Lesson 5: Strategic Management

Strategy
Strategy helps to explain things that managers and organisations do in order to fulfil the
purpose of the organisation. Strategies should also be feasible.

A winning strategy is a strategy that:

- Links and organisation’s internal strengths and weaknesses with the opportunities
and threats from its external environment.
- Builds a sustainable competitive advantage for the organisation. A competitive
advantage can be defined as the ability of an organisation to add more value for its
customers than its rivals, and thereby attain a position of relative advantage. The real
challenge for a winning strategy is to sustain and advantage once achieved.
- Continuously seeks ways to improve organisational performance. Performance refers
to aspects such as profits, job creation, organisational goals and objectives and so on
- Meets the expectations of external and internal stakeholders
- Aligns itself with environmental requirements in a global context

Strategic management: entails strategic analysis, strategy formulation, strategy

implementation and strategic control.

4 phases of strategic management process

- Phase 1: Strategic analysis
- Phase 2: strategy formulation
- Phase 3: Strategy implementation
- Phase 4: Strategic control
Strategy analysis
Strategic analysis: the determination of the current position of the organisation by
formulating a vision, mission and analysis of the management environment.

Analyse the environment:

- Internal environmental analysis

Develop a vision Formulate the mission - External environmental analysis

statement
Develop a vision
Vison: a statement of what the organisation wants to become and where it wants to be in
future.
A clear vision statement:
- Portrays the dream that the organisation has for the future
- Promotes change within the organisation
- Forms the basis for planning and decision-making
- Provides a basis for strategic control
- Motivates individuals and facilitates the recruitment of talent
- Has positive consequences for the organisation, its internal and external stakeholders
Develop a mission statement
Mission statement: reflects an organisation’s reason for being (it has three core components:
products and/or services, market and technology of the organisation).
Every mission statement should answer at least the following critical questions:
- What is our business (what is our primary products and/or services that we offer to
our market)?
- Who are our clients (who is our primary target market/markets)?
- How will we provide this product or service (what technology will be used to provide
the primary products and services)?

In addition to the three core components of a mission statement, organisations should also
address the following components, or state them in an addendum to the mission statement:
- The organisation’s concern for financial soundness is an important factor in terms of
the sustainability and long-term survival of the organisation
- The values, ethics and beliefs of the organisation. Values, ethics and beliefs from the
basis for the way in which business is conducted, or should be conducted, in the
organisation.
- The social responsibility of the organisation. Organisations have social obligations
above and beyond making profit, Organisations are also expected to obey the law, be
ethical in their conduct and be a global corporate citizen
- The public image of the organisation. The mission statement can include the image
that the organisation wants to portray to its stakeholders.
- The organisation’s concern for all stakeholders. The mission statement should clearly
underline the organisation’s concern for its external and internal stakeholders.
- How the organisation is different form, better than, its competitors.
Organisational philosophy: the organisation’s concern for financial soundness, the values,
ethics, beliefs of the organisation, public image of the organisation, organisation’s concern
for all stakeholders and the competitive advantage of the organisation.
A mission statement should be used as a strategic tool in an organisation. This is how it
should be done:
- 1. Formulate the vision
- 2. Formulate the mission statement
- 3. Identify the key performance areas
- 4. Ensure buy-in form all stakeholders
- 5. Base individuals’ performance agreements on key performance areas.

Analyse the environment

The purpose of the internal environmental analysis is to identify assets, resources, skills and
processes that represent either strengths or weakness of the organisation.
Strengths: aspects of organisational operations that represent a potential competitive edge.
Weakness: area of the organisation operations that are in need of change or improvement.
Key areas to be assessed in the internal environmental analysis are:
- The products and/or services offered to the market
- The marketing expertise of the organisation
- All the activities of the organisation
- The human resource of the organisation
- The organisation’s financial performance
Key areas to be assessed in the external environment analysis are:
- Remote environment
- Market environment
- New trends

The purpose of the external environmental analysis is to identify opportunities and threats
in the organisation’s external environment.
Opportunities: environmental variables that can improve an organisation’s competitive
position.
Threats: environmental variables that hinder an organisation to survive or be successful.

