STRATEGIC

FOURTH EDITION

MANAGEMENT
Towards Sustainable Strategies in Southern Africa
 STRATEGIC
FOURTH EDITION

MANAGEMENT
Towards Sustainable Strategies in Southern Africa

LOUW & VENTER (Editors)

Amos Davis Hamann
Jansen van Rensburg Callaghan
Neuland Perks Venter
 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in
research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the
UK and in certain other countries.

Published in South Africa by

Oxford University Press Southern Africa (Pty) Limited

Vasco Boulevard, Goodwood, N1 City, Cape Town, South Africa, 7460

P O Box 12119, N1 City, Cape Town, South Africa, 7463

© Oxford University Press Southern Africa (Pty) Ltd 2019

e moral rights of the author have been asserted.

First published 2006

Second Edition published in 2010
ird Edition 2013

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by
any means, without the prior permission in writing of Oxford University Press Southern Africa (Pty) Ltd, or as expressly
permitted by law, by licence, or under terms agreed with the appropriate reprographic rights organisation, DALRO, e
Dramatic, Artistic and Literary Rights Organisation at [email protected]. Enquiries concerning reproduction outside the scope
of the above should be sent to the Rights Department, Oxford University Press Southern Africa (Pty) Ltd, at the above address.

You must not circulate this work in any other form and you must impose this same condition on any acquirer.

Strategic Management 4th edition

Print ISBN: 978-0-190723-74-3

ePUB ISBN: 978-0-190449-62-9

Typeset in Minion Pro Regular 10pt on 12pt

Acknowledgements
Publisher: Janine Loedolff
Editor: Wendy Priilaid
Designer: Judith Cross
Typesetter: Barbara Hirsch

e authors and publisher gratefully acknowledge permission to reproduce copyright material in this book. Every effort has been
made to trace copyright holders, but if any copyright infringements have been made, the publisher would be grateful for
information that would enable any omissions or errors to be corrected in subsequent impressions.

Links to third party websites are provided by Oxford in good faith and for information only.
Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.
 Abridged table of contents
PART 1 Strategy, stakeholders and strategic direction
1 Introduction: The nature of strategic management
2 The purpose and context of business: Key elements of sustainable organisation
3 Strategic direction

PART 2 Strategic analysis

4 Strategic decision-making
5 Analysing the macroenvironment
6 Analysing the industry environment
7 Analysing the internal environment

PART 3 Strategic development and formulation

8 Business level strategy
9 Strategic innovation
10 Corporate level strategy
11 Strategies for international competitive advantage

PART 4 Strategic implementation

12 Strategic leadership
13 Organisational alignment and strategy implementation through organisational
architecture
14 Strategic risk management

CASE STUDIES
Table of contents
Preface
Contributors

PART ONE Strategy, stakeholders and strategic direction

CHAPTER 1: Introduction: e nature of strategic management

Lynette Louw
Learning outcomes
Opening case study
Overview
1.1 Introduction
1.2 e essence of strategy
1.3 e nature and role of strategy
1.4 Strategic management
1.5 Perspectives on managing strategically
1.6 e strategic management process
1.7 Tests for a winning strategy
1.8 Strategic paradoxes
1.9 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 2: e purpose and context of business: Key elements of sustainable organisation

Ralph Hamann
Learning outcomes
Opening case study
Overview
2.1 Introduction
2.2 Purpose
2.3 From short- to long-term strategising
 2.4 From shareholders to stakeholders
2.5 e dynamic business context and evolving risks
2.6 Context as opportunity: Shared value and inclusive business
2.7 e process of embedding context in strategy
2.8 Measuring and reporting on progress
2.9 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Suggested websites
References and endnotes

CHAPTER 3: Strategic direction

Mari Jansen van Rensburg
Learning outcomes
Opening case study
Overview
3.1 Introduction
3.2 Strategic intent
3.3 Vision statements
3.4 Mission statements
3.5 Value statements
3.6 Bene ts of clear strategic direction
3.7 Challenges of creating a clear strategic direction
3.8 Translating strategic direction into operational terms
3.9 Balanced scorecard
3.10 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

PART TWO Strategic analysis

CHAPTER 4: Strategic decision-making

Peet Venter
Learning outcomes
Opening case study
Overview
 4.1 Introduction
4.2 How strategic decisions are made
4.3 Contextual in uences on strategic decision making
4.4 Strategic decision enablers
4.5 Integrating mechanisms
4.6 Improving the quality and speed of strategic decision-making
4.7 Summary
Opening case questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 5: Analysing the macroenvironment

Ernst Neuland
Learning outcomes
Opening case study
Overview
5.1 Introduction
5.2 Strategic relevance and structure of the external environment
5.3 Strategic importance of the macroenvironment
5.4 Factors and forces of the macroenvironment
5.5 Analysis of the macroenvironment
5.6 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 6: Analysing the industry environment

Peet Venter
Learning outcomes
Opening case study
Overview
6.1 Introduction
6.2 Industry analysis
6.3 Intra-industry analysis
6.4 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 7: Analysing the internal environment

Peet Venter
Learning outcomes
Opening case study
Overview
7.1 Introduction
7.2 e strategic importance of resources and capabilities
7.3 Identi cation of resources and capabilities
7.4 Internal analysis and industry key success factors
7.5 Dynamic views of strategy
7.6 Identifying strengths and weaknesses
7.7 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

PART THREE Strategic development and formulation

CHAPTER 8: Business level strategy

Annemarie Davis
Learning outcomes
Opening case study
Overview
8.1 Introduction
8.2 Levels of strategies
8.3 Factors in uencing strategic choice
8.4 Business level strategies
8.5 Evaluating strategies
8.6 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 9: Strategic innovation

Chris Callaghan
Learning outcomes
Opening case study
Overview
9.1 Introduction
9.2 Innovation opportunities
9.3 Supportive organisations
9.4 Innovative individuals
9.5 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
References and endnotes

CHAPTER 10: Corporate level strategy

Annemarie Davis
Learning outcomes
Opening case study
Overview
10.1 Introduction
10.2 What corporate strategy entails
10.3 An overview of corporate strategy options
10.4 Growth strategies
10.5 Defensive strategies
10.6 Managing the multi-business organisation
10.7 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 11: Strategies for international competitive advantage

Ernst Neuland
Learning outcomes
Opening case study
Overview
11.1 Introduction
11.2 Concepts in international business
11.3 Globalisation: e context of international business
11.4 e global business imperative
11.5 e business environment in a global context
11.6 International competitive advantage
11.7 International competitive strategies
11.8 Strategies for entering foreign markets
11.9 International strategic management in a global context
11.10 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

PART FOUR Strategic implementation

CHAPTER 12: Strategic leadership

Trevor Amos
Learning outcomes
Opening case study
Overview
12.1 Introduction
12.2 Understand the organisation as a whole
12.3 Lead ethically and effectively for strategic results
12.4 Develop and communicate a compelling vision to lead change
12.5 Create an integrated organisational system to enable strategy implementation
12.6 Build, use and grow distinctive organisational capabilities aligned to the strategy
12.7 Ensure ethical practices and good governance
12.8 Initiate and lead strategic change
12.9 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 13: Organisational alignment and strategy implementation through organisational architecture
Robert Venter
Learning outcomes
Opening case study
Overview
13.1 Introduction
13.2 What is organisational architecture?
13.3 e ‘shape’ of organisational architectures
13.4 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

CHAPTER 14: Strategic risk management

Sandra Perks
Learning outcomes
Opening case study
Overview
14.1 Introduction
14.2 Strategic risks in context
14.3 Managing strategic risks
14.4 Implementing strategic risk management in the organisation
14.5 Summary
Opening case study questions
Discussion questions
Using knowledge and skills
Further reading
Suggested websites
References and endnotes

Part 1 Case study

Part 2 Case study
Part 3 Case study
Part 4 Case study

Glossary
Index
 Preface
e fact that we are working on the preface for a fourth edition of Strategic Management suggests that a southern African
textbook on strategic management was indeed well received by its target market. In this edition we continue with the theme of
developing strategies that contribute to organisational sustainability, placing it well and truly in the southern African context. e
number of public and private sector governance failures that we have faced over the past few years suggests that the need for
organisations to manage their own resources while at the same time being responsible, sustainable, and global corporate citizens
is as acute as ever. Strategic Management 4e is aimed at the future business and public sector leaders in southern Africa, namely
the senior undergraduate and postgraduate students in business, and speci cally in strategic management.
As calls for Africanisation and decolonisation intensify, we believe that it is important to balance the African context with
relevant global insights to enable African leaders and organisations to play their rightful role in the region, but also in the global
economy. erefore, as in previous editions, the general structure of the book and the strategic management principles should be
recognisable from global content on strategic management. To this we add a southern African feel with local examples and cases
that we use and integrate into the discussion, including four more extensive regional cases to enlighten certain sections of the
book. We have also continued our practice of including topics that may not form part of conventional strategic management
books, but that we feel are critical to contemporary southern African organisations.
Part 1 introduces the nature of strategic management (Chapter 1), what it means to be a stakeholder-focused sustainable
organisation (Chapter 2), and the importance of strategic direction (Chapter 3). In this section, Chapter 2 (on sustainable
organisations) has undergone a major revision to make it even more suited and practical to southern African organisations.
Part 2 focuses on strategic analysis. Strategic management should depend heavily on an in-depth understanding of the risks in
the external environment (Chapters 5 and 6) and the organisation’s strategic resources and capabilities (Chapter 7). While
most strategic management books emphasise the importance of external and internal environmental analysis, a few include
strategic decision-making. is is an aspect that we now include in Chapter 4, building on our previous focus on the enablers
of strategic decision-making.
Part 3 addresses the concepts of strategy development and formulation. Strategies can focus on the level of strategic business
units: business level strategy (Chapter 8), corporate level strategy in the multi-business organisation (Chapter 10), and
strategies for global expansion (Chapter 11). In addition, we have continued with our focus on strategic innovation as an
important element for strategic renewal and contextualisation of strategy (Chapter 9).
A strategy is ultimately only as successful as its implementation. Part 4 examines the critical role of strategic leadership in all
aspects of strategic management (Chapter 12), while Chapter 13 deals with strategy implementation as the task of ensuring
alignments between strategy and organisational architecture. Chapter 14 was also updated signi cantly and focuses
speci cally on the growing eld of strategic risk management. It addresses the processes for identifying and responding to
strategic risks, and organisational processes for strategic risk management.

As usual, any update of a textbook is the culmination of a lot of hard work by a team of colleagues. ank you to our team of
chapter and case study authors, and to the colleagues at Oxford University Press South Africa, namely the publisher, Janine
Loedolff, and her team, Liezl Roux and Nicola van Rhyn.

Lynette Louw & Peet Venter

June 2019
 Contributors
Lynette Louw (DCom, Business Management, UPE) is Professor in the Raymond Ackerman Chair in Management and Deputy
Dean of the Faculty of Commerce, Rhodes University. Professor Louw’s areas of specialisation include strategic management,
international management, organisational behaviour, and crosscultural management. She is the author of numerous chapters in
management textbooks and has been published in national and international journals. She has also taught in China, Germany
and the Netherlands.

Peet Venter (MBA, UP; DCom, UNISA) is Professor of Strategy, Graduate School of Business Leadership, UNISA. Prior to this,
Dr Venter was a Professor of Strategic Management in UNISA’s Department of Business Management. Dr Venter’s experience
includes involvement in several aspects of market intelligence, business management, competitive simulation, business
intelligence, competitive strategy, business process re-engineering, and product management.

