How To Understand Strategic Thinking

MASTER OF BUSINESS ADMINISTRATION Competitive Strategy Contact details: Regenesys Business School Tel: +27 (11) 669-5000 Fax: +27 (11) 669-5001 Email: info@regenesys.co.za www.regenesys.co.za

Version Control 5.6_e_f Date of Publication: June 2014 Publisher: Regenesys Management Place of Publication: Sandton Document Change History Date Version Initials Description of Change 29 October 2012 1 LC First draft 30 October 2012 2 LC Submission of updated version 19 November 2012 3 SME review 26 November 2012 4 LC Amendments as per SME suggestions 29 November 2012 4_e LvN Editing 3 December 2012 4.1_e LC Amendments 13 January 2013 4.2_e LC Amendments 14 January 2013 5 PL Final approval 30 January 2013 5.1 LC Approved 22 July 2013 5.2_f FVS Formatting changes 14 August 2013 5.3 CT Reformatted Competitive Strategy (MBA) SG v5.2 for SC purposes and revised referencing 15 October 2013 5.3_f FVS Formatting 10 November 2013 5.4 CT Inclusion of facilitator feedback and continuous improvement 14 November 2013 5.4_e LS Editing 20 November 2013 5.4_f FVS Formatting 4 December 2013 5.5_e_f CT Inclusion of feedback academic head (MdS) 17 June 2014 5.6_e_f SK Updating template as well as the articles to Emerald This Study Guide highlights key focus areas for you as a student. Because the field of study in question is so vast, it is critical that you consult additional literature. Copyright Regenesys, 2014 All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without written permission of the publisher. Any person who does any unauthorised act in relation to this publication may be liable for criminal prosecution and civil claims for damages.

CONTENTS 1 WELCOME TO REGENESYS... 1 2 INTRODUCTION... 2 2.1 TEACHING AND LEARNING METHODOLOGY... 3 2.2 ALIGNING ORGANISATIONAL, TEAM AND INDIVIDUAL OBJECTIVES... 4 3 ICONS USED IN THIS STUDY GUIDE... 5 4 STUDY MATERIAL FOR THE MODULE... 6 5 RECOMMENDED RESOURCES... 6 5.1 RECOMMENDED BOOK... 6 5.2 RECOMMENDED ARTICLES... 7 5.3 RECOMMENDED MULTIMEDIA... 8 5.4 ADDITIONAL SOURCES TO CONSULT... 9 6 LEARNING OUTCOMES... 10 7 CONTENT SCOPE AND LEARNING GUIDANCE... 11 7.1 INTRODUCTION TO COMPETITIVE STRATEGY... 12 7.1.1 WHAT IS STRATEGY?... 12 7.1.2 STRATEGY AS PROCESS... 17 7.1.3 ADDING CONTEXT AND CONTENT TO THE PROCESS OF STRATEGIC MANAGEMENT... 19 7.1.4 PRESCRIPTIVE THEORIES OF STRATEGIC MANAGEMENT... 23 7.1.5 EMERGENT THEORIES OF STRATEGIC MANAGEMENT... 26 7.2 STRATEGIC ANALYSIS: ORGANISATIONAL PURPOSE... 29 7.2.1 ORGANISATIONAL PURPOSE... 29 7.2.2 DEVELOP A STRATEGIC VISION FOR THE FUTURE... 31 7.2.3 STAKEHOLDER POWER ANALYSIS... 34 7.2.4 DEVELOP THE MISSION... 35 7.2.5 FORMULATE A MISSION STATEMENT... 36 7.2.6 ORGANISATIONAL VALUES... 38 7.2.7 DEVELOP OBJECTIVES... 39 7.2.7 CORPORATE GOVERNANCE AND THE OBLIGATIONS OF THE BOARD OF DIRECTORS... 40 7.2.8 ETHICS AND CORPORATE SOCIAL RESPONSIBILITY (CSR)... 41 7.3 STRATEGIC ANALYSIS: RESOURCES... 44 7.3.1 ANALYSING RESOURCES AND CAPABILITIES... 44 7.3.2 RESOURCE ANALYSIS AND ADDING VALUE... 46 7.3.3 ADDING VALUE: THE VALUE CHAIN AND THE VALUE SYSTEM... 47 7.3.4 THE RESOURCE-BASED VIEW (INTERNAL ANALYSIS)... 53 7.3.5 IMPROVING COMPETITIVE ADVANTAGE... 56 7.4 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT... 58 7.4.1 EXPLORING THE EXTERNAL ENVIRONMENT... 58 STAGE 1 MARKET CHARACTERISTICS... 59 STAGE 2 DEGREE OF TURBULENCE... 60 STAGE 3 GREEN STRATEGY... 60 STAGE 4 THE PESTLE ANALYSIS... 61 STAGE 5 THE INDUSTRY LIFE CYCLE... 63 STAGE 6 KEY FACTORS FOR SUCCESS... 65 STAGE 7 COMPETITIVE INDUSTRY... 66 STAGE 8 THE COOPERATIVE ENVIRONMENT... 68 STAGE 9 COMPETITOR PROFILING... 69 STAGE 10 ANALYSING THE CUSTOMER... 70 7.4.2 THE SWOT ANALYSIS DEVELOPMENT OF STRATEGIC OPTIONS... 71 7.5 DEVELOPING A STRATEGY... 75 7.5.1 DEVELOPING THE STRATEGY: CORPORATE VS. BUSINESS LEVEL... 75

7.5.2 GENERIC STRATEGIES THE CONTRIBUTION OF PORTER... 76 7.5.3 ENVIRONMENT-BASED STRATEGIC OPTIONS: MARKET OPTIONS MATRIX... 77 7.5.4 ENVIRONMENT-BASED STRATEGIC OPTIONS: EXPANSION METHOD MATRIX... 79 7.5.5 STRATEGY EVALUATION AND DEVELOPMENT: PRESCRIPTIVE PROCESS... 83 7.5.6 THE CLASSIC PRESCRIPTIVE MODEL OF STRATEGIC MANAGEMENT: EXPLORING THE PROCESS... 87 7.5.7 WHAT IS THE STRATEGIC ROUTE GOING FORWARD?... 90 7.5.8 THE SURVIVAL-BASED STRATEGIC ROUTE FORWARD... 91 7.5.9 THE UNCERTAINTY-BASED STRATEGIC ROUTE FORWARD... 92 7.5.10 THE NETWORK-BASED STRATEGIC ROUTE FORWARD... 93 7.5.11 THE LEARNING-BASED STRATEGIC ROUTE FORWARD... 93 7.5.12 CONSEQUENCES FOR THE STRATEGIC MANAGEMENT PROCESS... 95 7.5.13 INTERNATIONAL CONSIDERATIONS... 95 7.6 STRATEGY IMPLEMENTATION... 96 7.6.1 IMPLEMENTING AND CONTROLLING THE STRATEGIC PLAN... 97 7.6.2 THE NATURE AND IMPLICATIONS OF THE IMPLEMENTATION PROCESS... 97 7.6.3 OBJECTIVES, TASK SETTING AND COMMUNICATING THE STRATEGY... 99 7.6.4 INFORMATION, MONITORING AND CONTROL... 100 7.6.5 THE BALANCED SCORECARD... 101 7.6.6 ORGANISATIONAL STRUCTURES, STYLES AND PEOPLE ISSUES... 103 7.6.7 BUILDING THE ORGANISATIONS STRUCTURE: BASIC PRINCIPLES... 104 7.6.8 THE CHOICE OF MANAGEMENT STYLE AND CULTURE... 105 7.6.9 TYPES OF ORGANISATIONAL STRUCTURE... 107 7.7 MANAGING STRATEGIC CHANGE... 108 7.7.1 WHAT IS STRATEGIC CHANGE?... 108 7.7.2 ANALYSING THE CAUSES OF STRATEGIC CHANGE... 109 7.7.3 DEVELOPING A STRATEGIC CHANGE PROGRAMME... 110 7.7.4 KOTTER S EIGHT STEP CHANGE MODEL... 111 8 REFERENCES... 113

List of Tables TABLE 1: THREE LEVELS OF STRATEGY... 15 TABLE 2: DISTINGUISH BETWEEN THEORIES... 20 TABLE 3: QUESTIONS TO SHAPE THE ORGANISATIONAL PURPOSE... 30 TABLE 4: APPROACHES TO MISSION DEVELOPMENT... 36 TABLE 5: APPROACHES TO CORPORATE SOCIAL RESPONSIBILITY... 43 TABLE 6: TYPES OF RESOURCES... 44 TABLE 7: FIVE AREAS TO EXPLOIT EXISTING RESOURCES... 56 TABLE 8: PESTLE ANALYSIS... 62 TABLE 9: LYNCH'S FOUR LINKS MODEL... 68 TABLE 10: COMPETITOR PROFILING... 69 TABLE 11: SIX EVALUATION CRITERIA... 83 TABLE 12: PROBLEMS WITH THE PRESCRIPTIVE APPROACH... 87 TABLE 13: ALTERNATIVE APPROACHES TO STRATEGY DEVELOPMENT... 90 TABLE 14: PRESCRIPTIVE PROCESS VERSUS SURVIVAL-BASED PROCESS... 91 TABLE 15: MAIN ELEMENTS OF ORGANISATIONAL DESIGN... 104 List of Figures FIGURE 1: THREE LEVELS OF STRATEGY IN AN ORGANISATION... 16 FIGURE 2: PORTER'S VALUE CHAIN MODEL... 48 FIGURE 3: A VALUE SYSTEM... 49 FIGURE 4: THE HIERARCHY OF THE DEVELOPMENT OF COMPETITIVE ADVANTAGES... 54 FIGURE 5: ANALYSING THE STRATEGIC ENVIRONMENT... 59 FIGURE 6: PORTER S FIVE FORCES OF COMPETITIVE POSITION... 67 FIGURE 7: CUSTOMER ANALYSIS... 70 FIGURE 8: SWOT ANALYSIS... 71 FIGURE 9: PORTER'S GENERIC STRATEGIES... 76 FIGURE 10: ANSOFF MATRIX... 79 FIGURE 11: EXPANSION MATRIX... 80 FIGURE 12: ADL MATRIX... 86 FIGURE 13: MAIN ELEMENTS OF THE IMPLEMENTATION PROCESS... 97 FIGURE 14: FOUR ELEMENTS OF IMPLEMENTATION... 98 FIGURE 15: CASCADING THE CORPORATE GOAL TO DIVISIONAL/FUNCTIONAL LEVELS... 99 FIGURE 16: THE BALANCED SCORECARD... 101 FIGURE 17: ORGANISATION STRUCTURE AND PEOPLE ISSUES... 103 FIGURE 18: MANAGE STRATEGIC CHANGE... 109 FIGURE 19: KOTTER S EIGHT-STEP CHANGE MODEL... 111

1 WELCOME TO REGENESYS Have a vision. Think big. Dream, persevere and your vision will become a reality. Awaken your potential knowing that everything you need is within you. Dr. Marko Saravanja At Regenesys we help individuals and organisations achieve their personal and organisational goals by enhancing their management and leadership potential. We approach education and development holistically, considering every interaction not only from an intellectual perspective but also in terms of emotion and spirituality. Our learning programmes are designed to transform and inspire your mind, heart and soul, and thus allow you to develop the positive values, attitudes and behaviours required for success. Having educated more than 100 000 students based in highly reputable local and international corporations across more than 160 countries since the inception of Regenesys in 1998, we are now one of the fastest-growing and leading institutions of management and leadership development in the world. Regenesys ISO 9001:2008 accreditation bears testimony to our quality management systems meeting international standards. Regenesys is accredited with the Council on Higher Education. Our work is rooted in the realities of a rapidly changing world and we provide our clients with the knowledge, skills and values required for success in the 21st century. At Regenesys you will be treated with respect, care and professionalism. You will be taught by business experts, entrepreneurs and academics who are inspired by their passion for human development. You will be at a place where business and government leaders meet, network, share their experiences and knowledge, learn from each other and develop business relationships. You will have access to a campus in the heart of Sandton, with the tranquillity of a Zen garden, gym and meditation room. We encourage you to embark on a journey of personal development with Regenesys. We will help you to awaken your potential and to realise that everything you need to succeed is within you. We will be with you every step of the way. We will work hard with you and, at the end, celebrate your success with you. Areas of Expertise Regenesys Business School 1

2 INTRODUCTION An organisation s results are, in part, the consequences of the decisions made by its leaders. The framework that guides and focuses these decisions is called strategy. The purpose of competitive strategy is to build a distinctive and sustainable competitive advantage over an organisation s rivals. A competitive strategy answers the following questions: How do we define our business today and how will we define it tomorrow? The intensity of competition in an industry determines its profit potential and competitive attractiveness; so in what industries or markets will we compete? How will we respond to the competitive forces in these industries or markets (in terms of suppliers, rivals, new entrants, substitute products, customers)? What will our approach be to attaining competitive advantage (through lower prices, greater differentiation, niche positioning)? What size or market position do we plan to achieve? What will our focus and methods be for growth (will it be to increase sales or grow profit margins internally or by acquisition)? Most businesses have competitive strategies. However, many strategies are implicit, in that they (often organically) evolve over time, rather than as a result of a process of explicit thought and planning. Implicit strategies have generally been shown to lack focus, result in inconsistent decisions, and become obsolete. Most organisations that do not have well-defined strategies (prescriptive or emergent) are found to be driven by the pressures of current operational imperatives rather than by planned future visions. The three key elements of strategic planning: 1. Developing a strategy for business growth requires you to deepen your understanding of the way your business works and its position relative to other businesses in its market. As a starting point, you need to ask the following three questions: o Where is our business now? This involves understanding as much about the business as possible, including how it operates internally, what drives its profitability, and how it compares with its competitors. In considering these factors it is important to be realistic, detached and critical. o Where do we want to take it? You need to set out your top-level goals. Work out your vision, mission, goals, values, techniques and objectives. Where do you see your business in 5 or 10 years? What do you want its focus to be and what do you regard as its source of competitive advantage in the marketplace? Regenesys Business School 2

o What do we need to do to get there? What changes will you need to make in order to deliver on your strategic objectives? What is the best way of implementing those changes? What changes to the structure and financing of your business will be required and what goals and deadlines will you need to set for yourself and others in the business? While the second question (Where do we want to take it?) is at the heart of the strategic planning process, it can only be considered usefully in the context of the other two (where is our business now and what do we need to do to get there). 2. You should balance your vision for the business against the practical realities of your current position. You need to take into account the implications of any changes, such as increased investment in capital and other resources. A strategic plan needs to be realistically achievable. 3. You should implement the strategic plan. Many organisations invest time and money in the development of a strategic plan but fail to follow through by implementing the plan. Remember, a plan has little value if it collects dust on a shelf. Hold various people accountable for the implementation of the strategic plan and monitor progress against the objectives and targets on a regular basis. 2.1 TEACHING AND LEARNING METHODOLOGY Regenesys uses an interactive teaching and learning methodology that encourages self-reflection and promotes independent and critical thinking. Key to the approach utilised is an understanding of adult learning principles, which recognise the maturity and experience of participants, and the way that adult students need to learn. At the core of this is the integration of new knowledge and skills into existing knowledge structures, as well as the importance of seeing the relevance of all learning via immediate application in the workplace. Practical exercises are used to create a simulated management experience to ensure that the conceptual knowledge and practical skills acquired can be directly applied within the work environment of the participants. The activities may include scenarios, case studies, self-reflection, problem solving and planning tasks. Training manuals are developed to cover all essential aspects of the training comprehensively, in a user-friendly and interactive format. Our facilitators have extensive experience in management education, training and development. Please read through this Study Guide carefully, as it will influence your understanding of the subject matter and the successful planning and completion of your studies. Regenesys Business School 3

2.2 ALIGNING ORGANISATIONAL, TEAM AND INDIVIDUAL OBJECTIVES This module will draw on a model developed by Regenesys Management, which demonstrates how the external environment, the levels of an organisation, the team and the components of an individual are interrelated in a dynamic and systemic way. The success of an individual depends on his/her self-awareness, knowledge, and ability to manage successfully these interdependent forces, stakeholders, and processes. The degree of synergy and alignment between the goals and objectives of the organisation, the team and the individual determines the success or failure of an organisation. It is therefore imperative that each organisation ensures that team and individual goals and objectives are aligned with the organisation s strategies (vision, mission, goals and objectives, etc.); structure (organogram, decision-making structure, etc.); systems (HR, finance, communication, administration, information, etc.); culture (values, level of openness, democracy, caring, etc.). Hence, an effective work environment should be characterised by the alignment of organisational systems, strategies, structures and culture, and by people who operate synergistically. Regenesys Integrated Management Model Regenesys Business School 4

3 ICONS USED IN THIS STUDY GUIDE Icons are included in the study guide to enhance its usability. Certain icons are used to indicate different important aspects in the study guide to help you to use it more effectively as a reference guide. The icons in this study guide should be interpreted as follows: Definition The definitions provide an academic perspective on given terminology. They are used to give students a frame of reference from which to define a term using their own words. Video clip or presentation This icon indicates a hyperlink to a video clip or presentation on the subject matter for discussion. It is recommended that students follow the link and listen to or read the material it provides. In a nutshell This icon indicates a summary of the content of a section in the workbook and is used to emphasise an important issue. Self-reflection Students complete the self-reflection activity in their own time. It requires students to think further about an issue raised in class or in the learning material. In certain instances students may be required to add their views to their assignments. Note This icon indicates important information of which to take note. Examples The example icon is used to indicate additional text that illustrates the content under discussion. This includes templates, simple calculations, problem solutions, etc. Interesting source to consult The source icon is used to indicate text sources, from the internet or resource centre, which add to the content of the topic being discussed. Calculations This icon indicates mathematical or linguistic formulae and calculations. Tasks The task icon indicates work activities that contact students must complete during class. These tasks will be discussed in class and reflected upon by students and facilitators. E-learning students can use these tasks simply to reinforce their knowledge. Regenesys Business School 5

4 STUDY MATERIAL FOR THE MODULE You have received material that includes the following: Study Guide; Recommended reading; and Assignment. These resources provide you with a starting point from which to study the contents of this module. In addition to these, other resources to assist you in completing this module will be provided online via the link to this module. Guidance on how to access the material is provided in the Academic Handbook, which you will receive when registering for this module. 5 RECOMMENDED RESOURCES A number of recommended and recommended resources have been identified to assist you in successfully completing this module. 5.1 RECOMMENDED BOOK The following book is highly recommended for this module: 1. Lynch, R. 2012, 'Strategic Management', 6 th ed., Cape Town: Pearson Education Limited. It is highly recommended that you order, or download, your textbook before you start with the module. Regenesys Business School 6

5.2 RECOMMENDED ARTICLES o Blumentritt, T. 2006, 'Integrating strategic management and budgeting', Journal of Business Strategy, 27 (6), 73-79. o o o Brandenburger, A.M., and Nalebuff, B.J. 1995, 'The right game: use game theory to shape strategy', Harvard Business Review, July-August 1995, 57-71. Brannback, M. (n.d.) 'DSS Rethinking Strategic Management', http://www.syros.aegean.gr/users/tsp/books/ewg6/01malin.pdf (accessed online 28 October 2012). Conbbold, I., and Lawrie, G. 2002, 'The development of the Balanced Scorecard as a strategic management tool', http://www.2gc.co.uk/pdf/2gc-pma02-1f.pdf (accessed online 16 November 2012). o Hansen, M.T., and Birkenshaw, J. 2007, 'The innovation value chain', Harvard Business Review, 1-13, https://blog.itu.dk/kmp-e2008/files/2008/08/theinnovationvaluechain.pdf (accessed online 14 November 2012). o Khalifa, A.S. 2008, 'The strategy frame and the four Es of strategy drivers', Management Decision, 46 (6), 894-917. o Kim, W.C., and Mauborgne, R. 2002, 'Charting your company s future', Harvard Business Review, June 2002, 77-83. o o o o o Mason, R.B. 2007, 'The external environment s effect on management and strategy: a complexity theory approach', Management Decision, 45 (1), 10-28. Mele, D., and Guillen, M. 2006, 'The intellectual evolution of strategic management and its relationship with ethics and social responsibilities', http://www.iese.edu/research/pdfs/di-0658-e.pdf (accessed online 14 November 2012). Mindtools.com, 2012, 'Porter s generic strategies: choosing your route to competitive advantage', http://www.mindtools.com/pages/article/newstr_82.htm (accessed online 29 October 2012). Porter, M. 2006, 'Michael Porter asks and answers: why do good managers set bad strategies', http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594 (accessed online 28 October 2012). Sandhya, K., and Kumar, D.P. 2011, 'Employee retention by motivation', Indian Journal of Science and Technology, 4 (12), 1778-1782, http://www.indjst.org/index.php/indjst/article/view/30326/26258 (accessed online 18 June 2014). Additional articles that may prompt discussions and further assist you in completing this module will be saved on Regenesys Online under the relevant module. Please visit the site regularly to access these additional sources. Regenesys Business School 7

5.3 RECOMMENDED MULTIMEDIA 1. Boutellier, R. (n.d.) 'Basic types of organisational structure' [Article with embedded slides] http://www.tim.ethz.ch/education/courses/courses_fs_2008/course_gm1_fs_2008/05_basic_types_of_organisat ion_.pdf (accessed online 3 December 2012). 2. Change management consultant.com, 2012, 'John Kotter leading change: how leaders successfully transform business' [Article with embedded video clips] http://www.change-management-consultant.com/john-kotter.html (accessed online 16 November 2012). 3. Duesrst, A. 2011, 'Strategic change processes Managed Holistically' [Video] http://www.youtube.com/watch?v=x25- hmr6dqy&playnext=1&list=pl2405fe1a247a2caf&feature=results_main (accessed online 29 October 2012). 4. Lynch, R. (n.d.) 'What is strategic management?' [Article with embedded slides] http://www.globalstrategy.net/what-is-strategic-management/ (accessed online 18 June 2014). 5. Warren, K. 2012, 'Strategic Management Dynamics' [Video] http://www.youtube.com/watch?v=qcu0if8dpek (accessed online 30 October 2012). Regenesys Business School 8