Strategy formulation
Strategy formulation involves setting long-term goals for that organisation and then
formulating corporate and business strategies that will lead to the realisation and the long-
term goals.

Set long-term goals

Formulate corporate and business strategies:

Generic strategy and Grand strategy

Set long-term goals

Formulating long-term goals
- Goals are the general targets to be accomplished
- Objectives determine what needs to be accomplished in singular, specific and
measurable terms, with a target date.
Kaplan and Norton balance score card (BSC): measurement of organisational performance if
four areas of equal importance, namely financial performance, customer service, internal
business performance and learning and growth performance
The income statement of an organisation is often referred to as the profit and loss statement
that shows the organisation’s income, expenses and net profit for a specific financial period.
Normally a year.
A balance sheet provides a snapshot of an organisation’s financial position at a certain point
in time, showing its assets, liabilities and equity.
A cash flow statement reflects the amounts of cash moving in and out the organisation.

Formulating corporate and business strategies

After the vision and mission have been formulated, the situation analysis has been
completed and strategic goals and objectives have been set, corporate and business
strategies should be developed.

Generic strategies
Generic strategy: core idea about how the organisation can best compete in the
marketplace.

Michael Porter originally identified three generic strategies, namely:

- Cost leadership strategy
- Differentiation strategy
- A focus strategy (low-cost and differentiation)
Low-Cost leadership focus: The first generic strategy, which attempts to maximise sales of
the organisation by minimising costs per unit
Differentiation focus: The second generic strategy, which distinguishes an organisation’s
products or services from those of its competitors.
Focus generic focus: The third generic strategy, which attempts to focus on a specific product
line or a segment of the market that gives an organisation a competitive edge.

Grand strategy
A grand strategy can be described as the overall corporate-level strategy of growth and
decline. Growth strategies make aggressive attempts to increase in size through increased
sales.
Corporate growth-strategy
Corporate growth strategy: the organisation makes aggressive attempts to increase its size
though increased sales.
Corporate growth strategy options:
- Concentration growth strategy. With a concentration growth strategy, the
organisation grows aggressively in its existing line(s) of business. In other words, the
organisation continues to be in the same line of business as far as products, markets
and technology are concerned.
- Market development. A market development strategy is closely related to a
concentration growth strategy. It involves selling present products (using present
technology) in new markets by opening new outlets or attracting other market
segments.
- Product development strategy. Involves a substantial change in existing products or
additions to present products. These products are sold in existing market by using
the existing technology.
- Innovation strategy. Refers to the development of new products, services or
technologies that completely replace the existing products, services or technologies
in an industry. Organisations choosing this strategy continually search for original or
novel ideas.
 - Integration strategy. The organisation enters a forward, backward or horizontal line
or business. Forward integration occurs when an organisation enters a line of
business closer to the final customer, in other words, when an organisation takes
control of aspects related to its distribution, transport or selling. Backward
integration occurs when the organisation enters a line of business further away from
the final customer to get increased control over its supply source. In other words, the
organisation produces what it previously bought in. Horizontal integration refers to
the acquisition or merger of organisations at the same stage in the supply chain. Such
organisations may be direct competitors or they may focus on different market
segments
- Diversification strategy. The organisation can go into a related or unrelated line of
business. Related diversification is also called concentric diversification and it
involves the addition of related business in terms of product market and technology.
Unrelated diversification is also called conglomerate diversification. It involves the
addition of unrelated business in terms of product, market and technology.
- Corporate combination. An organisation can also choose to grow by means of a
corporate combination, which includes mergers, acquisitions, takeovers, joint
ventures and strategic alliances. A merger occurs when two organisations form one
new organisation by pooing all their resources. In a merger, the two organisations
simply agree to come together as one new organisation. An acquisition occurs when
one organisation all or part of another organisation for either cash or equity in the
parent organisation. One business becomes part of another existing business. When
management of the target business rejects the purchasing company’s offer, the
purchasing company through a ‘takeover’. In the case of a takeover, the acquisition is
hostile. A joint venture is created when two or more businesses join resources to
form a separate new business in which they share ownership. Equity positions are
usually taken by participants. A strategic alliance is an agreement between
organisations but does not necessarily involve shared ownership.