Trevor L Amos (BSocSci Hons, (Econ); BSocSci Hons (Psych); MSocSci (Psych) is a Senior Lecturer in the Department of
Management, Rhodes University.

Annemarie Davis (BCom; BCom Hons; MBL, DCom) is a Senior Lecturer in Strategic Management, Department of Business
Management, UNISA.

Ralph Hamann (BSc, UCT; BSc (Hons), UCT; MSc, UCT; PhD, University of East Anglia) is Professor and Research Director at
the University of Cape Town Graduate School of Business. He is also co-founder of the South African leg of the Embedding
Project, an international collaboration between researchers and practitioners focused on integrating sustainability issues into
corporate strategies and practices.

Ernest Neuland (MSc, Stellenbosch; MBA; DBA, Northwest University) is Professor in International Business and Strategy,
currently teaching International Business Strategy and International Management in the Monash Master’s in International
Business at IIEMSA (formerly Monash South Africa).

Mari Jansen van Rensburg (MCom, UP; CM, SA; DCom; UNISA) is Professor of Marketing Management, Graduate School of
Business Leadership, UNISA.

Chris Callaghan (MCom; PhD, Wits) lectures Human Resources Management and Management subjects in the School of
Economic and Business Sciences (SEBS) at the University of the Witwatersrand. His academic work is published in a range of
local and international journals.
PART ONE
Strategy, stakeholders and
strategic direction
 CHAPTER 1 Introduction: The
nature of
strategic management
Lynette Louw

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain the essence of strategy
demonstrate an understanding of strategy development and perspectives of strategy
discuss the nature and role of strategy
explain the concept of strategic management
formulate an argument on the different perspectives of managing strategically
identify and explain the elements of the strategic management process
identify and explain the tests for a winning strategy
demonstrate an understanding of strategic paradoxes.

KEY TERMS

business model
competitive advantage
complexity theory
dynamic capabilities
multiple connections
strategic flexibility
strategic frames
sustainability
values

OPENING CASE STUDY

Insight into Shoprite Holdings Ltd’s strategy1

Shoprite Holdings Ltd, headquartered in Brackenfell, South Africa, opened their first small supermarket in 1979
when Pep Stores purchased a small 8-store Western Cape grocer, named Shoprite. In 1980 their vision was set,
focusing on the middle-to-lower income market and internal growth with acquisition of promising supermarkets.
During the 1980s they expanded nationally and 1990 marks their first expansion across the African continent. In
1991 The Shoprite Group acquired the Checkers chain of supermarkets and increased their footprint fourfold to
241 outlets. In 1997 they acquired OK Bazaars Group from SAB. The Group was added to the JSE Top-40 index
of blue chips in 2008.
The Shoprite Group was rated as the biggest South African retailer in the 2019 Deloitte Global Powers of
Retail Report based on revenue. It is the only South African retailer to be listed in the top 100 and is placed 86th
in the world. The report ranks the 250 biggest retail groups across the world. The Shoprite Holdings Group
employs over 146 000 people and has grown to more than 2 738 outlets in 15 countries across Africa and the
Indian Ocean Islands.
The Group operates across the following market segments, namely Food, Household products, Furniture,
Pharmaceutical and other Services. Other services include financial and ticketing services to consumers
through Computicket stores.
Shoprite Holdings Ltd’s mission is to ‘deliver low prices in a world-class shopping environment to customers
across the African continent by bringing choice, quality products and job creation to communities in all the
countries’ they serve. The company is very committed to living out their values in that they aspire to become a
global leader in customer service by putting the customer first. Shoprite Holdings Ltd firmly believe in treating all
people, be it their colleagues or customers, with respect and integrity and acting fairly in all dealings.
According to the Chairman of Shoprite Holdings Ltd, their success rests on their ability to maintain their
position as a market leader and deliver on their low-cost promise and value proposition across diverse locations
in Africa.
The CEO reiterated on numerous occasions that everything that they do is, first and foremost, geared
towards improving their service to their customers. Therefore the Group’s diversified portfolio enables them to
maximise business performance during bad times. Shoprite have implemented six drivers of growth – a
customer first culture, growing LSM 8–10 share of wallet, developing a private label, developing a stronger
franchise offering, strategic footprint expansion and leveraging their African advantage. They retain a competitive
advantage by investing in innovation, staying abreast of international best practice, undertaking preventative
measures, continually managing risk and staying true to their core business – providing quality, affordable food
in a world-class shopping environment.
Shoprite Holdings Ltd are also following a strategy of expanding internationally. They currently have 308
outlets in 15 other African and Indian Ocean islands and are also planning to further expand into the African
continent and Eastern Europe. Their expansion into other countries in Africa began in 1990 with the opening of
their first supermarket in Windhoek, Namibia. From 2000 to 2012 they opened stores in countries such as
Uganda, Zimbabwe, Eqypt, Malawi, Madagascar, Zambia, Nigeria, Democratic Republic of Congo, India and in
2018 in Kenya.
Shoprite’s CEO is of the view that their growth strategy has been to purchase businesses in the past, but
organic development is now their main growth driver. They have three core supermarket brands each with a
distinctive positioning in the market:
Usave, a discounter with limited choice
Shoprite, with a low price leadership strategy
Checkers, catering to more upmarket consumers.

In catering to more upmarket consumers, their corporate strategy, according to their CEO, is not about
replicating other upmarket retailers, but to ‘dismantle the monopoly of premium food trade’. This new strategy
has opened new generation Checkers stores in wealthy areas boasting a wide selection of fresh produce, wine,
meat, cheese and many convenience foodstuffs. Shoprite is also working in partnership with international chef
Gordon Ramsay to develop a range of convenience and ready-to-eat meals.
A further key growth driver according to the CEO is the addition of complementary business services such as
pharmacies, liquor outlets, event ticketing services and basic financial services.
 The Shoprite Group’s success depends on its ability to consistently provide communities in Africa with food
and household items in a First World shopping environment at the lowest possible prices. At the same time, the
Group encourages and contributes to the development of stable economies in the countries in which it operates
and the social upliftment of its people. For example, the Shoprite Group has partnered with Food & Trees for
Africa, where they work with community garden projects to help upskill the community and increase production
capacity in order to enhance food security in local communities and also to assist them in earning a living from
their garden projects.
The Shoprite Group has adopted and implemented a sound governance model through the introduction of
specialist disciplines such as audit and risk, and legal and compliance management. In 2017 a Social and Ethics
Committee was established, charged with ensuring that Shoprite business is conducted holistically and operates
in a responsible, ethical and sustainable manner. Their corporate social investment program supports the
communities that they operate within by fighting hunger, empowering women, developing skills and
demonstrating that they #ActForChange.
According to the Shoprite Holdings Ltd sustainability report for 2017, the organisation highlights the
importance of the support they receive from their capitals and are of the opinion that their continued success
rests on effective engagement with their customers, communities, employees and suppliers, and access to a
healthy and stable natural capital base. The six capital bases include human, social and relationship, natural,
intellectual, manufactured and financial capitals.

Overview
The purpose of this chapter is twofold – firstly, to introduce the nature of strategic management as relevant to the
focus of this text, and secondly, to provide a guide to the structure and content of this text by means of the strategic
management framework.
Section 1.2 introduces the nature of strategic management and provides an overview of the essence of strategy,
including a description of the concept of strategy and an explanation of how historical context has influenced the
development of strategy. Section 1.3 explains the nature and role of strategy in terms of the five Ps of strategy and
the levels of strategy, culminating in a definition of strategic management in section 1.4. Section 1.5 discusses two
different perspectives on managing strategically. This text uses perspectives on managing strategically to understand
the nature of strategic management in the contemporary dynamic competitive landscape, which requires an
organisation to be strategically flexible in order to attain a competitive advantage. Strategic flexibility requires an
organisation to have the dynamic capabilities necessary to deal with uncertainty and risk in responding to the
demands and opportunities in uncertain competitive environments.2 An organisation can attain a competitive
advantage by making optimal use of its resources (resource-based and dynamic capabilities viewpoint, i.e. the
inside-out perspective), and combining them with its external environment (i.e. the outside-in perspective). In the
context of this text, an organisation can achieve a competitive advantage with above-average returns by creating
superior value, managing ethically, and being sustainable. A competitive advantage can be achieved by an
organisation when superior value is created for its customers compared with its competitors or when it outperforms
its competitors in key areas, such as profitability. A competitive advantage can only be sustainable if an organisation
persists in creating superior value compared with its competitors.3 Sustainability and strategy are thus considered to
be inseparable.
Section 1.6 discusses the strategic management process, illustrated in the strategic management framework in
Figure 1.6, in terms of stakeholders and strategic direction, strategic analysis, strategy development and
formulation, and strategy alignment and implementation.
The discussion on the strategic management process continues with understanding the purpose and context of a
sustainable organisation (Chapter 2) and the setting of the strategic direction for an organisation (Chapter 3). This is
done within the context of understanding what it means to be a sustainable organisation that is stakeholder-focused
(discussed in Chapter 2). The concept of sustainability relates to the maintenance and enhancement of
environmental, social and economic resources to meet the needs of current and future generations. It also implies
that organisations should integrate corporate social responsibility, stakeholder claims, corporate citizenship and
social entrepreneurship into their strategic planning and implementation.
Chapters 4 to 7 deal with strategic analysis. This consists of the strategic decision-making process and its
influences, and the strategic link between the organisation’s external environment and the opportunities and threats it
presents (outside-in perspective), as well as its internal strengths and weaknesses (inside-out perspective). An
organisation needs to develop and formulate its strategy based on its strategic direction and analysis. This stage in
the strategic management process includes an understanding of the underlying strategic value innovation options
(Chapter 9) to develop and formulate strategies at the business level (Chapter 8), corporate level (Chapter 10) and
international level (Chapter 11). Once the organisation has developed and formulated its strategies the next step is to
implement them. Successful strategy implementation is dependent on strategic leadership, the key driver of
implementation (Chapter 12), and organisational alignment through organisational architecture (Chapter 13),
supported by strategic risk management (Chapter 14).
The final part of this chapter comprises sections 1.7 and 1.8, which give a brief overview on the tests for a winning
strategy and the various strategic paradoxes, which are as follows:
The past and future
Intended and emergent strategy
Reactive or proactive approaches to strategy
Inside-out or outside-in driven strategies
Profitability versus sustainability.

1.1 Introduction
Managing an organisation in the competitive landscape of the 21st century is a highly complex task, and has an
impact on organisational leadership, strategies and organisational architecture. Among the reasons for the
heightened complexity are increasingly competitive business practices, the inclination towards strategic exibility to
accommodate change, the emergence of networked organisations, and the concern for sustainability and business
ethics in the global arena. It is vital that leaders think strategically about how they achieve a competitive advantage
that is sustainable for the organisation. Leaders need to understand where they t in the global competitive
landscape, what it means to be a sustainable global organisation, and how they can contribute towards strategic
development, change and transformation.
In the context of developing countries, especially in Africa, this contribution towards strategic sustainable
development and transformation includes, among other things, empowering people from the designated group and
involving them in the formal economy, being a responsible corporate citizen, and thinking globally while acting
locally, as illustrated by the Shoprite Group in the Opening case study. Consider, for example, how organisations
from various economic sectors in South Africa have had to learn how to conduct business and understand the
competitive landscape in the rest of Africa and, in most instances, have contributed towards transformation and
sustainable development. ese examples include South African parastatals (Portnet); the telecommunications
sector (MTN, Vodacom); retail, beverage and food sectors (Shoprite, Pick n Pay, Woolworths, Clicks, Unilever); the
insurance sector (Old Mutual, Sanlam); and the construction and oil sector (Murray & Roberts, WBHO, Sasol).
When thinking strategically about their organisation’s current situation and future prospects in a competitive
landscape, management is faced with four critical questions:4
Where are we now?
Where do we want to go?
How will we get there?
How are we doing?