5.4 ADDITIONAL SOURCES TO CONSULT As a higher education student, you are responsible for sourcing additional information that will assist you in completing this module successfully. Below is a list of sources that you can consult to obtain additional information on the topics to be discussed in this module: Emerald NetMBA: MindTools: Brunel Open Learning Archive: ProvenModels: 12manage.com: Alliance Online: The Free Management Library: The Charity Village: TEDx This is an online database containing journal articles that are relevant to your modules. Please refer to the attached Emerald manual to assist you to download required articles. Information on how to access Emerald is provided in your Academic Handbook. You will receive access to the database once you register as a student. This is one of several web sites that provide a selection of MBA constructs and discussion. It is one of the better of these addresses. http://www.netmba.com/ MindTools.com is a very useful source of ideas, constructs, management models, etc with even more useful commentary and description. http://www.mindtools.com/ A Brunel University support-site that provides an easily accessible library of ideas, concepts, constructs techniques, tools, models, etc. http://www.brunel.ac.uk/ ProvenModels' Digital Model Book presents digitalised management models categorised in a clear, consistent and standardised information structure to improve the usability and reusability of management literature. Management models are important generalisations of business situations when applied in context and are powerful tools for solving business issues. http://www.provenmodels.com/ This is a website on which one can access numerous models as well as global comments on the models and principles. This could also serve as a place for you to voice your ideas and get feedback from all over the world. http://www.12manage.com/ The Alliance for Non-profit Management's general introduction to strategic planning is built around 15 questions that cover just about all aspects in brief (click on Strategic Planning.) http://www.allianceonline.org/faqs.html The Free Management Library can be used to improve your organisation, and for your own personal, professional and organisational development. This is by far the most comprehensive overview of all aspects of strategic planning covering all stages of the process. http://www.managementhelp.org/np_progs/sp_mod/str_plan.htm A series of 12 very short articles by Ron Robinson, an independent Canadian consultant, appeared on Charity Village between November 2001 and October 2002. These articles are refreshing in that they do not advocate a one best way for all types of nonprofit organisations. They discuss various ways of approaching the strategic planning process. https://charityvillage.com/topics/management/planning/strategic-planning.aspx?page1424=2 The TEDx programme (Technology, Entertainment and Design) was created to help communities, organisations and individuals to spark conversation and connection through local TED-like experiences. It includes topics from science to business to global issues in more than 100 languages their mission is to spread ideas ("to make great ideas accessible and spark conversation"). https://www.ted.com/about/our-organization Regenesys Business School 9

There are many more sites and articles available that can help you to successfully complete this module. You are encouraged to post the website addresses or URLs of any additional interesting sites that you come across on the Regenesys Learning Platform. In this way, you can assist other students to access the same wonderful information that you have discovered. A word of caution not all information available on the Internet is necessarily of a high academic standard. It is therefore recommended that you always compare information that you obtain with that contained in accredited sources such as articles that were published in accredited journals. 6 LEARNING OUTCOMES Upon completing this module, participants should be able to: Understand and interrogate the context of competition, corporate strategy and relevant theories; Analyse, formulate and implement strategy in different business environments for achieving competitive advantage; Apply and review investigative skills in understanding industry strategies; Select and apply different strategic analytical tools and techniques for leveraging organisational strategy; Formulate and explain strategies for managing competitive and co-operative dynamics; Develop business plans and devise systems aimed at efficient management within global markets; Distinguish between corporate and business strategy; and Understand corporate governance and the roles and obligations of the boards of directors. Regenesys Business School 10

7 CONTENT SCOPE AND LEARNING GUIDANCE A number of topics will be covered to assist you in successfully achieving the learning outcomes of this module. It is important to study each of these sections to ensure that you expand your knowledge in the subject and are able to complete the required assessments. The sections that will be dealt with include: Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Introduction to Competitive Strategy Strategic Analysis: Organisational Purpose Strategic Analysis: Resources Strategic Analysis: External Environment Developing a Strategy Strategy Implementation Managing Strategic Change A more detailed framework of what is required for each of these topics follows under each section heading. The content that follows will guide you towards the relevant chapter in your recommended textbook as well as additional articles to be consulted. A number of questions to probe discussion and guide you towards comprehension and insight are also provided. The timetable under each section heading provides guidance on the time to be spent to study each section. It is recommended that you follow the given timetable to ensure that you spend the appropriate amount of time on each section. Following the timetable will ensure that you have covered the required sections relevant to each assignment and have appropriate time to prepare for the examination. Regenesys Business School 11

7.1 INTRODUCTION TO COMPETITIVE STRATEGY Timeframe: Learning outcome: Recommended reading: Multimedia: Section overview: Minimum of 10 hours Understand and interrogate the context of competition, corporate strategy and relevant theories Brandenburger, A.M., and Nalebuff, B.J. 1995, 'The right game: use game theory to shape strategy', Harvard Business Review, July-August 1995, 57-71. Brannback, M. (n.d.) 'DSS Rethinking Strategic Management', http://www.syros.aegean.gr/users/tsp/books/ewg6/01malin.pdf (accessed online 28 October 2012). Lynch, R. n.d., 'What is strategic management?' [Article with embedded slides] http://www.global-strategy.net/what-is-strategic-management/ (accessed online 18 June 2014) In this introductory chapter, we provide an overview of competitive strategy by defining key concepts. We also introduce the broad competitive strategy frameworks including the 'prescriptive' and 'emergent' approaches that guide strategic analysis and the development of strategies. 7.1.1 What is Strategy? Whilst the definition of 'strategy' is relatively simple a plan of action designed to achieve a longterm or overall aim when we think in terms of 'competitive strategy' several competing definitions emerge. Strategic management: "This has at least three definitions. First, the identification of the purpose of the organisation and the plans and actions to achieve that purpose. Second, the identification of market opportunities, coupled with experimenting and developing competitive advantage over time. Third, the pattern of major objectives, purposes or goals and the essential policies or plans for achieving those goals." (Lynch, 2012: 830) Company strategy: "A strategy reflects a company s awareness of how, when and where it should compete: against whom it should compete; and for what purposes it should compete." (Pearce and Robinson, 2011:3-4) Competitive strategy: "Long-term action plan that is devised to help a company gain a competitive advantage over its rival. Competitive strategies are essential to companies competing in markets that are heavily saturated with alternatives for consumers." (Business Dictionary, 2013) Offensive competitive strategy (as opposed to defensive): "A type of strategy that consists of actively trying to pursue changes within the industry generally investing heavily in technology and research and development in an effort to stay ahead of the competition." (Investopedia, 2013) Regenesys Business School 12

Warm-up Task Questions What are the commonalities and differences between the definitions provided above? In your own experience of business, what does strategy mean, and what does competitive strategy mean? Is there a difference? Consider the following example of offensive vs defensive competitive strategies and then answer the questions that follow: "Assume Company X is in the publishing industry. The industry is undergoing significant changes in terms of technology and distribution. An offensive competitive strategy for Company X might involve investing capital in developing and patenting new distribution technology, as well as diversifying into more attractive markets; a defensive competitive strategy, on the other hand, might involve waiting a few years to see "where the chips fall" in terms of readership preferences and then adopting whatever technology is the cheapest or most popular." (Financial Dictionary, 2013) Based on the example, what are the key factors that differentiate offensive from defensive strategies? Evaluate the following statement: "Companies that pursue offensive competitive strategies are trend-setters, however it is an expensive strategy." Integrate your understanding of 'risk and reward' from your financial management module to assist you in your evaluation. Companies that acquire other companies to create some forward or backward integration or eliminate competitors are often pursing competitive strategies. Do you agree that strategic actions are strong indicators of the strategies that organisations are pursuing? Justify your response by citing examples. The concepts of 'purpose' and 'competitive' are synonymous with most definitions and therefore it is useful to explore these in more depth. Perhaps one of the most respected explanations of purpose derives from Peter Drucker and it is worth reflecting on this in terms of strategy. Organisational purpose: A business is an organisation that adds value and creates wealth. Value is created for customers and wealth is generated for owners. (Drucker in Watson, 2002) While there are many definitions of organisational purpose (and you should be open to but critical of these), Drucker does point toward the connections between strategy and purpose if the purpose of organisations is to add value and create wealth, then strategies must be formulated to achieve these ends. Regenesys Business School 13

Task Questions Using your own research, define organisational purpose. Explore some of the more recent trends, e.g. "greening" and add these to your understanding of purpose. Think systemically about organisational purpose across industries and economies. How does this change the way that you think about purpose? Organisations exist in a competitive environment (e.g. even not-for-profit organisations are competitive they compete for donor funds, and governments too compete they compete for foreign direct investment). Consider the concepts of 'competition' and 'competitive advantage'. Direct competition: These are organisations that produce the same or very similar goods in the same industry, which may or may not be differentiated. Indirect competition: Occurs when organisations compete for the $ of expenditure, although the organisations might be in different sectors of the same market or different markets. Competitive advantage: "The significant advantages that an organisation has over its competitors. Such advantages allow the organisation to add more value than its competitors in the same market." (Lynch, 2012:822) Sustainable competitive advantage: "An advantage over competitors that cannot be easily imitated. Such advantages will generate more value than competitors have." (Lynch, 2012:830) Task Questions Brainstorm organisations from several industries. Identify their direct and indirect competition, and their likely competitive advantage. From your list of organisations, identify examples of organisations with sustained competitive advantages. Compare your understanding of 'sustainable competitive advantage' with the example given below. Coca-Cola's competitive advantage has proven its sustainability over the last 100 years Coca-Cola's sustained competitive advantage can be ascribed to: 6. "The secret recipe for Coca-Cola, which arguably tastes better than other cola drinks. 7. Their ability to continue developing new products and re-inventing old ones (Coca-Cola currently offers over 400 brands in 200 markets worldwide) 8. The world's most comprehensive distribution system has made Coca-Cola accessible to billions of people worldwide. Coca-Cola is often available in ample supply to people in areas where other consumer goods companies would never consider delivering their products. The African continent is an excellent example it's fairly common to see a small shop selling cold Coke in the middle of nowhere. 9. Coca-Cola's production techniques are so well developed that it costs a fraction of the selling price to manufacture their product, resulting in high profit margins." (Author unknown, n.d.) Regenesys Business School 14

Levels of strategy Bhasin (2010) differentiates between three levels of strategy. These are outlined in Table 1 and Figure 1. Table 1: Three levels of strategy Corporate level Business level (Strategic Business Units) Functional support Decisions made by Board of Directors/Chief Executive Officers Responsibility for organisation s financial performance and the achievement of nonfinancial goals (e.g. green objectives) Decisions reflect concerns of shareholders Visionary, goal-setting, and purposeful (philosophy of the organisation) Decisions made by Business and Corporate Managers (i.e. across SBUs) Responsible for translating the strategic direction set at the corporate level into concrete objectives and individual business unit strategies Decisions are made at this level with regard to market segments and how the company will compete in its selected product-market arenas Decisions help bridge decisions made at the corporate and functional levels (middle-updown) Decisions made by Functional Managers Responsibility for supporting the SBUs in executing the organisation s corporate vision, goals and philosophy Decisions address issues such as efficiency, effectiveness, quality and service levels in order to increase market share (Adapted from Bhasin, 2010) Corporate level strategy is responsible for the highest level of strategic decision-making it includes decisions about fulfilling the organisation's vision (i.e. the purpose), corporate goals, and organisational philosophy (the value orientation which is conceptual and less concrete than decisions at the business or functional levels). The concept of 'middle-up-down' applies here the business level is responsible for translating corporate level decisions to the functional level and they are responsible for co-ordinating the feedback from the functional level to the corporate level. In this model, Strategic Business Units (SBUs) serve discrete, independent product/market segments and are supported by functional departments (e.g. IT, Finance, Marketing, etc.). This suggests that different strategies are required for different product groups. Each SBU sets its own strategies to ensure the best use of organisational resources given the environments in which it operates. The corporate level assists the SBUs to define their scope of operations by either limiting or enhancing the SBUs operations in accordance with corporate strategy (vision, goals, and philosophy). Corporate strategy relates to the 'what' (the shape) and business unit strategy relates to the 'how' (execution). Corporate strategy defines the business in which a company will compete focussing its resources on converting distinctive competence into (sustainable) competitive advantage. Regenesys Business School 15

Functional strategy refers to the generic business functions of IT, Finance, Marketing, Research and Development, Human Resources, and where applicable Manufacturing. Decisions here are referred to as 'tactical' the use of budgeted resources for optimal contribution to the achievement of the SBUs and corporate level goals. There is integrity in the whole. Systemically all parts of the whole are affected by the actions of the individual parts. Figure 1: Three levels of strategy in an organisation Strategy Corporate Strategy Business unit strategy Func9onal strategy Vision Mission Informa9on systems Corporate goals Business goals Finance Philosophy Competencies Marke9ng Research and development Human Resources Manufacturing (Bhasin, 2010) Why is systems' thinking an important concept in strategy formulation and execution? What are the consequences of inappropriate SBU strategy formulation on corporate goals and functional resources? Regenesys Business School 16

7.1.2 Strategy as Process Lynch (2012:7-8) describes strategic management as: The identification of the purpose of the organisation and the plans and actions to achieve that purpose finding market opportunities, experimenting and developing competitive advantage over time. Dealing with major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments. (Lynch, 2012:7-8) This suggests that strategy requires several processes and is on-going. Broadly, strategic management requires three processes (Lynch, 2012:15): Strategic analysis entails the examination of the organisation, its mission and goals; how value will be created (stakeholder analysis including the relationship with the environment); competitor analysis and resource analysis. Strategy development entails strategic options (development and selection). This may be built on the competencies in the organisation or to be acquired; and includes special relationships including suppliers, customers, distributors and government. In most cases there are several competing options, which require careful selection (i.e. to ensure sustainable competitive advantage). Strategy implementation is the realisation of the options. Options can range from the simple (e.g. same product in same market) to the more complex (e.g. new products in new markets). Various complications may have to be overcome, e.g. power relationships, funding, government restrictions, offensive strategies from direct competitors, etc. Keep the above framework in mind as you work through this Study Guide. Regenesys Business School 17

Derived from the elements of strategic management outlined above, Pearce and Robinson (2011:3) propose eight core tasks, notably they combine the resource-based view with an assessment of the external environment. 1. Formulate vision (and mission) 2. Analyse internal conditions and capabilities (resource-based view) 3. Assess external environment 4. Identify most desirable options, i.e. match resources with external environment 5. Select long-term objectives and grand strategies 6. Develop annual objectives 7. Implement choices budget, resources, tasks, people, structures, technologies and reward systems 8. Evaluate the success Strategic management, in its many forms, has significant benefits for the organisation. Some of these benefits are listed below: Gives direction to the whole organisation; Defines what the organisation wishes to achieve; Makes management more aware of change, opportunities and threats; Is a rational basis for the allocation of resources; Helps management co-ordinate decisions (creating integrity between the parts); Promotes a pro-active management style; Helps identify threats before they damage the organisation; Reduces gaps and overlaps between teams and individuals; Assists in reducing resistance to change (guided by purpose); and Assists with monitoring managers performances. (Adapted from Saleeth, 2010) 1. Reflect on your own organisation what are the benefits of strategic management at a corporate level, business level and at the functional level? 2. What are the consequences of poor strategic thinking at each of these levels? For an extended overview of strategic management, read and watch the following: Lynch, R. (n.d.) 'What is strategic management?' [Article with embedded slides] http://www.globalstrategy.net/what-is-strategic-management/ (accessed online 18 June 2014). Regenesys Business School 18

7.1.3 Adding Context and Content to the Process of Strategic Management For the successful implementation of a sustainable strategy, decision makers must consider both content and context (e.g. strategy formulation post 2008/09 is unlikely to be the same as pre the financial downturn). Compare the following: Context: This refers to the context in which the strategy is being proposed i.e. the environment (e.g. global, macro, and micro; present and future trends, etc.) Content: The actions required for the implementation of the strategy (e.g. changes to the debt/equity ratio; divestiture, acquisition, existing/new products, existing/new markets, R&D, merger, international expansion/fdi, etc.) Process: The interplay between the three core areas strategic analysis, strategic development and strategic implementation. It also describes how the strategic process will impact on the context (e.g. change the playing field) and how content will impact on process. (Lynch, 2012:17-19) In most strategic management situations, the context and content are reasonably clear/predictable; it is the process that causes the problems because people are at the heart of processes. Evaluate the strength of this argument (challenge the assertions). Linking the three core areas Different academic arguments arise in terms of the development of strategy. Two predominant viewpoints include the prescriptive approach and the emergent approach: The prescriptive approach (pre-determined and sequential) A prescriptive strategy is one whose objectives have been defined in advance and whose main elements have been developed before strategy implementation commences (Lynch, 2012:19). The three core areas follow sequentially, i.e. strategic analysis, strategic development then strategic implementation. The emergent approach (emerge and overlap) An emergent approach is one whose final objective is unclear and whose elements are developed during the course of its life (i.e. as strategic implementation progresses). The theorists of this approach often argue that long-term prescriptive strategies are of limited value (Lynch, 2012:19). The processes of strategic development and strategic implementation overlap. Strategic analysis is followed by trial and error experimentation and the strategy development and implementation processes are altered accordingly. Regenesys Business School 19

Table 2 summarises the difference between prescriptive and emergent strategic management. Table 2: Distinguish between theories Prescriptive Strategic Management 1. Objectives defined in advance and main elements developed before the strategy commences 3. Objectives may be adjusted if circumstances change significantly 5. After defining the objective, the process then includes analysis of the environment, the development of strategic options and the choice between them. 6. The chosen strategy is then implemented. Emergent Strategic Management 2. Final objectives are unclear and elements are developed as the strategy proceeds 4. No single final objective strategy develops over time 7. Allows for experimentation about the strategy to take place. 8. It enables flexibility in order to respond to changes in the environment (Lynch, 2012:17) Task Questions 3.1 Identify examples of why a prescriptive strategic management approach is preferable/not preferable to an emergent approach. 3.1 Discuss the likely challenges associated with each approach? Task questions short case studies Read the short case studies below and answer the question that follow. Prescriptive strategy to build a world airline Singapore Airlines Widely regarded as one of the world s leading airlines, Singapore Airlines started as a small regional airline in 1972. With the backing of the Singaporean government, the company chose to use prescriptive strategies to build its market position. But the outcomes for the company have not always been as predictable as assumed by prescriptive strategists. When the Prime Minister of Singapore, Mr. Lee Kuan Yew (now the distinguished Senior Minister of that country), led his country to break away from the Malaysian Federation in 1965, he realised that a relatively small country of 6 million people needed a strong and distinctive strategy if it was to survive and grow. His government allowed the existing airline Malaysian-Singapore Airlines to continue until 1972. At that time, both his government and the government of Malaysia judged that it would be better if the airlines of the two countries followed the distinctive paths set by their separate countries. Two airlines, Malaysian Airlines System (now called Malaysian Airlines) and Singapore Airlines were therefore founded. This case focuses on Singapore Airlines but acknowledges that Malaysian Airlines has also built a major international airline in the period up to 2008. Regenesys Business School 20

From its foundation to the present, the Singapore government has held a controlling share (57 per cent through a company called Temasek Holdings) in Singapore Airlines. The government has therefore been at the centre of the development strategy of the airline. In 1972, the airline had a fleet of 10 aircraft, a staff of 6,000 and a route network of 22 cities in 18 countries. By 2007, the airline was recognised as one of the world s leading airlines with a fleet of 89 aircraft serving 90 destinations in 40 countries. The company also had 16 more aircraft on order and options on another 45 spread over the years 2008-12. Importantly, its operations base in Singapore Changhi Airport was widely regarded as one of the most modern and smooth-running aircraft hub operations in the world. In addition, Singapore Airlines had a strong service reputation with customers based on its use of modern aircraft, attractive in-flight food and extensive provision of in-flight entertainment. What were the strategies that led to this level of success? The following prescriptive strategies were undertaken for the development of Singapore Airlines on the important assumption that significant growth in world travel would continue: From the beginning, the airline decided that it would build a reputation of superior service to its rivals. Thus, it introduced free drinks, hot towels and headsets from the outset in 1972 such amenities are relatively cheap and quick to introduce. In more recent years, it was one of the first airlines to offer in-flight entertainment screens at each individual seat even in economy class. Substantial investment in staff training, employee welfare and related activities. Singapore Airlines took the view that staff was crucial both to in-flight service delivery and also to aircraft safety through expertise in ground and related operations. Equally, as aircraft design changed and in-flight service operations became more complex, the airline recognised a need to update continuously, especially its knowledge and expertise in these areas. The investment in a modern fleet of aircraft with a policy of always seeking out the latest in terms of technology and aircraft design. For example, the airline introduced the new ultra long-range Airbus A340-500 aircraft in 2004. These planes permitted, for the first time, non-stop flights from Singapore to Los Angeles. Equally, Singapore Airlines was also the first airline to operate the new Jumbo Passenger Jet the A380-800, which was expected to revolutionise long-distance air transport, beginning in the year 2007. Such a prescriptive strategy carries a number of risks for example, will the aircraft design actually work? Will it prove acceptable to customers? Will it deliver the cost savings planed? Development of a modern airport at its main base in Singapore Changhi Airport couples with the related strategy of ensuring that the airport became an efficient handling facility for rival airlines. This would encourage other airlines to base their services at Changhi when seeking stopover locations on long-haul flights between continents of the world. Co-operation with other airlines through code-sharing and ticket marketing arrangements to make it easier for customers to travel around the world and to lock them into certain airlines rather than rivals. For example, Singapore Airlines operated code sharing with Scandinavian Airline Systems (SAS) in 1999. In the following year, Singapore joined the Star Alliance, which included not only SAS but also the leading German company Lufthansa, and the major American airline, United Airlines. Co-operation was taken further, with attempts to buy into rival airlines Singapore unsuccessfully tried to acquire stakes in South African Airways and the Australian airline Ansett in 2000. It then acquired a 49 percent shareholding in Sir Richard Branson s Virgin Airlines in year 2000 for US$980 million. The prescriptive strategy assumption that growth in world travel would continue was cast into doubt by two major events. The company s profits suffered twice in consequence. In 2001, the disastrous attack of September 11 in America caused a major downturn in world air travel. Singapore Airlines was forced to make cuts 180 pilots and 415 ground crew lost their jobs. In 2003, the fears associated with the highly infectious SARS virus had a severe impact on air travel, especially to Asian destinations, including Singapore. Regenesys Business School 21

