Strategic Management in the Cintext of Existing Management Principles
TOPIC 1: ALL ABOUT STRATEGIC MANAGEMENT
*Study unit 1.1: A review of our existing knowledge of business management
*Study unit 1.2: The strategic management process and strategic planning
*Study unit 1.3: Foundational concepts of strategic management
*Study unit 1.4: Advantages and disadvantages of strategic management
TOPIC 2: THE FIRST STEP IN THE STRATEGIC PLANNING PROCESS: SETTING STRATEGIC DIRECTION
*Study unit 2.1: Importance of strategic direction, vision and strategic intent
*Study unit 2.2:Mission statement and stakeholders
TOPIC 3: THE SECOND STEP IN THE STRATEGIC PLANNING PROCESS: ENVIRONMENTAL ASSESSMENT
*Study unit 3.1: The rationale for assessing the environment
*Study unit 3.2: Internal environmental assessment using a resource-based view
*Study unit 3.3: Internal environmental assessment using a value-chain analysis
*Study unit 3.4: Internal environmental assessment using a functionalapproach and financial ratio analysis
*Study unit 3.5: Macro environmental assessment
*Study unit 3.6: Industry environmental assessment
*Study unit 3.7: Market or task environmental assessment
*Study unit 3.8: Interpreting and applying the results of an environmentalassessment
TOPIC 4: THE THIRD STEP IN THE STRATEGIC PLANNING PROCESS: SETTING STRATEGIC GOALS
*Study unit 4.1: Developing strategic goals
TOPIC 5: THE FINAL STEP IN THE STRATEGIC PLANNING PROCESS: STRATEGIC CHOICES
*Study unit 5.1: What are the strategic options?
*Study unit 5.2: Making a choice
STUDY GUIDE REFERENCES TO BE FOUND IN THE TEXT BOOK:
• Section A comprises 4 paragraph typequestions for 20 marks
• Section B comprises essay-type questionsfor 50 marks
• Learning outcome standards
• Activities in the study guide
• Self-assessment assignments
• Previous exam paper
• Start preparing today!
• Use diagram of strategic management processfor context
STRATEGIC MANAGEMENT IN THE CONTEXT OF EXISTING MANAGEMENT PRINCIPLES
- Organisations operate in changing environments.
- An interdependent relationship between the organisation and the environment.
- Systems theory concept: the organisation is a system that operates in a specific environment.
- Synergy: the whole is greater than the sum of its parts. The organisation consists of subsystems that work together to achieve goals and objectives
- Management levels: top management, also known as strategic management (CEO and the board of directors), middle management is the functional managers (HR, Finance managers etc.) and lower/first-line managers are the supervisors they have more technical skills and are involved in day-to-day operations.
- Skills for sound management: conceptual skills, interpersonal skills and technical skills.
- Management decisions are made at different levels: the tactical level and the strategic level.
DEFINING STRATEGIC MANAGEMENT
- Management: planning, leading, organizing and controlling
- Strategy: an effort or deliberate action that an organisation implements to outperform its rivals. An organisations theory about how to gain competitive advantage.
- Strategic management: the process whereby all the organisational functions and resources are integrated and coordinated to implement formulated strategies which are aligned with the environment, in order to achieve the long-term objectives of the organisation and therefore gain a competitive advantage through adding value for the stakeholders.
- The art and science of formulating, implementing and evaluation cross-functional decisions that enable an organisation to achieve its objectives. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow.
- The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives
- The process by which a firm incorporates the tools and frameworks for developing and implementing a strategy
- All the decisions and actions arising from the formulation and implementation of strategies with the aim of achieving the organisations objectives
- Competitive advantage: the edge that an organisation has over others. To achieve this an organisation needs to meet he needs of stakeholders, which means adding value
- Stakeholders: anyone who is directly or indirectly influenced by the acts of the organisation. Long-term wealth maximization is for stakeholders and short-term profit maximization is for shareholders. Shareholders, media/press, government, suppliers, community, employees, financial institutions and customers
- Wealth maximization incorporates all spheres of the organisation and emphasises sustainability and survival in the long term.
- Profit maximization emphasises maximum profits and therefore focuses only on turnover, sales and marketing
- The people involved in strategic management: environmental analysis is the responsibility of every manager. A strategy formulation is mainly the responsibility of top management. Strategic implementation can only be achieved with communication from all the parties involved
- Qualitative and quantitative decisions. Qualitative decisions are based on intuition, whereas qualitative decisions are built on proper strategic analysis and choice. Both should be used in conjunction with the other.
- Levels of strategy: 3 levels- corporate level, business level and functional level.
- Corporate strategy: for guiding a firms entry into and exit from different businesses, for determining how a parent company add value to and manages its portfolio of businesses, and for creating value through diversification
- Business strategy: developing and sustaining a competitive advantage for the goods and services that are produced. Strategy for competing against competitors within a particular industry
- Functional level: decisions involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.