To answer the rst question, ‘Where are we now?’, management should consider:
 the organisation’s competitive positioning
the organisation’s resources and dynamic capabilities
the appeal and innovative value added to its products and services
the extent to which it meets the needs and expectations of its customers and stakeholders
the organisation’s environmental integrity
the organisation’s current performance.

In the Opening case study, Shoprite Holdings Ltd has successfully managed to integrate its concern for its
stakeholders, the environment, economic progress and technological innovation into its strategic management
process.
e second question, ‘Where do we want to go?’ refers to the strategic direction that management believes the
organisation should adopt. For example, Shoprite’s mission is to ‘deliver low prices in a world-class shopping
environment to customers across the African continent by bringing choice, quality products and job creation to
communities in all the countries’ they serve.
e answer to the third question, ‘How will we get there?’ depends on:
how strategy is formulated at the different organisational levels based on customer needs, stakeholder
expectations, integration with the environment, and ethical perspectives
the in uence of leadership, values, organisational culture and organisational architecture on strategy
implementation.

Finally, to answer the last question, ‘How are we doing?’ requires that strategic leaders manage the performance of
the organisation by means of strategic control and risk measures and appropriate feedback.
We propose that in future the extent to which an organisation successfully implements its strategies will be
determined by the approach to sustainability it adopts. To refer to sustainable strategic management, there is a
growing need for organisations to manage their own resources while at the same time being responsible and
sustainable global corporate citizens. Both the ecological and social aspects need to be integrated into the strategic
vision, analysis, planning and generation of options, and premise the applicability of strategies.5 Interestingly, there
is a positive association between economic and environmental performance, while corporate social responsibility is
closely linked to economic performance.6 In the Opening case study on Shoprite Holdings Ltd, it is evident that the
organisation began the journey in this direction, moving beyond simply reporting on their triple bottom line
(economic, social and environmental) achievement, to including sustainability issues into their strategy
development and implementation in pursuit of their organisational purpose.
Shoprite produces an integrated report in line with the King IV requirements in South Africa. In their
sustainability report for 2017, the organisation highlights the importance of the support they receive from their
capitals (human, social and relationship, natural, intellectual, manufactured and nancial) and are of the opinion
that their continued success rests on effective engagement with their customers, communities, employees and
suppliers, and access to a healthy and stable natural capital base. For example, for their natural capital Shoprite is
committed to reducing carbon emissions by setting a carbon emission intensity target to reduce metric tonnes of
CO2e per square metre by 25% by 2025 with a base year of 2016.
It is important to note that all organisations require strategies to achieve their purpose, whether they are in
developed or developing countries, large or small, pro t seeking or not-for-pro t, private or public sector. As
explained previously, sustaining a competitive advantage is in uenced by the organisation’s engagement with
government, environmental focus (process improvement and products/services), and socio-economic development.
Many organisations are realising that the opportunities represented by the large emerging markets demand an
entirely new way of thinking in terms of sustainability. e overarching imperative to support developing nations in
their quest for better livelihoods, human rights and environmental integrity – in short, sustainable development – is
a challenge, and the business community, ranging from small organisations to multinational corporations, has an
important role to play7
As managers gain a better understanding of the markets in developing countries, they have to continually rethink
and recon gure every element of their business models.8 A business model is a plan of how an organisation creates
value for its customers while simultaneously generating sufficient revenue or surpluses to have above-average
returns. As illustrated in the Opening case study, Shoprite’s involvement in the community partly informs their
business model. As the leading retailer in Africa, Shoprite regards themselves as being part of a larger community
and represent themselves as socially active, through their dictum of #ActForChange. Whether it be through job
creation, ensuring the most affordable products available, lending a hand to those in need or feeding the most
vulnerable in our society, they ensure that their business model remains relevant and trustworthy to the
communities they serve.

1.2 The essence of strategy

is section presents an overview of the conceptualisation of strategy and the historical perspectives of strategy
development.

1.2.1 Strategy conceptualised

e concept of strategy dates back to ancient Athens and the documentation of Sun Tzu’s e art of war, written in
about 500 BC. Strategy has always been considered to be a key element of managerial activity and is still offered as a
capstone course (strategic management) at business schools. But what does strategy really mean? Table 1.1 offers
selected de nitions to illustrate the complexity of the concept.
Strategy can be regarded as a game plan indicating the collective effort organisations need to make in order to,
for example:9
attract customers and meet customer needs
compete differently from rivals
create value for customers
develop the necessary dynamic capabilities
grow the organisation
manage the organisational architecture
achieve performance targets by implementing strategy successfully.

Table 1.1 Selected definitions of strategy10

Strategy: a plan, method or series of actions designed to achieve a specific goal or effort.
Wordsmyth dictionary
The determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and
the allocation of resources necessary for carrying out these goals.
Alfred Chandler, Strategy and structure
A strategy is the pattern or plan that integrates an organisation’s major goals, policies and action sequences into a
cohesive whole. A well-formulated strategy helps marshal and allocate an organisation’s resources into a unique
and viable posture based upon its relative internal competencies and shortcomings, anticipated changes in the
environment, and contingent moves by intelligent opponents.
James Brian Quinn, Strategies for change: logical incrementalism
What business strategy is all about is, in a word, competitive advantage … The sole purpose of strategic planning
 is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors. Corporate
strategy thus implies an attempt to alter a company’s strength relative to that of its competitors in the most efficient
way.
Kenichi Ohmae, The mind of the strategist
Without a strategy the organisation is like a ship without a rudder, going around in circles.
Joel Ross and Michael Kami, business authors and consultants
Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.
Michael Porter, professor and consultant

Strategy can also be viewed as ‘the direction and scope of an organisation over the long term, which achieves
advantage for the organisation through its con guration of resources within a changing environment and to ful l
stakeholder expectations’.11
e next section provides a more comprehensive understanding of this concept by considering its historical
origins, context and perspectives.

1.2.2 The historical origins of the concept of strategy

Despite the numerous attempts to de ne the concept of strategy over the decades (see Table 1.1), efforts are
constantly being made to rede ne it.12 A less arbitrary approach to explaining it would be to consider the changing
concepts of strategy, as envisioned by academics, managers and consultants.
e concept of strategy derives from the Greek word strategos meaning ‘a general’. Strategos in turn derives from
stratos (the army) and agein (to lead),13 so originally strategy was associated with the military – the ‘art of leading
the army’.14 Sun Tzu’s primal work, e art of war, is regarded as the rst formal article on strategy. However, it was
only in the 20th century that the concept of strategy gained importance in the business world.15 Military and
business operations share some common concepts and principles, particularly strategy and tactics. A tactic is a plan
for a speci c action, while strategy is the overall scheme for leveraging resources to obtain a competitive advantage.
Strategic decisions, whether in the military or business sphere, share common characteristics:16
Strategy is concerned with long-term direction and sustainable success.
Strategy exploits the links between the internal and external environments – the so-called strategic link.
Strategies require major resources.
Strategies are likely to affect the whole organisation.
Strategies are shaped by the values and expectations of stakeholders.
Strategies are directed by vision – the ability to move forward.

e next section presents a brief historical overview, and explains the changing concepts of strategy as envisioned by
academics, managers and consultants in the 20th century.

1.2.3 Strategy development in the 20th and 21st centuries

During the early 20th century, managers, rather than academics, began to explore and de ne the management task.
Examples include industry leaders such as F.W. Taylor in the USA, who used time and motion studies to identify the
best way for employees to perform a task, and Henri Fayol in France, who emphasised formal structures and
processes for the adequate performance of all important tasks. Other important contributors include Henry Ford
(1908–1915) and Alfred Sloan from General Motors (1920–1935). Henry Ford focused on innovative technology,
mechanisation, quality standards, redesign and cost cutting, while Alfred Sloan emphasised rapid model changes,
niche marketing, structured management teams, and separate operational and strategic planning.17
In 1954, Peter Drucker18 argued for proactive planning (i.e. planning well in advance) to shape the organisation’s
environment. In 1957, Philip Zelznick19 introduced the notion of distinctive competence that became the core
concept of the resource-based organisational perspective, as discussed in section 1.5 in this chapter. A distinctive
competence refers to a set of activities that an organisation does particularly well, relative to its competitors.
In 1912, the Harvard Business School introduced a capstone course in business policy. To this day, strategy is
positioned as a cornerstone of high-performing organisations, while strategic management is offered as a capstone
course in many MBA programmes. Although research in the early 2000s suggested that an organisation’s strategy is
more important to its performance than industry context,20 the authors of this title argue that in the contemporary
dynamic business environment, strategy must be closely aligned with the ‘ t’ between the internal and external
environments to enhance superior returns in a particular industry context. is strategic ‘ t’ is further explained in
section 1.5 of this chapter.
Table 1.2 explains the evolution of strategy development from the 1950s to 2018.21

1.2.3.1 Strategy in the 20th century

e general theory of competitive behaviour evolved aer Von Neumann and Morgenster’s e theory of games and
economic behaviour was published in 1944.22 From the 1950s to the 1970s, writers such as Ansoff developed
corporate strategy concepts.23 Two environmental factors accelerated the development of strategy during the 1950s
and 1960s – the accelerated rate of change, and the greater spread of wealth, especially in Europe.24 Research
focused on general management and business policy issues to develop better ways of making decisions and
maintaining coordination in increasingly large and complex organisations. During this period, rational planning
was preferred to the haphazard workings of the market economy.25 Rational planning contributed towards what
became known as the prescriptive and predictive approaches to strategy generation. Well-known researchers during
this era include Kenneth Andrews (1971), Alfred Chandler (1962) and Igor Ansoff (1965).26

Table 1.2 The evolution of strategic management

Period 1950s 1960s – Late 1970s – Late 1980s 2000s 2010s

early 1970s mid-1980s – 1990s
Dominant Budgetary Corporate Positioning Competitive Strategic and Competitive
theme planning planning advantage organisational advantage
and control innovation that is
sustainable

Main issues Financial Planning Selecting Focusing Reconciling Focusing on

control growth, industries and strategy size with value
through especially markets around flexibility and innovation
operational diversification Positioning for sources of responsiveness Sustainability
and capital and portfolio market competitive Stakeholder
budgeting planning leadership advantage engagement
New Winner-
business takes-all
development markets
Multiple
connections
 Period 1950s 1960s – Late 1970s – Late 1980s 2000s 2010s
early 1970s mid-1980s – 1990s
Principal Financial Business Industry Resources Cooperative Value
concepts and budgeting forecasting analysis and strategies innovation
techniques Investment Corporate Segmentation capabilities Competing for Stakeholder
planning planning Experience Shareholder standards engagement
Project techniques curves value Complexity Governance
appraisal Synergy PIMS (Profit Knowledge and self- and ethics
Impact of management organisation Multiple
Market Information Corporate scenarios
Strategies) technology social
analysis responsibility
SBUs
(Strategic
Business
Units)
Portfolio
planning

Organisational Systems of Rise of Multidivisional Restructuring Alliances and Global

implications operational corporate and and re- networks strategies
and capital planning multinational engineering New models Blue ocean
budgeting departments structures Refocusing of leadership strategies –
become key and long- Greater Outsourcing Informal non-
mechanisms term formal industry and E-business structures disruptive
of planning market Less reliance creation
coordination Mergers and selectivity on direction Integrated
acquisitions and more on sustainability
and control
emergence reporting
Brokering
and
participating
in
stakeholder
relationships
More
reliance on
distinctive
capabilities
(process)
rather than
resources
Strategic
action and
reaction

During this era, strategy was essentially de ned as a process, comprising the following sub-processes:27
identifying and analysing threats and opportunities
responding to threats and opportunities by formulating strategic plans
implementing strategic plans
designing control systems for implementation processes.

