)

Brandes and Brege (1993) define a turnaround as the process

that will take an organisation from a situation of poor
performance to a situation of good, sustained performance.
In a narrow definition, a turnaround situation refers to a distressed
company that is facing imminent failure as a result of a cash or
solvency crisis. A wider viewpoint of turnaround leans towards the
need for turnaround before a distressed situation has developed.

It is important to note that turnaround is a management process that

will take place within a certain context and it emphasises certain
practices and procedures. Another explanation of a turnaround,
according to Marino (2004a), is that it can also be characterised as a
cycle during which the organisation shows declining financial
performance followed by a recovery situation. A turnaround strategy
can thus be described as a plan of action that is implemented for
organisations that have cash flow and overall operational performance
problems, pointing to a situation of imminent organisation failure if
something is not done to turn the situation around.

10.4.1 Difference between turnaround and normal

management
In theory there is no reason to believe that a turnaround should differ
from normal management. This assertion only holds true if one views
it from the perspective of the ultimate objective of the organisation, i.e.
providing value to all its stakeholders.

The following are important issues when engaged in a turnaround:

During a turnaround, an organisation requires a different type of

leadership and a greater sense of urgency.
Serious interventions might be considered due to failings from the
past.
Management will be under severe pressure since it has to manage
both the turnaround and the day-to-day activities of the organisation.
Because of the critical nature of the prevailing conditions, rapid
decisions and actions are required.
The situation is generally much worse than was initially thought.
The organisation will possibly be exposed to various legal
consequences and risks.

10.4.2 The turnaround process

There is a wide range of turnaround process models that can be
followed. There is no reason to believe that one process model is better
than the next. It is fair to say that the various process models vary in
complexity and it simply depends on which one an organisation feels
comfortable with and which process model is best suited to its specific
situation.

Marino (2004a) states that turnaround specialists must embrace a

structured framework to turn an ailing organisation around. If this does
not happen, the chances of success are minute. Four possible scenarios
are also highlighted if an organisation is not using a structured
framework:

1. Nothing happens – the organisation will either divest or face

insolvency.
2. Cosmetic changes are introduced – but the underlying problems
remain unchanged.
3. Change is not monitored – the organisation has a tendency to
revert to the status quo.
4. An unforeseen negative turn of events outweighs the benefits.

In the literature, it is pointed out that in a turnaround situation,

depending on the degree of decline and size of the organisation, it can
take a few years to achieve a full recovery. It is certainly not a quick
fix. When one looks at a small-to-medium-sized organisation, the
turnaround is usually a lot shorter and in some instances it can happen
within a 12-month period.

A tough management decision to make is whether the existing

management team should lead the turnaround or not. One could
question whether or not it is competent to lead the turnaround. Perhaps
the existing management team is actually the cause of the poor
situation and its decisions made previously got the organisation into
the current trouble. The question whether or not to bring in a
turnaround specialist or manager from the outside is a decision the
owners of the organisation would usually make. These specialists are
professional and well skilled and, most importantly, will be objective.
They would be willing to change anything and everything within the
organisation because they do not have a vested interest other than to
rescue the organisation from impending disaster.
The decisions taken by the turnaround specialists may vary depending
on the complexity and nature of the organisation they are trying to
rescue. The functioning of the turnaround specialist can be made much
easier if staff in the organisation join forces with the specialist and
become part of the team rescuing the situation. If the owners of the
organisation believe in the competence of the management team, they
may suggest the management team assist the turnaround specialist in
the design, execution and implementation of the turnaround plan.

Figure 10.1 shows the typical timeline the turnaround process takes,
with the main activities highlighted as well. It is very important to
maintain good stakeholder relationships throughout the process.

Figure 10.1 Timeline for a typical turnaround process

Source: Adapted from Harvey (2003)

The owners of an organisation may, upon scrutiny of the financial

statements or through reports from external experts, realise the state of
their organisation and that if things are to be left as they are the
organisation may very well close its doors forever. At some point a
decision is made to rescue the organisation because it is worth
retaining. Literature suggests that as long as there is still a core that
can be salvaged, a sensible and well-structured plan should place the
organisation in a position to be rescued through a turnaround process.
A viable core would include a good product or service to sell, a well-
established and proven market, operating assets, and competent
employees. The acknowledgment of the imminent failure will lead to a
more important decision and that is to turn the organisation around. If
the organisation is not worth rescuing, the owner(s) may decide to
divest or liquidate the organisation. These options will be discussed
later in this chapter.

It is vitally important to acknowledge or realise the true condition of

the organisation. Often the management may ignore this or pretend
that nothing is wrong. This type of behaviour will not benefit the
future of the organisation. The recognition and acknowledgement of
the problem(s) are the first and most important steps in rectifying or
rescuing the organisation. It was pointed out in Chapter 9 that the
turnaround as a recovery strategy involves two stages: retrenchment or
downsizing and the recovery stage.

Oliver and Fredenberger (1997) propose the turnaround process used

by the Turnaround Management Association (TMA) in the USA. It is a
typical and widely used framework. This framework has been
amended and adapted and is presented below.

10.4.2.1 Step 1 – Acknowledging there is a crisis

This is the initial realisation that the organisation is in trouble. It has
come to a point where the issues, as evidenced in the financial position
of the organisation, can no longer be ignored and it is realised that
failure is imminent if the crisis is not managed. Read Strategy in action
10.3.

Strategy in action 10.3 The Glass Doctor

 The Glass Doctor was a business established to compete against the
franchised glass outlets. Though it did not have the buying power of the
franchise stores, the owner, Mr Govan, believed he could outcompete them on
the basis of personal service and flexibility in terms of working hours. The
franchise outlets had a monopoly in the country as a whole and customers
were fully aware of the consequences of a monopoly. Glass suppliers were very
keen to do business with independently owned non-franchise enterprises. Over
a ten-year period, The Glass Doctor established itself as worthy competitor and
had a loyal customer base of individuals, contractors, and a few key corporate
clients. Having established the glass supply and repair section of his business,
Mr Govan decided to venture into other areas such as painting, carpentry and
small-scale building operations. He thought of drawing on his existing client
base to grow the other areas of the business. The initial years were busy and
productive, but Mr Govan had a sense that financially he was not sure if the
other divisions were self-sustaining. He was not quite sure if there was cross-
subsidising of the divisions. Mr Govan felt stressed and started feeling financial
pressure as well as time-management pressures.
What advice would you give Mr Govan, bearing in mind that he has a sense
that things are not well in his enterprise?

10.4.2.2 Step 2 – Management change

During this phase of the turnaround process the management of the
organisation needs to change because of the reasons stated earlier in
this chapter. According to the TMA, most turnaround specialists would
not engage with a client unless they have complete management and
authority regarding the organisation that requires their intervention.
Turnaround specialists are committed to change and have to make
harsh short-term decisions in order to gain long-term benefits for the
organisation. Critical during this phase is to establish whether or not
the organisation will survive in the short term while a longer-term plan
is formulated to rescue the organisation.

The first responsibility of the “new” management is to establish

extremely tight controls in the area of finances and inventory. A cash-
flow forecast must be established together with a centralised control of
all outgoing and incoming cash. An expenditure control system must
be put in place immediately and all payments must be verified and
authorised by one person. Tight controls over inventory should also be
established.
10.4.2.3 Step 3 – Situational analysis
During this phase a thorough analysis of the organisation and its
constituent parts must be done. The turnaround specialist gathers data
and analyses the various challengesfacing the organisation. The data
could be in the form of facts and the opinions of staff of the
organisation. Staff will obviously also include the existing
management. This phase of the turnaround process starts from day one
of the intervention, as indicated by Figure 10.1.

An important component of this step is that financial ratios may be

carefully assessed over the previous three years or so. It is believed
that these ratios have predictive value when they are viewed over this
period. Serious deviations must be assessed and explained as well as
addressed in terms of a tentative solution. The use of ratio analysis is
suggested (see below), and finding low ratio values is often an
indicator that more capital is required. Financial institutions will
usually provide the much-needed capital only if a sound turnaround
plan and strategy are presented.

The most useful ratios to assess the financial condition of an

organisation include the following:

Working capital to total assets

Retained earnings to total assets
Earnings before interest and tax to total assets
Market value of equity to book value of total debt
Sales to total assets

Apart from the financial ratios that are analysed during this phase of
the turnaround process, according to Marino (2004b) there are also
important questions that need to be answered:

How severe is the crisis in the organisation and at what stage of

decline does the organisation find itself?
 What options are available to the organisation? Must it be turned
around, liquidated, divested, or is insolvency the only option?
What mix of strategies and actions is needed for survival over the
short term?
How is the organisation perceived by the stakeholders and how
influential and supportive will the stakeholders be during this
process?
Must the owner be part of the solution?
Does the owner/management team have the aptitude, skills and
vision to implement a turnaround?

10.4.2.4 Step 4 – Emergency action

The following three commonly used strategies are proposed during this
phase of the turnaround process. They are as follows:

A strategic turnaround, which redefines the organisation in terms

of changing markets and redefining the product lines.
An operational turnaround that changes the manner in which
operations are conducted, which means cost-cutting measures,
revenue generation and a reduction in the assets of the organisation.
A financial turnaround, which restructures the financial operations
of the organisation. The idea is to use the financial strength of the
organisation and to leverage this to restructure the business.

It is during this phase of the turnaround process that all the drastic cuts
are made in assets, personnel, liabilities, costs and non-productive
efforts. This is actually the retrenchment phase of the turnaround
strategy. These are not the easiest decisions to make but they are
necessary for the future survival of the organisation. Where personnel
are to be retrenched, it must be done in accordance with the prescripts
of the Labour Relations Act; and where a union is present, with their
involvement. Ethics and morality must be demonstrated at all times.
This phase could be likened to that of haemorrhaging and the most
crucial objective is to stop the bleeding. The idea is to reverse the
negative cash flow, preventing further losses, eliminating activities that
have a negative impact on the organisation, and to reduce the size of
the organisation as well as its complexity.

Where assets have been reduced and costs have been cut, the
turnaround specialist would then identify the most profitable
customers and try to increase revenue by targeting them. It is at this
stage that the organisation needs to apply the 80/20 rule, which states
that 20 per cent of the products or services will generate 80 per cent of
the cash flow. If the organisation is able to identify the 20 per cent of
the products or services that generate the highest levels of cash, then it
needs to identify the customers who will purchase this 20 per cent of
the products or services. The objective is also to determine whether the
customer base can be increased and whether the volume of sales of
such products or services can be increased, and in so doing increase
the cash flow.

The actions taken during this phase of the turnaround process are
based on the analysis performed during Step 3. This step will also steer
the process of stabilising the situation.

10.4.2.5 Step 5 – Organisation restructuring

During this phase of the turnaround process elements of what the
organisation will look like in the future start to emerge. In other words,
what happens is

a reworking of the strategies of the organisation and its mission

the closing of some lines of business
the starting of new ventures
strengthening of the most productive lines
changing the organisational structure in order to pursue the
organisation’s new mission.
Once this phase is completed, the new organisation may well be totally
different from the old organisation. The re-engineering is drastic but
necessary, and the focus is on the organisation’s core strengths when
all the non-profitable or unrealistic operations are stripped away. It
seems that the organisation in Strategy in action 10.4 was initially
successful after the restructuring process, but still experiences some
problems.

Strategy in action 10.4 Dulce Espresso Café on campus

After struggling for years with the incumbent operator of the student café on its
campus, the university decided to terminate its lease due to poor service
delivery and the generally unprofessional manner in which it conducted its
operations. The incumbent did not dispute the termination of its lease –
probably because the university had legal grounds to terminate. The university
was now in need of a new operator.
The university placed the tender advertisement in the local newspaper. The
location of the premises is the student hub, which is literally located in the
centre of the university. A number of individuals submitted tenders. After a
lengthy process the tender was awarded to Dulce Espresso Café (DEC). Dulce
Espresso Café is a scaled-down version of the original Dulce Café. The
Espresso version is usually one with a limited menu though pricing is the same
as that of the original café. DEC managed to invest a substantial amount of
money, altering the building infrastructure and installing state-of-the-art
equipment. The duration of the lease was for a five-year period and the
university officials were very clear in their expectations of the operator. Once its
doors opened the enterprise flourished and DEC believed it was delivering on
the plan on which basis the tender was awarded. However, in a very short
space of time DEC started experiencing problems such as stock shortages,
empty fridges, poor customer service, equipment failure, unreliable delivery of
stock, and poor quality food. The unfortunate state of affairs started becoming a
regular occurrence. The patrons (students and staff) complained via email to
the university. The university in turn took up the complaints with DEC’s owner.
With all the feedback the university provided to DEC, it was still unable to
rescue the situation.
In response to the issues raised with DEC, the owner decided to forego the
franchise and operate the facility as an independent enterprise. The main
changes to the enterprise were the removal of all logos and signage belonging
to DEC. The enterprise was renamed Dolphin Café and a few changes were
introduced, most notably to the menu and its prices. The venture continued with
some success but after a short period of 13 months it became evident that the
same problems as the ones experienced by DEC were emerging. Dolphin Café
had not paid its electricity bills, telephone account or its rent to the university for
a period of 11 months. These and other problems emerged a quarter of the way
 into the academic year and students, staff and university officials were very
frustrated.
What steps should the university take to ensure that the proper services are
provided to its community?

10.4.2.6 Step 6 – Return to normal

The new organisation may very well be pursuing a new mission and,
during this phase, the organisation is stabilised, redesigned and begins
to function in new, more efficient ways. It has a new organisational
structure and a new balance sheet, new methods of doingthings, and
may even have new people, a new culture, and new hope. When this
state is reached, the turnaround specialist has completed his or her
mandate and will now move on to a new turnaround challenge.
However, the management team that stays to manage the organisation
must constantly monitor its performance to ensure it is running
efficiently internally and that the external factors are also taken care of.

Even though these stages are presented as distinct parts of a complete

process, it must be emphasised that steps 3, 4 and 5 may well happen
simultaneously, as indicated in Figure 10.1. Given this fact, it can be a
challenge to determine at what stage an organisation might find itself
in.

These stages are broken down in order to give the reader a clearer
understanding of what is involved in a turnaround.

A key point to take away from Figure 10.1 is the line at the bottom,
referring to stakeholder relationships. Common sense dictates that all
organisations will have a range of stakeholders. As is already known,
these may include the owners, customers, employees, investors,
shareholders, unions, financial institutions, government, suppliers,
distributors and the community, to name a few. Since there is a
mutually beneficial relationship between the organisation and its
stakeholders, it is critically important to keep them well informed of
any interventions. The support and understanding that one may receive
from the stakeholders will have an impact on the success or failure of
the turnaround plan.

Coupled with stakeholder relations is the connection between

leadership and strategy, in which it is noted that strong leadership is
the single most important feature for the successful implementation of
turnaround strategies. Transformational leadership is the one style of
leadership that reflects the traits and behaviours necessary for initiating
change. During the turnaround process a transformational leader with
empathy, good rhetorical skills, emotional intelligence and a high
consideration for others will be required. The effect of this type of
leadership style is that it will inspire and motivate employees; gain
commitment from followers; change the attitudes, beliefs and goals of
the individuals; change the values of the organisation; and make
subordinates feel that they are being treated as individuals. A leader
using this style will communicate and transmit a new vision for the
organisation.

A successful turnaround will require a leader to have the following:

Strong analytical and diagnostic skills

High energy levels
Excellent strategic and risk-taking skills
Good crisis management skills
Ability to manage pressure well
Good communication and negotiation skills

It is believed that a charismatic leadership style will fail at a

turnaround because it can be damaging to the organisation.
Charismatic leaders can lead followers into “groupthink” and are also
accused of being self-centred. Given these different opinions regarding
different leadership styles, there is also a contrasting view that
advocates a team-based approach. Essentially, the team-based
approach entails using employees from all levels of the organisation,
including management, to design and implement the organisation’s
vision and strategic plan. This way power is diffused throughout the
organisation in a democratic manner. This implies that a democratic
leadership style can also be beneficial during a turnaround process, but
it remains important to remember that a strong leader with a clear
vision is necessary to lead the process.

Assuming the organisation does not meet the necessary criteria to

qualify for a turnaround, the owners have the option to divest or
liquidate the organisation, division or subsidiary. Bankruptcy is the last
option if all the previous strategies fail and the organisation wants to
avoid major debt obligations and union contracts. Creditors will in this
case be paid to the extent that cash resources will allow.

It is obvious that these strategies are defensive in nature, in the sense

that they “defend” the negative and poor situation of the organisation.
They are also sometimes referred to as decline strategies. It is
important to understand the progression in the stages of decline.
Turnaround is the first strategy to implement in order to recover the
competitive position of the organisation. If that fails, divestiture is the
next option, followed by liquidation and, if absolute failure is
inevitable, bankruptcy is the final consequence.

10.5 Divestiture

Divestiture is also known as divestment or disinvestment

and is the release (through sale or other means) of assets.
Although divestiture is usually associated with financial
problems, it may also be used to raise capital for better acquisitions or
investments. Assets may be released slowly over time or all at once,
depending on which option works best for the organisation. Once an
organisation decides to sell all or some of its assets, it may send out a
very powerful message to those inside and outside the organisation.
The most obvious message is one of imminent closure, but this may
not be true, as will be explained later when mentioning the reasons for
divestiture.

The most common reason for a divestiture is a financial one. However,

there are also other reasons for an organisation to opt for divestiture:

Social or political. This is when humanitarian organisations put

pressure on an organisation to divest in certain regions of the world.
For example, in the 1980s humanitarian organisations put pressure
on American and British companies to divest from South Africa due
to its apartheid policies. Today labour movements (unions) are
putting pressure on organisations not to use factories in countries
that have poor labour practices and poor human rights records. The
downgrading of South Africa by major rating agencies to junk
status, as a result of political events, weakens standards of
governance and public finances. It may also raise the prospect of a
bond sell-off by investors whose mandates restrict them to the
holding of only investment grade assets. Disinvestment in South
Africa by foreign investors may happen.
Financial. Where organisations are under financial stress they may
divest a division or a subsidiary to gain financially or to prevent
bankruptcy.
Strategic change and redirected focus of the organisation. Where
a division or subsidiary is not considered strategic for the new
direction the organisation wants to pursue, it becomes a candidate
for divestiture.
Non-performing assets. They may drag an entire organisation
down – a non-performing division or subsidiary may place the rest
of the organisation at risk and may be divested.
Desire to take profits. Where an organisation is required to take
profits, it may decide to divest a division or subsidiary (or some
assets) to show a profit on the financials of the organisation. This
happened with Spoornet in South Africa a few years ago where
many assets were sold to show a profit. In the long run it may have
been to the disadvantage of that organisation.
 Bankruptcy. Assets could be released through divestiture when
bankruptcy is imminent.
Not competitive enough. An organisation may decide to divest a
division simply because it is not competitive enough relative to
similar divisions in the same industry. This may present the original
organisation with an opportunity to invest in another division that is
more aligned with its mission.
State intervention. Where an organisation holds the position of a
monopoly, the state could insist that it unbundles its portfolio of
organisations and the main organisation could consider divestiture in
one or more divisions or subsidiaries.
Inability to integrate a new organisation into the original
organisation. During periods of growth, organisations tend to
acquire new organisations to increase their revenue. Sometimes the
new organisations might be completely different to the core
organisation and as such management might not have experience in
managing the new organisation. Organisational cultural differences
may emerge and after a period of time the new venture becomes a
candidate for divestment.

10.6 Liquidation

Liquidation refers to a situation in which an organisation is

unable to honour its debts. Generally, a liquidator will take
charge of the organisation and sell its assets by way of a
public auction. In the event that the assets auctioned cannot raise
enough capital to cover the debts, the liquidator will turn to personal
sureties to pay the difference. Should the personal sureties be
insufficient to cover the remaining outstanding debt, then the directors
of the organisation have the option to include these debts under debt
review or they may apply for sequestration in their personal capacity.
Essentially, sequestration is when an individual applies for personal
insolvency.

During the process of liquidation, the management of the organisation

has a duty to protect all the assets of the organisation. In the event that
management is not in a position to protect the assets, the legal firm
dealing with the liquidation could make arrangements to protect the
assets. After the liquidation order has been granted, management has
an obligation to disclose everything to the liquidator in terms of
information, books and paperwork, and also to disclose all the assets
belonging to the organisation.

The decision to follow a process of liquidation is usually very

emotional. It basically means that management/the owner is admitting
defeat and perhaps experiencing a sense of failure in themselves.
Liquidation means hardship for all the stakeholders, but especially for
the employees, because they will lose their jobs. Liquidation is,
however, better than bankruptcy, because the latter means losses to all
stakeholders of the organisation.

10.7 Managing in an economic downturn

Economic data regarding the state of a country’s economy is released

on a quarterly basis. Major economies from around the globe will also
have reports released on the state of their domestic economies. There
is a wide range of entities, like the World Trade Organisation, the
International Monetary Fund, the World Competitiveness Report, the
ratings agencies, etc., which will release information from time to
time. Governments will also release data and the proactive
organisation and its management team ought to take notice of these
reports.

An economic downturn is commonly known as an economic

recession where there is a slowing down of economic activity, a
 contraction in the organisational cycle, and a widespread
drop in spending. When the macroeconomic indicators fall,
this is an indication of an economic downturn. Typical
indicators of an economic downturn are decreases in the gross
domestic product, household income, organisations’ profits,
employment and investment.

A consequence of these indicators falling is an increase in

bankruptcies and unemployment. Both consequences will drastically
affect a country’s economy as well as its well-being.

The external forces having an impact on an organisation are virtually

impossible to control, but the management team may be better placed
to position the organisation to avert or cushion the effects of the threats
emanating from the external environment. During an economic
downturn the general mindset of the organisation and its management
team should be one of consolidation and to maintain its market
position. Growth or expansion is not usually a priority during an
economic downturn.

It is important to keep a keen eye on the strategic initiatives of the

competition and especially what the market leader is doing. The
possible exit of organisations in the same industry must be carefully
assessed, as understanding their exit is critical if it is due to the
economic downturn. The factors causing the exit must be studied and
understood and, more importantly, acted upon to ensure that the same
fate does not befall their organisation.

If an organisation has divisions or subsidiaries that are not performing

as expected, an economic downturn might in fact put additional
pressure on such units, thereby requiring an intervention. Such units
should be closely monitored given their precariousness. The
management team will have to be acutely aware of the state of the
economy and how the customers respond to these circumstances as
well as the potentialimpact on a division or subsidiary that is in a risky
position. Investment is not a priority during an economic downturn, so
looking for additional capital to fund a struggling division or
subsidiary might be very difficult.
10.8 Summary

To be successful in organisational turnaround, it is important that the

organisation be analysed to identify whether it is still viable and has
the potential to grow. An organisation needs time to get through the
recovery period and must be able to develop and expand. A clear
vision and organisational mission are necessary to provide motivation
and direction.

Restructuring finances is vital since an organisation in a crisis mode

requires capital. There are, however, a number of expenses that may be
incurred during the initial phase of the turnaround process, but these
will be worthwhile if the organisation is still viable. For example,
retrenchment packages may require capital or the organisation might
need to negotiate a new lease for important resources. Since the
organisation has a core worth saving, capital will be required to
finance the future growth of the organisation.

The organisation’s management must be highly motivated and skilled

and should lead from the front. Where management encounters areas
of uncertainty it should seek outside assistance to ensure that the
ultimate goals of the organisation are achieved. Communication and
support from all the key stakeholders are vital if the turnaround is to
succeed. Management and owners of the organisation must ensure that
the intervention is built on a well-developed turnaround plan with a
focus on the solutions.

A turnaround is about winning back the organisation and all its

stakeholders, and having a thorough understanding and appreciation of
what is happening inside as well as outside the organisation. It is about
understanding the competitive environment and also matching
resources and capabilities to opportunities.

If the organisation cannot be turned around successfully, the option of

divestiture must be followed to raise capital for important operational
tasks. The most obvious message of divestiture is one of imminent
closure, but it may not always be appropriate. The final outcome of
failure is liquidation, and if the organisation waits too long, bankruptcy
is inevitable.

During an economic downturn the general mindset of the organisation

and its management team should be one of consolidation and
maintenance of its market position. Tough decisions need to be taken
and it is management’s job to scrutinise the external environment for
any signs that may lead to organisational failure.

Exploring the web

There are numerous websites to peruse on the subject of turnarounds. A word of

warning: make sure that these websites are credible and that the authors or the
organisations are contactable. Also, ensure that you understand the context of the
articles as these may offer advice in terms of the turnaround of a specific organisation
whose outcomes and method may not be relevant to your situation. This warning
regarding the context is especially pertinent when looking at corporate turnarounds
and small to medium-sized organisations’ turnarounds. There are very particular
differences between the two.
Try to look at professional bodies like the Turnaround Management Associations
found in America, the UK, as well as that of Southern Africa (TMA-SA).
http://www.turnaround.org/
http://www.tma-uk.org/
http://www.tma-sa.com/

References and recommended reading

Bibeault, D.B. 1982. Corporate turnaround: how managers turn losers into winners.
New York: McGraw-Hill.
Brandes, O. & Brege, S. 1993. Strategic turnaround and top management
involvement: the case of ASEA and ABB. In Harker, M. 2001. Market manipulation: a
necessary strategy in the company turnaround process? Qualitative Market
Research: An International Journal, 4(4): 197–206.
Burns, J.M. 1978. Leadership. New York: Harper & Row.
Ehlers, T. & Lazenby, K. 2010. Strategic management: Southern African concepts and
cases, 3rd ed. Pretoria: Van Schaik.
Emery, F. & Purser, R. 1996. The search conference: a powerful method for planning
organizational change and community action. San Francisco: Jossey-Bass.
Fin24. 2010. 63% of small businesses fail. Available at:
http://www.fin24.com/Entrepreneurs/63-of-small-businesses-fail-20101111 (accessed
4 May 2013).
Gerstein, M. & Reisman, H. 1983. Strategic selection: matching executives to
business conditions. Sloan Management Review, (24)2: 33–49.
Goodman, S.J. 1982. How to manage a turnaround. New York: Free Press.
Harvey, N.H. 2003. Managing turnaround. Accountancy SA, Nov–Dec: 1–7.
Harvey, N.H. (Ed.). 2011. Turnaround management & corporate renewal: a South
African perspective. Johannesburg: Wits University Press.
Hoffman, R.C. 1989. Strategies for corporate turnarounds: what do we know about
them? Journal of General Management, (14)3: 46–66.
Janis, I.L. 1989. Crucial decisions: leadership in policymaking and crisis
management. New York: Free Press.
Marino, V. 2004a. When it is broke, how do you fix it? Business Day, 19 April: 1–3.
Marino, V. 2004b. Action plan needed to kick-start effective turnaround strategy.
Business Day, 17 May: 1–4.
Marino, V. 2004c. Solving a business’s ailing fortunes. Business Day, 19 July: 1–4.
Nadler, D.A. & Tushman, M.L. 1989. Beyond the charismatic leader: leadership and
organizational change. In Steers, R.M., Porter, L.W. & Bigley, G.A. (Eds). Motivation
and leadership at work, 6th ed. New York: McGraw-Hill.
Oliver, J.E. & Fredenberger, W.B. 1997. Human resource turnarounds: advice from
the experts. Career Development International, 2(6): 274–277.
Pettigrew, A.M. & Whipp, R. 1991. Managing change for competitive success. Oxford:
Basil Blackwell.
Pre-emptive turnaround / corporate revitalisation. [n.d.]. Available at:
http://www.cxoadvisorygroup.com/Services/corporate-revitalization.htm (accessed 4
May 2013).
Republic of South Africa. 2008. Companies Act 71 of 2008. Pretoria: Government
Printer.
Scherrer, P.S. 2003. Management turnarounds: diagnosing business ailments.
Corporate Governance, (3)4: 52–62.
Scherrer, P.S. 2004. Surviving the danger zone: a step-by-step guide to getting your
business back on track. Strategic Direction, 20(5): 26–27.
Van der Walt, J. 2007. Managing a turnaround. Johannesburg: Wits Business School,
14–18 May 2007.

Case study

The Day Kaif (TDK)

(The names of the individuals involved in the business have been

changed for the purposes of this case study.) Note: This particular case
study follows on from the case in Strategy in action 10.4.

Rhodes University started erecting new and bigger lecture venues from
around the early 1990s. In the past, the central point for student social
gatherings was the old Student Union Building, which also housed a
huge cafeteria – called the Main Kaif. The students living off-campus
and staff in the vicinity frequented the Main Kaif. The cafeteria was a
short distance from the lecture venues and academic departments.
Relative to the main library, it was certainly not a central point.

As the expansion of the campus infrastructure took place on the

opposite side of the main library, so the central gathering point for
students moved closer to the main library. The university then
established a small cafeteria – called The Day Kaif (TDK) – next to
the library. Over the years this facility has become the central hub for
both students and staff.

With the growth in popularity of TDK, the demise of the Main Kaif
was inevitable. The Day Kaif saw a number of operators managing the
place with relative degrees of success. It was also apparent that most of
the incumbents at TDK had very short leases and generally operated
the facility for a year or so. The students and staff, as its main
customers, did not have much confidence in the operators, as none of
them seemed to last very long. In addition, no tenant managed to
secure a long-term lease. The facility was both extremely basic and
small. It also sold a very limited range of products.

After the university had struggled for years with the operators of TDK,
it tried another strategy. In the past it had appointed operators who
established independently owned businesses that seemingly did not
last very long and were not sustainable. None of the previous operators
had challenged the termination of their leases, most likely because they
did not deliver on the requirements of the lease agreement. The
university subsequently decided to consider finding a franchise that
might be keen to operate the facility as a franchised facility.

The university placed the tender advertisement in the local newspaper.

The location of the premises was the student hub and was literally
located in the centre of the university. A number of tenders were
received. After a lengthy process, the tender was awarded to Dulce
Espresso Café (DEC). Dulce Espresso Café is a scaled-down version
of the original Dulce Café. The Espresso version is usually one with a
limited menu, although the pricing is the same as that of the original
Café. DEC invested a substantial amount of money, altering the
building infrastructure and installing state-of-the-art equipment. The
facility was enlarged to nearly double its original size and the look and
feel were upgraded to a modern-looking facility. With the sizeable
investment made in the infrastructure, the university gave the operator
(DEC) a five-year lease. The university officials were very clear in
their expectations of the new operator.

Once DEC opened its doors, the enterprise flourished and it believed it
was delivering on the plan according to which the tender was awarded.
However, within a very short space of time – approximately eight
months – DEC started experiencing serious problems such as stock
shortages, empty fridges, poor customer service, equipment failure,
unreliable delivery of stock, and simply poor quality of food. The poor
state of affairs started becoming a regular occurrence. The patrons
(students and staff) complained via email to the university. The
university, in turn, took up the complaints with the DEC owner.
Despite the feedback the university gave DEC, it was still unable to
rescue the situation.

In response to the issues highlighted to DEC, the owner decided to

forego the franchise and operate the facility as an independent
enterprise. The main changes to the enterprise were the removal of all
logos and signage belonging to DEC. The enterprise was renamed the
Dolphin Café and a few changes were introduced, most notably to the
menu and its prices. The venture continued with some success, but
after a period of 13 months it became evident that the same problems
had emerged as those experienced by DEC. Dolphin Café struggled to
meet its financial commitments and experienced a range of other
problems. Something needed to be done.

The cafe’s operating hours are Monday to Friday from 8 am to 5 pm.

The facility does not operate on weekends or public holidays. When
the facility opens at 8 am, the expectation is that the staff and students
will be able to purchase coffee and snacks straightaway.

One of the more peculiar features of any business reliant on students is

that they are at university for a finite period during a given calendar
year. In this case, the university has lectures for 26 weeks and the
examination periods are in total approximately 8 weeks long.
Furthermore, the operator must take into account the annual university
shut-down period, which usually commences a few days before
Christmas until the first working day in January. This shut-down
period is usually approximately two weeks in duration. The students
are in essence on the campus for approximately 34 weeks. The
problem here involves the remaining 18 weeks (four and a half
months) when the students are not around. The company still had rent,
lights and water, staff salaries, and other fixed costs to pay with very
little, if any, revenue. Yes, variable costs would be very low. And yes,
university staff were still around during the quiet periods, but they
formed a small component of the customer base. The only other time
the cafeteria could close its doors was during protest periods. These
protests had no specific start or end date, and impacted negatively on
the business, depending on the nature of the protests.

At the university, approximately 40 per cent of students live in

residences and the remaining student population resides off-campus.
This necessitates a functioning cafeteria for students and university
staff. Given the location of the cafeteria and the distance to the nearest
off-campus shop, it is safe to say that the operator of the cafeteria has a
captive audience. Despite this major advantage in terms of its location
and its captive audience, staff and students were growing frustrated
with the poor service delivery of the last three incumbents. Numerous
emails to university officials over a prolonged period highlighted the
plight of the university community once again, and steps needed to be
taken to improve the situation.

Should the university have considered operating the cafeteria itself? Or

should the university have put it out to tender in the hope of finding a
long-term solution? In order to attract a possible operator, the
university offered a cheap rental plan and pay-as-you-use electricity
and telephone charges, it maintained the facility in terms of building
maintenance, there was a security guard stationed next to the facility, it
offered free Wi-Fi, and it maintained the courtyard area, and cleared all
the refuse bins placed in the courtyard. The lease conditions were
negotiated with the university and were generally dealt with in a
reasonable manner.

When the university appointed Dolce Espresso Café, it genuinely

thought that its problems with the cafeteria were a thing of the past,
given the nature of franchises and the guarantees they bring. To this
end, it offered DEC a five-year contract – something it had never
offered to previous operators.

As mentioned previously, there are two distinct groups of customers

who typically shop at the cafeteria, namely, students and staff.
Students comprise approximately 80 per cent of the customer base and
the remaining 20 per cent are staff. Because of the location of the
facility, it is rare for someone other than a student or staff member to
shop at the cafeteria. Access to certain parts of campus is restricted and
as such it is difficult for an individual from town to shop there.

In terms of the spending power of the students, it should be noted that

the student population had changed from a largely white to a largely
black student population. One must also take into account that a fair
percentage of the black student population might have been on
financial aid, which affected their ability to spend. In terms of tapping
into this segment of the student population, some research to ascertain
the students’ buying habits would have assisted the operator of the
cafeteria to ensure their needs were catered for. Another important
factor would be the different dietary requirements of the student and
staff, which include halaal, kosher, vegan and vegetarian meals. The
university dining halls catered for a similar range of dietary
preferences and the expectation would be that the cafeteria would
follow suit.

The customers typically required basic necessities from the cafeteria –

the broad categories include savouries, confectionery, sweets and
chocolates, a variety of non-alcoholic beverages, juice, water, burgers,
sandwiches, crisps, popcorn, cigarettes and airtime.

Based on an analysis of the complaints the university received from

students and staff against the previous operators, the following critical
points were raised:

Constant stock shortages

Unfriendly staff
Expensive pricing
Limited range of certain categories
Beverages not very cold
Limited range of beverages
Quality of the food
The number of pay points
 Cleanliness of the facility
Erratic hours of operation

Both the franchise and the Dolphin Café had the same number of staff
performing the same tasks. There was only one cashier operating at a
time, which caused tremendous delays in the delivery of services.
Queues tended to be very long. This was particularly frustrating for
staff who had a limited time to purchase from the cafeteria, as they
often frequented the place during tea breaks.

The question is: “To tender or not to tender?”

CASE STUDY QUESTIONS

1. Is it a reasonable proposition for the university to operate the

cafeteria?
2. Identify the key issues the university should include as
requirements for an outside vendor to operate The Day Kaif.
3. Considering the poor service delivery and the poor management of
the facility. Should the new operator consider employing the
existing staff?
4. How should the operator manage the quiet periods when the
students are not around?
5. Identify the pros and cons to consider before tendering for this
facility.
6. Provide a broad top-level plan to ensure future financial and
business success.

Strategy exercises
1. An organisation experiencing declining profitability wishes to
remain a competitor in a declining industry. What might be the
reasons for this organisation to remain a competitor in this
industry?
2. Organisation XYZ got into some difficulties. The reasons for this
were as follows: it was more concerned with sales than cash; it
was not innovative enough; management did not really analyse the
implications of large customers who did business with the
company; the manager always thought he knew best and did not
accept outside views and advice; and there was not a learning and
sharing culture in the organisation. What would your
recommendations for this organisation be?
 11 Strategies in different
industry contexts
KOBUS LAZENBY
ANNEMARIE MARX

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the importance of the industry life cycle when doing an external
environmental analysis
Identify the strategies applicable to organisations in the different life cycle
phases
Apply your knowledge of the identification of strategic options for organisations
in fragmented markets
Align a strategy with a specific organisational situation
Understand how the strategic management process can be applied to
organisations in the not-for-profit sector
Discuss strategy in the health sector

11.1 Introduction

The previous chapters highlighted the grand strategies that

organisations can implement to pursue competitive advantage, based
on the generic strategies of low cost, differentiation and focus. It was
also emphasised that competition is a dynamic process in which
organisations compete to gain a competitive advantage. As a result of
this continuous process of competition, the industry environment is
being reshaped. It is, however, important to realise that organisations
are part of different industries that also experience different life cycle
phases in growth. It is important for organisations to customise their
strategies to the specific industry situation. The various external and
internal considerations must be weighed and a fine balance between
the pros and cons of the various strategic options must be found.

11.2 Industries in different phases of the industry life

cycle

Life cycle models are not just a phenomenon of the life sciences.
Industries experience a similar cycle of life. Just as a person is born,
grows, matures, and eventually experiences ageing/decline and
ultimately death, so too do industries and product lines. The industry
life cycle can be regarded as the supply-side equivalent of the product
life cycle and also implies that the industry life cycle is of longer
duration than that of a single product. The stages are the same for all
industries, yet every industry will experience these stages differently;
they will last longer for some and pass quicker for others.

Even within the same industry, various organisations may be at

different life cycle stages. Figure 11.1 is important for managers as
they need to understand in which life cycle stage their organisations
are, because each stage is associated with particular kinds of force in
the task environment. An organisation’s strategic plan is likely to be
greatly influenced by the stage in the life cycle at which the
organisation finds itself. Some companies or even industries find new
uses for declining products, thus extending their life cycle.
 Figure 11.1 Stages in the industry life cycle

Source: Adapted from Jones & George (2003: 161)

The growth of an industry’s sales over time is used to chart the life
cycle. The distinct stages of an industry life cycle are introduction,
growth, maturity, and decline. Sales typically begin slowly at the
introduction phase, and then take off rapidly during the growth phase.
After levelling out at maturity, sales then begin a gradual decline. In
contrast, profits generally continue to increase throughout the life
cycle, as companies in an industry take advantage of expertise and
economies of scale and scope to reduce unit costs over time.

The industry life cycle is an important determinant of the nature and

extent of the forces in an organisation’s task environment and can be
described as the changes that take place in an industry as it goes
through the stages of birth, growth, maturity and decline. These
different stages also present different opportunities and threats to an
organisation as it moves through the life cycle. It is thus important to
understand what is happening in each stage. Table 11.1 summarises the
main characteristics of each of the stages.

Table 11.1 The main characteristics of the different life cycle stages
 Factor Introduction Growth Maturity Decline
Demand Early Increasing Mass market, Obsolescence
adopters of market replacement/ of products
the product penetration repeat buying
High income Price-sensitive
customers
Technology Competing Standardisation Well-diffused Little product
technologies around technical or process
Rapid product dominant knowledge innovation
innovation technology Quest for
Rapid process technological
innovation improvements
Products Poor quality Design and Attempts to Commodities
Wide variety quality differentiate by the norm
of features improvement branding, Differentiation
and Emergence of quality, bundling difficult and
technologies dominant unprofitable
Frequent design
design
changes
Competition Few Entry, mergers Shake-out Price wars
companies and exits Price Exits
competition
increases
Key Product Design for Cost efficiency Low
success innovation manufacture through capital overheads
factors Establishing a Access to intensity, scale Buyer
credible distribution efficiency and selection
image for firm Building a low input costs signalling
and product strong brand High quality commitment
Fast product Rationalising
development capacity
Process
innovation

Source: Adapted from Grant (2005)

The forces that drive the evolution of an industry through the different
phases are as follows:

The changes in the industry’s growth rate over time. This is

determined by the demand for the products supplied by the industry
 and this in turn leads to the life cycle phases of the industry.
Knowledge. New knowledge in the form of product innovation is
responsible for the birth and introduction of a new industry. The life
cycle in the computer industry has seen the birth and decline of
different data storage systems (floppy disks, stiffy disks, CDs, etc.)
and operating systems (DOS and Windows).

An important question that can be asked is: To what extent do

industries conform to this life cycle pattern? Compact discs (CDs),
introduced in 1984, passed almost immediatelyfrom the introduction to
the growth phase, and matured in the 1990s. They then went into a
decline in 2000 because music downloads started to displace CD sales.
Another important point has to be stated – there is a tendency over
time for life cycles to become compressed, especially with electronic
consumer products and in ecommerce.

There are different industry and organisational situations in these

different stages of the industry life cycle. The following section is
mainly based on the work of Thompson, Strickland and Gamble
(2007).

11.2.1 Industries in the introduction (emerging) life cycle

phase
In the introduction stage of the life cycle, an industry is in its infancy
and is said to emerge. Perhaps a new, unique product offering has been
developed and patented, thus beginning a new industry. Some analysts
even add an embryonic stage before introduction. At the introduction
stage, the organisation may be alone in the industry. It may be a small
entrepreneurial company or a proven company, which used research
and development funds as well as expertise to develop something new.
Marketing refers to new product offerings in a new industry as
“question marks” because the success of the product and the life of the
industry are unproven and unknown. In these early stages of an
industry’s evolution, managers of new companies experiment with
different ways of producing the product or delivering it to customers in
order to attain the winning technology. In this stage the environment is
uncertain and difficult to predict and control because the organisation’s
relationships with its suppliers, customers and distributors are likely to
change quickly. Typical characteristics of organisations in this type of
industry are that they are perfecting technology, adding people,
acquiring or constructing facilities, gearing up operations, and trying to
broaden distribution and gain buyer acceptance.

An organisation will use a focused strategy as an attempt to gain

competitive advantage at this stage and to stress the uniqueness of the
new product or service to a small group of customers. These customers
are typically referred to in the marketing literature as the “innovators”
and “early adopters”. Marketing tactics during this stage are intended
to explain the product and its uses to consumers and thus create
awareness for the product and the industry. According to research,
organisations establish a niche for dominance within an industry
during this phase. For example, they often attempt to establish early
perceptions of product quality, technological superiority, or
advantageous relationships with vendors within the supply chain to
develop a competitive advantage.

Because it costs money to create a new product offering, to develop it

and test prototypes, and to market it, the organisation’s and the
industry’s profits are usually negative at this stage. Any profits
generated are typically reinvested into the company to solidify its
position and help fund continued growth. Introduction requires a
significant cash outlay to continue to promote and differentiate the
offering and expand the production flow from a job shop to possibly a
batch flow. Market demand will grow from the introduction, and as the
life cycle curve experiences growth at an increasing rate, the industry
is said to be entering the growth stage. Organisations may also cluster
together in close proximity during the early stages of the industry life
cycle to have access to key materials or technological expertise, as in
the case of the US Silicon Valley computer chip manufacturers.

Industries in this introduction stage are also known as

emerging industries. The focus in this type of industry is on
innovation, which is responsible for the birth and
introduction of industries. There are plenty of examples of this type of
industry such as wireless internet communications, high-definition TV
and organic food products.

Some of the characteristics of emerging industries present managers

with unique issues that will guide them in making strategic choices:

The market is new and unproven, which leaves much uncertainty,

speculation and many opinions about how it will function, how fast
it will grow, and how big it will become. It is also not certain how
the industry will attract customers for the product and how much
they will be willing to pay for it.
In many cases, much of the technological know-how underlying the
products of emerging industries is proprietary and therefore closely
guarded. This can be an advantage and serves as an entry barrier.
There is no consensus regarding which of several competing
technologies will win or which product attributes will prove decisive
in winning buyer favour.
During the introduction phase of an industry, all buyers are first-
time users. The marketing task is thus to induce initial purchase and
to overcome customers’ concerns about product features,
performance reliability and the conflicting claims of rival
organisations.
There is also a tendency for many potential buyers to expect first-
generation products to improve rapidly, so they delay purchase until
the technology and product design have matured.
Organisations in an emerging industry also have trouble securing
ample supplies of raw materials and components.
They also find themselves short of funds to support the needed R&D
and may experience several lean and tough years until the product
catches on.

From these characteristics, it is clear that there are three critical

strategic issues confronting organisations in an emerging industry. The
first is how to finance the initial operations until sales and revenue take
off, the second is what market segments to target, and the third is what
specific competitive advantage is important in order to secure a
leading position. These three issues imply that an organisation with
solid resource capabilities and a good strategy has a golden
opportunity to shape the rules and establish itself as the recognised
frontrunner in the industry.

What strategic options are available to organisations in an emerging

industry? To be successful, organisations usually have to pursue one or
more of the following strategic avenues:

Try to be first in terms of industry leadership with risk-taking

entrepreneurship and a creative strategy. There is a saying that “first
is first and second is last”.
It is important to perfect the technology, to improve product quality
and to develop additional attractive performance features. The goal
must be to attract as many customers as possible.
Form strategic alliances with key suppliers to gain access to
specialised skills, technological capabilities and critical materials or
components.
Acquire (through diversification) or form alliances with companies
that have related or complementary technological expertise so as to
outcompete competitors on the basis of technological superiority.
Try to be a first-mover in every possible way. This can be achieved
by making early commitments to promising technologies, forming
alliances with the most capable suppliers, expanding the product
selection, improving on the styling of the product and becoming
well positioned in new distribution channels.
There must be a constant focus on gaining new customer groups,
new user applications and entry into new geographical areas. This is
typically a market development strategy.
Make it easy and cheap for first-time buyers to try the industry’s
first-generation product. However, price cuts to attract the next layer
of price-sensitive buyers into the market must be used with great
care.
It is, however, not always an advantage to be in an emerging industry.
Three strategic challenges for an organisation that may be regarded as
hurdles need mentioning. Firstly, managing the rapid expansion of an
organisation is a challenge and secondly, defending itself against
competitors trying to butt in on its success is a continuous effort.
Thirdly, building a competitive position extending beyond its initial
product or market is of the utmost importance.

11.2.2 Industries in the growth life cycle phase

When the product gains customer acceptance and more customers
enter the market, the second stage in the life cycle begins. Demand for
the product or service rises and this attracts many new organisations
into the industry, thus increasing the level of competition. Like the
introduction stage, the growth stage also requires a significant amount
of capital. The goal of marketing efforts at this stage is to differentiate
an organisation’s offerings from other competitors within the industry.
Thus the growth stage requires funds to launch a newly focused
marketing campaign, as well as funds for continued investment in
property, the plant and equipment to facilitate the growth required by
market demands. However, the industry is experiencing more product
standardisation at this stage, which may encourage economies of scale
and facilitate development of a line-flow layout for production
efficiency.

Research and development funds will be needed to make changes to

the product or services to better reflect the customers’ needs and
suggestions and improve the first-generation products. In this stage, if
the organisation is successful in the market, growing demand will
create sales growth. Earnings and accompanying assetswill also grow
and profits will be positive for the organisations. As a result of
industry-wide acceptance of the product, new entrants join the industry
and more intense competition results. Organisations find themselves in
industry situations that are characterised by rapid technological change
and short product life cycles, because of the pace at which next-
generation products are being introduced. It is no longer an emerging
industry, but is now established, with rapid change being the prevailing
condition.

The duration of the growth stage, as all the other stages, depends on
the particular industry or product line concerned. Some items, like fad
clothing, for example, may experience a very short growth stage and
move almost immediately into the next stages of maturity and decline.
A hot toy during holiday season may be nonexistent or relegated to the
deep discount back shelves the following year. Because many new
product introductions fail, the growth stage may be short or
nonexistent for some products. However, for other products the growth
stage may be longer due to frequent product upgrades and
enhancements that forestall movement into maturity. Personal
computer hardware and software are examples of an industry with a
long growth stage as a result of upgrades in hardware and services and
add-on products and features. The internet industry is also a typical
example, with turbulent, high-growth markets. See Strategy in action
11.1.

During the growth stage, the life cycle curve is very steep, indicating
fast growth, and change is the only sure thing. Organisations also tend
to spread out geographically during this stage of the life cycle and
continue to disperse during the maturity and decline stages. As an
example, the automobile industry in the United States was initially
concentrated in the Detroit area and surrounding cities. Today, as the
industry has matured, automobile manufacturers are spread throughout
the country and internationally. Rapid changes in the relationships
between suppliers, the organisation and competitors are also obvious
during this stage.

Strategy in action 11.1 Microsoft gets into search – with a Bing

Described as a “decision engine”, Bing is the latest attempt by the Seattle

software giant to gain popularity in the search market and wrestle some
momentum back from its Californian adversary.
The site’s basic approach may seem familiar. There will be a page featuring a
single empty box that, when text is entered, provides a list of useful webpages
in response. Microsoft executives hope that the new website, which has been in
development for several years, can chip away at the dominance Google exerts
 on the lucrative web search market. “Today, search engines do a decent job of
helping people navigate the web and find information, but they don’t do a very
good job of enabling people to use the information they find,” said Steve
Ballmer, the chief executive of Microsoft. “Bing is an important first step forward
in our long-term effort to deliver innovations in search that enable people to find
information quickly and use the information they’ve found.”
Among the features that he hopes will turn internet users on to Bing is “guided
search”, which categorises searches and attempts to get users to useful
information speedily. The system also integrates with a number of other
technologies, bringing news and maps straight to searchers, as well as linking
in to the company’s cashback scheme – which effectively pays users a small
dividend every time they buy a product through the site. This, they believe, will
really make it attractive to customers.
“The major search engines were developed over a decade ago, and we believe
the category is still in its infancy,” said Paul Stoddart, Microsoft’s UK search
lead. “It’s important to challenge and evolve the search market … there is much
more that people can and should expect.” It remains to be seen, however,
whether Bing can really succeed where a series of earlier revamps and
rebranding attempts have failed – despite Microsoft’s eagerness to gain a
serious position in the lucrative search engine market.
Source: Adapted from http://www.mg.co.za/article/2009-05-29-microsoft-gets-
into-search-with-a-bing (accessed 29 May 2009)

Change is a fundamental characteristic of the turbulent market

environment during the growth stage and thus poses a challenge for
strategy making. An organisation in this industry has three strategic
options for dealing with the change:

It will react to change. Reacting to change means that the

organisation defends itself. The organisation can, for example,
respond to a competitor’s new product with a better one. This is a
defensive strategy and unlikely to create a fresh opportunity. It is,
however, a necessary component of an organisation’s possible
options.
It will anticipate change. Anticipating change is still fundamentally
a defensive strategy because forces outside the organisation are
controlling what is going to happen in it. Anticipation means that
the organisation is looking ahead to analyse what is going to happen
and then to prepare and position itself for that future. It is, however,
 better to anticipate than to react to change, because it can open up
new opportunities.
It will lead change. To lead change is inherently an offensive
strategy because it means being first in the market with a new
product or service. Organisations in this situation are industry
leaders. Leading change initiates the competitive forces that other
organisations must react and respond to, with the result that they
have to defend themselves.

An organisation’s approach to managing change should, ideally,

incorporate all three of these strategic postures (though not in the same
proportion). A best-performing organisation will lead change with
proactive strategies, but at the same time an environment with
relentless change also makes it important for an organisation to
anticipate and prepare for the future, and sometimes to react quickly to
unpredictable new developments.

What will determine competitive success during this fast-growing and

changing phase? The organisation’s abilities to improvise, experiment,
adapt, reinvent and regenerate as market and competitive conditions
shift rapidly and sometimes unpredictably are key factors for success.
The following strategic moves may help the organisation to gain a
competitive advantage:

In order to stay at the leading edge of technological know-how, it is

important for organisations to invest aggressively in R&D.
Specific organisational capabilities are required for an organisation
to respond quickly to the moves of competitors and surprising new
developments. That is why organisations need to develop the
capacity and capability to respond to competitors’ moves.
Organisations do not always have all the resources and
competencies to pursue so many new technological paths and
product categories. That is why it is important to rely on strategic
partnerships with outside suppliers and with companies making tie-
in products. For example, personal computer companies such as
Compaq and Acer rely heavily on the makers of faster chips,
 monitors and screens, and built-in faxes and modems. The
advantage of this outsourcing strategy is that it allows a company
the flexibility to replace suppliers that fall behind on technology or
product features or that cease to be competitive on price.
Organisations must be proactive by making time-paced moves. The
correct strategic move is therefore to initiate fresh actions every few
months, not just when a competitive response is needed. Again, it
means trying to be first.

In order to pursue these strategic moves, cutting-edge know-how and

specific organisational capabilities, such as in-depth expertise, speed,
agility, innovativeness and opportunism, are valuable resources in this
kind of market.

11.2.3 Industries in the maturity life cycle phase

As the industry approaches maturity, the industry life cycle curve
becomes noticeably flatter, indicating slowing growth. While sales can
expand and income can grow from the so-called “cash cow” products,
the growth rate has slowed from the growth stage.

An industry is said to be mature when nearly all the

potential buyers of the products in that industry are already
users of the products. Market demand consists mainlyof
repetitive or replacement sales to existing users. The main
characteristics of a mature industry are as follows:

The demand is saturated and slow-growing if it is not declining.

There is an excess of supply from competition that is too willing to
give discount.
The organisation’s profits and returns are eroded.
The major emphasis for these organisations is cost-cutting to stay
ahead of margin erosion.
A consolidation of competitors is taking place.
The “growth” in this industry hinges on its ability to attract a few new
buyers and to convince existing buyers to increase their usage. The
goal at maturity is simple; that is, to maintain profits at pre-existing
levels. Marketing and financial management are vital to achieve this.
A good example of maturity is McDonald’s. The majority of the more
than 6 billion people in the world knows about it. The same can be said
about Coca-Cola.