The company was forced to cut back nearly 360 flights per week at one stage during that year. Later in the decade, two further developments were predicted to have an adverse impact on passenger numbers. First, the substantial increase in fuel costs and second the greater awareness of the impact of air travel on global warming. More generally, the predictions needed for the prescriptive strategies outlined above were subject to increased uncertainty due to events outside the control of the company. This does raise the question of whether it is appropriate to rely on prescriptive approaches when outside events can clearly undermine the outcome. (Lynch, 2009:41-42) Emergent strategy at Virgin group Under the strong and populist leadership of its chief executive, Sir Richard Branson, Virgin Group pursued an emergent and more opportunistic strategy to build a company with estimated annual sales of over US$10 billion by 2007. Starting from nothing in 1968, the Virgin Group tried a series of strategies over the next 30 years. Its aim was to find opportunities to grow the business on the basis of what became the Virgin brand name and on the strong reputation of its founder and chief executive. The strategic trial-and-error process was essentially emergent, rather than prescriptive this case outlines some of the main strategies with Virgin s successes, failures and continuing business developments. Background to the early years After an experimental launch of a student magazine, the young Richard Branson developed a small record mail-order business in 1969 to take advantage of the end of resale price maintenance in the UK. He opened his first record shop two years later and subsequently developed it into the Virgin Megastore chain. At the same time, he was attempting to develop a record label by signing up various pop artists of the time. None of these businesses possessed any clear competitive advantage, though arguably contractual rights to popular musicians and the Virgin brand itself had some real value. He continued to seek business opportunities using the Virgin brand and, by chance, met up with an entrepreneur wishing to develop an airline business. This eventually led to the Virgin airline business with its first route to New York in 1984. In later years, the company moved into a variety of business ventures from Virgin Bride and Virgin Cola to Virgin Trains and Virgin Mobile telephones. In terms of its strategy, Virgin Group claims to examine business opportunities carefully, seeking an opportunity for restructuring the market and creating competitive advantage. Virgin Group s underlying business strategy The company has developed its strategy over a number of years. Essentially, Virgin takes the view that there are always opportunities available for the hungry business executive. The underlying business logic has been summarised by Branson thus: Business opportunities are like buses there s always another one coming along. In practice, what this means is that Virgin examines new opportunities to see if the group can offer something better, fresher and more valuable than existing companies. It looks particularly at markets where the existing customers are not always receiving value for money and where the existing companies have in some cases become complacent trains, insurance and banking for example and where new technology (e.g. the Internet, Smart phones, etc.) might deliver a business opportunity. This means that the main thrust of the strategy has been to find new market opportunities where the company believes its brand name can create competitive advantage. Contrary to what people may think, our constantly expanding and eclectic empire is neither random nor reckless. Each new business demonstrates our skill at picking the right market and the right opportunity, says the Virgin website. Regenesys Business School 22

Outcome of emergent strategies: Virgin focuses on geographical expansion In the last few years, Virgin has focussed its strategy on geographical expansion of its existing product portfolio rather than adding products. For example, it has taken its highly successful concept of Virgin Mobile telephones to other countries beyond its UK base. However, it remains opportunistic in its main product areas for example, its bid to rescue the failed UK bank Northern Rock in 2007. The strategy continues to emerge both into new countries and into new product areas. (Lynch, 2009:46) Task questions 1. Explain why Singapore Airlines Strategy is considered to have a prescriptive strategic approach and Virgin Group, by contrast, has adopted an emergent approach to strategy. 2. How appropriate is it to rely on prescriptive approaches when outside events can clearly undermine the outcome? Relate your response to Singapore Airlines as well as any other relevant organisation. 3. Analyse the process, context and content of the Virgin Group. 4. Examine how the 'opportunistic' strategic approach continues to benefit the Virgin Group. 5. What is an appropriate strategic management approach for your organisation? Justify your response. 7.1.4 Prescriptive Theories of Strategic Management Lynch (2012:45-51) differentiates between four different prescriptive theories, which are outlined below. Industry- and environment-based theories of strategy (externally focussed) These theories includes: Profit-maximising, competition-based theory A strategy that is primarily (but not exclusively) driven by the objective of maximising profitability in the long-term A belief based on profit being obtained by selecting the most attractive industry and then competing better than other organisations in that industry One of the most popular models that support this theory is Porter's Five Forces (he maintains that the industry in which the organisation chooses to compete and the way that it competes in that industry are the prime determinants of its long-run profitability). We will review this model later in the Study Guide. In general, many of the other models that support this approach remain largely Western and Anglo-American in their orientation. It is argued that they are primarily concerned with profit and leave only limited room for social, cultural, governmental and other considerations (Lynch, 2012:47). Countries with high social content such as France, Poland, the Netherlands and Scandinavian countries do not find this approach appealing. Regenesys Business School 23

"These nation-state arguments are, however, a matter of degree and they do not deny the need to make long-term profits in order to ensure the survival and growth of the enterprise." (Lynch, 2012:47) When all companies use the prescriptive approach (e.g. Porter's Five Forces) there is information symmetry. To some extent this reduces the advantages that some organisations may have enjoyed in the past, with only the largest most powerful organisations able to sustain their advantages (e.g. through barriers to entry). Resource-based theories of strategy (internally focussed) Includes: Concentration on the chief resources and capabilities of the organisation, especially where the organisation has a competitive advantage. Competitive advantage comes from the organisation s resources and capabilities rather than the environment within which the company operates. This approach does not mean that all the resources of an organisation will deliver competitive advantage but the core will. Examples include physical resources such as plant and machinery, people resources such as leadership and technical know-how, and most importantly how these resources combine to create value. Arguably, organisational knowledge is a competitive advantage provided that it continues to remain relevant. Some strategists go so far as to say that this might be the only resource that will continue to provide sustainable competitive advantage. Game-based theories of strategy This includes theories: Based on mathematical models of options and choice coupled with the theory of chance; That recognise a simple choice of best strategy will have implications for other companies such as suppliers and competitors; That attempt to model the consequences of each choice and thereby allow the choice itself to be modified as the game progresses; and That support on-going anticipation of competitive responses and possible counter-moves in the search for optimal strategy. As the above suggests, game theory attempts to explore the interaction between an organisation and others as the decision is made the game. Regenesys Business School 24

Co-operation and network theories of strategy These strategies include those that: Focus on formal and informal relationships that can be built to develop strategic management such as strategic alliances and joint ventures; Co-operative strategy theory, where at least two independent companies work together to achieve an agreed objective; and Network theory where the focus rests on sharing networks of personal contacts, knowledge and influence both inside and outside the organisation. A franchise is a form of co-operative strategy in which an organisation (the franchisor) develops a business model and then offers it to others (the franchisees) in return for royalties (contractual arrangement). Read more about game theory and strategy in the following article and then complete the task questions that follow. Brandenburger, A.M., and Nalebuff, B.J. 1995, 'The right game: use game theory to shape strategy', Harvard Business Review, July-August 1995, 57-71. Task Questions After reading the journal article above: 1. Explain the concept of 'competition' and use examples to demonstrate your understanding. 2. Examine the following statement, "The game of business is all about value: creating it and capturing it." 3. Critically evaluate the framework created by the authors that draws on the insights of game theory. 4. Draw a Value Net for your organisation and determine how to change the game. Evaluate the strengths and weaknesses of this approach. Regenesys Business School 25

7.1.5 Emergent Theories of Strategic Management Emergent theories have no long-term strategic plan and are more flexible. Strategies are located within the environment that changes with them. The planning is more short-term, reactive and entrepreneurial. Lynch (2012:53-58) distinguishes between four sets of emergent strategy theories: Survival-based theories of strategy These theories: Regard the survival of the fittest company in the market place as being the prime determinant of strategic management; Explore how to survive in an environment that is highly competitive, shifting and changing; Propose that strategy emerges as the organisation attempts to dodge and weave with market changes; and Argue that differentiation and efficiency are important to respond effectively to environmental changes. Uncertainty-based theories of strategy These theories: Argue that prediction is regarded as impossible because of the inherently unstable nature of business and its environment; and Propose that strategy should be allowed to emerge and change with fluctuations in the environment. Human-resource-based theories of strategy These theories: Encourage the people element in strategy development is emphasised; Pay careful consideration to elements such as motivation, politics, desires and the culture of the organisation; Focus on the difficulties that can arise as a result of the need for change and uncertainty; and Suggest that strategy would benefit from an element of experimentation and learning that empowers individuals. Regenesys Business School 26

Innovation and knowledge-based theories of strategy These theories: Stress the value of radical new strategic thinking in order to move ahead of rivals; and Emphasise that the sharing of knowledge (collective wisdom) through the Internet may be an important part of the process. The case study, The Virgin Group, is an example of the sharing of new ideas and an innovative approach to business strategy. For more information on different strategic management theories, read the article indicated below: Brannback, M. (n.d.) 'DSS Rethinking Strategic Management', http://www.syros.aegean.gr/users/tsp/books/ewg6/01malin.pdf (accessed online 28 October 2012). Recap Questions 1. Use the research platforms available to you (e.g. EBSCO) and read widely on the topic of 'Competitive Strategy'. Draw your findings together to define the concept using examples to support your position. 2. Based on your research, discuss what constitutes effective strategic management keeping in mind the type of industry, context and content. 3. Conclude by reflecting critically on how organisations can follow both prescriptive and emergent strategies. Substantiate your thinking. Regenesys Business School 27

Important: At Masters Level, National Qualifications Framework (NQF) Level 9, you must be able to present a text that is guided by the framework described below. Knowledge content (factual, conceptual and procedural knowledge) Understanding/explanation (definitions, theories, models, relationships, frameworks, processes/procedures) Application (use of knowledge for a specific purpose, e.g. citing of explained examples) Analysis (breaking down/segmenting into parts and describing how the parts relate to the whole in examples given) Synthesis (drawing together of the discussion to formulate conclusions) Evaluation (making of judgements based on specific criteria and/or standards) Insight (recognising components of a new structure, creating something new, demonstrating insightful and original thought) Students will be penalised both in the assignment and examination by failing to demonstrate the above. Applying synthesis, evaluative competence, and providing insights (original thought) will significantly elevate the quality of your submissions but only if these are supported by the early stages in the framework (e.g. knowledge, understanding, application and analysis). If you are unsure as to the requirements for answering questions at NQF Level 9 please revert to your facilitator or academic head for guidance. Regenesys Business School 28

7.2 STRATEGIC ANALYSIS: ORGANISATIONAL PURPOSE Timeframe: Learning outcomes: Recommended reading: Multimedia: Minimum of 15 hours 1. Analyse, formulate and implement strategy in different business environments for achieving competitive advantage 2. Understand corporate governance and roles and obligations of the boards of directors 3. Mele, D., and Guillen, M. 2006, 'The intellectual evolution of strategic management and its relationship with ethics and social responsibilities', http://www.iese.edu/research/pdfs/di- 0658-E.pdf (accessed online 14 November 2012). 4. Warren, K. 2012 'Strategic Management Dynamics' [Video] http://www.youtube.com/watch?v=qcu0if8dpek (accessed online 30 October 2012). In the past, strategy was considered to be primarily concerned with maximising the wealth of its shareholders earning above average returns. This is now considered to be too simplistic a view because it does not clearly take into account the other stakeholders both in and outside the organisation. Today, organisations are being shaped by more systemic factors including: Section overview: 10. The values of the organisation 11. The power of the stakeholders including the shareholders 12. Corporate governance obligations, ethics and corporate social responsibilities Organisations are increasingly having to face up to environmental consequences (green issues) and social issues after all as Drucker states a business enterprise is an organ of society and that there is only one valid definition of business purpose: to create a customer (Drucker in Watson, 2002). 7.2.1 Organisational Purpose An organisation s strategic purpose concerns identifying and defining its vision, mission and goals. According to Lynch (2006:343-345), six questions must be answered to shape the purpose of the organisation. These questions are prescriptive in their approach in that they assume that clear answers can be given. Arguably, emergent approaches will also be needed if the organisation is to develop its purpose successfully. These questions are discussed in the table below. Regenesys Business School 29

Table 3: Questions to shape the organisational purpose What is the focus of the organisation? The purpose of the organisation needs to be focussed based on its resource capacity. A small company might, for example, focus on one market, growing steadily within that market before branching out to bigger and better things, e.g. a narrow focus with limited range of products and/or services. A large organisation, however, might focus its resources and efforts across multiple markets with a diversified set of products and services. This question relates to the human resources of the organisation and includes choices in two related areas: What kind of organisation does it want to be? How important are the stakeholders and shareholders of the organisation? Does the organisation want to grow? What is the relationship with the organisations immediate environment and with society in general? How are all these considerations brought together? Organisational culture Organisational challenges (those that the employees of the organisation need to face) Organisational culture is defined by its values. These values are then reflected in the ways in which the organisation conducts its business and deals with its clients and employees. Organisational purpose and the established values combine to impact on the working styles of the employees. Stakeholder analysis (e.g. level of impact/influence and interest) should be evaluated when defining purpose. Arguably, the larger the company the less influence the shareholders have on the decisions made by senior management in the organisation senior management will hold more power. Consequently, senior management are likely to exert greater influence over the purpose and direction of organisational strategy. Conversely, major shareholders who are not part of senior management will exert more influence over purpose and strategy. Some organisations may be content to sustain their current market share. The decision on growth is an important one but entirely dependent on the organisation and its environment the choice is not automatic. Purpose cannot be set without some consideration of the environment within which the organisation operates. For example, government may dictate an adjustment in purpose to focus increasingly on renewable energy resources such as solar power. At the centre of the above is Strategic Intent. The phrase strategic intent captures the essence of the purpose of the organisation. (Adapted from Lynch, 2006:112) It is useful to expand on the concept of 'strategic intent' originally conceived by Hamel and Prahalad in 1989 against the backdrop of the dramatic post-war ascent of Japanese companies. They argue that strategic intent was at the core of this success the Japanese had ambitions that the West considered to be highly unrealistic in terms of resources and capabilities. The Japanese created an obsession to win and sustained this at all levels in the organisation that led to a 10 to 20 year quest for global leadership. Regenesys Business School 30

The concept is based on the following three attributes of strategic intent: direction, discovery and destiny: Sense of direction implies a point of view about the long-term (decade or more) market or competitive position that an organisation hopes to build. Sense of discovery implies a competitively unique point of view about the future (holds out to employees the promise of exploring new competitive territory). Sense of destiny implies an emotional edge; a goal that employees perceive as inherently worthwhile. The process that reflects strategic intent consists of three important steps (Hamel and Prahalad in Value Based Management, Author Unknown, 2013): Set the strategic intent (including all three characteristics stated above) Set the challenges (e.g. think of the smartphone industry, the strategic intent of Apple's competitors might be to come up with a smartphone that is cheaper than Apple but as innovative) Empowerment of the strategic intent (creating an environment conducive to success; capture the "wisdom of the anthill"; utilise new ideas from across the whole organisation) Task Questions Although Lynch (2006) incorporates 'strategic intent' into his framework (Table 3), what is inherently different about Hamel and Prahalad's original proposition? Critically evaluate the inclusion of stakeholders in strategy formulation. 7.2.2 Develop a Strategic Vision for the Future According to Louw and Venter (2012:110), a vision statement can serve as a guide to an organisation by providing direction of purpose and by indicating the core ideology to be preserved. Lynch (2012) takes this definition further: Vision is "a challenging and imaginative picture of the future role and objectives of an organisation, significantly going beyond its current environment and competitive position. It is often associated with an outstanding leader of the organisation." (Lynch, 2012:831) Regenesys Business School 31

Some examples of corporate vision statements are provided below: Avon: To be the company that best understands and satisfies the product, service and self-fulfilment needs of women globally. Epson is committed to the relentlessness pursuit of innovation in compact, energy-saving, highprecision technologies, and through the formation of group-wide platforms will become a community of robust businesses, creating, producing, and providing products and services that emotionally engage customers worldwide. The Gillette Company s Vision is to build Total Brand Value by innovating to deliver consumer value and customer leadership faster, better and more completely than our competition. Pfizer: We will become the world's most valued company to patients, customers, colleagues, investors, business partners, and the communities where we work and live. Lynch (2012:226-227) refers to five reasons why organisations should develop a strategic vision: Vision refers to an organisation s ambitions that go well beyond the immediate future and any full investigation of purpose needs to explore this vision. The organisation's mission and objectives may be stimulated in a positive way by the strategic options that are available from a new vision. There may be major strategic opportunities from exploring new development areas that go beyond the existing market boundaries and organisational resources. These require a vision that deserves insightful exploration and development. Simple market and resource projections for the next few years will miss the opportunities opened up by a whole new range of possibilities, such as new information technologies, biogenetics, environmental issues, new materials and lifestyle changes. Virtually every organisation will feel the impact of these significant developments. Merely, extrapolating the current picture is unlikely to be sufficient. Vision can provide a desirable challenge for management across the organisation. 1. Reflect critically on your own organisation's vision (or an organisation with which you are familiar) in terms of the 5 points given by Lynch (2012) above. 2. How important is it to get the vision 'right'? Regenesys Business School 32

Organisations that have a vision statement should evaluate it regularly. Dolak (2003) provides a useful set of questions to evaluate the effectiveness of a vision statement: Does it identify direction and purpose? Can it build loyalty through involvement? Does it set standards of excellence that reflect high ideals and a sense of integrity? Is it persuasive and credible? Will it inspires enthusiasm and encourages commitment? Is it well articulated and easily understood? Is it ambitious and does it call for shared commitment? Does it challenge and inspire people to align their energies in a common direction? Does it fit with the business's unique culture and values? Will it result in efficiency and productivity? Does it reflect the company's unique strengths? 1. Again, using your organisation (or one with which you are familiar) reflect critically on the vision. What are the potential misalignments between what Dolak (2003) proposes and your organisation's vision? 2. Are these significant? Why/why not? The vision should reflect purpose and core values in a way that is meaningful, easy to remember, and transparent. Vision has little meaning unless it can be successfully communicated to those working across the whole organisation (top to bottom), since these are the people that have to realise it. Watch the following video clip to gain more information on strategic management dynamics: Warren, K. 2012 'Strategic Management Dynamics' [Video clip] http://www.youtube.com/watch?v=qcu0if8dpek (accessed online 30 October 2012). Regenesys Business School 33

7.2.3 Stakeholder Power Analysis Stakeholders can be defined as: "Individuals and groups who have an interest in the organisation and, therefore, may wish to influence aspects of its mission, objectives and strategy." (Lynch, 2012:830) An organisation s mission and goals need to be developed bearing in mind two sets of stakeholder interests: The managers and employees who implement the strategy (internal) The stakeholders who benefit from the outcomes of the strategy (external, e.g. clients and customers, suppliers, and government) (Lynch, 2012:232) Together these two groups form the stakeholders, which may/may not be in conflict and may/may not wield power. For example, the agents of the organisation (management) might prefer a profit orientation since this is linked to rewards, whereas customers might prefer a value orientation, which is linked to costs. Lynch (2012:234) lists six major steps that could be followed when conducting a stakeholder power analysis: 1. Identify the major stakeholders. 2. Establish their interests and claims on the organisation, especially as new strategy initiatives are developed. 3. Determine the degree of power that each group holds through its ability to force or influence change as new strategies are developed. 4. Development of mission, goals and strategy, possibly prioritised to minimise power clashes. 5. Consider how to divert trouble before it starts, possibly by negotiating with key groups. 6. Identify the sanctions available and, if necessary, apply them to ensure that the purpose is formulated and any compromise reached. Regenesys Business School 34

Task Questions Use the following grid to brainstorm stakeholder power in your organisation. State each stakeholder's relative power (high, medium, low) and the types of mechanisms they use to wield power, e.g. power of middle management to block the communication flow from high-level decision-makers to business units and functional departments. Managers Relative power and the mechanisms through which they wield power Employees Government Funders (e.g. banks) Shareholders Suppliers Customers Sanctions may need to be investigated, with respect to certain stakeholder groups, to ensure a resolution is achieved. This may be achieved through a bargaining process involving compromise depending on the power of the groups and their willingness to agree. 7.2.4 Develop the Mission Lynch (2012) describes the mission of an organisation in the form of a statement: "The broad general directions that the organisation should and will follow and briefly summarises the reasoning and values that lie behind it." (Lynch, 2012:827) The difference between the mission statement and goals (or objectives) is that the goals take the generalities of the mission and turn them into more specific commitments. Lynch (2012:828) emphasises that they must state more precisely what is to be achieved and when the results are to be accomplished (e.g. quantifying the mission statement). These goals (or objectives) are typically stated using SMART terms: Specific, Measurable, Achievable, Relevant, and Time based. Before we discuss the development of a mission statement, we need to evaluate the different approaches to mission development (Table 4): Regenesys Business School 35

Table 4: Approaches to mission development Prescriptive approach Emergent approach The mission statement is set for a few years (e.g. 5 to 10 years). Strategies are then developed which are aligned with the mission statement. The emergent approach does not rely on the mission statement since it argues that the future is unpredictable (there are too many chance events which can derail an organisation's mission, not least of which is game theory). (Lynch, 2012:247-248) 7.2.5 Formulate a Mission Statement For the proponents of the prescriptive approach, when formulating a mission statement, the following guidelines could be followed (Lynch, 2012:248-249): Consider the nature of the organisation's business. Consider how the customer will perceive the mission statement (the viewpoint from their set of 'lenses'). Ensure that the mission statement underpins organisational values and beliefs (e.g. a respect for the environment, freedom from prejudice, customer value). Ensure the mission reflects sustainability (e.g. an element of the organisation's sustainable competitive advantage). Summarise the reasons for the strategic approach in the mission. Task Questions Select a sample mission statement and use the guidelines provided by Lynch (2012) above to evaluate the integrity of the mission statement. Carry out your own research into mission statement formulation. What contradictions and commonalities exist? Evaluate Apple's most current mission statement: Apple Mission Statement 2013 "Apple designs Macs, the best personal computers in the world, along with OS X, ilife, iwork and professional software. Apple leads the digital music revolution with its ipods and itunes online store. Apple has reinvented the mobile phone with its revolutionary iphone and App Store, and is defining the future of mobile media and computing devices with ipad." There has been much controversy around Apple's latest mission statement. Do you think they have a prescriptive or emergent view on strategy? Justify your argument. Does their statement include reference to: customers, concern for survival, philosophy/values? Why/why not? Does their statement include reference to: products, markets, and technology? Why/why not? Is the Apple mission statement an exception to the rules? Argue your position. Finally, why is there a bite in the Apple? Could this have something to do with their approach to mission statements? Regenesys Business School 36

From our discussions, the mission statement should therefore: Be specific enough to have an impact upon the behaviour of stakeholders; Reflect the distinctive advantages of the organisation and be based upon an objective recognition of its strengths and weaknesses; Be realistic and attainable; and Be flexible enough to take account of shifts in the environment. Does the Apple mission statement fulfil the above four points? Why/why not? For discussion purposes, the corporate mission statement and vision of Coca-Cola has been included below: Coca-Cola Company Our Mission "Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions. A. To refresh the world B. To inspire moments of optimism and happiness C. To create value and make a difference. Our Vision Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. People: Be a great place to work where people are inspired to be the best they can be. Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs. Partners: Nurture a winning network of customers and suppliers, together we create mutual, ensuring value. Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities. Profit: Maximise long-term return to shareholders while being mindful of our overall responsibilities. Productivity: Be a highly effective, lean and fast-moving organisation. (Coca-Cola Company, 2013) Regenesys Business School 37