In the 1970s, circumstances changed, largely in uenced by major increases in the oil price. Diversi cation did not
deliver the anticipated synergies in the organisational value chain, and Japanese, European and Southeast Asian
organisations brought about increased international competition worldwide.28
In the mid-1980s, organisations and academics focused on the analysis of the external environment, and viewed
strategy as a quest for positioning and market leadership. is is referred to as the outside-in perspective discussed
in section 1.5.2 of this chapter, and includes organisational positioning, attaining a competitive advantage in a
changing environment, and maximising pro t potential. During this period, contributions were made by, among
others, Porter (1980),29 the Boston Consulting Group and the Strategic Planning Institute (Pro t Impact of Market
Strategies) project.
In the late 1980s and early 1990s, the focus shied to the internal organisational environment, and from strategic
planning to strategic management. is is the inside-out perspective explained in section 1.5.1. Stimulated by the
accelerated rate of technological change and the greater spread of wealth, new demands for strategy development
were created. Consequently, the source of pro tability and the basis of long-term strategy resulted from
developments in the resource-based and dynamic capabilities viewpoints, which are explained in section 1.5 in this
chapter.30 ese viewpoints argued that any form of sustainable competitive advantage results from an organisation’s
unique resources and dynamic capabilities. e internal focus emphasised the differences within organisations to
achieve a competitive advantage. Organisations moved towards specialisation that resulted in outsourcing and the
divestment of non-core business activities. e rapid advancement in technology during the late 1990s led to
rethinking business models with a move towards the emergence viewpoint of strategic planning, which is explained
in the next section.

1.2.3.2 Strategy into the 21st century

At the beginning of the 21st century, key theoretical developments that in uenced the rethinking of contemporary
business models included the application of game and complexity theories to business,31 and the analysis of the
disruptive effect of technology.32 Complexity theory is a science of complex interacting systems,33 and is
characterised by non-linearity, unpredictability and aperiodicity.34 e challenge was how to incorporate the
unpredictable conditions of non-linearity, uncertainty and ambiguity into an organisation’s strategy to ensure the
sustained management of innovation and change. As far back as 2001, Ilbury and Sunter advocated the re-
emergence of scenario planning as a valuable tool in preparing for possible different futures. To support their
viewpoint, it is asserted that both the current and future environments need to be considered in strategising and that
scenario planning is useful in determining possible futures.35 Other developments included:
the diagnosis of the 21st century competitive landscape and the impact of globalisation
the strategic use of knowledge in organisations
the application of real options thinking (decisions about expanding or ceasing capital investment projects that
pertain to tangible assets)36
risk management
multiple connections or interconnectedness between markets
the availability of big data
the power of the cloud and the internet of things (IoT)
value innovation, blue ocean strategy and non-disruptive creation
sustainability, governance and ethics
the principle of action and reaction to strategising.

Managers and academics had to rethink previous business models during the early 21st century. is rethinking was
in uenced, among other things, by the 2008–2009 recession. Becoming disillusioned with ‘shareholder value
capitalism’, there is a renewed interest in corporate social responsibility, business ethics and sustainability.
Sustainability implies that organisations can achieve a competitive advantage with above-average returns by creating
value, managing ethically, and being sustainable, corporate global citizens with social, environmental and economic
integrity.
It is interesting to note that even though there is a renewed interest in including sustainability into contemporary
business models, the World Commission on Environment and Development had already introduced a broader
discourse on sustainable development during the late 20th century. In 1992, the concept was thrust onto centre stage
of the global public policy debate at the UN Conference for Environment and Development or the Earth Summit in
Rio de Janeiro. In 2000, the UN Secretary-General, Ko Annan, established the UN Global Compact which
indicated how business should become part of the solution to sustainable development while the Global Reporting
Initiative (GRI), a multi-stakeholder initiative, developed a set of principles and indicators for sustainability
reporting. is was taken one step further by the King Report IV on Corporate Governance, published in 2016,
further emphasising the need for integrated sustainability reporting, in adherence to the GRI guidelines.37 Chapter
2 provides further discussion on the sustainable organisation and the importance of stakeholder relationships.
In addition to sustainability, the other main issues included in contemporary business models are the ability to
attain a competitive advantage through value innovation using blue ocean strategies in which uncontested market
spaces (where no competitors exist) are identi ed; stakeholder engagement; governance and ethics; a focus on global
strategies where the winner takes the market; multiple connections; and the generation of multiple scenarios (see
Table 1.2). Increasingly the focus is shiing from structure to process. Multiple connections refer to the
‘interconnectedness between markets and the constant intensifying diversifying of economic exchanges
worldwide’.38 e concept of multiple connections or interconnectivity is driven by the unpredictability and
constant change caused by volatility in the marketplace.39 ‘Digital technologies are re-engineering how industry
works, channelling the power of the cloud into the Internet of ings (IoT), and revolutionising how we experience
and interact with everything around us’ … ‘organisations need to be agile, innovative’ and open to the external
environmental changes to deliver what their customers want as well as envisioning their future demands (multiple
scenarios). As such, the value propositions are constantly changing40 and the principle of strategic action and
reaction becomes vital to ensure that the organisation’s strategy is appropriate.41 With regard to this principle, we
argue that while organisations need to internalise the impact of the external environment and the role of increased
connectedness in their strategy implementation, simultaneously there is increasing pressure to also consider their
socio-ecological impact on communities and environments, especially in developing countries. According to Robert
Kaplan, a professor at the Harvard Business School, it does not mean that strategy needs to be changing every year
but that ‘you need to have a true north for your organisation where you have position for competitive success’.42
From the authors’ perspective, we assert that while strategising oen responds to innovative disruption, oen caused
by technology changes, it can also follow a blue ocean strategy that is regarded as a non-disruptive creation. Blue
ocean strategies, elaborated on in Chapter 9, focus on value innovation. In creating value innovation, a blue ocean
strategy considers both the organisation’s cost structure and the value proposition it offers to its customers. In
essence, in creating value, an organisation’s strategy can be very competitive and disruptive by ‘focusing on
displacing existing players and markets with superior products’ or services. On the other hand, an organisation’s
strategy could be to ‘create new markets without disrupting existing ones’, thus following a blue ocean strategy.43
AutoTrader, operational in South Africa since 1992, used disruptive innovation to generate blue ocean strategies
that were non-disruptive in nature. is example is further discussed in section 1.5.
e concept of multiple connections is illustrated with examples from Cisco and Philips, Ford Motor Company
and BSK Marketing in South Africa.

CASE EXAMPLE: How multiple connections create value44

 The collaboration between the IT giant Cisco and Philips Lighting is illustrative of multiple connections between
two organisations. By combining Philips’ Ethernet-powered and connected systems with Cisco’s networking
know-how, the next generation of lighting will improve energy efficiency, enhance user environment, and can be
controlled by a smartphone. Philips’ cloud-based CityTouch software platform enables urban managers to
analyse data, fix problems and control street lighting networks in real time. According to Eric Rondolat, CEO of
Philips Lighting, ‘[i]n the future, connected street lighting could form the digital backbone of smart cities’.
Furthermore, Tony Shakib from Cisco emphasises that connectivity is also ‘about productivity. When you connect
your assets, you can see how they are performing’.
Similarly, Ford Motor Company is shifting its value proposition and business model from being an auto
manufacturer towards becoming a manufacturing technology and information organisation where innovation is
core. Ford is not merely looking at producing cars but also at providing other services to address different
transportation needs. To achieve this shift, they realised that they needed to disrupt their current business model
by considering societal trends over the next 15 years and the impact on human health. Instead of just counting
the number of cars sold, Ford will explore how people move in the future, from car- and ride-sharing to
developing connectivity to self-driven vehicles. For example, in London they launched their GoDrive scheme. In
this scheme, the GoDrive app lets users locate hubs, pick up an electric Focus or low-emission Fiesta, pay per
minute to drive with no mileage limits, and drop the vehicle off in a guaranteed parking space on arrival. This app
illustrates the connectedness between users and multiple ride-sharing activities, all made possible because the
Ford Motor Company is using next-generation technology and information.
Busi Skenjana, CEO and founder of BSK Marketing, Stokvel Voice magazine and the Stokvel Academy,
focused on ‘unlocking the stokvel market and forming strategic partnerships between government and private’
enterprise. In addition, she understood what the stokvel market’s unique challenges were and how to offer
solutions to market needs. Marketers did not understand stokvels or how the community works, particularly
because stokvels exceed traditional socio-economic lines. Skenjana saw the opportunity of bringing together
different groups of people with different needs who could benefit from each other but do not necessarily have
access to each other. As such, Stokvel Voice provides niche information on topics such as ‘finance, legal, health,
home improvements, parenting and fashion’. Skenjana is using the principle of multiple connections between
government and private enterprise, and is satisfying the multiple needs of different groups of people by including
niche information in Stokvel Voice on various aspects. Uber and Airbnb also use a similar business model by
linking ‘people and product or service’.

is section provided an overview of how strategy developed during the 20th century and into the 21st century. e
next section expands further on the nature and role of strategy.

1.3 The nature and role of strategy

is section explains the nature of strategy by considering Mintzberg’s45 ve Ps of strategy. e role of strategy will
be dealt with in terms of an explanation of the levels of strategy in an organisation.

1.3.1 The five Ps of strategy

Before discussing the ve Ps of strategy (strategy as a plan, position, perspective, ploy and pattern), as shown in
Figure 1.1, it is important to understand that these ve Ps provide insight into how strategy is de ned by the
different perspectives and processes used in formulating and implementing strategy. While each P provides a
speci c de nition of strategy, no one de nition takes preference over the other, and they should all be seen as being
complementary and interrelated, for example the relationship between strategy as a plan and strategy as a
perspective. As a plan, strategy has traditionally been viewed as something an organisation ‘has’ in setting direction,
while strategy as a perspective is seen as something that people in an organisation ‘do’, i.e. the practice of strategy.46
In turn, the practice of strategy is in uenced by the practices (how things are done) external to the organisation
(extra-organisational) and the activities (what is done) of people in the organisation (intra-organisational).47 ere
is a reciprocal relationship between intra- and extra-organisational strategic activity. However, this relationship is
in uenced by what people do (their activities). e activities of people in uence the way in which strategy is
implemented.