Some competition from late entrants will be apparent, and these new
entrants will try to steal market share from existing organisations.
Thus, the marketing effort must remain strong and stress the unique
features of the product or the organisation to continue to differentiate
an organisation’s offerings from industry competitors. Organisations
may compete on quality to separate their product from other lower-cost
offerings, or conversely the organisation may try a low-cost/low-price
strategy to increase the volume of sales and make profits from
inventory turnover. An organisation at this stage may have excess cash
to pay dividends to shareholders. But in mature industries, there are
usually fewer organisations, and those that survive will be larger and
more dominant. While innovations continue they are not as radical as
before and may be only a change in colour or formulation to stress
“new” or “improved” to consumers. Laundry detergents are examples
of mature products.

In the maturity stage, demand is growing slowly or can be regarded as

constant, with most of the customers having already bought the
product. Relationships with suppliers, distributors and competitors are
more predictable and this makes the industry’s environment more
stable. Customers have also developed brand loyalty and managers
have good working relationships with distributors. The level of
competition is lower, or at least more predictable, because a few large
organisations dominate the industry and because each can predict how
its competitors will behave. Organisations that survive this far are
protected from new entrants by relatively high entry barriers.

Although this stable situation may persist for a long time and
companies can enjoy high profits, the threat of new entrants and the
rapid changes they can bring about should not be overlooked.

The imports of clothes from China and other countries have a negative
effect on the South African clothing sector (see Strategy in action
11.2).

Strategy in action 11.2 Clothing and textiles – a challenging sector

South Africa has a mature clothing and textiles sector. It dates back to the
1920s when only a few small companies started out in Johannesburg and Cape
Town. Since South Africa became a democratic country two decades ago, the
Industrial Development Corporation has played a leading role in supporting and
stabilising the industry. The clothing and retail sector’s products range from
inexpensive and mass-produced basic goods to tailored fashion garments of
higher value.
In the past few years, the sector has struggled to hold its own against legal and
illegal cheap imports from China, India and Pakistan. Apart from this, the sector
also had to deal with insufficient investment, the slow adoption of new
technologies, low productivity, labour-related challenges, skills shortages,
inadequate competitiveness at firm level, and limited access to credit. It is
expected to continue facing serious challenges in the coming years, with its
future performance and sustainability highly reliant on a package of support to
enhance subsectoral competitiveness, among other measures.
Source: Adapted from http://www.idc.co.za/20years/making-an-impact/clothing-
and-textiles (accessed 11 March 2017) (link no longer available)

Industry maturity has two important implications for competitive

advantage. Firstly, it tends to reduce the number of opportunities to
establish a competitive advantage and, secondly, opportunities for
competitive advantage move from differentiation-based to cost-based
factors. This means that an organisation has to focus on low costs as a
way of achieving competitive advantage in a matured industry. If this
is the case, special attention should be paid to the following three cost
drivers: economies of scale, low-cost inputs and low overheads.

Some of the fundamental changes in the industry’s competitive

environment in the case of a maturing industry are as follows:

Slow growth in buyer demand generates more intense competition

for market share. Price cutting and increased advertising are some of
 the aggressive tactics competitors use to gain market share.
Buyers become more sophisticated, have experience with the
product and are also familiar with competing brands. They are in a
better position to evaluate different brands and they use this
knowledge to negotiate a better deal on repeat purchases.
Buyers begin to focus on which seller offers the best combination of
price and service.
The increased competition, slow industry growth and more
sophisticated buyers put pressure on industry profitability.
Stiffening competition induces a number of mergers and
acquisitions among former competitors. This drives the weakest
organisations out of the industry and produces industry
consolidation in general.

What are the strategic options available to maturing industries? As

organisations start to experience the new competitive character of
industry maturity, any of several strategic moves can strengthen their
competitive position:

A positive step is to get rid of slow-selling products that do not

cover their true costs.
It will be worthwhile to place more emphasis on value chain
innovation. In an effort to “reinvent” the industry value chain,
innovation may confer a few advantages such as lower costs, better
product or service, quality and perhaps shorter design-to-market
cycles. The lower costs make a Low-cost strategy an option, or a
Differentiation strategy can be followed where the emphasis is on
better products and/or better quality service. The important
requirement for the Differentiation strategy is that customers must
be prepared to pay for the price premium.
A good strategic move is to trim costs. In an attempt to focus on cost
reduction with the accompanying pressure on price competition,
some of the options most frequently pursued are pushing suppliers
for better prices, implementing tighter supply chain management
 practices, and cutting low-value activities out of the value chain. A
Cost Leadership strategy seems the obvious competitive strategy.
An attempt should be made to increase sales to present customers.
This is a typical concentrated growth strategy. In a mature market, it
is perhaps easier to grow by expanding sales to existing customers
than to take customers away from rivals. Convenience stores, for
example, can boost their sales per customer by adding extras such as
video rentals, automated teller machines and petrol pumps, instead
of just being ordinary supermarkets.

It is obvious that organisations in maturing industries will experience

some hard times and for that reason there are also some strategic
pitfalls. Perhaps the biggest strategic mistake an organisation can make
as its industry matures is to be stuck in the middle between low cost,
differentiation and focus, with little commitment to winning a
competitive advantage. Another strategic pitfall is an organisation
being slow to adapt its existing competencies and capabilities to
defend itself against stiffening competitive pressures. A major pitfall is
an organisation attempting to protect its short-term profitability rather
than building or maintaining a long-term competitive position. Other
pitfalls include waiting too long to respond to price cutting by rivals,
overexpanding while knowing that there is slow growth, and
overspending on advertising and sales promotion efforts.

11.2.4 Industries in the decline life cycle phase

This stage starts when the customer demand for an industry’s
products decreases. This falling demand typically leads to a
situation in which an organisation is making more of a
product than the customers want to buy. Organisations usually react to
this by cutting their prices, causing competition to increase and, once
again, the most inefficient companies are driven out of the industry.
The primary sector of industry as a whole is declining. Although there
are areas in which profit can be made, including the extraction of
minerals (sand, gravel) and organic food production, there are no
longer many advantages to starting a new business in the sector where
the output is falling.
Another good example is “non-renewable” products such as coal. This
is because these kinds of minerals are limited in supply and will
eventually be completely used up. Other reasons for decline in the
primary sector are prices that are unstable and change frequently, and
the small proportion of income that is spent on primary sector products
making it difficult to increase prices. Another example of a declining
industry is the railroad industry, which has experienced decreased
demand – largely due to newer and faster means of transporting goods
(primarily air transport and trucking). The South African Post Office is
also experiencing decline (see Strategy in action 11.3).

Strategy in action 11.3 Post Office shows “gross inefficiency”

Financially, things at the South African Post Office have been going south for
years, with its woes exacerbated by labour unrest and management issues. In
2005, profit before tax was R943 million. This dropped to a pre-tax loss of R206
million in 2013.
The mail business has been declining – not only because people are using
more advanced technology to communicate, but because companies like
PostNet are able to offer a more reliable service. The CEO of the Post Office
made a presentation in 2014 on some of the biggest challenges facing the
organisation. These include the following:

A continuous decline in mail distribution

The courier freight group is bleeding financially and its survival is dependent
on the Post Office
The failure to secure R3,5 billion from Treasury for corporatisation
Trying to reverse expensive decisions like paying rent when the company
could have used its own building
The withdrawal of a subsidy by government but still being expected to
honour its universal service obligation
Ongoing strikes
Key business partners, like Unisa, cancelling their contracts because of
instability

Companies like PostNet have been able to thrive as they make up for the Post
Office’s failure to operate efficiently. Ian Lourens, the CEO of logistics company
OneLogix, of which PostNet is a subsidiary, said that strikes at the Post Office
have been a contributing factor to the growth of PostNet. “There are definitely
people coming to us … rather than the Post Office. It is a part of the growth that
we have seen.” Lourens said PostNet and the Post Office generally operate in
 different markets, although there are gaps PostNet is able to fill that the Post
Office cannot, like courier services. He said because of this, many customers
choose to courier parcels instead of send them by post.
Source: Adapted from http://www.fin24.com/Tech/Companies/Gross-
inefficiency-of-the-Post-Office-20141013 (accessed 20 April 2017)

What are the secrets of organisations that succeed in declining

industries? They have probably employed one of the following
strategic themes:

They pursue a focused strategy aimed at the fastest growing market

segments within the industry.
They stress differentiation based on quality improvement and
product innovation.
They strive to drive costs down and become the industry’s low-cost
leader. Cost-saving actions they can apply include: (a) cutting
marginally beneficial activities out of the value chain; (b)
outsourcing functions and activities that can be performed more
cheaply by outsiders; (c) redesigning internal business processes; (d)
consolidating underutilised production facilities; and (e) cutting out
marginal products from the organisation’s offerings.
They can also implement mergers and consolidations as strategic
options. This will be the norm as organisations try to continue to be
competitive or grow through acquisition and/or diversification.
It would also seem obvious for these organisations to follow a
divestiture strategy to obtain the greatest cash flow if financial
resources are under pressure.

There are, however, also some common strategic mistakes that

organisations can make in stagnating or declining markets. They can
get trapped in a profitless competition war, become overly optimistic
about the industry’s future and spend too much on improvements in
anticipation that things will get better. This can result in problems that
leave them with no option but to follow a liquidation or bankruptcy
strategy.
11.3 Strategies for competing in fragmented
industries

A number of industries are populated by hundreds of small and

medium-sized companies, none with a substantial share of total
industry sales. The most important competitive feature of a fragmented
industry is the absence of market leaders with king-sized market
shares or widespread buyer recognition. Examples of fragmented
industries include landscaping and plant nurseries (see Strategy in
action 11.4), real-estate development, convenience stores, health and
medical care (see Strategy in action 11.5), mail order catalogue sales,
computer software development, customised printing, kitchen cabinets,
trucking, auto repair, restaurants and funeral services.

Strategy in action 11.4 Malanseuns nursery

Pleasure Plants was founded way back in 1913 by Danie Malan on the northern
slopes of the Magaliesberg, just outside Pretoria. Originally a fruit-producing
farm, surplus fruit trees were sold to the public for planting on farms and in
gardens. Over time the business grew and developed to a point where four of
the owner’s sons embarked on growing ornamental garden plants to
complement the fruit tree sales.
Today Malanseuns is a leader in the growing and distribution of ornamental
plants. The family were pioneers in the development of sustainable, organic
growing mediums to alleviate the need for using topsoil for the production of
container grown plants. Containers were transformed from rusty old tins and
other receptacles often retrieved from rubbish dumps and industry to the
modern nursery bags and pots used to this day. Plant production was altered to
a professional industry that could trade effectively all year round, allowing the
people of South Africa to plant and garden whenever they wanted to.
As the fourth generation of the Malan family enters the business, millions of
plants are still grown today at the original nursery site and at two other
nurseries in the Pretoria area. This offers a range of climatic conditions from
subtropical to freezing cold, ensuring that plants are grown to the highest
possible quality standards. A continuous search for new and better plants
around the globe along with trialling and testing in South African conditions
guarantees that Malanseuns Pleasure Plants leads the way by introducing
exciting new plants to local gardeners.
Source: http://www.malanseuns.co.za (accessed 4 May 2013)
 Strategy in action 11.5 Walmart of pharmacies

It’s been 31 years of hard work for Ivan Saltzman, founder and CEO of discount
pharmacy chain Dis-Chem, who entered a fragmented and competitive market
when the prevailing wisdom was that retail pharmacy was an expensive and
risky industry. In 1978, with as little as R10 000 of capital investment, Saltzman
and his wife, Lynette – both recently qualified as pharmacists – opened their
first pharmacy in Mondeor, south of Johannesburg. “At the time pharmacies
were seen as expensive stocks to buy,” says Saltzman.
Source: http://www.fin24.com/Search/News?queryString=fragmented
industry&pageIndex=0 (accessed 2 May 2013)

The most common reasons for the fragmentation of the supply side of
an industry are the absence of market leaders; low entry barriers that
allow small organisations to enter quickly and cheaply; and customers
who require relatively small quantities of customised products (funeral
services, interior design, kitchen cabinets and advertising).

Some fragmented industries consolidate over time as growth slows and

the market matures. The increased competition that accompanies
slower growth produces a shake-out of weak, inefficient organisations
and a greater concentration of larger, more visible sellers.

Competitive rivalry in fragmented industries can vary from moderately

strong to fierce as a result of the low entry barriers. The comparatively
small size of companies in such industries puts them in a relatively
weak position to bargain with powerful suppliers and buyers. Some of
the strategic options that organisations have in a fragmentedindustry
include becoming a low-cost operator by stressing no-frills operations
featuring low overheads, working to achieve high productivity with
low-cost labour, and focusing on one product, service category or
customer type, or on a limited geographical area.

11.4 Alignment of strategy with a specific situation

In order to decide on a strategy for a specific situation in the industry
or the organisation, it is important to make a quick diagnosis of the
specific environment and the organisation’s competitive situation in
the industry. Two basic questions need to be answered:

In which industry environment is the company operating? Is it an

emerging, rapid-growth, mature or fragmented industry? By
answering this question about the nature of the industry
environment, it will be possible for the organisation to identify the
specific strategic moves that are best suited to that type of
environment.
What is the specific position of the organisation in the industry?
Does it have a leadership or a weak or crisis-ridden position? Once
again, this will help the organisation to identify its strategic options.

To decide on a specific strategy, it is important that the organisation

considers the primary internal and external environmental situations,
as discussed in Chapters 5 and 6, determining how all these factors add
up in order to make a sensible strategic decision. The pros and cons of
all the generic strategies in the different situations must be considered
to help make a final decision. The final strategic choice must be
appropriate for both the industry environment and the organisation’s
situation with regard to its competitors. The following questions can
help to make decisions on the best possible strategy for the specific
situation:

What kind of competitive advantage could the organisation

realistically achieve?
To achieve this competitive advantage, does the organisation have
the capabilities and resources to be successful?
How can the organisation protect its competitive advantage? Are
any defensive strategic moves necessary?
Is it necessary for the organisation to implement a more aggressive
growth strategy to capitalise on the weaknesses of its competitors?
There are, however, also some strategic pitfalls to avoid, including an
overly ambitious plan, or one that does not fit the organisational
culture (this will be explained in Chapter 17), or a lack of
wholehearted commitment to the chosen competitive strategy.

11.5 Strategies for not-for-profit organisations

Strategic management is essential and relevant to all types of

organisations. The main reason why non-profit or not-for-profit (NFP)
organisations are so important is that they account for an average of at
least five per cent of all jobs worldwide. They also constitute an
important sector of the economy of any country as they provide
services and goods that profit-seeking organisations cannot or will not
provide. Organisations such as churches, schools, museums and
charities clearly fall into this sector. From some NFPs, such as
churches, people receive a benefit although they do not pay for the
services. Many of the services provided by government are “free”
(although paid for through taxes). The government provides “free”
primary health care services, for instance, as it is not a profit-seeking
organisation. The fees charged by organisations such as the Society for
the Prevention of Cruelty to Animals (SPCA) and the Cancer
Association of South Africa (CANSA) cannot generate a profit or even
cover their costs. Yet, although the services provided by NFP
organisations cannot generate a profit, the organisations are necessary
for any community. There is a global tendency to privatise state-owned
enterprises as was the case with Telkom. Some government services
can easily be privatised, but if the process goes too far, problems can
result in that profit-seeking organisations will be unable to satisfy all
of society’s needs.

In public schools the government pays teachers’ salaries. If

privatisation of all schools took place, some parents would no longer
be able to afford education for their children and an important need of
society would not be met. If government decided to privatise primary
health care, society would also experience some serious problems. It is
thus clear that some NFP organisations are necessary for society. It is
also important that they experience a positive cash flow in order to
provide these vital services.

Many of the key issues that are discussed in this book apply to
different contexts, including those of NFP organisations. The only
difference is in the relative importance of these issues. Profit-seeking
and NFP organisations have a major factor in common – the concern
about finances. The important difference, however, about finances is
that NFP organisations seek a positive cash-flow position, while profit-
seeking organisations are focused on profit. Charities and churches can
only spend on good causes if they have the money to do so. The
generation of funds is therefore of the utmost importance.

Practitioners and consultants of strategic management agree that many

of the strategic management concepts and techniques can easily be
adapted for NFP organisations. The strategic management approach is
used by countless NFP and government organisations such as schools
and churches. Growth is still an important requirement for these
organisations, and there remains an important relationship between
strategic planning and organisational performance. In fact, many NFP
organisations out-perform private profit-seeking firms in terms of
innovativeness, motivation, productivity and strategic management.
Read Strategy in action 11.6.

Strategy in action 11.6 The Cancer Association of South Africa (CANSA)

CANSA is a community-driven and volunteer-based organisation that has been

fighting cancer to save lives for the past 82 years. Started in 1931 by a group of
medical professionals concerned about the high incidence of cancer, CANSA
has grown to become the leading cancer NGO in South Africa, with 45 offices
around the country and more than 12 000 volunteers and 260 staff members.
For many years CANSA has been rendering a wide variety of high quality
support services to cancer patients and their families. Rendering such services
is CANSA’s core business, but promoting health and preventing the disease
also is a very important part of its work. This is done through CANSA’s trained
staff, as well as by volunteers working for the organisation. CANSA also plays
an important role in promoting cancer education in Africa and is regarded as
the most effective organisation of its type in the developing world.
11.5.1 The strategic management concepts and techniques
in NFPs
As with profit-seeking organisations, it is of central concern to NFP
organisations to achieve a competitive advantage. This raises specific
strategic questions:

Why do we exist?
What do we want to be for our clients?
What determines the viability of our organisation?
How can a competitive advantage be gained and sustained?
Who are our competitors in terms of the services we provide?
Who are our competitors in terms of the limited financial resources?
What are the influences of the external environment on the
organisation?
What do we do well?
What can be improved?

If the output of an organisation in terms of services and products is not

objectively measurable, it is more difficult to apply strategic
management. This is why so many NFP organisations fail to use
strategic management principles. The fact that revenue is determined
by sponsors and not generated by selling products or rendering
services, makes it easy for NFP organisations to neglect strategic
management.

When thinking about the usefulness of strategic management concepts

to NFP organisations, it is clear that some of the concepts cannot be
applied in the same way as for profit-seeking organisations. One of the
important concepts in strategy, namely competition, clearly has
different meanings for the two categories of organisation. When profit-
seeking organisations seek competitive advantage, they have a profit-
making advantage in mind. NFP organisations would rather speak of
institutional advantage when they are performing their tasks more
effectively and efficiently than other comparable organisations.

It is, however, important that NFP organisations have a clear idea

about their vision – what they want to become – and how they will
achieve it – the mission. A clear mission statement is thus an essential
part of any NFP organisation’s strategic planning. The mission is
actually the broad objective of how the vision or dream of the NFP
organisation is to be achieved. There is no doubt that these components
of strategic management are just as relevant for NFP organisations as
they are for profit-seeking ones. It is important for NFP organisations
to know where they are going (vision) to be able to answer the
questions what? for whom? and how? in terms of the mission
statement. It is important for NFP organisations to do an internal
environmental analysis, and to answer the questions on what they are
doing well and what can be improved. These answers will determine
their strengths and weaknesses. It is equally important for NFP
organisations to take note of what is happening in the political,
economic, social, technological and ecological environments because
these will influence the opportunities for, and threats to, them.

Conventional strategic management analysis distinguishes between

suppliers and buyers in the external environment and the different
internal value chain activities of the organisation. Such separation of
the value chain activities is often less appropriate for NFP
organisations than for profit-seeking ones. The consumers are in many
cases simultaneously the suppliers, producers and customers of the
services provided by the organisation.

It is also important for any NFP organisation to determine what it aims

to achieve in order to gain an institutional advantage. One of the key
conditions for competitive or institutional advantage for an NFP
organisation is credible commitment and the social perception of
legitimacy. An aspect that can give an organisation an institutional
advantage is when it provides a unique service that is in fact
inimitable. It is this condition of inimitability that it must exploit. NFP
organisations must also be clear on their market segmentation and the
product or service they provide. If they are not successful in satisfying
the needs of clients and convincing the community about their role in
terms of social responsibility, then they do not have a reason to exist,
and certainly will not be able to achieve a positive cash flow.

It is thus clear that many strategic management concepts are just as

relevant for NFP organisations as they are for profit-seeking
organisations. NFP organisations also have to become more market-
oriented (client-oriented) and this necessitates the use of strategic
management. Strategic management for NFP organisations will
become more important in the future because of the turbulent business
environment and the limited revenue sources.

11.5.2 Revenue sources for NFP organisations

The main difference between NFP and profit-seeking organisations is
the source of revenue. In the case of the former, revenue is usually not
obtained from the sale of goods or services to customers, but from
donations, which are needed to break even. In profit-making
enterprises the normal business is the selling of products and services,
to which a profit in addition to the costs of the services or goods
provided has been added.

Revenue for an NFP organisation is generated from a variety of

sources. These may include sponsors, grants from the government and
clients who pay for the services they receive. Donations usually
account for the major portion of revenue.

There is a special relationship between the client and the NFP

organisation, which differs from the direct relationship between the
customer or client and the profit-seeking organisation. In the case of
NFP organisations, a third party – sponsors – is the more important
party in the relationship. The direct relationship between a profit-
seeking organisation and its customer/client can be seen in the
aggressive marketing attempts to attract and please customers. They
are completely dependent on revenue received through the selling of
products and/or the rendering of services, while a charity is almost
completely dependent on sponsors. Figure 11.2 illustrates this clearly
in the case of the SPCA. The higher the dependency of an organisation
on sponsors, the less market oriented it is. Private schools depend more
on parents (customers/clients) than public schools do in terms of their
revenue.

Figure 11.2 The effect of sources of revenue on different

organisations

Source: Adapted from Wheelen & Hunger (2002: 328)

The sources of revenue will influence the strategic decision making of

NFP organisations; this is clearly illustrated in Figure 11.3. The direct
relationship of the clientwith, and thus the strong influence on, the
organisation is clear in the case of a profit-seeking organisation. In the
case of the private school, sponsors have a marginal influence on the
organisation; the clients (learners and parents) have a stronger
influence and will definitely have an effect on strategic decision
making. In the case of the charity (NFP) organisation, the client has no
direct influence on the organisation, because the organisation is not
dependent on the client’s money for the services rendered. The
organisation is influenced by its dependency on the sponsor.
 Figure 11.3 The influences on organisations

Source: Adapted from Wheelen & Hunger (2002: 328)

The important thing to understand in terms of the management of NFP

organisations is who pays for the services delivered. If the recipients or
clients pay for the services, they have to be taken into consideration
when strategic decisions are being made. If the clients do not pay for
the services, the NFP organisation must focus its strategic decisions on
the sponsors, who do pay. The sources of revenue thus play an
important role in the sense that they will have an effect on the strategic
planning and management of the organisation.

Despite the fact that most strategic management concepts are

applicable to NFP organisations, there are some constraints that should
be taken into consideration.

11.5.3 Constraints on strategic management for NFP

organisations
NFP organisations do have some specific characteristics that have an
impact on the behaviour of the organisation and which, as a logical
consequence, will affect its strategic management:

The services that are provided by the charity organisation are not
tangible. Quite often this service is actually hard to measure. The
service must satisfy not only the sponsors, but also the needs of the
clients who make use of it.
 The fact that the organisation is dependent on clients and sponsors
makes it difficult for it to be too particular. It is, for example,
difficult to target a specific market. Another effect is that these
sponsors may intrude on the organisation’s internal management.
The community actually expects the services that NFP organisations
provide. Communities even expect central, provincial or local
government to render this kind of service. When these NFP
organisations are driven by government initiative, the client’s
influence may be weak as a result.
Another characteristic of NFP organisations is that they often entail
community involvement.
Some “employees” of NFP organisations are part-time or even
voluntary workers. They may also be professional people serving on
the board of directors owing to their professional knowledge. Their
main commitment is to their other (fulltime) job.

These characteristics of NFP organisations sometimes make it difficult

to do strategic planning in the full sense of the word. These issues can
be seen as constraints for strategic management in NFP organisations
and will influence the three main elements of strategy: formulation,
implementation, and evaluation and control. The impact of these
constraints will be discussed in terms of these three elements.

11.5.3.1 Impact of constraints on strategy formulation

As pointed out at the beginning of this section, clear-cut performance
measures are not part of NFP organisations. Performance measures
such as increasing profits or market share are not typical of these
organisations. NFP organisations have different and often divergent
goals. This sometimes makes rational strategic planning difficult. The
influence of sponsors on the internal management of NFP
organisations can prevent management from being specific in its
mission statement for fear of sponsors cancelling the donation of funds
to the organisation. Several studies throughout the world have found
that many of these organisations have very general and sometimes
ambiguous goals.
The involvement of the community in NFP organisations is
praiseworthy. The impact of community involvement in local
government issues is, however, also an important constraint for the
strategic planning and management of a municipality. Local economic
development in South Africa is an important goal of local
governments, but the involvement of the community in, for example,
an application for rezoning a specific land use to implement the
municipality’s strategic plan for local economic development makes
the implementation of the strategic plan difficult. The negative
response of a few members of the community to this rezoning issue
may result in a council decision that may not be in the best interests of
the community as a whole.

Earlier the importance of revenue sources for NFP

organisations was stressed. Such organisations may tend to
shift their focus from results to resources, especially revenue
sources. The focus is thus on the input side and perhaps not that much
on the output side. Outputs in the form of services rendered are not all
that easily measured, whereas it is easy to measure the financial inputs.
The ultimate goal of the NFP organisation may therefore be to get
enough revenue to carry on with its operations. This is known as goal
displacement – the goal is not to render the service, but to gain
revenue. One type of goal displacement is known as suboptimisation.
This is where one division in an organisation functions as if it were the
most important section in the organisation. This can happen in an NFP
organisation when the division responsible for getting sponsors thinks
that it is more important than the rest of the organisation.

It was also mentioned that the goals of NFPs tend to be vague and
ambiguous. This creates opportunities for internal politics and goal
displacement. In many instances the effectiveness of NFP
organisations is determined by the satisfaction of sponsors and not
clients’ needs. Sometimes a sponsor will donate money for a new
building so that the building can be named after him or her; the greater
need for the upgrading and maintenance of existing buildings is
overlooked. It is also common practice to select sponsors to serve on
the boards of directors or trustees as a way of thanking them for the
sponsorship. They are not selected because they have managerial
experience, but because they will ensure revenue sources for the
organisation. This raises the question of how compatible this is with
corporate governance principles.

People serving on the board of directors or trustees do not receive any

remuneration or compensation because they are involved voluntarily.
They often do not have any interest in sound management and thus in
the strategic management of the organisation. Some of these board
members are even professional people to whom keeping to their
professional values and traditions is more important than responding to
the changing needs of their clients. These professional people
sometimes act as a barrier holding the NFP organisation back from
becoming more businesslike.

All these issues have an influence on strategy formulation. The impact

will be in terms of formulating the mission statement, doing an
environmental analysis, setting up long-term and short-term goals, and
deciding on a strategy.

11.5.3.2 Impact of constraints on strategy implementation

It is well known that structure follows strategy and if the constraints
influence strategy, it follows logically that there will also be an impact
on the structure which is part of implementation.

It is difficult for the management of an NFP organisation to delegate

decision-making authority because of its dependence on sponsors for
revenue support. Top management must always be alert to the needs of
sponsors in terms of its organisational activities. If decision-making
authority is delegated, it can happen that low-level managers take
action that may offend sponsors. As a result of the difficulty of
delegating authority, it is also difficult to implement job enlargement
and job enrichment. The development of employees is difficult,
especially where professional people are involved. This inhibits the
role that all employees should play in implementing the strategy.
Revenue sources for NFP organisations are also diverse, resulting in a
need for people who can relate to both inside and outside groups to fill
so-called “buffer roles”. These people are necessary because of the
intangible service, broad mission and multiple goals that are pursued.

11.5.3.3 Impact of constraints on evaluation and control

Revenue sources remain the most important issue for NFP
organisations. The result of this is that the output or performance side
of the organisation does not receive the same attention. The quality of
outputs is thus not controlled in the same way as inputs are. Limits are
also set on costs and expenses, and these create negative responses
from employees. This also means that rewards and penalties have little
or no relation to performance.

These implications for the strategic management of NFP organisations

may result in money being wasted in many ways, especially on
administrative expenses. Some ratio estimates indicate that an NFP
organisation should not spend more than 35 per cent on administrative
expenses. This implies that NFP organisations should be efficient in
their operations.

11.5.4 Some useful strategies

One of the ironies of strategy for NFP organisations is the fact that
these organisations often have to provide more services to the clients
than the clients can pay for, or even more than the sponsors have paid
for. These organisations have to think about strategies that will help
them to meet the demands for the desired services.

Two strategies can be selected by NFP organisations to meet the

demands of clients for their services. NFP organisations can choose
between “strategic piggybacking” and strategic alliances. (This is apart
from the decision about which generic strategy – differentiation, low-
cost or focus – is being pursued.)

11.5.4.1 Strategic piggybacking

 What is the meaning of strategic piggybacking? This term
refers to the development of a new activity for the NFP
organisation that will generate the funds necessary to make
up the difference between revenue and expenses. The purpose of this
new activity is solely to help subsidise the primary service
programmes of the NFP organisation by generating revenue. This
strategy is not about how to deliver a better service to the clients, only
about making up the shortfall in terms of revenue.

An example of this piggybacking strategy is school shops selling

school clothes and other basic requirements for learners. Some schools
also engage in strong marketing activities involving their facilities,
such as hiring out the school hall. Universities also make extra money
by hiring out their facilities for conferences – the accommodation
provided and the conference facilities generate extra income for the
institution. Many churches engage in a variety of activities to generate
extra income.

It is, however, important for NFP organisations to remember that they

need some resources to engage in successful strategic piggybacking.
They should have the following:

Something to sell. The NFP organisation should assess the needs of

its clients in order to determine whether they will be willing to pay
for some goods or services that are closely related to the
organisation’s primary activity. Schools that sell school clothes, for
example, help learners as well as subsidise some of the expenses of
the school.
Venture capital. It takes money to make some money. If NFP
organisations have revenue problems, but do not have some extra
start-up funds, it will be difficult for them to engage in strategic
piggybacking.
Management talent. Competent management people must be
available to nurture and sustain an income-generating venture over
the long haul. As previously stated, management of an NFP
organisation is sometimes difficult, and some competent people do
 not want to be managers. If the managers do not have any
entrepreneurial talent, it will be difficult to be innovative.
Management/trustee support. The governing body of NFP
organisations must support the income-generating ventures,
otherwise its strong resistance will hinder commercial involvement
and the resulting success of the venture.

It is clear that strategic piggybacking can help an NFP organisation to

pursue its primary mission. There is, however, also a downside. Some
disadvantages to strategic piggybacking, if it is not managed with great
care, are as follows:

In any start-up venture it takes some time for an organisation to

experience a positive cash flow. The same could happen in this case
and the NFP organisation could even lose some money in the short
term.
A new venture could become the primary purpose of the
organisation. A loss of focus on the primary mission is the result.
If the organisation started making some money, previous sponsors
could decide to withdraw their sponsorships.

11.5.4.2 Strategic alliances

To form a strategic alliance with another organisation is an attractive
alternative for profit-seeking organisations if they want to bundle
competencies and resources that are more valuable in a joint effort
than when kept separate. This can also be an attractive strategy for
NFP organisations as a way of enhancing their capacity to serve the
clients. Two schools buying a school bus for their joint use is an
example of bundling finances to obtain a necessary resource to provide
a better service to their clients.

It is also possible for strategic alliances to be formed between NFP and

profit-seeking organisations. At universities it is commonplace for
profit-seeking organisations to fund research in exchange for the
results of the research. It is also commonplace for some schools to
form a strategic alliance with an insurance broker or even an estate
agent. The broker and estate agent get the opportunity to market their
products and services to the parent community in exchange for the
school getting a percentage of the commission in the case of resulting
business. Many questions can be asked about this type of strategic
alliance, but they are likely to continue and even to prosper in the
future.

11.6 Strategy in the health sector

A core issue in the health sector is the increasing demand for health
services as a result of the complex and changing disease profile of the
country. South Africa has more people with HIV and AIDS than any
other country. About 5,7 million people are thought to be living with
the virus, and this creates a major health concern for the country. It is
important that organisations take note of this issue becaues it has a
serious effect on human resource management and organisational
strategy in general. Absenteeism as a result of poor health is a major
issue for organisations. The health status of South Africans has
deteriorated since 1994. Access to adequate sanitation facilities is a
problem. This creates some serious infectious diseases in South Africa,
like bacterial diarrhoea, typhoid fever and hepatitis A. This places
pressure on already constrained budgets. Plans by government to
improve equitable access to health services increase the need for
investment in both infrastructure and management capacity – calling
for further resources.

There are a few determinants that will influence the health care
systems in a country. Apart from the internal environment, the external
environment is also particularly important. According to Van Rensburg
(2012), the following environmental determinants play an important
role:

POLITICAL ENVIRONMENT
Political ideologies, policies and institutions are generally affecting the
health care system. If one expects the health care system to be
changed, then one would start with a change in the political structure.
It is especially the political environment that will determine the place
and the importance of the health care system, as well as the financing
of health services’ delivery. Measures in the political environment can
facilitate or hinder the equity, equality and accessibility of health
services.

ECONOMIC ENVIRONMENT
It was mentioned in Chapter 6 that there is a close relationship
between the political and the economic environment. The same
relationship can be seen in the health sector. The political environment
will influence a country’s economy, which will, in turn, influence the
health service industry. Economic production, distribution and
consumption have an influence because they influence the availability
of a country’s resources. The level of economic development,
consumer disposable income, and other factors will influence a
country’s economic health. This will influence the government’s
ability to provide health services to its inhabitants.

SOCIAL ENVIRONMENT
Religion, ideology, education and cultural values and traditions play a
role in health care systems as they all influence people’s different
responses to illness. Different cultures also have different health
healers making the medical environment diverse. There are four
cultures that can be distinguished, namely, religious, magical,
pastoral/supportive and technical/medical responses. General
population and demographic variables, like an ageing population for
instance, will also influence a country’s general health situation.
Obviously these elements of the social environment will also influence
the country’s general health care system.

ECOLOGICAL ENVIRONMENT
The physical environment generates some important determinants of
health care systems. Not only do the climate, rainfall, temperature, etc.
influence the nature and functioning of the health care system, but they
also influence people’s health. The way the population is concentrated
in a specific environment and how the physical environment is being
utilised will affect the health care system.

11.6.1 Strategic impact of the HIV and AIDS epidemic

This epidemic in South Africa has the potential to destroy the chances
of socioeconomicgains. Individuals who suffer from this illness are
unproductive and ineffective. It is an impediment to empowerment and
skills development. Heunis, Wouters and Kigozi (2012) explain the
impact of this epidemic on the social and economic environment.

The prevalence of HIV in young adults and children in South Africa

affects the population structure, thereby influencing the country’s
demographic composition. This means that the number of members of
the population younger that 25 will decline. In the long term this will
have an effect on some future development changes. For example,
extra health care services are needed to prevent mother-to-child
transmission and to treat HIV-positive infants and children. The
younger health workers (under 35 years) are also at risk, because about
25 per cent of them are infected with the virus. This also places stress
on the health care system.

The economic impact of this epidemic is also serious. HIV and AIDS
are linked to poverty and slow economic development. Many studies
indicate that this epidemic causes the economy to grow at a lower rate.
At an organisational level, the influence of HIV and AIDS is a factor
to consider in strategic planning. This epidemic results in higher labour
costs, increasing absenteeism, decreases in productivity and
effectiveness, and markets that are negatively affected. The influence
over the longer term will be more dramatic, because young infected
children and HIV orphans do not or cannot attend school, thus leading
to a decrease in human capital investment.

The impact on households also affects the broader economy.

Households with infected family members will experience an extra
burden on their economic activity. Firstly, there is a loss of income,
because the household will incur additional health costs. Secondly, the
majority of infected people are unemployed and therefore unable to
contribute financially.

11.6.2 Health care in South Africa

South Africa has a private health sector and a public health sector. A
wide variety of services are available, from primary health care
(offered free by the government), to highly specialised, hi-tech
services (offered mainly by the private health sector). As in many other
countries, the public sector is understaffed and underresourced. Even
though the state contributes about 40 per cent for the services, these
services are rendered to about 80 per cent of the population that needs
it.

On the other hand, the private health sector, which is administrated on

business principles, caters for middle- and high-income people, who
tend to be on medical aids. Health professionals are driven to work in
the private sector for a variety of reasons. The private health sector is
also not only inequitable, but also inaccessible to a large portion of
South Africans. Owing to maladministration in the public sector, many
of the institutions have suffered poor management, underfunding and
deteriorating infrastructure. While access has improved, the quality of
health care has fallen with a huge shortage of key medical personnel.
This system is hampered further by the public health challenges and
the burden of diseases, such as HIV and AIDS and tuberculosis (TB).

The key consequences of this changing and more complex health

environment for the health sector include the following:

Both private and public providers are likely to offer services on

behalf of government.
Financial controls are likely to become more complex to ensure
accountability of the different providers.
A sound regulatory framework will need to be developed.
An effective supply chain for goods and services will need to be
designed.
 Financial and clinical reporting requirements are likely to change.
Changes to human resource management systems may be needed,
for example to ensure parity in salary packages.
A risk management strategy will need to be put in place.

11.6.3 Health strategic plan

The vision of the Department of Health is to achieve a high-quality
health care system that is accessible and caring. To achieve this vision,
the mission is formulated “… to improve health status through the
prevention of illnesses, the promotion of healthy lifestyles and to
consistently improve the health care delivery system by focusing on
access, equity, efficiency, quality and sustainability flows”
(Department of Health, 2017). To attain the government’s outcomes-
based approach, the four key areas to attend to are increasing life
expectancy; combating HIV and AIDS; decreasing the burden of
diseases from tuberculosis; and improving the effectiveness of health
systems.

There are, however, serious concerns about the sustainability of health

care financing in South Africa. McIntyre, Doherty and Ataguba (2012)
are of the opinion that despite the increase in health care resources,
they largely occur in the private sector. This is mainly due to the
inefficiencies in the use of public sector resources. It is further noted
that private insurance coverage and benefit packages have declined
while the public health care sector is heavily dependent on tax funding.

To revitalise and restructure the public health care system, the South
African government put a reform plan in place. This includes the
following:

Speeding up the implementation of a National Health Insurance

scheme. This will eventually cover all South Africans (see Strategy
in action 11.7).
Strengthening the fight against HIV and TB, non-communicable
diseases, as well as injury and violence.
Improving human resource management at state hospitals and
strengthening coordination between the public and private health
sector.
Deploying “health teams” to communities and schools.
Regulating costs to make health care affordable to all.
Increasing the general life expectancy.

Strategy in action 11.7 NHI to bite health insurers’ profits

Johannesburg. South Africa’s plan to overhaul health care and give the poor
greater access to medical services could eat into the profits of domestic
insurers if one of the biggest reforms by the government since 1994 is
implemented. Under the national health insurance plan (NHI) being discussed
by the government and other parties in the health care sector, every South
African will be forced to pay into the scheme, regardless of whether they
already have private insurance. “People are saying that they are going to be
paying an additional tax; we don’t see it as an additional tax, all we see is the
redirecting of their medical aid contributions into the fund (NHI),” said Anban
Pillay, the health department’s head of financial planning and health economics.
While the nation’s more than 100 private health insurance providers are still
expected to have a place, they would be forced to offer better value than the
government insurance would be providing. “I definitely think that when the NHI
is fully operational the number of people paying into their own private medical
schemes will decrease significantly,” Pillay told Reuters.
But economists see many staying in private schemes, even if they are forced to
pay for NHI, unless the government can quickly fix failing public hospitals that
are short of staff, equipment, medicine and beds. But Pillay said, “The only
reason why people would want to spend their money on private insurance is if
they wanted additional services not offered under the NHI.”
South Africa’s R90 billion private health insurance sector serves just over eight
million of the country’s nearly 50 million people. The NHI will likely drive up
costs for employers who would be forced to pay for the government plan and
could face a backlash from staff if they dropped coverage under private plans.
Discovery, the country’s biggest health insurer, said it does not expect the plan
to have any specific impact on medical scheme contributions in the foreseeable
future. “(But) as the NHI system emerges over time, it is possible that medical
scheme products and coverage will adapt to the changing environment,” said
Jonathan Broomberg, head of Discovery’s health unit.
The plan, which is expected to be phased in over 14 years, is unlikely to hit
medical schemes in its first few years as the focus will be on hospital
infrastructure. “Certainly in the short to medium term it’s unlikely to have any
impact on the revenues. In the longer term, there will likely be an impact on the
 revenues to the degree that they lose membership,” one health care analyst
said.
Analysts also say many people will eventually face the decision on whetherto
pay for the public and private plans. “It really depends on how much you’ll pay
into the NHI fund,” said Mathew Menezes, a health care analyst at Avior
Research. “If the state says I have to pay R1 000 on NHI and I also have to pay
R2 500 on my own private scheme, then I have to start thinking about how I
can cut costs.”
Source: Adapted from http://www.fin24.com//Companies/Health/NHI-to-bite-
health-insurers-profits-20110817 (accessed 2 May 2013)

As part of the process of strategic management of the health sector, the

government has set in place the Medium Term Strategic Framework
(MTSF). The purpose of this framework is ultimately to improve the
South African health system so that it will be capable of improving
health. As part of the plan, the upgrading and rebuilding of nursing
colleges and tertiary hospitals are priorities, so that the National Health
Insurance Scheme (NHI) can be implemented. There are different
priorities in this health care plan such as the provision of strategic
leadership and the creation of a social compact for better health
outcomes, the revitalisation of health care infrastructure and mass
mobilisation for better health for the population, to mention only a few.

11.7 Summary

It is one thing to have a good understanding of an organisation’s basic

competitive strategies such as Low-cost Leadership, Broad
Differentiation, and Focused Low-cost and Differentiation strategies. It
is quite another, however, to understand that some of these strategic
options are better suited to specific industry and competitive
environments, or certain organisation situations. In this chapter it was
discussed that organisations (and industries) have life cycles. From the
emerging phase, through the fast growth, maturity and ultimately the
decline phase, there are different strategic challenges and options
available to organisations.

Another industry setting for organisations is the not-for-profit

organisations. It is important for NFP organisations to employ a
strategic management approach, because they can no longer function
without proper management principles. A country cannot afford to be
without some important NFP organisations as they render necessary
services to the community. NFP organisations have to manage their
cash flow in such a way that their expenses are covered by their
income. This is an important challenge for NFP organisations. The
impact of constraints on NFP organisations was discussed in terms of
the development, implementation, and strategic control and evaluation
of the strategy. Two strategies – strategic piggybacking and strategic
alliances – were discussed as possible and popular strategies followed
by NFP organisations. It is important to highlight the fact that the
generic strategies of Differentiation and Focus are especially relevant
for NFP organisations.

The discussion of the health care sector was included in this chapter
because it is such an important sector of any country’s economy.
Absenteeism as a result of poor health is, for example, a major issue
for any organisation.

Exploring the web

Explore some of the websites of South African companies and try to identify the life
cycle phases of their specific industries. Other resources are:
http://www.inc.com/encyclopedia/industry-life-cycle.html
http://www.financewalk.com/2011/4-stages-industrys-life-cycle/
http://www.picknpay.co.za
http://www.sab.co.za
http://www.toyota.co.za
References and recommended reading

Clothing and textiles: stabilising a challenging sector. 2017. Was available at:
http://www.idc.co.za/20years/making-an-impact/clothing-and-textiles (accessed 11
March 2017).
Coulter, M. 2005. Strategic management in action, 3rd ed. Upper Saddle River, NJ:
Prentice Hall.
Department of Health. 2017. Vision and mission. Available at
http://www.health.gov.za/index.php/shortcodes/vision-mission
Dess, G.G. & Lumpkin, G.T. 2003. Strategic management: creating competitive
advantage. New York: McGraw-Hill.
Ehlers, T. & Lazenby, K. 2010. Strategic management: Southern African concepts and
cases, 3rd ed. Pretoria: Van Schaik.
Grant, R.M. 2005. Contemporary strategy analysis, 5th ed. Oxford: Blackwell
Publishing.
Heunis, J.C., Wouters, E. & Kigozi, N.G. 2012. HIV, AIDS and tuberculosis in South
Africa: trends and responses. In Van Rensburg, H.C.J. (Ed.). Health and health care
in South Africa. Pretoria: Van Schaik.
Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2003. Strategic management:
competitiveness and globalisation. Mason, Ohio: Thomson Learning.
Jones, G.R. & George, J.M. 2003. Contemporary management, 3rd ed. Boston, MA:
McGraw-Hill Irwin.
KPMG. 2010. The South African public health sector: the KPMG approach. Available
at: http://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/General-
Industries-Publications/Documents/The-South-African-Public-Health-Sector.pdf
Malanseuns. 2012. Available at: http://www.malanseuns.co.za/ (accessed 4 May
2013).
Masote, M. 2014. Post Office shows “grocery inefficiency”. Fin24. Available at:
http://www.fin24.com/Tech/Companies/Gross-inefficiency-of-the-Post-Office-
20141013 (accessed 20 April 2017).
McIntyre, D.E., Doherty, J.E. & Ataguba, J.E. 2012. Health care financing and
expenditure: post-1994 progress and remaining challenges. In Van Rensburg, H.C.J.
(Ed.). Health and health care in South Africa. Pretoria: Van Schaik.
Miller, K.D. 2002. Competitive strategies of religious organisations. Strategic
Management Journal, 23(5): 435–456.
NHI to bite health insurers’ profits. Fin24. 2011. Available at:
http://www.fin24.com//Companies/Health/NHI-to-bite-health-insurers-profits-20110817
(accessed 2 May 2013).
Nielsen, R.P. 1984. Piggybacking for business and nonprofits: a strategy for hard
times. Long Range Planning, April: 96–102.
Pearce, A.P. II & Robinson, R.B. Jr. 2003. Formulation, implementation and control of
competitive strategy, 8th ed. New York: McGraw-Hill Irwin.
Thompson, A.A. & Strickland, A.J. 2003. Strategic management: concepts and cases,
13th ed. New York: McGraw-Hill.
Thompson, A.A. Jr., Strickland, A.J. III & Gamble, J.E. 2007. Crafting and executing
strategy: the quest for competitive advantage, 15th ed. New York: McGraw-Hill Irwin.
Van Rensburg, H.C.J. 2012. National health care systems: structure, dynamics and
types. In Van Rensburg, H.C.J. (Ed.). Health and health care in South Africa. Pretoria:
Van Schaik.
Wall-mart of pharmacies. Fin24. 2009. Available at:
http://www.fin24.com/Search/News?queryString=fragmentedindustry&pageIndex=0
(accessed 2 May 2013).
Wheelen, T.L. & Hunger, J.D. 2002. Strategic management and business policy.
Upper Saddle River, New Jersey: Prentice Hall.

Case study

Karan Beef

The mission of Karan Beef is to maintain its distinction as the premier

supplier of the highest quality beef and beef products available in
South Africa and to continue to assume a leadership role in setting the
benchmark of quality for the South African beef industry. Karan Beef
seeks to be recognised for the commitment of its people to the highest
standards of productivity, hygiene, housekeeping and general
maintenance. Karan Beef desires to position itself for sustainable
growth in line with the demand by its consumers.

Karan Beef’s roots are planted firmly in the soil, affecting both its
heritage and its future. When it first began feedlotting on the Karan
family farm the herd numbered fewer than 100 head of cattle. But that
was way back in 1974. Over the years the capacityof the feedlot has
increased to accommodate over 120 000 head of cattle – making the
Karan Beef feedlot the largest in Africa. The past 25 years have seen
great changes at the Heidelberg farm, just south of Johannesburg in
South Africa, as it has expanded to accommodate the changing needs
of the blossoming feedlot business. The purchase of three adjoining
farms increased the overall size of the estate to 2330 hectares – not
only accommodating the growing feedlot, but also allowing for the
evolution of the facilities into a fully integrated business unit.

This expansion has also allowed it to establish a game farm and

wetland ecodevelopment, which has become a significant attraction in
its own right and is now home to one of the widest selections of water
fowl found anywhere in Southern Africa.

As the business grew, the construction of the largest feedmill of its

kind in the world was undertaken. Making use of the very best design
techniques and technology available, the feedmill now occupies an
area of 15 000 square metres and is capable of producing up to 1500
tons of mixed feeds per day.

With the changing face of the deregulated South African meat industry
the companywas able to purchase an abattoir in the town of Balfour.
This facility is close to the feedlot and a mere 75 kilometres from
Johannesburg. Having extensively modernised the abattoir, it is now
used exclusively for the slaughter of animals from the Karan Beef
feedlot and the processing of those carcasses into a wide range of beef
products.

The purchase of the Balfour abattoir prompted Karan to establish a

marketing and distribution centre in Johannesburg. With its extensive
cold store and freezer facilities, the City Deep Distribution Centre
allowed them to complete the supply chain and has helped secure for
the Karan Beef Group its position as the largest fully integrated beef
production organisation in Africa.

Like any truly successful company in South Africa, Karan has long
recognised the responsibility it has to the staff and their families – and
to the communities in which they operate. At Karan Beef they have
committed themselves to a comprehensive and ongoing policy of
social upliftment which manifests itself in many different forms and
initiatives. In order to provide the staff – and the agricultural workers
from the surrounding area – with homes of their own, Karan Beef
donated a large tract of land adjoining the farm to the Tokolohong
Home Owners Association. Tokolohong means, quite literally,
“freedom”. The Tokolohong Agricultural Village is managed by the
association, with the homes within the village owned by the workers
themselves. Not only does this agrivillage feature housing, but also
communal areas set aside for growing vegetables and maintaining
livestock – allowing the people to take responsibility for their own
lives and become progressively more self-sufficient. The medical
assistance programme features a day clinic, which facilitates primary
health care as well as educating the local community about such
critical issues as family planning and AIDS awareness.

Over the years the organisation has also developed strong and lasting
relationships with the breeder suppliers and it is these relationships
that help Karan Beef maintain the high quality of the herd, which
results in the top quality of the beef for which they are renowned.

The highly trained team of buyers is constantly on the move, visiting

the breeders and carefully selecting only the very best weaner calves
for purchase by Karan Beef. The breeders also benefit from this
special relationship. Freed from the inconvenience and cost of
transporting their cattle to auction and having to pay auctioneers
commissions, the breeders know that – as long as they meet the
demanding standards – they will always have a market for their cattle
at Karan Beef. Once purchased, the calves, which are bought at
between seven and twelve months of age, are collected and transported
to the feedlot by Karan’s own fleet of trucks, making use of
transportation techniques that are designed to ensure minimum levels
of stress to the cattle. Upon arrival at the feedlot each calf is weighed,
inspected, inoculated and tagged. This information is captured into the
database, which enables each individual animal to be tracked from this
point all the way through to slaughtering.
Once processed, the cattle are moved into pens of 120 animals where
they are fed a scientifically prepared starter ration, which stimulates
feed intake before being moved on to production and finishing rations.
During the entire feeding period the organisation is able to monitor the
animals comprehensively, quickly identifying and treating any diseases
within the herd, and monitoring the animals’ well-being. The
relationship with the breeders does not stop once the cattle arrive at the
feedlot. In fact they maintain constant communication with the breeder
suppliers – keeping them informed about the quality of the cattle they
have supplied and helping them improve their own breeding methods.
Through regular visits to the feedlot by the breeder suppliers, Karan is
able to keep them informed about the very latest technology and trends
in animal husbandry and the international beef market, and together
they are able to further strengthen and maintain this vital relationship.

The care and management of livestock is a highly demanding business

– combining the most up-to-date thinking from across the globe with
the experience and knowledge that farmers have been gathering since
before the dawn of time. The company’s ongoing success can be
directly attributed to the many different people that they have
assembled within the Karan Beef Group. The in-house teams
encompass a whole spectrum of experience and expertise – all of
which combine to enable Karan to provide exceptional levels of
quality and service throughout the group.

From within the ranks the organisation can draw on all the skills
needed in the production of the highest quality beef products. From the
animal sciences, to human resources, administration, and even
maintenance and training, all the staff are dedicated to the constant
drive for excellence.

From the dedicated team of research and development scientists, to the

teams of drivers who keep the entire organisation moving, the Karan
Beef family pays eloquent testament to the belief in “Quality through
Control”.

Of course, the care taken in properly feeding the cattle and the quality
of what they eat has always been of paramount importance to the
company. After all, what the cattle are fed during their time at the
feedlot significantly influences the quality of the beef they produce.
The feedmill is arguably one of the most modern of its kind in the
world – making extensive use of PLC technology (Programmable
Logic Controls) and the very best support technology available. The
feed recipes are scientifically formulated from data collected from
around the globe, and the mixed feed is produced using ingredients
sourced from across Southern Africa to ensure a reliable supply of
only the very best quality raw materials.

Capable of producing up to 1500 tons of mixed feed every day, the

computer-assisted feeding programme controls the amount fed to
individual pens and is monitored on a daily basis. This allows the
quantity of feed given to be varied whenever necessary to suit the
specific requirements of the cattle. This highly complex system
enables those responsible to accommodate such variables as the
physical condition of the animals, prevailing weather conditions and
the changing seasons. The completely computerised operation allows
the feedlot section managers to monitor and control the feeding
process by making use of the most advanced computer systems and
radio telemetry. In this way they are able to make sure that the cattle
are always optimally fed. Of course, all the rations are produced using
the very best quality raw ingredients and contain no animal by-
products whatsoever. The attention to detail required to feed and care
for cattle is extensive and the state-of-the-art feedmill facilities have
been designed to best meet the challenges and demands of this
essential function.