THE CONTEMPORARY BUSINESS ENVIRONMENT
- Organisations have to adapt rapidly to change
- Non-profit organisations also need to apply strategic management.
- Globalization involves more strategic management options
- Technology affects the business environment as does the political, social, economic environments.
- Technology has brought about change in the marketing aspects of business and as well as change in the processes, production methods and new ways to make an established product.
- Partnerships, outsourcing, flexible labour, work-around-the-clock and interim managers are different ways of creating a competitive advantage
THE STRATEGIC MANAGEMENT PROCESS AND STRATEGIC PLANNING
- Organisational direction: developed on the basis of ethical behaviour and corporate governance. Direction is provided by the vision and the mission statement of the organisation.
- Environmental analysis: evaluating and analyzing the external environment for opportunities and threats, and the internal environment for strengths and weaknesses (SWOT analysis)
- Strategy formulation: long-term goals are developed- derived from the mission statement and a generic strategy is chosen and grand strategies developed
- Strategy implementation: strategic drivers are implemented i.e. leadership, culture, reward systems, organisational structures and allocation of resources. Improvement through strategic control and evaluation.
WEALTH MAXIMISATION v PROFIT MAXIMISATION
- Wealth maximization modifies the goal of profit maximization in order to deal with the complexities of the business environment- both the external and the internal environment. It takes the long-term view of the success of the organisation, which is often in conflict with the short-tem yardstick of profit maximization
SUCCESS IN STRATEGIC MANAGEMENT TERMS
- Strategic competitiveness implies that an organisation has created a competitive advantage which other organisations are unable to duplicate or find too costly to imitate.
- Above average returns are returns in excess of what an investor expects to earn from other investments with a similar exposure to risk.
- By exploiting its competitive advantage and realizing above average returns the organisation will achieve its primary objective of wealth maximization
- Strategic management is about surviving in a changing environment, and to do this strategic managers will have to make decisions that allow them to achieve a competitive advantage and above average returns.
- Corporate governance is about setting standards for business ethics in South Africa and world wide to ensure that an organisation accept and extend the organisations responsibility beyond its primary function of generating profit and creating wealth for its stakeholders.
- Corporate and business governance is a partnership of shareholders, directors and management to provide wealth creation and economic well-being to the wider community of stakeholders and society.
- Narrow sense: corporate governance refers to the formal system of accountability of the board of directors to shareholders
- Broad sense: corporate governance refers to the informal and formal relationship between the corporate sector and its stakeholder; and the impact of the corporate sector on society in general
- King report: “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals… the aim is to align as nearly as possible the interest of individuals, corporations and society”
- 7 characteristics of good corporate governance: discipline, transparency, independence, accountability, responsibility, fairness and social responsibility
- Recommendations for good corporate governance on aspects: board and directors, risk management, internal audit, sustainability report, accounting and auditing and relations with shareholders and communications
- Disclosure and transparency relate to the communications of outcomes.
- Is based on the idea that organisations have a duty to serve not only the financial interests of shareholders, but also the interests of society
- The extent to which an organisation makes a positive contribution to society by respecting and showing consideration to its stakeholders; has high ethical values; adheres to legislation, rules and regulations; and has a high regard for the natural environment.
- Contemporary corporate citizenship issues:
Corporate social responsibility- organisational decision making linked to ethical values, compliance with legal requirements, and respect for communities and the environment
3 reasons for taking social responsibility into account: an organisations right to exist depends on its environment and society; national legislation threatens increased regulations if organisations do not meet changing social needs and a responsive corporate policy may enhance an organisations long-term profitability and sustainability.
Environmental responsibility- organisations have to take responsibility to do no harm to the environment and use their resources and technology to address the issue of population growth through sustainable development
Sustainability- development: development that meets the needs of ht e present generation without compromising the ability of future generations to meet their own needs
Sustainability and the triple bottom line reporting- the triple bottom line approach embraces the economic, environmental and social aspects of an organisations activities, therefore organisations will report on these aspects
Stakeholder engagement- the king report recommends that the board identifies the organisations stakeholders and agree on policies which dictate how relationships with them should be managed. The king report follows the inclusive approach which recognises that organisations should consider the needs of its stakeholders when formulating strategies.
The king report recommends that a balance between individual interests of the stakeholders and the collective good of the organisation be established
Freemantle and Rockey: guidelines for engaging with stakeholders
─Understand the purpose of stakeholder engagement
─Map all stakeholders
─Link sustainability issues to core stakeholder engagement
─Go deeper than research
─Select the most appropriate methods
─Deal with conflicting stakeholder demands
─Stakeholder engagement informs reporting
- Direct drivers which provide momentum for corporate citizenship: legislation, JSE social responsibility index, industry charters and the king code on corporate governance in South Africa
- Higher profitability
- Higher productivity
- Improved communication across the different functions in the organisation
- Discipline and a sense of responsibility to the management of the organisation
- More effective time management
- Strategic management
DISADVANTAGES (RISKS) OF STRATEGIC MANAGEMENT
- Time- strategic management only shows fruits in the long-term
- Unrealistic expectations from managers and employees
- The uncertain chain of implementations
- Negative perceptions of strategic management
- No specific objectives and measurable outcomes- no measurement tools to measure implementation success
- Culture of change- ever changing environment
- Success groove- mangers get stuck in a success rut and forget to foresee future difficulties
- Strategic planning begins with the setting of strategic direction. To set strategic direction, organisations use a vision statement, a mission statement or strategic intent
- Vision: translates what is essentially an act of imagination into terms that describe possible future courses of action for the organisation
- Mission: implies that throughout an organisation’s many activities there should be a shared theme.