Figure 1.1 The five Ps of strategy

e ve Ps of strategy are as follows:

Strategy as a plan provides overall direction and a course of action. e planning viewpoint or ‘design school’ of
strategy48 views strategic decision-making as a formal, logical, top-down structured process in which strategy is
formulated by means of a rational analysis of the organisation, its performance, and external environment. As a
plan, strategy formulation is a formal process of conception49 implemented through organisational layers,
structure and control systems. In this approach strategy is intended, as it looks and seeks to attain a match or
strategic link between the internal organisational capabilities and external opportunities, forming the basis of the
sustainable resource-based and dynamic capabilities perspective discussed in section 1.5.1. e planning
approach to strategy has been criticised for being a too rational, top-down management approach, and for not
being realistic enough given the unpredictability of the 21st century competitive environment. However, research
suggests that formal planning systems contribute towards better strategic decision-making, and have a positive
impact on organisational performance.50
Strategy as a position concerns the determination of particular products in particular markets51 – a matching of
the external and internal environments. As a position, strategy looks downwards (meeting customer needs) and
outwards, towards the external competitive market. e focus is on an outside-in perspective (see section 1.5.2).
Strategy as a perspective refers to the organisation’s way of doing things, and is also called the interpretative
view52 or experience.53 Future strategies are formed by adapting past strategies based on the collective
experience of individuals and the way of doing things embedded in the cultural web of an organisation. It is a
product of the minds and ideologies of individuals, groups and management in the organisation. Resolving
different views and experiences requires negotiation and bargaining. In other words, the extent to which the
strategic link is attained between the organisation and its competitive environment is mediated by how
individuals and management interpret the internal resources and capabilities in the environment. As a
perspective, strategy looks inside the organisation – inside the mindset of the collective strategists – and upwards
 toward the strategic purpose, intent and direction of the organisation.54 Strategy as a perspective is becoming
more important in developing a competitive advantage by creating better value propositions through people and
processes. e focus is on an inside-out perspective (see section 1.5.1).
Strategy as a ploy is a speci c manoeuvre to outwit a competitor. For example, to give the impression of
expanding capacity, an organisation may purchase land to discourage a competitor from building a new plant.
e real strategy is not the expansion itself, but the threat or ploy.
Strategy as a pattern concerns consistent behaviour over time. For example, an organisation that perpetually
markets cheap products pursues a low-cost strategy.
» While strategy as a plan is intended, strategies as a pattern evolve over time as a ‘pattern in a stream of
actions’.55 Strategy as a pattern encompasses a series of behaviours that result in a strategy, whether intended
or not. For example, the realised strategy at Ford Motor Company was to produce the Model T Ford only in
black. While realised strategies do not always arise from intended strategies, in this example it was an
intended strategy of Henry Ford. Intended strategy is the strategy envisioned by top management and is
achieved by managers shaping and reshaping strategies as circumstances dictate, and as they learn from
experience and seek out improvements. Only 10–20% of intended strategies are realised.56 Intended strategies
that are fully realised are referred to as deliberate strategies, and those that are not realised, mainly due to
unpredicted change, are called unrealised strategies57 or abandoned strategies.58
» When the pattern realised is not explicitly intended, it is referred to as an emergent strategy (see Figure 1.2).
Emergent strategies are ‘the patterns of decisions that emerge from individual managers adapting to changing
external circumstances and the ways in which the intended strategy is interpreted’.59 Such strategies are
unplanned responses to unforeseen circumstances. ey are neither a product of formal top-down planning
nor a bottom-up approach, but rather a ‘fuzzy and intuitive process of understanding’.60 For example, rather
than pursuing a comprehensive diversi cation strategy, an organisation may rst test the market by
purchasing a restaurant, then a resort hotel, and then an urban hotel, until a strategy pattern of diversifying
into urban hotels with restaurants emerges.61

To summarise, the challenge for organisations is to maintain a balance between deliberate and emergent strategies.
is is associated with the strategic paradox and is discussed further in section 1.8.
e most classic case of strategy as a pattern is the Honda Motor Company’s entry into the US motorcycle
market.62 e conventional explanation of Honda’s success is that it rede ned the US motorcycle industry with a
well-conceived intended strategy. Despite the fact that Honda’s strategy was close to disastrous, the Japanese
management astutely and exibly responded to unforeseen circumstances. Honda’s reaction was unplanned, and
emerged as circumstances changed.
An important lesson for strategists is that they need to recognise the process of emergence and intervene where
appropriate. ey need to realise that strategies can grow from any point in the organisation, provided people have
the capacity to learn and the resources to support that capacity. Eighty percent of the success of world-class
organisations can be attributed to the implementation of emergent strategies – ‘the trick is to co-ordinate the 101
little things that make the idea happen’ rather than the major innovative ideas.63

Figure 1.2 Deliberate and emergent strategies

 Management is responsible for evaluating the appropriateness of emergent unplanned strategies. As illustrated in
Figure 1.2, management does this by comparing the emergent strategy with the organisation’s external environment
and internal factors to assess whether there is a strategic link between them, and whether there is alignment with the
organisational purpose.
It is normal for organisations to pursue an umbrella strategy in which broad outlines are deliberate, while the
details emerge within, provided learning takes place.64 Figure 1.2 illustrates that it is normal to nd deliberate and
emergent strategies simultaneously in an organisation.
Despite the differences highlighted in this discussion on the essence of strategy, there are also some areas of
agreement:65
Strategy is concerned with the organisation and its environment.
Effective strategies are important to ensure value creation for all stakeholders and above-average earnings for the
organisation.
Strategy sets direction, focuses effort and provides consistency.

e essence of strategy is complex and unstructured. Strategies can be deliberate, intended but unrealised, or
emergent, and exist on different levels, namely corporate, business and functional, as discussed in the next section.

1.3.2 Levels of strategy

As mentioned previously, primary objective of strategy is to achieve a sustained competitive advantage as this leads
to above-average returns (increased pro tability). However, once an organisation has analysed, developed and
formulated its strategy, it needs to implement and manage risk to ensure that strategy successfully. e overall
strategy is the collection of the strategic initiatives and actions developed by managers and key employees, in the
organisational hierarchy, as discussed below and illustrated in Table 1.3:
Business level strategy relates to how the organisation competes to strengthen its market position and attain a
competitive advantage in each area of its business units. e strategic link between internal capabilities and
external relationships is important.66 e business unit head is responsible for orchestrating business level
strategy; for ensuring that lower-level strategies are well-conceived, consistent and match the corporate level
strategy; and for obtaining approval by corporate level executives and the board of directors.67 Chapter 8
examines business level strategy in detail.
Corporate level strategy relates to the overall purpose and scope of an organisation. It addresses the question of
how value can be added at all business levels and lines. General decisions about what type of business the
organisation conducts, or ought to be conducting, are taken at this level. is could include aspects such as
geographic coverage, diversity of products or services, turning cross-business into competitive advantage, and
divestments.68 e CEO and senior managers are normally responsible for orchestrating corporate strategy, with
input from the key senior executives who head up the business.69 e CEO is responsible to all stakeholders. e
organisation’s board of directors usually reviews and approves corporate level decisions. Consider the Opening
case study of Shoprite Holdings Ltd as an example. Shoprite has a diversi ed portfolio of businesses that are
active in four segments, namely Supermarkets RSA, Supermarkets Non-RSA, Furniture, and Other Operating
segments. e company is also the largest private sector employer in South Africa and a major employer in the
rest of Africa with approximately 143 000 employees. ey currently have 308 outlets in 15 other African and
Indian Ocean islands, and are also planning to further expand into the African continent and Eastern Europe.
eir success resides in their ability to maintain their position as a market leader, and deliver on their low-cost
promise and value proposition across diverse locations in Africa. To do so, the CEO of Shoprite Holdings Ltd
must provide the strategic direction and is responsible for setting the overall strategic goals, allocating resources,
driving the value proposition and deciding on international strategies. He is responsible for managing the
corporate portfolio of businesses to have above-average returns. Corporate level strategy is further discussed in
Chapter 10, while Chapter 11 discusses strategies for international competitive advantage.
Functional level strategy (discussed in Chapter 13), which includes operational level strategy, underpins business
level strategy by implementing business strategies through the functional areas, such as marketing, human
relations, production, information systems and nance. e primary role of functional strategy is to support the
overall business strategy and competitive approach by performing strategy-critical activities.70 e decision-
making responsibility, at functional level, resides with the heads of the respective functional areas, and with the
general manager, at business level, who approves the content of these strategies. Oen the links between business
level and functional level strategy are tenuous. If there is no clear direction at business level, functional level
strategies are unlikely to be mutually supportive and consistent. ere should be synergy and cooperation
between the functional areas in an organisation to achieve a competitive advantage.

Chapter 14 discusses operational and strategic risk management relevant to all the levels of strategy.
Ideally, cohesion should be achieved between these three levels of strategy. Cohesive strategy-making becomes
easier to achieve when all the organisational members, at different levels, understand the organisation’s strategy as a
result of clear communication and guiding principles.71 In Table 1.3, the strategic perspective, key questions and
decision-making responsibility for each level of strategy are given.

1.4 Strategic management

e success of an organisation is mainly determined by the effectiveness and efficiency of its management. In the
words of Peter Drucker,72 efficiency is concerned with ‘doing things right’, while effectiveness is concerned with
‘doing the right things’. Effectiveness is associated with strategic management, while efficiency is related to
operational management.
Strategic management is concerned with the overall effectiveness and choice of direction in a dynamic, complex
and ambiguous environment. Strategic decisions have long-term implications and concern the entire organisation.
Strategic management encompasses more than strategic decision-making and the strategic planning process. It has
to ensure that strategy is implemented, i.e. that strategies are working in practice. In other words, strategic
management refers to the management processes that de ne the organisation’s goals for value creation and
distribution, and design the way the organisation will be composed, structured and coordinated in pursuing its goals
for value creation and distribution.73 It is the process by which organisations determine what value is needed and
how to add that value, and enables organisations to cope effectively with the myriad demands placed on them both
internally and externally.

Table 1.3 Levels of strategy and decision-making hierarchy

Strategy levels Strategic perspective Key questions Decision-making

responsibility
Corporate strategy Overall purpose, scope, What is the purpose of the Orchestrated by the CEO
range, and diversity of the organisation? or MD, other senior
organisation – What type of business are executives and the board
organisation as a whole we conducting? of directors
perspective What business should we
be conducting?
What is our overall
direction for the future?
What is our leadership
style and organisational
culture?
What is our attitude
towards strategic change?

Business strategy Determining competitive What is our sustainable Orchestrated by the

strategy and achieving competitive advantage? general manager of each
competitive advantage for What value do we add? line of business, with
a single line of business – Where? Why? How? advice and input from the
business, product or What markets should we heads of functional areas
service compete in? in each line of business
What competencies and
capabilities do we need?
Who are our customers?
How can we innovate?
 Strategy levels Strategic perspective Key questions Decision-making
responsibility

Functional strategy Source of competitive What is the role of this Crafted by the heads of
advantage in a particular department or functional functional division within a
activity or line of business area in delivering business particular line of business
– functional level activities, level strategies? with the involvement of
processes, practices and How is strategy key employees
resources implemented and
coordinated at functional
level?
Does the organisational
architecture support
strategy implementation?

Source: Thompson et al. 2004. Op. cit.: 27; Thompson et al. 2016. Op. cit.: 33

From the authors’ perspective, strategic management is concerned with:

Strategic planning or the thinking aspect of strategy. Strategic planning is concerned with:
» sustainable stakeholder context
» analysing the external and internal organisational environments, supported by strategic decision-making
» developing and formulating effective strategies that balance the organisation’s internal and external
environments.
Strategic planning is supported by strategic decision making, risk management and strategic leadership.
In doing so, strategic managers are responsible for establishing a clear direction for the organisation and a means
of getting there, which requires the creation of strong competitive positions through their value proposition. is
might mean a change in the business model.
Strategy implementation or the doing aspect of strategy. In effective strategy implementation, the
organisational alignment through its architecture (i.e. processes, structure, systems, knowledge, skills, abilities,
technology and organisational culture), leadership activities, supported by strategic risk management are
synergistically integrated to achieve effective performance.
Integrating sustainability into all the strategies.

Note, however, that strategic management per se based on past and current success will not guarantee continued
prosperity and success.74 Constant organisation-wide learning, visioning of the future, strategic exibility to deliver,
and a team approach towards employees and stakeholders are required to sustain prosperity and establish a
competitive advantage. e primary objective of strategic management is to achieve a sustainable competitive
advantage for the organisation. is can be achieved only if strategy is formulated and implemented properly.
Good strategic management = good strategic planning + good strategy implementation
To position an organisation strategically, there needs to be a conceptual t, or a strategic link, between the
internal and external environments. Matching the conditions of the internal and external environments is the
foundation on which the organisation needs to develop its strategic direction, plan strategically and implement
strategies and manage risk in the pursuit of strategic competitiveness, i.e. sustainable and above-average returns. e
next section discusses the inside-out and outside-in perspectives that explain how to achieve a strategic link between
these two environments.