7.2.6 Organisational Values Considering the interrelationship between a mission statement and organisational values, and the fact that an organisation s mission must be premised on organisational values, is it important to distinguish between a mission statement and organisational values. A mission statement focuses on the broad direction that an organisation should follow. On the other hand, organisational values reflect what is important to an organisation. It contributes to informing the behaviours of employees (Ferguson and Milliman, 2008:441). Ferguson and Milliman (2008) define effective core organisational values as: "A unique set of organisational wide beliefs and ideas that intrinsically influence the attitudes and behaviours of employees to achieve institutional and greater societal goals as well as promote employee attainment of personal aspirations." (Ferguson and Milliman, 2008:441) It is argued that organisational values are critical for organisations because they (Change Dynamics Limited, 2004 and Hyde and Williamson, 2000:3-4): Provide a framework for how employees should treat each other and their customers; Contribute to understanding one s purpose in the organisation; Contribute to achieving the vision and mission of the organisation; Differentiate organisations from each other; Establish the organisational culture and forms the basis for creating culture change; Provide a means to measure performance of employees; and Guide decision-making processes, especially during crises. Because organisational values are often written in vague terms, it is recommended that a descriptive statement is developed to explain the company s unique interpretation of its values (Ferguson and Milliman, 2008:442). Refer to Coca-Cola s culture and values below: The Coca Cola Company Values (2013): Our Winning Culture Our Winning Culture defines the attitudes and behaviours that will be required of us t o make our 2020 Vision a reality. Live Our Values Our values serve as a compass for our actions and describe how we behave in the world. 1. Leadership: The courage to shape a better future 1. Collaboration: Leverage collective genius 2. Integrity: Be real 3. Accountability: If it is to be, it's up to me 4. Passion: Committed in heart and mind 5. Diversity: As inclusive as our brands 6. Quality: What we do, we do well (Coca-Cola Company, 2013) Regenesys Business School 38

7.2.7 Develop Objectives Objectives typically cascade from the overarching mission (goals) of the organisation. They focus the strategy on specific outcomes for the organisation. They also provide a measuring tool to evaluate whether the plan was achieved. Objectives should be set across the organisation, e.g. financial objectives, marketing objectives, etc., with the combined effect of achieving the organisational mission (goal). Financial objectives will reflect, for example, the earnings per share required by the organisation whilst marketing objectives will measure, for example, customer value. Some authors group all the objectives, other than the financial objectives, under the umbrella of 'strategic objectives' (Lynch, 2012:253), e.g.: Financial objectives e.g. return on investment, cash flow, etc. Strategic objectives, e.g. market share increase (Marketing), productivity (Operations), employee job satisfaction (HR), etc. Organisations must devise their own approaches and strategists argue that the objectives must be challenging but achievable (e.g. create 'stretch'). Conflicting objectives One of the most significant conflicts that occur across objectives is between short- and long-term goals. For example, on the one hand the organisation may want to provide investors with annual dividends, but on the other hand these profits could be put to good use in capital expansion. Dividend policies make this potential conflict transparent. Task Questions You and a colleague decide to open a school that caters for high school students who require additional coaching across the core academic subjects, e.g. mathematics, physics, chemistry, etc. Develop the following for your start-up company: 1. A vision statement 2. A mission statement 3. A set of values 4. An overarching goal 5. Strategic objectives Critically evaluate the above tasks in light of the discussions provided in this section. Regenesys Business School 39

7.2.7 Corporate Governance and the Obligations of the Board of Directors Corporate Governance Corporate governance has become increasingly important in strategic management. The purpose of corporate governance is to enhance board transparency, increase director accountability, and give greater voice to shareholders over critical boardroom decisions (PWC, 2013). Corporate governance refers to: "The influence and power of the stakeholders to control the strategic direction of the organisation in general and, more specifically, the chief executive and other senior officers of the organisation." (Lynch, 2012:823) The relationship between strategy and corporate governance are related to the influence senior management have on the future purpose of the organisation. Due to the corporate scandals in past years, corporate governance is moving toward evaluating the strategies developed by senior managers and not only to reviewing the conduct of these decision makers. In order to evaluate the decision makers' strategic choices, corporate governance should be integrated in the purpose of the organisation. Various corporate governance legislation and frameworks apply across nations (e.g. King III in South Africa, and the Sarbanes-Oxley Act in the USA). Key issues include (PWC, 2013): 1. Bribery and corruption (prosecutions are at the highest level ever) 2. Separating the board chair and CEO roles remains an on-going debate (e.g. conflict of interest) 3. Executives compensation and say on pay (it is expected there will be some more securities and exchange commission rulemaking related to executive compensation) 4. Financial regulatory reform (e.g. CEO/employee pay ratio disclosures) 5. IT governance and IT oversight 6. Risk management (risk oversight and risk mitigation protocols) 7. Succession planning (a company's long-term viability depends upon successfully identifying and grooming potential candidates, for example, for the CEO role) 8. Sustainability and climate change (contributing to the bottom line while reaching environmental goals) 9. Whistle-blower programmes (including audit committees) Regenesys Business School 40

Obligations of the Board of Directors The fundamental responsibility of board members is to maintain financial accountability and act as trustees of the organisation's assets. They must exercise due diligence in overseeing organisational strategy and ensure the organisation is well managed. The board has a fiduciary duty to remain objective, responsible, honest and trustworthy. As stewards of the shareholders they are bound to act for the good of the stakeholders rather than for the benefit of themselves. 7.2.8 Ethics and Corporate Social Responsibility (CSR) It is argued that ethics and corporate social responsibility combine to shape the purpose of the organisation and the development of a corporate strategy. Lynch (2012) refers to ethics and corporate social responsibility as: "The standards and conduct that an organisation sets itself in its dealings within the organisation and outside with its environment." (Lynch, 2012: 243) Ethics describes the manner in which the organisation conducts business whilst corporate social responsibility (CSR) relates to the environment beyond the stakeholders of the organisation. Corporate social responsibility will include issues such as the environment, charitable work within the corporate environment and local and national community concerns. According to Lynch (2012:243), there are four main reasons for considering the ethical conduct of organisations: 1. Inescapable: It is often mandatory and recommended by law. 2. Important: The society in which the organisation does business might view certain issues as essential and will not support an organisation who does not adhere to them. 3. Professionalism: Ethical behaviour reflects a professional image. 4. Self-interest: It could be an effective branding strategy. CSR is closely linked with the principles of sustainability, which argues that organisations should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities. It has become prominent in the language and strategy of business. Regenesys Business School 41

Organisations that are active in their local communities are seeing significant benefits from their involvement: Reduced costs Increased business leads Increased reputation Increased staff morale and skills development Improved relationships with the local community, partners and customers Innovation in processes, products and services Today, Corporate Social Responsibility (CSR) is widely accepted as an essential component of business ethics and a key management strategy in most companies. CSR has become linked with the pressing need to conserve the planet s diminishing resources because the future of mankind everywhere is threatened by the degradation of the environment in which we all live and work, as one commentator put it. (WordPress.com, 2011) Task Questions Read the following news item and then answer the questions that follow: Beyond the haze The haze in Singapore has been the subject of much media attention and debate, with widespread public anger against the failure to enforce forest protection laws in the region. Digital air pollution monitoring platforms allow members of the public to identify correlations between a company's operations and their own quality of life the use of real-time monitoring is a very powerful tool. Companies are becoming increasingly sensitive to the reputational risks and can no longer remain complacent about the damage they are contributing to the environment. Dirty 'palm oil' is one such sector bearing the brunt of criticism from consumers and investors. It has been recently reported (Hii, 2013) that Malaysia and Indonesia, which produce more than 80 percent of the global supply of palm oil recently signed a pact to conceal critical information on the annual forest fires that happen in Borneo and Sumatra to create more palm oil plantations. Savvy consumers have stopped buying products that contain harmful palm oil and are monitoring those that contribute to pollution. Task questions: 1. Various consumables such as baked goods, confectionary, cosmetics, baby products and cleaning agents contain palm oil (over 50% of products). Today almost all palm oil is produced without using sustainable measures. To compound the problem companies hide palm oil under the name of 'vegetable oil' or over 170 other names. Discuss the ethical and corporate social responsibility issues surrounding palm oil. 2. The 'ethical consumer' has emerged over the past decade as a consequence of heightened sensitivity to environmental degradation. How seriously should organisations take this 'breed' of consumer? Justify your position. 3. A recent decision by food giant Nestlé to re-instate a previously banned palm oil supplier on sustainability grounds may help the business case for more sustainable palm oil. Refer to the game changing strategies discussed earlier in this Study Guide together with ethical and corporate social responsibility factors in this section and critically evaluate Nestlé's decision. Regenesys Business School 42

Different approaches to CSR There has been significant research on corporate social responsibility (CSR) and ethical issues. Three approaches are discussed by Lynch (2009) and presented in Table 5: Table 5: Approaches to corporate social responsibility Stakeholder driven Performance driven Motivation driven CSR is largely seen as a response to pressures from stakeholders that are external to the organisation for example, consumer lobby groups or government organisations. Research in this area has focused on measuring the effectiveness of CSR actions in terms of their purpose by the organisation and their impact on the outside world, for example, the impact on profitability. This approach explores the reasons why organisations undertake CSR. For example, businesses may see this as enhancing the corporate reputation, lowering risk and generating customer loyalty. There are numerous differences between organisations over what should be covered under ethics and social responsibility. Fundamentally, this reflects different approaches to doing business. Read more about corporate social responsibility and ethics in strategic management in the article below: Mele, D., and Guillen, M. 2006, 'The intellectual evolution of strategic management and its relationship with ethics and social responsibilities', http://www.iese.edu/research/pdfs/di-0658-e.pdf (accessed online 14 November 2012). Recap Questions 1. Do companies always need to behave ethically, regardless of the cost? 2. Should green environmental issues form part of the corporate social responsibility of all organisations? Substantiate your position. Regenesys Business School 43

7.3 STRATEGIC ANALYSIS: RESOURCES Timeframe: Learning outcomes: Minimum of 15 hours Analyse, formulate and implement strategy in different business environments for achieving competitive advantage Select and apply different strategic analytical tools and techniques for leveraging organisational strategy Recommended reading: o Hansen, M.T., and Birkenshaw, J. 2007, 'The innovation value chain', Harvard Business Review, 1-13, https://blog.itu.dk/kmp-e2008/files/2008/08/theinnovationvaluechain.pdf (accessed online 14 November 2012) The next two sections (7.3 and 7.4) focus on strategic analysis 7.3 from an internal perspective and 7.4 from an external perspective. Section overview: The purpose of analysing organisational resources and capabilities is to determine the 'value add' component (how resources in particular can deliver superior performance and profit) and to determine where sustainable competitive advantage lies in the organisation (the capabilities). Combined, we refer to this as resource and capability analysis. 7.3.1 Analysing Resources and Capabilities Four key questions need to be addressed with regard to analysing the organisation's resources and capabilities: What are the resources and capabilities of the organisation from a strategy perspective? Why do organisations possess resources? Why are resources and capabilities important? How can we improve the resources and capabilities of the organisation? The resources of the organisation are those assets that contribute to the generation of value add (Lynch, 2012:123). Resources can be divided into two categories, which are explained in the table below. Table 6: Types of Resources Tangible resources Intangible resources Physical resources of the organisation that contribute to the value added, e.g. the physical location of McDonalds sites or the plant and machinery of Hyundai Engineering & Construction Co. Resources that have no physical presence but represent real value to the organisation, e.g. the brand names of Coke and Toyota. Regenesys Business School 44

In contrast, an organisation's capabilities are those "management skills, routines and leadership that deploy, share and generate value from the resources of the organisation", (Lynch, 2012:128). Taking into account that tangible and intangible resources are valuable, these resources will be under utilised (possibly ineffectual) unless the organisation can deploy, use and share them across the various parts of the organisation. Competitive advantage arises because organisations identify their resources and develop the capabilities to turn these into long run profits. Can I list five resources in my organisation? And five corresponding capabilities? What is the combined effect of the resources and capabilities in my organisation are they, for example, faster and leaner than our competitors? Task Questions Refer to the following table: Tangible resources Intangible resources Capabilities Resources and capabilities of Marriott Hotels More than 500 Marriott Hotels worldwide at top destinations (and growing, e.g. into Africa) Extensive facilities for leisure, business, functions, meeting and mixing, shopping, etc. Technologically advanced (e.g. mobile check-in) Brand name Group partner and affiliate leverage Hotelier knowledge Innovation Carry out your own research into the hotel group and add to the resources and capabilities listed above. In your own words, describe "the business of Marriott Hotels". Marriott are expanding into Africa; they are negotiating the hotelier rights for the Protea Group for the next 20 years (the physical assets, e.g. hotels will remain the property of Protea). Why do you think Marriott are implementing this strategy? (Refer to the following article to assist in your analysis: http://www.bdlive.co.za/business/transport/2013/11/08/marriott-international-set-to-acquire-protea-hotels) Regenesys Business School 45

The analysis of the resources and capabilities of an organisation is a difficult task for three main reasons: There is often uncertainty about industry conditions and the actions of competitors; Many factors making up the analysis are complex and the underlying root causes difficult to understand; and There is often disagreement within the organisation over what constitutes a competitive resource. Prescriptive approaches regard resources as objects to be moulded for maximum strategic benefit. Emergent approaches tend to value the human element more highly and emphasise the need for a close relationship between the changing environment and the resources. Does the Marriott group have a prescriptive or emergent view on resources and capabilities? Justify your argument. 7.3.2 Resource Analysis and Adding Value Added value can be defined as: "The difference between the market value of the output of an organisation and the cost of its inputs." (Lynch, 2012:136) It is argued that the role of resources in an organisation is to add value, which means the organisation must ensure that their resources do not lose value in the long-term as they will not survive. A detailed analysis of every aspect of costs (inputs) and sales (outputs) is required to determine value added. Three strategies can raise value added in a commercial organisation (Lynch, 2012:136): Inputs: Lower the costs of its labour, capital and materials (e.g. as a percentage of sales) Process: Use organisational resources to add value Outputs: Increase the value of its sales Notably organisational capabilities will contribute across all three stages, in particular, determining where competitive advantage can be achieved. Regenesys Business School 46

7.3.3 Adding Value: The Value Chain and the Value System The value chain To develop competitive advantage an organisation constructs its unique value chain. "The value chain identifies where the value is added in an organisation and links the process with the main functional parts of the organisation. It is used for developing competitive advantage because such chains tend to be unique to an organisation." (Lynch, 2012:137) "Interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create competitive advantage. A value chain typically consists of (1) inbound distribution or logistics (2) manufacturing operations (3) outbound distribution or logistics (4) marketing and selling, and (5) after sales service. These activities are supported by (6) purchasing or procurement, (7) research and development, (8) human resource development, (9) and corporate infrastructure." (Business Dictionary, 2013) Consider too, that organisations operate within a wider system of suppliers and distributors known as the 'value system'. The organisation value chain should not be seen in isolation as its competitive advantage can also derive from this wider value system. Porter s Value Chain Model is one of the most well known models depicting how value is created in an organisation. The value chain represents sets of activities that an organisation performs to create and distribute its goods and services. The organisation achieves competitive advantage by managing this value chain more efficiently and more effectively than its competitors. The value chain activities are commonly subdivided into two categories: Primary activities Support activities The primary activities include those activities that are directly associated with producing a product or service: receive and store raw materials, make and deliver the product or service, marketing and sales, and after-sales service. The support activities are those that provide functional support to the organisation: the organisational infrastructure (e.g. Administration, HR, etc.). Figure 2 illustrates Porters model. Regenesys Business School 47

Figure 2: Porter's Value Chain Model ADMINISTRATIVE Accounting, Financial management, Legal SUPPORT ACTIVITIES PRIMARY ACTIVITIES HUMAN RESOURCE MANAGEMENT PRODUCT & TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND LOGISTICS Receiving and warehousing materials, Inventory control, Transportation, Scheduling to manufacture, Quality control OPERATION Manufacturing, Packaging, Production control, Quality control, Repairs and Maintenance Recruitment, Training, Succession planning, Performance management, etc. Product and process design, Production engineering, Market testing, R&D Supplier management, Funding, Sub-contracting, Specification OUTBOUND LOGISTICS Finished goods, Order handling, Dispatch, Delivery, Invoicing SALES & MARKETING Customer management, Order taking, Promotion, Sales analysis, Market research SERVICING Warranty, Maintenance, Education and training, Upgrades Profit = Sales less costs (Karis, 2012) The value chains will vary according to the nature of the organisation (e.g. manufacturing, services, etc.). However, in the main the primary activities of the company include: Inbound logistics; Operations; Outbound logistics; Sales and marketing; and Service. These are the individual areas where a competitive advantage can be gained. The support activities to these primary activities include: Procurement; Technology development; Human resource management; and Firm infrastructure. Each support area is analysed in terms of added value to the different primary activities of the organisation. Regenesys Business School 48

The value system The value system shows the wider routes in an industry that add value to incoming supplies and outgoing distributors and customers. It links the industry value chain to that of other industries. Again it is used to identify and develop competitive advantage because such systems tend to be unique to organisations (The Antidote, 1997). Competitors may, or may not, use the same value chain system: some suppliers and distributors will be better than others in the sense that they offer lower prices, faster service, more reliable products, etc. Real competitive advantage may be gained by using the best suppliers or distributors. Figure 3: A value system Supplier value chain Firm's value chain Channel value chain Buyer's value chain Assessing the organisations value chain and value system can be complex. Each part needs to be assessed for its contribution to competitive advantage. Access the article below to read more about Porter's value chain: Hansen, M.T., and Birkenshaw, J. 2007, 'The innovation value chain', Harvard Business Review, 1-13, https://blog.itu.dk/kmp-e2008/files/2008/08/theinnovationvaluechain.pdf (accessed online 14 November 2012). Green strategy value chain linkages The green value chain linkages must be continuously re-examined in light of legislation and consumer sentiment. Consider, for example, that your suppliers are not using 'green' processes. This can impact on your organisation in terms of brand. We saw this with the palm oil example. Key areas include: Suppliers and inbound logistics (e.g. 'green' applications at the source) Infrastructure (e.g. energy efficient buildings) Production processes (e.g. low emissions) Customers (e.g. opportunities for recycling waste) Services (e.g. advice) In total, the value systems are aimed at becoming carbon neutral. Regenesys Business School 49

Identify 'green' strategies in your industry To be meaningful these 'green' strategies must occur throughout the value system (in the five bullet points given above) Reflect on the benefits and costs of 'greening' What are the consequences of not 'greening' your organisation's value chain? Task questions case study Read the following case study and then complete the questions that follow. Resource strategy at GSK: Negotiating a merger and making it work In the technically innovative and global market for pharmaceutical products, GlaxoSmithKline (GSK) is one of the world s largest drug companies and size matters in this industry. This case explores the competitive benefits of larger size and how GSK is using this to tackle the twin strategic challenges now facing the industry. Background Over the past 20 years, pharmaceuticals have become increasingly expensive to develop typically, costing around US$500 million, spread over several years, for one major drug. After development, these drugs need to be marketed to customers such as doctors, hospitals and government health services for example, several thousand specialist sales personnel may be required for such a task in the North American market alone. To support such activities, substantial cash resources are important. In addition, world alliances and other connections between manufactures can also be highly beneficial: drug companies can use these to support areas where they are both weak geographically and have gaps in their product development programmes. From the size perspective, it helps to have substantial resources. But this does not explain why even large companies have chosen to become larger over the last five years. For example, the Swedish company Astra merged with the UK company Zeneca and the French company Rhone-Poulenc joined together with part of the German company Hoechst to form Aventis during 1998/99. Over this time, half the world s largest drug companies announced either mergers or takeovers of fellow companies. Some strategists would argue that if all the companies become larger then no drug company has developed any competitive advantage over another. The benefit cannot simply be size alone. It is necessary to examine the individual competitive resources of each company to see what size delivers. To explore this, we need to look separately at the two merger candidates in the case in question Glaxo Wellcome and SmithKline Beecham. Competitive resources at Glaxo Wellcome During the period 1980-95 Glaxo (as it was called) was highly dependent on its patented drug, Zantac, which is used to treate ulcers. For example, in 1994 this one drug alone accounted for 44 per cent of the company s sales and 50 per cent of its profits. In the early 1990s, Zantac was the single biggest selling drug in the world and its ownership by Glaxo was a major strategic resource. But this substantial strength faced two threats. First, the patents would begin to expire in 1997 allowing any company to manufacture and market the drug, thus reducing the profit margins that Glaxo was able to charge. Secondly, a new rival drug, Losec, was introduced to health authorities in 1993/4 by the Swedish company Astra Pharmaceuticals. Regenesys Business School 50

Losec was claimed to be even more effective than Zantac. Glaxo knew the seriousness of such a competitive threat because its own drug, Zantac, had wiped the floor with an earlier rival in the mid-1980s, namely Tagamet, from the pharmaceutical company SmithKline Beecham. Faced with these twin threats, Glaxo needed a new resource strategy. Given the time lag in developing new drugs, Glaxo used its existing resource strength the profitability of Zantac to acquire two existing drug companies. Welcome (UK) was bought in 1995 for US$13,5 billion. This delivered a whole new range of patented drugs into the Glaxo portfolio, including the anti-aids drug Retrovir and the anti-viral drug Zovirax. In addition, the US company Affymaxx was bought for US$533 million. The latter company was developing a range of genetic products whose benefits would be truly revolutionary, if successful. In addition to acquiring drugs from the two new companies, Glaxo gained other resource benefits from these purchases. The acquisition allowed Glaxo to combine its R&D team with that of Wellcome, saving 1,800 jobs and the labour costs associated with this. In addition, 3,000 jobs were lost in manufacturing by combining various plants and 2,600 jobs were lost in marketing and administration. In total, around US$1 billion cost savings were achieved. But it was not all good news; the patents on the top-selling drug Zovirax were due to expire from 1997 onwards (patents have roughly a ten year life from first registration). Competitive resources of SmithKline Beecham It was the loss of profits from Tagamet mentioned above that forced its makers, the American company SmithKline, to seek a merger with the UK company Beecham in the late 1980s. Nevertheless, the new company had proceeded to develop many new, patented drugs over the succeeding ten years into the late 1990s. It had also exploited its range of branded medicines sold directly to the general public with higher profit margins than were available on many pharmaceuticals. By 1998, the company was particularly strong in anti-depressants, vaccines, antibiotics and diabetes medicines. Merger failure in 1998 and success in 2000 In 1998, Glaxo Wellcome explored merging the company with SmithKline Beecham. This would have transformed the resource capability of the two companies because they both had different areas of product strength in the drugs market, and the duplication of some facilities and services could have been eliminated. But the merger did not take place. The two companies clashed over two matters: the styles of negotiation and the proposed new management structure. The cultures of the two companies were so different that the merger discussions themselves became difficult for example, they were so bad that the participants never even had lunch together. In addition, there were differences between the two chief executives and other senior managers over their respective roles in the merged company. The result was that the merger never took place and the substantial resource benefits were never achieved. In the face of increased competition and the cost of drug development, the pressure to consolidate remained. What made the difference was that some of the senior managers involved in the abortive talks in 1998 decided to retire, allowing the two companies to merge in year 2000. As a result, the combined company was able to employ an enhanced research budget of over US$4 billion in 2002. Annual cost savings of US$750 million were achieved: this was ahead of earlier expectations. It had sales teams in North America alone of over 7,500 people. The two product ranges from the two companies complemented each other, with some minor overlap. The company had a global market share of over 7 per cent. This might appear small but the company dominated some segments of the world drug market. Regenesys Business School 51