The abattoir is used for the slaughter of cattle from the Heidelberg
farm and is one of the most modern facilities of its kind found
anywhere in Africa. With a capacity to process up to 2000 head of
cattle every day, it makes use of the very best equipment and
technology throughout the slaughter process.

At Karan Beef they believe in humane slaughtering practices and have

put in place systems that make sure that these are maintained and
controlled and that subsequent processes comply with the strictest
health standards. This allows the organisation to meet the demanding
international food safety expectations of the sophisticated client base.

To this end, Karan Beef carries out ongoing health and quality audits
with absolutelyno tolerance for substandard hygiene practices of any
kind. And, as a result of the strict application of these quality controls,
they are able to minimise any risk of bacterial cross-contamination
throughout the abattoir. The Balfour facility comprises

the abattoir and associated departments

deboning
fresh meat processing
by-products.

On the slaughter floor they process carcasses for direct sale to the
clients. Situated alongside the slaughter floor, the deboning plant is
equipped to process up to 120 tons of deboned product per shift. The
desire is to make the most efficient use of each and every animal
slaughtered. The company therefore also processes red and rough offal
for sale as basic foodstuffs throughout Southern Africa, as well as
producing a range of value-added offal products such as tripe, liver and
sweet meats.

In fact, the entire animal is utilised in one way or another – from the
hides, which are sold locally to Bader South Africa for use in the
manufacture of top-quality leather car seats, to blood meal, carcass
meal and tallow, which are produced in the by-products plant and used
in pharmaceutical products and additives for pet foods.

Making use of a powerful networked database they are able to track

slaughtered animals all the way back from the abattoir to their farm of
origin – thus providing the breeders with valuable information about
the quality of their cattle. Because of the export status that they enjoy
at Karan Beef, all health inspection during the slaughter process is
carried out by the meat inspection division of the South African
Department of Agriculture.
Every carcass is electrically conditioned, steam vacuumed and pH
monitored in order to enhance the overall quality of the beef. Once the
cattle are slaughtered and dressed, a certain percentage is sold as
swinging sides and the balance is moved through to the deboning plant
and meat processing facility where they add value, creating the many
different high quality beef products. Situated alongside the slaughter
floor, the deboning plant is equipped to process up to 120 tons of
deboned product per shift.

Producing a full range of prime cuts for major supermarket chains,

caterers, hotels, restaurants, butchers and other retail outlets, all the
products are vacuum-packed and selected products are aged before
distribution. The deboning plant provides the organisation with the
ability to add great value to the products and provide all the clients
with the very finest prime cuts and other beef products. As well as
producing top quality vacuum-packed prime cuts, the Modified
Atmospheric Packaging System (MAP) – making use of a mixture of
oxygen and CO2 – allows them to produce a range of retail case ready-
packaged products with a greatly extended shelf life.

The ability to deliver world-class services to clients is as important to

Karan Beef as the quality of the products they produce. All the
products – whether swinging carcasses, prime cuts or branded products
– are distributed directly from the abattoir in Balfour or transferred to
the distribution centre in City Deep for delivery to the customers in
Gauteng.

Use of both of these facilities makes it possible for them to offer the
very best service to all the clients across South Africa and around the
globe. When it comes to beef, they believe that they are the specialists
– maintaining extensive quality controls all the way from the feedlot to
the final product. It is the principle of quality through control that has
made it possible for them to satisfy even the most demanding clients. It
is this principle that enables them to penetrate international markets
not open to other companies.

Source: Adapted from http://www.karanbeef.co.za (accessed 11 March

2017)
CASE STUDY QUESTIONS

1. In which industry does Karan Beef operate? Give reasons for your
answer.
2. Can you identify some strategic decisions in this case? What are
they?
3. What corporate strategies have they implemented so far? Explain.
4. Do you think they have a competitive strategy? If you say no, what
would be an appropriate competitive strategy? If you say yes, give
reasons for your answer.

Strategy exercises

1. Take an industry of your choice. Obtain statistics about this

industry. Identify in which life cycle phase it is and identify all the
challenges organisations will experience in this specific life cycle
phase. What are the strategic options available to an organisation
in this industry?
2. Visit the nearest SPCA or any other not-for-profit organisation.
Talk to the CEO/manager and develop an executive summary
about the strategic management process they are following at that
organisation.
 12 Strategy in the public sector
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the specific nature of strategic management in the public sector

Discuss the advantages and shortcomings of strategic management in the public
sector
Discuss what strategic plans in the public sector entail
Explain the different strategic planning concepts in the public sector
Understand the importance of strategy implementation and control in the public
sector organisation

12.1 Introduction

South Africa has undergone a significant political transition. At the

same time, its public sector has also changed, becoming more
representative of the diverse backgrounds and needs of the South
African people. Accordingly, the public sector’s mandate has
broadened. Economic growth and good stewardship of South Africa’s
resources and economy, equal education opportunities, a strong health
care system and services to combat AIDS, significant infrastructure
investment, equal access to housing, and social programme delivery
are all priorities. Public managers must manage complex issues such as
those mentioned. Many issues should be prioritised and some of these
issues are not necessarily based on a sound strategic plan; however,
actions should be based on strategically effective decisions.
Strategic management for the public sector remains an important issue.
As has already been said “failing to plan, is planning to fail”. This is
also true for institutions in the public sector. The focus in the public
sector is on service delivery to the community, while the focus in the
private sector is to make money. Money is also important in the public
sector, because without money, no services can be rendered. The
management of public money is vital and should be managed in
relation to efficiency, efficacy and appropriateness. It is with regard to
these important requirements that strategic management is a significant
management activity in the public sector. The strategic management
process that is applied in the private sector can also be applied in the
public sector.

If the environment is static, the tasks of management, planning,

organising, activating and control are basically done as always – just
manage to maintain the status quo. Managing in an environment where
change is a given, results in a situation where a number of trends and
events force public institutions to be managed in such a way that they
are at least kept aligned with the changing environment.

Alternative approaches to management in the public sector are

important for governments in the new millennium. Changing market
dynamics like advances in technology, increased societal demands, and
the need to provide more social services with fewer resources have
also created challenges for public organisations. Increased
organisational scrutiny has increased the pressure for change, because
there is growing critical media attention on government’s service
delivery inefficiencies. Private sector organisations are able to be more
responsive to the challenges presented in the changing environment,
but government organisations have been slower to respond because of
fiscal constraints and the bureaucratic process characteristic to
governments. In the public sector there are forces in favour of change,
but there may also be forces in favour of the status quo. Things usually
happen very slowly in public institutions. This increases the necessity
for an approach in which strategic management tools are incorporated
to achieve improved performance and overall service quality.
It is clear in the public sector that there is a move away from
traditional thinking about organisational design and public
management, but a systematic process for creating and sustaining
improved performance that reflects changes in the environment
sometimes seems absent. The guiding principles in any strategic
management process, whether in the public or private sector, are about
understanding what changes are needed, how to implement and
manage these changes, and how to create a road map for sustaining
improvements that lead to better performance.

12.2 Nature of strategic management in the public

sector

It is not necessary to provide a definition of strategic

management again. The definition stays the same as
discussed in Chapter 1. Strategic management in public
institutions still implies a continuous process in which the institutions’
internal resources and capabilities must be aligned with the external
environment’s opportunities and threats, leading to strategic decisions
that will help the institutions to achieve their objectives. The external
environment for both the private and public sectors in South Africa can
be summarised as in flux and volatile. To cope with this ever-changing
environment and to deliver sustainable, efficient, effective and quality
services, strategic management principles and a strategic approach are
important for managers in public institutions.

The nature of strategic management in the public sector differs in

terms of the internal environment, but not in terms of the different
phases of strategic management. With regard to the latter, the phases
are still environmental analysis, strategy formulation, strategy
implementation and strategy control. In terms of the internal
environment, it is obvious that many legal policies and constraints are
present. Furthermore, the clients (customers) of a public institution
have no choice but to be associated with the institution. They have no
other option, but to use a specific public institution for its specific
service. Public institutions also depend on the budget allocated by
Parliament. They receive their income without being dependent on the
market customers. This issue results in a situation where no
entrepreneurial spirit is necessary, because the public institution does
not have to convince customers to use its services.

Government and the public sector as a whole have the responsibility to

ensure responsible spending, given the limited nature of public funds.
There must be a close link between the costs of initiatives taken and
the results to ensure that clients (taxpayers) experience value for
money.

12.2.1 Advantages and some shortcomings of applying

strategic management in the public sector
The specific reasons and advantages for applying strategic
management in the public sector institutions are as follows (Pauw,
Woods, Van der Linde, Fourie & Visser, 2009: 90–91):

It improves the decision making about future opportunities,

challenges and threats that become evident during a situational
analysis.
It stimulates the development of appropriate strategic goals and
objectives that will serve to increase service delivery.
It enables the institution to implement the actions proactively
according to a framework. This will influence the community and
environment in a positive way.
It promotes effective and efficient communication, coordination and
participation in the institution.
It improves the effective, efficient and appropriate allocation of time
and resources.

There are, however, also some shortcomings in strategic management

in the public sector. Mercer (1991: 3–4) has listed the following:
 Environmental risks are not always determined as a result of poor
information or a lack thereof.
Internal resistance to change may emerge.
The forecasted outcomes may not be achieved.
The strategic management process is time-consuming, expensive
and complicated. The shortcoming is that specific managerial talent
is needed and is not always available.
It is sometimes difficult to link the strategic plans with the national
budget. The same can be said with regard to the provincial and
municipal budgets.
There is a lack of group dynamics in the public sector.

In the public sector organisation there are also certain

microenvironmental issues that will play a role in the success or failure
of strategic management. Although these are not discussed in detail in
this chapter, this is worth mentioning because it will definitely
influence the strategic management process in the public sector
environment. These issues in general relate to the following (Van der
Walt & Du Toit, 1999):

Administrative and managerial challenges

Personal intellectual challenges
Insufficient relevant management information
Insufficient time to analyse the information
Insufficient knowledge on the part of those who have to apply the
management decisions
Insufficient identification and defining of the public and institutional
issues
The general management challenge of human resource management

The next section will deal with the nature of the public sector’s
macroenvironment, after which the strategic plans of a public
institution will be explained. It is important to remember that the
strategic plan depends on the capabilities of the institution. Before any
strategic plan can be developed, a SWOT analysis is important. The
identification of the strengths and weaknesses of the institution provide
guidance for assessing the suitability of its strategic goals in relation to
the alignment with the external environment. Identifying the strengths
and weaknesses will also provide information about resource planning
and the deployment of resources. It will also determine how well these
capabilities are linking activities to render services to the community.

Not all aspects of the strategic plan will be discussed in detail, but
what will be discussed is adapted from the guidelines from the
National Treasury department of the Republic of South Africa.

12.2.2 Nature of the environment of the public sector

The general public is the most important component of the external
environment of the public sector, because the community also
constitutes the customers of the public sector. The public sector also
depends on resources to deliver a service. Suppliers of the resources
(finance, labour, products and other physical resources) have an
influence on service delivery. If suppliers are not trustworthy, then the
public sector institution may run out of the supplies needed to deliver
the service to the community.

The public sector also experiences the environment in which it

operates as complex and uncertain. The political and economic
decisions taken in the external environmentwill have an influence on
the public sector, although the private sector usually experiences the
public sector as the cause of some political and economic decisions.
Pre-1994, the international pressure and decisions regarding sanctions
also influenced the public sector. The clash between political decision
making and what is practically viable and realistic increases the
complexity of the public sector environment.

The public sector environment is also characterised by uncertainty.

New policy decisions regarding service delivery increase uncertainty.
The public’s behaviour and response to these decisions are uncertain.
The influence of the economic and social environment on the public
sector is also uncertain.

The pace at which the external environment in general is changing

creates instability. This volatile environment creates many challenges
and opportunities for the public sector.

These fundamental characteristics of the public sector’s external

environment must be taken into consideration when decision making
and strategic planning are taking place. They should never be ignored.

12.3 Strategic plans

A strategic plan in the public sector should cover a period of at least

five years. It sets out an institution’s policy priorities, programmes and
project plans for that five-year period, as approved by its executive
authority, within the scope of available resources.

A strategic plan may be changed during the five-year period that it

covers. However, such changes should be limited to revisions related
to significant policy shifts or changes in the service-delivery
environment. The relevant institution does this by issuing an
amendment to the existing plan, or by issuing a revised strategic plan.
Government institutions vary greatly in terms of their roles and
responsibilities, and therefore develop their plans, policies and
programmes in varied ways and over differing timelines. Some plans
are about activities that are programmed and sequenced for
implementation; others are about possible responses to uncertain future
developments. Some plans relate to short-term social or economic
challenges, others have a time horizon spanning five years or more,
and perhaps extending to 30 years and beyond.

The focus of strategic plans must be on issues that are strategically

important and on strategic outcomes-oriented goals linked to, and
flowing from, various plans developed within institutions to fulfil their
mandates. Operational issues such as an institution’s finances, supply
chain management, information systems or human resources can be
considered strategic priorities if they have to be addressed to facilitate
improved performance. Similarly, if an institution delivers services
inefficiently, improving productivity would be a legitimate strategic
priority. Nevertheless the primary focus should be on the outputs the
institution produces, and the outcomes and impacts it seeks to achieve.
This outcome-oriented process moves from the inputs (what is used to
do the work) to the outcome (what must be achieved) and the ultimate
impact (what will change). The specific elements in this process are
the following:

What do we use to do the work? The resources that contribute to

the production and delivery of outputs.
What do we do? The processes or actions that use a range of inputs
to produce the desired outputs and ultimately outcomes.
What do we produce or deliver? The final products, or goods and
services produced for delivery.
What do we wish to achieve? The medium-term results for specific
beneficiaries that are the consequence of achieving specific outputs.
What do we aim to change? The developmental results of
achieving specific outcomes.

The focus of the strategic plan is on the institution as a whole, as well

as on specific objectives for each of its main service delivery areas
aligned with its budget programmes. Although plans may have a
longer time frame, they should be revised at least every five years, and
a draft new or revised strategic plan should generally be prepared for
consideration early in the year, prior to the planning period.

12.4 Planning concepts

The following concepts are not unfamiliar. Although they have been
discussed before, they are briefly looked at again as they explain all
the components in the strategic plan in the public sector.

12.4.1 Vision
A vision is an inspiring picture of what the future should look like. It
serves as a foundation for strategic planning and all policy
development. It must be motivational and guide all decision making in
the specific public sector institution.

12.4.2 Mission
A mission statement defines the reason for an institution’s existence.
The mission should identify what the institution does, how and for
whom. Typical issues covered in the mission will include the services
it provides, a description of the clients (internal and external) and the
way in which the institution wants to treat the clients and contribute
positively to their well-being. It actually defines the scope of the
institution’s business. It is not a marketing slogan. It is sometimes
found that employees in public sector institutions take the reason for
the institution’s existence for granted. As already indicated, public
sector institutions are required, especially if they are established by an
Act of Parliament. The mission can, however, give it a corporate
identity by defining its fundamental purpose in the community.

12.4.3 Values
Values are derived in conjunction with the institution’s mission and
identify the principles for the institution’s conduct when carrying out
its mission. These values must define a citizen-oriented approach for
producing and delivering government services in line with the Batho
Pele principles. Typical values are integrity, honesty, service
orientation, accountability, etc.

12.4.4 Situational analysis

The two components for the public sector situational analysis are the
internal and external management environments. These components
must be analysed in order to enable the public organisation to develop
a thorough SWOT analysis. The internal environment refers to all the
factors that will influence the competencies and skills of human and
informational resources. This actually refers to the organisation’s
institutional capacity to achieve the specific strategy objectives.
Some of the variables that play an important role in applying strategic
management in the public sector and affect the institutional capacity
are

administrative shortcomings and procedural issues

inability to embrace a long-term vision
inability to react to change and the accompanying resistance to
change
competency level of human resources

These variables reflect on the following aspects that will determine

whether they are strengths or weaknesses in the organisation.
Administrative policies may inhibit some decisions or create a
background against which decisions are made more easily. The
competency levels of employees can be an important strength or the
lack of competencies and organisational capabilities can be a major
weakness.

12.4.5 Strategic outcomes-oriented goals

Strategic outcomes-oriented goals identify the areas of institutional
performance that are critical to achieving the mission and generally
have a time span of at least five years. All strategic goals should focus
on impacts and outcomes and must challenge the institution, but they
must be realistic and achievable. In the health sector, a strategic goal
may be to “render a full package of community-based and facility-
based services at relevant community health centres and district
hospitals within the provinces”.
Strategic goals should focus on strategies and actions to achieve
specific outcomes and impacts and should be written as statements of
intent that are specific, measurable, achievable, relevant and time-
bound (the SMART principle). Priority for public institutions should
relate to the national priorities and to the planning of service delivery.
Institutions should give preference to this priority, although it can
happen that there may be strategic outcomes-oriented goals in other
areas where they relate directly to its mandate. Institutions should
exercise discipline in choosing strategic outcomes-oriented goals to
avoid the trap of prioritising everything.

12.4.6 Budget programmes and purposes

Every public institution must, in consultation with National
Treasury, develop a budget programme and subprogramme
structure that are aligned with the main areas of service
delivery responsibility within the institution’s mandate. A budget
programme is a main division within a department’s budget that funds
a clearly defined set of objectives based on the services or functions
within the department’s legislative and other mandates. A
subprogramme is a constituent part of a programme that defines the
services or activities that contribute to the achievement of the
objective(s) of the programme of which it forms a part.

Public institutions formulate their budgets to ensure that the outcomes

are achieved. The expenditure should be focused on social and
economic priorities that add value to the community, enhancing the life
of all people. Budget planning should be based on the strategic goals
of the institution and not on adjusting the estimates of the previous
year.

12.4.7 Strategic objectives

Strategic objectives should state clearly what the institution intends to
do to achieve its strategic outcomes-oriented goals. The objectives
should generally be stated in the form of an output statement. They
should be written as a performance statement that is SMART and must
set a performance target the institution can achieve by the end of the
period of the strategic plan. The present baseline and annual
performance targets must be expressed in terms of numbers. In the
health sector, a strategic objective to help to achieve the strategic goal
mentioned earlier is, for example, “to expand access to an appropriate
package of treatment, to 100 per cent (45 000) of all people diagnosed
with HIV and AIDS in the province”.

A generic template for a public institution strategic plan is presented in

Strategy in action 12.1. It is clear that the plan moves from the general
to the specific.

Strategy in action 12.1 Template for a strategic plan for a public

institution

Part A: Strategic overview

1. Vision
State the institution’s vision.

2. Mission
State the institution’s mission.

3. Values
List the institution’s values.

4. Legislative and other mandates

Set out the specific constitutional and other legislative, functional and policy
mandates of the institution. Focus on the legislative and other mandates that
the department is directly responsible for implementing, managing or
overseeing – not the entire list of legislation that the institution is subject to in
the course of its operations.

4.1 Constitutional mandates

State the relevant section(s) of the Constitution and how the department or
public entity is directly responsible for ensuring compliance with this section(s).

4.2 Legislative mandates

State the name of the relevant act and outline the key responsibilities this
legislation places on the institution.

4.3 Policy mandates

State the name of the policy and outline the key responsibilities it places on the
institution.
4.4 Relevant court rulings
Complete this section if there are any specific court rulings that have a
significant, ongoing impact on operations or service delivery obligations.
Name of court case: [outline the impact the court ruling has on the institution’s
operations or service delivery obligations]

4.5 Planned policy initiatives

Indicate in point form the most important policy initiatives the department plans
to continue or initiate in the period covered by the plan. This section applies to
departments only.

5. Situational analysis
Present broad information on the performance and broader institutional
environment based on the detailed information gathered in the strategic
planning process. Institutions’ various medium- and long-term policies and
plans should also be considered.

5.1 Performance environment

Summarise key issues in the delivery environment, providing important
background information on demand for services and other factors that have
informed the development of the strategic plan. Present a range of explanatory
indicators that reflect the demand for services and the nature of the challenges
to be addressed.

5.2 Organisational environment

Summarise the structure of the institution and highlight any important issues.
The objective is to provide information on the capacity of the institution and
other internal factors that have informed the development of the strategic plan.

5.3 Description of the strategic planning process

Describe the activities and processes followed to develop the strategic plan,
including timetables and stakeholders consulted.

6. Strategic outcomes-oriented goals of the institution

State the institution’s strategic outcomes-oriented goals. Departmental
outcomes identified by the Presidency must be reflected here as goal
statements.

Strategic outcomes-oriented goal 1

Provide a short title for the stated goal.

Goal statement
Write the outcomes-stated goal out in full – ideally this statement should be
SMART. Provide similar information for each strategic outcomes-oriented goal
set by the institution. For each strategic outcomes-oriented goal complete a
technical indicator description, which should be posted on the institution’s
website along with the strategic plan.

Part B: Strategic objectives

This section covers the strategic objectives identified to achieve the set goals.
The strategic objectives that have been identified should be related to and
discussed within the context of the approved budget programme structure.

7. Programme X (insert name of programme)

State the programme purpose as stated in the budget documentation. Provide
a brief description of the programme: how it is structured, what institutions are
responsible for the performance delivery and whether there are any key
categories of personnel where the trends need to be monitored. Wherever
possible use succinct tables, graphs and maps to present the information. The
description should not exceed three pages.

7.1 Strategic objectives

State the institution’s strategic objectives for the programme.

Strategic objective 1.1

Provide a short title for the strategic objective.

Objective statement
Write the objective out in full – this statement should be SMART.

Baseline
What is the present baseline level of performance in relation to this strategic
objective?

7.2 Resource considerations

Discuss the resourcing issues considered when developing the strategic
objectives. The discussion should deal with the following issues, as
appropriate:

Expenditure trends in the programme’s budget and how these can be

expected to evolve over the five-year period (this analysis should also focus
on trends in expenditure by economic classification)
Trends in the numbers of key staff
Trends in the supply of key inputs

Discuss issues under these headings if they are important to the realisation of
the strategic objectives relevant to this programme. Additional headings may be
added to this section to address other important resource-related issues.
Present the information in succinct tables where possible.
7.3 Risk management
It is important to list and discuss the five key risks that may affect the realisation
of the strategic objectives stated for this programme. For each item, include a
paragraph describing the risk and a paragraph indicating how the department
intends to mitigate its effects. Repeat this for each programme.

Part C: Links to other plans

It is important to outline links to other plans such as the institution’s long-term
infrastructure and other capital plans; its conditional grants; plans to review its
public entities; and the management of its public–private partnerships.

8. Links to the long-term infrastructure and other capital plans

Each department and public entity should have long-term infrastructure and
other capital plans that should outline their infrastructure investment needs for
the next 10, 20 or even 30 years. Indicate here which of the projects outlined in
its long-term capital investment plan the institutions intend implementing or
initiating during the period of the strategic plan.

9. Conditional grants
The section applies to departments only. It is important to list and briefly
describe each of the relevant conditional grants, also indicating whether the
grant will be continued or ended during the period of the plan.

Continuation
State whether the grant programme is to continue or be discontinued during the
period covered by the strategic plan.

Motivation
State the motivation for continuing or discontinuing the grant programme.

10. Public entities

This section applies to departments only. It is important to list and briefly
describe each of the public entities that are the department’s responsibility, also
providing a list of the public entities to be evaluated during the upcoming five-
year period.

11. Public–private partnerships

It is important to list and briefly describe each of the public–private partnerships
managed by the department, and indicate which partnerships will be ending
during the five-year period. Also outline the steps that are being put in place to
ensure a smooth transfer of responsibilities in the case of agreements that will
expire during the five years covered by the plan.

Annexures
Institutions may add annexures to present other information deemed relevant to
their strategic plan, as well as the technical indicator descriptions.
 Source: http://www.treasury.gov.za (accessed 25 March 2013)

An example of a strategic plan for a government department is

presented in Strategy in action 12.2. Obviously not all the goals and
objectives have been listed. This will, however, give a good idea of the
strategic plan.

Strategy in action 12.2 Strategic plan 2015–2020 | Department of Labour

(This is a shortened version of the strategic plan)

1 OUR VISION
The Department of Labour strives for a labour market which is conducive to
investment, economic growth, employment creation and decent work.

2 OUR MISSION
Regulate the South African labour market for a sustainable economy through:

Appropriate legislation and regulations

Inspection, compliance monitoring and enforcement
Protection of human rights
Provision of employment services
Promoting equity
Social and income protection
Social dialogue

3 OUR VALUES
We shall at all times be exemplary in all respects:

We treat employees with care, dignity and respect.

We respect and promote

− client-centred services
− accountability
− integrity and ethical behaviour
− learning and development.

We live the Batho Pele principles.

We live the principles of the department’s Service Charter.
 We inculcate these values through our performance management system.

4 LEGISLATIVE AND OTHER POLICY MANDATES

4.1 Constitutional and legislative mandates
The Department of Labour’s legislative framework is informed by the South
African Constitution, Chapter 2, and the Bill of Rights:

Section 9, to ensure equal access to opportunities

Section 10, promotion of labour standards and fundamental rights at work
Section 18, freedom of association
Section 23, ensuring sound labour relations
Section 24, ensuring an environment that is not harmful to the health and
wellbeing of those in the workplace
Section 27, providing adequate social security nets to protect vulnerable
workers
Section 28, ensuring that children are protected from exploitative labour
practices and are not required or permitted to perform work or services that
are inappropriate for a person of that child’s age or that place their well-
being, education, physical or mental health or spiritual, moral or social
development at risk
Section 34, access to courts and access to fair and speedy labour justice

The Department administers the following legislation: Labour Relations Act 66

of 1995 (LRA)
The LRA aims to promote economic development, social justice, labour, peace
and democracy in the workplace, and so on.

4.2 Policy mandates

The mandate of the Department is to regulate the labour market through
policies and programmes developed in consultation with social partners, which
are aimed at

improved economic efficiency and productivity

creating decent employment
promoting labour standards and fundamental rights at work
providing adequate social safety nets to protect vulnerable workers
promoting sound labour relations
eliminating inequality and discrimination in the workplace
 enhancing occupational health and safety awareness and compliance in the
workplace
giving value to social dialogue in the formulation of sound and responsive
legislation and policies to attain labour market flexibility for the
competitiveness of enterprises, which is balanced with the promotion of
decent employment.

4.3 The core functions and service rendered by the Department are
focused on:

Administration. Provides strategic direction, leadership and administrative

support services to the Ministry and the Department.
Inspection and Enforcement Services (IES). Examines how national
labour standards are applied in the workplace through inspection and
enforcementof labour legislation, and educates and advises social partners
on labour market policies.
Public Employment Services (PES). The main functions of Employment
Services are to register work-seekers, obtain vacancies and identify other
opportunities so as to facilitate the entry and re-entry of work-seekers into
the labour market.

4.4 Relevant court rulings

Name of the court case: Law Society of the Northern Provinces vs Minister of
Labour, Minister of Justice and CCMA
The impact that the court ruling has on the CCMA’s operations or service
delivery is that the current rule 25, which makes provision for CCMA
commissioners to exclude legal practitioners from dismissal matters involving
claims of conduct and capacity, has been upheld. The constitutionality of this
rule was challenged by the Law Society, but has been upheld by the Supreme
Court of Appeal. A further application for leave to appeal was denied by the
Constitutional Court.

5 SITUATIONAL ANALYSIS
The National Development Plan (NDP) presents a new trajectory to move
beyond the constraints of the present to the transformation imperatives of the
next 20 and 30 years. Thus, the South African government remains hopeful and
the NDP is regarded as the point of departure where it

recognises that our medium-term plans are framed in the context of a long-
term vision and strategy
focuses on strengthening growth and employment creation
prioritises improvements in education and expansion of training
opportunities
 promotes progress towards a more equal society and an inclusive growth
path.

5.1 Performance environment

The first challenge facing us is unemployment and underemployment. Over
the year to September 2014, there has been a noticeable shift in the distribution
of the economically active population. This includes those who were employed
and unemployed. Against the backdrop of the South African government’s
policies regarding employment creation, the South African labour market
illustrated a mixed result. Quarterly changes reflected either an increase or a
decrease in the unemployment rate. The labour market was confined to a high
unemployment rate (above 24%), a high number of discouraged workseekers
and a minimal increase in the number of jobs being created.
The second challenge relates to the changing nature of work. There has been
a tendency among employers to move away from full-time employment towards
atypical forms of employment such as casual labour, part-time employment,
temporary and seasonal work. The increase in atypical forms of employment is
contributing to instability in the labour market and a potential increase in the
violation of labour standards and fair labour practices.
The third challenge still facing the country relates to inequalities and unfair
discrimination in the workplace. Black people, women and people with
disabilities remain marginalised in relation to meaningful and influential
participation in the economy.
The fourth challenge relates to domestic and cross-border labour migration.
Domestic migration describes a phenomenon whereby people from rural areas,
some (although not all) of whom are unskilled, migrate to urban areas in search
of employment.
The fifth challenge relates to inadequate instruments for constant performance
monitoring and evaluation of labour market policies and programmes to
determine their impact on the economy. (The necessity to base policy and
programme interventions on facts and evidence and to measure their impact is
critical for any labour market system.)

5.2 Organisational environment

To deliver on its core business of Public Employment Services and Inspection
and Enforcement Services, the department has a staff complement of 8769.
With regard to the institutional capacity of the Department of Labour, the
department has an infrastructure network of 421 service points spread across
the country. These include labour centres, satellite offices, mobile offices,
visiting points, as well as services provided at the Thusong Service Centres.
This is the Department’s provincial footprint at the point of contact of service
delivery. To deliver on its core business of Public Employment Services and
Inspection and Enforcement Services, the Department has a staff complement
of over 5767 in the provinces, including at service points. It therefore remains
vital that these centres are fully functional and operate optimally if we are to
fulfil our mandate as a department.
6 STRATEGIC OUTCOME-ORIENTED GOALS OF THE INSTITUTION
In the medium term, the Department of Labour will contribute mainly to the
following outcomes:

Outcome 4: Decent employment through inclusive economic growth

Outcome 5: A skilled and capable workforce to support an inclusive growth
path (More outcomes have been listed)

6.1 Government service delivery outcomes and the Department of Labour

Strategic goals:
To address these outcomes, the Department was mandated to implement the
following strategic goals:

Strategic outcome-oriented goal 1: (Outcome 4)

Decent employment through inclusive economic growth

Goal statement

1. Promote occupational health services

2. Contribute to decent employment creation
3. Protect vulnerable workers
4. Strengthen occupational safety protection
5. Promote sound labour relations
6. Monitor the impact of legislation
7. Development of occupational health and safety policies

(All the strategic outcome-oriented goals are listed and explained by the goal
statement.)

7 PROGRAMME STRATEGIC OBJECTIVES

7.1 Programme 1: Administration

Programme purpose
Provide management, strategic and administrative support services to the
Ministry and the Department. The Ministry provides political oversight to ensure
that the department’s mandate is achieved. The Office of the Director-General
provides administrative oversight for effective implementation of the
department’s mandate and overall accounting oversight. The programme
consists of different subprogrammes.
Strategic outcome-oriented goal (Outcome 12)
An efficient, effective and development-orientated public service

Strategic goal
Strengthen the institutional capacity of the Department.

7.1.1 Strategic risks

Risk
Poor performance

Risk description
Management: Inadequate monitoring and evaluation of organisational
performance.

Mitigation strategy

Finalisation and implementation of the dashboard system

Further enhancement of current information management system
(electronic) to enable it to produce accurate information
Use of manual registers (source documents for each entry) at Labour Centre
level
Service delivery monitoring reports reviewed and followed up timeously by
the branch heads prior to submission

7.1.2 Strategic objectives

Strategic objective 1
Provide integrated business and service delivery solutions

Objective statement
Support improved planning, monitoring and evaluation of organisational
performance of the Department in line with the National Treasury Framework
for Managing Performance Information.

Baseline
Strategic Plan and Annual Performance Plan approved and tabled in
Parliament on 12 March 2014; APR produced 15% of total department’s M-PAT
standards per KPI at level 4, and 30% standards at level 3 SDIP submitted to
DPSA.

Justification
This objective focuses mainly on organisational performance, which involves
planning, monitoring and evaluation of activities in relation to the Department’s
plans so as to assess the impact, efficiency and effectiveness of the
Department’s strategies that are aimed at improving the livelihood of the public.
It also entails providing service delivery and institutional support to the
provincial operations.

Links
Outcome 12, National Treasury Regulations and the Public Finance
Management Act of 1999

Five-year target
Achieve at least level 3 within 50% of the M-PAT standards for each cycle.

7.2 PROGRAMME 2: INSPECTIONS AND ENFORCEMENT SERVICES (IES)

(Same format as for programme 1)

8 CONDITIONAL GRANTS
Not applicable to the Department of Labour

9 PUBLIC ENTITIES REPORTING TO THE MINISTER OF LABOUR

Name of public entity: Unemployment Insurance Fund
Mandate: The Unemployment Insurance Fund (UIF) contributes to the
alleviation of poverty in South Africa by providing short-term unemployment
insurance to all workers who qualify for unemployment-related benefits. The
fund is financed by a dedicated tax on the wage bill.
Outputs: Collection of unemployment insurance contributions and payment of
benefits to qualifying contributors.
Current annual budget (R ‘000): R18 930 858
Date of next evaluation: 01 April 2015

10 PUBLIC–PRIVATE PARTNERSHIPS
None
Source: Adapted from
http://www.labour.gov.za/DOL/downloads/documents/annual-
reports/department-of-labour-strategic-plan/2015-2020 (accessed 21
April 2017)
12.5 Strategy implementation

Strategy implementation is highly applicable and important in the

public sector. Without thorough and dedicated implementation plans,
the strategic plan is worthless. Implementing the strategic plan of a
public institution is an operational process. All the activities and
choices necessary for executing the strategy must be determined. All
the important management activities for effective strategy
implementation in general will be discussed in Chapter 15. It is,
however, important to note here that all the role players in the strategy
implementation process should be committed to it. They should be
experienced and have the necessary competencies to ensure effective
strategy implementation. That is why human resources play such an
important role in the strategy implementation process. Various systems
should be managed to ensure the effective integration of the human
resources, organisational structures, procedures and tasks to achieve
the strategic objectives, as well as to ensure the
financialresourcesneeded to achieve these objectives.

An operational plan is thus developed to help with the strategy

implementation process. In this plan, the tasks are identified (what),
activities are set in terms of how they must be achieved (how), the
human resources taking responsibility must be allocated (who) and the
deadline should be noted (when). This is usually the responsibility of
managers on the levels of the subprogrammes. An important
requirement is that the necessary authority is delegated to the people
responsible for managing the implementation process. If this does not
happen it will be difficult for these people to ensure that the relevant
resources for executing the strategy are available when they need
them.

The operational activities to help achieve the strategic objectives are

identified in the operational plan. Budgets are linked to these activities
otherwise it would be impossible to execute the plan. Budgeting will
not be discussed here because it is beyond the scope of this textbook.
The link between the strategic plan and the operational plan is
explained in Figure 12.1. This is a very simple example for a
municipality, to explain that the strategic plan will be difficult to
implement if it is not broken down into different operational plans and
strategic objectives.

Figure 12.1 Link between different levels of plans

Pauw et al. (2009) identify important aspects of the operational plan.

These aspects are actually the requirements of an effective operational
plan. Effective operational plans should meet the following criteria:

Base all annual objectives on the strategic plan.

Provide enough information for proper budgeting.
Provide timelines so that monthly cash flows can be calculated.
Clearly state the deliverables for all strategic objectives.
Assign people to tasks with clearly defined terms of reference.
Indicate the other resources needed for each objective.
Identify risks of achieving the objectives and planning for
contingencies.
12.6 Strategic control

In Figure 12.1 it was indicated in simple terms that the strategic goals
on a tactical and operational level refer to a target. Performance on
these strategic targets can be determined to evaluate whether progress
is being made. Performance should be evaluated at regular intervals to
assess whether the planned performance according to the strategic
goals and targets correlates with what has been achieved in reality.
Strategic control and evaluation is thus a continuous process. The goal
is to determine any deviations as soon as possible in order to apply
corrective action, before the delay or underperformance has a severe
effect on the overall performance of the institution. The result of
strategic and performance evaluation may be that the goals should be
adapted. Activities and actions needed may need to be revised and
systems, procedures, structures and support might also need revision to
help with the implementation of the strategic goals. This evaluation
and monitoring will enable management to deal immediately with
performance problems, to identify the support that is needed and to
ensure that continuous learning and development will take place.

12.7 Summary

The purpose of this chapter was to introduce the fact that strategic
management is also applicable in the public sector. No organisation
can move forward and increase its performance without strategic
management. The nature of the environment of the public sector
organisation has been described as uncertain, complex and volatile.
The macroenvironment of the public organisation can also be analysed
using the PESTE analysis explained in Chapter 6.

The advantages and shortcomings of strategic planning in the public

sector have been described. It is clear from this that, although strategic
planning has an important role to play, managers in the public sector
should be aware of its shortcomings in order to adapt and avoid these
potential issues.

Strategic plans and their major components and concepts have been
described. The format of a strategic plan for a South African public
institution on national, provincial and municipality level has been
provided to give an idea of what such a strategic plan might include.
Finally, the importance of strategy implementation and strategy control
has been discussed. A good strategy without effective and efficient
implementation is worthless. If a continuous process of strategy
evaluation and control is not followed, deviations from the plan will
never be identified and no corrective action will take place.

Exploring the web

Visit the following strategic plans:

http://www.dpsa.gov.za/documents.php
http://www.dpsa.gov.za
http://www.gov.za/documents/annual-report (indicate different departments’ annual
reports)
http://www.mckinsey.com/global_locations/africa/south_africa/en/our_work/public_sec
tor
http://www.treasury.gov.za/legislation/PFMA/default.aspx

References and recommended reading

Mercer, J.L. 1991. Strategic planning for public managers. New York: Quorum Books.
Minnaar, F. 2010. Strategic and performance management in the public sector.
Pretoria: Van Schaik.
Naidu, V. [n.d.] The implications of HIV/AIDS for strategic market planning. Available
at: http://www.skills-
factory.co.za/docs/The%20Implications%20of%20HIV%20on%20SMP-AAA-ed.pdf
(accessed 25 March 2013).
Pauw, J.C., Woods, G., Van der Linde, G.J.A., Fourie, D. & Visser, C.B. 2009.
Managing public money: systems for the south. Johannesburg: Heineman.
Republic of South Africa. Department of Labour. [n.d.]. Strategic plan 2015–2020.
Available at: http://www.labour.gov.za/DOL/downloads/documents/annual-
reports/department-of-labour-strategic-plan/2015-2020 (accessed 21 April 2017).
Republic of South Africa. National Treasury. 2010. Framework for strategic plans and
annual performance plans. Available at: http:www.treasury.gov.za (accessed 25
March 2013).
Van der Walt, G. & Du Toit, D.F.P. 1999. Managing for excellence in the public sector,
2nd ed. Cape Town: Juta.
Van der Walt, G., Van Niekerk, D., Doyle, M., Knipe, A. & Du Toit, D. 2001. Managing
for results in government. Sandown: Heinemann.

Case study

Charlotte Maxeke Johannesburg Academic Hospital

Of the estimated 1,2 million Gauteng residents who are HIV positive,
close to 900 000 now have access to antiretroviral therapy through the
public health system – a big increase compared to just 75 000 in 2006.
In this endeavour, the Charlotte Maxeke Johannesburg Academic
Hospital has played an important role. The Charlotte Maxeke
Johannesburg Academic Hospital is an accredited central hospital with
1 088 beds, serving patients from across the Gauteng province and
neighbouring provinces.

As part of a turnaround strategy, the provincial Health Department of

Gauteng focused on restoring effective controls and systems and
improving efficiencies, capacity and management in key areas in four
central hospitals – Chris Hani Baragwanath Academic, Charlotte
Maxeke Johannesburg Academic, Dr George Mukhari and Steve Biko
Pretoria Academic. To ensure the effective functioning of these and
other hospitals, the implementation of the strategy addressed staffing,
equipment, the number of beds, the working environment, the drug
supply as well as patient and staff satisfaction and morale.

In Charlotte Maxeke Johannesburg Academic, 14 autoclaves, 12

generators, five chillers, six gas sterilisers and five boilers are all fully
functional. The hospital is scheduled to have 40 lifts in total; 25 are
functional, one is being repaired and 16 are scheduled to be replaced.
All laundry machines are functional. To prevent challenges in theatres
during power outages, new generators have been put in place and
permanent onsite maintenance officials have been appointed. Other
improvements as a result of the implementation of the Health
Turnaround Strategy include increasing the availability of essential
medicines at facilities from 40 per cent to 78 per cent. The aim is to
increase this to 98 per cent.

The hospital’s professional and support staff members exceed 4 000

people. Support services are delivered through a mix of in-house,
outsourced and other government agencies, e.g. maintenance that is
done by Public Works. The hospital offers a full range of tertiary,
secondary and highly specialised services. The costs of providing these
services to the population of Gauteng Province and also to the
neighbouring provinces are funded by a National Tertiary Services
Grant as well as Provincial allocation. The hospital is located in
Parktown and also serves in theory as a referral hospital for a number
of hospitals in its referral chain. The services are extremely expensive,
with unique specialist skills and are high tech, which accounts for the
cost per patient compared to primary health care centres.

This hospital is also the only public hospital in Gauteng to be

acknowledged as the Best Public Hospital for four consecutive years
from 2003 to 2007 by the readers of a major publication, The Star. The
Charlotte Maxeke Johannesburg Academic Hospital has a private
wing, Folateng, a Sotho name meaning “Place of healing”. Each ward
gives the patient the quality and convenience of private health care
with specialist physicians and cutting-edge technology that only a
long-established hospital has the capacity to offer.

The hospital is also the main teaching hospital for The University of
the Witwatersrand faculty of Health Sciences. The institution provides
the service base for undergraduate and postgraduate training in all
areas of the health professions. The joint staff produces world-class
research and collaborates with several universities on the continent of
Africa and abroad.

The Johannesburg Hospital School is situated inside the hospital where

learners well enough to leave the wards go to classes. This reduces
feelings of depression and normalises their stay in the hospital.
Sources: Adapted from http://www.johannesburghospital.org.za/ and
http://www.sanews.gov.za/south-africa/gauteng-health-turnaround-plan-making-
strides (accessed 5 May 2013)

CASE STUDY QUESTION

1. Apply your knowledge about a strategic plan for a public sector

institution; then develop a strategic plan for this hospital based on
one strategic performance issue.

Strategy exercises

1. Visit a police station in your area. Ask the commanding officer

whether he or she can supply you with some of the strategic goals
received from the national department. Identify whether they have
operational goals to implement the strategic goals.
2. Visit your local municipality. Try to get the strategic plan of the
municipality for the next five years. Evaluate the plan and identify
how it correlates with the template for strategic plans provided in
this chapter.
 13 Strategy choice
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand what a socially responsible strategic choice is

Identify the important questions in strategic choice
Identify the influence of culture and politics on strategy evaluation and choice
Identify and apply different criteria for effective strategies
Analyse the different evaluation techniques and tools for strategy choice

13.1 Introduction

It is never easy to choose between alternatives. One of the first

important requirements in order to make a decision is to have all the
relevant information. The environmental analysis stage in the strategic
management process provides all the information regarding the
organisational strengths and weaknesses and the external threats and
opportunities. This information helps the organisation to consider
different strategic goals and strategies because there are usually
different strategic options available. It is important to evaluate each
strategic option with consistency and equal thoroughness. The
information from the internal and external environmental analysis,
together with the present strategy and the new strategic objectives and
goals, provides the basis for evaluating the feasible alternative
strategies and the final strategic selection and choice. The primary
purpose of strategy must always be kept in mind, namely, the
enhancement of organisational performance and the effective and
efficient utilisation of the organisational resources and the applicable
organisational capabilities.

It is important to consider the advantages, the disadvantages, the costs,

the trade-offs and the appropriateness of the different strategic options
available. The important issue is to choose the right strategic option
that will help the organisation to position itself optimally. The choice
of the strategy must be a socially responsible one. This means the
following:

The strategy must enable the organisation to conduct its business in

the general public interest of all its stakeholders.
The strategy must respond positively to emerging societal priorities
and expectations.
The strategy must ensure that the organisation will remain a good
citizen in the community.
The strategy must adhere to the triple bottom line of corporate
governance.

There are also some other questions regarding important issues that
need to be answered in strategy evaluation. The major questions
considered in strategy selection are concerned with the following:

What markets and products should be targeted? The decision

about which products and markets to serve is extremely important.
This choice has an influence on the profitability, sustainability and
survival of the organisation. It is not only the choice of the products
and/or services that is important, but also the consideration of the
specific life cycle position of the product and market (see Chapter
11). In markets that are approaching late maturity and entering the
decline stage, for example, strategic decisions will be concerned
with developing new products or even exploring new markets on an
ongoing basis.
What generic strategy must be followed? (See also Chapter 8.)
Organisations strive to get a competitive advantage. To define the
 competitive position of the organisation, different business (generic)
strategies are available. It is important that a choice must be made
because the generic strategy will determine the way that the value
chain activities are configured in order to achieve a competitive
advantage. In the case of a Differentiation strategy, the
organisational culture, structure and value chain activities must be
organised in such a way that the focus is on quality and the superior
features of the product and/or service. In terms of the Cost
Leadership strategy, the emphasis is put on driving costs down.
What growth and development options are available? (See also
Chapter 9.) A new strategy will influence the size of the
organisation. Usually a new strategy must help the organisation to
grow to a better position. Growth strategies are concerned with
growing bigger. The decision that needs to be taken concerns the
strategic direction and mechanism to employ to pursue organic
(internal) or external growth. It is obvious that each of these
strategic options do have their own benefits and risks. Strategy
evaluation and choice necessitate the analysis of the strategic
options in order to make an informed decision.

Organisations are operating in a rapidly changing environment. It is

obvious that this fact will require decisions on the different strategic
choices on a continuous basis. Before the different evaluation tools and
techniques will be discussed, it is important to discuss the influence of
culture and internal politics on strategy evaluation and choice.

13.2 Influence of culture and internal politics on

strategy evaluation and choice

Without neglecting the importance of strategy-shaping factors external

to the organisation like the economic and political environment, there
are two important internal factors that have an influence on strategy
selection and choice. As will be seen in Chapter 17, organisational
culture plays an important role in strategy implementation.
Organisational culture describes the unique way the organisation
performs its day-to-day business. It is then logical to consider
organisational culture when talking about strategy choice, because the
success of a new strategy will be based on the degree of support that
the strategy will receive from an organisation’s culture. If a strategy is
aligned with the organisation’s values, beliefs, rituals, ceremonies,
stories, symbols and other cultural dimensions, it makes it easier for
management to implement the strategy.

Although organisational culture must not be the determining issue and

consideration in strategy choice, it does, however, play an important
role. In considering the different strategic options, top management
may debate the number of cultural changes that may be necessary if
they decide to implement a specific strategy. Fewer changes in the
values and beliefs and in other cultural issues may make a specific
strategy more attractive as less time will need to be spent on the effort
of aligning the organisational culture with the new strategy. It is
already a given in the corporate world that the right organisational
culture lays the foundation for corporate excellence.

Internal organisational politics are always present in organisations

and will affect the choice of strategies in all organisations. The impact
of internal politics is seen when organisational goals are being put
behind personal self-interest goals. Internal politics divert the energy
of the people who are engaged in political manoeuvring and
sometimes also lead to the loss of valuable employees. Internal politics
are seen when different people in the organisation start to form
coalitions in order to manipulate the allocation of scarce resources and
to benefit their own career aspirations. The formation of coalitions is
not always a bad thing, but the moment it starts to undermine the
strategic goals and purpose of the organisation, it is a negative trend.

The strategic managers of the organisation must try to guide these

coalitions in the direction of playing a positive role in the strategic
choice and selection. The nurturing of the team concept, getting the
support of key employees and coalitions, and managing the political
relationships in the organisation are one of management’s major
responsibilities. When there are no formal objective strategy selection
procedures and tools, internal politics will become an important issue
in making strategic decisions.

Successful strategic managers keep a low political profile on

unacceptable strategic proposals and let the negative strategic
decisions come from subordinates. They also minimise their exposure
regarding highly controversial strategic issues. They do not get
involved too early, but reserve their vetoes for the major issues and the
crucial decisions. This helps to create trust among the subordinates that
the strategic leaders in the organisation are consistent in putting
organisational interests first and that the strategic leaders are not
susceptible to internal politics and proposals that are not in the
interests of the organisation.

It is important that strategic managers must be effective in getting

internal commitment from their employees. There are some
organisational tactics that can be applied to get internal commitment
from employees:

Satisfaction. A strategy may have the potential to achieve optimal

results, but may be an unpopular strategy. Nevertheless, it may be
better to achieve satisfactory results than failing to achieve any
results.
Focus on higher-order issues. If employees understand the higher-
order importance of a strategy, they are more committed to support
the chosen strategy. That is why many short-term interests may be
postponed in favour of the long-term interests of the organisation.
Adopting alternative methods. “There are many ways to skin a
cat” is a well-known saying, which means that it is possible to
achieve the same results with a different method or alternative
strategy. It is also better to achieve the desired outcome with an
alternative method or strategy, than to stick to a specific strategy.

Internal politics and culture are two important issues that play a role in
strategy selection and choice. The effective management of these
issues is important in organisations to select the best strategy in the
interests of not only the organisation itself, but also in the interests of
all the stakeholders. The evaluation techniques that can be applied in
strategy selection and choice will be discussed next.

13.3 Strategy evaluation criteria

There are essential criteria that should be considered in assessing

possible strategic alternatives. This does not mean that any strategy is
wrong in absolute terms. It is, however, important to consider whether
a strategy is likely to be effective for a specificorganisation if it is
selected and implemented. The important principles of a good strategy
are summarised in Strategy in action 13.1.

Strategy in action 13.1 Principles of good strategies

The strategy must satisfy the needs of the organisation’s customers in line
with its mission.
Customers must really experience that they receive value for their money.
The strategy must be flexible and adaptable to changing environmental
conditions.
The strategy must be cost-effective – this relates to effective cost control
and efficiency.
The strategy must align the internal organisational situation with the external
environmental opportunities and threats.
Organisational efforts must create synergy.
The strategy must create and sustain a competitive advantage for the
organisation.
The strategy must be understandable and be able to be implemented.

There are other general considerations like appropriateness, feasibility

and desirability. There may also be conflict between some of these
considerations, for example the most feasible strategic option may not
be the most desirable. An element of judgement from strategic leaders
is then necessary to make the best possible choice. The logical
reasoning in strategy selection concerns the following:

Whether there is a relationship between the possible strategic option

and the mission of the organisation that will answer the question of
appropriateness
Whether the necessary resources are available
Whether the financial returns will exceed the cost of capital
employed
Whether it will help the organisation to match and influence the
changes in the environment
Whether the strategy is feasible and implementable: who is going to
do it and is there sufficient capacity for implementation?

This logical reasoning can further be extended to consider good

reasons why a specific criterion, tool or technique must be used and
applied in the selection of the most effective and efficient strategy. It is
also important to note that specific criteria and tools may be more
applicable in certain industries than in others. The purpose and specific
life cycle phase of the industry must be considered when evaluating
strategies. The careful selection of criteria and especially tools is of the
utmost importance, because strategic leaders should not just use tools
and criteria blindly.

13.3.1 Appropriateness
The important question to answer is whether there is a
relationship between the possible strategic option and the
mission of the organisation. A strategy is said to be suitable
or appropriate when it will enable the organisation to achieve its
strategic goals and objectives. In simple terms it means that if the goal
were driving from Cape Town to Johannesburg, the appropriate route
would be the N1 and the inappropriate route would be the N2. If the
organisation wanted to increase its investment in a new market, a
concentrated growth strategy would be inappropriate. Thompson
(2001) explains some general points to consider when evaluating the
appropriateness of a strategic option.

Mission and objectives. The question is whether the new strategy

will help the organisation to achieve its mission and objectives.
Competitive position. Important questions to answer are: Will the
new strategic option improve the general competitive position of the
organisation? Will the strategy help the organisation to arrive at a
better competitive position and to be a more effective competitor in
the market?
Changing external conditions. The changing external environment
(PESTE elements) has a major influence on an organisation. Will
the new strategy help the organisation to take advantage of emerging
trends and opportunities in the market and industry?
Competencies and resources. If the new strategy stretches the
resources in any disadvantageous way, it will not benefit the
organisation. It is therefore important to ask whether the new
strategic option is consistent with the skills, competencies and
resources of the organisation.
Culture. In an ideal world the culture will be adaptable and flexible
enough to adapt to the new strategy. It is, however, essential to
consider whether the new strategy will fit the culture and values of
the organisation. If there is no alignment between culture and
strategy it will be impossible to implement the new strategy.
Acceptability. The new strategy must be simple and acceptable.
When communicated to all stakeholders, they should be enthusiastic
about the new strategy, because they understand it.

13.3.2 Feasibility
When a strategy has the potential to be implemented, it is
regarded as feasible. The feasibility depends to a large
extent on the availability of resources. A lack of financial
resources can place a constraint on the possible demands of the new
strategy. It is, however, not only financial resources that play an
important role, but also the availability of physical, human and
intellectual resources. If a strategic option requires a specific but
unavailable human skill or piece of equipment, then the strategic
option will fail the criterion of feasibility. Other general points
(Thompson, 2001) to consider include the following:

The ability to meet the key success factors. During the

environmental analysis phase, the key success factors for the
industry have been determined. If the new strategy cannot meet the
requirements of the key success factors, questions arise about the
feasibility of the strategy.
Timing. The organisation is confronted with many opportunities
and risks. An opportunity in the market is not only available to the
organisation, but also to the competitors. Timing becomes an
important issue, but the question remains whether the strategy is
feasible. An organisation that wants to pursue the opportunity must
make sure that the strategy to do so is feasible. The availability of
resources is again of the utmost importance.