1.5 Perspectives on managing strategically

To achieve a competitive advantage, strategy has to be consistent with the organisation’s internal and external
environments (macro- and industry environments). Our perspectives for managing strategically, as illustrated in
Figure 1.3, view strategy as a link, or conceptual t, between the organisation’s internal environment (referred to as
the inside-out perspective) and its external environment (referred to as the outside-in perspective). Successfully
attaining this strategic link will shape the strategies formulated, which will lead to a competitive advantage and
above-average returns, and potentially a revised business model. Well-developed and well-formulated strategies will
build and reinforce organisational resources and capabilities, strategic architecture, and goals, values, and business
intelligence to generate new value propositions. According to research, approximately 20% of an organisation’s
variance in pro tability can be explained by the industry in which it competes, while 36% could be attributed to its
internal environment.75 is suggests that there is a reciprocal relationship between the external and internal
environments in shaping the competitive advantage of an organisation and its above-average returns. e next
section discusses the inside-out and outside-in perspectives to explain what is meant by the conceptual t between
an organisation’s internal and external environments.

Figure 1.3 Strategy link perspective

1.5.1 The inside-out perspective

Strategic leaders who adopt an inside-out perspective believe that strategies should be designed and developed
around the organisation’s resources, dynamic capabilities, and strategic architecture, goals and values,76 as well as
being able to convert business intelligence into useable knowledge77 to take advantage of the opportunities in the
external environment.78 is is known as strategic stretch, as shown in Figure 1.4. From this perspective, the
organisation leverages its resources and dynamic capabilities by ‘stretching’ its resources and capabilities to achieve
a competitive advantage and/or yield new opportunities. e organisational resources and capabilities are discussed
further in Chapter 7. e ability to be innovative (discussed further in Chapter 9) and strategically exible is critical
to achieving a competitive advantage. e resource-based and dynamic capabilities viewpoints form the basis of this
perspective and are explained below.
1.5.1.1 Resource-based and dynamic capabilities viewpoints
e answer to the question: ‘What can this organisation do for me?’ usually lies in the organisation’s resources,
which are at the core of the resource-based viewpoint (RBV). e RBV is a theoretical perspective for understanding
how competitive advantage is achieved in organisations and sustained over time. is view assumes that
organisations are conceptualised groupings of resources that are heterogeneously distributed across the organisation
and persist over time. An organisation can use its unique resources to implement value-creating strategies and to
exploit new market opportunities.79
e perspective taken in this text is that a sustainable organisation can be achieved by formulating and
implementing value-creating strategies while concurrently considering the urgent social and environmental
problems facing the global community. When an organisation implements value-creating strategies that other
competitors are unable to duplicate, or are too costly to imitate, it has achieved a competitive advantage.80 A
competitive advantage and above-average returns are easier to attain when an organisation has resources that are
valuable, rare, costly to imitate and non-substitutable, i.e. unique.81 In this sense, strategy is neither a quest for the
universally best way of competing nor an effort to be all things to every customer, but rather how the organisation
competes to deliver unique value.
e term value used here refers to the contribution that strategic leaders make to their organisations, products,
customers and stakeholders. An organisation creates value through exibility and innovation. Strategic exibility
implies that the organisation has sets of capabilities in different areas of operations that add value to how it responds
to external opportunities and challenges in a dynamic and uncertain environment.82 Competitive advantage can be
achieved only when the organisation’s products or services are perceived as having value, determined by customer
acceptance. e key challenge is to sustain the competitive advantage. A competitive advantage can only be
sustained for a certain period, given the speed with which competitors are able to copy value-creating capabilities.83
For example, Kodak, founded in 1888 by George Eastman, almost lost its competitive advantage by focusing on lm
technology for too long. In 2004, declining consumer lm sales forced the company to restructure to accelerate its
digital transformation.84 Unfortunately Kodak went bankrupt in February 2012 and exited the camera business.85
e company, Eastman Kodak Co, emerged from this bankruptcy in 2013 as a smaller company in the printing
industry, showing a pro t in 2016. and has a new business model that is technology-based and able to adapt to
changes in the external environment more quickly.86
Owing to the current competitive environment of rapid and unpredictable change, the emphasis has shied
towards an organisation’s capabilities rather than its resources. Consequently, the competence-based view and
capabilities-based view have gained in popularity. Core or distinctive capabilities are distinctive skills that yield a
competitive advantage, and are difficult for competitors to imitate or obtain. Distinctive capabilities are inherent in
the technologies, processes, strategic architecture,87 combination of strategies, values and relationships88 in an
organisation. Building onto the RBV, distinctive capabilities are process-based (internal processes such as
coordinated activities that rely on sets of activities and resources simultaneously) and higher-order competencies
(the ability to think critically).89
e ability to stretch resources and capabilities is largely dependent on the organisation’s strategic architecture.90
Organisational architecture, further explained in Chapter 13, integrates the key dimensions of the organisation, such
as organisational structure, leadership, organisational culture, policies and strategies, to guide strategy formulation,
alignment and implementation. e ability to manage architecture strategically is supported by effective functional
processes and strong technological capabilities:
Internally, organisations must behave in a coordinated manner that creates synergy by integrating functions,
systems, processes, people and structure, i.e. sustainable systems thinking. For example, AutoTrader (see the
 Strategy in action feature in section 1.5.2) connected automotive buyers and sellers on their digital platform
which assisted them in building a new value proposition. In creating value, they developed a free call-tracking
system for their car dealers enabling them to interact directly with buyers. e value proposition was further
enhanced by the leveraging of data into useable knowledge that enabled AutoTrader to further enhance their
service offerings to meet the needs of their customers. To achieve this, the functional specialists met regularly to
create sustainable synergy between functions, systems, processes, people and structure.91
Externally, integrating value-adding networks contribute to adding value in the value chain. For example,
Woolworths ensures that its supply chain operates smoothly to deliver a good service to its trade partners and its
stores by focusing on vendor capability, packaging and barcodes, primary freight, distribution centres, timely
replenishment and international logistics.92

Dynamic capabilities are activities and processes that strategic leaders employ to integrate, build and recon gure
internal and external competencies to address rapidly changing environments, and which become the source of
sustained competitive advantage.93 ey are the drivers behind the creation, evolution and recombination of other
resources into new sources of competitive advantage,94 and cut across the entire organisation. Examples are
Michelin’s complex technological process in manufacturing radial tyres, and Coca-Cola’s specialised marketing and
merchandising know-how.
However, resources and capabilities can become a threat to an organisation if they are lost or diminished, or too
entrenched to change quickly enough. In other words, if the factors that contributed towards a competitive
advantage become too entrenched into modes of thinking and working, under conditions of change they could lead
to the downfall of an organisation. e main cause of a downfall is usually the ‘inability to take appropriate action …
[with] reasons ranging from managerial stubbornness to sheer incompetence – but one of the most common is a
condition called active inertia. Active inertia is an organisation’s tendency to follow established patterns of
behaviour – even in response to dramatic environmental shis’.95
Figure 1.4 illustrates the importance of resources and capabilities as initiators of superior returns.

Figure 1.4 Inside-out perspective of superior returns96

An organisation can build on its internal resources, such as technological infrastructure and know-how, and
capabilities, for example IT capabilities, to take advantage of external market forces. For instance, the strategic
decisions made by Nokia to turn the organisation around amidst strong competitors such as Apple, Google and
Samsung were successful over a number of years. ey were able to leverage their internal resources and capabilities
until new challenges arose. Some of these new challenges included their ability to move from a device-centric to a
platform- and application-centric system; and to become more soware and application ecosystem orientated.97 In
the constant restructuring to respond to ‘technological advancement, rapid market change and growing
complexity’,98 there were a number of internal mistakes that contributed towards their decline. ese included
decisions by management, a dysfunctional organisational structure, increasing bureaucracy, internal rivalries99 and
overestimation of their brand value. Nokia sold its mobile phone business to Microso for $7.2 billion in 2013, but
retained its other businesses.100
In adopting an inside-out perspective in the new era of innovation, an organisation’s core expertise is more
important than ever before. Data, turned into intelligence, will become the most powerful asset, and being able to
build or participate in platforms is vital to a sustained competitive advantage.101 e resource-based and dynamic
capabilities viewpoints suggest that an organisation’s unique resources and capabilities are the critical link to
sustained competitive advantage and above-average returns. However, failure to match the organisation’s resources
and capabilities with the external environmental factors could be a critical error.

1.5.1.2 e importance of goals and values

e importance of goals and values cannot be ignored. In this text, values have a wider meaning than mere ethical
connotations. We de ne values as the standards by which all employees set priorities and de ne the rules that they
should follow to achieve a sustainable competitive advantage. In doing so, employees at every level, not just at the
strategic top level of management, make prioritisation decisions regarding what is attractive or unattractive, or more
or less important.
Given the hyper-competitive 21st century environment, a new mindset emerged in which values such as
exibility, speed, innovation and integration are pertinent. A key method for determining ‘good’ strategic
management is to assess whether clear and consistent values have lled the organisation.102 As mentioned in section
1.3.1, while creating a culture that can embrace and adapt to technology change is critically important, but it needs
to be supported by the appropriate value system of employees at every level in the organisation. Likewise, the Nokia
example emphasises the importance of values and organisational culture. Some argue that the lack of similar values
and the ability to manage the organisation’s emotions in a collective (emotions felt by people can in uence strategy
implementation) was one of their downfalls.103 As mentioned previously, being able to create an organisational
culture and values that embrace and adapt to change is the most important resource for coping with disruptive
innovation.104 Just as important is the access to, and use of, business intelligence systems that provide structured,
quantitative and historical information about the organisation. Chapter 4 discusses the analysis of this information
by means of organisational integrating mechanisms (people, technology and processes) facilitating effective strategic
decision-making.
In conclusion, the factors that de ne an organisation’s internal capabilities evolve over time. ese factors begin
with resources, and then move to visible, articulated processes and values, using business intelligence as a strategic
decision-making enabler, and nally becoming ingrained in the organisation’s culture. Being exible and ensuring
the strategic link between the inside-out and outside-in perspectives is a challenging strategic task.

1.5.2 The outside-in perspective

e outside-in perspective is also referred to as the market-driven strategy105 and the industrial organisation
model.106 Strategic leaders who adopt an outside-in perspective believe that strategies should be designed and
developed as determined by market needs, and based on an understanding of and response to the external
environment. From this perspective, the organisation:
Identi es opportunities in the external environment
Creatively de nes its competitive industry, facilitated by environmental scanning activities known as competitive
intelligence
Adapts its resources and dynamic capabilities to take advantage of these opportunities. is is known as strategic
t.107

e key to this perspective is competing successfully in an attractive industry, with the external environment as the
initiator of strategy. is requires the organisation to develop new resources and dynamic capabilities to establish a
competitive advantage. Alternatively, the organisation can create new opportunities by forming strategic alliances
with organisations that have superior resources. In Figure 1.5, the outside-in perspective suggests that above-average
returns are earned when the organisation develops, or acquires, the internal resources and dynamic capabilities
needed to implement strategies as dictated by the external environment. Examples of organisations that were not
able to adapt their dynamic capabilities to t strategically with the demands of the external environment are Kodak
and Nokia. For further information refer to http://www.kodak.com and to Doz, Y. (2017) e strategic decisions
that caused Nokia’s failure. December, 4. http://www.leader.co.za/article.aspx?s=6&f=1&a=6837

Figure 1.5 Outside-in perspective of superior returns108

Chapters 5 and 6 discuss the external environment, as the initiator of strategy according to the outside-in
perspective, consists of the macro- and industry environments while Chapter 4 discusses an organisation’s ability to
scan the competitive environment using competitive intelligence as a strategic decision enabler.
 One example of how the external environment affected a company’s competitive actions and responses is found
in the Strategy in action section on AutoTrader, below, who positioned themselves for sustained growth in the
digital market of buying and selling cars.