Corporate decline strategy

Corporate decline strategy: appropriate strategies to follow when on organisation needs to
regroup its activities to improve efficiency after a period of fast growth, where long-term
growth and profit opportunities are unavailable, where other opportunities are more
attractive or where there is a period of economic uncertainty.

Various corporate decline strategy:

- A turnaround strategy focuses on eliminating inefficiencies in an organisation.
Turnaround (or recovery) applies to an organisation or business unit that has the
potential to be efficient, nut has suffered setback in recent times. A turnaround
strategy is aimed at restoring productivity, quality and competiveness of the
organisation or business unit, by means of cost cutting and/or the reduction in non-
 core assets. A turnaround strategy may thus involve a reduction in staff, automation,
leasing rather than buying assets, and so on.
- A divestiture strategy involves the sale of a business or a major component of the
business to achieve a permanent change in the scope of operations. The intention is
to focus on more efficient divisions or business units of the organisation.
- Also termed ‘asset reduction’ a harvesting strategy refers to an organisation that
disposes of a subsidiary once it has maximised return form it with the aim to
maximise cash flow in the short run, regardless of the long-term effect
- Liquidation is the appropriate strategy to follow when no future for the organisation,
or a part of it, is envisaged. Liquidation is the ultimate exit strategy, where the entire
organisation is sold off, either as a whole or in parts of it. Liquidation may be
voluntary or, in the case of bankruptcy (where the organisation can no longer pay its
depts.), may be directed by the court. In other instances the liquidation is prompted
by management, simply wanting to harvest it and move on.

Select a corporate strategy

Different techniques available to management to help them select a corporate strategy:
- SWOT analysis: is an acronym for strengths, weaknesses, opportunities, and threats
—and is a structured planning method that evaluates those four elements of a
project or business venture.

- Business portfolio analysis: the process of determining which line or lines of business
the organisation will be in and how it will allocate resources among them.

- Boston Consulting Group growth-share matrix (BCG): a technique used to plot an

organisation’s strategic business units (or SBUs) according to its relative market
growth rate and relative market share.

The growth-share matrix is divided into four quadrants, where each represents a particular
type of business:
- Stars are those strategic business units with a relative high market share and a
relative high market growth rate. SBUs in this quadrant are the market leaders in
growth markets. Investment in these SBUs is still required in order to maintain their
growth rate and to keep their leadership position.
- Question marks are SBUs with a low relative market share and a high relative market
growth rate. These SBUs compete in high-growth markets, but their relative market
share is low. High investment is normally required for the question ark in order to
develop the unit and its relative position in the market.
 - Cash cows are SBUs with a high market share and a low market growth rate. Cash
cows are the well-established market leaders. As market growth slows down, there is
less need for a high investment in these SBUs. Consequently, these SBUs will be the
most profitable units in a portfolio of SBUs. Cash cows are normally used to fund the
SBUs in the other three quadrants.
- Dogs are SBUs with a low market share and a low market growth rate. Dogs should
be withdrawn from the market when they become loss makers.

SBUs falling into the various quadrants of the BCG matrix, call for various strategies, for
example:
o Cash cow – “milk” the SBUs categorised as cash cows and redeploy the cash
flow
o Dog – liquidate of divest and redeploy the resources or proceeds from
liquidation or divestiture.
o Star – strengthen the SBUs competitive position in a growth industry.
o Question mark – make appropriate investment in SBUs in order to secure and
improve its competitive position.