13.3.3 Desirability
It has already been stressed that the strategy must be appropriate in the
sense that it should achieve the strategic objectives of the organisation.
Linked to this is the desirability of the strategy to produce results in
both the short and longer term. This means that the planning gap in
terms of the needs of the organisation must be closed. Thompson
(2001) also identifies the following evaluation criteria that should be
considered:

The level of returns expected. An important selection decision is

whether the new strategy will increase the return on investment
(ROI). The new strategy might require the purchase of new
technology. The question is whether this new technology will
provide an adequate increase in the financial return to merit the
purchase.
 Synergy. In the discussion of appropriateness, the implication of a
new strategy with regard to the organisational culture has been
discussed. The issue in this instance is the synergy or strategic fit
that the new strategy can create. The new strategy must complement
existing strategies and create an all-inclusive improvement for the
organisation.
Risk. Risk is linked to opportunity. When identifying an opportunity
in the market environment, the possibility is always there that some
risks may have been overlooked. To determine the desirability of a
new strategy, each risk must be considered in terms of its effect on
competition, the availability and competence of management and
the organisation’s finances.
Stakeholder needs and expectations. The different stakeholders
have different needs and expectations. They want the organisation to
perform and deliver better results. In evaluating the new strategic
option, it is important to recognise these needs and expectations and
to consider whether the strategy will satisfy them.

13.3.4 Competitive advantage

One of the best criteria to apply is the simple question of whether the
new strategy will create or improve the competitive advantage
position of the organisation. The question is simply: What is the
rationale for deciding on and implementing a strategic option if it is
not going to result in the organisation’s superior performance or
creating higher-than-average profitability? A new strategy will fail this
criterion if it only results in average business performance.

It is wishful thinking to believe that one strategic option will meet all
the criteria discussed. There will always be trade-offs, because it will
be rare that a strategic option will be appropriate, feasible, desirable
and create or improve the competitive advantage of the organisation.
Despite this concern, the value of all possible new strategic options
must be evaluated against these criteria and then the best option must
be selected. It is important to point out that the real value of a strategy
will only become apparent when it has been implemented. The
effectiveness of the strategy will only then be really determined.

13.4 Strategy evaluation tools and techniques

There are some techniques and tools available to help the strategist to
evaluate the different strategic options. It is important to stress that
these tools and techniques should not be blindly applied. They should
be used according to the purpose for which they were initially
designed.

13.4.1 Contribution to the portfolio of the organisation

Although different portfolio analysis techniques could be discussed,
this is beyond the scope of this book. It is, however, important to refer
to the Boston Consulting Group (BCG) matrix as a method to
determine whether the addition of an extra business unit (in the case of
integration and diversification strategies) will result in a cash producer
or a cash user. It is also used to determine what strategy to follow with
regard to its existing portfolio of business units.

Business units can be classified in this BCG matrix as dogs, question

marks, stars or cash cows. Business units are measured according to
their relative market share (based on internal strengths and
weaknesses) and the industry growth rate (based on external
opportunities and threats). A business unit that experiences low
industry growth and low relative market share is then classified as a
dog. The best strategy for such a business unit will be divestiture or
liquidation. A business unit classified as a question mark experiences
high industry growth, but low relative market share. It is perhaps also
wise to sell this business unit (divestiture) because of the uncertainty
about what will happen with it. A star is a business unit with high
industry growth and high relative market share. Business units
identified as stars should be kept and perhaps more investment should
be made in these businesses. Internal growth strategies will be the
obvious choices. Finally, the cash cows are business units with low
industry growth, but high relative market share. They are strong cash
providers and should be used to support the question marks with
potential and the stars (see Figure 13.1).

Figure 13.1 Boston Consulting Group matrix

This portfolio analysis approach is only useful if the organisation has

more than one business unit. With this tool organisational decision
makers can decide what to do with the various business units. Is it time
to sell them, or is it time to acquire other business units (diversification
and integration)? Nevertheless, it is important to caution against using
this technique alone. It must be used in conjunction with some other
evaluation techniques and tools.

In the case of an organisation not having different business units, this

tool can still be used, but then applied to the suitability of the different
products in the portfolio. The following techniques will be more
helpful in evaluating strategies in the case of organisations with only
one business unit.

13.4.2 Investment appraisal

Investment in its simplest terms refers to the money
invested in a specific project in the expectation that it will
make money in the future. The economic purpose of an
organisation in the private sector is to make money and in the public
sector it is to manage within the budget requirements and to experience
a positive cash flow. The important issue in the evaluation of the
investment is to answer the question of how much money each
strategic option will make.

Time is an important issue to consider in this strategic option

evaluation. The return on an investment may be immediate, but it can
also take years to really experience the positive influence of the
investment. One way to decide between different strategic options is to
calculate the payback period for each strategic investment option.
The shorter the payback time, the better the strategic option will be.
Competitor A can be acquired through the horizontal integration
strategy at R1 million rand, and this will increase the profits by R50
000 per month. The payback period is 20 months (1 000 000/50 000).
If organisation B is acquired (maybe a different type of business in
another industry in an unrelated diversification strategy) at R500 000
and this increases the profits by R30 000 per month, the payback
period will be 16,7 months. The obvious strategy choice will be the
unrelated diversification strategy, because it makes more financial
sense if the payback period is shorter.

Obviously the calculation is not that simple, because the time value of
money must also be taken into consideration. This is beyond the scope
of this book. The issue that is being stressed in this discussion is that
appraising the investment is an advisable tool.

13.4.3 Cash flow forecasting

A straightforward tool to use is a cash flow analysis. In this type of
analysis, the flow of funds is recorded as income from a strategic
option minus the outflow of funds. This will create a cash flow
position every month, indicating what the cash position at the end of
each month will be. This is not a profit-and-loss statement, but a cash
flow statement. This statement can be developed for every strategic
option and this will help to identify the most favourable one.

13.4.4 Cost-benefit analysis

A tool that can also be applied is the identification of the costs and
benefits of each strategic option. Each option will have its associated
costs and be expected to have its benefits. The requirement in this case
is that the benefits and the costs must be quantifiable in financial
returns. This can create a challenge, because the costs of the option
itself as well as the opportunity costs if the option is not pursued must
both be determined. This may be challenging.

Apart from the financial costs, social costs and benefits must also be
considered. Every organisation has an impact on the society in which it
operates. The elements that need to be taken into consideration are the
social costs associated with an increase in unemployment, higher
levels of environmental pollution, lower salaries, etc. Social benefits
will obviously refer to the positive effects. If a strategic option creates
improved working conditions and higher salaries in society, it will be a
social benefit, but at the same time it will be a direct increased cost to
the organisation. It is clear that this tool is challenging in the sense of
calculating the real values of financial and social costs and benefits. It
is, however, useful in evaluating the financial feasibility of a strategic
option.

13.4.5 Impact analysis

Every strategic option has a consequence. Despite this it is possible
that some strategic options have serious financial and/or social
consequences. In such a case an impact analysis may be appropriate by
asking the question “what will the impact be on …?” In the case of
opening a new mine, the impact will include any implications for
employment, tourism, health risks, etc. Usually the impact analysis
will be part of a cost-benefit analysis.

13.5 Strategic evaluation in the different strategic

approaches

In Chapter 1, the prescriptive and emergent approaches to strategy

development were discussed. In the case of the prescriptive approach,
it was argued that a rational sequence of steps is followed. In this
approach different strategic options are identified as possible options
to implement. It is clear that it will be relatively “easy” to apply some
of the strategic evaluation techniques and tools.

In the case of the emergent approach, strategic options emerge along

the way. Although it will be more challenging to apply these strategic
evaluation criteria and tools, it does not mean that they are not
applicable. The intelligent strategic leader will still be able to evaluate
intuitively the different strategic options. The limitation of the
emergent approach is however more obvious – the emergent approach
relies on behavioural patterns that do not ensure that the best option is
taken at all times during decision making. It may be the right strategy,
but it might also not be the right strategy.

13.6 Summary

A good strategy must be appropriate for a specific purpose and lead to

sustainable competitive advantage. The primary purpose of any
strategy is also to enhance the performance of the organisation. The
three basic elements of any strategy are the enhancement of
performance, the effective and efficient use of organisational resources
and the enhanced applicable organisational capabilities. In selecting
the best strategy, these three elements are critical. It was also stressed
that organisations should not use these evaluation criteria and tools
blindly. Organisations may make the mistake of picking and applying
tools and not using them for their original purpose. The logic for using
a tool must also be linked to the specific strategy and the
developmental phase in which the industry finds itself.
Exploring the web

http://www.endrawnow.org/en/articles/929-use-tools-to-select-a-strategy-or-
strategies.html
http://www.pvpc.org/ehamp/web-
content/docs/draft_plans/Strategy%20Selection%20Criteria.pdf
http://www.publicsector.wa.gov.au/public-administration/sector-wide-
management/senior-executive-services/selection-criteria/samples-selection-criteria
https://webgate.ec.europa.eu/fpfis/cms/farnet/sites/default/files/documents/FARNET_
Good-strategy_Criteria.pdf

References and recommended reading

Campbell, D., Stonehouse, G. & Houston, B. 2002. Business strategy: an

introduction. Oxford: Butterworth Heinemann.
Coulter, M. 2008. Strategic management in action, 4th ed. New Jersey: Pearson
Prentice Hall.
David, F.R. 2001. Strategic management: concepts and cases. 8th ed. New Jersey:
Prentice Hall.
Kotler, P. 1997. Marketing management analysis, planning, implementation and
control, 9th ed. Upper Saddle River, NJ: Prentice Hall.
Porter, M.E. 1985. Competitive advantage. New York: Free Press.
Republic of South Africa Department of Arts and Culture. 2006. The South African
craft industry. Available at: http://www.westerncape.gov.za/Other/2006/S/industry-
report-cultural.pdf (accessed 25 April 2013).
Thompson, A.A. & Strickland, A.J. 2001. Strategic management: concepts and cases,
12th ed. Boston: McGraw Hill.
Thompson, J.L. 2001. Strategic management. 4th ed. London: Thomson Learning.
Thompson, J. & Martin, F. 2010. Strategic management: awareness and change, 6th
ed. London. South Western Cengage Learning.
Case study

Rustic Furniture

David Mosego knows about real estate, but he does not know much
about the furniture business. David owns a building in the
Johannesburg industrial park that housed Rustic Furniture, a furniture
manufacturer with a strong reputation but which was plagued by
financial problems. When the owner approached David about buying
Rustic Furniture, David was excited at first, but later started to wonder
whether it was a good idea.

However, David thought he could improve the business by developing

new products and breaking into new markets. His wife and his bank
were not so sure whether that would work. South Africa’s economy is
depressed, and that’s where most of Rustic’s customers are situated.
David was not discouraged and found two banks willing to lend him a
total of R13 million, and he decided to go ahead with the purchase. He
kept on the entire workforce, put R60 000 into marketing, and began
adding new products.

David was advised by business consultants to choose dealers carefully

and maintain a strong brand, so customers would pay a premium for its
products. It was also important to make the furniture factory as
efficient as possible. One consultant suggested to David that the
company should offer cheaper imported products in addition to locally
produced goods. What did David do? He has been overhauling his
manufacturing processes, adding products, and reaching out to new
distributors. Sales are up 65 per cent and the company is
manufacturing more products. He is also expanding the business to
Cape Town and he plans to add custom high-end furniture.

This is a fictitious case study.

CASE STUDY QUESTIONS

 1. What are the different main strategies that David identified when
he bought Rustic Furniture? If you were David, how would you
have evaluated whether your investment would be sound and safe?
2. Buying a business in an industry that differs from the one you are
used to requires some serious questions to decide on the strategic
choice of diversifying into such a business. What are the important
questions that need to be answered?

Strategy exercises

1. Which of the strategy evaluation criteria and techniques discussed

in this chapter do you think are the most useful? Why would you
say this? How would you use these techniques and what are their
limitations?
2. Which criteria do you think would be applicable in selecting the
following strategies? Give reasons for your choice.

Concentrated growth
Market development
Product development
Horizontal integration
Forward vertical integration
Related diversification
Unrelated diversification
 PART
III

STRATEGY IMPLEMENTATION

I n the previous chapters the first two phases were explained. Now it
is time to implement the strategic choice with regard to the strategic
direction to follow. Strategies must be implemented, otherwise they are
not worth the paper they are written on. Strategy implementation, or
execution, involves putting the strategy into action. This phase of
implementation means that things in the organisation will change. This
important aspect is discussed in Chapter 14.

For successful strategy implementation, organisations make use of

various strategy implementation components. A brief introduction and
explanation of these components will be discussed in Chapter 15.
There are two components in particular that really have a major impact
on strategy implementation: leadership and culture. The importance of
strategic leadership is discussed in Chapter 16 and organisational
culture in Chapter 17.
The strategic management process
 14 Strategy implementation and
change management
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the significance of strategy implementation

Differentiate between strategy formulation and strategy implementation
Assess strategy implementation as a component of the strategic management
process
Examine the performance gap with regard to successful strategy implementation
Explain the different types as well as the issues of strategic change
Demonstrate the different causes of strategic change
Understand the three-step process of change
Analyse the strategic change process and illustrate knowledge of the different
components of the change process

14.1 Introduction

Once the appropriate strategy or strategies have been selected, the

strategic management process moves into a critical new phase – that of
strategy implementation. Strategy implementation, or execution,
involves putting the strategy into action. This is the most important
phase in the strategic management process. Implementing strategies in
an environment characterised by rapid change and challenges is a
tremendous task for any organisation. Organisations need to ensure
that the entire workforce is committed to strategy implementation and
change. For successful strategy implementation, organisations make
use of various strategy implementation drivers, namely, leadership,
organisational culture, reward systems, organisational structure and
resource allocation. In order to understand the role of these drivers in
strategy implementation, it is firstly important to understand the
significance of strategy implementation as a vital phase in the strategic
management process. To implement the strategy also means that
change in the organisation will be needed. Therefore it is important to
discuss the issue of how to manage change.

14.2 The significance of successful strategy

implementation

14.2.1 What is strategy implementation?

Strategy implementation can be defined as the process that
turns the selected strategy into action to ensure that the
stated goals (which are aligned with the vision and mission)
are accomplished. What was planned must now be executed. From this
definition it is clear that strategy implementation deals with translating
the strategic plan into action. It is the phase in which management
aligns or matches strategic leadership, organisational culture,
organisational structures, reward systems, policies and resource
allocation with the chosen strategy or strategies.

Strategy implementation is an essential component of the strategic

management process as it deals with the strategic change required
within an organisation to make the new strategy work and to achieve
the desired results. It is significant that it has often been considered the
most difficult part of the strategic management process. Research has
indicated that it is much easier to formulate a strategic plan than to
implement it and that it is at the implementation stage that strategies
often fail. To formulate a strategy, a “recipe” can be followed by
developing the vision and the mission, doing environmental analyses
and deciding on certain competitive and grand strategies.
Implementing a strategy is not all that easy. Research has also
indicated that the real value of a strategy can be recognised only
through implementation, and that the ability to implement a strategy is
considerably more important than the quality of the strategy itself.
There is a saying: “Rather have a B-strategy with an A-
implementation, than an A-strategy with a B-implementation.”
Strategy implementation poses a challenge to management, not only
with regard to the motivation of employees, but also in terms of the
discipline, commitment and sacrifice required.

Strategy implementation differs from strategy formulation in several

ways:

Strategy formulation is the intellectual or thinking phase, while

implementation is the phase in which these thoughts are
operationalised and turned into action.
Strategy formulation is mainly a market-driven activity with an
external focus, whereas strategy implementation is an internal,
operations-driven activity.
Strategy formulation requires good intuitive and analytical skills,
while strategy implementation requires motivation and leadership
skills.
Strategy implementation is not as well structured, rational and
controlled as strategy formulation.
Strategy implementation and formulation differ considerably
regarding who takes responsibility for each phase. Strategy
formulation takes place mainly at top and senior management levels,
in spite of a drive during the last few years of the 20th century to
include wider participation. Strategy implementation, in contrast, is
the responsibility of all levels of management, from supervisor level
to the board of directors.

Middle management plays an especially important role in strategy

implementation. Middle managers are the recipients of decisions made
by top management and are instrumental in motivating lower-level
managers and employees to improve continuously on how strategy-
critical activities are performed. Top management relies on the support
of middle management to push strategy implementation into all
functional areas and operating units daily. It is important for the
strategy formulators to remain genuinely committed to the
implementation process and to serve as a powerful inspirational force
for managers and employees. Strategy implementation affects the
entire organisation and all employees are participants in the
implementation process.

In spite of strategy implementation being an essential ingredient in the

success of any organisation, there is no single winning recipe for
strategy implementation. In each organisation, strategy implementation
takes place in a different organisational context and setting. Strategy
implementation can serve as a source of competitive advantage in
industries where unique strategies are difficult to create. The challenge
of successful strategy implementation is to create a series of tight fits
between the chosen strategy and leadership, strategy and culture,
strategy and reward systems, strategy and structure, strategy and
policies, and strategy and resource allocation.

14.2.2 Strategy implementation as a component of the

strategic management process
From the strategic management model depicted in Chapter 1, it is clear
that strategy implementation is an integral part of the strategic
management process. However, the strategic management process is
not as clearly divided and neatly performed in practice as the
prescriptive approach of strategic management suggests. Although it is
sometimes depicted as two separate, sequential phases in a linear
process, strategy formulation and implementation often overlap in
practice. In a contemporary business environment characterised by
high levels of uncertainty, turbulence and rapid change, a strategy can
be obsolete by the time it has been implemented. That is why an
emergent approach to strategy is sometimes more applicable.

The strategic management process is a dynamic, interrelated process.

Formulation decisions have a direct impact on strategy
implementation, which in turn directly affects strategic control. Recent
research also suggests that decisions about implementing the strategy
must be anticipated and incorporated into decisions concerning
formulation. Strategy formulation and implementation are interrelated
and success in both phases is necessary for superior performance. All
formulated strategies should be worth implementing because a strategy
that is chosen but not implemented serves little purpose. Implementing
strategy requires that management must manage the change, and
change is inevitable as a result of the new strategy. To manage this
change requires special people management skills. Before strategic
change management is discussed, it is important to focus on the
performance gap if strategy is not implemented and on some barriers
to strategy implementation.

14.2.3 The performance gap

As was pointed out throughout this book, strategy is all about optimal
positioning. This means that the organisation wants to increase its
performance. If organisations are not successful in implementing their
strategies, a performance gap occurs. A study done by Mankins and
Steele (2005) investigated how successful companies are at translating
their strategies into performance. Specifically, the researchers were
interested in how effective organisations are at meeting the financial
projections set out in their strategic plans, and if they fall short, what
are the most common causes, and what actions are most effective in
closing the strategy-to-performance gap. This strategy-to-performance
gap can be attributed to a combination of factors, such as poorly
formulated plans, misapplied resources, breakdowns in communication
and limited accountability for results. This study further points out the
following common problems:

Companies rarely track performance against previous years’

long-term plans. The research reveals that less than 10 per cent of
organisations make it a regular practice to compare the
organisation’s results with the performance forecast in its prior
years’ strategic long-term plans. As a result they do not know
whether the projections that underlie their investment and strategy
decisions are in any way a true prediction of actual performance.
The fact that so few organisations routinely monitor actual versus
planned performance may help to explain why so many
organisations continue to fund losing strategies rather than searching
for new and better options.
Multiyear results rarely meet projections. When companies do,
however, track their performance relative to projections over a
number of years, the starting point for each year may be a bit higher
than the prior year’s starting point, but rarely does performance
match the prior year’s projection. The obvious implication is year
after year of underperformance relative to what was planned. This
creates a number of problems: Firstly, the financial forecasts are
unreliable and therefore senior management cannot confidently tie
capital approval to strategic planning. This makes it difficult for
resource allocation. The problem with this is that the annual budget
drives the organisation’s long-term investments and not the strategic
plan. Secondly, portfolio management becomes a concern, because
inaccurate financial forecasts make it difficult to know whether a
particular business in the portfolio of businesses still has some
worth to the organisation and its shareholders. Thirdly, poor
financial forecasts complicate communications with the investment
community and risk damaging the organisation’s reputation with
analysts and investors.
A lot of value is lost in translating strategy to performance.
Given the poor quality of financial forecasts, most organisations fail
to realise their strategies’ potential value, because failure to have the
right resources in the right place at the right time strips away some
7,5 per cent of the strategy’s potential value, 5,2 per cent of value is
lost to poor communication, 4,5 per cent to poor action planning and
4,1 per cent of value is lost by limited accountability for results. The
problem is that strategies are approved but poorly communicated to
everyone in the organisation. This makes the translation of strategy
into specific actions and resource plans impossible and lower levels
in the organisation do not know what they need to do, when they
need to do it, or what resources will be required to deliver the
performance that is expected. Consequently, the expected results
 never materialise. The research indicates that, on average, most
strategies deliver only 63 per cent of their potential financial
performance. If management can realise the full potential of its
strategic plan, the increase in value could be as much as 60 to 100
per cent.
Performance problems are frequently invisible to top
management. The processes most companies follow to develop
plans, allocate resources and track performance make it difficult for
top management to determine whether the strategy-to-performance
gap stems from poor planning, poor execution, both or neither.
When strategic plans are realistic and performance falls short, top
management has few early warning signals. They often have no way
of knowing whether critical actions were carried out as expected,
resources were deployed on schedule, competitors responded as
anticipated, and so on. Unfortunately, without clear information on
how and why performance is falling short, it is virtually impossible
for top management to take appropriate corrective action.
The performance gap fosters a culture of underperformance. In
many organisations, planning and failure to execute the strategy are
actually reinforced. Unrealistic plans create the expectation
throughout the organisation that plans simply will not be fulfilled.
Once this culture has taken root it is very hard to reverse, because as
the expectation becomes experience, it becomes the norm that
performance commitments will not be kept. So employees cease to
understand that performance commitments are binding promises
with real consequences. The organisation becomes less self-critical
and less intellectually honest about its shortcomings, and
consequently loses its capacity to perform.

Some of the problems organisations often experience when attempting

to implement their chosen strategy or strategies can be attributed
directly to the lack of these managerial competencies. These problems
include the following:

There is no alignment between the organisational structure and the

strategy.
 The information and communication systems are inadequate to
report on the progress of strategy implementation.
The coordination of implementation efforts is not sufficiently
effective.
The leadership and direction provided by top and middle managers
are inadequate.
Goals are not sufficiently defined and not well understood by
employees.
The formulators of the strategy are not involved in implementation
or leave before the implementation is complete.
Key changes in the responsibilities of employees are not clearly
defined.

In another study it has also been found that nine out of 10

organisations fail to implement their planned strategies and as little as
10 per cent of the strategies effectively formulated are effectively
implemented. Although this study was done a number of years ago, the
results still seem to be applicable. Four barriers to strategy
implementation have been specifically identified. These barriers are
depicted diagrammatically in Figure 14.1.
 Figure 14.1 Barriers to strategy implementation

Source: Adapted from Business Day (30 September 1999: 37)

14.2.4 Strategy implementation and corporate governance

As mentioned in Chapter 4 on corporate governance in South Africa, it
is the responsibility of the organisation’s board of directors to define
the organisation’s purpose and to identify the stakeholders relevant to
its business. Subsequently, the board has to formulate a strategy based
on these factors. The King IV Report also states that it is the board’s
responsibility to ensure that management not only implements the
formulated strategy, but also monitors that implementation.

Strategy implementation should take issues such as social

responsibility, environmental responsibility, stakeholder engagement
and sustainability into consideration at all times. Top management
must ensure that strategy implementation activities support the drive
toward social and environmental responsibility. Stakeholder
engagement should be encouraged. Various strategy experts emphasise
that in order to implement strategies successfully, an organisation must
achieve consensus both within and outside the organisation. If an
organisation fails to take external stakeholders such as regulatory
agencies, environmental groups and the community into consideration
and if these groups have the power to block or delay key strategic
elements, strategy implementation efforts could be seriously
jeopardised.

14.3 Change – a fundamental implementation issue

It has been clear from the outset that strategy implementation is not as
straightforward a process as one would imagine. Many strategic
changes have to be made and it is important to examine these before
we discuss the different tools and instruments that can help to
implement strategies. The people working in organisations generally
make it difficult to implement new strategy, although sometimes they
are enthusiastic and make significant contributions to the proposed
strategy. The ability to manage change is fundamental to an effective
organisation. This means that managers and all employees are being
supportive of, rather than resistant or hostile to, the proposed change.
However, sometimes management itself must be changed to implement
new strategies and to take the organisation further. The case of Comair
(Strategy in action 14.1) is an example of the strategic change that an
organisation can embark on to take the organisation to the next level
and turn it around.

Strategy in action 14.1 Changes in Comair

In 1946, Commercial Air Services (Comair) began its business with a number of
Fairchild UC-78 planes that were bought in Cairo after World War II. It began as
a charter service to some of the remotest places in Africa. The company grew
organically to the current situation, where it carries an average of 4,8 million
passengers per annum in its Boeing 737-300/400/800 aircraft. Comair
underwent major changes in 1996, when it became a franchise partner with
British Airways. Since then, Comair has been known as British Airways Comair.
The next major development was the launch of South Africa’s first “low-cost”
carrier in the form of kulula.com, in 2001. The word “kulula” means “easily” in
Zulu and has, since its inception, revolutionised air travel in South Africa by
making it much easier and more accessible to the general public.
 For about 70 years, Comair has provided a product and service of consistent
value, reliability and professionalism with an aviation record of 67 consecutive
years of operating profit. The organisation employs over 1800 employees
across Southern Africa, serving 10 cities with both its British Airways and
kulula.com brands. It is this reputation of quality and passion for service that will
ensure that Comair continues to play a major role in the South African aviation
and travel industry.
As a result of the fact that Comair has grown organically, it had a number of
systems that had been “put together” with which it was operating its business.
After a strategic review of the business in 2010, the leadership team at the
carrier took the decision to implement an integrated system to replace the
previous jumble of systems, specifically in the kulula.com operations. This
would allow for streamlined operations and better cost control, directly affecting
the company’s bottom line. As a result of this strategic change, Comair Limited
in South Africa embarked on a journey to a new and better way of working
when it strategically selected Sabre Airline Solutions (Sabre) in 2011 to provide
a comprehensive end-to-end airline solution. The new platform was designed to
deliver benefits such as integrated systems, improved customer experience,
integration with third-party systems, an opportunity to enhance and grow its
distribution footprint, and ultimately to grow its revenue.
A technological transformation like using Sabre can create procedural,
attitudinal and behavioural complexities among organisational members,
resulting in decreased levels of efficiency and customer service that have an
impact on bottom-line business performance. With this in mind, leadership of an
external organisation was contracted to facilitate the change management
process within Comair. This organisational development firm helps companies
to achieve exceptional performance through the lens of culture and leadership.
With its guidance, Comair was able to create a clear case for change by
gaining commitment from key stakeholders, by engaging creative methods and
by providing the necessary structure, skills and tools to assist people working
through the change.
Much learning and development has taken place throughout Comair and the
organisation and the competencies and skills gained through this process have
been invaluable. A few “uncovered gems” with unique qualities and leadership
potential were identified within the organisation, giving Comair the benefit of
employing and retaining the right person for the job and the individual with an
opportunity for self-growth.
Source: Adapted from https://gothamculture.com/clients/case-studies/comair-
organizational-change-management/ (accessed 14 March 2017)

It is important to have clarity about the strategy. All employees must

understand that a new strategy has been developed for the
organisation, and that its implementation will require new action plans
and perhaps a process of total restructuring. It is especially the latter
issue that creates “fear” among organisational members as to what is
going to happen. The four key features of change management are

dissatisfaction with the present strategy

the vision of a better alternative or desired future state
a strategy for implementing the change
resistance to some of the new proposals of the strategy at some
stage.

The basic process of managing strategic change, which will be

discussed in this section, includes the issues illustrated in Figure 14.2.

Figure 14.2 Managing strategic change

14.3.1 Strategic change

The reason for developing a strategy is to take the
organisation from a position A to a better position B. This is
called optimal positioning. To do this successfully involves
strategic change. What is strategic change? Strategic change includes
all the efforts and actions to move an organisation from its present
state towards the desired future state to increase its competitive
position and its profitability. Strategic change is thus the
implementation of a new strategy that involves substantive changes to
the normal routines of the organisation. FNB’s strategy to encourage
innovation has led to many innovations that contribute to its success
(see Strategy in action 14.2).

Strategy in action 14.2 FNB celebrates 10 years of innovation success –

innovation changes the status quo in banking

Until 2014, the FNB Innovators Programme had implemented just over 9000
innovations. It has come a long way in the innovation game. According to
S’onqoba Maseko, Head of FNB Innovators, innovation helps to improve
banking processes and to re-invent products, processes and services. This
programme of innovation has given employees the platform to generate ideas
and products that have made a difference in the banking landscape. It
continually pushes the limits, searching for solutions that will make people’s
lives easier – not by being different for the sake of being different, but by really
striving to live up to the promise of FNB: the promise of helpfulness.
The Innovators Programme continues to nurture a culture of innovation at FNB.
Maseko explains that the task of being innovative requires that employees who
understand the business embrace the organisation’s culture and look for ways
of doing things differently. It is a challenge to remain relevant in the highly
competitive financial environment. This has largely been the result of global
trends and developments, such as advances in technology, a competitive
landscape, and changes in stakeholder and customer attitudes and
expectations. These shifts result in new entrants competing and challenging
current business models to adapt and come up with new and advanced
business solutions.
To satisfy a new generation of customer-centric, technology-savvy customers, it
is important that FNB emphasise innovation and technology in banking services
that are moving away from physical, tangible products and solutions to
technology-enabled and digital channels. Innovation and technology is a
definitive asset that can contribute positively to any customer’s experience.
Changes in current regulations, customer behaviour and technology – coupled
with changing market dynamics and aggressive competitors – mean that
banking in the future cannot simply be a continuation of banking as it has been.
It seems that innovation at FNB is not simply a slogan; it is a primary way of
working in the bank.
Source: Adapted from https://blog.fnb.co.za/2015/03/fnb-celebrates-10-years-
of-innovation-success-innovation-changes-the-status-quo-in-banking-
2/
Strategic change is not the normal organisational change or organic
growth that happens in organisations as part of normal development.
Strategic change is the proactive change that should be implemented
in organisations to achieve the clearly identified strategic objectives.
This implies that strategic change must be proactively managed. The
implementation of the new strategy requires the organisation to go
through this strategic change process. Strategic change is concerned
primarily with people and the tasks that they perform in the
organisation. The partnership between Pick n Pay and BP in terms of
developing the new BP Forecourt Pick n Pay Express stores is an
example of a proactive strategic change (see Strategy in action 14.3).

Strategy in action 14.3 BP teams up with Pick n Pay in retail deal

Oil giant BP is to embark on a huge expansion of its forecourt retail offering in

South Africa, announcing that it will convert 120 BP Express stores to PnP
Express stores. This move opens a new front in the battle for the motorist’s
rand. Additional stores may also be converted after the initial five-year period.
The roll-out of PnP Express stores will concentrate on BP sites that are most
suitably located for Pick n Pay’s customers. International experience suggests
that small-format stores often spur growth, and most leading global retailers
have a multichannel presence, including forecourt outlets.
Both companies are confident that the dual format brings multiple benefits to
the two companies, their franchisees, suppliers, and more specifically to South
African customers who are in search of efficient and affordable convenience
retailing. This development is a great opportunity for Pick n Pay to extend its
brand offering to existing Pick n Pay customers and expose it to BP forecourt
customers too.
This development will enhance and strengthen the key strengths of both
businesses, and it enables Pick n Pay to expand its small-store format while
continuing to create new entrepreneurs, in line with its franchise strategy.
The agreement paves the way for significant enterprise development through
the development of new and existing franchisees, and will add value to broad-
based black economic empowerment (BBBEE).
Pick n Pay customers want to shop in smaller convenient and well-located
stores that are easily accessible and that keep longer trading hours.
Competitive pricing remains an important requirement. Customers will also be
able to use their Pick n Pay Smart Shopper cards throughout the network. This
new format of the PnP Express sites at BP filling stations provides all of this,
and also allows customers to have easily accessible free parking.
Source: Adapted from http://www.bdlive.co.za/business/retail/2013/04/24/bp-
teams-up-with-pick-n-pay-in-retail-deal; accessed on 6 May 2013, and
 http://www.picknpay.co.za/news/smallformat-stores-on-their-way
(accessed 15 March 2017)

It is important that the organisational culture is conducive to change.

This is highlydesirable but very difficult to achieve. That is why
strategic change depends on a perceived need for change that
originates with either the strategic leader or other managers who are
aware of the new possibilities the external environment offers. It is
secondly very important that the necessary resources (competencies
and physical resources) to implement the change are available. Lastly,
commitment from managers and employees to support the change is
an important requirement. If employees do not understand this need for
change as a result of a new strategy and if they are not committed to
supporting the change, it will be difficult to implement change. This is
even truer if the necessary resources are not available to support
change.

14.3.1.1 Types of strategic change

Strategic change can be analysed in terms of the nature of the change
and the scope of the change. The nature of the change can be
incremental or it can be revolutionary (fast, sudden and disruptive).
The scope of the change refers to whether change can happen in the
current organisational setting, or whether a fundamental change of
strategic direction is necessary. When these four possibilities are
compared, four types of strategic change can be identified (see Figure
14.3).
 Figure 14.3 Types of strategic change

Source: Adapted from Johnson & Scholes (2005: 536)

It is clear from Figure 14.3 that four different types of strategic change
emerge (Johnson & Scholes, 2002: 536–537):

Adaptation. The current organisational setting can facilitate the

incremental change that must happen in order to achieve the desired
goals. It is only necessary to adapt to this new situation.
Reconstruction. The current organisational setting can handle a
change that involves a sudden alteration in the market conditions. It
may be that only the reconstruction of processes and policies is
required to implement the new strategy.
Evolution. The strategy involves fundamental changes in the way
the organisation has to deal with the situation, but it can happen over
time. However, the lack of urgency may cause strategic drift. The
ideal situation in this case is that the organisation becomes a
learning organisation to manage this change.
Revolution. The strategy involves fundamental changes as a result
of sudden and fast-changing conditions. There may be the threat of a
hostile takeover, in which case the organisation will have to
implement a new strategy very quickly. This type of change is
usually applicable to organisations in high-velocity environments,
because incremental changes will not be sufficient. They have to
take revolutionary decisions. (Read Strategy in action 1.1.)

These types of change actually boil down to the questions of whether

the change required can be accommodated within the boundaries of the
existing organisational setting, or whether significant changes are
required in terms of the structure, assumptions and beliefs of the
organisation. While the launch of a new product does not really require
fundamental changes, a change from being a manufacturing to a
service-oriented organisation requires fundamental change.

14.3.1.2 Strategic issues of change

Strategic change requires that important issues be taken into account.
Different organisational settings will require different emphases to be
put on these issues. Strategic change in a small organisation with
relatively motivated and committed employees will be quite different
from an attempt to change the culture and processes in a large
established organisation. Think how difficult it is to change the
established routines and formal structures in the public sector – in fact
the bureaucratic processes make it almost impossible.

Some of the strategic change issues that must be managed and taken
into consideration are the following (Johnson & Scholes, 2002: 536):

Time. How quickly is change needed; does the organisation have

time to change? A sudden decline in profits leads to a different need
for change compared to management seeing the need for change in
the future.
Scope. What is the scope of change needed? Is dramatic
revolutionary change needed, or only a moderate change?
Diversity. What is the level of homogeneity in the organisation? A
heterogeneous workforce can extend the time it will take to accept
and implement change.
Capacity. Does the organisation have the capacity in terms of the
resources needed to change? If an organisation does not have the
necessary capacity in terms of its resources, it will be difficult to
implement change.
Readiness. Are the employees ready for change? This also refers to
the level of resistance to change. People who have been in the
organisation for many years are often unwilling to contemplate
change.
 Capability. Do the organisation’s employees and management have
the capabilities to implement change?

The answers to these questions indicate the organisation’s level of

readiness to implement strategic change. Organisations will experience
resistance to strategic change if some of these issues are not positive or
if the organisation does not have some of these attributes. Such
possible resistance contributes to the difficulty of implementing
strategy.

14.3.1.3 The causes of strategic change

A prerequisite to managing any issue is to understand the causes of
that particular issue. For example, to manage diversity it is important
to understand diversity and all the factors that contribute to diversity.
The same can be said of strategic change: one must understand the
causes of strategic change in order to help with its management. The
main reason given for strategic change so far is that it is the direct
consequence of a planned new strategic direction. It has been further
argued that a new strategy is the result of changes in the organisation’s
different environments (micro-, market and macroenvironment). Apart
from these factors, there are some direct triggers or forces for strategic
change (Lynch, 2000). These triggers or forces have been discussed in
Chapters 5 and 6 where the organisational environment was discussed.
They can be summarised as follows:

Environment. Changes in the organisation’s different macro- and

market environments lead to a demand for major strategic change.
Technology. Technological obsolescence and improvements can
have a substantial impact on companies’ survival. Technological
change can stem from outside or inside the organisation. In high-
tech organisations this can become a very significant issue.
Regulatory events. Many of these change pressures will be outside
the organisation’s control and it may have no option but to respond.
For example, environmental issues such as ozone-friendly products
and government regulations about the use of lead-free petrol forced
car manufacturers to respond.
 Business relationships. New alliances, mergers and other
significant developments resulting from a new strategy may require
substantial changes in the organisational structure.
The strategic awareness and skills of managers and employees.
Promotion expectations require strategic development and growth in
organisations. This strategic growth requires changes.
Organisational capabilities and resources are important in this sense.

These main triggers or forces for change do not relate only to strategic
change, but also to a complex interplay between people and groups in
the organisation and with people and groups outside the organisation.
In practice, there is always a need to define more precisely the causes
of strategic change that apply to a specific organisation. This is
essential, otherwise the wrong issues will be managed.

14.3.2 Kurt Lewin’s model of understanding change

14.3.2.1 Force-field analysis
It is vital to have a thorough understanding of organisational change.
Force-field analysis is a powerful method for gaining a comprehensive
overview of the different forces acting on a potential organisational
change issue.

Lewin (1947a) describes any current level of performance in

an organisation as a state of equilibrium between the
driving forces that encourage upward movement and the
restraining forces that discourage it. Essentially this means that a
current equilibrium exists, because the forces (called driving forces)
that act for change are balanced by the forces (called restraining
forces) acting against change. The driving forces are usually positive,
reasonable, logical, intentional and economic. The restraining forces
are usually negative, emotional, illogical, unintentional and
social/psychological.

According to this way of looking at organisational behaviour, change

will take place when an imbalance occurs between the sum of the
restraining forces that are against change and the sum of the driving
forces that are for change. A force-field analysis assumes that any
situation is a balance between these forces. Both these sets of forces
are very real and need to be taken into account when dealing with
managing change. This equilibrium process is illustrated in Figure
14.4.

Figure 14.4 Force-field analysis

A simple procedure to apply this analysis can be explained in five

steps:

Step 1: Define the problem. What is the nature of the current

organisational situation that is unacceptable and needs modification?
Step 2: Define the change objective. What is the desired situation
that would be worth working towards?
Step 3: Identify the driving forces. What are the factors that
support change in the desired situation? What are the relative
strengths of these forces? One can place these driving forces on the
force-field analysis diagram (Figure 14.4) as labelledarrows, with
the length of the arrow reflecting the relative strength of that
specific force.
Step 4: Identify the restraining forces. What are the factors or
pressures that resist the proposed change and maintain the status
quo? These forces can also be represented on the diagram by
arrows, with the length of the arrow reflecting the relative strength
of that specific force.
 Step 5: Develop the comprehensive change strategy. What are the
strategies that will reduce the restraining forces? How can
supporting forces be strengthened?

If the driving forces are increased but the restraining forces remain on
place, organisational change will not take place. As long as the
restraining forces remain in place, it becomes harder to use the driving
forces and to see their effect. This can be explained by the effect of
pushing against a spring – the more you push, the harder it becomes
and as soon as you stop pushing the spring, it reverts back to its
previous position. Lewin suggested that change would be easier and
longer lasting if the restraining forceswere reduced, rather than
increasing the driving forces. Lewin also suggested that modifying the
forces that maintain the status quo may be easier than increasing the
forces for change.

It is, however, important to remember that this analysis is an

investigative and analytical tool for diagnosing a problem, and is not
intended for problem solving.

14.3.2.2 Lewin’s change model

Lewin (1947a) developed a model that consists of three steps in order
to understand change and to manage the change process. The
application of this model will enable managers to help their employees
progress through a strategic change situation.

Unfreezing. In order for change to take place, employees need to

abandon their current practices and cultural norms. Unfreezing is a
necessary step to change, because the previous ways of doing things
will no longer be applicable. Employees sometimes realise that
things are changing by identifying the changing behaviour of
customers. The unfreezing of their current way of doing things is
thus imminent. Managers can help with this step if they prepare
employees for changes that must be implemented.
Moving to the next level. The required change is introduced. The
amount of time this step will take depends on the number of changes
 and the nature of each change. Changes in organisational culture can
take years, while changes in systems may be relatively easy and
need only a short time.
Refreezing. The new behaviour and changes must be locked in to
prevent the organisation from going back to the old ways of doing
things. The new way of doing things must be “frozen” in order for it
to become the “normal” way of doing things.

14.3.3 A model of the strategic change process

It is clear that managing strategic change involves a process. Clarity
about what changes are necessary is an obvious starting point for such
a process. One of the most important tasks in this process is to
understand and manage resistance to change. The aspects that should
form part of such a process include identifying the areas of change;
considering how to manage resistance to change; deciding on how to
use power and influence to persuade people to support change; and
deliberating on how to become a learning organisation. Other models
of the strategic change process explain it in terms of determining the
need for change; determining the obstacles to change; working out
how to manage the change; and change evaluation. This last issue is,
of course, important; when the need for change is the result of a new
strategy, the implementation of this new strategy will mean change and
that must obviously be evaluated through the strategic control process.

14.3.3.1 Identifying the areas of change

The first important issue regarding the process of strategic change is to
identify the areas in which change has to take place. This happens, of
course, after the need for change has been determined and usually
when a gap has been identified between the desired performance of the
organisation and its actual performance. Once the need has been
determined, the source of the problem should be identified. This is
done through the process of environmental analysis, and leads to a new
strategy and change.
Change is associated primarily with employees and the tasks that have
to be performed. Broadly, the areas that need to be changed as a result
of a new strategy include technology, operations, administration and
people.

New technology and operational tasks may be needed in new

production or service delivery processes. In order to implement this
new production or service delivery process, technology and
operational tasks need to be changed.
Administrative changes involve the adoption of new structures,
policies, budgets and reward systems. These issues will be discussed
in more detail in Chapter 15.
In the people area of change, it is important to match individual and
corporate values. It is imperative that there is alignment between the
corporate values and the values an individual believes in. New
operational tasks have to be performed and employees must be
trained or retrained to do these tasks. To manage these new tasks, a
different management style may be needed. It is important to know
how best to change the behaviour of employees.

It is obvious that a change in any of the areas mentioned will place

demands for change on the other areas. For example, if the
organisation decides on product development as a grand strategy, it
may require new technology. This may involve modifying its existing
production facility, which, in turn, may involve a new organisational
structure, new policies and a new budget. Existing employees must be
trained to acquire the applicable new skills or new employees may be
needed. Employees’ attitudes and values should be matched with what
is required to implement the new strategy.

The important point here is that before the management of change can
be successful, a new strategy must be identified for areas where
change is necessary. Resistance from employees will often be
experienced. People who are comfortable with the way they are doing
things will not be all that willing to change to new ways of doing
things.
14.3.3.2 Managing resistance to strategic change
The effect of change is that it disrupts normality. The decision to re-
engineer business processes and to restructure an organisation requires
the establishment of new roles and authority relationships among
managers and subordinates in different functions and divisions.
Employees may feel that their job security is threatened and they may
also fear changes to their personal position in the organisation. They
question existing values in the organisation. The fact that the
employees are expected to be more flexible and to work harder in
tough times is frequently the last straw that breaks the camel’s back.
The employees start to resist all the things that change implies for the
organisation.

Resistance to change can be regarded as the key obstacle to the

successful implementation of a new strategy.

One important reason why people resist organisational change is that

they think they will lose something of value as a result of the change.
In these cases, people focus on their own best interests and personal
objectives and preferences, and not on those of the organisation as a
whole. Organisational change is then seen as a threat to their personal
ambitions and plans. Similarly, change can be seen as a threat to their
familiar jobs and responsibilities. This may cause anxiety and perhaps
pessimism. It is not unusual for employees to experience this, as the
unknown factors associated with a new strategy and a different way of
doing things create fear, because they are not comfortable with new
situation, policies and procedures. People also resist change when they
do not understand the implications of the new strategy and perceive
that it might cost them much more than they will gain. This again
refers to a lack of proper communication. Such situations often occur
when trust is lacking between management initiating the change and
the employees.

Managers, too, may resist strategic change. This is especially true

when the new strategy involves a lot of investment in new equipment
and there are considerable risks involved. Managers may also perceive
some flaws or weaknesses in the new strategy. Lower-level managers
may resist strategic change, because they are involved mainly in the
implementation process but were not part of the strategic development
phase.

A new strategy may affect different divisions and departments in

different ways because the new strategy may favour the interests of
certain departments and not others. The managers in the different
departments may therefore have different attitudes towards the new
strategic change: some will be more supportive of the changes than
others. If a product development strategy is followed, a new product
division may come into existence. This will diminish the importance of
existing product divisions and will also reduce the resources allocated
to them. Managers in these existing divisions or departments will
probably not be all that supportive of the new strategy. Alterations to
functional strategies will make it difficult for employees to accept the
changes, or at least these may sometimes slow down the process of
implementing a new strategy. At an individual level, of course, people
also experience resistance to change, because change implies
uncertainty. Insecurity and fear are associated with uncertainty and the
unknown. These issues can be regarded as obstacles to change and
they make it difficult to implement a new strategy.

The following are ways of overcoming resistance to change

(Thompson, 2001: 867):

Education and communication. This helps people to understand

why it is necessary to change. Managers sometimes underestimate
the extent to which organisational members understand the need for
change. The reasons for strategic change must be communicated in
such a way that the importance of change is clearly understood by
everybody in the organisation. That is why mutual trust is so
important. The only drawback to communication and education is
that it takes time to apply.
Participation and involvement. If people are part of the strategy
formulation process, they will be more supportive of the strategic
changes that are necessary to implement the new strategy. The
 drawback in this case is that people may compromise to save time.
This will lead to suboptimisation, i.e. it is not the optimal solution.
Facilitation and support. This involves giving support for change.
The building of support networks throughout the organisation is
helpful in overcoming resistance to change. This is, however, a
difficult process because it does not guarantee resistance being
overcome.
Negotiation and agreement. This is generally linked to incentives
and rewards. It makes sense if there is a perception of loss due to the
change, but the drawback is that employees will expect incentives
and rewards every time change is inevitable.
Manipulation and cooptation. Manipulation is an attempt to
influence or force people into accepting the necessity for change.
Cooptation can involve the “buying off” of informal leaders by
giving them personal rewards to accept and promote change. The
major drawback is that it is an ethically questionable way of doing
things and may also cause grievances.
Giving clear direction. Authority may be used to set the direction
and impose the necessary means to implement the change. The
drawback is that it may lead to coercion when the organisation is
experiencing a crisis.
Explicit and implicit coercion. Coercion is not a positive way to
manage resistance to change, and is actually the last option to apply
if everything else fails. It may work in the short term, but it is
unlikely that it will result in long-term commitment on the part of
employees.

14.3.3.3 Power and influence

The next step in managing strategic change is persuading
organisational members to support the change. A basic theme in
organisational behaviour is that an appropriate organisational culture
will support the desirable changes in strategy. The importance of
organisational culture as a driver in strategy implementation will be
discussed in Chapter 17.
An important element in implementing the necessary change is that
managers should have the necessary power to implement the decisions
that will bring about this change. Managers are, by definition, people
who get things done through other people and who must introduce the
necessary changes. They are the people whose task it is to generate
agreement and who should manage potential conflict. Although the
intention here is not to discuss the different types of power that
managers need to have to bring about change, it remains important to
realise that managers have to use their power to influence people and
to bring about the necessary change. In this endeavour, internal
organisational politics play a central role. Some of the “political”
tactics that managers can use to influence the organisational employees
(Thompson, 2001: 884) are the following:

Develop relationships with other people who do have the power to

influence organisational members.
Present a positive conservative image and implement change
gradually if time allows it. It is sometimes a disadvantage to be seen
as too radical an agent for change.
“Divide and rule” can sometimes be a powerful strategy. This is
achieved when conflict and differences are brought into the open.
To gain people’s support, it is sometimes necessary to follow an
approach of compromise and being willing to give and take. A
manager must remember that one has to work with and through
people to get things done.
Successful managers should strike while the iron is hot. This implies
that a manager must build on his or her success and reputation
quickly.
Radical changes sometimes have to be disguised as minor changes.
This can be achieved if changes happen gradually.
Politically successful managers understand the organisational
processes and they are sensitive to people’s needs.

Power and influence are important aspects of strategy implementation

and strategic change, because they enable managers to be proactive
and to influence the business environment by controlling situations and
changing people’s intentions. There are two ways in which managers
can exercise control over their employees’ behaviour. Firstly, they can
structure the situation in such a way that the employees will comply
with their wishes. Secondly, they can communicate with the
employees in such a way that employees will change their
perceptions so that they see things differently and decide to do what
the manager suggests (in this case the manager is actually busy
changing their intentions). The outcome of both of these actions can be
either positive or negative. When the outcome is positive, employees
feel that they are better off as a result of the changes, but when the
outcome is negative, they feel that they are worse off. This will again
lead to resistance to change.

14.3.3.4 The learning organisation

The concept of a learning organisation entails the capability
of thinking continually about strategy and creating synergy
by sharing knowledge and ideas, and by generating actions
that will contribute positively to the whole organisation. The idea
behind a learning organisation is that it is easier to adapt to change if
the organisation first has the ability to learn. This actually means that
the employees in the organisation accept the importance of continuous
learning. An important logical argument linked to the importance of
learning is that “unlearning” also has to take place. The acquisition of
new practices is often obstructed by a persistent clinging to past
practices. These old practices and ways of doing things need to be
unlearned in order to create a space for the learning of new practices
and ways of doing things. Prahalad and Bettis (1986: 498) define
unlearning as simply the process by which organisations eliminate old
logics and behaviours and make room for new ones.

Becoming a learning organisation may also help with the process of

managing strategic change. This approach to managing strategic
change does not mean that a learning organisation will suddenly adopt
strategic change, but it will be amenable to seeking it gradually
(Senge, 1990). Below are some of the important aspects of the learning
approach:

Learning must be seen as a continuous process.

Employees work and learn as a team.
Management development and personal growth are important.
Visions for the future must be shared.
It must be realised that the employees’ skills are the organisation’s
most important asset.
It will be necessary to reconsider the organisational habits,
generalisations and corporate interpretations that may no longer be
relevant.
A systems approach must be applied when analysing and viewing
the business environment.

It is clear that the learning approach will work well if an organisation

has the time and resources to invest in these important areas. It may be
that these aspects in themselves create significant strategic issues for
an organisation. Clearly, in the learning organisation the employees
should understand that they are responsible for shaping their own
future over time. In the case of a sudden change, the learning approach
will not be as applicable, but it may equip employees better to handle
and adapt to change. Although the practicalities of how to become a
learning organisation may not be clear enough, it is important to know
that the learning approach will assist an organisation to tackle specific
change issues.

14.4 Summary

Strategy implementation is a crucial component of the strategic

management process. The ability to implement strategies successfully
can serve as a competitive advantage in an environment characterised
by increased ambiguity and rapid change. Strategy implementation
means that strategic change must take place, but the members of an
organisation are not always willing to accept change. The fact that
habits and organisational culture are deeply rooted in organisations
makes it difficult to change, and results in resistance to change. A
special kind of management approach and set of leadership capabilities
are needed to manage change and the resistance to change. The
strategic change management process can help an organisation to
manage the changes associated with the implementation of a new
strategy.

Exploring the web

Change management:
http://www.prosci.com/change-management/what-is-change-management
http://www.mindtools.com/pages/article/newPPM-87
Change designs:
http://www.changedesigns.co.za/

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Case study

Kagiso Tiso Holdings

Kagiso Trust Investments (KTI) and Tiso Group have completed their
merger to form a leading black-owned South African investment
company of scale. The merged company is called Kagiso Tiso
Holdings (KTH) and will be led by a strong, proven, predominantly
black management team with a depth of skills and experience. KTH
was created on 1 July 2011.
The merger created a sizeable investment company of critical mass,
with access to larger transactions and increased investment portfolio
diversification.

KTH’s enhanced balance sheet strength, portfolio diversification and

stronger cash flow profile will create more opportunities for growth. A
merger committee has overseen the full implementation of the merger
and has fulfilled all the legal and regulatory requirements, including
gaining Competition Commission and Competition Tribunal
permission.

Where did it all start? KTI was established in December 1993 as an

investment company under the stewardship of the late Eric Molobi, as
a vehicle to generate sustainable, long-term financial support for
Kagiso Trust (KT). Initially it was focused on purchasing minority
equity stakes in unlisted companies that promised exceptional growth
opportunities. KTI evolved into a diversified investment company with
financial, industrial and mining interests. The portfolio of businesses
was restructured into three pillars, namely, financial services, resources
and industrial. The core business areas of the financial pillar were
investment banking services, life insurance and short-term insurance.
The resources pillar included a joint venture in a platinum mine. The
industrial pillar focused on media and ICT services, and the industrial
sector.