STRATEGY IN ACTION: AutoTrader109

AutoTrader South Africa, a subsidiary of the UK holding company, has been operational in South Africa since
1992. The CEO of AutoTrader South Africa, George Mienie, joined the organisation in 2004. AutoTrader in South
Africa experienced a boom in the sales of their magazine during 2005 to 2008. In 2007 they sold 108 000 copies
of the magazine each month, prior to the unforeseen recession and the exponential change (disruptive
innovation) from print to digital.
George and his team decided to change their business model as they recognised that the market was
changing and that their current business model would not support sustainable growth. They decided on a
business model that focused on digital rather than only on print platforms, despite the fact that in 2007 the
market need in South Africa was satisfied with print platforms. In changing their business model ‘two key areas
had to be addressed. First, the team needed to determine how a digital business could potentially eradicate the
limitations of print. Second, they needed to understand the customer and their needs, which would inform what
AutoTrader’s new products should deliver’. It was difficult for AutoTrader to envision the scope that digital offered,
as print business offered a limited scope and there was no further room for scalable growth. Increasing print
readership in an existing market, or expanding the market into different geographical areas, would not provide
opportunities for scalable growth in the future, and the sustained competitive advantage would slowly become
eroded by the emergence of the digital platforms. In this case the emergence of the digital platform represented
a disruptive innovative opportunity for AutoTrader to change their business model. In doing so, they had to
consider three important points. Firstly, changing a business model from an extremely successful one to an
unknown one is risky. Secondly, besides focusing on what their customers needed, they also had to find out what
their customers wanted. ‘In many instances the customers do not know what they want until you give it to them.’
Thirdly, they had two sets of customers, namely those who were readers (potential car buyers) and those who
were selling cars (the advertisers).
As such, they had to understand what their value proposition would be to their customers. More specifically,
AutoTrader had to understand what the needs and wants of their car sellers and buyers were. In meeting their
customers’ needs and wants, they had to design a call tracking system to make their value proposition attractive
to their customers using the online digital platform. In addressing the needs and wants of the car sellers, George
and his team were able to build on their dynamic capabilities to design a ‘call tracking system that we gave to all
our car sellers for free, with one telephone number and a line that we paid for. The number was printed on their
magazine adverts’ so that they were able to track the incoming calls based on the adverts. AutoTrader ‘is one of
the few companies worldwide that has successfully transitioned all of its clients onto a call tracking system’. In
building their value proposition, ‘[t]he key lesson was in understanding what a digital product should look like …
and understand[ing] and defin[ing] who you are’. For AutoTrader this was the ‘two-sided marketplace for buying
and selling cars. Everything else was secondary.’ Both sides of the marketplace could be tracked, and they could
do business with each other through AutoTrader. Besides selling the magazine online, they developed specific
products for car sellers at ‘different prices with different value propositions. ‘To ensure that online advertisers on
different packages received value, data was continuously collected and monitored, and online packages adjusted
to deliver the best results for buyers and sellers.’ This was a process that took time, and the product offerings
often had to be modified.
AutoTrader South Africa made the decision to be proactive and to be an industry leader ahead of the
innovation curve. In so doing, they positioned themselves for sustained growth in the ‘digital market of buying and
selling cars’. They became content creators, brought together buyers and sellers on one online platform, and
converted data into knowledge to create value propositions for their customers. They were able to innovate and
create a new market space of connectedness within their own market – the essence of a blue ocean strategy.
 Currently ‘AutoTrader.co.za’s online customer base is exponentially greater than the size of its print readership at
its height’.
According to the CEO, implementing the strategy is more important than the innovative ideas as it is important
to constantly stay ahead of the innovation ‘S’ curve.

Questions
1. Outline how AutoTrader was able to adapt their dynamic capabilities to strategically t the demands of the
external environment. Refer to this article for additional information:
https://www.entrepreneurmag.co.za/advice/success-stories/case-studies/how-autotrader-anticipated-change/
2. Explain how AutoTrader applied the principles of strategic action and reaction and market
interconnectedness, introduced in section 1.2.3.2.

It is evident that AutoTrader, despite not being fully aware of what the future might hold, was able to stay ahead of
the innovation curve, understood the need for change, analysed the market correctly and implemented the required
changes in their business model. e Strategy in action case study illustrates how they were able to adapt their
dynamic capabilities to strategically t with the change in technology and market needs. It also illustrates the
principles of strategic action and reaction and market interconnectedness, introduced in section 1.2.3.2.
Whether intentionally or not, AutoTrader applied a blue ocean strategy as they created a new market space in
their current automotive industry by changing their business model to a digital platform triggered by disruptive
innovation. In turn they were able to use a blue ocean strategy in a non-disruptive manner rather than competing
with competitors head on. In redesigning their business model, they were also able to create value through a blue
ocean strategy by considering the cost structure and value proposition they offered to their customers. Blue ocean
strategies will be further discussed in Chapter 9.

1.6 The strategic management process

Section 1.4 mentions that strategic management consists of a series of decisions about the organisation’s strategic
direction, strategic planning and strategy implementation, supported by strategic decision making, strategic
leadership and strategic risk management.
e next section discusses each aspect of the strategic management process, as illustrated in Figure 1.6. While
Figure 1.6 depicts the strategic management framework for this text – re ected by the order in which the chapters
are arranged – it is important to bear in mind that the strategic management process involves the inherent strategic
thinking that underpins the content of each chapter. e strategic management framework, based on Figure 1.6,
appears at the beginning of each part of this text as a mind map with the relevant chapters highlighted.
Even though the strategic management framework in Figure 1.6 is presented in linear form, depicting a
prescriptive strategic nature, the emergent (descriptive) nature and practice of strategy is considered to be an
essential ingredient to successful strategic management. Consequently, strategy formulation and implementation are
concerned with both the prescriptive (rational and logical) and emergent (intuitive, creative, experiential and
emotional) approaches to strategy, i.e. a combination of Mintzberg’s ve Ps of strategy. In most instances, the
strategy an organisation follows will be a mixture between ‘deliberateness’ and ‘emergence’. In the strategic
management process as shown in Figure 1.6, strategic planning (strategic direction and analysis, strategy
development) and strategy implementation takes place within an organisation’s strategic context. In turn strategic
planning and implementation is supported by strategic decision-making, strategic leadership and strategic risk
management.
1.6.1 Strategic direction
e strategic management process outlined in this text is grounded in setting the strategic direction for the
organisation. is includes understanding the purpose and context of the organisation – key elements of a
sustainable organisation (Chapter 2), and the importance of strategic direction (Chapter 3).
In Chapter 2 we discuss the organisational purpose and context as vital elements of strategy and a sustainable
organisation. Strategy design and implementation are in uenced by understanding the purpose of an organisation
and the changing context in which it operates. Within the changing context, we argue that in strategising it is
important to focus on value creation for an array of stakeholders rather than only on the shareholders. is includes
identifying and responding to diverse risks and opportunities that arise from the changing context, recognising the
potential for turning social problems into business opportunities – key elements of a sustainable organisation. e
chapter ends with an overview on integrated reporting as a means of transparently communicating on progress, and
this in turn should help managers improve their strategies.
Strategic direction, discussed in Chapter 3, is essentially concerned with the direction in which an organisation
wants to advance, the type of organisation it aspires to be, and how it proposes to achieve this direction. When an
organisation persistently pursues its strategic vision, mission and goals, and focuses all its resources and competitive
actions on achieving them, then it demonstrates strategic direction. In this chapter, the strategic tools organisations
employ to set their strategic direction are explained. ese include strategic intent, vision statements, mission
statements, value statements and balanced scorecards.

Figure 1.6 Strategic management framework

 Considering what it means to be a sustainable organisation, strategic direction normally signi es the beginning
of the direction-setting stage in the strategic management process, as the organisation poses the question: ‘What do
we really want to become?’ At times, it is necessary to refer back to the strategic direction aer extensive strategic
analysis has been conducted. e next section introduces strategic analysis.

1.6.2 Strategic analysis

While most texts emphasise the importance of external and internal environmental analysis in supporting strategic
decision-making, few recognise the importance of having an integrating mechanism and a complex infrastructure in
place to support strategic decision-making. In Chapter 4 we examine strategic decision-making as a complex
activity that differs from organisation to organisation. Various approaches to strategic decision-making and the
many contextual in uences on it are discussed. It is argued that effective strategic decision-making is supported by a
complex network of people, processes and technology that process intelligence and present it in a form that adds
value to and supports management decision-making. e chapter also highlights how managers can use simple
approaches such as stimulating con ict and developing collective intuition to improve decision-making speed and
efficiency in organisations.
Facilitated by strategic decision-making, the organisation analyses its environments in order to address the
question: ‘What is our current situation?’ Strategic analysis consists of analysing and evaluating the strategic link
between the opportunities and threats in the external environment of the organisation (outside-in perspective) and
its internal strengths and weaknesses (inside-out perspective). In Chapter 5 the importance of the external
environment (political-legal, economic, sociocultural, demographic is, technological and natural environment is
evaluated while the industry environment is discussed in Chapter 6.
e internal environment refers to the organisation’s strategic ability to innovate as determined by its resources
and capabilities (inside-out perspective) when creating customer value and building a competitive advantage.
According to the inside-out perspective, an organisation should design and develop its strategies around its
resources, and distinctive and dynamic capabilities to take advantage of the opportunities in the external
environment (see Chapter 7).

1.6.3 Strategy development and formulation

Aer an organisation has set its strategic direction and external and internal environments, facilitated by strategic
decision-making, strategic leadership and strategic risk management, it needs to develop and formulate its
strategies. e organisation now needs to answer the key question: ‘Where are we going?’
e organisation must rst develop and formulate business level strategies. Chapter 8 discusses business level
strategy concerns when an organisation plans to compete successfully. Strategies at business level are oen referred
to as competitive strategies because they relate to the organisation’s deliberate decisions on how to:
Meet customers’ needs
Counter the competitive efforts of competitors or rivals
Cope with existing market conditions
Sustain or build competitive advantage in a single line of business.

e development and formulation of corporate level strategies are based on the decision to move an organisation
into more than one line of business, nationally or internationally, and an understanding of the underlying strategic
value innovation options. Chapter 9 discusses strategic innovation, which essentially offers existing buyers in
existing markets signi cantly greater net value than they are currently receiving, or offers fundamentally new and
signi cant net value for buyers that results in the creation of new markets. In creating new and signi cant net value
for buyers, organisations have to consider gaining a competitive advantage by operating in several businesses
simultaneously beyond their business level strategies. Blue ocean strategies and the opportunities for innovation, the
role of leadership as a contributor towards organisational innovativeness and individual innovativeness within an
organisation are also dealt with in this chapter.
Operating in several businesses simultaneously means that organisations need to develop and formulate
corporate level strategies (discussed in Chapter 10), and strategies for attaining a global competitive advantage.
Chapter 11 discusses strategies for global competitive advantage, and focuses on examining the motives for
internationalisation, and the strategic options available to organisations that intend to expand their business to
foreign markets. Chapters 8 to 11 discuss strategic choices in strategy development and formulation. ese choices
are guided by the organisational purpose, context and strategic direction of an organisation.