- Product portfolio analysis: the process of determine which product line or lines of
business the organisation will be in and how it will allocate resources among them.

Strategy implementation
Strategy implementation: formulate medium- and short-term goals and objectives and
institutionalise strategy

Strategy implementation phase:

- 1. Set functional goals and objective
- 2. Formulate medium- and short-term strategies.
- 3. Institutionalise strategies through:
 Strategic leadership
 Organisational culture
 Organisational architecture

Strategic leadership: leading the entire organisation.

Effective strategic leadership involves tasks such as:
- Setting the direction for the organisation strategy or combination of strategies
- Providing leadership to drive the organisation strategy or combination of strategies
 - Providing the necessary human resources for effective strategy implementation
- Managing social capital
- Building and utilising core competencies and strengths of the organisation
- Creating an alignment between organisation vision, mission, gaols and strategies
- Leading and managing change effectively

Organisational culture: the values, beliefs, norms and attitudes that bind people together
and help them make sense of the system within an organisation.

Organisational architecture
Organisational architecture: an integrated model of how the organisation is doing business.
An organisational architecture should:
- Be contained in a formal document, lending clarity to what the organisation is about.
- Refer to the key strategic drivers of the organisation.
- Relate each key aspect of the organisational architecture to the organisation itself,
thus creating a blueprint which is unique and specific to the organisation.
- Be collectively agreed upon by all constituencies in the organisation in order to attain
maximum strategic impact.
- Be communicated as widely as possible.

Strategic control: involves monitoring the implementation of the strategic plan and ensuring
quality and total effectiveness in terms of organisational performance, productivity and
management effectiveness.

The logical process for conducting the strategic management process, which is:
- 1. Strategic analysis
o Develop a vision
o Formulate the mission statement
o Analyse the environment
- 2. Strategy formulation
o Set long-term goals
o Formulate corporate and business strategies
o Select corporate and business level strategies
- 3. Strategy implementation
o Set functional goals and objectives
o Formulate medium- and short-term strategies
o Institutionalise strategies
- 4. Strategic control
o Organisational performance
 o Productivity
o Management effectiveness

NB! Outputs of the control phase serve as input to the next strategic management process

Chapter summary:
1. Differentiate between the terms ‘strategy’ and ‘strategic management’.
- A strategy is a mean to an end
- Strategic management is a process that entails various phases, namely strategic
analysis strategic formulation, strategic implementation and strategic control.

2. Discuss the various phases in the strategic management process.

- Strategic analysis. Determine the current position of the organisation by formulating
a vision, mission statement and analysing the external and internal environment of
the organisation.
- Strategy formulation. Involves the setting of long-term goals and objectives and the
selection of corporate and business strategies. A generic strategy is the core idea
about how the organisation can best compete in the market place. Porter identified
generic strategies, namely cost leadership strategy, differentiation strategy, and
focused low cost strategy and a focused differentiation strategy. A grand strategy is
the overall corporate-level strategy of growth and decline. With a corporate growth
strategy, the organisation, makes aggressive attempts to increase its size through
increased sales implementing one, or a combination of more than one of the
following strategies: concentration growth, market development, product
development, innovation, integration, diversification or corporate combination. A
corporate decline strategy is the appropriate strategy to follow when the
organisation needs to regroup its activities to improve efficiency. Corporate decline
strategies can be categorised as turnaround, divestiture and liquidation strategies.
Various techniques are available to assist management in the selection of a corporate
strategy or a combination of corporate strategies, namely the SWOT analysis and the
Boston Consulting Group growth-share matrix. Once corporate-level strategies are
formulated, business-level strategies need to be developed for each business unit.
- Strategy implementation. Involves the formulation of medium- and short-term goals
and the institutionalisation of the strategy, where the latter refers to strategic
leadership, organisational culture and organisational architecture.
- Strategic control. This phase involves the determination of the total effectiveness,
productivity and management effectiveness of the organisation.