Tiso was established in 2001 and was one of South Africa’s leading
black-controlled and managed investment companies. Founded by
leading African entrepreneurs, David Adomakoh and Nkululeko
Sowazi, it was a business largely owned and controlled by its
management and staff. Over time, Tiso built a strong and defensive
investment portfolio, with stakes in blue-chip companies in the
infrastructure and natural resources sectors. Its portfolio also included
strategic holdings in construction, steel supplies, coal, industrial
minerals, mining services, power and property development firms.

As the new merged company, KTH emphasises that its vision is

explicit in defining its strategic approach and its focus on becoming a
leading black-owned and managed investment company with a pan-
African scope. Its investment strategy aims to position KTH to achieve
the vision by specifying the criteria it seeks in investments and across
its portfolio. The company also wants to be an active long-term
shareholder of reference. Values are important and are at the core of
KTH’s business philosophy and frame the way it conducts its business.
The company also strives to align its values with those of the
leadership of the companies in which it invests. KTH believes this will
support its ability to influence its growth and sustainability.

People are at the heart of KTH. To make sure that it is able to attract
and retain the best talent in South Africa and across the African
continent, the company continues to invest in creating a compelling
value proposition for its people. The company achieves this through
five key focus areas that are aligned with the vision, mission, values
and strategy of the company. These focus areas are talent management,
building a unique culture, developing and training employees for
growth and excellence, promoting wellness at work, and ensuring that
KTH has effective human resources reporting and metrics in place.
The company is also fortunate to have built a team with the expertise
and experience to execute its strategy while driving growth.

It recognises the fact that excellence and transformation are not

mutually exclusive. KTH is passionate about South Africa’s social and
economic transformation, and it demonstrates this commitment
through consciously seeking to ensure that transformation is on the
agenda of all its investee companies, whether this pertains directly to
black economic empowerment (BEE) or the broader aspects of
socioeconomic development that may be pertinent in each case.

In the first five years of its existence, KTH has made remarkable
progress. Thanks to the exceptional calibre and unwavering dedication
of KTH’s people and the strength of its financial position, the brave
dream of an African investment champion that applies its commercial
astuteness to add value to its investments, to grow and manage its
portfolio, and thereby create profound social value, is being realised.
KTH has outgrown its BEE label.
Sources: Adapted from http://www.fin24.com/Companies/Investment-Holdings/Kagiso-Tiso-
merger-concluded-20110706 and https://www.kagiso.com/ (accessed 15 March
2017)

CASE STUDY QUESTIONS

1. What type of strategic change is obvious from this case?

2. What are the main problems when a new company is acquired?
3. Comment on the specific actions that the leadership of KTH took
during this whole process.
4. If a substantial number of employees might lose their jobs as a
result of this acquisition, do you think the process should be
managed in the same way?

Strategy exercises

1. Develop a mental map about the importance of strategy

implementation and how it links to change management. Present
your mental map to a group of people who do not understand
strategy implementation and change management.
2. Find an example of a recent strategic change announcement by a
company in South Africa. What are the strategic changes that must
be implemented? What do you think the reactions of the
employees of this company regarding the announced strategic
changes will be? What are the options available to the managers of
this company?
 15 Components of successful
strategy implementation
AMANDI VAN DER WALT

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the importance of successful strategy implementation

Differentiate between strategy formulation and strategy implementation
Understand the role that the implementation framework plays in the
implementation process
Assess and discuss the components as drivers and instruments for successful
strategy implementation
Understand the role and building blocks of organisational structure in strategy
implementation
Identify the role of short-term goals, action plans and functional tactics as
instruments for strategy implementation

15.1 Introduction

Once managers have decided on a strategy or strategies suited to the

organisation the emphasis moves to implementing these strategies. The
importance of strategy implementation was already discussed in
Chapter 14, but it is important to emphasise again this important phase
where specific actions need to take place to achieve the desired results
– the process of implementing the new strategy. Any experienced
manager will be convinced of the reality that it is a lot easier to
develop a thorough strategic plan than it is to execute it successfully.
The success of all the prior strategic planning boils down to this phase.
Without good strategy implementation the chosen strategy will be
meaningless and of no value. This means that it is possible that even a
“good” or “excellent” strategy can be of no value if it is not
implemented, despite the fact that a considerable amount of time and a
lot of effort were spent on choosing the most effective strategy. In an
environment characterised by rapid change, it can be extremely
challenging to execute a strategy successfully. The challenge of the
turbulent business environment can be managed if the entire workforce
is on board and truly committed.

Organisations need to develop the ability to be flexible throughout the

whole process, adapting and dealing with changes that will have an
impact on these elements and actually influence strategy
implementation. As already explained in the previous chapter, dealing
with change is central to strategic management. The success of the
strategic leader managing the implementation process depends on his
or her ability to manage all these aspects. This ability will have an
influence on the effectiveness of the implementation of strategies and
strategic changes, which is determined through the planning and
visionary modes of strategy creation. It will also have an influence on
the ability of the organisation, and its managers, to respond to changes
in the environment and adapt to these changes as well as to relevant
opportunities.

Mintzberg (1979) argued that there are two sides to strategy, namely,
the strategy the organisation intends to implement and the actual
strategy implemented. The intended strategy consists of
indispensable directions and one of the main challenges is to put the
formulated strategy to work and get the desired results.

Despite the fact that most organisations have an intended strategy it

does not always go according to the initial implementation plan. The
reason for the deviation is the influence of the dynamic environment in
which the strategies are to be implemented. Changes happen so
quickly that an alternative route is often neededto get to an intended
destination. The dynamic environment, which can shape and change
the competitive landscape and possibly even derail the current strategy
implementation status, does not have to be seen only as a negative
influence on implementation. It could also be treated as a positive
aspect if the organisation adopts and develops the ability to react
quickly to these changes. If the organisation develops the ability to
implement strategies effectively through this dynamic environment, it
can gain a competitive advantage over other organisations that do not
have the same ability.

Throughout this book it is emphasised that the purpose of an

organisation is to create and provide ongoing value to current and
future customers and at the same time optimise the organisation’s
performance. The strategy developed will achieve this goal if it is
successfully implemented. Good strategy implementation is then the
process of putting the strategy in place and putting it into action
through the participation of the whole organisation. Since strategy
implementation is the most important phase in the strategic
management process, an organisation must establish the ability to
manage this process.

This competency of good strategy implementation depends on the

ability to work with and through employees; being able to strengthen
and build competitive capabilities in people and in the organisation;
motivating others to support strategy implementation; giving
appropriate and deserved rewards; and establishing the urgency of
strategy implementation among employees. It is clear that the
implementation of the strategy depends on the organisation’s internal
functioning.

15.2 Implementation framework

The organisational framework as a concept in this chapter refers to the

framework through which an organisation aims to realise its strategy. It
involves the management of a framework for the “organisation of the
future”. All aspects of an organisation need to be continually studied,
refined and/or recreated, and aligned to serve current and anticipated
customer needs, wants and expectations. The purpose is to create and
to provide value.

While some models of an organisational framework to achieve

effectiveness come and go, one that is highly valid is the McKinsey 7S
framework. This model can be used to determine how effectively the
organisation is implementing its strategy. Figure 15.1 depicts the
interdependency of the elements and indicates how a change in one
affects all the others.

Figure 15.1 McKinsey 7S Framework

Source: http://whittblog.wordpress.com/2011/04/24/mckinsey-7s-model-a-strategic-
assessment-and-alignment-model/

This model was developed in the early 1980s by Tom Peters and
Robert Waterman, two consultants working at the McKinsey &
Company consulting firm. The basic premise of the model is that there
are seven internal aspects of an organisation that need to be aligned if
the organisation is to be successful. This model can be used in a wide
variety of situations where an alignment perspective is useful in
improving the performance of the organisation and when determining
how best to implement the strategy. The McKinsey 7S model involves
seven interdependent factors, which can be categorised as either
“hard” or “soft” elements. The “hard” elements are strategy, structure
and systems, and management of these can directly influence the
organisational design, the reporting lines, formal processes and the IT
systems. The “soft” elements are shared values, skills, style and staff.
They are less tangible and more influenced by culture. However, they
are as important as the hard elements if the organisation is going to be
successful.

Although there is not really a design sequence in this model, the

starting point is the strategy. Strategy drives organisational structure
and must fit the culture in the organisation. Culture is based on the
shared values and is especially influenced by the style of leadership.
The systems will be determined through, and influenced by, the
organisation’s structure. Structure and systems will define what staff
and skills are required. The seven components can thus be described
very briefly as follows:

1. Strategy: the plan devised to maintain and build competitive

advantage
2. Structure: indicates the way the organisation is structured and
who reports to whom
3. Systems: involve the daily activities and procedures (e.g. IT
systems) that staff members engage in to get the job done
4. Shared values: originally called “super-ordinate goals”, these are
the core values of the organisation that are evidenced in the
corporate culture and organisational ethics
5. Style: the style of leadership applied in the organisation
6. Staff: the employees and their general capabilities
7. Skills: the actual skills and competencies of the employees needed
to do the work in the organisation

The model is based on the assumption that in order for an organisation

to perform well, these seven elements must be aligned. Any change in
the strategy or other changeslike restructuring, new processes, new
systems, change of leadership, etc. will influence the other elements
and this model can then be used to understand how these
organisational elements are interrelated. So, the model can be used to
help identify what needs to be realigned to improve performance, or to
maintain alignment (and performance) during other types of change.

The organisation’s strategy determines how its goals and objectives are
going to be achieved and what operational units will be necessary to
make implementation possible. The chosen strategy will also
determine what resources will be needed and how these resources will
be acquired and divided in the implementation process. Successful
strategy implementation requires active and deliberate actions to
ensure that multiple factors and activities in the strategy
implementation process are coordinated. All these actions will help
managers to minimise the potential gap between the intended strategy
and what really is being implemented. Minimising this performance
gap is an important requirement for successful strategy
implementation.

Mankins and Steele (2005) studied a number of high-performing

organisations that had found ways to close the gap between strategy
and the execution of strategy. They suggest the following seven rules
that apply to planning and execution. These rules may seem obvious,
but they can transform both the quality of an organisation’s strategy
and its ability to implement the strategy and deliver results.

Rule 1: Keep it simple, make it concrete. At most companies,

strategy is a highly abstract concept. The link between strategy and
performance cannot be drawn, because the strategy itself is not
sufficiently concrete. For this reason organisations must use clear
language to describe their course of action. By being clear about
what the strategy is and is not, everyone in the organisation is
headed in the same direction.
Rule 2: Debate assumptions, not forecasts. At many organisations
a strategic plan is little more than a negotiated settlement. Planning
is sometimes seen largely as a political process in which managers
argue for lower near-term profit projections (to secure higher annual
bonuses) and top management presses for more long-term income
(to satisfy the board of directors and other external constituents).
This leads to the forecasts that emerge from these negotiations
which almost always understate what can be delivered in the short
term and overstate what can realistically be expected in the long
term. Assumptions underlying the long-term plans must reflect both
the real situation of the markets and the performance experience of
the organisation relative to its competitors. That is why it is
important to make sure that they drive the strategy and its execution,
and not its forecasts.
Rule 3: Use a rigorous framework and speak a common
language. The specific framework a company uses to ground its
strategic plans is not all that important. What is critical is that the
framework must establish a common language for communication
among all in the organisation.
Rule 4: Discuss resource deployments early. Organisations can
create more realistic forecasts and more executable plans if they
discuss upfront the level and timing of deployment of the critical
resources. Once agreement is reached on resource allocation and the
timing thereof, those elements can be included to create a more
executable plan.
Rule 5: Clearly identify priorities. To deliver any strategy
successfully, managers must make thousands of tactical decisions
and put them into action. But not all tactics are equally important. In
most instances, a few key steps must be taken – at the right time and
in the right way – to meet planned performance. Leading companies
make these priorities explicit so that each executive has a clear sense
of where to direct his or her efforts.
Rule 6: Continuously monitor performance. Experienced
managers in high-performing organisations use real-time
performance to identify whether there are too much or too few
resources being deployed. They continuously monitor their resource
deployment patterns and their results against what was planned, and
use continuous feedback to reset some planning assumptions and to
reallocate resources. Continuous monitoring of performance is
 particularly important in highlyvolatile industries, where events
beyond control can render a plan irrelevant.
Rule 7: Reward and develop execution capabilities.
Organisations have to motivate and develop their staff; in the end,
no process can be better than the people who have to make it work.
The selection and development of management is an essential
ingredient in success. Improving the capabilities of a company’s
workforce is no easy task, but once built, it can drive superior
planning and execution of strategies for many years.

There are some components that can be regarded as driving forces for
strategy implementation. These components do not provide a recipe
for strategy implementation, but they can be linked to McKinsey’s 7S
model and should be aligned in order to ensure success in strategy
implementation. They will now be discussed in more detail.

15.3 Strategy implementation process – core

components for strategy implementation

All organisations have their own unique situations for which tailor-
made strategy implementation approaches need to be formulated, but
there are also core managerial components that should be covered – no
matter what the situations in various organisations are. These core
managerial components are applicable in all strategy implementation
efforts and are sometimes categorised as drivers and instruments for
strategy implementation. In this chapter all these drivers and
instruments will be discussed as components, because they all play an
important role in strategy implementation. The strategy
implementation components are as follows:

Building an organisation that grows and develops the needed

competencies, capabilitiesand resource strengths to execute strategy
successfully
 Putting strong strategic leadership in place as an important
implementation driver to achieve operating excellence
Nurturing and establishing a corporate culture as a strong driver that
will advance the process of good strategy implementation
Linking rewards and incentives to the achievement of strategic
targets and milestones – this is an important driver of strategy
implementation
Establishing an organisational structure that fits the strategy – this is
a structural driver for strategy implementation
Deploying resources as an important structural driver behind
successful strategy implementation
Establishing policies, guidelines and procedures as instruments that
support the strategy implementation process
Developing action plans, short-term objectives and functional tactics
as instruments to implement the strategy
Designing and incorporating information and operating systems that
will empower employees to carry out their strategic responsibilities
and roles skillfully
Striving towards continuous improvement in all areas of strategy
implementation by implementing best practices

How well managers perform these management tasks has a direct

effect on whether the outcome of the implementation process is
successful or not. Some of these strategy implementation management
tasks can be managed more directly and some cannot be management
directly. The following tasks can be managed directly:

Organisational structure
People management and reward management systems
Policies and procedures
Action plans, short-term objectives and functional tactics
Management information systems and financial systems
The management aspects of strategy implementation that cannot be
managed directly but which will indirectly benefit from good strategic
leadership are to guide and develop excellence and quality, to instil
values and to develop an effective organisational culture.

Although the application of these components in the strategy

implementation process can help to ensure success in strategy
implementation, there are reasons why strategy implementation may
still be unsuccessful. Read Strategy in action 15.1 as an example of the
implementation of new plans and strategies that went wrong.

Strategy in action 15.1 Things did not work out as planned for Samsung

Samsung’s Galaxy Note 7 had to be recalled not once, but twice, in one of the
most embarrassing episodes in tech history, because its batteries
spontaneously exploded. The Samsung Note 7 situation, which was covered
widely in the news, sucked the wind out of Samsung’s remarkably successful
year in 2016, and led to countless exploding phone jokes on social media.
This hurt Samsung’s brand image tremendously. Part of Samsung’s strategy
was to step out from the shadow of its best known competitor, Apple. In many
ways Samsung has already accomplished that. It is the largest phone maker in
the world, and it moves millions more units than Apple does each year. Koh,
Samsung’s president, admitted he was disappointed by the company’s failures.
“We set our own standard, but we didn’t keep our standard,” he admits.
Source: Adapted from http://www.theverge.com/2017/3/29/15094720/samsung-
galaxy-s8-design-safety-vs-note-7-battery-explosion (accessed 26
March 2017)

The reasons why strategy implementation may be unsuccessful are

also called strategy implementation pitfalls and managers should be
aware of them when attempting to implement the strategy. They
include the following:

Lack of ownership. The most common reason a plan fails is lack of

ownership. If people do not have a stake in and responsibility for the
plan, it will be business as usual for all but a frustrated few.
Lack of communication. The plan does not get communicated to
employees and they do not understand how they can contribute.
Getting stuck in the day-to-day activities. Owners and managers,
consumed by daily operating problems, lose sight of long-term
goals.
Out of the ordinary. The plan is treated as something separate and
removed from the management process.
An overwhelming plan. The goals and actions generated in the
strategic planning session are too numerous, because the team failed
to make tough choices to eliminate non-critical actions. Employees
do not know where to begin.
A meaningless plan. The vision, mission and value statements are
viewed as fluff and not supported by actions, and/or do not have
employee buy-in.
Annual strategy. Strategy is only discussed at yearly weekend
retreats.
Not considering implementation. Implementation is not discussed
in the strategic planning process. The planning document is seen as
an end in itself.
No progress report. There is no method to track progress, and the
plan only measures what is easy, not what is important. Employees
and managers do not feel any forward momentum.
No accountability. Accountability and high visibility help drive
change. This means that each measure, objective, data source and
initiative must have an owner. Employees should be held
responsible for their part in strategy implementation.
Lack of empowerment. Although accountability may provide
strong motivation for improving performance, employees must also
have the authority, responsibility, and tools necessary to implement
relevant measures. Otherwise, they may resist involvement and
ownership. It is easier to avoid pitfalls when they are clearly
identified. When employees are aware of the pitfalls they can avoid
them.
15.3.1 Building an organisation that develops the necessary
competencies and capabilities
Having the organisational ability to adapt to changes in the
environment will not in itself guarantee success. It is critical that
managers see the organisation as a bundle of resources, capabilities
and core competencies that must be built and used to establish a
desired position in the market. The task of identifying, developing and
deploying resources, capabilities and core competencies is a difficult
challenge in strategic management, but without building competencies
and capabilities and resource strengths, there will be insufficient
support for continuous and systematic successful implementation.

Building a capable organisation is the number one priority before

starting with the implementation process. Competent personnel will
determine the success of strategy implementation. It starts with
recruiting competent personnel who possess competitive capabilities.
There are, however, a variety of actions that need to take place when
building an organisation of this standard. The most important
components of building an organisation with the competency and
capabilities necessary for good strategy implementation are the
following:

Putting the right people in place. Personnel are the most important
tool in taking the strategy from a desired strategic position and
making it a reality. Competent, motivated, skilled employees, and/or
people with the potential for growth and development need to be
recruited.
Develop and maintain core competencies and competitive
capabilities. Managers should determine which competencies are
critical for strategic and competitive success and they must ensure
that constant improvement and the necessary changes take place to
develop these competencies.
Good administration. For the organisation to achieve good
performance and excellence in strategy implementation, it is
important that there should be a constant close fit between strategy
and structure, because that may lead to good administration and
 accurate resource allocation and will prevent conflicting priorities
regarding strategy implementation tasks.

15.3.1.1 People management

People are the key actors that can minimise the gap between what was
intended and what is in fact realised. Since everything in an
organisation depends on people, effective human resource
management provides possibly the greatest opportunity for improved
performance. People management is perhaps the most important
element of organisational capital. Employees are the driving force
behind achieving competitive advantage and can also ensure
sustainable competitive advantage. Strategy in action 15.2 illustrates
how even big, successful companies are failing at effective human
resource management.

Competitive advantage can be achieved by harnessing the knowledge,

skills and ideas of the entire workforce through good people
management. It is, however, challenging to manage employees to their
full potential. Hersey and Blanchard (1982) say that if an organisation
wants to accomplish its objectives, the objectives of managers and
subordinates should be supportive of each other and of the
organisation.

Organisations need to attract both talented managers and employees

who have distinct skills and competencies to boost and enrich the
implementation process. It is, however, important that organisations
recognise that even though employees’ potential must be stretched and
used to its maximum capacity, it is also important to look after
employees and reward them generously for successful goal-driven
actions. The human resource practices adopted by the organisation, as
well as good leadership, will determine the level of outcomes that
people are capable of producing. To summarise then, all employees are
part of the strategy implementation process and they should have the
following characteristics to support strategy implementation. They
must
 be committed to the strategy
be competent by possessing the skills needed or the ability to
develop the skills needed
have high performance levels
agree with, and support, the aims of the organisation.

15.3.1.2 Empowerment and the participation of people

It is the responsibility of every individual in the organisation to play
his or her role in making the implementation of the chosen strategy
successful. Therefore, it is important that managers understand how to
motivate employees through this challenging process. A new strategy
brings many challenges and may cause uncertainty about the future.
Therefore managers need to strike the right balance between keeping
employees motivated and at the same time successfully achieving the
desired outcomes of strategy implementation. Getting employees
motivated starts with establishing a clear understanding among
employees about the strategy and what strategy implementation will
require from them.

To get employees motivated, an empowerment approach

should be followed. Employee empowerment has been
defined in many ways but generally can be defined as the
process of allowing employees to have input in and control over their
work, and the ability and opportunity to openly share suggestions and
ideas about their work and the organisation as a whole. Empowered
employees are committed, loyal and conscientious, and they are eager
to share ideas. They can also serve as strong ambassadors for their
organisations. This allows employees to take action by themselves, at
the same time ensuring that employees are adequately informed and
knowledgeable to make good strategy supportive decisions.
Empowerment can be a direct benefit of strategic management if
managed correctly.

There are some benefits and risks when it comes to empowering

employees. Some of the benefits include the following:
 Relief of management stress. There will be fewer worries for
managers when they allow empowered employees to help with
decision making. Employee empowerment will facilitate authority
transition from managers to subordinates. Managers can focus on
their role of implementing strategy successfully and can fulfil their
managerial roles, while employees can be concerned with the
operations side of the business.
Reduce the chance of unionisation. When employees feel valued
and more invested in their work, there is less chance of unionisation.
Empowered employees will have more say in everyday operations.
With this sense of control comes a feeling of self-worth. Because of
this they will not feel the need to look to labour unions in order to
get more rights in the workplace.

The following risks should be avoided during employee

empowerment:

Ineffective empowerment. Many organisations believe that they

are giving employees more empowerment when, in fact, they are
not. The best way to avoid this risk is to make sure that employee
empowerment is being implemented properly by all levels of
management and is accepted by employees.
Unclear management roles. Many managers may worry that
because employees are being empowered, they may lose their jobs.
This can cause conflict between employees, which will have a
negative outcome on strategy implementation. This is indeed a real
risk, as empowering employees means that there is less need for
different levels of management. It is important to make sure that
management still plays distinctive value-adding roles throughout the
whole strategy implementation process.
Employees not ready for empowerment. Not all individuals are
seeking more responsibilities and some employees may not be ready
to be empowered. If employees are given important responsibilities
in strategy implementation and they are not ready to embrace the
increased responsibility, it can negatively affect progress. Some
employees may also take advantage of their new responsibility and
 abuse their power. It is important to make sure that employees are
completely ready for, and informed of, their new responsibilities
before they are empowered.

15.3.2 Strong strategic leadership to drive the

implementation process
Strategic leadership is perhaps one of the most important drivers for
strategy implementation. The strategic leader has the role of clarifying
direction; deciding upon strategies; influencing employees and
individuals who are involved in strategy implementation to perform
actions that are based and focused on the strategy; and ensuring that
the structure of the organisation is continuously strategy supportive. As
such, it is important that strong leadership is in place to constantly
drive strategy implementation and operational excellence. Creating
and implementing strategic change, especially corporate strategic
change, is very important in strategy implementation. The impact that
leadership has on every single aspect in the strategy implementation
process should not be underestimated. This important strategic
implementation component is discussed in more detail in Chapter 16.

15.3.3 Establishing and nurturing a strategy-enhancing

corporate culture
An effective culture that supports strategy implementation is of vital
importance. Strategy in action 15.2 shows how important
organisational culture is. It illustrates that a negative organisational
culture can be a liability for an organisation.

Strategy in action 15.2 A toxic workplace is now a greater liability for

companies

Uber’s culture came under the magnifying glass recently when a former Uber
engineer, Susan Fowler, resigned and made allegations in a deeply unsettling
blog post about her experience while working for Uber. She claimed it had a
sexist, chaotic and aggressive culture. New employees at Uber are asked to
subscribe to 14 core company values. Some of these values include making
bold bets, being “obsessed” with the customer, and “always be hustlin’”. Uber
 wants employees to buy into the idea that the best and brightest will rise to the
top based on their efforts, even if it means walking over others to get to the top.
Although questionable, those values have helped propel Uber to one of Silicon
Valley’s biggest success stories. The company is valued at close to $70 billion
by private investors and now operates in more than 70 countries.
This all-or-nothing approach to push for the best result has yielded good
results, but also fuelled what current and former Uber employees describe as a
Hobbesian environment at the company, in which workers are sometimes pitted
against one another and where a blind eye is turned to infractions from top
performers. In interviews with many employees, Uber’s culture was described
as unrestrained.
Nobody paid attention to some of the above allegations until Susan Fowler’s
resignation. She detailed a history of discrimination and sexual harassment by
her managers, which she said was shrugged off by Uber’s human resources
department. Ms Fowler said the culture was encouraged – and even fostered –
by those at the top of the company. Although Uber has achieved much success
in the past, it must solve the internal problems in its culture if it wants to remain
at the top of its game. Top management must be the ones leading this change if
Uber is planning on reversing the damage done by a toxic culture.
Source: Adapted from https://www.nytimes.com/2017/02/22/technology/uber-
workplace-culture.html?_r=1 (accessed 28 February 2017)

Culture can be defined as a system of shared values that

shapes what is important to people as well as norms that
define what attitudes and behaviours are appropriate. Strong
cultures improve organisational performance in two ways. Firstly, a
strong culture improves performance by energising employees –
appealing to their higher ideals and values and uniting them around a
set of meaningful, unified goals. Such ideals motivate employees’
commitment and efforts. Secondly, it enhances performance by
shaping and coordinating employees’ actions. Values and norms focus
employees’ attention on organisational priorities that then guide their
behaviour and decision making. They do so without intruding, as
formal control systems do, on the autonomy necessary for excellent
performance under changing conditions.

An effective culture is closely related to business strategy. To craft a

culture, the organisation must first develop its business strategy. To use
culture as an implementation tool and driver, it is important that it
must be strategically relevant. This important strategic implementation
component is discussed in Chapter 17.

15.3.4 Linking rewards and incentives to the achievement of

set strategic targets and milestones
Rewards as a strong driver for strategy implementation embody a
principal method by which organisations obtain and underline desired
behaviour from their employees. Encouraging employees and
managers to work towards the achievement of strategic goals is a
significant challenge to management. One of the ways organisations
can improve employee commitment and encourage behaviour
consistent with the new strategy is by establishing reward systems.
This ensures that specific strategy-supportive tasks are performed and
implementation goals are met. Strategy in action 15.3 points to three
things that some of the best companies to work for do in order for
employees to be happy.

Strategy in action 15.3 Drive appreciation, access and rewards

A study done by Forbes to find the 18 best companies to work for in the
Fortune 500 indicates three broad themes that play a pivotal role in the
happiness of employees: appreciation, access and rewards. Companies that
provide these three things include Google and American Express. Making
employees feel appreciated, giving them access to senior leadership and
information and giving them financial and psychological rewards seem to be the
keys to being both big and a great place to work.
To make employees feel appreciated, companies should demonstrate
appreciation of their employees in tangible ways on an ongoing basis. Access
to senior leadership entails opening up opportunities to employees. Managers
should share more than they are comfortable with sharing if they want their
employees to commit to the cause. Lastly, being good to employees includes
giving them rewards, but also opportunities to grow and get extra rewards for
their buy-in into the strategic management process. That is exactly what the top
companies to work for have in common.
Source: https://www.forbes.com/sites/georgebradt/2014/03/12/how-the-best-
fortune-500-companies-to-work-for-drive-appreciation-access-
rewards-2/#70c6e6055613 (accessed 25 March 2017)
If rewards are utilised correctly by linking them to specific
performance standards it will help motivate employees to perform at
higher levels. It is, however, important that managers realise that
reward systems should not only be seen from a subjective perspective.
What motivates one employee will not necessarily have the same
motivating effect on another. Therefore one can say that reward
practices and preferences are culturally bound. The same basis for
reward systems cannot be universally applied across different
countries, for in one country it might be successful but in another it
may be dysfunctional, because national cultures influence its adoption,
variety and success. Strategic leaders should therefore make sure that
the reward system is closely linked to the desired strategy to ensure
that employees are motivated to achieve the correct outcomes. They
should also ensure that reward systems appeal to the employees to
ensure maximum motivation to achieve outcomes.

15.3.4.1 Processes and practices for rewarding employees

Part of managing the implementation process is managing the reward
systems established in the organisation. Reward systems have a direct
impact on organisations’ capability to catch, retain and motivate high-
potential employees and, as a result, to achieve the desired high level
of performance. A holistic view of the whole strategic management
process needs to be adopted when formulating organisation-specific
reward systems. The rewards should support the vision, align with the
internal culture of the organisation and promote the strategy
implementation process, while ensuring that the reward systems are
relevant for the long term. Too often reward systems are designed with
a short-term focus and only in favour of some managers. Reward
systems should be extended to middle- and lower-level management
and be applicable to the entire workforce since every single individual
plays his or her own fundamental part in the strategy implementation
process.

If the reward systems that are established to motivate employees are

inefficient or do not use suitable and equal rewards, the way the
strategy is implemented will not be important. Reward systems that
focus blindly on meeting the set implementation goals at all costs often
destroy employee motivation. They will then negatively affect strategy
implementation. Managers should establish structured reward systems
that are based on the motivation of employees and the satisfaction of
their needs combined with a serious focus on achieving strategy
implementation milestones.

The reason behind the rewards means that they should be created in
such a way that they support strategy implementation. When managers
establish reward systems there are certain requirements they need to
adhere to in order to support the strategy implementation process.
These are as follows:

Rewards should be created in such a manner that they are closely

linked to the organisation’s chosen strategy.
They should encourage positive behavioural change among
employees to support the strategy.
They should reward managers for performance measures achieved
over the long term.
Rewards should be tied to specific strategic implementation
outcomes.
Rewards given should send out a clear message that the organisation
rewards people who show results, and not for dutifully performing
their assigned tasks according to their job descriptions.
Rewards should be equal; in other words, rewards for employees
should be equal, irrespective of differences in gender and culture.
Rewards should create performance-oriented employees and make it
possible to institutionalise performance management systems and
performance excellence.

Read Strategy in action 15.4 to see how rewards should not be applied.

Strategy in action 15.4 Wells Fargo scandal shows poor incentives at

work
 Wells Fargo & Co’s accounts scandal is a recent incident in the banking
industry that clearly indicates that incentives to drive performance remain a
problem on Wall Street. According to William Dudley, president of the New York
Fed branch that acts as the US central bank’s eyes and ears on Wall Street, the
culture of banks has been rotten for years. The incentive and reward systems in
this industry have been a problem for a long time.
In the Wells Fargo case, compensation was at the centre of the scandal. It was
found in 2016 that thousands of employees at the US-based bank had opened
perhaps millions of unauthorised customer accounts. This scandal did huge
damage to the bank and in the end led to the resignation of chief executive,
John Stumpf. This is an example where “incentives shape behaviour, and
behaviour drives culture”. Incentives can lead to compromising behaviour that
can damage the culture in the end. Some suggestions were made after the
scandal that bank culture needs to be improved, suggesting that senior
executives lead by example and that firms reward employees who speak out.
Source: Adapted from: http://www.nasdaq.com/article/feds-dudley-says-wells-
fargo-scandal-shows-poor-incentives-at-work-20170321-00780
(accessed 21 March 2017)

Reward management system tools can be divided into both financial

(monetary) and non-financial (non-monetary) rewards. Monetary
rewards include salary increases, bonus systems, benefits, profit
sharing, share options, retirement packages and so forth. Organisations
can also use non-monetary rewards like promotion and title awards,
authority, extra vacation time, recognition, awards, a confortable
workplace, social activities, feedback, flexible working hours, work
design, social rights and other perks. Figure 15.2 illustrates the
different components of the reward system.

Figure 15.2 Components of a reward-system model

When rewards are used properly, they motivate and energise
employees. In contrast, when managers do not apply rewards systems
correctly they can demotivate, baffle and even anger employees.
Reward management systems thus play an important role in shaping
the process of strategy implementation. The reward management
system must, however, be matched by the organisation’s policies,
processes and practices in order to support the chosen strategy.

It is clear that establishing reward systems is a way of ensuring that

specific strategy-supportive tasks and tactics will be performed. This
will help ensure that implementation goals are met.

15.3.5 Establishing an organisational structure that fits the

strategy
As the environment in which the organisation operates changes, so too
the organisation’s strategy has to change to ensure continued success
and wealth maximisation for all its stakeholders. A change in strategy
thus requires a change in organisational structure. It is important that
the organisational structure remains aligned with the strategy at all
times, as the organisational structure serves as a framework for the
setting of short-term objectives, tactics and policies as well as resource
allocation.

Whether the organisational structure is supportive of the strategy and

promotes strategy implementation actions is another question. A good
organisational structure does not necessarily guarantee good
performance, but a poor organisational structure will inhibit any form
of good performance, no matter how good the individual manager may
be.

Since the statement made by Chandler in 1962 that “structure follows

strategy”, there has been interest in the relationship between strategy
and organisational structure. This statement was prompted by Chandler
noting that the transition from one form of structure to another usually
did not take place unless some key strategic issues in the
organisational structure changed. Research, however, argued that
structure does not always follow strategy and that in some instances
strategy follows structure. In the case where strategy follows structure,
the argument is based on the idea that managers already working
within a particular organisational structure which they feel works well
will try and retain the current structural setting. They tend only to
consider strategies that will “fit” best with the already established
structure. The simple reason for wanting to retain the current
organisational structure is that it is extremely time consuming and
costly to change the organisational structure. However, it remains
important that the organisation should still achieve a fit, or congruence,
between the strategy and the organisational structure.

The organisational structure needs to be flexible and able to respond

to changes in strategy and/or in the environment. When a strategy is
chosen, a few aspects within the organisational structure should be in
place to support the strategy implementation process. The relationship
between strategy and structure is a matter of give and take. With the
same intensity that structure influences strategy, strategy influences
structure. Therefore it is important that when a strategy is chosen, the
organisational structure must be taken into consideration by ensuring
that the strategy is compatible with the structure.

Organisational structure is there to break down the actions and tasks to

be carried out into distinct components. Therefore an organisational
structure is concerned with the way in which work is divided,
resources are utilised and efforts are coordinated towards achieving the
organisation’s goals. The structure of an organisation is the blueprint
according to which tasks are performed, and wherein actions take
place to achieve strategy implementation.

Good organisational structures will

enable the implementation of new ideas

effectively deploy human resources
properly empower managers
facilitate strategy implementation actions.
During the whole strategy implementation phase the structure of the
organisation must be flexible about changes in the strategy, otherwise
the structure will be a hindrance to strategy implementation. Therefore
structure must enhance, complement and promote strategy
implementation actions. Mintzberg (1979), who was an expert in the
field of strategic management, determined in his research on
organisational design that the organisation consists of three
components. These are five basic parts of an organisation; six basic
coordinating mechanisms; and the essential parameters of design. The
purpose of this section is not to present different organisational
structures such as functional, matrix, divisional, etc., but rather to
present the basic building blocks and essential components associated
with an organisational structure. It is always important to remember
that there is not really a “one-size-fits-all” structure, but rather a best
structure that meets the requirements of the organisation in terms of its
strategy.

15.3.5.1 The five building blocks of the organisation

As previously mentioned, the organisational structure divides and
coordinates work throughout the different functional divisions and
work processes. Therefore, there are certain parts of the organisation
that are responsible for certain duties. Figure 15.3 illustrates the five
building blocks of the organisation categorising employees’ duties.
 Figure 15.3 The five building blocks of the organisation

The operating core. This is the area where the organisation’s

products and services are produced or delivered. The larger the
organisation, the more complex this operating core will be, but in
the case of small organisations, the operating core may represent
nearly the entire organisation.
The middle line. The middle line serves as the connection between
the strategic apex and the operating core, linking the authority from
senior managers to firstline managers.
The strategic apex. This is the area where strategies are formulated,
responsibility for strategy implementation is carried and supervision
is given to ensure that the organisation serves its mission statement.

As the organisation gets established and shows good growth prospects,

it can make use of specialised staff outside the central line positions to
promote further growth in the organisation. The two categories where
specialised staff are placed are as follows:

The techno structure. This will include employees who are

concerned with coordinating work by standardising work processes
and outputs and designing the work processes of others in the
organisation. This may include positions such as accountants,
engineers, human resource managers, etc.
 Support staff. Support staff provide assistance for the organisation
outside its normal operational activities. Examples include external
caterers, legal advice, press relations and so forth.

15.3.5.2 Six basic coordinating mechanisms

The second component of organisational design entails six basic
coordinating mechanisms. Through these six coordinating
mechanisms, Mintzberg (1979) argues that an organisation is the sum
total of the ways in which it divides its labour into distinct tasks and
then achieves coordination among them. Coordination is an important
aspect in organisational structure to ensure organisational alignment.
Six coordinating mechanisms can be identified:

Mutual adjustment. Mutual adjustment achieves the coordination

of work by the simple process of informal communication.
Examples include liaison devices, task forces and standing
committees, integrating managers, and matrix structures.
Direct supervision. Direct supervision involves having one
individual taking responsibility for the work of others, issuing
instructions to them and monitoring their actions. Through informal
communication employees understand who is responsible for which
tasks.
Standardisation of work processes. Standardisation of work
processes involves imposing the means by which decisions and
actions are to be carried out by specifying rules or guidelines that
have to be followed.
Standardisation of work outputs. Standardisation of work outputs
occurs through performance control or specifying goals and
monitoring the extent to which they have been accomplished. It is
about the results. Halfway between behaviour formalisation and
performance control lies action planning. This method of
coordination enforces specific decisions and actions to be carried
out at specific points in time.
 Standardisation of employees’ skills. Employees’ skills are
standardised through training or teaching employees job-related
skills and knowledge. This is a less formal coordinating mechanism
where, over time, different employees know what to expect from
one another.
Standardisation of employees’ norms. The standardisation of
workers’ norms occurs through a process of “coaching” in which
people acquire certain values and viewpoints. This forms part of the
culture of the organisation and is a powerful coordinating
mechanism.

15.3.5.3 Essential parameters of design

The following parameters of design were identified by Mintzberg
(1979) to help coordinate the division of labour and coordinating
activities in the organisational structure:

Job specialisation. This defines what each individual is responsible

for in the organisation, and how many distinct tasks they should
perform. This also entails how much control and responsibility one
person should have over a specific task.
Behaviour formalisation. This indicates the specific desired
behaviour with which certain tasks and responsibilities should be
carried out. Behaviour formalisation ensures that tasks are carried
out in a set standardised manner, which increases productivity and
effectiveness.
Training. Every position in a functional area requires different
training and it is important to train employees and select
appropriately trained people for the different positions. Employees
that are not well trained in their specific areas can make
unproductive and potentially destructive decisions. For example, a
senior financial manager’s formal training may need to be qualified
as a chartered accountant to ensure that well-calculated decisions are
made in the financial functional area.
 Socialisation. This refers to the whole process from where a newly
hired employee becomes part of the organisation as a whole. The
employee adopts the organisation’s value system and the patterns of
behaviour needed in the organisation. This process where the
employee gets integrated into the culture of the organisation is
important to ensure that the employee achieves and experiences
cohesion within the organisation.
Centralisation/decentralisation. This parameter of design indicates
the extent to which decision-making power is distributed and shared
within the organisation. In a decentralised organisation, decision
making is dispersed among many individuals, whereas in centralised
organisations decision making is concentratedon a single point in
the organisation, usually in the strategic apex.

The following two design parameters address the grouping of

employees within their units as well as the size of the unit in which
employees are grouped:

Unit grouping. This entails grouping specific positions in the

organisation into units. Each of these units has its own managers,
but still forms part of the organisation along with all the other
different units and their separate managers as a whole. The
managers are then under the management of the CEO, who is
positioned at the strategic apex.
Unit size. This refers to the number of employees in a unit. The size
of the unit is determined by the extent to which mutual adjustment is
needed and standardisation is used.

All the above parameters shape the whole design framework of the
organisation. Liaison devices and planning and control systems are
used throughout the organisation to create linkages. Liaison devices
can be explained as jobs that are created to directly coordinate the
work of two units, project teams, committees and so forth.

Earlier in this section, strategy was identified as the major factor that
influences organisational structure. Other internal factors that will also
influence the choice of structure include the level of specialisation, the
distribution of power through the organisation, the size of the
organisation and its organisational culture. In the new economy
organisations, external factors that drive changes in organisational
structure such as buyer power, globalisation, the internet and
ecommerce applications, variety and speed of decision making, must
also be recognised.

15.3.6 Allocating the resources that are necessary for

successful strategy implementation
To achieve successful strategy implementation, it is essential that
resources are allocated in such a way that they support the
organisation’s long-term goals, chosen strategy, structure and short-
term objectives. Resource allocation is an important structural driver
for strategy implementation.

All organisations differ in terms of their sets of experience, assets,

skills and organisational culture. Implementation may require
significant budget shifts that will impact on human and capital
resources. Resources and capabilities determine how effectively and
efficiently an organisation performs its activities, and an organisation
will enjoy success if it possesses the best and most suitable resources
for its strategy. It is important, therefore, that organisations place
realistic expectations on their resources, and ensure that these
resources are allocated in such a way that they support the
organisation’s long-term and short-term goals, and its chosen strategy.
All resources are scarce and need to be implemented efficiently
throughout the strategy implementation process. From the start when
setting up a budget, managers should take the strategy into
consideration to ensure that the budget is linked to it. This will ensure
that strategy implementation can be carried through without any
unnecessary barriers or constraints.

Some of the resources needed in strategy implementation include

human resourcesand knowledge factors, financial resources and
physical resources, as illustrated in Table 15.1.
 Table 15.1 Types of resources needed in strategy implementation

Human Competent employees with skills, talent, experience and knowledge

resources of employees and other stakeholders, relationship with other
and employees, suppliers and distributors. It also includes the culture,
knowledge leadership, teamwork and so forth.
factors
Financial Capital, cash flow and so forth.
resources
Physical Property, land, buildings, manufacturing plants, equipment, patents,
resources information systems, technology infrastructure, shares and so forth.

The contribution of resources has changed over the past few decades.
The source of valuable resources for organisations has shifted from
tangible to intangible assets. In the early 1980s, the majority of the
market value of organisations was based on their tangible assets, with
62 per cent based on tangible assets. By 1998, the ratio was 85 per cent
intangible assets and 15 per cent tangible assets. This shift in the
contribution of assets has had a huge impact on strategy formulation
and implementation. Kaplan and Norton (2004) emphasised that if an
organisation’s intangible assets represent more than 75 per cent of its
total value, then its strategy implementation needs to focus on the
mobilisation of its human capital, information capital and
organisational capital. Strategy in action 15.5 illustrates the important
contribution the vision can make in an organisation if all employees
are focused on the vision and values of the organisation.

Strategy in action 15.5 LinkedIn CEO shares the importance of vision,

values and culture

CEOs rarely share the importance of creating an organisation’s vision, values

and culture. In a letter to employees, Jeff Weiner, LinkedIn CEO, discussed the
importance of organisational vision, values and culture after Microsoft had
acquired LinkedIn. For perspective, LinkedIn employee numbers grew from 338
to over 10 000 in just seven-and-a-half years. Keeping all employees focused
on the vision with such fast growth is a challenge. In his letter to LinkedIn
employees, Weiner mentioned that every day he focused his actions at work on
two things:
 First, realising LinkedIn’s mission and vision, which include creating economic
opportunity. Secondly, he ensures that every day he is in the office, he is
making LinkedIn’s culture and values come to life. When Weiner started as
CEO, he began to appreciate just how important culture and values were.
Culture and values provide the foundation on which everything else is built.
According to Weiner, it is arguably LinkedIn’s most important competitive
advantage, and something that has grown to define them. Its values can be
summarised as follows: “Members first. Relationships matter. Be open, honest
and constructive. Demand excellence. Take intelligent risks. Act like an owner.”
That is LinkedIn.
Source: Adapted from https://www.consciousculturegroup.com/linkedin-vision-
values-insights/ (accessed 5 March 2017)

The allocation of financial resources plays an important

role in strategy implementation. Budgets form the plan
according to which the different financial resources available
to an organisation are allocated in order to achieve the organisation’s
objectives. The important role of budgets as a financial resource
allocation plan is only understood if one realises that they quantify,
specify and prioritise the resources needed to ensure strategy
implementation. Budgets give a sense of reality to the organisation’s
objectives and strategies.

The budget supports strategy implementation if senior management

has a strong commitment to budgeting. This implies that senior
management must really understand that the budget can only be
developed after there is a clear understanding of the strategic direction
the organisation is following. The strategic goals are thus the
determining factor in developing the budget, and then this financial
plan to implement the organisation’s objectives is used to achieve the
strategy. Effective and efficient financial management is determined by
comparing the operating results with the budget.

15.3.7 Establishing policies, guidelines and procedures that

support the strategy implementation process
Policies act as important instruments for supporting the
successful implementation of strategies. Policies can be
defined as the specific guidelines, methods, procedures,
rules, forms and administrative practices that direct the thinking,
decisions and actions of managers and employees and serve as
instruments to aid the strategy implementation process. Policies inform
employees of what is expected of them and clarify the actions that are
allowed and are prohibited in pursuit of the short-term objectives in the
strategy implementation process. It is important that the policies,
guidelines and procedures support the chosen strategy. If the strategy
changes or is adapted during the strategy implementation process, the
policies and guidelines must also be changed, otherwise these will
present a barrier to strategy implementation. Policies are there to assist
in the strategy implementation process by guiding day-to-day activities
and procedures in support of the chosen strategy.

Policies can be divided into two groups of rights and duties

in the organisational structure. The first group is
authorisation policies that specify what activities an
employee is permitted to perform in the framework of the strategy or,
in contrast, actions that are forbidden during strategy implementation.
Competition in the new business environment shifts more and more
focus to customers and organises their operations in a way that meets
the superior quality expectations of the customer. Frontline employees
are the contact point between the organisation and the customer. To
ensure a high standard of customer service it is necessary to empower
these frontline employees to make decisions or to act to fulfil customer
needs. One way of creating empowerment is through authorisation
policies. In order to support customer-focused strategies then,
organisations have to change their policies.

Duties, as obligation policies, make up the second category

and can be explained as a set of actions that employees must
or must not perform based on a set of objectives. The
specific actions needed to perform in the case of an outstanding debtor
for more than 90 days, is an example of an obligation policy. This
means that it is the duty of an employee to perform a specific task in
order to help the organisation achieve the objectives.
A policy establishes a relationship between the manager and the
employees in the strategy implementation process. It acts as a
guideline for decision making and shapes the approaches taken to
support organisational efforts to achieve the stated and intended
objectives throughout strategy implementation. Policies are therefore
important instruments that managers can use to guide the strategy
implementation process by ensuring that required and important
strategy-based actions and behaviour take place. If existing and
outdated policies are not changed when a new strategy is implemented,
it can become a barrier to strategic change.

15.3.8 Developing action plans, short-term objectives and

functional tactics
Although strategic goals have been identified during the strategy
development phase, the development of short-term objectives as an
important instrument for strategy implementation cannot be
overemphasised. Long-term or strategic goals indicate what the
organisation wants to achieve in the next five or ten years. Functional
and operational managers need to know exactly what should be done
in the short term in order to achieve the long-term goals and the
selected strategy. Thus, short-term objectives are set in order to
provide more specific guidance and a clear indication of the actions
needed to translate the vision into action. Strategy in action 15.6
illustrates the role of long-term goals and short-term objectives,
functional tactics and policies as important instruments in managing
and implementing strategy in an organisation.

Strategy in action 15.6 Relationship between long-term goals and short-

term objectives, functional tactics and policies
Source: Adapted from Ehlers & Lazenby (2010: 340)
The reason managers set goals is to convert the strategic vision into
specific performance targets. These show the results and outcomes that
the organisation’s management wants to attain. Goals show
management’s commitment to supporting the strategy by achieving
specific results and outcomes. Goals should be concrete and
measurable to serve as yardsticks for tracking the company’s
performance and progress throughout strategy implementation and
other activities. Well-formulatedgoals are quantifiable, or measurable,
and have a deadline by which time they should be actualised.

Managers view goal setting as an exercise to stretch the whole

organisation to perform at its full potential, delivering profound results
and achieving success. When there is sensitivity in developing the
different goals it is important to look at the contribution that each goal
will make to achieve the organisation’s strategy. Not all goals will
contribute the same amount towards success. Employees must be
challenged to achieve goals, but they must also be motivated to do so.
For example, setting financial and strategic goals and achieving them
will lead to an improvement in the organisation’s position,
strengthening its competitive vitality and improving future business
prospects. This will benefit all employees, and it is important that they
see and feel the rewards of reaching goals to ensure that they remain
motivated.

Strategic and financial goals are two distinct performance yardsticks to

assist during the strategy implementation process. Table 15.2 gives
examples of strategic and financial goals that managers can set to fulfil
the organisation’s vision and mission.

Table 15.2 Strategic and financial goals

Strategic goals Financial goals

 Strategic goals
– Consistent development of products
and services to stay ahead of
competitors
– Establish better product selection than
competitors
– Build and strengthen brand equity
– Winning an x per cent market share
– Beat competitors with lower overall
costs
– Beat competitors on product
performance or supreme quality of
products and/or services
– Achieve industry leadership
– Achieve technological leadership
based on innovation
Financial goals
– Build strong credibility
– Establish sufficient internal cash flows
that lead to the funding of new capital
investments
– Achieve stability in earnings during
periods of recession
– Work towards larger profit margins
– Strive towards an annual increase by
x per cent in earnings per share
– Increase in annual after-tax profits of x
per cent
– Increase in annual revenues by x per
cent

Source: Adapted from Hough, Gamble, Strickland & Thompson (2010)

Part of setting goals is to know what your organisation is capable of.

That is why it is important that a thorough internal environmental
analysis is done to indicate what the organisation can do.

Goals serve as a powerful tool that managers can use during strategy
implementation to help ensure that actions will encourage effective
and successful results.

15.3.9 Designing and incorporating information and

operating systems
Over the past few years, information provision within organisations
has changed and evolved immensely through advances in technology.
In modern organisational settingsinformation is considered a key
corporate resource. The design and incorporation of information
systems will empower employees to carry out their strategic
responsibilities and roles. Management needs information systems to
communicate with employees and to keep everyone updated with
regard to the current position of the strategy implementation process.
Effective communication enhances efficient and effective operations
and this helps the organisation to improve its products and services.
Effective communication, both vertical and horizontal, helps to ensure
that employees are informed about and understand the strategies,
understand what their role is and ensure that employees stay updated
with regard to changes in the environment that might lead to changes
in the strategy.

Information systems are there for managers to help improve

the effectiveness and efficiency of the whole organisation.
Since information systems can make such a meaningful
contribution to the organisation, it is important for managers to realise
the role they can play in effective strategy implementation.
Information systems can be defined as a set of interrelated elements
of components that collect (input), manipulate (process), and
disseminate (output) data and information, and also provide
opportunity for feedback in order to meet an objective. Information
systems are importantand relevant in every organisation and
profession. For example, employees in the sales department use
information systems to advertise a product, communicate with
customers and receive relevant and accurate feedback to analyse sales
trends. All managers need information systems to ensure that the
correct business decisions are made. It is also important that
information systems should ensure that efforts are coordinated to the
appropriate and desired extent and that the strategic leader and other
senior managers are aware of progress and results.

Aspects that will have an influence on whether the information system

will be effective or not include the information system’s capabilities,
the characteristics of the organisation, the organisation’s work systems,
the people and the culture among personnel. Building and managing
effective information systems is a challenge. Information systems are
complex and purposefully designed for the specific organisation, and,
like the organisational structure and all the other management systems,
they should be closely linked with the strategy.
An information system’s purpose is to keep organisations up to date on
changes in customer preferences and new developments in the ever-
changing and complex markets and to help organisations to be
proactive and adapt to changes. Successful organisations are aware of
these changes, because they monitor changes in customer activities,
their suppliers and their competitors. In many organisations managers
do not receive the information needed to make informed and timely
decisions. Information systems should be established to provide
managers with the relevant information to make timely decisions.
There are three levels of information that managers should develop
and exploit:

Operating information systems. This includes cost accounting

systems, sales analyses and production schedules that are used for
control throughout the organisation. Operating information systems
can serve as a competitive advantage if managed correctly, but they
are not designed to drive strategic change.
Competitive information systems. Competitive information
systems relate to the organisation’s competitive advantage. They
require managers to think and work across functional boundaries
and evaluate the total service package that is provided to customers.
These systems indicate all the ways in which an organisation can
add value in a coordinated way. Organisations must understand why
they are successful and how they obtained their competitive
advantage. If an organisation does not realise how it got its
competitive advantage, it will be in a vulnerable position.
Strategic information systems. Strategic information systems are
there to support strategic decisions. For good strategic decisions,
managers need organised, up-to-date and relevant information about
markets, customers and non-customers. Strategic information
systems ensure that managers are aware of all the factors that might
have an influence on the strategy implementation process. Some of
the success factors in strategic information systems include the
following:
 – External focus by observing customers, competitors, suppliers and
even other industries, and the business’s relationships with, and
similarities to, the external industry area.
– Seeking to add value and not only focusing on cost reduction.
Even though cost reductions may accrue due to business
expansion at reduced marginal costs, strategic information
systems help organisations to obtain information to ensure that
“things are rather done better before they are done cheaper”.

It is important that the organisation’s information system adds value

during the strategy implementation process. The value of an
information system is determined by how effectively it assists
managers and decision makers to achieve the organisation’s goals. Not
all information will be of value to decision makers; therefore it is
important that the information system filters the information and
ensures that only the relevant and valuable information will be
received by the decision makers. For information to be valuable it
must be accessible, reliable, relevant, accurate, secure, flexible,
complete, simple, verifiable, economical and timely.