Twin strategy challenges of the new millennium The increased size of the company delivered a diverse product range in terms of geographical spread and product portfolio. But the company faced two major strategic challenges in the new millennium: Some of its leading drugs would run out of patent protection, allowing generic varieties of the same drug to be made and sold much more cheaply. This was a major threat to companies like GSK that invested heavily in new drugs and then relied on a high profit margin stream to pay for the drug development costs. The generic drug companies were picking off major drugs as they came out of patent and marketing cheap, reliable, copies at much lower prices. The new company had only a limited supply of new-patented drugs in its pipeline. All drugs have to go through a period of rigorous testing procedure over several years. Inevitably, there would be failures during the tests, so it was essential to have a good pipeline of new drugs. When the GSK chief executive took over in 200, he made a detailed study of the company s drug pipeline. He concluded: We had an empty cupboard. He therefore set about creating a new, vibrant research and development regime in the company. He regarded this as being crucial to the long-term future of any major pharmaceutical company. It would counteract the effects of the generic drug companies and would ensure continued growth at GSK. He recognised that the danger for a large company like GSK was to make its research and development large and bureaucratic: the small bio-engineering companies had been more successful in recent years. Hence, with his new research director, Tachi Yamada, he set up seven centres of excellence for drug discovery (CEDD) in Europe and the USA. Size was getting in the way explained Yamada. In the bureaucracy, traditional biotechnology expertise was forgotten. Very few companies believed that they were failing in the 1990s. Most are just beginning to realise how bad it is. The GSK solution was to set up the seven CEDD teams, each no more than 300 strong and multidisciplinary in make-up. Each team had its own library, research facilities, even its own financial director. The smaller structure meant that there were fewer reporting layers so that research could be started and stopped more quickly. One of Yamada's colleagues explained: Before we could be stuck for years with a project that was not viable because the visibility was not there. [Now] we can give a Go/No Go decision within six months. For many of our competitors, that takes two years. But the results of this massive re-organisation were not yet complete in early 2005. The company s turnover had continued to increase and it was making progress in terms of new product development. R&D productivity metrics were showing success in terms of drug developments in the pipeline. However, as the chief executive, Garnier, stressed at that time: We are not claiming victory yet. Progress to 2008 Perhaps Garnier was wise to express caution because there were still problems in late 2007. A new research director Moncef Slaoui had been appointed to succeed Yamada. Slaoui explained that the problem was not so much the organisational structure but the need for a change in company culture. It s one thing to create an organogram. It s another to change values. We ve done well on the structure but more is required on behaviour. His priority was to scale down the dominance of managers, who had in the past placed too much reliance on large-scale laboratory testing to find new drugs rather than the innovative smaller teams needed in the new GSK. In addition to the changes being pursued in R&D, GSK had also taken a decision on the successor to Garnier himself, who was due to leave in early Summer 2008. The new CEO was an internal candidate, Andrew Witty, who would lead the company forward. (Lynch, 2009:119 121) Regenesys Business School 52

Task questions: 1. What are the key factors for success in this market? Use a value chain approach to assist in your analysis. What are the implications of your answer for large and generic drug manufacturers? 2. What was the nature of the competitive advantages held by Glaxo Wellcome and SmithKline Beecham respectively? Were they sustainable? 3. Do cost savings in themselves represent substantive competitive advantage? Justify your answer. 4. What lesson, if any, on the development of sustainable competitive advantage can be drawn from the case for other companies outside the pharmaceutical industry? 7.3.4 The Resource-Based View (Internal Analysis) Before reviewing the hierarchical development of competitive advantage, consider sources of competitive advantage (Lynch, 2012:152): Differentiation (e.g. unique features and attributes) Low cost (e.g. outsourced labour) Niche marketing (e.g. understanding special buyer needs) High performance or technology (e.g. recruitment of the 'best' employees, leveraging technology) Quality (e.g. levels of reliability unachieved by competitors) Service (e.g. service standards that brand an organisation) Vertical integration (e.g. owning backward suppliers and/or forward distribution) Synergy (e.g. the sum is worth more than the individual parts) Culture, leadership and style of an organisation (e.g. unique training approaches) The following diagram shows the hierarchy in the development of competitive advantage. Regenesys Business School 53

Figure 4: The hierarchy of the development of competitive advantages Resources - Tangible or intangible assets, skills, abilities, etc. that enable production of products and services Tangible resources Financial Resource Physical plant, raw materials and equipment Human abilities, including experience, knowledge, skills, attitudes Organisational abilities including structure and processes Intangible Resources Technological resources, including patents, trademarks, knowledge Innovation abilities, including facilities and employee research skills Reputation, including perceptions by stakeholders and brand name Competitive Advantages Resources that produce value for a firm's customers By providing value to the customers, the resources supplement the firm's ability to compete in its selected competitive positiion Competitive Capabilities Sets of competitive advantages that management integrates and coordinates to produce a multifaceted valueproducing advantage over competitors Sustainable Competitive Advantages and Capabilities Sustainable attributes that provide a firm with advantages over competition for the foreseeable future because competitors find it difficult to emulate these competitive advantages and capabilities Core competencies Sustainable competitive advantages and capabilities that a firm has relied upon as the basis for its strategy throughout all of its products and businesses over a period of time In order to assess which resources have true strategic value an organisation needs to identify and evaluate each resource as a basis for future competitive advantage. Once an organisation's tangible assets, intangible assets and organisational capabilities have been identified the RBV applies a set of guidelines to determine which of these resources generate core competencies that are sources of sustained competitive advantage. Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required in undertaking them. So the goal is for management to focus attention on competencies that really affect competitive advantage. Regenesys Business School 54

According to Pearce and Robinson (2011), these guidelines are derived from the idea that resources are more valuable when they: Are critical for meeting a customer s needs better than other alternatives; Are scarce few others if any possess that resource or skill to the same degree; Drive a key portion of overall profits in a manner controlled by the organisation; and Are durable and sustainable over time. Guidelines It is useful to consider the following four guidelines in the resource-based view (RBV): RBV Guideline 1: Is the skill or resource critical to fulfilling customers' needs better than that of the organisation's competitors? Four resources, namely store locations, brand recognition, employee loyalty, and sophisticated inbound logistics, allowed Wal-Mart to fulfil customers' needs much better and more cost effectively than its competitor Kmart and other discount retailers. RBV Guideline 2: Is the resource scarce? Is it in short supply or not easily substituted for or imitated? When a resource is scarce, it is more valuable and can become the basis for a competitive advantage for the organisation. Very limited natural resources, a unique location or rare skills all can represent scarce resources. RBV Guideline 3: Appropriateness: Who actually gets the profit created by a resource? Restaurant franchisees of a national organisation can become frustrated by the fees they have to pay the franchisor. RBV Guideline 4: Durability: How rapidly will the resource depreciate? The slower a resource depreciates the more valuable it is. It is possible to measure depreciation of tangible assets such as commodities. Intangible assets such as brand names or organisational capabilities are more difficult to measure in terms of depreciation or appreciation. The Coca-Cola brand has continued to appreciate whereas technical know-how in computer technologies can depreciate rapidly. Regenesys Business School 55

7.3.5 Improving Competitive Advantage Benchmarking According to Lynch (2012), benchmarking is: "The comparison of practice with that of other organisations in order to identify areas of improvement." (Lynch, 2012:163) The objective is to identify best practices in performing value chain activities and to learn how to meet or exceed these (e.g. lower costs, fewer defects and how outcomes linked to excellence can be achieved) in terms of customer needs. Companies committed to benchmarking attempt to isolate and identify where their outcomes are out of line with best practices of competitors or other companies that undertake similar tasks (Pearce and Robinson 2011:162). Exploiting existing resources leveraging Arguably, it does not make sense to try to meet or exceed all best practices; rather the organisation should focus on best practices that support the key objectives of the organisation. Lynch (2012:164) provides a useful analysis of the five areas to exploit. Table 7: Five areas to exploit existing resources Concentration Conservation Accumulation Complementarily Recovery Concentrate on the resources that support the key objectives of the organisation. Focus on the resources that will add the most value to the organisation. Use the resources to their full potential/maximum and recycle where possible. Ensure that all knowledge resources are used, developed and documented (build organisational memory) Conduct an audit to evaluate where resources could be blended (e.g. digital marketing and sales). Generate cash sooner rather than later. (Lynch, 2012:164) Regenesys Business School 56

Upgrading resources What if your resource analysis shows that the organisation has little or no competitive resources? There are three main ways to improve competitiveness (Lynch, 2012:164): Add new resources to add value to existing products and/or service areas or add new products and/or services; Focus on enhancing the resources that are being directly challenged by competition; and Consider adding resources that will transcend the organisation into another industry. Sustainable competitive advantage is the long run advantage an organisation enjoys over its competitors which infers that it cannot easily be imitated. Reflect on the following elements that are associated with this distinct advantage before concluding this section with the recap questions: Innovative capability across the organisation; Comparatively better than the competition (inputs, processes and sales); Products and services cannot be imitated or substituted easily; Retaining appropriability (not giving up any of the advantages achieved to others in the system); Longevity of resources; Uniqueness of resources and capabilities; 'Hidden' competitive edge (not easy for competitors to determine what it is that makes the organisation unique); and Resources and capabilities that are prohibitively expensive in time and cost to achieve. Recap Questions Identify and develop the value chain for an organisation that you are familiar with. Develop the value system in which this same organisation operates. What strategy conclusions can you draw? Identify the distinctive capabilities of the organisation. Then compare the organisation with its competitors and comment on the strategic implications. Explain how resources can deliver a sustainable competitive advantage. Outline three methods for improving the sustainable competitive advantage of an organisation s resources. Regenesys Business School 57

7.4 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT Timeframe: Learning outcomes: Recommended reading: o o o o Minimum of 15 hours Analyse, formulate and implement strategy in different business environments for achieving competitive advantage Select and apply different strategic analytical tools and techniques for leveraging organisational strategy Mason, R.B. 2007, 'The external environment s effect on management and strategy: a complexity theory approach', Management Decision, 45 (1), 10-28. Porter, M. 2006, 'Michael Porter asks and answers: why do good managers set bad strategies', http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594 (accessed online 28 October 2012). Section overview: In this section, we turn our attention to the external forces at play keeping in mind organisations and their environments are dynamic organisations change as the environment shifts and as organisations change so to does the environment. 'Greening' is a prime example of this. Organisations have created mass deterioration of the environment, which has led to legislation and regulation, which in turn has changed the ways in which organisations may do things. The extent to which the environment is predictable and understanding root cause and effect are significant to an understanding of the external environment. 7.4.1 Exploring the External Environment Why is an understanding of the external environment an essential element of strategic management? Amongst others, there are three key reasons for this: Most organisations compete against others data, information, and knowledge (insights and wisdom) and the nature of this competition assists in the development of own sustainable competitive advantage; Interrogating the competitive environment facilitates the identification of new opportunities for the organisation; and Threats are identified, analysed and mitigated (and in some cases turned into advantages). Opportunities and threats derive from competitors and from government decisions, technological changes, social developments and emerging environmental challenges to name a few. In order to carry out a robust analysis of the forces at play, Lynch (2012:76-115) identifies ten stages, which are depicted below. Regenesys Business School 58

Figure 5: Analysing the strategic environment Customer analysis Market size, growth and share Degree of turbulence Competitor analysis Green strategy Lynch's Four Links PESTEL Porter's Five Forces Key factors for success Life cycle (Lynch, 2012:116) Stage 1 Market Characteristics Exploring the basic characteristics of the environment: Market definition and size usually described in terms of annual sales. Large markets are generally more attractive than small markets. Cognisance is taken of the existence of substitute products when analysing the size of a market. Market growth is the market growing rapidly or slowly? Is this in line with what the shareholders require? Market share a large market share can be strategically beneficial as it may allow the organisation to influence prices and take advantage of economies of scale. The combined knowledge from the above should define the market opportunity. Regenesys Business School 59

Stage 2 Degree of Turbulence Consider the degree of turbulence in the environment: Modern organisations exist within increasingly complex environments over much of which they exercise little or no control. Successful leaders are expected to anticipate and respond to environmental turbulence capitalising on emerging opportunities, minimising the impact of adversity and actively managing the process of realignment and transformational change. Increased volatility of the business environment makes systematic strategic planning more difficult. Rapid change requires strategies that are flexible and creative (Hamel in Grant, 2002). If the degree of turbulence is very high (e.g. technology sector, emerging economies) this will make strategic prediction more difficult. However, regardless of the level of turbulence, organisations need to be equipped to cope with change keeping in mind the systemic effects of change in the wider system. According to Lynch (2012:78-79), the degree of turbulence surrounding the organisation can be assessed according to two main measures: Changeability how likely are changes to the environment? Factors to analyse when looking at changeability include the following: o Complexity How the organisation is effected by external factors such as technology, social and political complications. o Novelty how the organisation will deal with new situations. Predictability the manner in which the organisation can predict change: o Is the rate of change slow or fast? o Visibility of the future availability of information to predict the future. Stage 3 Green Strategy A green strategy is twofold on the one hand the organisation is focused on sustaining the earth's environment, and on the other hand organisations can create businesses that arise from such sustainability (e.g. energy saving light bulbs). Analysis should consider: 1. Government legislation (the regulatory environment) 2. Business opportunities 3. Customer perceptions News travels fast in a matter of seconds (e.g. via Twitter, Facebook, etc.), customer perceptions about an organisation's impact on the environment can be transmitted across the globe. This has the potential to do irreparable damage to the brand. Regenesys Business School 60

In structuring green strategies there are winners and losers, e.g. lower consumption in oil and gas versus increased demand for insulation and solar energy. Stage 4 The PESTLE Analysis The PESTLE analysis is a simple but important and widely used tool that helps management understand the interplay between the: 1. Political 2. Economic 3. Socio-Cultural 4. Technological 5. Legal and 6. Environmental forces Used by business leaders and strategists worldwide the method is, however, preferred by prescriptive strategists over emergent strategists. Prescriptive strategists believe that past events are strong indicators for forecasting the future. Emergent strategists, however, may well comment that prediction particularly in a turbulent environment is of little use. The PESTLE analysis provides strategic decision-makers with an outline of the environmental influences if the environment can be assessed, organisations will have the ability to respond to changes. Before considering the PESTLE framework, to make strategic decisions, management need to understand the environment at three levels: Micro (the study of resource allocation by households and firms) Meso (the intuitional aspects of the economy that are not captured by micro or macroeconomics, e.g. the web of contracts, formal or informal, in family, corporate, market, civil, and social institutions) Macro (the study of economic performance, structure, behaviour and decision-making at the national, regional or global level) Sheng and Geng (2012) argue that meta-economics goes still further; by "studying deeper functional aspects of the economy, understood as a complex, interactive, and holistic living system" management will understand why, for example, governance structures evolve. Clearly, the argument for new levels of economic analysis provides for more accurate predictions about the future. The PESTLE analysis is useful for understanding the big picture environment in which an organisation is operating. Specifically, it is a useful tool for understanding risks associated with market (the need for a product or service) growth or decline, and as such the position, potential and direction for an individual business or organisation. The PESTLE analysis is described in more detail in Table 8. Regenesys Business School 61

Table 8: PESTLE analysis Factor Political Economic Social Technological Environmental Legal External Influences These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. These include, for example, interest rates, taxation, economic growth, inflation and exchange rates. Higher interest rates may deter investment because it costs more to borrow, however, this could also attract external investment. A strong currency may favour imports but negatively impact on exports. Inflation may provoke higher wage demands and raise costs. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. An ageing population will impact on demand, for example, increased demand for medical benefits, pension funds, and on working population. Some governments are making tentative steps to raise the retirement age. New technologies create new products and new processes. Sophisticated computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation in manufacturing. These developments can benefit consumers as well as the organisations providing the products, however, improved technologies can also make certain jobs redundant. Environmental factors include weather/climate changes, and reduction in natural resources especially in terms of water. Changes in temperature can impact on many industries including farming, tourism and insurance. The increasingly urgent call to protect the environment is impacting on almost all industries (e.g. levies on the sale of new cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities. The legal landscape examines the structure of the judicial system, legislation affecting businesses, tax regulations, labour laws, trade regulations and corporate governance. What is the legal structure and are the laws conducive for investment? Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service). (Oxford University Press, 2007) In general, the tool should facilitate a regular assessment of the growth (and risk) prospects for an industry. However, the individual parts should not be seen in isolation and just because a market is growing, and all appears positive, it does not necessarily follow that an organisation can make profits within that industry. To improve analysis, a range of managers should be involved and the quality of the data should be considered. What criticisms are there of the PESTLE analysis tool? What are its strengths? What are its weaknesses (limitations)? Regenesys Business School 62

Stage 5 The Industry Life Cycle According to Lynch (2012:88), an industry goes through four phases of development, each of which has implications for strategy introduction, growth, maturity, and decline. Industries evolve over time, structurally and in terms of size. The industry life cycle is measured in terms of both the quantum of, and the growth in, total industry sales. The end of the desktop PC? The latest data from the market analyst Gartner paints a bleak picture of the PC industry. For CIOs, the era of the desktop refresh cycles may well be over. According to Gartner, worldwide PC shipments totalled 90.3 million units in the fourth quarter of 2012, a 4.9% decline from the fourth quarter of 2011. Tablets have dramatically changed the device landscape for PCs whereas once we imagined a world in which individual users would have both a PC and a tablet as personal devices, we increasingly suspect that most individuals will shift consumption activity to a personal tablet and perform creative and administrative tasks on a shared PC. (Saran, 2013) The industry structure and the competitive forces that shape the environment change throughout the life cycle. Lynch (2012:88-94) describes the industry life cycle and its strategy implications as follows. Introduction In this stage the industry is still very new so there are few competitors and no threat from substitutes. Also, because the availability of the product is limited, the power of buyers is low, because those who want the product are prepared to pay to get it. Suppliers, however, do exert some power, because volumes purchased are still low making the industry relatively unimportant to them. Growth The number of competitors increases rapidly in this stage as other firms seek to gain a share of the growing industry. However, growth in demand outstrips growth in supply. Therefore, competition, for a time, is kept in check. The power of buyers is still very low because demand exceeds supply. Often industry growth is associated with high profitability. While, at this stage, firms may be profitable, they could still be cash hungry and be exposing themselves to risk as they jockey for market position and share. Regenesys Business School 63

Maturity By the time the industry enters this stage, the business and market dynamics will exhibit noticeable shifts. For example, the power of buyers will have increased because supply will have begun to match, or even exceed, demand. In contrast, the power of suppliers will have declined because the volumes purchased by the industry will have become increasingly important sources of revenue for the suppliers. So losing a large customer could now be very damaging to a supplier. The threat from substitutes will have also grown. Another important shift that can become noticeable in this stage is how the industry looks to consolidation, possibly through mergers and acquisitions, as a way of maintaining and even improving market positioning and strategic advantage. Mature industries are settled in their market segments. They face low risk and they are able to generate cash. However, rivalry among competitors becomes fierce and falling prices pose a serious threat to profitability. Decline This decline stage poses new challenges and new opportunities. Here capacity exceeds supply and thereby increases the power of buyers. The weakest competitors will have no choice but to withdraw from the industry, leading to a reduction in rivalry among firms. It is usually in this stage when firms may combine forces to ask for government intervention or subsidies to help to protect the declining industry. The threat of substitutes is high; indeed substitutes are often the root cause of decline. However, managed correctly, a slowly declining industry can produce attractive returns for investors: because there is no new investment in the industry, it is gradually run down and milked for cash. Task Questions Discuss the following industry life cycles: The printed media industry (e.g. newspapers) The bottled water industry The tobacco industry Regenesys Business School 64

Stage 6 Key Factors for Success Key success factors in an industry are the combined effect of the resources, skills and attributes of the organisation. All of these are essential for delivering success in the market relevant to that industry. The areas that require in-depth analysis include (Lynch, 2012:95-97): Customers (market analysis) Competition (4 Ps product, price, place, promotion) Corporate resources and capabilities including strategic leadership Task Take ownership of your studies At NQF level 9 you are required to read widely. Consider researching what the following authors (and others) have to say about strategy analysis and success factors: P.J.H. Schoemaker (one of Europe's experts in the field of strategic management and decision-making) J. Kay (one of Britain's leading economists who offers insights on the relationships between economics and business strategy) K. Ohmae (renowned Japanese strategist who provides insightful comment not only from a Japanese perspective but in terms of global success) Excerpt from Schoemaker on adaptive strategic leadership essentials for success "Most of the focus in companies is on what's directly ahead. The leaders lack 'peripheral vision'. This can leave a company vulnerable to rivals to succeed well you must: Anticipate: 1. Look for game-changing information at the periphery of your industry 2. Search beyond the current boundaries of your business 3. Build wide external networks to help you scan the horizon better Think critically (critical thinkers question everything): Reframe problems to get to the bottom of things (root causes) Challenge current beliefs and mindsets including your own Uncover hypocrisy, manipulation, and bias in organisational decisions Interpret (hold steady, do not reach for a fast solution, synthesise information from many sources before developing a viewpoint): Seek patterns in multiple sources of data Encourage others to do the same Question prevailing assumptions and test multiple hypotheses simultaneously Decide (move on from analysis): Carefully frame the decision to get to the crux of the matter Balance speed, rigor, quality and agility Regenesys Business School 65