- Strategic intent:the leaders clear sense of where they want to lead their company and what results they expect to achieve
- The vision statement: what do we want to become?
- As many managers as possible should give input into the creation of a vision statement and achievable in the long run.
- Functions:way to integrate a wide variety of goals into one theme; provides focus and direction; forms the foundation for a mission statement, long-term objectives and strategy decisions; can serve as a motivational tool.
- the vision statement should be communicated in such a way that it clarifies the purpose of the organisation to all its stakeholders
- Strategic intent: creating a sense of urgency through the setting of an overarching, ambitious goal that stretches the organisation and focuses on winning in the long run.
- Gives a sense of direction and purpose; it drives strategic decision making and provides a basis for resource allocation; forces manages to be innovative and inventive in their use of limited resources; leaves room for short-term flexibility
- Has an internal focus can be used as a basis for setting the mission statement
THE MISSION STATEMENT: WHAT IS OUR BUSINESS?
- The role of the mission statement: Is an enduring statement of purpose that distinguishes an organisation from other similar ones; identifies the scope of the organisations operations; indicates an organisations reason for being
- 4 focus areas: purpose ( the reason for the organisations being)
- identifies the organisations strategy in terms of the nature of the business, its competitive positioning in terms of other organisations and the sources of its competitive advantage
- it refers to the organisations behaviour standards and culture in terms of the way it does business
- The mission statement is about the values, beliefs and moral principles that support the behavioral standards.
- Components of the mission statement:
Product/services, market and technology
Survival, growth and profitability
The philosophy of the organisation
Customers and quality
- Stakeholders and the mission statement: the legitimate claims of the organisations stakeholders should be considered when formulating a mission statement.
- Formulating a mission statement: as many managers as possible should be involved in the process; the process of developing a mission statement should create an emotional bond and sense of mission between the organisation and its employees; the mission should be communicated to all internal and external stakeholders of the organisation
- Vision, strategic intent and mission: a vision statement focuses on the future, whereas the mission statement focuses on the present or the reality. Strategic intent contains elements of both the vision and the mission- like the vision ,it focuses on a goal, and also loses its power once achieved, but it also focuses on the purpose and strategy of the organisation like the mission
- Any one who is directly or indirectly influenced by the acts of the organisation
- Employees- want job security, job satisfaction and compensation
- Shareholders- want dividends, capital growth and safe investment
- Government- wants taxes, employment, skills development and BEE
- Media and press- want transparent and honest reporting
- General community- wants fair employment, socially and environmentally responsible actions and no discrimination
- Financial institutions- want interests and security of loans
- Competitors- want fair business practices and ethical competition
- Customers- want high quality products and good service value
- Suppliers- want regular payments, continuity of business and long-term relationships.
COMPOSITION OF THE ENVIRONMENT
- Macro-environment, market environment, internal environment, industry environment and the operating environment
THE RATIONALE FOR ASSESSING THE ENVIRONMENT
- The importance of internal environment assessment: an organisation cannot decide on a specific strategic direction if it does not know what it can and cannot do, what assets it has and does not have.
- Only when an organisation is able to match what is can do with what it might do can it develop its vision or strategic intent. The vision of what it actually wants to become must actually set a challenge to the internal resources of the organisation
- The outcome from an internal environment analysis will determine what the organisation can do, while the outcome form an external environment analysis will identify what the organisation can choose to do.
- It is important for managers to view the organisation as a bundle of resources, capabilities and core competencies that can be used to create an exclusive position in the market
- The recognition of core competencies is essential before any strategic management decision can be taken
- The importance of external environmental assessment: the organisation and the environment in which it operates is not a closed system, because they influence each other
- The environment usually changes faster than the organisation can adjust to it
- External environmental analysis focuses its attention on identifying and evaluating trends and events beyond the control of a single organisation, and also reveals key opportunities and threats confronting the organisation that could have a major influence of the organisations strategic actions
- An opportunity is a favourable condition in the external environment, if seized by the organisation to its advantage, strategic competitiveness can be achieves
- A threat is an unfavourable condition in the external environment that may hinder an organisations efforts to achieve strategic competitiveness
- After external opportunities and threats have been evaluated and combined with the knowledge of the internal environment it will be easier for the organisations to:
Develop a clear mission