15.3.10 Striving for continuous improvement by

implementing best practices
Continuous improvement is a company-wide process of focused and
incremental innovation. Implementing continuous improvement in
itself is not easy, and is influenced by a number of organisational
factors. These include a clear strategic framework for incorporating
continuous improvement, the foundation of a supportive culture, an
enabling infrastructure as well as a supporting toolkit and a recognition
of the importance of managing continuous improvement as an ongoing
process. It is not a short-term commitment, but rather an ongoing
course of action, involving the development and implementation of
best practices favouring and supporting good strategy implementation
processes. This issue will be discussed in more detail in Chapter 18.
15.4 Strategy implementation and corporate
governance

In order for organisations to be excellent corporate citizens,

organisational leaders and managers should ensure that the
recommendations of the King IV Report on corporate governance with
regard to social responsibility, environmental responsibility,
stakeholder engagement and economic sustainability form the
fundamental components during the implementation of the strategy.
Corporate governance issues are applicable to all the components of
strategy implementation discussed. They are especially applicable to
strategic leadership and the establishment and nurturing of an
organisational culture as ethical in its day-to-day operations. It is also
important that the design of reward systems is such that it ensures that
good corporate governance practices are adhered to within an
organisation. According to the King IV Report, one of the
responsibilities of the board of directors is to monitor remuneration.
The Report suggests that organisations should appoint a remuneration
committee to make recommendations to the board of directors on the
organisation’s framework of executive remuneration and to determine
specific remuneration packages for each of the executive directors.

There is no way that organisations can escape the requirements of

good corporate governance principles in implementing their strategy.

15.5 Summary

A beautifully crafted strategy on its own is of little value. The real

value of strategy is only visible and experienced through its effective
and efficient implementation. Strategy implementation is a crucial step
in the strategic management process. If an organisation can master the
challenge of successfully implementing the strategy, this will give it a
competitive advantage. This will be of immense value, especially since
the environment is characterised by increased uncertainty and rapid
and dynamic changes.

The driving components for strategy implementation include building

an organisation that grows and develops the competencies, capabilities
and resource strengths needed. These will assist in successfully
executing strategy, deploying resources, and establishing policies,
guidelines and procedures that support the strategy implementation
process. Furthermore, strong strategic leadership must be in place to
drive the implementation forward to achieve operating excellence. It is
also vital to nurture and establish a corporate culture that will advance
the process of good strategy implementation. The organisational
structure must in turn fit its strategy. Employees are further motivated
through rewards and incentives linked to the achievement of strategic
targets and milestones. Short-term objectives, action plans and tactics
must also be implemented with a strong focus on the organisation’s
strategy and goals. In addition, an organisation will need to strive for
continuous improvement and design, incorporating information and
operating systems that will empower employees to carry out their
strategic responsibilities and roles skillfully.

Exploring the web

Strategy implementation and realisation

http://www.businessballs.com/businessstrategyimplementation.htm
Strategy implementation plan
http://socialmediatoday.com/patricialotich/551482/example-implementation-plan-how-
implement-business-strategy
Strategy implementation step and meaning in implementation
http://www.managementstudyguide.com/strategy-implementation.htm
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Case study

Power Clothing

Power Clothing Stores was formed in Swaziland in the 1960s and

today is a South African brand involved in the retail industry with its
headquarters in Durban. Currently the company has over 90 branches
around South Africa, Swaziland and Lesotho.

Power Clothing Stores is one of the strategic business units (SBUs) of

a larger group of companies, Otto Bros Pty Ltd. Power focuses on
adding value by giving customers fashion at the lowest possible price
while adding value. Power Clothing Stores focus on customers who
depend on low prices. Therefore, the focus is on offering the poor the
minimum acceptable quality at the most affordable prices. The
company is still in its growing phase and it plans to have 150 stores by
2020. The mission and the values of Power are as follows:

Power’s mission

Power is a team with energy and a passion for people, value and
fashion. We strive to be the best low-cost fashion retailer in our target
market.

Best in value for money

 Best in customer service
Best in operating profit
Employer of choice
Best corporate reputation

Power’s values

Pride: The pursuit of excellence

Discipline: We are accountable to each other
Respect: We treat everybody with dignity
Integrity: We conduct ourselves honestly and ethically
Loyalty: We are loyal to each other and our company
Teamwork: Our success depends on us working together
Energy: We act with enthusiasm using our initiative to achieve
success and improve productivity
Community: We cannot survive without the support of others
(Izandla Ziyagezana – “one hand washes the other”)
Service: Our culture is service-centredness, as opposed to self-
centredness

The retail industry in South Africa

The retail industry is very competitive, and consumers are highly

informed and empowered. Looking at the history of this industry, it
can be said that retail sales growth tends to be more cyclical than
overall economic growth. Retail sales usually outperform economic
growth in the good times, but in tougher times often underperform
compared to economic growth. For the period 2010 to 2016, the retail
industry experienced favourable growth, outperforming economic
growth.

For much of the time since the end of the recession in mid-2009,
growth has been good in the industry. Retail sales growth noticeably
exceeded real economic growth in the period 2010 to 2015, with 2016
being another such year.

However, the steady slowing in monthly real retail sales growth in late
2016, all the way from 4,3 per cent year-on-year as at December 2015
to a 0,2 per cent decline as at October 2016, suggests a likely weak
start to 2017, and a possible tough 2017 in the retail industry.

This means that competition in this industry will be as tough as ever.

Retail companies will have to compete to retain market share, while
achieving growth and not compromising margin in the process.

South Africa’s retail industry has evolved significantly over the years.
Upgraded and modern infrastructure in the country has allowed for an
increase in economic activity. The retail industry has benefited from
the efficient distribution of goods to urban centres, townships and rural
areas. The development of shopping centres has shifted from being
concentrated in inner cities to suburbs and townships. Rapid
construction of high-density housing in the surrounds of major urban
areas has led to the demand for, and increased developments of retail
centres in these residential areas.

There are, however, many forces that are driving industry change, thus
affecting competitive intensity and industry profitability. The
following are some of the forces that affect Power Clothing and all
other major clothing retailers:

Urbanisation. According to Gavin Tagg, managing director of

Retail Network Services, urbanisation is the top trend driving retail
in South Africa at the moment. As more and more people come to
live in the country’s economic centres, they drive a demand for
more retail infrastructure. This leads to increased competition in
urban areas but also more profitability, since sales will increase.
Globalisation. Globalisation is another dominant force, with more
global brands like H&M, Zara, Hamleys and Forever 21 entering the
South African market. As more and more international retail brands
enter the country, South Africa’s retailers need to put their best foot
 forward to avoid losing market share and to remain attractive in the
retail mix. This intensifies rivalry.
Online shopping. More retail spending is moving online, and
companies need to realise that they need less bricks-and-mortar
retail space and more online retail space. This can lead to an
increase in sales if companies are creating an accessible platform
and processes for customers to do online shopping.
Social media. Social media has become a retailer influencer and an
opportunity for retailers and shopping centres to relate to consumer
expectations. This also leads to more intense rivalry.
Emerging black middle class. The emerging black middle class in
South Africa and growing urbanisation have been driving retail
demand in many areas in South Africa, such as Gauteng, Limpopo
and Mpumalanga. This holds a big opportunity for companies who
serve the middle-class customer. This will also intensify
competition, since there is a big new emerging market companies
will try and appeal to.

To withstand the fierce competition in the industry and the

macroenvironment, Power Clothing must ensure it stays true to one
thing – offering fashionable, acceptable quality clothing at the lowest
possible prices. Some of the core competences that Power Clothing
uses to ensure it is a price leader include sourcing the lowest-cost
good-qualityproducts, sourcing local and international chain store
cancellations that are resold at highly competitive prices, creating a
positive, caring and family-orientated culture within the company,
creating a flat organisational structure where communication takes
place easily and effectively, and ensuring Power has key contacts to
manufacture some products locally. This also leads to a decrease in the
cost of products.

Power’s low prices are based on internal efficiency to ensure a margin

that will sustain above-average returns and low costs to the customer,
so that customers will purchase Power’s products. Ongoing efforts to
lower costs relative to competitors are necessary to be a successful cost
leader. Power’s competitive advantage lies in its ability to source
cancellations from big chain stores, and sell the same product as large
competitors at a lower price. One other key area of advantage is that
Power is the only store that has such a broad range of plastic shoes.
Plastic shoes are the most basic level of footwear and are very
competitive in price. The selling price of basic plastic shoes is
anything between R25 to R35. This ensures that all people can afford
basic footwear.

Power has a competitive advantage, because although products are

cheap, they are fashionable too. This results in the products having the
price of standardised goods but not the look. Power minimises costs to
the company to minimise costs to the customer without decreasing
profits. It strives to sell its goods at below-industry prices, trying to
profit by gaining market share. Power’s strategy to achieve its set
goals, mission and vision should continuously be revisited by
observing external factors and trends. It should control its internal
environment and strengthen its core competencies to maintain
customers by not losing sight of its competitors and their relevant
strategies.
Source: Adapted from Treadwell. [n.d.] Macroenvironment in retail industry. Available at:
http://www.smalbusiness.com (accessed 3 March 2016)

CASE STUDY QUESTIONS

1. The implementation of strategies is not complete until short-term

goals and action plans have been formulated for each of the
functional strategies identified. What short-term and long-term
goals can Power formulate to ensure it can successfully strive to be
an industry cost leader? Discuss and give examples.
2. Simply following the Low-cost provider strategy is too simplistic
and does not consider other possibilities for striving for a
competitive advantage. Grand-level strategies need to be
formulated that will complement Power’s business-level strategies.
Grand-level strategies can be described as a comprehensive
general approach that guides a firm’s major actions. Critically
discuss and recommend some grand-level strategies Power can
implement that will complement its current business level strategy.
 3. Construct a diagram that illustrates the relationship between Power
Clothing’s long-term goals and short-term objectives, functional
tactics and policies.

Strategy exercises

Retail giant Mr Price enters Australia

In October 2015, the South African discount fashion retailer, Mr Price,

entered Australia.

Mr Price is owned by the publicly listed South African-based retail

company, the Mr Price Group. Mr Price has more than 1062 retail
stores in South Africa. The Mr Price Group trades across five
divisions, Mr Price, Mr Price Sport, Mr Price Home, Miladys and
Sheet Street. A stand-alone store, which is around 1000 m2, opened in
the Melbourne Central shopping centre. The stores are expected to
carry women’s, men’s and children’s clothing, accessories, footwear
and sleepwear.

Mr Price MD, Nicci Lyn, mentioned that Melbourne Central was a

prime location for opening Mr Price in Australia. Mr Price will only
focus on its apparel stores for now, but there is potential to follow with
the MRP Home and MRP Sport divisions, according to the CEO,
Stuart Bird.
Source: Adapted from https://www.insideretail.com.au/blog/2015/08/17/south-african-retail-
giant-heads-to-australia/ (accessed 15 March 2017)

Questions

1. Advise Mr Price what to do to improve the speed of

implementation of its market development strategy. Refer to the
components of successful strategy implementation.
2. Identify possible barriers that hinder fast decision making in the
structure of the organisation. Give advice on how Mr Price can
overcome these barriers.
3. Formulate some strategic goals for Mr Price that will ensure that it
establishes itself in a strong position in the market.
 16 Strategic leadership
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand the role of leadership as a driver for strategy implementation

Identify the characteristics of strategic leaders
Identify and explain the skills associated with emotional intelligence
Differentiate between key actions and responsibilities
Determine the qualities and skills of effective and ineffective leaders
Identify the leadership style necessary for an organisation in a specific industry
life cycle
Identify and explain the importance of transformational leadership
Understand the close relationship between strategic leadership and corporate
governance

16.1 Introduction

Strategy implementation is a challenge to organisations, as was made

clear in Chapters 14 and 15. In order to implement the strategy,
strategic leadership is critical to the organisation as it concerns its
people. It is the strategic leader’s task to move the organisation
towards the future. However, this involves much more than just
mobilising people in teams. Effective strategic leadership depends on
respect for the people who contribute to the organisation. Effective
strategic leadership can help organisations to compete successfully in
turbulent and unpredictable environments. Effective leaders can help
organisations to enhance performance, because without them an
organisation will not achieve superior performance when facing the
challenges of the global economy.

The essence of strategic leaders is the ability to think, make

things happen and engage the support of employees and
other people. There is no right style or personality, but the
strategic leader does need to fulfil certain roles effectively regardless
of the type or size of the organisation. One of these important roles is
not only to lead from the front, but also to create a climate that
facilitates change. Change is the only guaranteed global reality and
leaders will have to cope and be comfortable with ambiguity. One
major challenge in this ambiguity is to create order in the presence of
change. It is believed that this level of comfort can be achieved by
openness to change and a focus on new innovative ideas. The strategic
leader has an important role to play in creating a specific culture in the
organisation. Organisational culture is also one of the important drivers
in strategy implementation and it will be discussed in more detail in
the next chapter.

16.2 The role of leadership in strategy

implementation

Implementing a new strategy involves change. This change can be

incremental, but sometimes revolutionary change is a more appropriate
description. To implement and manage this change, leadership is
needed. While management may be concerned about coping with
complexity, leadership is about coping with change. Managers tend to
focus on the details and apply authority, while leaders focus on the
bigger picture, inspire and apply influence. Such a visionary leader
understands the different systems in the organisation and how they will
influence the organisation.

It is important to point out that leadership is not better than

management, or that they are replacements for one another. What is
needed in organisations are managers with visionary leadership
qualities. The different attributes of visionary leaders and managerial
leaders complement each other, and expertise in both types of
leadership is necessary for successful strategy implementation and
survival in the contemporary organisational environment. Major
changes in the organisational environment need a visionary leader with
superior leadership and management skills, one who can cope with
changes to survive and compete effectively.

In the previous chapter, different implementation tasks were

discussed. The focus of these tasks is to get things done. The
essence of leadership is the ability to influence people in
such a way that they willingly follow the leader and perform the tasks
necessary to implement the strategy. Leadership is vital in strategy
implementation, as it is only through effective strategic leadership that
organisations are able to apply the strategic management process
successfully. Someone in the organisation must have a passion for the
vision of the ideal state to which the organisation wants to move, and
such a person (the strategic leader) must be willing to guide the
organisation to achieve this vision through successful strategy
implementation.

Who are the strategic leaders in an organisation? In terms of the

different management levels in an organisation, strategic leadership is
associated with the whole top management team, including the board
of directors. There are, however, also some supporting personnel like
the chief financial officer (CFO) and the chief human resources officer
(also referred to as the human resources manager or director), who
must supplement the leadership skills of the CEO and strengthen the
overall organisational strategic leadership. In South Africa’s public
sector, the top managers of national, provincial and local institutions
would be expected to fulfil the role of strategic leadership. Although
the responsibility for strategy and strategic leadership is associated
with the top management team, it is important to emphasise that
leadership can be found at all levels of an organisation. Successful
strategy implementation and strategic change will depend on the
leaders and managers distributed throughout an organisation. Every
line manager will have the responsibility to exercise strategic
leadership.

The most important role of the strategic leader is the ability to make
things happen and to bring about positive results. Strategic leaders will
be the doers in the organisation and will make sure that the
organisation’s resources are managed efficiently and effectively.
Together with this ability to get things done, it is important that the
leader must also have a clear idea of the organisation’s purpose and
direction. Another important role of the strategic leader is to decide on
the organisation’s structure and policies. These important issues have
already been discussed in Chapter 15.

In this chapter the broader issues and characteristics of leadership will

be discussed. It is, however, important to remember that the tasks for
strategy implementation as discussed in Chapter 15 are primarily the
strategic leader’s responsibility.

16.3 The characteristics of a strategic leader

Before the characteristics of a strategic leader can be discussed, it is

important to explain the concept of strategic leadership. Strategic
leadership is not about the position a person holds; it is about the will
of an individual (the leader) to improve the circumstances of a
situation as a service to all the organisation’s stakeholders. The
improvement of the situation is an important aspect in strategy – the
essence of a new strategy is to move to a better future situation, and
leadership must provide the drive for this movement.

Strategic leadership can thus be defined as the ability to

anticipate what is necessary by articulating a strategic vision
for change in the organisation, as well as how to empower
and motivate employees to create and implement the strategic change
as necessary. The essence of strategic leadership is also about
managing through others and influencing human behaviour in order to
achieve certain goals. A strategic leader needs to inspire commitment
from all employees to apply the implementation tasks effectively and
to embrace change. Strategic leaders should ask some questions in the
process of strategy implementation. The following list is not
exhaustive:

Do we have the right people for the right tasks?

How do we get people to work effectively and efficiently in teams
and obtain synergy?
How can we motivate and inspire employees to add more value to
the organisation?

There are a number of different leadership theories. It is, however,

beyond the scope of this textbook to elaborate on the different theories
on leadership, because so many authors have so many varied opinions.
However, what can be identified and what is a common understanding
among researchers, is that there are some specific characteristics of
leaders. This links very strongly with the so-called traits theory of
leadership.

Some specific characteristics of strategic leaders can be identified:

The ability to create and communicate a vision. This is one of the

key characteristics of a good strategic leader. Strong leaders must
have a clear and compelling vision of where the organisation should
go in the future. Bill Gates is an example of such a leader. Jack
Welch, a former CEO of General Electric, had a powerful vision –
GE should be first or second in every business that it competed in.
David Kneale, the CEO of New Clicks Holdings, has a clear vision
for his organisation. (See Strategy in action 16.1.)

Strategy in action 16.1 CEO of New Clicks, David Kneale, says keep it
simple

David Kneale was raised on a small island called the Isle of Man, between
England and Ireland. It was a simple life where everybody knew each other. He
was, however, keen to “get out” into the big world, which is what he did when
he turned 18 and left to study in England. He acknowledges that the way he
was brought up made him eager to succeed. He believes that one can learn
leadership. It is a continuous journey where one is always learning and if one
no longer has the desire or passion to learn to do better, it is time to quit a
specific leadership responsibility.
He believes that leaders firstly develop a technical skill, and because they are
good at it, they are promoted. But for the rest of their career journey, a fragment
of that initial technical skill remains with them and influences how they lead –
their “style” of leadership. Technical background, together with one’s
personality, informs or influences the lens through which a leader sees life and
leadership situations. Kneale also believes that part of successful leadership is
marketing your personal brand, what you are trying to persuade people to do,
and so on.
Kneale believes that one should continually learn and reflect on how one could
have handled situations better. This is what he did during his journey through
many leadership positions at different organisations. What he wished he was
more successful at doing was to bring the people with him, in making them
understand the rationale for changing. All these experiences and more, his
technical “marketing lens” and his personality, moulded him into a leader who
eventually came to South Africa to lead Clicks, which he and his team seem to
have put on a much better path.
He realised that a leader should instil a degree of confidence in his or her
employees and that one could not control everything from head office, but one
had to win hearts and minds at a distance. Being out in the stores
demonstrates to employees that he is not stuck at head office, having corporate
lunches, all the time. It encourages other executives to get out there onto the
floor, and avoids a disconnect between head office and the actual operations in
the field. His final message to leaders is to keep it simple.
Source: Adapted from http://www.leadershipplatform.com/ceo-new-clicks-david-
kneale-says-keep-it-simple/ (accessed 17 March 2017)

The ability to instil commitment. Strategic leaders must

demonstrate commitment to the vision of the organisation through
their actions and words. Rob Shuter, a former managing director of
Nedbank’s retail business, says that if you want your employees to
watch the rands and cents, then you must fly economy class, if you
want your employees to be disciplined then you as the leader should
practise discipline, and if you want your staff to work in open-plan
offices, then you as the leader must also do so, because people are
sensitive to hypocrisy. Strong strategic leaders should lead by
example. In Strategy in action 16.2, the “walk-the-talk” issue is
illustrated.
Strategy in action 16.2 Leading by example – making sure you “walk the
talk”

There’s the boss who tells everyone to stay late, and then leaves promptly at
17:00 to go and play golf. There’s the manager who criticises everyone for
spending too much private time on the internet, but it has been discovered that
she buys groceries online in the middle of the afternoon. How about a CFO who
recommends lay-offs to stop “unnecessary spending”, but then buys himself
brand-new luxury office furniture?
There are many leaders like this in organisations. There is hardly anything
worse for an organisation’s morale than leaders who practise the “Do as I say,
not as I do” philosophy. When this happens, you can almost see the loss of
enthusiasm and goodwill among the staff. It’s like watching the air go out of a
balloon – and cynicism and disappointment usually take its place.
No matter what the situation is, double standards – witnessing managers say
one thing and then doing another – always feel like a betrayal. This can be very
destructive in an organisation. If it happens to you, you will experience
disappointment in the leader. You will lose your trust in him or her.
Therefore, to ensure that employees stay motivated and committed to the
organisation, leaders should lead by example.

The willingness to delegate and empower. High-performance

strategic leaders are skilled in empowering. Max Makhubalo, the
CEO of BANKSETA, believes that it is not his job to be a
policeman. He is there to help his managers to become the best
managers they can be. His staff recognises this fact by highlighting
his trust in their ability to do the job well without his interference.
This can only be achieved if a CEO empowers his people to do their
jobs excellently.
Leaders should be able to make tough decisions. Sometimes these
decisions are risky, but they must have a firm belief in what is in the
best interests of the organisation. In Strategy in action 16.3, it is
obvious that the CEO of Toyota has taken a drastic decision in the
interests of the organisation.

Strategy in action 16.3 Toyota’s Digg transparency during the recall

In 2013, Toyota announced that it had to recall 2,3 million vehicles for faulty
brakes. Outrage ran rampant across the media and the public. Complaints were
 laid and lawsuits were filed. It appeared as if the Toyota brand had been
tarnished for many years to come.
Instead of letting a PR team handle the issue with only press statements and
interviews, Toyota turned quickly and offered a live conversation on one of the
most popular communities on the web: Digg. The community behind the social
news site Digg is generally quite hostile to corporations. So it came as a shock
to many that the Toyota CEO, Jim Lentz, would appear on a Digg Dialogue to
be asked all sorts of questions about the company and the recall. More than a
thousand hard questions were submitted from consumers and even from past
employees, and Mr Lentz answered as many as possible in the given time. The
questions were prioritised by votes, and none were filtered. It was a completely
transparent interview.
While the fallout from the recalls was massive, Toyota’s openness, and strong
leadership in this unfavourable situation, helped to minimise the damage to the
company’s reputation.
Source: Adapted from http://www.adweek.com/news/advertising-branding/how-
toyota-helped-digg-itself-out-trouble-101993 (accessed 7 May 2013)

The leadership needs of organisations include the ability to build

confidence and enthusiasm, to deliver results, to influence others and
to form networks. These needs require organisational leaders to have
some competencies. These include relationship building, problem
solving, teamwork, vision, business literacy, creativity and flexibility.
The most important characteristic that strategic leaders should have is
emotional intelligence (EQ).

16.3.1 Emotional intelligence

Emotional intelligence (EQ) refers to the ability to
perceive, control and evaluate one’s own and others’ feelings
and emotions. This definition stresses the importance of the
ability to perceive, control and evaluate the emotions of the self and
other people. Understanding the emotions of the self and others
depends on a process involving four steps:

1. Understanding emotions by perceiving them accurately. This

might involve understanding non-verbal signals such as body
language and facial expressions.
 2. Reasoning with emotions. This involves using emotions to
promote thinking and cognitive activity to prioritise what people
pay attention and react to.
3. Understand emotions. Emotions can carry a wide variety of
meanings. If someone is expressing angry emotions, it is important
that the observer interprets the cause of this anger and what it
might mean.
4. Manage emotions effectively by responding appropriately to
others’ emotions.

Goleman (2004) researched more than 200 large, global organisations

and concludes that there is a link between EQ and measurable business
results. Effective leaders in these organisations are similar in one very
important respect, namely, that they all have a high degree of
emotional intelligence. Emotional intelligence is regarded as being
more important in the job success and performance of managers than
traditional general mental intelligence. The top performers in
organisations showed significantly greater strengths in a range of
emotional competencies. These leadership competencies include the
ability to influence people, team leadership, political awareness, self-
confidence and achievement drive. According to certain research into
leadership, close to 90 per cent of leaders’ success in their roles as
leaders in their organisations was attributable to emotional
intelligence.

Some researchers suggest that emotional intelligence can be learnt and

strengthened, while others claim it is an inborn characteristic. The
truth is that it can be learnt and strategic leaders should learn this
important skill and ability. There is also not necessarily a strong
relationship between intellectual intelligence (IQ) and
emotionalintelligence (EQ). Someone with a lower IQ can sometimes
be a better leader than a highly intelligent (high IQ), highly skilled
individual who is promoted to a leadership position, but who has low
EQ.
Who are some of the CEOs with a high EQ in the world? Jeff Bezos
from Amazon. com does not sound like a Fortune 500 CEO and that is
probably to his benefit. He has an obsession with the hearts and minds
of his customers and has a long-term perspective on relationships.
Warren Buffett of Berkshire Hathaway says that success in investing
does not correlate with IQ. Once you have ordinary intelligence, what
you need is the temperament to control the urges that get other people
into trouble when investing. He is intensely loyal and relationship
driven, and he asks his managers to run their companies as if they were
to own them 100 years from now. Brand Pretorius, the retired CEO of
McCarthy’s (previously Toyota South Africa), believes in the power of
the human spirit. He regarded his employees as the most important
resource in the organisation, and as a result he had the ability to
motivate them to achieve their fullest potential. He has the ability to
understand and manage his own emotions and the ability to exercise
self-control.

What are the elements of emotional intelligence? They include aspects

such as self-awareness, self-regulation, self-motivation, social
awareness (empathy) and social skills. The first three are internal skills
and can be managed by oneself. Social awareness and social skills
focus on a leader’s ability to manage his or her relationships with other
people. Each of these components will now be discussed in more
detail.

16.3.1.1 Self-awareness
People with high emotional intelligence are usually aware of their
emotions, strengths, weaknesses, needs and drives. They usually
understand their emotions, and they do not allow these emotions to
rule them. They are confident, because they trust their intuition and do
not let their emotions get out of control. They are also willing to take
an honest look at themselves. They know their strengths and
weaknesses, they are realistic about their own capabilities and they
work on the skills areas where they are lacking so that they can
perform better.
16.3.1.2 Self-regulation
This is the ability to control emotions and impulses. It remains true
that people have feelings and emotions and sometimes will experience
bad moods. People who apply self-regulation will not allow
themselves to become too angry and make wrong, impulsive and
careless decisions because of this. Typical characteristics of self-
regulation are the ability to think before one acts, and openness to
change. Self-regulated individuals are also able to create an
environment of trust and fairness.

16.3.1.3 Self-motivation
Leaders with a high EQ have high levels of motivation and a lot of
energy. Motivatedpeople have a passion for their work and a deep
desire to achieve for the sake of achievement. They are willing to defer
immediate results for long-term success. They are also highly
productive, and thrive on challenges. Leaders with a high EQ are
always committed to the organisation and to their jobs.

16.3.1.4 Social awareness

This is perhaps the second-most important element of
emotional intelligence. It refers to sensing and understanding
other people’s feelings and their perspectives. It is about
taking an active interest in their concerns. The skill of empathy is the
ability to identify with, and understand the wants, needs and
viewpoints of those around you, even when those feelings may not be
obvious. It refers to the extent that a leader can consider employees’
feelings and make thoughtful decisions. This is an especially important
requirement when working with a diverse employee corps. As a result,
empathetic people are usually excellent at managing relationships,
listening and relating to others. They avoid stereotyping and judging
too quickly. They live their lives in an open and honest way.

16.3.1.5 Social skills

Good social skills are another sign of high emotional intelligence. This
does not simply refer to friendliness in general terms, but to the social
skill of helping others to develop and shine. An emotionally intelligent
leader is able to establish a rapport with anybody (regardless of his or
her background), as a result of his or her excellent communication
skills, and they are masters at building and maintaining relationships.
They have the ability to manage teams and they are capable of
building relationships throughout the organisation.

It is important to emphasise again that emotional intelligence can be

learned. To acquire this characteristic of leadership, leaders need to
practise new emotionally intelligentbehaviours, because it will make
them more effective strategic leaders. Table 16.1 presents the
competencies and skills that leaders can learn and acquire to become
emotionally intelligent. Read Strategy in action 16.4 about some of the
signs that indicate that a leader lacks emotional intelligence.

Table 16.1 Competencies and skills associated with emotional intelligence

Competency EQ Skills Application

element
Personal Self- Emotional Knows the emotions one is
Competence awareness awareness feeling and why
Recognises how one’s
feelings affect one’s
performance

Accurate self- Aware of one’s strengths and

assessment weaknesses
Reflects on and learns from
experience
Open to candid feedback,
new perspectives, continuous
learning and self-
development
Competency EQ Skills Application
element
Self-confidence Presents oneself with self-
assurance
Voices views that are
unpopular and pursues what
is right
Is decisive and able to make
sound decisions despite
uncertainties and pressure

Self- Self-control Manages impulsive feelings

regulation and emotions well
Stays composed and positive
in difficult situations
Thinks clearly and stays
focused under pressure

Trustworthiness Acts ethically

Is reliable and authentic
Takes tough, principled
stands even if they are
unpopular

Conscientiousness Meets commitments and

keeps promises
Holds oneself accountable for
meeting one’s objectives
Is organised in one’s work

Innovativeness Generates new ideas

Takes fresh perspectives and
risks in thinking

Adaptability Is able to handle multiple

demands, shifting priorities
and rapid change
Is flexible in how one sees
events
Competency EQ Skills Application
element
Self- Achievement Is results-oriented
motivation driven Sets challenging goals and
takes calculated risks
Learns how to improve
performance

Commitment Is prepared to make personal

or group sacrifices to meet
the larger organisational goal
Understands the sense of
purpose in the organisation’s
mission and actively seeks
out opportunities to fulfil the
mission

Optimism Persists in seeking goals

despite obstacles and
setbacks
Operates from hope of
success, rather than fear of
failure
Sees setbacks as due to
manageable circumstances
rather than personal flaws

Social Social Empathy Shows sensitivity and

Competence awareness understanding of other’s
perspectives
Understands other people’s
needs and feelings

Service orientation Understands customers’

needs and matches them to
services or products
Seeks ways to increase
customer satisfaction and
loyalty
Gladly offers appropriate
assistance
Competency EQ Skills Application
element
Developing others Acknowledges and rewards
other people’s strengths,
accomplishments and
development

Leverage diversity Respects and relates well to

people from various
backgrounds
Understands diverse
worldviews and is sensitive to
group differences
Sees diversity as an
opportunity

Political Detects crucial social

awareness networks
Understands the forces that
shape the views and actions
of clients, customers and
competitors

Social Influence Is skilled at persuasion

skills Makes presentations to
appeal to the listener
Uses strategies like indirect
influence to build consensus
and support

Communication Is effective in formulating a

message
Deals straightforwardly and
directly with difficult issues
Listens well, seeks mutual
understanding, and welcomes
sharing of information
Fosters open communication
and stays receptive to bad
news, as well as good
Competency EQ Skills Application
element
Change catalyst Recognises the need for
change
Challenges the status quo to
acknowledge the need for
change
Champions change and
motivates others in its pursuit
Models the change expected
of others

Conflict Handles difficult people and

management tense situations with
diplomacy and tact
Identifies potential conflict
and helps to defuse it
Encourages debate and open
discussion
Initiates win–win solutions

Leadership Articulates and arouses

enthusiasm for a shared
vision and mission
Guides the performance of
others while holding them
accountable
Leads by example
 Competency EQ Skills Application
element
Building Cultivates and maintains
relationships extensive informal networks
Builds relationships and
rapport and keeps others in
the loop
Makes and maintains
personal friendships among
work associates
Balances a focus on tasks
with attention to relationships
Collaborates, sharing plans,
information and resources
Promotes a friendly,
cooperative climate

Team capabilities Models team qualities like

respect, helpfulness and
cooperation
Involves all members in
active and enthusiastic
participation
Builds team identity and
commitment

Source: Adapted from www.eiconsortium.org (accessed 10 May 2017)

Strategy in action 16.4 Eleven signs that you lack emotional intelligence

There are specific behaviours that a leader should eliminate from his or her
conduct if he or she wants to be a leader who has emotional intelligence.

1. Getting stressed easily

Emotional intelligence skills help make stress more manageable by enabling
one to identify and tackle tough situations before things escalate. People who
fail to use their emotional intelligence skills are more likely to turn to other, less
effective means of managing their moods.

2. Difficulty asserting oneself

When people are antagonised, they often default to passive or aggressive
behaviour. People with high EQs balance good manners, empathy and
kindness with the ability to assert themselves and establish boundaries. This
enables them to neutralise difficult and toxic people without creating enemies.

3. Having a limited emotional vocabulary

All people experience emotions, but it is a select few who can accurately
identify them as they occur. People with high EQs master their emotions
because they understand them, and they use an extensive vocabulary of
feelings to do so. Many people might describe themselves as simply feeling
“bad,” emotionally intelligent people can pinpoint whether they feel “irritable,”
“frustrated,” “downtrodden” or “anxious”.

4. Making assumptions quickly and defending them vehemently

People who lack EQ quickly form an opinion and then gather evidence that
supports their opinion and ignore any evidence to the contrary. This is
especially dangerous for leaders. Emotionally intelligent people let their
thoughts develop because they know that initial reactions are driven by
emotions. They subsequently communicate their developed idea in the most
effective way possible.

5. Holding grudges
The negative emotions that come with holding onto a grudge are actually a
stress response. Holding onto a grudge means holding onto stress, and
emotionally intelligent people know to avoid this at all costs. Letting go of a
grudge not only makes one feel better, but can also improve one’s health.

6. Not letting go of mistakes

Dwelling too long on one’s mistakes creates anxiety, while forgetting about
them carries the risk of repeating them. Emotionally intelligent people distance
themselves from their mistakes, but they do so without forgetting them. By
keeping their mistakes at a safe distance, yet still handy enough to refer to,
they are able to adapt and adjust for future success.

7. Feeling misunderstood
When you lack emotional intelligence, it is hard to understand how you come
across to others. You feel misunderstood because you do not deliver your
message in a way that people can understand. Emotionally intelligent people
know that they do not communicate every idea perfectly and they can adjust
their approach and re-communicate their idea in a way that can be understood.

8. Not knowing your triggers

Everyone has triggers, which refer to situations and people that push their
buttons and cause them to act impulsively. Emotionally intelligent people study
their triggers and use this knowledge to sidestep situations and people before
they get the better of them.

9. Not getting angry

 Constantly masking your emotions with happiness and positivity is not genuine
or productive. Emotional intelligence is not about being nice; it is about
managing your emotions to achieve the best possible outcomes. This means
that it is sometimes necessary to show people that you are upset, sad or
frustrated. Emotionally intelligent people employ negative and positive emotions
intentionally in the appropriate situations.

10. Blaming other people for how they make you feel
It is tempting to attribute how you feel to the actions of others, but you must
take responsibility for your emotions. No one can make you feel anything that
you do not want to feel. Emotionally intelligent people exercise self-regulation.

11. Feeling easily offended

If you understand who you are, it is difficult for someone to say or do something
that will offend you. Emotionally intelligent people are self-confident and open-
minded, which creates a pretty thick skin. You may even make fun of yourself
or allow other people to make jokes about you because you are able to
mentally draw the line between humour and degradation.
Source: Adapted from https://www.entrepreneur.com/article/288181 (accessed
17 March 2017)

16.3.2 Strategic intelligence

The development of intelligence is an essential component of every
rational decision-making process, whether for individuals,
organisations or governments. In each one of these contexts, decisions
need to be made that relate to the overall purpose, direction and focus
of the organisation or the individual. Perhaps more common and
importantis the notion that strategic intelligence is about the ability to
get things done to achieve a given set of objectives.

The changing environment in which organisations are operating has

forced a radical shift in the basic foundations of how business is
conducted. Internal as well as external factors have forced
organisations to monitor constantly the surrounding environment in
order to create an awareness of opportunities and threats to allow it to
survive in the competitive environment. To do this effectively demands
a high degree of knowledge and awareness of the environment within
which the organisation is to work. Organisations need to gather all the
information at their disposal, and turn the raw data into intelligence
through a process of analysis and an exercise of human judgement.
Information is the key to this process, but information alone is not
enough to ensure that decision making is rational and logical. What is
really needed is the ability to transform this information into
knowledge. Strategic intelligence has information as its foundation.
Utilising the potential offered by information systems in the process of
generating information and then creating a knowledge base that can be
used in strategic decision making, will lead to competitive advantage
and constant innovation.

The transformation of information into knowledge requires

strategic thinking from strategic leadership. Better developed
strategic intelligence leads to strategic excellence. What is
strategic intelligence? In practical terms, strategic intelligence can be
described as the process of gathering information about competitors
and then being able to transform this information into knowledge by
developing short- and long-term strategies to stay one step ahead of the
competition. Strategic intelligence is actually the ability to interpret
trends and events and then develop appropriate strategies for
addressing them. Read about the brave decision of IBM’s leadership in
Strategy in action 16.5.

Strategy in action 16.5 IBM encourages blogging

At a time when the idea of “business blogging” was brand new (and usually
feared), IBM encouraged its 320 000 employees to start company blogs. IBM
leadership drafted a corporate blogging policy that encouraged employees to
be themselves, speak in the first person and respect their co-workers. The
result? A marketing bonanza for IBM.
Its company blogs are some of the most trusted technology blogs and generate
tons of page views and links back to IBM. Instead of fearing the new
technology, IBM’s leadership team embraced the new uncertain opportunity,
making its customers and employees very happy.

Strategic intelligence is important for managers in the process of

identifying opportunities and for creating competitive advantage. It can
also add value to the organisation’s decision-making capabilities,
leading to the achievement of the organisation’s long-term goals.
Strategic intelligence is about using a realistic situational
understanding to develop a strategy that is appropriate and will work,
but at the same time it is about the ability to implement that strategy.
Strategic intelligence prepares leaders to understand the context in
which they are leading and to work for the common good.

Leaders may be effective in one context, but not in another. For

example, Winston Churchill was the indispensable leader of Great
Britain during World War II. As soon as the war ended, he was voted
out of power. His ideas, the sense of purpose he proposed, and his
leadership style were rejected before and after the war. Before the war,
the British people wanted to believe they could have peace with
Germany, while Churchill told them they must prepare for war. After
the war, Churchill’s determination to preserve the empire and his
autocratic style did not fit the British demand for a more consensual
leadership and equitable society. It is clear in this example that to be an
effective leader in one context does not mean that the leader will be
effective in another, unless he or she has strategic intelligence – the
ability to understand the situation and develop an appropriate strategy.
It is clear that strategic intelligence is an important requirement and
characteristic of strategic leadership.

16.4 Key actions and responsibilities of strategic

leaders

Leadership is a key component of the strategy implementation process.

Ireland, Hoskisson and Hitt (2013) identify five actions and
responsibilities of strategic leadership. There is a close interaction
among these actions and effective strategic leaders will understand
how these interactions can be applied in the organisation.

16.4.1 Determining the organisation’s strategic direction

Perhaps the most important task of a strategic leader is not only to
determine the vision of the organisation, but also to develop the
strategy to achieve this vision. This responsibility rests on the
shoulders of the CEO and top management, who ideally are the
strategic leaders in the organisation. The information about this
strategic direction must be communicated consistently and clearly to
all affected stakeholders. It is also the responsibility of these strategic
leaders to make sure that not is only the right strategy developed to
help the organisation achieve strategic direction, but also that all the
implementation tasks are carried out during the process.

16.4.2 Effectively managing the organisation’s resource

portfolio
The management of the organisation’s resources is perhaps the most
important strategic leadership task. The management of financial
resources is obvious, because it will lead to organisational success. The
management of human resources is also critically important, as well as
the integration of these resources. Organisations should be willing to
use their financial resources and invest significantly in human
resources in order to derive the full competitive benefit from them.
The building of core competencies that are based on the knowledge
and skills of an organisation’s entire workforce, rather than the markets
being served, has become the basis of the new competitive landscape
on which organisations build their long-term strategies. This refers to
the development of human capital. Another important responsibility of
a strategic leader is the development of social capital. This refers to the
development of good relationships inside and outside the organisation
in order to create value for the customers and the owners of the
organisation. A strategic alliance is a typical example of a strategy that
can help the organisation to build its social capital.

16.4.3 Sustaining an effective organisational culture

Organisational culture refers to the complex set of
ideologies, symbols and core values that are shared
throughout the organisation and that will influence “the way
we do things here”. Organisational culture will be discussed in more
detail in the next chapter. Organisational culture provides the context
within which strategies are formulated and implemented.
Organisational culture influences the way in which an organisation
carries out its operations and it can become a competitive advantage.
An important responsibility of strategic leaders is to develop the
capability to shape the organisational culture in a way that is
competitively relevant. This positive organisational culture will
become a valued source of competitive advantage. The strategic leader
will dictate the organisational culture to a great extent. The values of
the strategic leader will influence his leadership style and that will
influence the culture of the organisation. For example, if the leader has
strong financial capabilities, it will influence his style.

16.4.4 Emphasising ethical practices

The effectiveness of an organisation increases when its
operations are based on ethical practices. Ethical practices
refer to right and fair behaviour when conducting the
organisation’s business. When top management bases its decisions on
the desire to do the right thing, and also values honesty, trust and
integrity, this has a crucial influence on the organisation’s ethical
practices. Strategic leaders who display these values, as part of their
strategic direction for the organisation, will develop an organisational
culture in which ethical practices are the behavioural norm. They will
also be inspirational leaders to their employees. Strategic leaders can
take the following actions to develop an ethical organisational culture:

Establish and communicate a specific ethical code of conduct in

which the ethical standards of the organisation are described.
Based on the input of all stakeholders, continuously revise and
update the code of conduct.
Disseminate the code of conduct to all stakeholders to inform them
about the ethical standards of the organisation.
Develop and implement various methods to apply the organisation’s
ethical standards, e.g. establishing an internal audit committee or
 implementing a specific rewards system to recognise the reporting
of wrongdoing in the organisation.
Create a work environment in which all people are treated with
fairness and dignity.

In relation to corporate governance, the King IV Report pays a lot of

attention to ethical leadership. It is the cornerstone of and a necessary
condition for an ethical corporate culture. Ethical leadership starts with
the board, but is not limited to the decisions and behaviours of the
board alone. Ethical leadership must filter down from the board to all
levels of management, as staff are influenced by the role modelling of
their direct managers and supervisors. According to King IV, ethical
leadership is about ensuring that management actively fosters a culture
of ethical conduct and sets the values to which the company will
adhere.

16.4.5 Establishing balanced organisational controls

Organisational control is an important part of the strategy
implementation process. Controls will guide the work in such a way
that the performance goals are achieved. Organisational control will
help strategic leaders to build their credibility among the organisation’s
stakeholders, because it provides the parameters within which strategy
implementation takes place. It is the responsibility of strategic leaders
to develop and establish controls that allow for flexible, innovative
employee behaviour that will ensure a competitive position for the
organisation.

Linked to these actions and responsibilities, Abell (2006) identifies

additional leadership tasks:

Strategic leaders should recognise the dual nature of strategy in the

sense that strategy is about both short-term and long-term strategic
actions.
It is the task of the strategic leader to focus on strategy as being the
alignment between the external and the internal worlds of the
organisation.
 Strategic leaders should recognise that there is a growing
decentralisation of strategy making and leadership. An
entrepreneurial initiative and leadership culture in the organisation
should be encouraged.
An essential responsibility of the strategic leader is aligning the top
management team. An aligned top management team is one in
which the team members function as a coherent entity, helping the
organisation towards a competitive advantage position. To create
this alignment, executive reward systems should reward team
performance. Leaders should learn to cooperate and not to compete
with one another.

In addition to from the characteristics and actions discussed here,

Thompson and Martin (2010) summarise the qualities and skills of
effective and ineffective strategic leaders. These are presented in Table
16.2.

Table 16.2 Qualities and skills of effective and ineffective leaders

Effective leaders Ineffective leaders

Have clear vision
Build and control an effective team of
managers
Believe in success
Effectively delegate, decentralise and
motivate
Have credibility and competence in
exercising power and creating
change
Persevere and persist in pursuing the
vision and mission
Have the flexibility to change
strategies, structure and style
Have few initiatives
Surround themselves with loyal
supporters and not competent ones
Are not in touch with the customers’
views and competitors’ activities
Spend too much time on external
activities and not on organisational
issues
Enjoy their power and status, but do
not add real value to the organisation
In Strategy in action 16.6, a list of nine roles of strategic leaders is
presented. These nine roles are important at senior strategic levels
because they help leaders understand what to do to be strategic.

Strategy in action 16.6 The nine roles of strategic leadership

The nine key strategic leadership roles are as follows:

Navigator. Clearly and quickly works through the complexity of key issues,
problems and opportunities to affect actions.
Strategist. Develops a long-range course of action or set of goals to align with
the organisation’s vision.
Entrepreneur. Identifies and exploits opportunities for new products, services
and markets.
Mobiliser. Is proactive in building and aligning stakeholders, capabilities, and
resources for getting things done quickly and achieving complex objectives.
Talent advocate. Attracts, develops and retains talent to ensure that people
with the right skills and motivation are in the right place at the right time.
Captivator. Builds passion and commitment towards a common goal.
Global thinker. Integrates information from all sources to develop a well-
informed, diverse perspective that can be used to optimise organisational
performance.
Change driver. Creates an environment that embraces change; makes change
happen, even if the change is radical, and helps others to accept new ideas.
Enterprise guardian. Ensures shareholder value through courageous decision
making that supports the enterprise.
Source: Adapted from http://www.ddiworld.com/DDI/media/white-
papers/WhatSeniorLeadersDoTheNineRoles_wp_ddi.pdf (accessed
17 March 2017)

It is clear from these tasks, responsibilities and roles that being

successful in operational/functional roles does not ensure leaders’
success in senior strategic roles. The irony is, however, that
organisations routinely rely on these very people to move into these
critical roles as strategic leaders. The result is that they have strategic
leaders who are unprepared to deal effectively with the situations and
challenges they must face.
16.5 Matching leadership styles with the chosen
strategy

When a new strategy is developed as a result of a changing

environment, this implies that the strategy must be implemented in the
changing environment. Sometimes this new strategy requires new
strategic leadership to lead the organisation into the desired future.
Different types of strategies will often require different types of
leadership styles. In a typical growth strategy, the organisation needs a
leader who pays attention to managing relationships, who is able to
inspire employees and is also capable of, and willing to, communicate
with his or her employees on a continuous basis. The corporate
combination strategies, like strategic alliances and joint ventures,
require a leader who can integrate the different cultures and value
systems of the different organisations. The same is also applicable in
diversification and integration strategies. Organisations that follow
recovery strategies need leaders who are task oriented and who are
able to focus on reducing assets and costs in order to save the
organisation. Such a leader will often be more autocratic than the
leader required when a growth strategy is followed.

Rothschild (1996) proposes that an organisation in its start-up phase

will need a risk taker as a leader. These individuals are usually highly
intuitive and aggressive visionaries with an entrepreneurial leadership
style. Once the organisation has moved into its rapid growth phase, it
needs a caretaker as a leader. Such a leader leads with commitment, is
more directive and will build on the strengths of the organisation
creating gradual change. An organisation in its maturity stage needs a
selective, decisive, participative and delegative leadership style.
During this phase, the organisation needs a surgeon as a leader who is
able to make tough decisions. During the mature phase of the
organisational life cycle, organisations often undergo restructuring and
re-engineering. Tough decisions should be made to help the
organisation to start another growth phase, otherwise the organisation
will enter the decline phase. Organisations that are not successful in
starting a new growth phase, have to be “put to rest”, and this needs an
undertaker as a leader. Such a leader will also be faced with tough
decisions on how to go about preventing major losses for shareholders.

16.6 Leaders of transformation

During the strategy implementation stage it is important to get the

commitment of all employees, because strategy implementation
involves organisational changes. Instead of having a transactional
leader where employees offer their labour in return for pay or
promotion, the need is for a transformational kind of leadership
behaviour. This kind of relationship between leaders and employees is
based on mutual trust. Some of the characteristics that illustrate the
differences between these two leadership types are as follows:

Transformational leaders see themselves as change agents and want

to transform the organisation to this desired future position. In this
endeavour, they are visionaries – they have a clear picture of what
the organisation will look like in the future.
Transformational leaders can deal with resistance to change. They
are courageous, can take risks and confront reality without any fear.
They believe in the unlimited potential of the human being. They
believe in their employees and show it through trust and
empowerment.
They lead according to value-driven principles. They really believe
in positive values and act according to these values.
They are not afraid of making mistakes, because they regard this as
a learning opportunity. They believe in lifelong learning.
The difference between a manager and a leader is that a
transformational leader is capable of handling the complexity,
uncertainty and oftentimes ambiguity of the uncertain future
situation.
 A transformational leadership style is the most effective
one during the strategy implementation process. The essence
of this leadership style is the ability to motivate employees
to exceed the expectations that other people have of them, to
continually increase and enhance their capabilities and to place the
interests of the organisation above their own personal interests. It is
actually up to the ability of the leader to get the employees’
commitment in sharing the values and vision of the organisation. What
are the components of transformational leadership?

Influence. Having a clear vision and also understanding the purpose

of the organisation, a transformational leader has the ability to
influence employees by winning their trust and respect.
Individual attention. Through a process of delegation, mentoring
and constructive feedback, the leader pays attention to individual
needs for the development of individual employees.
Inspiration. The leader has the ability to motivate and inspire
employees. This leader will also generate enthusiasm in his or her
followers, because he or she will lead by example.

Looking at all these components, it is clear that transformational

leaders lead by trust. Trust is the lubricant for continued smooth and
effective interactions. The importance of trust is only acknowledged if
it is absent. Inherent in trust are the components of character and
competence. To be trusted as strategic leaders, employees must
experience their leaders as people with character (respect, honesty,
service, fairness, quest for truth, integrity) and competence (task
related, interpersonal, organisational competence). Strategic leaders
with transformational leadership styles will only inspire and enable
employees to excel in their work if they experience the leader as a
person who can be trusted.

Linked to transformational leadership is the notion of servant

leadership. Servant leadership is a long-term transformational
approach to life and work. Servant leadership also links well with the
traditional concept of Ubuntu, which comes from the Xhosa phrase
“Umuntu ngumuntu ngabanu” meaning “a person is a person through
other people”. It has the potential for creating positive change in the
organisation, because servant leaders put serving others – employees,
customers, and the community – as the top priority in the organisation.
At the core of servant leadership is humility, trust and
empowerment. It is not strange to see a servant leader manning the
phones to give the receptionist a well-deserved break. The servant
leader is not too important to play in the organisation’s action cricket
team. The servant leader also understands that bossing and leadership
are not synonymous. Essentially, servant leadership is the ability to
earn the voluntary commitment of people – this is in contrast with a
forced obedience approach taken by autocratic leaders. Read the views
of Brand Pretorius, the former CEO of McCarthy Holdings, on servant
leadership in Strategy in action 16.7.

Strategy in action 16.7 Servant leadership

Ex-CEO of listed company McCarthy Limited South Africa, Brand Pretorius’

ability to articulate a compelling vision has resulted in the transformation of
many people’s lives, making him an admired leader in South Africa. He
believes that before you can ask for a hand, you should touch a heart. And you
can only touch a heart by being willing to serve your people. He believes there
is wide scope for the application of servant leadership, because the reality in
the workplace is that there are so many disengaged people. There is reluctant
compliance and no real sense of belonging.
You can provide people with fancy objectives and try to inspire them towards
the attainment of a common vision; it helps, but in the final analysis, you have
to earn the commitment of the people and that can only happen when you
respect them, involve them, acknowledge them and serve them. Pretorius is a
disciple of servant leadership, because he believes if you are looking for
commitment on a sustainable basis, then you must really serve your people
and nurture them. The challenge is to engage the mind and engage the heart.
Therefore serving people is not just about creating a warm feeling; it is about
looking after people properly, developing them and simultaneously expecting
the very best results from them. In a business context one has to be tough
minded when it comes to results, but one has to have a gentle heart when it
comes to people. This is a challenge at times, because people could be
tempted to take advantage. But Pretorius’s view is that you have to be an
authentic servant leader who leads by example. And when people do not
deliver, then the necessary actions should be taken in a fair and consistent
manner, and with empathy.
Source: Adapted from http://criticalthought.co.za/conversations-in-leadership/
(accessed 18 July 2017) and Pretorius (2013)
16.7 Leadership and corporate governance

The King IV Report on corporate governance emphasises the role of

leadership in corporate governance. Corporate governance is
essentially about leadership and the realities of exercising power, as
well as the head of the organisation’s responsibilities. Leadership in
corporate governance terms is about efficiency, honesty, responsibility,
transparency and accountability. Strategic leaders must be committed
to corporate governance and top management’s responsibility to ensure
that the entire workforce understands the organisation’s corporate
governance and ethical code. The behaviour of the strategic leaders in
the organisation must serve as an example of ethical behaviour and
they must establish a tradition of integrity inside and outside the
organisation.

The King III Report (2009) includes five moral duties (the five Cs) for
strategic leaders and company directors:

Conscience. Strategic leaders and directors should act with

intellectual honesty, always working with a conscience and doing
everything in the best interests of the organisation and all its
stakeholders.
Care. Strategic leaders and directors must be caring. They must
devote serious attention to the affairs of the organisation.
Competence. Strategic leaders and directors should have the
knowledge, competencies and skills required for governing the
organisation effectively.
Commitment. Strategic leaders and directors should be committed
in performing their duties and responsibilities.
Courage. Strategic leaders and directors should have the courage to
act with integrity in all strategic decisions and activities.
Both internal and external stakeholders of the organisation expect
strategic leaders to incorporate strong corporate governance and
ethical behaviour in the culture of the organisation.