Align (total consensus is rare however pursue open dialogue, build trust and engage key stakeholders): Understand what drives people's agendas including what remains hidden Bring tough issues to the surface, even when its uncomfortable Assess risk tolerance and follow through Learn (honest feedback is harder and harder to come by but you have to do what you can to keep it coming): 1. Encourage and exemplify honest, rigorous debriefs to extract lessons 2. Shift course quickly if you realise you're off track 3. Celebrate both success and (well-intentioned) failures that provide insight" (Schoemaker, 2013) Stage 7 Competitive Industry Porter s five forces model provides a simple perspective for assessing and analysing the competitive strength and position of a corporation or business organisation. The five forces that Porter (1998) suggests drive competition are: 1. Existing competitive rivalry between suppliers 2. Threat of new market entrants 3. Bargaining power of buyers 4. Power of suppliers 5. Threat of substitute products Although the strength of each force can vary from industry to industry, the forces, when considered together, determine long-term profitability within the specific industry sector. The strength of each force is a separate function of the industry structure, which Porter defines as "the underlying economic and technical characteristics of an industry (Porter, 1998:5). Collectively, the five forces affect prices, necessary investment for competitiveness, market share, potential profits, profit margins, and industry volume. The key to the success of an industry, and thus the key to the model, is analysing the changing dynamics and continuous flux between and within the five forces. Porter's model depends on the concept of power within the relationships of the five forces. Regenesys Business School 66

Figure 5 below illustrates a version of Porter s five forces of competitive position (in this model Cengage includes product and technology development in place of Porter's 'substitutes and complementors'). The examples below highlight the interplay between the five forces. Figure 6: Porter s five forces of competitive position New market Entrants, e.g. Entry ease / barriers Geographical factors Incumbents' resistance New entrant strategy Routes to market Supplier power, e.g. Brand reputa?on Geographical coverage Product / service level quality Rela?onship with customers Bidding processes / capabili?es Compe99ve Rivalry, e.g. Number and size of firms Industry size and trends Fixed vs. variable cost bases Product / service ranges Differen?a?on, strategy Buyer power, e.g. Buyer choice Buyer size/number Change cost/frequency Product/service importance Volumes, JIT scheduling Product and Technology development, e.g. Alterna?ves price / quality Market distribu?on changes Fashion and trends Legisla?ve effects (Adapted from Cengage, 2006) Regenesys Business School 67

Task Questions Select one industry that you are familiar with and evaluate the forces at play in that industry, e.g. strength of the suppliers and buyers, impact of substitutes, and barriers to entry. In your evaluation determine the attractiveness of entering and participating in that industry. It is argued that Porter's Five Forces Model is a useful early step in analysing the environment but it has been the subject of recent criticism. Read the commentary in your recommended textbook (Lynch, 2012:103) and other credible sources. Reflect critically on these commentaries evaluate the key arguments. Stage 8 The Cooperative Environment Lynch (2012:105) proposes the Four Links Model as a method of analysing the co-operation between an organisation and others in its environment. This co-operation between the organisation and others in its environment is important as it may: Help in the achievement of sustainable competitive advantage Open up new markets and increase business opportunities Produce lower costs Deliver more sustainable relationships with those outside the organisation The basic co-operative linkages between the organisation and its environment can usefully be explored under four headings as shown in the table below. Table 9: Lynch's Four Links Model Informal co-operative links and networks Formal co-operative links Complementors Government links and networks The range of contacts that arise from organisations joining together informally for a common purpose. The strength of the Banking Industry network, as an example, gives it an informal competitive advantage over those banks excluded from this network. Linkages bound by formal contracts such as alliances and joint ventures. Those companies whose products add more value to the products of the base organisation than they would derive from the products themselves. Examples would include car cell phone chargers as a complementary business to cell phone manufacturers. The relationship that exists between national and international governments and organisations, including those concerning tax, legislation and formal government purchasing. (Lynch, 2012:105) Regenesys Business School 68

Task Questions List and evaluate opportunities for informal co-operative links and networks in your industry (or one with which you are familiar). For example, the South African Federation of Civil Engineering Contractors has been in existence for over 60 years and its members have been involved in developing South African infrastructure. Identify examples of formal co-operative linkages in your industry particularly those that have depth, longevity and a degree of mutual trust, e.g. UK retailer Marks & Spencer. Discuss how difficult it is for other industry participants to copy these co-operative links. Critically evaluate the following complementors: the airline industry and the tourism industry. Arguably complementary goods must offer more value to the consumer together than apart. Discuss the merit of this in terms of the airline industry and the tourism industry. Stage 9 Competitor Profiling Competitor profiling is the systematic analysis of competitors in order to: Evaluate (and learn from) their strengths Exploit their weaknesses Lynch (2012) recommends an evaluation of the following six criteria. Table 10: Competitor profiling Competitor objectives Competitor resources Competitors past record of performance Competitor current products and services Competitor links with other organisations Competitors present strategies Is the competitor seeking increased market share, increased sales or increased profitability? Often annual reports and press statements can provide information on a competitor s objectives. Alternatively consider their 4Ps. The scale and size of the competitor company s resources are often good indicators of the competitive threat it represents. Factors such as inferior or superior technology need to be assessed as well as its financial standing. Other issues to look at include the size and skill of its labour force. This is publically available through financial records and stockbroker reports. These may, however, be poor guides to future performance. Many companies buy competing products or services for the purpose of finding fault with them. Customers, quality, performance, after-sales service and the promotional material of the competitor are analysed. Often former competitor employees are interviewed for purposes of gaining insight into the competition. Joint ventures, alliances and other forms of co-operative agreements can provide insights into a competitor's strategic intent. Attitudes to subjects such as innovation, leading customers, finance and investment, human resource management, market share, cost reduction, product range, pricing and branding are all factors that provide useful information and when combined can reveal insights into competitor strategies. (Lynch, 2012:108) Regenesys Business School 69

Task Questions 1. Select one of your competitors for analysis. Obtain, where possible, the following: Annual reports Company profiles (e.g. from the website) Product brochures Press releases and articles published about the company in the media Sample products for analysis 2. Summarise the above into a competitor SWOT analysis (grid) using four quadrants: the competitor's strengths, weaknesses, opportunities, and threats (refer to 7.4.1 below to remind yourself about this approach). 3. Evaluate the information and reflect on the competitor's strengths and weaknesses. What have you learnt from their strengths? What weaknesses could be exploited? Stage 10 Analysing the Customer Since the customer is at the centre of most strategic decisions, analysing the customer plays a significant role in strategic management. Lynch (2006) highlights three areas on which to focus in analysing the customer. These are illustrated in Figure 7. Figure 7: Customer analysis Iden?fica?on of the customer and the market Both future customers as well as current customers should be analysed and the market clearly defined Market segmenta?on and its strategic implica?ons Some markets may be more profitable and avrac?ve than others. Some segments may have more compe??on than others. Some segments may be growing faster and offer more opportuni?es. Porter s market segmenta?on to dis?nguish between two major strategies Broad target segments large number of customers. Narrow market segments small niches in the market such as specialised products. (Lynch, 2006:104-105) Regenesys Business School 70

Consider the market for stationery in particular the market for pens. Define this market using examples, e.g. a Bic pen versus a Mont Blanc pen, utility pens versus gift items. Think about market segmentation and the strategic implications e.g. in terms of profitability, competition and market growth. Reflect on the distinctions between 'broad target segment' and 'narrow market segment'. In the next section (developing a strategy), we consider Porter's generic strategies (cost leadership, differentiation, cost focus and differentiation focus). Read more about strategic analysis in the two articles given below: Mason, R.B. 2007, 'The external environment s effect on management and strategy: a complexity theory approach', Management Decision, 45 (1), 10-28. Porter, M. 2006, 'Michael Porter asks and answers: why do good managers set bad strategies', http://knowledge.wharton.upenn.edu/article.cfm?articleid=1594 (accessed online 28 October 2012). 7.4.2 The SWOT Analysis Development of Strategic Options The familiar SWOT analysis is a tool used by decision makers to identify the strengths, weaknesses, opportunities and threats of an organisation (own or competitor). The strengths and weaknesses evaluate the internal organisational environment and the opportunities and threats identify the external organisational environment. An example of a SWOT analysis, and possible factors, is provided in Figure 8 below. Figure 8: SWOT analysis (Adapted from Gliffy.com, n.d.) Regenesys Business School 71

Berry (n.d.) provides the following guidelines when developing a SWOT analysis: Strengths Strengths describe the positive attributes, tangible and intangible, and internal to your organisation. They are within your control. What do you do well? What resources do you have? What advantages do you have over your competition? You may want to evaluate your strengths by area, such as marketing, finance, manufacturing, and organisational structure. Strengths include the positive attributes of the people involved in the business, including their knowledge, backgrounds, education, credentials, contacts, reputations, or the skills they bring. Strengths also include tangible assets such as available capital, equipment, credit, established customers, existing channels of distribution, copyrighted materials, patents, information and processing systems, and other valuable resources within the business. Strengths capture the positive aspects internal to your business that add value or offer you a competitive advantage. This is your opportunity to remind yourself of the value existing within your business. Weaknesses Note the weaknesses within your business. Weaknesses are factors that are within your control that detract from your ability to obtain or maintain a competitive edge. Which areas must you improve? Weaknesses might include lack of expertise, limited resources, lack of access to skills or technology, inferior service offerings, or the poor location of your business. These are factors that are under your control, but for a variety of reasons, are in need of improvement to effectively accomplish your marketing objectives. Weaknesses capture the negative aspects internal to your business that detract from the value you offer, or place you at a competitive disadvantage. These are areas you need to enhance in order to compete with your best competitor. The more accurately you identify your weaknesses, the more valuable the SWOT will be for your assessment. Opportunities Opportunities assess the external attractive factors that represent the reason for your business to exist and prosper. These are external to your business. What opportunities exist in your market, or in the environment, from which you hope to benefit? These opportunities reflect the potential you can realize through implementing your marketing strategies. Opportunities may be the result of market growth, lifestyle changes, resolution of problems associated with current situations, positive market perceptions about your business, or the ability to offer greater value that will create a demand for your services. If it is relevant, place timeframes around the opportunities. Does it represent an on-going opportunity, or is it a window of opportunity? How critical is your timing? Opportunities are external to your business. If you have identified opportunities that are internal to the organisation and within your control, you will want to classify them as strengths. Regenesys Business School 72

Threats What factors are potential threats to your business? Threats include factors beyond your control that could place your marketing strategy, or the business itself, at risk. These are also external you have no control over them, but you may benefit by having contingency plans to address them if they should occur. A threat is a challenge created by an unfavourable trend or development that may lead to deteriorating revenues or profits. Competition existing or potential is always a threat. Other threats may include intolerable price increases by suppliers, governmental regulation, economic downturns, devastating media or press coverage, a shift in consumer behaviour that reduces your sales, or the introduction of a leap-frog technology that may make your products, equipment, or services obsolete. What situations might threaten your marketing efforts? Get your worst fears on the table. Part of this list may be speculative in nature, and still add value to your SWOT analysis. It may be valuable to classify your threats according to their seriousness and probability of occurrence. The better you are at identifying potential threats, the more likely you can position yourself to proactively plan for and respond to them. You will be looking back at these threats when you consider your contingency plans. The implications The internal strengths and weaknesses, compared to the external opportunities and threats, can offer additional insight into the condition and potential of the business. How can you use the strengths to better take advantage of the opportunities ahead and minimize the harm that threats may introduce if they become a reality? How can weaknesses be minimized or eliminated? The true value of the SWOT analysis is in bringing this information together, to assess the most promising opportunities, and the most crucial issues. In the process of developing a SWOT analysis, you may find the following guidelines useful (Lynch, 2012:305): Stay focussed too much information will hinder the process. Link organisational strengths and weaknesses to industry key factors. State strengths and weaknesses in competitive terms. Ensure that statements are specific. The gap between where the organisation wants to be and where the organisation currently stands should be clear. Analysis of strengths and weaknesses should be realistic. Regenesys Business School 73

Task Questions 1. Analyse the competitive environment of your own organisation by using Lynch's ten stages. 2. Critically evaluate this approach what are its strengths and weaknesses? 3. Reflect on the following general SWOT analysis factors. Select those that are appropriate to your organisation and add further factors to arria comprehensive SWOT analysis. Strengths: Market dominance; core strengths; economies of scale; low-cost position; leadership and management skills; financial and cash resources; manufacturing ability and age of equipment; innovation processes and results; networks; differentiated products; and product and service quality. Opportunities: New markets and segments; new products; diversification opportunities; market growth; competitor weaknesses; strategic space (untapped business); demographic and social change; changes in the political or economic environments; new takeover or partnership opportunities; economic upturn; international growth Weaknesses: Few core strengths and low on key skills; old plant with higher costs than competition; weak finances and poor cash flow; management skills and leadership lacking; poor record of innovation; few networks; low quality and reputation; little product differentiation and limited product range. Threats: New market entrants; increased competition; increased pressure from customers and suppliers; substitutes; low market growth; economic cycle downturn; technological threats; changes in the political and economic environments; demographic change; and new international barriers to trade. (Adapted from Lynch, 2012:304) Regenesys Business School 74

7.5 DEVELOPING A STRATEGY Timeframe: Learning outcomes: Recommended reading: Section overview: Minimum of 15 hours Formulate and explain strategies for managing competitive and co-operative dynamics Distinguish between corporate and business strategy Develop business plans and devise systems aimed at efficient management within global markets Mindtools.com, 2012, 'Porter s generic strategies: choosing your route to competitive advantage', http://www.mindtools.com/pages/article/newstr_82.htm (accessed online 29 October 2012). Kim, W.C., and Mauborgne, R. 2002, 'Charting your company s future', Harvard Business Review, June 2002, 77-83. Now that the environment, resources and capabilities of the organisation have been analysed and their purpose defined, it is possible to develop a strategy. In this section, we will look at different approaches to develop and evaluate strategies. 7.5.1 Developing the Strategy: Corporate vs. Business Level At corporate level, a strategy is designed to link business activities with the organisation s vision and mission statement. These strategies, e.g. diversification, mergers and acquisitions, 'green' initiatives, etc., affect multiple stakeholders. Decision-makers therefore focus on stakeholder values and how these can be aligned with the mission statement of the organisation (Webster, 2012). Generally speaking, business strategies are developed to sustain the competitive advantage of the organisation. Decision-makers must ensure the organisation s position is (or remains) competitive in their industry. Likewise, notwithstanding the environmental factors, the organisation must continue to deliver profits and customer value in line with corporate level directives. Cost leadership and product differentiation, for example, are essential for business level strategies (Webster, 2012). Lynch (2012) defines corporate strategy on two levels: First, corporate level strategy is related to the strategic directions that lead companies to diversify from one business into other business areas, either related or unrelated. Second, corporate level strategy is defined as the role of the corporate headquarters in directing and influencing strategy. (Lynch, 2012:345). Regenesys Business School 75

In the texts that follow, we consider a range of strategies that may be viewed as corporate and business level strategies depending on the nature and size of the organisation including: 1. Generic strategies (the contributions of Porter) 2. Market and product options (the Ansoff matrix) 3. Expansion method matrix (Lynch's company vs geographic location approach) We also consider the evaluation of selected strategies and the processes to implement these. 7.5.2 Generic strategies The Contribution of Porter Porter (in Lynch, 2012:305-311) argues there are three generic strategies that businesses can adopt: 1. Low-Cost leadership (the business with the lowest costs has the advantage; e.g. 'no frills' flights; business puts considerable effort into exploiting all the sources of cost advantage and pursuing economies of scale) 2. Differentiation (occurs when the organisation differentiates its products/services and in doing so is able to charge more than competitors; e.g. Apple products command a premium price; the extra costs incurred by the differentiation must be recovered from the customer by charging the higher price) 3. Focus or niche (a segment is selected and products and services are tailored to serve these customers; e.g. Rolls-Royce and Ferrari representing differentiation focus; the objective is higher than average profits) Porter maintains that business needs to adopt one of these in order to compete competitively. By being in the middle the business will compete at a disadvantage. This is because the cost leader, differentiator, or focuser will be better positioned to compete in its segment (in Lynch, 2012:309). Figure 9: Porter's generic strategies Competitive advantage Competitive Scope Broad target Lower Cost Cost Leadership Differentiation Differentiation Narrow target Focus (Porter in Lynch, 2012:306) Regenesys Business School 76

To read more about Porter s generic strategies, access the article below: Mindtools.com, 2012, Porter s generic strategies: choosing your route to competitive advantage, http://www.mindtools.com/pages/article/newstr_82.htm (accessed online 29 October 2012). Refer to the recommended textbook to reflect on the criticisms of Porter's approach: Chapter 8, pp 309-311, Lynch, R. 2012, Strategic Management, 6 th ed., United Kingdom: Pearson Education Limited. 7.5.3 Environment-Based Strategic Options: Market Options Matrix The market options matrix/ansoff matrix Lynch (2012) describes the market options matrix (also known as the Ansoff matrix) as follows: "The market options matrix identifies the product and market options available to the organisation, including the possibility of withdrawal and movement into unrelated markets." (Lynch, 2012:315) This theory examines the strategic perspective of the organisation in a broader sense than a simple market or product matrix. The market matrix evaluates not only the introduction of new products and services into a market but also the withdrawal of a product or service from a market (Lynch, 2012:315-320): 1. Market penetration (same product in same market) 2. Product development (new product in same market) 3. Market development (same product in new market) 4. Diversification (new product in new market) Market penetration is seen as the lowest risk whereas diversification is seen as the highest risk. Refer to Figure 10 below. Penetration: When marketers try to sell the existing product to the existing customers, they engage in a penetration strategy. It can be achieved in multiple ways, e.g. by changing pricing, by adding minor features (new and improved), changing the packaging (shampoo sachets), or highlighting alternative uses. Product Development: McDonald's introduced salads in their outlets in order to retain their existing customers, many of whom were becoming more health conscious. Salads are exactly opposite of what McDonald's is known for. However, regulatory pressures, changing consumer behaviour, and negative media coverage forced them to introduce more healthy choices on the menu. Regenesys Business School 77

Market Development: Introducing an existing product in different markets is perhaps one of the most used strategies to extract full benefit of a successful product. A very common example is entering different geographical areas nationally and internationally as in the case of Starbucks, which originated in Seattle. They achieved widespread market penetration across the United States. Soon after, they expanded globally. Diversification: When marketers introduce a totally new product to a completely new market, they engage in diversification. ipod was perhaps one of the most successful diversification efforts. With its launch Apple targeted a very large customer group, very different from its traditional smaller cult-like following. Apple also entered into the music business that was completely new for the company. Steve Jobs and his team put a tremendous effort in creating contracts with music labels and artists. Together with these strategic options, alternative strategies should be considered (Lynch, 2012:316-317): Withdrawal (product life cycle is in decline) Demerger (particularly when the underlying assets are larger than the value implied by the share price, e.g. Hoechst demerger into chemicals and life sciences and its eventual focus on the latter) The market options matrix provides decision makers with useful options but does not provide an answer to which option to choose. The strategic value lies in the possibilities it provides. The decision maker's challenge is in choosing the right option. In order to make a worthwhile analysis it is also important to consider other factors, such as the condition of the market. You will need to know if it is in growth, decline or entering recession. Competition levels and amount of resources available should also to be taken into account. Regenesys Business School 78

Figure 10: Ansoff matrix Existing Products New Products Existing markets Market Penetra9on Product Development New markets Market Development Diversifica9on (QuickMBA.com, 2010) 7.5.4 Environment-Based Strategic Options: Expansion Method Matrix The expansion method matrix evaluates the internal and external resources available to the organisation. Lynch (2012) describes this matrix as: "The expansion method matrix explores, in a structured way, the methods by which the market opportunities associated with strategy options might be achieved. By examining the organisation s internal and external expansion opportunities and its geographical spread activity, it is possible to structure the various methods available." (Lynch, 2012:320) The full matrix is shown in Figure 11. Its value lies in helping to structure the prescriptive international and global options. Regenesys Business School 79

Figure 11: Expansion matrix (Lynch, 2012:321) The grid helps strategists to match geographical options (either home-based or internationally) to the company (internal or externally). Each of these options has both advantages and disadvantages. For example, whilst franchising requires a lower investment than outright purchase, part of the profits must be paid over to the franchise holder. Refer to your recommended textbook to read more about the advantages and disadvantages of the different methods of expansion: Chapter 8, pp 322, Lynch, R. 2012, Strategic Management, 6 th ed., United Kingdom: Pearson Education Limited. In general companies considering expansion do so in stages, for example, exporting might be a possible first expansion step followed by international offices (to establish a more permanent presence). The various risks and opportunities of each stage must be analysed, especially in terms of environmental factors such as currency volatility, and government restrictions. Regenesys Business School 80

Read more about developing strategies in the article below: Kim, W.C., and Mauborgne, R. 2002, 'Charting your company s future', Harvard Business Review, June 2002, 77-83. Task Questions Using Porter's generic strategies, the Market Options Matrix (or Ansoff matrix) and the Expansion Matrix analyse McDonald's most recent strategies described below. McDonalds Mini Case Study Here are five key takeaways from McDonald s Corporation s presentation for 2013, as the world's largest restaurant chain closes in on what is shaping up to be a mostly stagnant year for the global fast-food industry. 1. McDonald s Is Going Mobile, Among Other Digital Initiatives Chief Operating Officer Tim Fenton told investors that McDonald s is mapping out digital initiatives. He highlighted selfordering kiosks in Europe, mobile ordering, mobile payments and other smartphone tie-ins" as ways McDonald s is keeping up with modern consumers. The company is already testing mobile ordering apps for its U.S. stores. Tests are being done in Salt Lake City and Austin, Texas. According to public company documents, the system will allow customers to order by phone and then pick up at stores, curbside or at drive-thru's, and will include promotional and loyalty programs. McDonald s introduced free Wi-Fi at its restaurants in 2010. We re determined to keep strengthening our digital initiatives, said Fenton, "to stay in step with how our consumers look today. 2. Profit Margins Look Tough But profit margins at McDonald s have been tough this year, too, according to CFO Pete Bensen. This year's combined operating margins for the company fell to 30.3 percent, down 30 basis points, in 2013. While our margins remain solid within our industry, we are not satisfied with this result, said Bensen. He said the company's overall margins remained highly sensitive to changes in its chief components including franchise margins, corporate margins, and general and advertising budgets. Amid a tough environment for informal restaurants, the expectation is for margins to face ongoing pressure in 2013. Flattish sales, with slight declines in each major world region, also means that McDonald s can t easily cut prices to boost sales, another key factor in determining margins. Unless there s a dramatic change in the economy or consumers appetite, the size of the industry will remain relatively stagnant, said Bensen. Recovering margins could involve promotions to drive customer traffic, like premium food events common in European operations, or the new "Mighty Wings" products in the U.S. Slimming labor costs and raising prices are other alternatives, he said. 3. Globally The Picture Is Mixed, But Expansion Continues Recent sales results disclosed that McDonald s benefited from stronger European sales, which helped offset weak sales in the U.S., Asia and elsewhere. Global sales rose 1.9 percent in August. Surprisingly positive results in France, where McDonald s has faltered recently, were offset by a struggling business in China. McDonald s executives noted, however, that they weren't doing as badly as their competitors were in China, amid slowing economic growth and poultry safety scares. About $1.5 billion in capital spending will be allocated for more than 1,500 restaurant openings in 2013, in both established and emerging markets. As for Europe, this week s sales haven t convinced executives that a genuine recovery there is coming. I d say that things are less negative than they ve been, said Bensen, citing continuing high levels of unemployment and consumer confidence. Regenesys Business School 81

In China, McDonald s seeks to open 275 restaurants this year, beating last year s record, even as it closes (or delays the openings of) 50 stores. The goal is 2,000 restaurants there by the end of 2013, according to the 2012 annual report, compared to 34,000 worldwide and 14,000 in the U.S. The company also seeks to make China and Russia, two key markets, more like the U.S. in the dominance of the franchise business model. A tough year in China means the company has doubled down on value pricing and strategy, said Fenton. It isn t like we re expanding in all 119 markets at the same rate, added Bensen. Our [global corporate] results through June have been mixed, said Bensen earlier. He cited a sales boost of 3 percent, if counted in constant currencies, driven mostly by restaurant expansion, combined with revenue increases of 2 percent and earnings per share gains of 5 percent. 4. McDonald s Bets Big On Breakfast, Beef, "Mighty Wings," Longer Hours And Restaurant Renovations The fast-food titan s latest strategy is to emphasize new products, restaurant renovations and longer operating hours. Chicken, beef, breakfast and beverages are areas targeted for menu innovation because of their growth potential. The company has just introduced chicken wings, dubbed Mighty Wings, and steak in the U.S. Smoothies in the U.K., and relaunches of the quarter-pounder burger in Japan and the U.S. were significant, too, the executives noted. Even as U.S. customers enjoyed breakfast offerings, which made up 25 percent of total sales there, Asia and European customers avoided McDonald s breakfasts, something McDonald s is seeking to change. The company will "re-image" 1,600 restaurants globally, a tiny fraction of its overall presence, in an attempt to appeal to modern décor-conscious customers. Fenton hinted that new drinks are upcoming over the next year or so, as well as a potential dive into different ethnic flavors." Millennial consumers want more customization, he explained. Broadening accessibility is also about extending operating hours at our restaurants, said Fenton. In June 2013, the company rolled out "McDonald s After Midnight" menus in the U.S., and seeks to expand late-night and overnight menus here and in Asia, as it aggressively seeks more breakfast customers. 5. Fast-Food Restaurants Are In Street Fight Over Pricing Amid Poor Economy Amid a poor year for fast-food retailers, there s no denying an ongoing pricing street fight, acknowledged the executives. Asked whether fast-food rivals have become less rational amid depressed consumer spending, Fenton replied: It s a street fight. There s a lot of price [cutting], a lot of discount, a lot of couponing going on. Fewer customers, and everyone s going after the same customers for market share it s a tough fight, he said. We re fighting for the same customers that everyone else is, and value plays such a key role in attracting those customers, he said. The U.S. team is going to be a little more prudent about the level of price increases. It ll be a combination of monitoring the environment and using potentially short term promotions. Europe is another venue for ongoing fast-food street fights and price wars in particular, said the executives, given that the continent is only now emerging from its longest-ever recession. (Adapted from Rudarakanchana, 2013) 1. Compare your strategy analysis with a colleague. 2. Discuss the advantages and problems of McDonalds expansion strategies. 3. "The most important risk associated with international expansion is probably currency fluctuation." Evaluate this statement given the information provided in the case study and your own research. Regenesys Business School 82

7.5.5 Strategy Evaluation and Development: Prescriptive Process Once the organisation has identified the strategic approach, prescriptive strategic management requires that the next task is to select one and continue to progress from there. In order to make a selection, the following must be clear (Lynch, 2012:376): Strategy content: The strategy selected to achieve the objectives developed. Strategy process: The communication and discussion needed for the successful implementation of the strategy. The prescriptive process, discussed in a prior section requires that decision makers identify the most appropriate method to implement the strategy. In order to do this, Lynch (2012:379-384) suggests six evaluation criteria to evaluate strategic options. These are explained in Table 11 below: Table 11: Six evaluation criteria Consistency: Suitability: Validity: Feasibility: Business risk: Attractiveness to stakeholders: Is the strategy in agreement with the mission and goals of the organisation? Is the context of the strategy appropriate to the organisation both internally and externally? How well will it deliver competitive advantage? The SWOT analysis is an important analysis tool here. Are the calculations and other assumptions on which the strategy is based accurate and meaningful (do they provide the right measures)? Are the proposed strategies capable of being carried out (consider culture, skills, resources, competitive reactions, customer needs, commitment from management and employees and any other external and internal constraints)? Does the strategy expose the organisation to unnecessary risks or to an unreasonable degree of danger? Has a financial risk analysis been completed (cash flow, breakeven, ratio analyses)? Where risks are identified are these acceptable and manageable? Is the strategy sufficiently appealing to those people the organisation needs to satisfy? Is there a strategy in place to manage stakeholders (dividend policy, reward systems)? (Lynch, 2012:379-384) Regenesys Business School 83

Prescriptive strategy content: procedures and techniques Lynch (2012:388) identifies 10 steps towards an initial strategy evaluation: a) Screen out any early no-hopers that are highly unlikely to meet the objectives. b) Estimate the sales of each of the remaining strategic options based on market share, pricing, promotional support and competitive reactions. c) Estimate the costs of each of the remaining strategic options. d) Estimate the capital and other funds necessary to undertake each strategic option. e) Calculate the return on capital employed for each strategic option. f) Calculate the break-even of each strategic option. g) Calculate the net cash flow effects of each strategic option. h) Evaluate whether the projected sales levels imply exceptional levels of market share or unusually low costs. Are these reasonable? Real strategic weaknesses can emerge here. i) Assess the likely competitive response and its possible impact on each strategic option. j) Assess the risks associated with each strategic option. A cost benefit analysis: "Is the process of quantifying costs and benefits of a decision and those of its alternatives (within the same period) in order to have a single scale of comparison for unbiased evaluation. The calculation must show the Net Present Value (NPV) of the decision by discounting the investment and returns. Alternatively other comparative techniques may be used, e.g. Payback Period or Internal Rate of Return (IRR)." (Business Dictionary, 2013) A more sophisticated approach to cost/benefit measurement models is to try to put a financial value on intangible costs and benefits. This can be highly subjective, for example, is an historic water meadow worth R25 000, or is it worth R5m because if its environmental importance? Below is an example to indicate the practicality of the cost-benefit analysis: A sales director is deciding whether to implement a new computer-based contact management and sales processing system. His department has only a few computers, and his salespeople are not computer literate. He is aware that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to those customers. They are more able to meet commitments, and can work more efficiently with fulfilment and delivery staff. His financial cost/benefit analysis is shown below: Costs: New computer equipment: 1. 10 network-ready PCs with supporting software @ R2,450 each 2. 1 server @ R3 500 3. 3 printers @ R1 200 each 4. Cabling & Installation @ R4 600 5. Sales Support Software @ R15 000 Regenesys Business School 84

Training costs: Computer introduction 8 people @ R400 each Keyboard skills 8 people @ R400 each Sales Support System 12 people @ R700 each Other costs: Lost time: 40 man days @ R200/ day Lost sales through disruption: estimate: R20 000 Lost sales through inefficiency during first months: estimate: R20 000 Total cost: R114 000 Benefits: Tripling of mail shot capacity: estimate: R40 000/year Ability to sustain telesales campaigns: estimate: R20 000/year Improved efficiency and reliability of follow-up: estimate: R50 000/year Improved customer service and retention: estimate: R30 000/year Improved accuracy of customer information: estimate: R10 000/year More ability to manage sales effort: R30 000/year Total Benefit: R180 000/year Payback time: R114 000/ R180 000 = 0.63 of a year = approx. 8 months (Mindtools.com, 2011) Apply empirical evidence and guidelines Generic industry environments Generic industry environments propose, strategies can be selected on the basis of their ability to cope with a particular market or competitive environment" (Lynch, 2012:393). The ADL Matrix is a tool developed to assess how competitive positions and industry maturity influences your business strategy. It uses two axes: industry maturity and competitive position. The combination between the dimensions yields five (competitive position) by four (lifecycle stages) possible decisions (see Figure 12). The positioning in the matrix identifies a general strategy. This assessment of the industry life cycle stage of each business is made on the basis of: Business market share Investment Profitability and cash flow Regenesys Business School 85

Figure 12: ADL matrix (Value based management.net, 2012) Profitability and three key strategic issues Lynch (2012:395) argues that the profitability of organisations mostly relies on the following key strategic issues (derived from the PIMS study): The role of quality as part of the strategic decision Market share and expenditure as a contributor to strategy development Capital investments for new strategic issues Regenesys Business School 86

7.5.6 The Classic Prescriptive Model of Strategic Management: Exploring the Process The aim of this section is to describe and evaluate the usefulness of the prescriptive approach to strategic process. Wheelen and Hunger (in Lynch, 2012:402) identified five major elements of the process of strategic management: 1. Environmental scanning the external opportunities and threats of the SWOT analysis 2. Internal scanning the strengths and weaknesses of the SWOT analysis 3. Strategy formulation mission, objectives, strategies and policies 4. Strategy implementation including programmes, budgets and other procedures 5. Evaluation and control to ensure that the strategic process remains on its predicted path Unilever is constantly scanning its major competitors Proctor & Gamble (USA) and Nestle (Switzerland). It also examines its own resources, considers its business objectives and develops new strategies (e.g. investment in global ice cream markets). It implements such strategies by building or acquiring ice cream companies and then monitors profits to ensure they meet the groups strategic goals taking corrective action if they don't. (Lynch, 2012:402) Problems with the prescriptive approach Lynch (2012:404) identifies assumptions made by the prescriptive process, which might be a barrier to the implementation and development of a strategy. These are summarised in Table 12 below: Table 12: Problems with the prescriptive approach Environment Clear planning procedure Top-down procedures Culture The approach assumes that the environment is predictable. This is not always true. The approach relies on a procedure that once analysed; a clear and simple decision point will appear which could then be selected. Planning procedures rely on employees and employee tenure may be unpredictable. Enforcing strategy from decision makers to implementers is often a recipe for failure. Employees need to be consulted during strategy development, as this is then motivation for successful implementation. The approach assumes that organisational cultures are stable. It also requires organisational culture to follow the country-style approach. (Lynch, 2012:404) Jack Welch (GE) has the following to say on the problems encountered in strategic planning in the 1960s using the classical process (in Lynch, 2012:404): Regenesys Business School 87

Our planning system was dynamite when we first put it in. The thinking was fresh, the form mattered little the format got no points. It was idea-oriented. We then hired a head of planning and he hired two vice-presidents and then he hired a planner, and the books got thicker and the printing got more sophisticated, and the covers got harder and the drawings got better. Welch became increasingly concerned about the whole planning process in General Electric and moved to change it, being concerned about three areas: The bureaucracy that may breed under classical strategy processes The judgment required to make choices, which may not be as rational as the simple options and choice selection process suggests The need to encourage a culture of ideas rather than a top-down approach as in the classical strategy process. Read the case study below and answer the questions that follow: Task Questions Case Study Corporate strategy at two multinationals General Electric (USA) and Siemens (Germany) Multinationals are supposed to make superior profits from their internal resources and from their external market positions. But a comparison of two leading companies suggests that pursuing profitability is more complex in practice. General Electric As one of the world s largest multinational companies, GE has a wide range of commercial activities, ranging from financial services to media companies and heavy engineering. Essentially, this wide range of essentially unrelated business activities is co-ordinated and managed through a highly focussed corporate headquarters. The group s corporate purpose for many years has been to achieve high cash flow and drive down costs. Jack Welch, who retired as chief executive officer from GE group headquarters in 2001, was regarded as one of America s leading managers. He guided the multinational towards its current high profitability through mergers, acquisitions and divestments. Importantly, he also had a robust view of the performance of his senior managers in each of the company s divisions and sanctioned employment cuts where necessary to achieve the company s purpose. Siemens Siemens is one of Germany s largest multinational companies, with a long and distinguished history of invention, especially in engineering. In fact, the company has a reputation of being dominated for many years by engineers in senior management positions, with a consequent focus on the engineering excellence of its products. According to the Financial Times, [It] had management methods rooted in the 19 th century and financial returns to match. Much of its manufacturing was based on rigid production processes that could not be easily adapted to new products, but Siemens chief executive officer for the period 1992-2004, Heinrich von Pierer, guided the company towards a more marketoriented approach. Siemens headquarters then continued with this re-alignment under his successor, Klaus Kleinfeld, until Kleinfeld s sudden resignation in 2007. Unfortunately, Siemens found that there were suspicious payments amounting to US$1.9 billion in 2006, which may have been related to bribery at the company. At the time of writing, this matter was still under investigation. Regenesys Business School 88

Nevertheless, Kleinfeld judged that he should resign and a new chief executive, Peter Lőscher, was appointed. We are using the crisis and the positive elements to create something better, explained Lőscher. One thing is clear: this company failed based on leadership responsibility and culture. Essentially, the corporate headquarters team was then engaged in tackling the corruption accusations surrounding the company while at the same time allowing the various parts of the multinational to develop profitably. Beyond this matter, Siemens appears to have been in a constant state of re-organisation and flux since the mid-1990s, when it had a major downturn in its profits. Siemens corporate headquarters sold a range of poorly performing businesses in the late 1990s. Around 1999, the company HQ introduced a new three-part concept to improve its performance across the group called Top. It had three main pillars cost-reduction, growth and innovation directed at increasing the long-term profitability of the company. Cost-reduction was particularly important because Siemens costs in many product areas were 20-30 per cent higher than its competitors. (Lynch, 2009:342-343) Task questions: 1. What is behind the success of General Electric? 2. How relevant is the 'culture of ideas' in your organisation's strategic planning? 3. Explain why Siemens chose to acquire other companies rather than grow from within? What are the benefits and dangers relating to such a corporate strategy? 2. What are the benefits and problems involved with unrelated diversification? Do multi-product companies need to find degrees of relatedness in all their subsidiaries? 3. Describe the role of corporate headquarters and identify their implications for strategy development? Regenesys Business School 89

7.5.7 What is the Strategic Route Going Forward? In the previous section, we distinguished between the content (What?) of strategy development and the process (Why? Who? Where? When? and How?). Now we add a third element that helps to move beyond the simplified assumptions of the classic prescriptive approach: the context within which strategy is developed today. Strategic context refers to the ways in which strategy operates and develops within the environment in which it was developed. The prescriptive approach assumes predictable circumstances. Context thus needs to be developed further. In this section, we need to explore these routes, which identify alternative strategic approaches. The definition of context covers three main elements (Lynch, 2012:421): External environment customers, competitors and other areas that may also be important Internal environment the organisational resources Strategy as history the internal environment of the organisation Some context problems with the classic model of prescriptive strategy As mentioned before, the classic approach to strategy development assumes growth is a linear process. In a fluctuating economic environment, this approach is irrelevant. The external context could be extremely volatile. For example, selling E-books rather than selling hard cover books allows for publishers to distribute products differently. The internal environment could be even more complex because you are dealing with individuals and employees who might change their minds. The context (environment) in which strategy is developed could therefore influence the process of development. It is therefore important to explore alternative approaches to strategy development. Alternative approaches to strategy development (mainly emergent approaches) There are many alternative approaches to strategy development. We will discuss four different approaches in this study guide. These are briefly summarised below (Table 13) and then expanded on in the text that follows. Table 13: Alternative approaches to strategy development Survival-based Chaos-based Network-based Learningbased This approach argues that organisations must survive in a hostile and highly competitive environment. This route identifies the environment as unpredictable but within the uncertainty lie opportunities and transformation. This route has two elements: external networks and co-operative networks. External networks look at how the product or service can be reinforced. The second element looks at the co-operation between markets, industries and companies. Both the elements focus on outcomes that are unknown during the process. This approach is based on the existing knowledge and experience of the organisation. The process involves learning from the past and using that knowledge to contribute to the future. (Lynch, 2012:422-423) Regenesys Business School 90

7.5.8 The Survival-Based Strategic Route Forward This theory regards the survival of the fittest in the competitive market (Lynch, 2012:426-427). This theory is based on natural selection theory developed by Charles Darwin: survival only happens to those who change and adapt to their environment. Two mechanisms are in operation in the survival-based process. 1. Adaptation to the environment 2. Selection among those present for survival Examples of inertia towards change in company environments: Internal inertia 1. Existing investment in plant and machinery 2. Previous experience and history of the company Example: in European telephone companies the existing bureaucracy, built up during many years in government ownership, was very difficult to shift. External inertia 1. Barriers to entry and exit from an industry 2. Difficulty and cost of acquiring information on how the environment itself might be changing Example: European telephone companies' existing investment in exchanges and telephone equipment, coupled with external government restrictions that would prevent new companies entering until 1998, had created inertia towards change within the industry. (Lynch, 2012:427) This process makes the applicability of strategic management s influence limited. The approach/route is pessimistic in the ways in which organisations can shape their destiny. Figure 12 suggests the strategic process of the survival-based approach. Table 14: Prescriptive process versus survival-based process Typical outline of the prescriptive model of the strategic management process 1. Mission and objectives 2. Environmental analysis 3. Resource analysis 4. Strategy options generation 5. Strategy selection 6. Implementation Survival-based corporate strategy process Short-term conservative objectives Analysis to look for clues to survival but difficult to predict and inertia may be strong Internal factor analysis also important but note structural inertia Vital to generate many options Do not choose: keep options open and let the market choose Survive and hold some capacity in reserve for unknown events (Lynch, 2012:428) Regenesys Business School 91

Task Questions 1. Under what conditions is each of the above strategies suitable? 2. Critically evaluate the survival-based corporate strategy for a large petrochemical organisation (e.g. Shell). 7.5.9 The Uncertainty-Based Strategic Route Forward This theory considers the prescriptive approach to strategic management impossible because of the uncertainty and instability of internal and external environments. This approach assumes that organisational success depends on innovation and transformation. Organisations cannot merely continue to exist; they need to change as the world changes around them. As Lynch (2012:428-429) explains: Given this definition of success, the strategic process by which this is achieved will inevitably involve uncertainty. However, uncertainty can be modelled mathematically and its consequences set out in the science of chaos theory a system of modelling origin applied to scientific processes such as flow of liquid through a tube and subsequently weather forecasting. The theory demonstrates that, in certain types of uncertain environments, small changes in the early stages of a process can lead to major variances in the later stages. In the classic strategy process, there is a mechanism of cause and effect that control the dynamics of change. Feedback arises from an initial strategic decision, but goes beyond such a decision by multiplying its effects. Uncertainty is the unknown result of a strategic decision, which may be, affected by chance events along with those that are more predictable. Consequences for the strategic management process This theory argues that there is no use in predicting the future as it involves too much uncertainty. Therefore, actions planned should be short-term in nature. Organisations should learn and adapt to the circumstances as they change. Task Questions 1. Assume that your organisation is in the business of online travel bookings. How will the Internet impact on travel in the future? Can you answer this question with certainty? 2. Given your response to this question what time frame should your strategic planning take? Justify your response. Regenesys Business School 92

7.5.10 The Network-Based Strategic Route Forward Network externalities This aspect of the approach assumes that organisations try to standardise networks across the industry. The benefit is to the customers and the organisations as working in a standardised environment provides some stability. It is referred to as an externality because it is driven by internal activities in companies as well as the external network of companies belonging to the system. This approach could be adapted in organisations with a cooperative content, like the travel industry (Lynch, 2012:436). Network co-operation This approach relies on agreements between companies, which will benefit both companies. It is based on the value these relationships would add. Strategically, the issue is to optimise the relationship. This refers to two principles (Lynch, 2012:437): 1. Managing and owning resources 2. The value chain and value linkages Strategist argues that there is value in the combination of competitive and cooperative network. These issues should be balanced and success will depend on the context within which the strategy is being developed. Consequences for the strategic management process This approach relies on negotiation and revised objectives. The strategic process must however be moved forward which make the leadership of the process essential. 7.5.11 The Learning-Based Strategic Route Forward This approach requires a look at the past actions and includes learning and leveraging this for future success. Adapting to change using experience allows strategists to recognise risks and respond quickly to these. Organisational learning relies on shared mental models of the organisation, the market and the competitors. Planning is then seen as learning and corporate planning is institutional learning. Strategic decisions should be made within teams and shared amongst other teams. Learning is the expansion of organisational knowledge. This involves the acquiring of new knowledge, evaluating the new knowledge against reality and thereafter providing feedback on the result. Gaining knowledge could involve research, experience and an intuitive understanding of context. Regenesys Business School 93

Senge (1990) draws an important distinction between two types of learning: 3. Adaptive learning understanding changes outside in the environment and adapting 4. Generative learning creating and exploring new strategy areas for positive expansion within the organisation itself Both types of learning will come from experimentation, discussion and feedback with the organisation. Rigid, formal, hierarchical organisations are unlikely to provide this. New, more fluid structures are needed. The strategic importance of managing knowledge Many organisations are now realising the role of knowledge and are creating knowledge management capabilities by appointing CKOs (Chief Knowledge Officers). Such responses should be part of a coordinated effort that: Recognises the importance of knowledge assets in providing value Develops new measures of organisational performance based on knowledge Enhances learning through knowledge processes Encourages and rewards the sharing of knowledge The issues and challenges facing executives and senior managers are that it is difficult to go it alone. Stakeholders, especially employees and business partners must share similar views about the importance of knowledge processes such as creation, capturing, codifying, sharing and the application of knowledge for the organisation to succeed. Recognition and reward systems alone usually do not sufficiently stimulate contributions. Perhaps the biggest hurdle is that measures of return on investment are done using traditional accounting methods, thus investments in knowledge enhancing activities need strong advocates at senior levels. In the last few years, a growing recognition by accounting bodies and international agencies that knowledge is a crucial factor of production has become evident. For example, the Organisation for Economic Co-operation and Development (OECD) has groups investigating human capital and also the role of knowledge in international competitiveness. Several conferences in 1997, including one sponsored by the World Bank, have placed knowledge firmly at the heart of the economic agenda (Skyrme, 1997). The ability of using knowledge as the basis of economic advantage has become, over the past three decades, a key-factor of national competitiveness. As world development and international relations shift from geopolitics to geo-economics, competitive advantage of nations lies in their abilities to leverage strategic knowledge, for their administrations, their industries, their people, their economic wealth and social welfare. It is becoming essential to increase the level of information sharing among NGOs, governments, investors, private firms, farmers, and small rural service providers. Creating this knowledge sharing mechanism will be a worthy challenge for emerging economies. Regenesys Business School 94