16.8 Summary

Strategy implementation is the make-and-break phase of the strategic

management process. The ability to implement strategies successfully
can serve as a competitive advantage in a business environment
characterised by rapid changes. Strategic leadership affects both the
development of strategy as well as its implementation. Strategic
leadership must perform some important actions and tasks to help the
organisation implement its strategy. Leaders must ensure that the
organisation thinks strategically about the future of the organisation
and that the employees are engaged and committed to increasing its
performance. Strategic leaders must also ensure that the organisation
has a positive public image and is visible to external stakeholders.
Strategic leaders are indispensable for effective strategy development
and implementation.

There is a close relationship between the specific industry life cycles in

which organisations find themselves and the special kinds of leaders
they need. It is also argued that a transformational leader is more
desirable than having a transactional leader. Transformational
leadership is especially more effective as a strategic leadership style
during the process of strategy implementation. Leadership in corporate
governance terms is about efficiency, honesty, responsibility,
transparency and accountability. Strategic leaders must be committed
to corporate governance and to ensuring that the entire workforce
understands the organisation’s corporate governance and ethical code.
Exploring the web

http://mags.capemedia.co.za/leadership/336/
http://www.nwlink.com/~donclark/leader/leader.html
http://www.psychologytoday.com/basics/leadership
http://www.fastcompany.com/1838481/6-leadership-styles-and-when-you-should-use-
them
http://www.leadershiponline.co.za/
http://www.mindtools.com/pages/article/newLDR_84.htm
http://www.sas.com/knowledge-exchange/

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Case study

Santie Botha

Santie starts every day with a 6 km run. She believes that exercise
clears her head and helps her to focus on her work day. She confesses
that she is a big list person, so she uses this time to create lists of what
has to be done, and plan the days ahead. Botha holds a degree in
economics from Stellenbosch University, and started her career at
Unilever in London.

Santie Botha is the Chairperson of Curro and Famous Brands and

serves on the boards of Telkom and Tiger Brands. Botha first rose to
prominence when, at the age of 34, she became Absa’s youngest ever
board member. She joined MTN as Chief Marketing Officer in 2003
and oversaw the network becoming the Fifa World Cup’s first and only
global sponsor from Africa. She recently became South Africa’s
youngest ever university chancellor when, at 48, she headed up the
Nelson Mandela Bay Metropolitan University in Port Elizabeth.

In interviews with her, she indicated that at school and university her
life revolved around sport, tennis in particular. Botha had ambitions to
become the best women’s tennis player in South Africa, but chose to
take a job at Unilever instead. “I continued playing tennis for about
two years, but then work took over. I made that choice,” says Botha.
In 1996, while working in the UK, Botha decided to resign so she
could move back home to South Africa. She had an interview at Absa,
a brand she was unfamiliar with, and after numerous interviews and
psychometric tests they made her an offer she accepted. She stayed
with Absa for seven years, navigating the tension-fraught post-
amalgamation period, before joining MTN. She is a South African
marketing pioneer who played a role in the success of the 2010 World
Cup as head of marketing at FIFA sponsor MTN. At the end of the
World Cup, after seven years at MTN, Botha moved on. “It was the
only African brand in the top 100 global brands list,” says Botha. “I
think the job was done.”

What is her opinion about meetings? Now that she is working for
herself, she only attends meetings if the objectives are clear. “If I’m
not sure that I will add value, I simply won’t go. Meetings with no
clear goals are time wasters. If I’m chairing a meeting, I have the
CEO’s objectives in mind so that I can drive the meeting towards
achieving them, rather than simply allowing everyone to voice their
opinions without reaching any conclusions.”

She believes that people should take responsibility for tasks and not
teams, because she is not one for groups. “I like to make individuals
responsible for actions, and I am clear on what needs to be achieved by
when, and what I expect the outcome to be.” She is a hard worker and
completes the smaller tasks in the evening. She wants to tick them off
her list, so that she can start the new day without being bogged down
by yesterday’s concerns. She also tackles a task immediately and gets
it out of the way. If it requires significant effort, you must think about
it and plan. Success is the result of aligning your own objectives with
those of the company, and always focusing on the core of the business.
Big ideas and actions take companies forward. Do not let time be
swallowed up by stuff that has no bearing on the bottom line.

Botha has won a slew of awards, including the 2010 Businesswoman

of the Year from the Businesswomen’s Association of South Africa,
Marketer of the Year in 2002, the Star Top 10 Businesspeople in South
Africa 2003 and Young Business Person of the Year in 1998. The role
of a chancellor is traditionally that of a figurehead, but Botha has said
she plans to play an active role in developing the institution as a place
of learning and as a brand.
Sources: Adapted from http://www.leader.co.za/article.aspx?s=1&f=1&a=3890;
http://www.702.co.za/articles/1603/meet-santie-botha-curro-chairperson-and-one-
of-africa-s-wealthiest-most-successful-businesswomen;
http://www.entrepreneurmag.co.za/advice/women-entrepreneurs/women-
entrepreneur-successes/time-saving-tips-from-santie-botha/ (all accessed 18 March
2017)

CASE STUDY QUESTIONS

Do some research on Santie Botha and answer the following questions:

1. Which strategic leadership characteristics can be identified from

Santie Botha’s behaviour?
2. Look at the roles highlighted in Strategy in action 16.6. Do some
more research on Santie Botha and indicate how she measures up
against these roles.
3. Would you say that Santie Botha has emotional intelligence?
Substantiate your response.

Strategy exercises

1. Visit the manager of an organisation in your town. Ask him or her

what the most important leadership tasks are that they have to
perform every day. Do they apply the same tasks when they have
to implement a new strategy/plan?
2. Research the following strategic leaders and identify what their
influence was on strategy development and implementation during
the time they are/were in charge of their organisations.

Chriso Wiese
 Patrice Motsepe
Raymond Ackerman
Richard Branson

3. The source of competitive advantage is value creation. How can a

strategic leader contribute to value creation?
 17 Strategy and culture
TSHEDI NAONG

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Define organisational culture

Explain the creation and management of organisational culture
Discuss the role of culture in strategy implementation
Distinguish among the different levels and types of organisational culture
Describe Handy’s four typologies of organisational culture
Explain how an organisational culture can provide a competitive advantage
Explain the importance of culture–strategy fit
Identify the steps on how to change the culture to fit the strategy

17.1 Introduction

There have been growing concerns about the ways many organisations have chosen to do business in the
recent past. An organisation’s culture as a leadership concept has been identified as one of the many
components that leaders can use to grow a dynamic organisation. “Culture provides the greatest source of
competitive advantage. In fact, more than 80 per cent believe an organisation that lacks a high-performance
culture is doomed to mediocrity” (Rogers, Meehan & Tanner, 2006). Globalisation has further led to the
organisational community becoming a small village and a fertile ground for a rampant level of competition.
These developments obviously demand visionary strategists to answer a difficult question: Is my organisation
ready for the tough competitive environment? It becomes imperative, therefore, to review and identify
appropriate strategies. Organisations respond strategically to a changing environment through people, either
individually or collectively.

Culture plays a vital role in the development of strategy, but more importantly, perhaps, in strategic
implementation. Employees are the ones executing the different functions to implement strategy. So, the
interaction between these individuals and groups in the workplace is later transformed into a common practice
and tradition, called organisational culture. It is imperative, therefore, that every organisation has its own
unique culture. This culture is formed from the traditions, beliefs and behavioural norms and values of the
workforce, and is embodied in the structures, processesand strategies of the organisation. When new
strategies have to be implemented, it is imperative that they are supported throughout the organisation; the
opposite could easily prove disastrous for successful implementation.

Managing organisational culture and understanding its role in the organisation demands that attention be paid
to issues such as leadership; the role of symbols; and the use of time, communication and meetings in day-to-
day organisational life. Notably, an organisational culture can result from the internal structure of an
organisation and from the type of people it employs. Leaders of successful organisations comprehend that an
effective alignment of culture with strategy provides a means of getting people to work together to reach
strategic goals and achieve an organisation’s vision. Culture is the glue that combines and influences
managerial views, which in turn affect recruitment, resource allocation and management, and organisational
design, all of which make up the entire organisation. In the McKinsey 7S framework, the shared values in an
organisation are put at the centre of the model, implying that an organisation’s culture has an important
influence on all the other internal components of the organisation. (Refer to Figure 15.1 in Chapter 15.)
Although there are numerous aspects of culture, the following seven are generally the most common. The
relative significance of each of these will vary from industry to industry. The seven aspects are as follows:

The extent to which the organisation is marketing orientated, emphasising the organisation’s culture of
giving customers high priority.
The relationship between management and staff, manifested, for example, through communication and
participation systems.
The extent to which people are target orientated and have a culture of commitment to achieving agreed
levels of performance.
Attitudes towards innovation. It is particularly important that the risks associated with failure are perceived
as acceptable by all levels of management if innovation and entrepreneurship are to be fostered.
Employees’ and management’s attitudes towards costs and cost reduction.
The commitment and loyalty to the organisation in general, and shown by all employees.
The impact of, and reaction to, technology and technological change and development.

17.2 The role of organisational culture in strategy implementation

It was mentioned earlier that an organisation’s culture, that is, the system of shared values that guides
employees, is one of the significant factors that influences the success of strategy implementation.
Undoubtedly, organisational culture can directly influence the ability of a strategic visionary to “sell” his or
her ideas to other members of the organisation and win or gain their support and commitment to the vision.
The culture, climate and values of the organisation need to be aligned with, and supportive of, the strategy. It
is evident that a business can develop core competencies in terms of both the capabilities it possesses and the
way the capabilities are leveraged when implementing strategies to derive desired results. Of equal
importance is that the leaders of the organisation need to be conscious of their values and ensure alignment
with the organisational values. Read through Strategy in action 17.1 to see how values can be regarded as the
foundation of an organisation’s culture.

Strategy in action 17.1 Values as a foundation for organisational culture

Generally, organisations that are successful have a strong culture, something that is necessarily invisible to the naked eye but
is always evident in the routine behavioural patterns of staff. You can’t touch it or write it down, but it is there; its influence is
pervasive, and it can work for you or against you. Some authors even compare the culture of an organisation to an iceberg,
where only the tip of the iceberg is visible to the naked eye, yet the iceberg is much larger than its visible tip. What lies
underneath the surface represents the actual depth of the organisation’s culture. This is truly embedded in the organisational
behaviour and personality, providing a valuable starting point for understanding an organisation better. Table 17.1 provides
overviews of the values of two very different organisations, namely, Woolworths with its core business focus being the
provision of retail and financial services to upper- and middle-income groups mainly in South Africa, but also in Africa,
Australia and New Zealand; and Sasol, one of the world’s leading chemicals and energy companies.

Table 17.1 Examples of corporate values in different organisations

Woolworths Sasol
 Woolworths
Our values
At Woolworths we take our business values seriously. They aren’t just
words in an annual report – they are the foundation of our business. They
give us direction and guide our behaviour, actions and choices. In fact, our
values are so important to us that we’re measured not only on our
performance, but also by how well we live up to them.
1. Quality and style – deliver the best
It means giving 100%, 100% of the time. Whether it’s making sure that a
supplier is delivering to the standards we set or preparing a report, it all
boils down to one thing: there’s no compromising on quality, because “good
enough” just isn’t good enough.
2. Value – a simple and fair deal
Offering real value goes beyond offering our customers quality at a good
price: it also means offering value to each other, from sharing our
knowledge with colleagues and suppliers to being able to evaluate how the
decisions we make affect the business.
3. Service – we always think customer
At Woolies, we know that we have to go that bit further to really make a
difference. Putting the customer first is what service is all about. Whether
your customer is a shopper in our stores or the store manager who needs
a vital delivery, service is about understanding others’ needs, being willing
to do more than is expected, and being a good ambassador for the
Woolies brand.
4. Innovation – discover the difference
We do it for our customers. We love discovering new ideas, new products
and new processes. We enjoy thinking “out of the box” and finding
solutions that benefit the business.
5. Integrity – doing what you say you will do
Keeping our promises is important to us, whether it’s maintaining
confidentiality, not accepting gifts from suppliers, or simply listening to what
others have to say with an open mind. By being true to ourselves, we earn
the trust of our colleagues and our customers.
6. Energy – be passionate and deliver
When you’re passionate about what you do, when you really care, your
enthusiasm and belief rub off on others. At Woolies, you’re part of a 23
000-member team. Being part of a team means being an inspiration to
others and being inspired by their successes and triumphs.
7. Sustainability – build for a better future
While you may be familiar with some of our environmental and
conservation projects, for us in a South African, and African, context,
sustainability isn’t just about being “green”. It’s about sharing expertise,
helping local enterprises to grow, and contributing to a prosperous, secure
future for our country.
Sasol
Our shared values and culture
Our shared values inform our actions and behaviour.
They determine the way in which we interpret and
respond to risk management, business opportunities
and challenges.
Together our shared values and culture establish
expectations about how we work as colleagues, with
our customers, shareholders, suppliers, partners,
governments and communities. Being a values-driven
organisation means that all Sasol people embrace and
live our shared values, which underpin our high-
performance culture.
1. Safety
We are committed to zero harm and all that we do, we
do safely. We create a safe, secure, productive and
rewarding work environment.
2. People
We create a caring, diverse, and engaged work
environment that recognises both individual and team
contributions in pursuit of high performance.
3. Integrity
We act consistently based on a set of values, ethical
standards and principles.
4. Accountability
We take ownership of our behaviour and responsibility
to perform both individually and in teams.
5. Stakeholder focus
We serve our stakeholders through quality products,
service solutions and value creation.
6. Excellence in all we do
We deliver what we promise and add value that goes
beyond what is expected.
Source: http://www.sasol.com/extras/AIR_2015/air/our-
shared-values-and-culture (accessed 15
February 2017)

Source: http://www.woolworths.co.za/store/fragments/corporate/corporate-
index.jsp?content=../five-ways/fiveWays&contentId=cmp204259
(accessed 25 February 2017)

Entrenched culture provides a focus to enable organisations and individuals to reduce uncertainty, variability
and ambiguity, so providing a framework for acting in a consistent manner. Given its significance, a vibrant
organisational culture can easily be the most valuable competitive differentiator for an organisation. In
implementing strategy, strategic leaders must regularly analyse the organisational culture and its
appropriateness, and create, manage and sometimes even change the culture when necessary. Thus, shaping
the context within which the business formulates and implements its strategies, that is, shaping the
organisational culture, is an essential strategic leadership action.
 It is critical that every organisational leader understand that an organisation’s culture has the
potential to become either its greatest strength (asset) or its greatest weakness (liability) if not
properly managed. Typically, in some organisations, poor staff morale and a cynical attitude
towards customers often undermine organisational performance. Other organisations have succeeded in
creating cultures that are completely consistent with what the organisation is trying to accomplish, which is
improved or high-performance cultures. At Ackermans, one of the clothing retail stores in South Africa, the
company’s stated commitment to a low-cost strategy is supported by a culture that expects efficiency and
tight financial policy. When these values are coupled with intense, high-quality individual effort, the result is
a powerful commitment to excellence and a high level of organisational camaraderie. Organisational culture
is more profound than just, “This is the way things are done here”. The culture of the organisation is its core
value of beliefs and what it holds dear. For example, a culture that makes decisions by divine ruling will be
fundamentally different from one that depends on technical information, science, or a set of predetermined
facts.

For organisational success in strategy implementation, it is critical that members understand the organisation’s
culture and values. To know and understand those values require careful observation and specific questions.
Observe how information is disseminated. Is the organisation a rumour mill, or is it a place where gossip
abounds? Do the rumours eventually become official? Is the gossip harmful or is it ignored? What is the
diversity in terms of age, ethnicity, gender, or nationality? Is it family friendly? Is it health friendly, is
education encouraged, and how are pay and promotions handled? While it may be difficult to fully discern an
organisation’s nature, these are questions that may be asked to help employees assess the value of the group
of which they are members. If the organisation’s culture does not fit the employee’s core values,
implementation will be difficult. What an individual can observe and analyse, they can affect. Whether they
are new members or long-term professionals, doing this analysis will provide clearer insights into the
organisation’s values. The role of leadership with regard to culture is to define and then live by the values that
are sought, and to harness or redirect the organisation’s efforts towards the implementation of the significant
strategic priorities of the company.

17.3 Levels of culture

The nature and character of organisational culture can be described as consisting of some aspects that are
relatively more visible, as well as aspects that may lie below one’s conscious awareness. There is agreement
in the literature that organisational culture can be thought of as consisting of three interrelated levels, as
indicated in Figure 17.1.

Figure 17.1 Three levels of organisational culture

Source: Schein (2004)

These three levels can be regarded as a funnel through which organisational culture will emerge. At the
deepest level of cultural awareness lie basic assumptions. These assumptions are taken for granted and
reflect beliefs about human nature and reality. At the second level values exist. Values are shared principles,
standards and goals. At the third level of cultural awareness are the artifacts, or the visible, tangible aspects
of organisational culture. For example, in an organisation, a basic assumption employees and managers share
might be that happy employees benefit their organisations. This might be translated into values such as
egalitarianism, high-quality relationships and having fun. The artifacts reflecting such values might be an
executive’s “open-door” policy, an office layout that includes open spaces and gathering areas equipped with
pool tables, and frequent company picnics. These artifacts reflect a culture of fun in the organisation. This is
typically the culture of the Google company.

17.4 Aspects of culture (manifestations, people and culture)

It is generally agreed by most authors that culture is like the personality of the organisation, with every
organisation having its own unique culture. This organisational culture is manifested in its stories, legends
and traditions, its ways of approaching problems and making decisions, its values, and its dos and don’ts. It is
based on commonly shared beliefs, values and norms that characterise both individual and group behaviours
right across the hierarchical organisational levels. More specifically, the culture of an organisation is more
informal in nature and is based on the collective ideas and values shared by the employees. The ways in
which various tasks are performed at different levels also define the culture of an organisation. Organisational
culture is a critical, sometimes unwritten, set of rules by which every member of the organisation lives.

The culture of an organisation can be divided into an internal and external category. The external cultural
experience has to do with the stories you hear about an organisation; its awards, the own experience, and what
you hear and see through the media and advertising. This might include logos, uniforms, office space, jargon,
jokes, technology, products and services, published values, observable rituals, ceremonies, market/financial
conditions, competition, and so forth. All of this has an impact on the strategy of an organisation. But the
internal cultural experience – the shared habits, values, beliefs, assumptions, rules of conduct, etc. – is more
likely to profoundly affect the strategy. What are these common aspects of organisational culture? Luffman,
Lea, Sanderson and Kenny (1996) and Johnson (1988) present the following aspects:

Stories. What is talked about? Are there historical events that are significant?
Symbols. What are the symbols of success?
Power structures. Who makes the decisions and how are they influenced?
Organisational structure. Is the hierarchy tall or flat? Is there easy access to senior people?
Control systems. What is the degree of control? For example, is it performance orientated or bureaucratic?
Routines and rituals. Are there special occasions marked by events?
The paradigm. What the organisation is about, what it does, its mission, and its values.

17.5 Determinants of organisational culture

Although organisational culture commonly refers to the internal environment of an organisation, the nature of
it is directly and indirectly affected and determined by a myriad of internal and external factors. Internal
factors are specific to the organisation and external factors refer to a number of outside societal environmental
forces, for example politics or legislation and the economy. These factors influence management decisions
and strategic events within organisations. Although external determinants of culture may never be regarded as
unimportant, the focus in this chapter will fall on the six internal determinants of organisational culture that
follow.
17.5.1 Leadership style
There is a direct relationship between the leadership style and the organisational culture. Leaders are
responsible for creating an organisational culture, and their attitudes, beliefs and values are an important
manifestation of the organisation’s culture. Usually the founders of an organisation are especially important in
determining culture as they often imprint their values and leadership style on the organisation’s way of doing
things. For example, when leaders motivate employees through inspiration, corporate culture tends to be more
supportive and people oriented. Furthermore, when leaders motivate by making rewards contingent on
performance, the corporate culture tends to be more performance oriented and competitive. Rensis Likert
(1967) posits that all organisations can be classified into four major groups, depending on the way basic
organisational processes are conducted and how leaders manage these processes. These major groupings are
as follows:

Exploitative Authoritative. The leader has little concern for people and uses methods such as threats and
other fear-based methods to ensure conformance. Communication is almost always top-down and the
psychological concerns of employees are ignored.
Benevolent Authoritative. When the leader adds concern for people to an authoritative position, a
“benevolent dictatorship” is formed. The leader now uses rewards to encourage appropriate performance
and listens more to concerns lower down the organisation. What leaders hear is often biased and limited to
what their subordinates think that the boss wants to hear. There may be some delegation of decisions, but
almost all major decisions are still made centrally.
Consultative. The leader makes genuine efforts to listen carefully to ideas. The upward flow of
information is still cautious and biased to some degree. Major decisions are still largely centrally made.
Participative. In this style, the leader makes maximum use of participative methods, by engaging people
lower down the organisation in decision making. Employees across the organisation are psychologically
closer together and they work well together at all levels.

The influence of effective strategic leaders on the process of strategy implementation has been discussed in
Chapter 16.

17.5.2 Organisational policies

Rules, policies and procedures have a direct impact on organisational culture. Undoubtedly, certain
organisational procedures can influence a specific dimension of organisational culture to quite an extent. For
example, if organisational policy states that lay-offs will be used only as a last resort to cope with a business
downturn, then it would, in general, foster an internal environment that is supportive and humanistic. A
flexible leave policy will also instil a culture of caring for employees. Similarly, if one is working at an
organisation where it is agreed that employees will benefit from increased profits, and which perhaps has a
policy of profit sharing, then the organisational culture will be characterised by a reward orientation and
probably by high progressiveness and commitment.

17.5.3 Managerial values

It is generally accepted that newly appointed CEOs or leaders within organisations tend to imprint their ethos
and values across the entire organisation. The philosophy and values of the owners and founders of an
organisation have a strong influence on organisational culture, because values lead to actions and shape
decisions related to organisational behaviours. The values of the owners and managers contribute to
perceptions of the organisation as impersonal, paternalistic, formal, informal, hostile or friendly.

17.5.4 Organisational structure

According to the McKinsey 7S framework, there is also a strong relationship between structure and shared
values (culture). The structure of an organisation usually mirrors the perception of its internal environment.
For instance, a bureaucratic organisationalstructure that has strong formal lines of communication creates an
organisational culture very different from a structure that encourages a participative culture. (Refer also to the
leadership approaches mentioned in Section 17.5.1.)
17.5.5 Characteristics of the workforce
The type of employees in an organisation and their personal characteristics also affect the culture prevailing in
the organisation. For example, an organisation with well-educated, ambitious, younger employees is likely to
have a different organisational climate to that of an organisation with less educated, less upwardly mobile,
older employees. The former might encourage an environment of competitiveness, calculated risk-taking,
frankness of opinions, etc.

17.5.6 Organisational size

In small organisations it is much easier to foster a climate of creativity and innovation and to establish a
participative kind of management with greater emphasis on horizontal distribution of responsibilities. On the
other hand, in a large organisation it is easier to have a more authoritative kind of management with the
emphasis on a vertical distribution of responsibilities.

A strong and deeply engraved organisational culture ensures that people know what is expected of them and
they therefore understand how to act and what to decide under particular circumstances. They appreciate the
issues that are important. The inverse is also true; when the culture is blurred and weak, valuable time and
energy can be wasted in trying to decide what should be done and how. Moreover, it is noteworthy that
employees feel better about their organisations if they are recognised, known about and regarded as
successful, and these aspects will be reflected in the culture. There can be a number of separate strands to the
culture in any organisation, all of which should complement each other. For example, there could be aspects
relating to the strategic leader, the environment and the employees. There could be a strong power culture
related to an influential strategic leader who is firmly in charge of the organisation and whose values are
widely understood and followed. This could be linked to a culture of market orientation, which ensures that
customer needs are considered and satisfied. It could also be linked with a work culture if employees feel
committed to the organisation and wish to help achieve success.

Certainly, where there are cultures, there are also usually subcultures, and where there is agreement about
cultures there may also be disagreements and countercultures. In particular, there may also be significant
differences between espoused culture and culture-in-practice. All of this can adversely affect an organisation’s
performance. A number of researchers have attempted to rationalise the many types of culture by attempting
to group the various classifications (e.g. Deal & Kennedy, 1982; Quinn & McGrath, 1985; Hofstede’s national
clusters, 1980, 1990; Wilson, 2001). Handy’s (1995) categorisation of types of culture, as one among the
many, is very useful, in that it takes one beyond vague generalisation and gives a picture of differing cultures.
Handy’s categorisation of culture is perhaps the best known typology of culture and the one that has been
around the longest.

17.6 Handy’s typology of organisations based on cultural differences

It is generally acknowledged that organisational effectiveness is a primary intention in strategic planning.

Handy has provided a framework for depicting diagrammatically the relationship between organisations and
culture (see Figure 17.2).

Handy defines the four cultural typologies as power, role, task and person culture. He postulated that the
typologies reflect the organisation’s needs for and constraints on its operations.
 Figure 17.2 Handy’s framework of four cultures

Source: Adapted from Thompson & Martin (2010: 239)

The power culture typology depicts that power radiates from the centre like a web and engulfs the
organisation as a whole instead of multiple single pieces. The rate of strategic change is dependent on the
style of the leader, who is most probably also the owner. Organisations with power cultures depend on trust
and empathy for their effectiveness and personal conversation for communication. To get the job done the
centre chooses people who can think the same way as it does. There are few rules and procedures, and a lot
of faith is put in the individual. Individuals employed tend to be power orientated, politically minded and
take risks with little desire for security.
The role culture suggests authority is dictated by hierarchy. Specifically defined job descriptions are
handed down from the top where decisions are made, and the defined descriptions control the
organisation’s activities. Strategic change is likely to be slow and rational. Personal initiative is not an
attribute in the role culture. Role cultures offer individuals security, predictability and the opportunity to
acquire specialist expertise. This culture can succeed as long as it operates in a stable environment. Role
cultures are found in organisations where economies of scale are more important than flexibility and
innovation.
The task culture is about expertise where expert power is untouchable. Examples are research and
development organisations. The tasks in these organisations are technically challenging, they work cross-
functionally and the work generates dynamic interaction and intellect among the departments’ experts. This
is a team culture where the project outcome is more important than individual objectives. Influence is
widely dispersed and individuals have a high degree of control over their work. A task culture is
appropriate where flexibility, speed of reaction and sensitivity to the market or environment are important.
It is, however, difficult to produce economies of scale or great depths of expertise in such a culture.
The person culture is typical of self-help groups or partnerships. In this type of culture, the group sees
themselves as having the expertise to manage the organisation. They reject formal hierarchies of
management control or reporting structures. Members in the person culture usually work to meet the goals
and needs of their other members sufficiently. Examples include architect partnerships, doctors, lawyers
and even social groups.
17.7 Types of organisational culture

Apart from the typology just discussed, organisational culture can also be classified in various ways.
Generally, most strategic management authors identify and classify culture in terms of four broad functional
categories, namely, strong, weak, healthy and adaptive cultures.

A strong organisational culture exists where staff members respond to stimuli because of their alignment
with their deeply ingrained organisational values. In such environments, a strong culture becomes a
valuable asset, because it helps organisations to operate like well-oiled machines as they function in concert
with the chosen strategy. Research indicates that organisations may derive the following benefits from
developing strong and productive cultures:

– Better alignment of the organisation to achieving its vision, mission, and goals
– High employee motivation and loyalty
– Increased team cohesiveness among the company’s various departments and divisions
– The promotion of consistency and the encouragement of coordination and control within the organisation
– The shaping of employee behaviour at work, enabling the organisation to be more efficient

A weak organisational culture exists where there is little alignment with organisational values, because
the culture is fragmented, and control must be exercised through extensive procedures and bureaucracy. A
weak culture rarely serves as a driver for strategy implementation.
A healthy organisational culture is characterised by increased productivity, growth and efficiency and
reduced counterproductive behaviour and turnover of employees.
An unhealthy organisational culture is characterised by a politicised internal environment, hostile
resistance to change, etc. Such an organisation seldom benchmarks its practices and processes against those
of industry leaders, because it still believes that it has all the solutions. That is why resistance to change is
evident and this type of culture will make it difficult to implement a new strategy.
In an adaptive organisational culture, organisational culture fits the demands and members share a
feeling of confidence that the organisation can neutralise any threats and exploit the opportunities that
come along. An adaptive culture translates to organisational success. It is characterised by managers paying
close attention to all of their constituencies, especially customers, initiating change when needed, taking
risks, and encouraging innovation and experimentation.

17.8 Organisational culture and competitive advantage

It is a given that organisational culture stands out in strategy implementation as one of the vital components
for sustaining performance and competitive advantage. It is also a reason why an organisation becomes great.
The relationship between culture and superior financial performance has been the subject of debate for most
strategists, using microeconomics to define superior financial performance. Visionary strategists can use their
organisational culture to set themselves apart from the competition. The organisational culture affords
organisations an opportunity to create a differentiated brand, to attract and retain loyal employees, and to
build strong relationships with their customers, suppliers and partners. Superior results, which result from
some form of competitive advantage, attract competitors’ attention. They then seek whatever is thought to be
the source of the competitive advantage and success generation. Undoubtedly, given enough time and money,
competitors can with little effort duplicate almost everything that is working for that organisation. They can
lure away some of the organisation’s best people. They can re-engineer the organisation’s processes. The only
thing they cannot duplicate is the culture. That is why the organisational culture is such a strong source of
competitive advantage.
The organisational culture represents the unique core values that competitors cannot replicate. It is, however,
imperative that the organisational behaviour and actions are aligned with these core values. Recruiting and
hiring only employees that share these values and making decisions in line with these core values can
guarantee this alignment. It is clear that culture can generate sustained competitive advantage and hence long-
term superior financial performance, if important conditions are met. What are these conditions?

The culture must be valuable in the sense that it must enable things to happen, which themselves result in
higher sales, lower costs or higher profit margins.
The culture must be rare. This “scarcity” element in itself makes culture valuable.
The culture must be inimitable, i.e. it cannot be easily duplicated by competitors.

It is clear from Strategy in action 17.2 that Google experiences a competitive advantage as a result of its
specific values.

Strategy in action 17.2 Google’s values as its competitive advantage

Eric Schmidt, CEO of Google, describes Google’s culture as a competitive advantage. He spent time working with Google as a
client and found its culture and values to be very alive. Its core value lies in the statement “do no evil”. They received some
poor press for this around the time they went into China, and were struggling with the Chinese government’s attempts to
control the content that was visible to Chinese users. His experience of Google from the inside was that it treated the situation
as a true “values dilemma”. The role of a good values statement is to ensure that you ask the right set of questions. Values
create the right conversations in the many instances where a situation seems grey, not black or white. Was it more important to
provide Internet access to the Chinese people, even under restricted conditions, or not to provide it at all? Google is admired
because it has those conversations, vigorously, because it feels passionate about what it stands for. It made its decisions
within the context of the right conversation.
It is this that makes Google’s culture so strong. It seems conscious of culture all the time. Protective of it, proud of it, aware of
the responsibility it places on each one of them to do the right thing. There are not many companies who can call their culture
a competitive advantage. Most see their culture as holding them back in some way, and are focusing on how to change it. For
Google, the cultural challenge is how to preserve the culture it has as it grows.

Google’s approach to the economic downturn

As the financial crisis hit, and advertising revenues were down, Google faced the challenge of how to keep its employee-
centric culture while simultaneously making across-the-board expense cuts for the first time in its history. It had to distinguish
between the values of employee-centricity, and the perks which it had always given to employees. Schmidt says he
experienced its response firsthand. It made drastic cuts to external consultant budgets, moving within days of the crisis. Clean,
sharp, clear. He saw it demonstrating that accountability and employee-centricity can go hand in hand. Its recent results show
it has emerged even stronger from the crisis.
Once you have built a strong culture, you have a deposit of trust with your employees. You’ve walked your talk for a long time,
and they know that. Sending a message that employee benefits have to be cut, or the workforce reduced, is accepted within a
context of a strong culture and a financial crisis. But without the strong shared values, decisions like that are met with
cynicism. Schmidt claims that Google’s culture is a competitive advantage over Microsoft’s. Microsoft’s culture is also strong,
though very different from Google’s. The question for each to ask is, “Given the attributes of our culture, at what strategies are
we most suited to succeed?” This is the easier question. The more difficult one is, “Now that we need a new strategy, how do
we adapt our culture to enable us to execute it?” It is essential to address one or other question, or you will be blindsided by
the most powerful force of all – your culture.
Source: Adapted from http://www.walkingthetalk.com/google-culture-as-competitive-advantage (accessed 15 February 2013)

It is clear from the discussion so far that an organisational culture that is rare and not easily imitated can be a
source of competitive advantage. It is something that can distinguish an organisation from its competitors and
really make the difference between success and failure.

An organisational culture and leadership values are generally inseparable. This is understandable, because the
creation of any organisational culture is one of the fundamental responsibilities of strategic leaders. The
organisational culture is usually a significant revelation of the leadership’s attitudes, beliefs and values. An
organisation’s founders are particularly important in determining culture, as they often imprint their values
and leadership style on the organisation’s way of doing things. Read the case of three remarkable business
leaders and how they shaped the organisational culture in their business in Strategy in action 17.3. When an
organisation grows, recruitment of staff and the succession plans of leaders will typically be biased towards
attracting managers and employees who share in the founder’s values and belief system. Consequently, an
organisation’s culture becomes more and more distinct and concretised as its workforce becomes more
similar.

Strategy in action 17.3 Three icons and five reasons for their success

Everyone is familiar with three names in the hotel industry – Charles Forte, Sol Kerzner and Conrad Hilton. They are three
icons of our time, and developed the most majestic hotels and resorts in the world: the Hilton Group, Forte Hotels and One and
Only.
What was it that made these three so successful and influential? They did not inherit anything materially significant and it took
more than luck and financial backing to build these empires. So what are the personal attributes of these three gentlemen?

1. Succeed or starve (drive and a strong work ethic)

The Hilton family owned a general store in New Mexico, USA. Charles Forte was the son of poor Italian immigrants to the UK,
who sought better opportunities in Scotland by opening an ice cream business. Sol Kerzner’s father was a Russian immigrant
born in Troyville, Johannesburg, and there was definitely no silver spoon involved either.
All three worked for family businesses from a young age. They worked in small enterprises, and this taught them about
customer service, control, sales and the value of hard work. They learned one simple business philosophy – if you can run one
property at a profit, the same could be replicated elsewhere with a product that people love. These businessmen have an
uncompromising drive for perfection in all aspects of their business. They had little time for anything else in their lives, because
they worked long hours and expected everyone around them to do the same. It was almost like survival for them.

2. Passion and vision for the hotel industry

Everyone talks about passion, but unless it is channelled in the right direction and contains action, it is just talk. Hilton was
known for ensuring that each hotel in the group fitted the personality of its country and city. Hilton was the first international
hotel chain, and set a certain worldwide standard for hotel accommodation. Kerzner famously flew in a helicopter over the
Pilanesberg and pointed to a spot that became Sun City. He had the ability to conceive and build some of the greatest modern
hotels and resorts all over the world. His passion can actually be summarised by the saying that he did not work to make
money; he worked because he loved the hotel business. Forte loved aristocratic hotels such as the Savoy and Grosvenor
hotels in London. He was determined to purchase the Savoy and eventually did, because he argued that he could not stand to
see such a fine hotel being run so poorly.

3. Independent thought (not dancing to anyone else’s tune)

All three were extremely disciplined individuals with an independent and creative view of how they wanted things to be done.
Sol Kerzner is known for being uncompromising when it comes to hotel development and he actually knocks down whole
sections of buildings to correct errors. Conrad Hilton was equally uncompromising when it came to a deal and was a highly
disciplined man who not only had strong faith in God but also in his own ability. Charles Forte was often criticised for running a
mass catering operation. He was never deterred by his rivals’ criticism, however, and these critics had to eat humble pie when
Forte bought controlling stakes in their hotel groups.

4. Surrounding themselves with great people

These three gentlemen were aware that they could never run their businesses without hiring the best. Conrad Hilton hired
good managers and gave them the authority they needed to train and develop competent management teams and staff in
order to maintain standards and progress. He was famously loyal to his managers. Sol Kerzner would pay top rates for the
best advisors, lawyers, designers and builders, as well as managers. He would drive them relentlessly. The result was that he
was either loved or disliked, but always admired. Forte tended to nurture talent rather than simply buy it. He developed the
largest hotel group in the world, and the group developed measurable management development programmes and groomed
managers by providing further education and new challenges.

5. Persistence and courage in the face of adversity

Conrad Hilton lost his entire fortune during the American depression of the 1920s. He was retained as a manager at one of his
hotels and persisted until he bought back all seven of the hotels he had lost.
Charles Forte was arrested and detained as a prisoner of war in the UK after the Italians joined World War II. When he was
released, he returned to his business in a bombed out London. He eventually got his British citizenship, became a lord and
built a hotel empire. He never gave up living, and reached the ripe old age of 98. Sol Kerzner is probably facing one of his
greatest challenges with the worldwide recession. He has started a management company to run his hotels and resorts. Sol is
fighting every step of the way.
So it seems simple. Be born into a poor family. Work hard instead of starving to death. Find something you love to do. Think
creatively and know how to implement your ideas. Find some good people to work for you and never give up. This, coupled
with your ability to get others to believe in you and lend you money, should make you a Kerzner, Hilton or Forte. All that you
need are these five things and a little luck perhaps.
Source: Adapted from http://hospitality.co.za/three-icons-and-five-reasons-for-their-success/ (accessed 15 March 2017)

It is of paramount importance for strategic leaders to ponder and answer an important question: How can
organisational leaders and managers develop, manage and sustain a distinct culture? Pearce and Robinson
(2005) provide some guidelines for how leaders can manage and create distinct cultures:
 Emphasise the key themes or dominant values that reinforce the competitive advantage that the
organisation is seeking to build.
Encourage the dissemination of stories and legends about core values.
Institutionalise practices that systematically reinforce desired beliefs and values.
Adapt common themes such as “being the best” so that they are organisation specific.

17.9 Culture must fit the new strategy

Although the existing organisational culture is important and must be taken into consideration when selecting
a strategy, it is important to change those components of an organisational culture that may hinder successful
strategy implementation. In the next section steps will be explained that are sometimes necessary to get a
strategy–culture fit, because that will help to change the culture to support strategy implementation. The fit
between strategy and culture promotes employee identification with the organisation’s vision and strategy.
This is paramount to motivate employees to support strategy implementation activities. Pearce and Robinson
(2003) developed a matrix that can be used as a framework for managing the strategy-culture relationship.
This matrix is depicted in Figure 17.3.

Figure 17.3 A framework for managing the strategy–culture relationship

Source: Adapted from Pearce & Robinson (2003)

In cell A the organisation needs to make many changes to key organisational factors in order to implement the
new strategy. These changes are, however, incompatible with the current organisational values and norms. In
such a situation there is the challenge of a long-term orientation to change the culture, and sometimes this
seems impossible. Cultural changes are difficult to accomplish as habits and values are often deeply
embedded in the organisation and people tend to cling emotionally to the old and familiar. The question needs
to be asked as to whether all these changes are really necessary and worthwhile, and if implemented, will they
be acceptable and successful? If the answer to this question is no, then the organisation might consider
reformulating the strategy to make it more compatible and consistent with the existing organisational culture
and practices.

The situation in cell B suggests organisations that find themselves in a position where several changes are still
required in terms of structure, systems, operating procedures, etc., but where these changes are compatible
with the existing organisational culture, they seek to take advantage of their proven capabilities. The changes
necessary should link to the mission. Management must reinforce the message that the changes are linked to
this mission. Existing employees who share the values and norms must help with this compatibility as the
changes are implemented. Organisations should also focus on those changes that are the least compatible with
the existing culture to ensure that disruption does not happen in those areas.

Organisations faced with a situation where there are only a few changes required – and where these are
incompatible with the existing organisational culture (cell C) – should manage around the organisational
culture. The question being asked in this situation is whether the few changes can be made with a reasonable
chance of success. Organisations should create a way of achieving the required change that avoids
confronting the incompatibility with the existing culture by creating a separate division or making use of
subcontracting. This may help to diminish the resistance to change and increases the chance of the change
being absorbed into the organisation.

Organisations faced with a situation where there are only a few key changes in organisational factors
required, and where these changes are highly compatible with the existing organisational culture (cell D),
must reinforce the existing culture and make use of the opportunity to remove any barriers that prevent the
desired culture. The synergistic relationship between the existing culture and organisational stability must be
strenghtened. This will create the ideal situation for the implementation of the strategy.

In order to establish a tight fit between the new chosen strategy and the organisation’s culture, a change in
organisational culture may be required. To change the culture is a difficult management task, but there are
ways of achieving it.

17.9.1 Changing the organisational culture and restructuring

Changing an organisation’s culture is more difficult than maintaining it. However, effective strategic leaders
recognise when change is needed. Incremental changes to the organisation’s culture are typically used to
implement strategies. More significant and sometimes even radical changes to organisational culture support
the selection of strategies that differ from those the organisation has implemented historically. Regardless of
the reasons for change, shaping and reinforcing a new culture requires effective communication and problem
solving, along with selecting the right people (those who have the values desired for the organisation),
engaging in effective performance appraisals (establishing goals and measuring individual performance
towards goals that fit in with the new core values), and using appropriate reward systems (rewarding the
desired behaviours that reflect the new core values). Cummings and Worley (2001) recommend the following
six steps to change the culture:

1. Formulate a clear strategic vision. Effective cultural change should start from a clear vision of the
organisation’s new strategy and of the shared values and behaviour needed to make it work. This vision
provides the purpose and direction for change in the organisational culture.
2. Display top-management commitment. Cultural change must be managed from the top of the
organisation. Senior managers and administrators must be strongly committed to the new values and the
need to create constant pressure for change.
3. Model culture change at the highest level. Senior executives must communicate the new culture
through their own actions. Their behaviours need to symbolise the kinds of values and behaviours being
sought.
4. Modify the organisation to support organisational changes. Cultural change must be accompanied by
supporting modifications in organisational structure, human resources systems, information and control
systems, and management style. These organisational features can help to orientate people’s behaviours to
the new culture.
5. Select and socialise newcomers and terminate deviants. One of the most effective methods for
changing culture is to change organisational membership. People can be selected in terms of their fit with
the new culture and provided with an induction clearly indicating desired attitudes and behaviour.
Existing staff who cannot adapt to the new ways may have their employment terminated, for example
through early retirement schemes. This is especially important in key leadership positions, where people’s
actions can significantly promote or hinder new values and behaviours.
 6. Develop ethical and legal sensitivity. Most cultural change programmes attempt to promote values that
emphasise employee integrity, control, equitable treatment and job security. However, if one of the key
steps in pursuing culture change is to replace existing staff with new recruits, not only can this send out
the wrong message to newcomers and the remaining staff but, depending on how staff are selected for
replacement, it could also contravene employment laws. Therefore, organisations need to be especially
aware of these potential ethical and legal pitfalls. The important thing is that change in the organisational
culture must happen if it is required.

17.10 Summary

Culture is the way in which a business organisation performs its tasks, the way its people think, feel and act in
response to opportunities and threats, and the manner in which objectives and strategies are set and decisions
made. It reflects emotional issues and it is not easily analysed, quantified or changed. Nevertheless, it has a
key influence on strategic choice, strategy implementation and strategic change. Powerful organisational
cultures do not happen overnight, and they do not remain in place without a strong commitment by leaders
throughout the organisation, both in terms of words and deeds. It is important that there must be a tight fit
between the culture and the strategy to increase successful strategy implementation. A viable and productive
organisational culture can be strengthened and sustained. However, it cannot be “built” or “assembled”,
instead it must be cultivated, encouraged, and “fertilised”. Until the culture of an organisation is understood
properly, the challenge of strategic management in an organisation will not be grasped.

Exploring the web

Read about the culture in Google: https://www.officevibe.com/blog/7-secrets-of-googles-epic-organizational-culture

Also, read the “Ten Things Google Has Found to Be True”. https://www.whatsbestnext.com/2011/03/10-things-google-has-found-to-
be-true/
http://geert-hofstede.com/organisational-culture.html
http://www.forbes.com/sites/johnkotter/2012/09/27/the-key-to-changing-organizational-culture/

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Case study

Fascination as a culture asset: The BMW Group design philosophy

Read the following case study and answer the questions that follow below.

BMW Group

The design philosophy of the BMW Group is a reflection of corporate culture and an expression of dynamic
entrepreneurial spirit. Design culture more fittingly describes the endeavours of all those involved in the
design process. The BMW Group’s design culture is rooted in the bond between human and product, and
continuously evolves in the dynamic field of tension arising from the juxtaposition of the past and the future.

Human and product: a lifelong union

When it comes to design, the BMW Group has one pivotal aim in mind: to create emotionally charged
products with lasting appeal. The work of the BMW Group designers focuses on generating a momentum in
each vehicle that will engage people in a long-term emotional attachment. Indeed, it is the close affiliation
between person and product during the creative process that is the foundation of the BMW Group’s success.
From the initial development concept to the production-ready model, designers and engineers strive for
meaningful form and functional perfection. The customer experiences the harmonious interplay of these two
aspirations in the vehicle’s every detail.

Heritage and future: the bedrock and vision of design

BMW Group design is authentic, pioneering and sustainable. It draws its authenticity from the company’s
past and the various brand traditions. It is visionary and compelling for its sustainability concepts. The
heritage of the brand is the vital foundation without which no forward-looking design would be possible. A
long-term, ongoing chain of development embracing revolutionary leaps forward creates the force field
emanating from this dual focus on the past and the future.

BMW Group design shapes genuine personalities

Cutting-edge innovations, compelling aesthetics and an outstanding product substance make for an authentic
product personality. These values constitute the guiding principles for those involved in the creative process.

Perfection and innovation in technology and design are pivotal distinguishing characteristics of BMW Group
products. Design systematically and authentically translates function into meaningful form – a process that
spawns perfect proportions along with a fascinating and challenging formal vocabulary, from the overall
impression down to the smallest detail. The result is a product substance that can be experienced with all the
senses and engenders an emotional relationship between person and product.

This design culture creates a set of values to which all the BMW Group brands adhere. It is a shared value
perception that defines the endeavours of the BMW Group and forms the basis of the design strategy
underlying all its brands. Proceeding from this common foundation, each brand imbues it with an individual
expression and a life of its own.
The BMW Group

The BMW Group is one of the most successful manufacturers of automobiles and motorcycles in the world,
with its BMW, MINI, Husqvarna and Rolls-Royce brands. As a global company, the BMW Group operates 25
production and assembly facilities in 14 countries and has a global sales network in more than 140 countries.

In 2011, the BMW Group sold about 1,67 million cars and more than 113 000 motorcycles worldwide. The
profit before tax for the financial year 2010 was €4,8 billion on revenues amounting to €60,5 billion. At 31
December 2010, the BMW Group had a workforce of approximately 95 500 employees. The success of the
BMW Group has always been built on long-term thinking and responsible action. The company has therefore
established ecological and social sustainability throughout the value chain, comprehensive product
responsibility and a clear commitment to conserving resources as an integral part of its strategy. As a result of
its efforts, the BMW Group has been ranked industry leader in the Dow Jones Sustainability Indexes for the
last seven years.
Source: www.bmwgroup.com

CASE STUDY QUESTIONS

1. What are the fundamental bases of BMW Group’s corporate culture, and why?
2. Did its corporate culture assist the group in gaining a competitive advantage? Justify your answer.
3. How did/does BMW factor in consumer benefit from its design philosophy, if at all?
4. What are the bases of BMW Group’s unique long-term viability strategy? Justify your answer.
5. Would you describe the approach followed by BMW Group as reflecting a people-oriented approach, and
what does the action do to the organisational culture?
6. What type of organisational culture is likely to result from this management action? Explain your answer.

Strategy exercises

1. Self-evaluation exercise:

What is organisational culture?

Why do organisations need a culture?
Identify an organisation with which you are familiar and evaluate it in terms of Handy’s typologies.

2. Do you think it is a good idea for organisations to emphasise person–organisation fit when hiring new
employees?
3. What advantages and disadvantages do you see when hiring people who fit with the company’s
organisational values?
4. What is the influence of an organisation’s founders on its culture? Give examples based on your personal
knowledge.
5. How can a strong, positive culture enhance an organisation’s competitive advantage?
 PART
IV

STRATEGY CONTROL AND EVALUATION

T he last stage of strategic management is the control and review of

the strategic management process. In control it is important to
review whether what has been planned has actually been achieved. The
previous stages of strategy development and strategy implementation
determine the parameters for control. The long-term goals that have
been developed must be achieved in the strategy implementation stage.
The purpose of strategy review and control is to identify whether the
strategy has been realised. It is also important during this control stage
to implement approaches to enhance continuous improvement in the
organisation.
The strategic management process
 18 Strategic control and
improvement
KOBUS LAZENBY

LEARNING OUTCOMES

After studying this chapter, you should be able to do the following:

Understand and discuss strategic control as a component of the strategic

management process
Describe the different types of strategic control
Explain some criteria for evaluating a strategy
Design an effective strategic control system
Comment on the value of the role of the balanced scorecard in strategy
implementation and control
Understand and explain some approaches as ways of sustaining a competitive
advantage through continuous improvement
Understand ISO 9001 as a management system standard in the process of
strategic control
Identify the important link between strategy control and corporate governance

18.1 Introduction

The result of strategic management is that strategic decisions have

been taken that will have significant consequences for an organisation.
Strategy practitioners thus believe in the evaluation of strategic
decisions, because they are vital to the organisation’s well-being. It is
important that everything that was planned must be controlled. All the
preceding chapters have dealt with the phases of formulation and
implementation of strategy. This chapter deals with the last phase in
the strategic management process, namely, strategic control, evaluation
and improvement. In other words, once an effectively formulated
strategy has been successfully implemented, controlled and evaluated,
organisations need to review their strategic choices to identify how
well they have performed over the long term.

Adequate feedback on the success of strategies is the cornerstone of

effective strategy evaluation. The right information is, of course,
necessary for quality control and evaluation. Strategy control can also
be a very sensitive undertaking and must be managed with great care.
If employees’ behaviour is controlled and evaluated too closely, the
employees may become scared and control will not serve its purpose.
In this chapter the importance of strategic control as a component of
the strategic management process is discussed.

18.2 Nature of strategic control

18.2.1 Strategic control as a component of the strategic

management process
Strategic control is in essence the phase of the strategic
management process that concentrates on evaluating the
chosen strategy in order to verify whether the results
produced by the strategy are those intended. Strategic control includes
four basic activities:

Identifying the basis of the strategy – what should be achieved

Determining the actual results
Comparing the actual results with what the expected results should
be
Taking corrective action to ensure that the expected results will be
achieved
A basic strategic control framework is presented in Figure 18.1.

Figure 18.1 Basic strategic control framework

In many organisations strategic control is simply a process during

which managers evaluate how well an organisation has performed.
They tend to ask the following questions:

Have the organisation’s assets increased?

Is the profitability higher?
Is there an improvement in the productivity levels?
Is there an increase in the sales?
Is there an increase in the return on investment?

An example of effective control and its influence on profitability is

presented in Strategy in action 18.1.
 Strategy in action 18.1 Billing administration!

A major financial services company was concerned about the lack of

administration being done on its growing cellphone usage. When it reviewed all
its bills to identify saving opportunities and find new processes to ensure easy
and effective ongoing management, it was found that the organisation was
being charged for a number of contracts for which the contract period had
expired and for employees who had left the organisation. The estimated saving
on these bills was in excess of R300 000. If thorough control does not take
place in an organisation, it has a serious effect on the bottom line – the
profitability.
Source: Adapted from http://www.purchasingindex.co.za/billing-administration/
(accessed 27 April 2013)

Organisations sometimes argue that a positive answer to the questions

mentioned above prove that the strategy they are implementing is the
right one. This type of reasoning may be misleading, because the
short-term effect may be positive, but the strategy’s long-term effects
may cause problems.

Strategic control provides feedback and it may indicate that an

adjustment will need to be made in order to align the organisation
better with its environment, and to improve the likelihood of
successful strategy implementation. Strategic control results may lead
to changes in the choice of strategy, or to changes in how the strategy
is being implemented. The fact that organisations face dynamic
environments means that today’s success is no guarantee for
tomorrow’s success. Strategic control is an important component of the
strategic management process, since chosen strategies may become
obsolete as the organisation’s environment changes. Many
organisations are successful in one year, just to experience major
problems the following year. This is why strategy evaluation is so
important. Identifying and interpreting critical events or change
triggers in the external environment that require a response from the
organisation it is not always an easy process. Some reasons why
strategic control is difficult include the following trends:

The external environment has become increasingly more complex.

 It is difficult to forecast what will happen in the future.
Even the best plans of an organisation can easily become obsolete.
The lifespan of planning that has any degree of certainty is
decreasing.

It is therefore important for managers to ensure that the organisation’s

implementation activities are performed effectively and efficiently by
employees. This creates problems, because there is conflict between
control and the demands for greater flexibility, creativity and
innovation. Management must be continuously aware of deviations
from the strategic plan in order to take corrective action. Thus,
strategic control and evaluation have two focal points: firstly, to review
the content of the strategy; and secondly, to evaluate and control the
implementation process.

18.2.2 Types of strategic control

There are four types of strategic control that organisations can use:
premise control, strategic surveillance, special alert control and
implementation control. The first three are used to review the content
of a strategy and the last is used to evaluate strategy implementation.

18.2.2.1 Premise control

Any strategy an organisation is formulating is based on
certain assumptions. When analysing the external factors in
a PESTE analysis or by applying Porter’s Five Forces,
assumptions are made because organisations do not have all the
detailed information available to take into consideration. It is also
impossible to understand fully the complex environment in which the
organisation is operating. Strategy formulation premises are made and
should be evaluated to see whether they are still valid. The sooner the
validity is evaluated, the sooner an acceptable shift in the strategy can
be implemented, if this is necessary to realise the desirable outcome.
Premise control is a focused type of strategic control through which
managers evaluate those premises and assumptions that are likely to
change and those that will have a major impact on the organisation and
its strategy.