This is a strategic view of knowledge management that considers the synergy between technological and behavioural issues as necessary for survival in 'wicked environments'. The need for synergy of technological and human capabilities is based on the distinction between the 'old world of business' and the 'new world of business'. 7.5.12 Consequences for the Strategic Management Process Learning organisations depend on the element of discussion and co-operation between employees. The strategic process thus involves more people and is more open. More people usually translate to a slower process but it enhances commitment. The implementation phase will, however, be faster as everyone has been involved in the development of the activities they are expected to implement (Lynch, 2012:446-447). 7.5.13 International Considerations International considerations may impact on the strategy process at every stage. The ability of stakeholders to influence the process will vary from country to country for historical political and cultural reasons. The mission and objectives are likely to be rooted in the social and cultural systems of the country in which the strategy is developed. The environment may be important in another aspect of strategy development: the home country of an organisation will influence the way in which the international strategy is developed and managed. The culture and social systems of the people involved in the process will govern options and choice in the selection process. Task Questions 1. How would a learning-based strategy help your organisation? 2. The approach has been criticised for being vague and lacking operational structure people need to make decisions and cannot wait for a learning process to commence. What is your view on this? Substantiate your argument. Regenesys Business School 95

7.6 STRATEGY IMPLEMENTATION Timeframe: Learning outcomes: Minimum of 15 hours 1. Analyse, formulate and implement strategy in different business environments for achieving competitive advantage 2. Apply and review investigative skills in understanding industry strategies 1. Blumentritt, T. 2006, 'Integrating strategic management and budgeting', Journal of Business Strategy, 27 (6), 73-79. Recommended reading: Multimedia: Section overview: 2. Conbbold, I., and Lawrie, G. 2002, 'The development of the Balanced Scorecard as a strategic management tool', http://www.2gc.co.uk/pdf/2gc-pma02-1f.pdf (accessed online 16 November 2012). 3. Khalifa, A.S. 2008, 'The strategy frame and the four Es of strategy drivers', Management Decision, 46 (6), 894-917. 4. Sandhya, K., and Kumar, D.P. 2011, 'Employee retention by motivation', Indian Journal of Science and Technology, 4 (12), 1778-1782, http://www.indjst.org/index.php/indjst/article/view/30326/26258 (accessed online 18 June 2014). 13. Boutellier, R. (n.d.) 'Basic types of organisational structure' [Article with embedded slides] http://www.tim.ethz.ch/education/courses/courses_fs_2008/course_gm1_fs_2008/05_basic_t ypes_of_organisation_.pdf (accessed online 3 December 2012). No matter what method strategists select, there will come a time when every organisation will need to put its strategies into practice; i.e. implement them. This section discusses the implementation, monitoring and control of strategic plans. Regenesys Business School 96

7.6.1 Implementing and Controlling the Strategic Plan The aim in implementing a strategy is to deliver on the vision, mission and goals of the organisation. To achieve this, strategies need to be monitored (measured) and controlled (kept on track). Various tools, including the Balanced Scorecard are effective in achieving coherency between what needs to be achieved and actually achieving this. Figure 14 below shows the main elements of the implementation process each of which are discussed in detail. Figure 13: Main elements of the implementation process (Lynch, 2012:494) 7.6.2 The Nature and Implications of the Implementation Process Basic elements of the implementation process Irrespective of the approach to strategy, implementation needs to be planned. The plans should answer the following questions (using the 5Ws and H): What has to be achieved? Why is this important? Who is responsible for implementation? When does it have to be achieved by (including the milestones)? Which activities will enable the agreed objectives to be reached? How will we monitor and control progress? Regenesys Business School 97

Turning strategies to implementation, the following four elements should be considered (Figure 15): Figure 14: Four elements of implementation Iden?fy strategic objec?ves Formulate specific plans Allocate resources and budget Monitor and control the procedure (Lynch, 2012:497) Implementation requires carefully planned activities for the organisation to achieve its objectives. These include activities relating to corporate level responsibilities, business units and functional departments. At each level objectives are set, appropriate plans are drawn up, resources are allocated within clearly defined budgets, and monitoring and control processes are put in place. Within the implementation process, it may be useful to draw a distinction between different types of implementation. There are three major approaches: comprehensive (pushed through regardless of changes in the environment), incremental (in conditions of great uncertainty) and selective (compromises are made). Implementation in small and medium-sized businesses may be less elaborate but need to follow the same general principles. According to Pettigrew and Whipp (as cited in Lynch, 2012:499), implementation is best seen as a continuous and iterative process, rather than one that simply occurs after the formulation of the strategy (their research argues against a linear approach). Hrebiniak and Joyce (in Lynch, 2012:499) point out two significant limitations in implementation: 1 Bounded rationality (managers are bound by their own limitations in terms of options and will attempt to reduce implementation to bite size chunks; they may also make decisions that favour their own personal goals which are not necessarily the same as the organisation) 2 Minimum intervention (the philosophy of "if it ain't broke, don't fix it"; managers only change what they perceive to be necessary and sufficient) Implementation is not immutable and unchanging managers learn about their strategies as they implement them? Strategy implementation infers change the very prospect of change will confront established positions raising issues of power. Strategy implementation combines analytical, educational and political aspects. Regenesys Business School 98

Implementing green strategies Lynch (2012:500-501) recommends that green strategy implementation takes place on two levels: 1. Internal actions (include purpose, operational targets to achieve sustainability, defined roles/responsibilities and timing, specific tasks, and publishing of progress) 1.1 In-house waste and re-cycling 1.2 Pollution prevention 1.3 Better use of water and lower energy usage 1.4 Alternative fuels 1.5 Better design of equipment 2. External actions (includes published reports, public relations activities, commitment to local and national communities, development of external links and relationships with like-minded groups) 7.6.3 Objectives, Task Setting and Communicating the Strategy Setting objectives, formulating actions plans, and determining deadlines, milestones and resources required cascade from the corporate strategic goal as shown in the diagram below. Figure 15: Cascading the corporate goal to divisional/functional levels Corporate Goal Marketing Objectives Operations Objectives Finance Objectives Etc. Marketing Action Plan Operations Action Plan Etc. Deadlines, Milestones, Resources, Etc. Etc. (Adapted from Lynch, 2012:503) Regenesys Business School 99

The objectives must be stated in SMART terms, e.g. the Corporate goal might state "Increase Market Share", and therefore the Marketing objective might, for example, read: "Increase market share from 3% to 8% over two years using digital marketing strategies". Whilst the objectives set across the business and functional areas may be different, there will be integrity between them. For example, if the goal is to increase market share, operational and human resource objectives must also reflect this aim and be aligned to other functional and business needs. In fast-changing environments, it may not be possible (or desirable) to have rigid objectives because they may be made redundant by outside events. However, it can also be argued that without some structure monitoring and controlling of the individual objectives will become impossible. Clearly communication and co-ordination are integral to successful implementation. These are especially important in ensuring not only the understanding of the plan but also the underlying assumptions. Communicating the strategy to stakeholders (e.g. employees) should be done by integrating the viability of the plan into the everyday activity of employees and their performance objectives (Laban and Green, 2003). 7.6.4 Information, Monitoring and Control Once strategy implementation is in progress, monitoring and control become operational. The information gained from monitoring and control processes is used to (Lynch, 2012:512): Assess continued resource allocation options Monitor progress against objectives Evaluate performance of management against their functional/business unit objectives Monitor progress against changes in the environment (assumptions made against actual events) Provide a feedback mechanism so that fine tuning can take place Read more about strategic implementation in the articles indicated below: 1. Blumentritt, T. 2006, 'Integrating strategic management and budgeting', Journal of Business Strategy, 27 (6), 73-79. 2. Khalifa, A.S. 2008, 'The strategy frame and the four Es of strategy drivers', Management Decision, 46 (6), 894-917. Regenesys Business School 100

7.6.5 The Balanced Scorecard The balanced scorecard can be used as a strategic tool. The Balanced Scorecard Institute (2012) describes the balanced scorecard as: A strategic planning and management system that is used extensively in business and industry, government, and non-profit organisations worldwide to align business activities to the vision and strategy of the organisation, improve internal and external communications, and monitor organisation performance against strategic goals. (Balance Scorecard Institute, 2012) The balanced scorecard views the organisation from four perspectives: The learning and growth perspective, the business process perspective, the customer perspective and the financial perspective (Balanced Scorecard Institute, 2012). This is illustrated in Figure 15. Figure 16: The Balanced Scorecard (Balanced Scorecard Institute, 2012) Notice, that against each perspective there are criteria: objectives, measures, targets, and initiatives. The diagram also infers integrity between the parts shown by the use of arrows (all the parts are connected). Regenesys Business School 101

Read more about the balanced scorecard in the article below: Conbbold, I., and Lawrie, G. 2002, 'The development of the Balanced Scorecard as a strategic management tool', http://www.2gc.co.uk/pdf/2gc-pma02-1f.pdf (accessed online 16 November 2012). Task Questions 1. Write down the strategic goals in your organisation (read the vision and mission to determine these if they are not readily available). Create a cascading framework of the business and functional departments in your organisation and determine one strategic objective for each. Select one of these departments and determine the elements that would contribute to a meaningful action plan. 2. Explain briefly why strategic monitoring and controls are necessary and indicate how they might be improved in your organisation. 3. How can objectives and tasks be communicated from senior management while, at the same, time motivate those who have to implement them? 4. Explain why the Balanced Scorecard is an effective tool in bringing together the elements of the implementation process. Regenesys Business School 102

7.6.6 Organisational Structures, Styles and People Issues Once the strategy has been developed, the organisation needs a structure and people to implement the plan. The traditional approach to strategic management assumes that strategies are decided upon and then organisational structures follow. Recently research has questioned this approach (Lynch, 2012:456). Figure 17 illustrates the debate. Figure 17: Organisation structure and people issues (Lynch, 2012:456) Regenesys Business School 103

7.6.7 Building the Organisations Structure: Basic Principles It is argued that the structure of the organisation will either prevent or facilitate the organisation's ability to reach its mission and goals. When building the structure, the following questions should be answered (Lynch, 2012:463). What kind of organisation are we (project-based; service orientated; part of a supply chain; etc.)? Who are our stakeholders (consumers; businesses; government; etc.,)? What is our purpose (to what extent does the purpose dictate the structure)? 1. Think broadly about the structure of your organisation in terms of the above three questions. 2. Is the structure too rigid, hierarchical and bureaucratic to cope with the strategy or is there a 'strategic fit'? 3. Reflect back on what was discussed in terms of value chain what are the implications of this in terms of strategy? The main elements of organisational design The main elements of organisational design are described in Table 15 below. Whilst this may appear to over complicate the match between strategy and structure, these factors are worth considering in terms of how they may constrain or facilitate the organisation's ability to deliver on its strategy. Table 15: Main elements of organisational design Age Size Environment Centralisation / decentralisation Work to be undertaken Technical content of the work Tasks within the organisation Culture Leadership Older organisations are usually more formal. Age influences organisational style and culture (tradition is embedded in the structure). Larger organisations have more formal methods/systems and structures (a consequence of span of control) According to the five forces of Porter, the organisation's structure needs to respond to these forces. Each organisation has a choice as to what and how much they could control from the centre (to achieve economies of scale the control may be more centralised). Work within the organisation needs to be linked to the value chain of the organisation. Fast growing organisations may be more diversified. In company s working with mass production, it is often thought that technology controls employees and their activities. Organisations have different priority functions. Some organisations have extensive R&D departments with highly specialised employees (e.g. pharmaceuticals) whereas others require highly mechanised environments (e.g. motor assembly organisations). The organisation's susceptibility to change, its ambitions and its willingness to innovate will affect the design (e.g. IT organisation versus and accounting organisation). The leadership style of the management team will affect the organisation's design (an autocratic leader versus a transformational leader). (Lynch, 2012:464-465) Regenesys Business School 104

7.6.8 The Choice of Management Style and Culture Arguably, each organisation needs to adjust to the environment in which they find themselves. This often requires a change in leadership and management styles and possibly even culture (e.g. think of a small, family run business that develops into a national or even international organisation). Lynch (2012:469) emphasises: Strategic change will impact the people of the organisation as well as the organisation as a whole Leadership is essential to effect the changes A shift in culture and style is related to a change in strategy Read the following excerpt and then answer the questions that follow. Task Questions You need a new leadership strategy now It s 2010. Your business has survived the worst of the global recession. It may be a bit leaner, or even severely gutted. It certainly carries scars from a brutal time. As you plot your course ahead and continue to respond to change and uncertainty, now is the time when you must ask, What is our leadership strategy? Change is tough and always has been. Many executives aren t good at leading change because they don t understand the importance of making critical changes in how their companies are led, not just in how they operate. Consider the chief executive officer who wants to be first into a new market with a variation on the company s core product. Collaboration between research and development and marketing is essential, as is support from logistics, information technology and customer service teams. But if collaboration across boundaries isn t made an explicit leadership priority, and taught and rewarded, strategies that depend upon inter-unit or cross-functional collaboration will likely run into stiff resistance from leaders who judge success by the results in their own areas alone. A leadership strategy makes explicit how many leaders you need, what kind, where, with what skills, and behaving in what fashion individually and collectively to achieve the total success you seek. Getting your leadership strategy right begins with your business strategy, and it involves asking four big questions: 1. What are the drivers of our business? Key drivers are the things that make your business strategy unique. What key choices are you making about how to position the organization to take advantage of its marketplace strengths, weaknesses, opportunities and threats? Drivers, also known as key success factors, key value propositions or critical success factors, are few in number and help you understand what things your organization absolutely must accomplish. Key drivers can be identified by examining each business strategy or initiative and asking a few fundamental questions about it: Does it embody an organizational capability that is absolutely vital? Could something else be more essential in completing the company s mission and realizing its vision? What is most important for competitive success and mission completion? Is this something that the organization is positioned to do better than its competitors? Will doing it well translate directly into continued or future success? Will not doing it well cause the organization to fail? Regenesys Business School 105

2. What kind of leadership do we need? If as a CEO or senior executive you don t think about the key characteristics of the leaders in your company and how you want them to lead, you may not like what you get. One way to get a handle on the leadership culture you ll need for future organizational success is something called the future perfect method. We have senior leadership teams project themselves into the future by imagining that their organization is fully implementing its business strategy and operating as effectively as possible. What behaviors among leaders would they observe? What shared beliefs would be held by all the leaders that supported and reinforced those behaviors? What behaviors would be called out as indicative of good leadership and rewarded accordingly? By examining this future state, you can spot the gaps and limitations in your current leadership practices and set priorities for development. 3. How am I myself leading? Setting or changing a leadership strategy begins with you. Don t think you can delegate leadership strategy to others or ask others to change in ways you aren t willing to. Top executives must believe and show that they can learn and lead in new ways, if that s what s required to change the organization. 4. Who are our leaders? Once you set your organizational leadership strategy and start to walk the talk yourself, you need to assess the leaders you have against your strategy. That s often where things get interesting. Organizational change requires change in culture. Having a pool of managers with a track record of good performance is not enough. Simply filling all the leadership positions on the organizational chart will not produce the leadership you need to implement strategies, adapt to change, support innovation and meet other big organizational goals. It s not having the right number of bodies; it s what those bodies do and how they relate to one another. What do you do when you find out you don t have the right leadership? Are you willing to do something about it? If you are, do you understand how to get people to lead differently? Replacing them is one step you can take, but not by simply replacing them with others who lead the same way. Finding people who are willing to lead differently, or helping existing leaders lead differently, will be a key challenge at most companies over the next decade. Having a clear picture of the kind of leadership your company needs and how you ll get it is just as important as figuring out what you re trying to do. Yet very few organizations have explicit leadership strategies. Fewer still have leaders who are personally committed to changing the way they lead if it s clear the status quo isn t working. Next time you re bemoaning the gap between goals and execution, the falling short of a change initiative or the shortage of leadership talent in your organization, don t leap to change your operations. Instead, invest in a leadership strategy. (Pasmore, 2010) Task questions: 1. Do you agree with the arguments proposed by Pasmore in terms of leadership and culture? Why/why not? 2. Little mention is made of management? Why does Pasmore focus on leadership as opposed to management? 3. What does Pasmore mean by "inter-unit or cross-functional collaboration" and how does leadership act as a conduit? 4. Pasmore emphasises the need for a 'leadership strategy'. Are leaders of strategy different from organisational leaders? Evaluate his argument. Regenesys Business School 106

7.6.9 Types of Organisational Structure Six types of organisational structure can serve to implement the chosen strategy: Small organisation structure (owner/proprietor and small team) Functional organisation structure (locating the structure around the main activities such as production, marketing, human resources, finance, research and development) Multidivisional structure (includes separate divisions formed on the basis of products, markets, or geographical areas) Holding company structure (the holding company owns various individual businesses and acts as the investment company) Matrix organisation structure (combines two different structures such as functional structure and project teams) Innovative organisation structure (characterised by creativity and lack of formal reporting relationships) (Lynch, 2012:476) Read more about organisational structures in the source below: Boutellier, R. (n.d.) 'Basic types of organisational structure' [Article with embedded slides] http://www.tim.ethz.ch/education/courses/courses_fs_2008/course_gm1_fs_2008/05_basic_types_ of_organisation_.pdf (accessed online 3 December 2012). Motivation and Staffing in Strategy Implementation For a strategy to be successful, motivated employees are needed. Read more about employee motivation in the article below: Sandhya, K., and Kumar, D.P. 2011, 'Employee retention by motivation', Indian Journal of Science and Technology, 4 (12), 1778-1782, http://www.indjst.org/index.php/indjst/article/view/30326/26258 (accessed online 18 June 2014). Recap Questions 1. What structure would you expect the following organisations to have? A small management consultancy company based in one country only. A voluntary group providing volunteers to visit the housebound elderly. A medium-sized company (1 500 employees), two factories and a separate headquarters. A leisure park business owned and operated by a family company. A medium-sized computer company with 80 employees, which writes software for games machines. A large multi-national organisation with interests in the retail and energy sectors. 2. Discuss the main principles involved in finding a strategic fit between strategy and structure? 3. "Every organisation needs an element of innovation." Critically evaluate this statement. Regenesys Business School 107

7.7 MANAGING STRATEGIC CHANGE Timeframe: Learning outcome: Multimedia: Section overview: Minimum of 10 hours 1. Apply and review investigative skills in understanding industry strategies Change management consultant.com, 2012, 'John Kotter leading change: how leaders successfully transform business' [Article with embedded video clips] http://www.changemanagement-consultant.com/john-kotter.html (accessed online 16 November 2012). Duesrst, A. 2011, 'Strategic change processes Managed Holistically' [video clip] http://www.youtube.com/watch?v=x25- hmr6dqy&playnext=1&list=pl2405fe1a247a2caf&feature=results_main (accessed online 29 October 2012). Strategy requires change. In this section, we will discuss the management of strategic change and tools to manage change in an organisation. 7.7.1 What is Strategic Change? Whilst organisational change takes place continuously in organisations, strategic change is defined as: "The proactive management of change in organisations to achieve clearly identified strategic objectives." (Lynch, 2012:564) 'Proactive' means that the company takes the initiative to manage new strategies and the impact that these will have on people in an organisation. For an overview of strategic change management, watch the video clip below: Duesrst, A. 2011, 'Strategic change processes Managed Holistically' [Video] http://www.youtube.com/watch?v=x25- hmr6dqy&playnext=1&list=pl2405fe1a247a2caf&feature=results_main (accessed online 29 October 2012). Regenesys Business School 108

The scope of strategic change is illustrated in Figure 18 below. Figure 18: Manage strategic change (Lynch, 2012:561) 7.7.2 Analysing the Causes of Strategic Change Tichy (in Lynch, 2012:568) identifies four main triggers for change: 1. Environment: Environmental shifts in the economy, competitive pressures and legislative changes can lead to demands for major strategic change. 2. Business relationships: New alliances, acquisitions, partnerships and other significant developments may require substantial changes in the organisation structure in order to take advantage of new synergies, value chain linkages or core competencies. 3. Technology: Shifts here can have a substantial impact on the content of the work and even the survival of companies. 4. People: New entrants to organisations may have different educational or cultural backgrounds or expectations that require change. This is especially important when the leadership of the organisation changes. Regenesys Business School 109

Kanter, Stein and Jick (in Lynch, 2012:568-569) identify three causes of strategic change: Environment Lifecycle differences Political power changes inside the organisation 7.7.3 Developing a Strategic Change Programme The following twelve important steps develop a strategic change programme (Lynch, 2006:772): 1. Identify a change process that the organisation can easily apply. 2. Review selected documentation to determine issues, which should be addressed in the Strategic Change Planning process. 3. Analyse Stakeholder needs to determine what they want. 4. Conduct environmental assessment (benchmarking) to determine what others have done and to identify organisational readiness. 5. Establish vision, goals and objectives for strategic change. 6. Develop the core set of values and principles that will identify how the new culture will be developed for the organisation. 7. Identify communication channels for this change. 8. Establish goals for the strategic change. 9. Develop a strategy to implement the required change. 10. Conduct a Risk Assessment to uncover what might prevent total success. 11. Establish plans to manage risks. 12. Ensure that the driving forces of change are viewed as beneficial to the organisation by all levels of employees. Once you have considered the change management objectives and scope, you will need to consider the specific tasks. The range of possible change management activities is broad. The essence of this is to identify the tasks that are necessary if you are going to give change the greatest chance of success. Regenesys Business School 110

7.7.4 Kotter s Eight Step Change Model John P. Kotter, a Harvard professor, wrote an article in 1995 Why transformation efforts fail. This article has transformed how managers think about change management. The article identifies eight steps to change. These steps are illustrated in Figure 19 below. Figure 19: Kotter s eight-step change model (TheVirtualLeader.com, 2011) Access the following website for an explanation of Kotter s change model: Change management consultant.com, 2012, 'John Kotter leading change: how leaders successfully transform business' [Article with embedded video clips] http://www.change-managementconsultant.com/john-kotter.html (accessed online 16 November 2012). Regenesys Business School 111

Recap Questions 1. If strategic change is important, why do some people find it difficult to accept and what are the consequences of this for the change process? How can these difficulties be overcome? 2. Analyse the politics of an organisation with which you are familiar. If you were seeking significant strategic change in the organisation, how would you approach this? 3. Outline the main approaches to managing strategic change. Regenesys Business School 112

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