18.2.2.2 Strategic surveillance

Strategic surveillance is a type of strategic control whereby
the organisation monitors a broad range of unanticipated
events, both external and internal to the organisation, that
may affect the course of its strategy. It is an unfocused type of strategic
control and can be regarded as a loose “environmental scanning”
activity. It is based on the idea that trade magazines, newspapers and
conferences may provide important information that may influence the
strategy of the organisation. Trade magazines and newspapers are
scanned for relevant information.

18.2.2.3 Special alert control

Special alert control is a focused type of strategic control
and is the “thorough, and often rapid, reconsideration of the
firm’s strategy because of a sudden, unexpected event”
(Pearce & Robinson, 2003: 368). For example, the student protests in
2015 and 2016 triggered an immediate and intense reassessment of
strategies in higher education institutions (see Strategy in action 18.2).
After intense environmental disasters like tsunamis and volcanic
eruptions, organisations have to reconsider their strategies drastically.
The volcanic eruption in Iceland in 2010 cost airlines in Europe €160
million per day for six days. It is obvious that this event triggered a
reassessment of the strategies in the airline industry. Special alert
control is a focused type of strategic control that supports strategic
surveillance and premise control in reviewing the content of a chosen
strategy.

Strategy in action 18.2 South African universities must learn to engage

with chaos

Since the 1990s, higher education globally has experienced a new wave of
student protests – in the UK, Hong Kong, Chile, Turkey and the US, to name a
few. Although each has its own national character, scholars of protest have
identified a number of common themes. This generation of students is
 profoundly disillusioned with current democratic processes. They are angry with
neoliberalism’s “capture” of higher education and the consequences for fees
and increasing inequality. They are also critical of the ways in which a
Eurocentric, white, middle-class culture is unquestionably the norm – hence the
calls for “decolonising the curriculum”.
South African higher education experienced a rough ride in 2015 and 2016.
Whether it has merit or not, it revealed how hard universities must work in the
coming years to encourage dissent and debate; how important it is for
academics and other members of university communities to step out of their
comfort zones and listen to views with which they bitterly disagree. Universities
must engage with the chaos that has become their new reality.
It is profoundly naïve to lay the complex challenges facing higher education,
and the failure to resolve them, at any single leader’s door. Universities will
suffer the “departure of many of the best and brightest of academics”, the “loss
of donations and bequests” and so on. What the chaos pointed to more than
anything is that South Africa’s broader academic community has a long way to
go in being able to listen and engage with others who have different views to its
own.
What has happened in the past two years has exposed deep divisions in
university communities. They have always been there, but now they are visible.
The academic fraternity cannot run away from this. These divisions cannot be
shouted away. The coming years promise to be tough years as South African
universities head into the uncertain terrain of further exposing, addressing and
healing these divisions. Do not expect the chaos to be over. If universities are
to survive, they must learn to engage this uncertainty.
Source: Adapted from http://www.fin24.com/BizNews/senior-uct-academic-to-
survive-sa-universities-must-learn-to-engage-with-chaos-20161222
(accessed 21 March 2017)

18.2.2.4 Implementation control

Implementation control is the type of control that must be exercised
as various activities, initiatives and programmes occur over a period of
time. These activities include appointing key human resources,
restructuring the organisation, allocating resources and performing
different functional tasks related to the strategy. There are two types of
implementation control. The first monitors the strategic thrusts or
projects that provide managers with information regarding the success
of the strategy’s implementation process in terms of progress being as
planned, or whether any adjustments should be made. The second
reviews the milestones that will be reached during the implementation
process. This milestone review involves a thorough reassessment of
the strategy and whether the organisation should continue with its
strategic direction, or whether it should refocus. Implementation
control (a longer-term orientation) is conducted through short-term
operational controls like budgets, schedules and success factors. For
example, if the forecasted performance in terms of a key success factor
like gross profit is 40 per cent while the real performance is only 35
per cent, the deviation of five per cent should be analysed. This is a
typical example of operational control that assists implementation
control to arrive at a point where a decision should be made in terms of
the strategic direction.

18.2.3 Criteria for evaluating a strategy

Rumelt (1980) identifies four criteria that can be used to evaluate a
strategy. Although these criteria are more applicable to the choice of a
specific strategy, managers can again use them to test whether the
strategy is still on track and whether it is achieving the expected
outcome during strategy evaluation and control. These criteria are
based on an internal and an external assessment:

Consistency. An internal criterion to identify whether the strategy is

still consistent with the organisation’s goals and policies.
Organisational conflict and interdepartmental problems may be a
sign that there is inconsistency with regard to the goals and policies.
If one functional department’s success leads to the failure of another
department, there is possible strategic inconsistency. If policy
problems continue to surface, strategies may be inconsistent.
Feasibility. An internal criterion to identify whether the
implementation of the strategy is still within the limitations of the
physical, human and financial resources. Usually the financial
feasibility is the easiest to evaluate. Some of the strategic
developments may put a lot of strain on the financial resources and
should be redefined. Some skills and abilities should perhaps also be
adapted or acquired in line with the strategic expectations.
Consonance. An external criterion to evaluate whether the set of
trends or premises on which the strategy is based is still valid.
 Critical changes occur in the external environment and the strategy
should be adapted to respond to these changes.
Advantage. An external criterion to identify whether the strategy is
still effective in providing the organisation with a competitive
advantage. Organisational resources and skills are usually the main
source of competitive advantage, and this is why these aspects
should be evaluated to see whether the expected results will be
achieved.

18.2.4 Designing an effective strategic control system

In today’s turbulent business environment, organisations need to be
able to review and adapt their strategies as it becomes necessary. Thus,
organisations should also question the underlying assumptions of the
strategy to ensure that these remain valid. The main goal of a strategic
control system is therefore to identify critical events that have an
impact on the strategy. Read Strategy in action 18.1 again.

An effective strategic control system should be able to identify these

critical events so that managers can react with strategic change if the
situation calls for it. It follows that an effective strategic control system
should provide accurate and timely information and an updated, true
picture of the organisation’s performance. What are the requirements
of a strategic control system?

It must be economical – too much information is as bad as too little

information.
It must be meaningful.
It must provide timely information.
It should provide a true picture of what is happening.
It should foster mutual understanding, trust and common sense.

Although there is no ideal strategic control system, it remains true that

successful organisations will treat strategic control as a friend and as a
liberating process. The balanced scorecard can be used as a strategic
control framework or tool to ensure that critical points of strategic
control are incorporated into one system.

18.3 The balanced scorecard as strategic control

One way to increase the success rate of strategy implementation and

control is through the use of the balanced scorecard (BSC) as a
framework (see Figure 18.2).
 Figure 18.2 The Balanced Scorecard

Source: Kaplan & Norton (1996: 76)

The intention of the BSC approach is to provide a clear directive as to

what organisations should measure in order to “balance” the financial
perspective. By using the balanced scorecard, organisations can
monitor and evaluate short-term results from four different
perspectives in order to see whether the strategic goals are being
achieved in a balanced way. The BSC provides managers with the
ability to know at any point during strategy implementation whether
the chosen strategy is working. It also shows if the strategy is not
working and why it is not working.
The relationship between strategy development and the control of
strategy through the BSC is illustrated in Figure 18.3. This provides a
valuable look at the continuum of the strategic management process.

Figure 18.3 Place of the balanced scorecard

Source: Adapted form Kaplan and Norton (2004: 33)

The purpose of a strategy is to satisfy the customer and to provide

value to the customer. Quality is important for the customer, and this is
why employee empowerment and continuous improvement are so
important in this value proposition. Linking the output of the internal
business process (focus on customer satisfaction) with the financial
outcomes is actually what strategy is all about – the improved
performance of the organisation.

The balanced scorecard framework consists of the following elements:

The financial perspective – this provides the ultimate definition of

an organisation’s success. Financial objectives relate to profitability
and are measured, for example, by operating income and return on
 investment. It is quite simple – financial strategies focus on making
more money by (1) selling more and (2) spending less. Everything
else in the company is actually measured against the issue of
whether it will lead to selling more or spending less. This leads to
the two basic approaches in the financial perspective – revenue
growth and productivity.
The customer perspective. This is a focus on customers as a vital
component to improve on financial performance. In the customer
perspective, managers identify the targeted customer segments.
Customer satisfaction is at the heart of this perspective. It includes
what the organisation must do in terms of customer retention,
customer acquisition and customer profitability, and to increase the
market share. These elements are also interlinked – if customers
experience satisfaction, new customers can be acquired by word of
mouth, and the market share can be increased by customer retention.
Internal business perspective. Internal processes create and deliver
customer value. Internal processes accomplish two important
components of an organisation’s strategy: (1) they produce and
deliver the value proposition for customers, and (2) they improve
the processes and reduce the costs of the productivity component in
the financial perspective. If customers experience value, it will
improve customer and financial outcomes.
The learning and growth perspective. This describes how people,
technology and the organisational climate combine to support the
strategy and to provide the ultimate source of sustainable value
creation. It is important that organisations move away from
generalities like “develop our people” to more focused capabilities
and attributes that are required by the strategy’s critical internal
processes.

However, these perspectives should be interpreted in a chain of cause-

and-effect relationships – starting with the learning and growth
perspective. For example, to achieve a certain percentage of return on
investment (ROI) may be a financial objective. This goal may be
dependent on increasing the sales from existing loyal customers
(customer perspective), which could be dependent on providing the
desired products in time (internal business process). For employees to
be able to deliver excellent customer service, the organisation needs a
capable, motivated, enabled workforce (learning and growth). From
Figure 18.4, it is clear that private sector organisations, as well as
public sector and non-profit organisations, can benefit from the BSC
approach. In terms of the cause-and-effect relationship, an increase in
the capabilities of the human resources, the intangible assets, will lead
to an improvement in process performance, which, in turn, will result
in greater success for the customers and the shareholders. That will
help the organisation to achieve its strategy.

The BSC is more than just a collection of these four key perspectives.
To be of value, the various goals and measures of each perspective
should be consistent with and reinforce the goals and measures of the
other perspectives. Through its cause-and-effect relationships, the
balanced scorecard clarifies what actions should be taken from each
perspective in order to implement the strategy.
 Figure 18.4 Cause-and-effect relationships

Source: Kaplan & Norton (2004: 8)

As mentioned, the strategic goals within the four dimensions are

interlinked in terms of cause and effect. This causal relationship
between the performance drivers and goals allows management to
evaluate the validity of the strategy and the quality of its
implementation. If, for example, the goal of an increase in ROI has not
been achieved, but customer loyalty has increased and the desired
products were delivered in time by capable, motivated and enabled
employees, the assumption underlying the strategy may not be valid.
Management may decide to affirm its belief in the strategy, but to
adjust the quantitative relationship between the strategic measures on
the balanced scorecard. Alternatively, it may decide that in view of
new market conditions, a new strategy is required. Thus, by using the
balanced scorecard as a framework for strategic control, managers are
able to review the strategy’s content.

The balanced scorecard remains a popular management tool. It is

widely used by South African companies as a way of mapping their
strategies and then measuring their performance.

In Strategy in action 18.3, an example of a developed balanced

scorecard is given to implement a low-cost strategy.

18.4 Sustaining competitive advantage through

continuous improvement

An important issue related to strategy and achieving competitive

advantage over the long term is to perform all strategic management
activities within the context of continuous improvement. Organisations
need to continue focusing on the important building blocks of
competitive advantage. The important issues are efficiency, quality,
innovation and responsiveness to customers. In Chapter 5, these issues
were referred to as differentiation (quality and innovation), lower
prices (efficiency) and speed (responsiveness to customers).

To achieve continuous improvement, organisations must develop

distinctive competencies that will contribute to superior efficiency,
quality and innovation, and responsiveness towards customers. They
actually need to adopt and apply internal practices that help them to
achieve best industrial practices. These approaches will include
comparison with past performance and key success factors,
benchmarking, total quality management and re-engineering.

18.4.1 Comparison with past performance

A simple way to improve on internal organisational capabilities and
resources is to use the organisation’s historical experience and
performance and compare these to the current situation. Organisations
evaluate their production facilities, sales and marketing activities and
their financial capacity. They identify the capacities and current
situational performance of their facilities and compare these against
past performance, identifying whether there is an improvement or not.
Although this method presents an effective approach for continuous
improvement, management must avoid tunnel vision in using it. Using
only past performance as reference may be dangerous, because the past
performance may not have been up to standard and an improvement on
that may still not be the ideal. This is why benchmarking and a
comparison with key success factors are better monitoring methods.

Strategy in action 18.3 Balanced scorecard for low-cost strategy

Competitive pricing is a prominent feature of the low-cost strategy. An important

point must be stressed: a low price alone is not enough reason for customers to
buy the product – it must still be of acceptable quality. It can be said that
organisations following a low-cost strategy must provide products/services of
consistent quality.
 Source: Kaplan & Norton (2004: 324)

18.4.2 Comparison with key success factors

Although this topic is actually also about benchmarking, the focus is to
identify the key determinants of success (discussed in Chapter 6), and
to compare the organisation’s internal strengths and weaknesses
against these key success factors through a process of internal analysis.
By evaluating the customers’ needs and determining what will really
satisfy these needs, an organisation can identify key ingredients for
success. Comparing the internal capabilities and resources against
these success measures will motivate the organisation to improve and
meet these requirements.

18.4.3 Benchmarking
One of the best practices to apply is benchmarking. Through
benchmarking the organisation will be able to build and maintain those
resources and organisational capabilities that are vital to achieve
excellence in the industry. To be successful, organisations need to
achieve excellence in efficiency, quality, innovation and
responsiveness to customers. This can only be achieved if the
organisation compares its resources and organisationalcompetencies to
those of existing and potential new entrants, thereby determining
whether it does indeed have a competitive advantage (see Strategy in
action 18.4).

Strategy in action 18.4 To outsource or not?

A large South African mining company used benchmarking to take a decision

on outsourcing. There was mounting pressure from the executive to outsource
the catering function. In order to assist the company in its decision-making
process and provide an objective view, it benchmarked its in-house staff
catering against the market and other outsourced arrangements. The brief was
to evaluate the cost-effectiveness and efficiency of their arrangements.
The results showed conclusively that

the in-house staff restaurant was well supported and regarded highly by staff
operational costs were very competitive
staff meal pricing and subsidisation levels were also very competitive.

The benchmarking highlighted that the costs and service performance provided
by the in-house caterers far exceeded that which outsourcing could provide. As
a result of the benchmarking activity, the company averted what could have
been a very expensive mistake, both in terms of direct costs and staff loyalty.
 Source: Adapted from http://www.purchasingindex.co.za/to-outsource-or-not/
(accessed 26 April 2013)

Benchmarking is thus simply looking outside to compare

an organisation to the best organisations in the industry
using some challenging yardsticks, such as products,
services and organisational practices. Benchmarking can be defined as
a process for improving performance by constantly identifying,
understanding and adapting best practices and processes that are
followed inside and outside the organisation, and implementing the
results. By doing these comparisons, an organisation can measure itself
against key competitors in the industry or against the “best-in-class”
performers in the industry to identify how lower costs, fewer defects
and other important outcomes linked to excellence can be achieved. In
this way, benchmarking helps explain the processes behind excellent
performance. When the lessons learnt from a benchmarking exercise
are applied appropriately, it facilitates improved performance in
critical functions in an organisation or in key areas of the business
environment (see Strategy in action 18.5).

Strategy in action 18.5 Benchmarking car hire

Company A was very concerned about its deal with a car hire company. The
expenses related to hiring cars were very high. Using benchmarking principles,
Company A started to benchmark what it was paying for this service against the
industry average. After a few months, management realised that the average
benchmark rate had dropped by 18 per cent. Company A was actually paying
18 per cent too much by using this specific car hire company. Taking action
based on this opportunity, Company A renegotiated the rates it was paying to
be in line with the new market average and reduced its annual car hire spend
by more than R200 000.
Source: Adapted form http://www.purchasingindex.co.za/category/case-studies/
(accessed 23 March 2013)

Value chain analysis is an excellent approach for identifying a

company’s activities and then comparing them with those of the
competitors. Xerox, for example, was in trouble in the 1980s and
decided to apply a policy of benchmarking to establish in which
activities they could improve their efficiency. They compared over 200
different activities against comparable areas in other organisations, and
that helped them to improve their operational efficiency.
Benchmarking activities against the best organisations in the industry
demands a strong commitment from organisations and their members.
Benchmarking should be incorporated into strategy implementation
efforts by developing a policy of benchmarking and also applying the
policy in strategic control systems.

A typical benchmarking exercise is a four-stage process. Of the total

time spent on these stages, planning takes up 30 per cent, data
collection 50 per cent, and data analysis and reporting take up the
remaining 20 per cent. The four stages are as follows:

Planning. This involves identifying, establishing and documenting

specific study focus areas, key events and definitions.
Data collection. This involves the selection of appropriate data
collection tools to accumulate qualitative data and learn from the
best practices of different organisations.
Data analysis and reporting. This is the critical evaluation of
practices followed at high-performing companies, and the
identification of practices that encourage and deter superior
performance. A detailed final report is presented, which contains
key findings.
Adaptation. This entails developing an initial action plan to adapt
and implement the practices followed by high-performance
organisations.

Different types of benchmarking can be identified. Table 18.1 provides

a summary of the different types of benchmarking that can be applied
in organisations.

Table 18.1 Types of benchmarking

Type Description Purpose

 Type Description
Strategic This involves studying the long-
benchmarking term strategies and approaches
that helped the “best-practice”
organisation to succeed.
Performance Organisations consider their
benchmarking position in relation to the
performance characteristics of key
products and services in the same
industry.
Process The focus is on improving specific
benchmarking critical processes and operations.
Benchmarking will be done
against best-practice
organisations that perform similar
work or deliver similar services.
Functional Organisations benchmark
benchmarking themselves against organisations
from different organisational
sectors to find ways of improving
similar functions or work
processes.
Internal This involves benchmarking
benchmarking operations from within the same
organisation (e.g. business units
in different provinces). The main
advantage of internal
benchmarking is that access to
sensitive data and information is
easier.
External This involves analysing outside
benchmarking organisations that are known to be
the best in their categories.
Source: Riley (2012)
Purpose
The purpose is to examine
the core competencies,
product/service development
and innovation strategies of
such companies with the aim
of at improving a company’s
overall performance.
The relative level of
performance in key areas or
activities is assessed in
comparison with others in the
same industry to find ways of
closing gaps in performance.
The purpose is to achieve
improvements in key
processes in order to obtain
benefits.
This sort of benchmarking
can lead to innovation and
dramatic improvements in
activities or services.
Several business units in the
same organisation may be
examples of good practice,
and management may want
to spread this good practice
quickly throughout the
organisation.
It provides opportunities for
learning from those who are
at the at the forefront,
because there is a lack of
good practices in the internal
business units.
Another way in which organisations can achieve continuous
improvement and excellence is by applying total quality management
principles in the organisation.

18.4.4 Total quality management

Total quality management (TQM) focuses on an
organisational culture and a way of thinking and behaving in
which the focus is on customer satisfaction through the
continuous improvement of products, services and processes in the
organisation. TQM has gained the same popularity as MBO
(management by objectives). W. Edwards Deming and Joseph Juran
developed the TQM message, which was implemented in Japanese
organisations after World War II. During the 1970s, Japanese products
acquired an unquestioned reputation for their superior quality. In view
of this success, the TQM philosophy became the cornerstone of quality
programmes in many large and small organisations (Pearce &
Robinson, 2003). TQM may be defined as “a culture; inherent in this
culture is a total commitment to quality and attitude expressed by
everybody’s involvement in the process of continuous improvement of
products and services, through the use of innovative scientific
methods” (Melnyk & Denzler, 1996: 295). Following this definition, a
number of essential principles that stress the implementation of TQM
as an approach for continuous improvement can be identified:

Commitment to quality. This requires an attitude of commitment

to quality and actually acts as a preventive approach. Commitment
to quality instils a prevention orientation and acts as motivation for
an error-free approach to standards.
A clear idea of what quality means from the customer’s
perspective. This broadens the definition of quality to include
efficiency and responsiveness. This will lead to increased customer
value, because the organisation is more efficient (cost-effectiveness
leads to lower prices), and the increased focus on quality and
responsiveness leads to increased quality and speed.
Focus on the organisation’s business processes. Through the use
of scientific tools, technologies and methods, managers make
 systematic changes in processesand products.
Focus on the horizontal flow of business. This process runs from
the outside suppliers to the organisation itself, to the outside
customers of the organisation, thereby implying that suppliers are
part of the process of delivering total quality to the customers to
meet their needs.
Total involvement and a total quality undertaking. This involves
everybody in the organisation through teamwork and empowerment.
People from different functional areas in the organisation have
different perspectives, and if teamwork is used to strive for
improvement, the decision-making process is enriched. Employees
are empowered by giving them the power and authority to manage
problems in their departments and to implement solutions to these
problems.
Striving for continuous improvement. This actually refers to the
concept of kaizen pioneered by Japanese companies, which requires
the organisation and all its members to improve on something every
day. This is the key to Japanese competitive success. Improvement
should be a never-ending process. This kaizen process is about
examining the work processes and operating practices and
continuously looking for improvement opportunities. Employees are
empowered to experiment and make changes to improve quality,
and they are sometimes provided with their own limited budgets to
do so.

18.4.5 Six Sigma approach to continuous improvement

Although this approach is too comprehensive for the scope of this
book, it will be briefly explained as an important continuous
improvement approach. At the core of the Six Sigma approach is the
endeavour to achieve near perfection in every facet of the business –
from the production phase, through all the business processes, to the
transaction phase.

Pearce and Robinson (2003: 330) describe Six Sigma as a “highly

rigorous and analytical approach to quality and continuous
 improvement with an objective to improve profits through
defect reduction, yield improvement, improved customer
satisfaction and best-in-class performance”. It actually
complements the TQM philosophies and principles by focusing on
management leadership, continuous education and customers and by
deploying statistics. Like TQM, the Six Sigma approach implies a
culture of different strategies, tools and statistical analyses to improve
the bottom line – the income – of the organisation.

18.4.6 Re-engineering
Another approach to ensure continuous improvement is that of re-
engineering or business process engineering. Michael Hammer
developed the business reengineering concept (Hammer & Champy,
2014). Organisations tend to become bureaucraticover time, because
the mindsets of employees are defined by their organisational
functions (tunnel vision) rather than by a mindset of product quality,
customer service and improved organisational performance. This
tunnel vision leads to some mental “walls” – this means that
employees are so focused on their delineated functions that they lose
sight of organisational performance. The process of re-engineering is
about breaking down these functional barriers/walls and reorganising
the organisation in such a way that it creates value for customers by
providing the best-quality and lowest-cost goods and services to the
customers.

Re-engineering can thus be defined as the fundamental

rethink and radical redesign of organisational processes to
generate dramatic improvements in critical performance
measures, such as cost, quality, service and speed. It actually implies
that all the assumptions and traditions about the way business has
always been done in the past be disregarded, and that, in the place of
existing processes, a new process-centred organisation be developed
that achieves a dramatic improvement in performance. Practically, it
means to consider what is currently known about customers and their
preferences, and to develop a new organisation that will optimise the
process of creating satisfied customers. Re-engineering is not about
doing the wrong things more efficiently, because that will rarely make
any improvements to an organisation.

What types of organisations will undertake re-engineering as a process

of continuous improvement? Three generalisations can be made:

Organisations that find themselves in deep competitive trouble and

that require improvement in their operations to be able to compete
with others in their industry
Organisations with managers who are able to identify some future
problems and who want to start a re-engineering process before all
the competitive advantages they possess diminishes
Organisations with ambitious and aggressive managers that see re-
engineering as a way to position the company to extend their leading
position over their competitors

Re-engineering differs fundamentally from TQM or similar

approaches. Where TQM seeks to enhance and improve the existing
processes through ongoing, incremental improvements, re-engineering
discards existing processes entirely and replaces them with new
processes that will deliver major improvements in performance.

The typical characteristics of an organisation going through the

process of re-engineering are as follows:

Organisational processes are simplified rather than made more

complex.
People perform a broader range of tasks, meaning that job
descriptions expand and become multidimensional.
People in the organisation are empowered, as opposed to being
controlled.
The emphasis in the organisation moves away from the individual
and towards the team’s achievements.
The typical hierarchical organisational structure is transformed to a
flatter structure.
 Professional employees, instead of managers, become the key focus
points for the organisation.
The basis for measuring performance and compensation is results
and not activities.
The role and purpose of the manager changes from supervisor to
coach.
Employees no longer worry about pleasing the boss – they focus
instead on pleasing the customer.
The organisation’s value system becomes more productive.

A few guidelines can be given to help with the process of re-

engineering:

1. Always start with the customer and work backwards. The

purpose of re-engineering is to improve the customer relationship
continuously. The main purpose of existence for any organisation
is to satisfy its customers. This means that an organisation must
realign the organisation’s resources towards the goal of meeting
the needs of the customer. From an internal perspective,
employees must be inspired by the vision of what the organisation
can become.
2. Move fast. Re-engineering cannot be undertaken slowly. It should
be a dramatic, radical process. If it is not achieved quickly and
decisively, internal resistance will overwhelm and impede the
process. Experience has shown there is generally a 12-month
window of opportunity for a successful re-engineering initiative.
3. Tolerate risk. Any organisational change involves risk. In
undertaking re-engineering, employees who are by nature risk-
averse will feel threatened and disoriented. Employees must be
convinced that the greatest risk in the organisation is to stick with
the status quo and that this probably means being unemployed
very soon. This will help them to develop an appetite for trying
something new.
 4. Accept imperfections along the way. No re-engineering is
successful from the beginning. It is an iterative process in which
something new is trialled and expanded on if it works or altered if
it does not. This implies that there will be partial failures along the
way. The important key to success is thus not to avoid mistakes,
but to learn from them and move on. This must be accepted as a
normal, expected part of the process.
5. Do not stop too soon. Many organisations stop at the first hint of a
problem or suspend re-engineering when they see the first sign of
success. Both these actions are equally damaging to the long-term
success of the organisation. To really be successful in re-
engineering, the organisation should persevere and be patient.

Some of the elements in re-engineering involve decentralisation,

reciprocal interdependence and sharing information across the
functional areas. If organisations respond to the challenges of re-
engineering, they will be more focused on customer needs in terms of
better-quality, lower-priced products and increased responsiveness,
rather than on specific tasks or functional areas. However, it is
imperative that organisations approach re-engineering with a detailed
understanding of the process, commitment and strong strategic
leadership to really experience organisational performance success. It
is obvious that once better processes have been re-engineered, TQM
principles can be used to continue to improve the new processes.

18.5 ISO 9001

The quality management system standard, ISO 9001, was introduced

in the late 1980s. It is an international standard in both its scope and
impact. Organisations can register to become ISO-certified, which
gives customers the assurance that quality products and services will
be delivered. The ISO 9001 standard focuses an organisation on
processes to achieve increased customer satisfaction by emphasising
management responsibility, better resource management, product
realisation and improved measurement, documentation, assessment
and adjustment of the output. This standard delivers the requirements
for a quality management control system in which the organisation
delivers the following:

It demonstrates the ability to provide products and services that

consistently meet the requirements of customers.
Customer satisfaction is enhanced through the effective application
of the system.

Since its introduction, this standard has provided a common language

for quality in organisations. It is easily translatable and applicable
across many countries, cultures and organisations. The ultimate
purpose of this system is that the output of the organisation must
satisfy the customer.

18.6 Strategy control and corporate governance

The King IV Report on corporate governance is very clear that the

board of directors of an organisation should perform strategy reviews
at least annually. These reviews should be as objective as possible and
must be based on facts rather than opinions. The board of directors
may consider using external consultants to help with this review
process and to gather the relevant data. The following four questions
should be addressed:

Is the organisation adequately organised to execute the strategy?

Have all the decision rights been clarified and is information flow
appropriate?
Is the organisation’s strategic direction still viable, and does it
consistently correspond with the strategic vision and the
expectations of all its stakeholders?
 Is the implementation of strategy still proceeding in a satisfactory
manner?
Are there any other strategic options that must be explored at this
moment?

The primary purpose of strategy reviews and control is to force both

the organisation’s board and management to step back from day-to-day
operational concerns and to review the underlying strategic issues. By
making the reviews a formal, board-initiated process, boards adhere to
their ultimate corporate governance responsibility for strategy.

18.7 Summary

Strategic control is an essential component of the strategic

management process. It is the evaluation of the chosen strategy to
identify whether it produces the intended results of the strategy or not.
If the strategy does not increase the performance of the organisation,
some corrective action needs to be taken. The balanced scorecard was
introduced as a strategic tool that not only helps to develop and
implement the strategy, but can also be used as a strategic control
methodology.

Several approaches were discussed as strategic control practices that

can be applied to sustain and improve competitive advantage. Past
organisational performance, key success factors, benchmarking, total
quality management, the Six Sigma approach and re-engineering have
all become part of the strategic control process. The quality control
standard ISO 9001 is a mechanism to help organisations measure their
strategic effectiveness and efficiency. Strategic control is also an
important requirement in terms of the King IV Report on corporate
governance.
Strategic management is an interrelated process. Strategy
implementation depends on strategy formulation, while strategic
control depends on strategy implementation. Once strategic control has
been exercised, and corrective action is needed, a reformulation of
strategy is required, which will again have an impact on strategy
implementation decisions.

Exploring the web

About the balanced scorecard:

http://www.balancedscorecard.org/
About benchmarking:
http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard
About management tools:
http://www.bain.com/management_tools/tools_balanced.asp?groupCode=2
About TQM:
http://asq.org/learn-about-quality/total-quality-management/overview/overview.html
About Six Sigma:
https://www.toolshero.com/quality-management/six-sigma/

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Case study

Xerox – The benchmarking story

In the early 1980s, Xerox found itself increasingly vulnerable to

intense competition from different competitors. Xerox’s management
failed to give the company strategic direction and they ignored new
entrants like Ricoh, Canon and Sevin, who were consolidating their
positions in the lower-end market and in niche segments. The main
problems were the company’s high operating costs, and therefore the
high prices of its products, and the fact that its products were of
relatively inferior quality in comparison to its competitors. Xerox also
suffered from its highly centralised decision-making processes. As a
result of this, Xerox’s profits decreased from $1,15 billion to $290
million between 1980 and 1984.

In 1982, David T. Kearns took over as the CEO. He discovered that the
average manufacturing cost of copiers in Japanese companies was 40–
50 per cent of that of Xerox. As a result, Japanese companies were
able to undercut Xerox’s prices effortlessly. Kearns quickly began
emphasising a reduction in manufacturing costs and gave new thrust to
quality control by launching a programme that was popularly referred
to as “Leadership through Quality”. As part of this quality programme,
Xerox implemented a benchmarking programme. The pioneering
efforts of Xerox in the field of benchmarking undoubtedly played a
major role in pulling Xerox out of trouble in the years that followed.

The “Leadership through Quality” programme introduced by Kearns

revitalised the company. It encouraged Xerox to find ways to reduce
its manufacturing costs. After benchmarking against Japanese
competitors, Xerox found that it took twice as long as its Japanese
competitors to bring a product to market, five times the number of
engineers, four times the number of design changes, and three times
the design costs. The company also found that the Japanese could
produce, ship and sell units for about the same amount that it cost
Xerox just to manufacture them. In addition, Xerox’s products had
over 30 000 defective parts per million – about 30 times more than its
competitors. Another alarming finding was that Xerox would need an
18 per cent annual productivity growth rate for five consecutive years
to catch up with the Japanese. After an initial period of denial, Xerox
managers accepted the reality.

Xerox developed its own benchmarking model. This model involved

ten steps categorised according to five stages – planning, analysis,
integration, action and maturity:

Planning. Determine the subject to be benchmarked, identify the

relevant bestpractice organisations and select/develop the most
appropriate data collection technique.
Analysis. Assess the strengths of competitors (best-practice
companies) and compare Xerox’s performance with that of its
competitors. This stage determines the current competitive gap and
the projected competitive gap.
Integration. Establish the necessary goals on the basis of the data
collected to attain best performance; integrate these goals into the
 company’s formal planning processes. This stage determines the
new goals or targets of the company and the way in which these will
be communicated across the organisation.
Action. Implement the action plans established and assess them
periodically to determine whether the company is achieving its
objectives. Deviations from the plan are also tackled at this stage.
Maturity. Determine whether the company has attained a superior
performance level. This stage also helps the company determine
whether the benchmarking process has become an integral part of
the organisation’s formal management process.

Xerox collected data on the key processes of best-practice companies.

These critical processes were then analysed to identify and define
improvement opportunities. For instance, Xerox identified ten key
factors that were related to marketing. These were customer marketing,
customer engagement, order fulfilment, product maintenance, billing
and collection, financial management, asset management, business
management, human resource management and information
technology.

Having developed the model it wanted to use, Xerox began by

implementing competitive benchmarking. However, the company
found this type of benchmarking to be inadequate, as the very best
practices in some processes or operations were not being practised by
copier companies. The company then adopted functional
benchmarking, which involved a study of the best practices followed
by a variety of companies regardless of the industry they belonged to.
Xerox initiated functional benchmarking with a study of the
warehousing and inventory management system of L.L. Bean (Bean),
a mail-order supplier of sporting goods and outdoor clothing.

Xerox also zoomed in on various other best-practice companies to

benchmark its other processes. These included American Express (for
billing and collection), Cummins Engines and Ford (for factory floor
layout), Florida Power and Light (for quality improvement), Honda
(for supplier development), Toyota (for quality management), Hewlett-
Packard (for research and product development), Saturn (a division of
General Motors) and Fuji Xerox (both for manufacturing operations),
and Du-Pont (for manufacturing safety).

Xerox found that all the Japanese copier companies put together had
only 1000 suppliers, while Xerox alone had 5000. To keep the number
of suppliers low, Japanese companies standardised many parts. Often,
half the components of similar machines were identical. To ensure part
standardisation, Japanese companies worked closely with their
suppliers. In line with the best practices, Xerox reduced the number of
vendors for the copier business from 5000 to just 400. The company
also created a vendor certification process during which suppliers were
either offered training or explicitly told where they needed to improve
in order to continue as a Xerox vendor. Vendors were consulted for
ideas on better designs and improved customer service.

Xerox’s efforts to improve inventory management practices drew

inspiration from the innovative spare parts management practices of its
European operations. Traditionally, technical representatives decided
the level of spare parts inventory to be carried; little information was
available on the actual usage pattern of the spare parts. Xerox’s
European operations developed a sophisticated information system to
get around this problem. Actual usage, rather than mere withdrawal
from the stocking point, was used to determine inventory levels. In the
late 1980s, Xerox replicated the system in the US and saved tens of
millions of dollars in the process.

The process of benchmarking also helped Xerox to revamp its

manufacturing techniques. Each “family unit” (a manager and his
direct subordinates) was encouraged to identify its internal as well as
external customers and to meet their needs. For instance, the group that
built paper trays identified its external customer as the end-user who
would load the paper. Its internal customers were the assembly line
workers, who would combine the paper tray with hundreds of other
components to assemble the copiers. This process significantly
improved the operational efficiency of the work groups.

Xerox introduced a customer satisfaction measurement system that

integrated customer research and benchmarking activities. The
company sent out over 55 000 questionnaires monthly to its customers
to measure customer satisfaction and record competitors’ performance.
It then benchmarked against those competitors that had scored high
marks on specific measures of customer satisfaction. The company
also used the vast amount of information gathered by the system to
develop business plans for improving quality and meeting customer
needs.

As a part of its “Leadership through Quality” programme, Xerox

reformulated its quality policy. The new policy supplemented the
company’s benchmarking efforts. Xerox’s new quality policy stated:
“Xerox is a quality company. Quality is the basic principle for Xerox.
Quality means providing our external and internal customers with the
innovative products and services that duly satisfy their requirements.
Quality improvement is the job of every Xerox employee.” Following
this, the company embarked on a complete organisational restructuring
process that focused on research and development, employee
involvement and customer orientation.

By the late 1980s, benchmarking had become a day-to-day activity in

every division of the company. According to company sources,
Xerox’s guiding principle was “anything anyone can do better, we
should aim to do at least equally well”. In 1991, Xerox developed
Business Excellence Certification (BEC) to integrate benchmarking
with the company’s overall strategies. This was also done to ensure
continuous self-appraisal of the overall quality performance of the
company. The key performance factors measured by BEC were
management leadership, human resource management, customer focus,
quality support and tools, process management and business
priorities/results.

By the mid-1990s, benchmarking had been extended to over 240 key

areas of product, service and business performance at Xerox. The
initiatives were also adopted, at varying levels, at Xerox units across
the world. The benchmarking process encouraged the company’s
employees to learn from every situation. This new philosophy was
dubbed “steal shamelessly”, although the company used only those
ideas the best-practice companies willingly gave away. The salient rule
at Xerox for benchmarking was to “ask no question of another firm
that you would be unwilling to answer about your own”. This change
in attitude was just the beginning of the payoffs of the benchmarking
process.

The first major payoff of Xerox’s focus on benchmarking and

customer satisfaction was the increase in the number of satisfied
customers. Highly satisfied customers for its copier/duplicator and
printing systems increased by 38 per cent and 39 per cent respectively.
Customer complaints to the president’s office declined by more than
60 per cent. Customer satisfaction with Xerox’s sales processes
improved by 40 per cent, service processes by 18 per cent and
administrative processes by 21 per cent. The financial performance of
the company also improved considerably through the mid- and late
1980s.

Overall customer satisfaction was rated at more than 90 per cent in

1991. A summary of the benefits Xerox derived is as follows:

Number of defects reduced by 78 per 100 machines.

Service response time reduced by 27 per cent.
Inspection of incoming components reduced to below 5 per cent.
Defects in incoming parts reduced considerably.
Inventory costs reduced by two-thirds.
Marketing productivity increased by one-third.
Distribution productivity increased by 8 to 10 per cent.
Increased product reliability on account of 40 per cent reduction in
unscheduled maintenance.
Notable decrease in labour costs.
Errors in billing reduced from 8,3 per cent to 3,5 per cent.
Became the leader in the high-volume copier-duplicator market
segment.
 Country units improved sales from 152 per cent to 328 per cent.

Xerox went on to become the only company worldwide to win all

three prestigious quality awards: the Deming Award (Japan) in 1980,
the Malcolm Baldridge National Quality Award in 1989, and the
European Quality Award in 1992. Xerox Business Services, the
company’s document outsourcing division, also won the Baldridge
Award in the service category in 1997. Analysts attributed this success
to the “Leadership through Quality” initiative and, more significantly,
to the adoption of benchmarking practices.

The success of benchmarking at Xerox motivated many companies to

adopt benchmarking. By the mid-1990s, hundreds of companies had
implemented benchmarking practices at their divisions across the
world. These included leading companies like Ford, AT&T, IBM, GE,
Motorola and Citicorp. Analysts remarked that continuous
benchmarking helped companies deliver best-quality products and
services and survive competition in all businesses.
Source: Adapted from http://www.icmrindia.org/free%20resources/casestudies/xerox-
benchmarking-1.htm (accessed 2 May 2017)

CASE STUDY QUESTIONS

1. Explain the circumstances that led Kearns to adopt the

“Leadership through Quality” programme. Keeping in mind the
background of his initiatives to retain Xerox’s global
competitiveness, comment on the rationale behind the decision to
implement benchmarking practices at the company.
2. Define benchmarking and discuss the various types of
benchmarking. Explain the phases involved in the implementation
of a typical benchmarking process.
3. Describe Xerox’s benchmarking model. How did Xerox go about
implementing benchmarking practices in the company?
4. What benefits did Xerox derive from the implementation of
benchmarking practices?
 5. Why do you think benchmarking initiatives sometimes fail to give
companies the expected benefits?

Strategy exercises

1. Select an organisation with a familiar strategy. Identify what you

think were the premises for developing the strategy and what
should be used during strategic control.
2. Visit an organisation. Ask the manager what methods and
approaches it uses to improve on its performance on a continuous
basis. In this exercise it may be necessary to provide the manager
with examples on how to improve.
3. Select an organisation with which you are familiar. Apply the four
basic perspectives of the balanced scorecard and develop some
basic strategic objectives for this organisation by following a
cause–effect approach.
INDEX

A
acceptability 330
acquisitions 231
action plans 385
adaptation 350
administrative 354
advantage 455
ambiguity 176
apathetics 69
appropriateness 329
assessing 137
assets
intangible 115, 116
tangible 115, 116
authoritative
benevolent 430
exploitative 429

B
balanced scorecard 455
bankruptcy 259
barriers to entry 152, 154
behaviour formalisation 381
benchmarking 461, 462
types 463
best cost strategy 215
advantages 216
disadvantages 216
features 215
when to follow 216
best practices 389
Boston Consulting Group matrix 332
broad differentiation strategy see differentiation strategy
budgets 309, 384
business-level strategies 200,
see generic strategies
business process engineering see re-engineering
business relationships 351
buyers 158,
see also customer
bargaining power 158

C
capabilities 117, 351, 370
capacity 351
capital requirements 155
caretaker 415
case studies
BMW Group 443
British Petroleum (BP) 79
Cansa 51
Charlotte Maxeke Johannesburg Academic Hospital 323
Corrida/Tsonga 171
Dinokeng Scenarios 191
Kagiso Tiso Holdings 360
Karan Beef 297
McDonalds 132
Power Clothing 392
Rustic Furniture 335
Santie Botha 420
Takealot 20, 242
The Day Kaif 262
UCOOK 218
Vodacom 105
Xerox 470
cash cows 332
cash flow forecasting 333
causality 178
cause-and-effect relationships 457–458
centralisation 381
change 274, 344
proactive 348
 strategic 346
types 349
chief ethics officer 65
code of ethics 63
policy-based 63
principle-based 63
commitment 418, 464
communication 356, 387
competencies 330, 370
managerial 343
competitive advantage 3, 4, 38, 201, 282, 331, 435, 459
sustainable 201, 202
competitive edge see competitive advantage
competitive position 199, 329
competitive strategies see generic strategies
competitor analysis 162
competitors 161, 163
identifying 164
complexity 176
concentrated growth 225
concentration 151
concentric diversification see diversification
cone of possibilities 177
conglomerate diversification see diversification
consistency 46, 454
consonance 454
consortia 237
consultative 430
continuous improvement 389, 459, 465
coercion 357
cooperative strategies 235
cooptation 356
core competency 118, 120
core values 42–48, 430
definition 43
five-step process 47
importance 45
link with vision and mission 48
preparing 46
corporate
citizenship 70
 governance 89
definition 89, 90
King IV Report 93
social performance 70
social responsibility 69
social responsiveness 70
corporate-level strategies 221, 240
categories 223
cost-benefit analysis 333
cost leadership strategy 205, 460
advantages 207
cost drivers 206
disadvantages 208
features 206
when to follow 207
cost saving technologies 206
culture 146, 330, 374, 423,
see also organisational
culture
fit with strategy 438
levels of 427
person 433
power 432
role 432
task 433
customer 158
perspective 457
service 125
value 204

D
decentralisation 381
defenders 69
desirability 330
differentiation strategy 163, 204, 209, 240
advantages 211
disadvantages 211
features 210
when to follow 210
discretionary responsibilities 69
disinvestment 239
dissatisfaction 346
distinctive capabilities 120
distribution channel 155
divestiture 258
diversification 228
concentric 229
conglomerate 229
related 229
unrelated 229
diversity 351
dogs 332
downsizing 238
driving forces 352
dynamic capabilities 119

E
ecological environment 149, 292
economic
downturn 260
environment 143, 292
responsibilities 69
economies of scale 151, 154, 206
education 356
emergent approach 11
emerging industry 270, 271
emotional intelligence 402
emotions 403
empathy 404, 406
empowerment 370, 371, 417
benefits 372
risks 372
environment 351
global 151
industry 151,
see industry environment
macro 141,
see also macro environment
market 151, 152
task 152
environmental analysis 6, 8
external 135
 internal 109
ethical action 59
ethical awareness 59
ethical conduct 58
ethical decision making 60
model 60
approaches 61
individualism 61
justice 62
moral-rights 62
utilitarian 61
ethical individuals 63
ethical leadership 59, 63
ethical practices 412
ethical reasoning 59
ethical responsibilities 69
ethics 19, 57
and strategy 19, 76
business 57
code of see code of ethics
committee 64
descriptive 57
mechanisms and structures 62
normative 57
officer 65
training 65
evaluation criteria 454
evolution 350
exit barriers 163
exit strategies 239
external environment 137
external environmental analysis 135

F
facilitation 356
feasibility 330, 454
financial control 247
financial goals 387
financial management 127
financial perspective 456
five forces model 152
 limitations 166
fixed costs 163
focused strategy 211, 280
advantages 213
based on differentiation 211
based on low cost 211
disadvantages 213
features 212
when to follow 213
force-field 352
forecasting 137
four-scenario design 189
functional
approach 127
areas 128
structure see organisational structure
tactics 385

G
GDP see Gross Domestic Product
general administration 126
generic strategy 200, 204,
see differentiation, focus and low-cost
criticism 217
relationship to corporate strategies 240
Gini coefficient 140
globalisation 18
goal displacement 288
government 156
grand strategies 221
Gross Domestic Product 144
growth strategies 224
external 228
internal 224

H
harvest strategy 239
health care 293
health sector 291
health strategic plan 294
humility 417
human resources 126

I
industries 267,
see industry
intended strategy 364
impact analysis 334
implementation control 454
implementation framework 364
industry 151
decline 278
emerging 270
fragmented 280
growth 272
life cycle 267–270
maturity 275
inflation 144
information revolution 15
information system 387, 388
inimitability 121
innovation 16, 37
input logistics 125
institutional advantage 284–285
integration strategies 230
balanced 233
horizontal 231
vertical integration 232,
see vertical integration
interest rates 144
internal analysis 109
internal audit 127
questions 128
internal business perspective 457
internal environmental analysis 109
and strategic competitiveness 111
importance 110
investment appraisal 333
ISO 9001 468
issue 179

J
job specialisation 381
joint ventures 235

K
key performance indicators 168
key success factors(KSFs) 167, 168, 330, 461
King IV 93
and risk management 103
audit committee 99
different committees 99
governing body 97
primary characteristics 93
principles 94
Komatsu 29
Kurt Lewin’s model 352

L
latents 69
laws and regulations 59
leadership 398
charismatic 257
and corporate governance 418
servant 417
styles 415, 429
transformational 416
learning and growth perspective 457
learning and experience effects 206
learning organisation 358
legal responsibilities 69
level of returns 330
liquidation 239, 259
low-cost see cost leadership strategy

M
macro environment 141
elements 141
management
amoral 61
barrier 344
change 253
immoral 61
 moral 61
normal 250
poor 247
support 291
talent 290
turnaround 250
manipulation 356
Mankins and Steel 366
marketing 125
market development 226
market environment 151, 274
market penetration 225
master strategy 221
Mary Parker Follet 30
McKinsey 7S framework 365
merger 236
mission 35, 308, 329
components 40
definition 35
development 39
requirements 38
monetary policy 144
monitoring 137
moral duties 418
motivation 404

N
National Health Insurance Scheme 296
negotiation 356
NFP organisations see Not-for-profit organisations
Not-for-profit organisations 283
strategic questions 284

O
operations 125
opportunity see SWOT
optimal positioning 341, 346
organisation environment
drivers 14
organisational
capabilities 115, 118
 controls 413
culture 327, 412, 424
adaptive 434
aspects 428
changing 440
determinants 429
Handy’s typology 432
healthy 434
levels 427
types 433
unhealthy 434
weak 434
decline 246
direction 8
politics 327
policies 430
persuasion 347
size 431
structure 378, 430
building blocks 379
coordinating mechanisms 380
parameters of design 381
output logistics 125

P
participation 356
participative 430
payback period 333
people barrier 344
people management 371
PESTE analysis 141, 329
performance 342, 459
performance gap 341
philanthropic responsibilities 69
planning concepts 308
policies 384
authorisation 384
obligation 384
political environment 142, 292
Porter 122, 152, 197, 217, 248
portfolio analysis 332
power 357
premise control 452
prescriptive approach 10
primary activities 125
principle-agent problem 91
proactive change 348
procurement 126
product development 227
product differentiation 152, 154
productivity 13, 198
profitability 198
promoters 69
public responsibility 199
public sector 303

Q
question marks 332

R
rarity 121
RBV see resouce-based view
readiness 351
reconstruction 350
recovery 239, 244
reengineering 465, 466
guidelines 467
refreezing 354
regulatory events 351
relative market share 332
resistance 13, 346, 355
overcoming resistance 356–357
resource barrier 344
resource-based view 114
resources 115, 383
allocation 382, 384
capacity to exploit 121
human 199, 383
inimitability 121
physical 383
scarcity 121
responsible spending 305
restraining forces 352
restructuring 239, 255, 440
retaliation 156
retrenchment 238
revenue 286
revolution 350
rewards 374
components 377
processes 375
requirements 376
Richard Branson 1
risk 83, 331
compliance 84
external 84
financial 84
internal 83
management process 85
operational 84
reputational 84
responses 88
acceptance 89
avoidance 88
diversification 89
mitigation 89
transfer 88
tolerance 85
risk taker 415
rivalry 161
rules closing gap 366–367

S
satisfaction 328
scanning 137
scarcity 121
scenario
assessment 186
development 169, 174, 185
process 183
South Africa 188
end-state 183
exploration 185
 explorative 184
implementation 185
inputs 184
normative 183
preparation 185
process 184
territory 175
scenarios 179
building blocks 180
defining 181
Dinokeng 189
elements 182
when to use 181
scope 350
self-awareness 403, 405
self-motivation 404, 406
self-regulation 404, 405
situational analysis 253, 308, 316
Six Sigma 465
short-term objectives 385, 386
skills 366,
see also capabilities and core competencies
Skorokoro 188
social awareness 404, 406
social environment 145, 292
social norms 59
social skills 404, 406
socialisation 381
South Africa 144
environmental context 140
inequality 140
special alert control 452
stability 237
staff 366
stakeholders 2, 4, 67, 90
external 90
groups 68, 69
inclusivity 101
internal 90
mapping 68
needs 331
standardisation of
employees’ skills 380
work outputs 380
work processes 380
stars 332
state of equilibrium 352
storage costs 163
strategic
see also strategy
alliances 224, 236
apex 379
awareness 352
capabilities 118
change 346
areas 354
causes 351
incremental 349
process 354–359
revolutionary 349
types 349
competitiveness 3, 111
control 10, 102, 321, 450
corporate governance 468
definition 450
framework 450
system 455
types 452
goals 197,
see strategic goals
group 164
intelligence 409, 410
intent 27
leaders 397, 413
characteristics 399
transformation 416
qualities and skills 414
responsibilities 411
leadership see strategic leadership
management 2
approaches 10
benefits 12
 definition 2, 304
people involved 6
process 8
risks 14
objectives 310
opportunism 32
piggybacking 290
plan 310
planning 7
characteristics 7
positioning 26
risk 84
stubbornness 32
surveillance 452
vision 29, 32,
see vision
strategic goals 130, 197, 309, 321, 387
importance 198
plans 307
types 198
requirements 199
strategic leadership 247, 373, 397, 399
role in strategy implementation 398
roles 414
strategic objectives 310
strategy 365
alignment 282
and culture 423
and corporate governance 101
best cost 215
business 5
choice 325
control 468
cooperative 235
corporate 5
culture fit 438
differentiation 209,
see differentiation strategy
disinvestment 239
evaluation 328, 331, 334
criteria 328
 tools 331
exit 239
focused 211,
see focused strategy
formulation 6, 8, 288,
functional 5
generic see generic strategies
grand see corporate strategies
growth 224
implementation see strategy implementation
key elements 4
levels 5, 321
low-cost 205,
see cost leadership strategy
origin 3
public sector 303
review 6
selection 326
stability 237
turnaround 237
strategy implementation 6, 8, 320, 339
and corporate governance 344, 389
as component of strategic management 341
barriers 344
components 363, 367
definition 340, 344
drivers 368
instruments 368
framework 364
leadership see strategic leadership
pitfalls 369
process 367
significance of successful 340
structure 365
style 366
suboptimisation 288
subprogramme 309
substitute products 159
success groove 14
suppliers 4, 156
bargaining power 156
 support activities 125, 126
surgeon 415
sustainability 4, 71
elements 73
enablers 73
enabling conditions 74
principles of successful 73
switching costs 163
SWOT 8, 111–113, 129, 306
limitations 113
matrix 129
opportunity 112, 136
strength 111
threat 113, 136
weakness 112
synergy 331
systems 365

T
technological
advances 15
development 126
environment 148,
leadership 199
technology 351, 354
techno structure 379
threat see SWOT
threat of new entrants 153
timing 330
three-scenario design 188
Total Quality Management 464
training 381
trend 179
triple bottom line 73
triple E 73
TUNA 176
turnaround 237, 244, 250
operational 254
process 250
strategic 254
timeline 252
two-scenario design 188

U
Ubuntu 417
uncertainty 176
undertaker 416
unfreezing 353
unit grouping 382
unit size 382
unlearning 358
unrelated diversification 229
reasons 230
when to follow 230

V
value chain analysis 122—127, 462
definition 124
value(s) 121, 124, 308, 428,
see also core values
adding 4, 122
conflict 48
creation 203, 222
managerial 430
shared 366
VCA see value-chain analysis
venture capital 290
vertical integration
advantages 234
backward 159, 232
balanced 233
disadvantages 234
forward 157, 233
vision 29–34, 308, 346
barrier 344
development 33
reasons 31
risks 32
volatility 176
VRIO 120
VUCA 176
W
Warren Buffet 82
whistle-blower 65
whistle-blowing 65

X
Xerox 29