1.6.4 Strategic implementation

Once an organisation developed and formulated its strategies, the next step is to implement them. Successful
strategy implementation is dependent on strategic leadership (the key driver of implementation), sound
organisational architecture, and sound organisational alignment with its architecture, and strategic risk
management. In successfully implementing its strategy, the organisation needs to consider how its leadership and
organisational architecture enable a response to the question of: ‘How will we get there?’ while its strategic
performance and control addresses the question of ‘How are we doing?’
As mentioned previously, even though strategic leadership is associated with strategy implementation, in this
text while strategic leadership supports the strategic planning process, it is integral in implementing strategy
successfully.
Chapter 12 addresses leadership by considering the responsibilities of effective strategic leaders who are
responsible for understanding the organisation as a whole, leading effectively and ethically, developing and
communicating a compelling vision to lead change, creating an organisational system supportive of the strategy,
building and using distinctive organisational capabilities aligned to the strategy, ensuring ethical practices and good
governance, and initiating and managing change. Chapter 13 focuses on organisational alignment and how an
organisation implements its strategies through its organisational architecture, i.e. processes and routines, structures
and systems, KSAs (knowledge, skills and abilities), technology and organisational culture, to create a sustainable
competitive advantage by adding value. Chapter 14 discusses strategic risk management and its role in effective
strategic management, the risk management process, the impact of risk on strategy, the monitoring of risk and
nally how risk performance management could be improved.
Even though strategic risk management is integral to strategy implementation, in this text strategic risk
management also supports strategic planning.

1.7 Tests for a winning strategy

ere are three tests for assessing the effectiveness of an organisation’s strategy:110
Goodness of t test: How well does the strategy t the organisation’s situation? To be a sustainable organisation,
there has to be a conceptual t or strategic link between the internal and external environments. e organisation
can achieve this link by an inside-out (strategic stretch) or outside-in (strategic t) perspective (discussed in
section 1.5).
Competitive advantage test: Is strategy helping the organisation achieve a competitive advantage? e larger the
competitive edge over rivals is, the more sustainable the competitive advantage will be.
Performance test: Is strategy resulting in above-average organisational performance by adding value? Indicators
include nancial strength and above-average pro t gains, and an increase in competitive strength and market
 standing.

In the context of developing countries with emerging markets, the triple bottom line (economic, social and
environmental) impact of strategy is critical. Consequently, two additional tests are relevant in developing countries,
namely:
Social impact test: Is strategy contributing towards the expectations of stakeholders? In developing countries, an
organisation’s strategy contributes towards overall poverty alleviation and the well-being of citizens. In South
Africa, working closely with the political environment regarding aspects such as Broad-Based Black Economic
Empowerment, social responsibility, and HIV/Aids to improve social stability would contribute towards a
sustainable organisation. One of the dilemmas of strategic management is balancing social entrepreneurship with
the demands of global competitiveness.
Environmental system test: Is strategy contributing towards the protection and sustainability of natural resources
and the ecological system? Globalisation has stimulated growth in developing countries, along with the familiar
‘pattern of suburban sprawl, pollution, loss of habitat and competition for natural resources’.111 Sustainable
organisations meet the needs of current generations while protecting the sustainability of natural resources and
the ecosystem.

A winning strategy has the following characteristics:

ere is a strategic link between the organisation’s internal and external environments.
It builds a competitive advantage.
It improves organisational performance.
It meets the expectations of stakeholders.
It aligns itself with socio-environmental requirements in a global context.
It requires strategic feedback and monitoring.

1.8 Strategic paradoxes

is chapter referred to the dynamic nature of strategy, how this relates to decision-making, and its impact on
strategic effectiveness. However, in managing strategically, leaders are oen confronted with paradoxical situations.
A paradoxical situation is de ned as having ‘two opposite facts, or qualities, which you would think could not both
exist at the same time’.112 e next section explains the main strategic paradoxes113 referred to in this chapter. ey
illustrate the complexity of the nature of strategy.

1.8.1 Paradox 1: Past and future

e challenge for strategic leaders is to balance the past with the future. Organisations learn from their past
successes and failures. Oen, strategy development and formulation is based on the past with continuous
improvements around the same competitive paradigm. Organisations make incremental changes to their current
strategies.
At times, however, a more dramatic and discontinuous change means that an organisation should abandon the
past and current competitive paradigms in pursuit of a strategy to meet future demands. As is evident from this
example, strategic leaders should be careful of perpetuating the paradigms of the past. ey must consider the cost
of making unnecessary disruptive changes to adapt to current and future environmental demands. Strategic leaders
need the wisdom to know when, and how much, change is required to manage the paradox between past and future.

1.8.2 Paradox 2: Intended and emergent strategy

While adopting a rational approach to strategic planning is critical to accomplishing intended strategies, the
intuitive insights of leaders responding to the dynamic competitive environment are necessary for strategy
development. e challenge for leaders is to maintain a sense of balance and exibility in striving to attain intended
strategies while allowing for emergent strategies. Leaders should use their strategic decision enablers so as to be
nely attuned to the developments and unpredicted changes in the external or internal organisational environments.
In this way, they will be more open to accepting valuable emerging strategies that they could overlook because of
their focus on intended strategies. At Nokia, the change in technological advancement and the complexity of market
changes soon rendered their intended strategies ineffective. In an attempt to have a more relevant business model,
Nokia introduced the New Ventures Organisation (NVO) in 1995 – a new growth area. Despite the NVO being
ahead of its time as they correctly identi ed ‘the internet of things and found opportunities in the multi-media
health management, it failed due to an inherent contradiction between the long-term nature of its activities and the
short-term performance requirements imposed on it’.114 Leadership was not able to fully implement its intended
longer-term strategies as it was ‘too absorbed with managing growth in existing areas to focus on nding new
growth’.115

1.8.3 Paradox 3: Reactive or proactive approach to strategy

At times, strategic leaders will need to lead the change agenda with deliberate strategies while at other times they
should be able to respond to unexpected events by using emergent strategies. Strategic leaders should be attentive to
the process of managing emergent strategies and think strategically about the ‘worth of emergent strategies’. In other
words, which of these strategies should be relinquished or implemented based on whether it ‘ ts the company’s
needs and capabilities’, of which organisational culture is critical to successful strategy implementation.116 Whether
strategies are deliberate, emergent or a combination of both, strategic leaders’ approaches could either be proactive
or reactive in nature. In turn, a combination of being proactive and reactive to unexpected changes can also take
place.
e principle of being proactive in their strategic approach is highlighted in the Strategy in action case study of
AutoTrader. Even though South Africa was not quite ready for the internet in 2007, the leadership at AutoTrader
proactively decided to change their business model from print to digital platforms. Little did they realise that the
scope of the digital platforms would be so much (20%) larger than their magazine sales. Despite their success in the
print business, AutoTrader South Africa made the decision to be proactive and to be an industry leader ahead of the
innovation curve. In doing so, they positioned themselves for sustained growth in the ‘digital market of buying and
selling cars’.117 On the other hand, the leadership of Kodak responded reactively to changes in the external and
competitive environment by waiting too long before they transformed into a digital imaging organisation. Instead
they continued to focus on making photography available to the masses. Despite their attempts to transform the
organisation, they went bankrupt in February 2012. Kodak, has since then ‘emerged from bankruptcy, having shed
many of the businesses that made it famous’. eir focus has shied to selling printing equipment and services.118

1.8.4 Paradox 4: Inside-out or outside-in driven strategies

Section 1.5 discussed this point and highlighted that there needs to be a balance between the inside-out and outside-
in perspectives when managing strategically. e challenge that needs to be resolved is which one of these
perspectives should be prioritised. In the case of Nintendo, a Japanese multinational, the company was able to
introduce a new product using its internal resources and dynamic capabilities. For example, in 2018 Nintendo
introduced the new ‘Switch accessories dubbed Nintendo Labo – a range of build-your-own cardboard kits that can
transform the Switch’s controllers into anything from a keyboard to motorbike handles … [T]hese cardboard
devices add a creative and educational dimension making the Switch more appealing to younger children’.119 To
learn more about their inside-out blue ocean strategy, view the video clips on https://labo.nintendo.com/
In the Strategy in action case study on AutoTrader, we see that in response to the external environment the
organisation was able to position itself for sustained growth in the digital market of buying and selling cars – an
outside-in strategic approach.

1.8.5 Paradox 5: Profitability versus sustainability

As already mentioned, all organisations, whatever their size, format or stage of development, require strategies to
achieve their purpose. e main strategy for pro t-seeking organisations is to maximise the return on their
investment, thereby maximising pro tability. Pro tability is the ability of an organisation to generate net income on
a consistent basis, oen measured by the price-to-earnings ratio. e perspective taken in this text is that a
competitive advantage with above-average returns (maximising pro tability) is enhanced by creating value,
managing ethically, and being a sustainable organisation. Sustainability and strategy are inseparable. A pro t-
seeking organisation that is sustainable, in addition to seeking a pro t, maintains and enhances its environmental,
social and economic obligations to meet the needs of current and future generations. Such organisations integrate
corporate social responsibility, stakeholder claims and corporate citizenship into their strategic planning and
implementation. e challenge for strategic leaders is to bear in mind that pro tability and sustainability are not
mutually exclusive. Focusing on pro tability alone is a short-term orientation, while broadening the focus to include
sustainability is a longer-term, more bene cial orientation.

1.9 Summary
As globalisation and technological innovation drives the 21st century competitive landscape, the challenge in
managing strategically is to achieve strategic competitiveness while being sustainable in the global environment. e
perspective of this text is that an organisation can achieve strategic competitiveness by formulating and
implementing value-creating strategies while following the principles of sustainability. When an organisation
implements value-creating strategies that competitors are unable to duplicate, or that are too costly to imitate, it has
achieved a competitive advantage. Strategy is the manner in which (how) the organisation competes to deliver
unique value. Only when strategy is grounded in a competitive advantage will it contribute towards above-average
returns by offering value to customers. is implies that the organisation has resources and dynamic capabilities in
different areas of operation that add value to how it responds to external opportunities and challenges in a dynamic
and uncertain environment, while being a valued corporate global citizen. Attaining the strategic link between the
internal (inside-out) and external (outside-in) organisational environments is fundamental to achieving strategic
competitiveness and above-average returns, and enhancing long-term sustainability.
is chapter discussed the nature of strategic management. In presenting the nature of strategy, aspects discussed
included the essence of strategy, historical context and strategy development, the nature and role of strategy, levels of
strategy, perspectives on managing strategically, the strategic management process, the tests of a winning strategy,
and strategic paradoxes. is chapter explained why applying the principles of strategic management is important in
establishing a competitive advantage, and highlighted the importance of being a sustainable organisation. e
framework representing the chapters in this text is depicted in Figure 1.6.

REFLECTION BOX:

Consider the changes in the world from 2020 to 2050. Identify what you think would be the main drivers of
strategy during this period. Reflect on your opinion as to how these drivers will influence the strategic
 imperatives faced by organisations, including the changes in the workplace.

Hint: Refer to the following video clip to stimulate your reflection: The world 2020–2050
http://www.youtube.com/watch?v=rU2iTUeCfkI [Accessed 30 January 2018]

Opening case study questions

1. Advise the CEO at Shoprite Holdings Ltd on the strategic management process.
2. Identify and discuss the implications of the new strategic direction of Checkers in catering for the more
upmarket consumers.
3. Comment on what Shoprite Holdings Ltd do to ensure that their business is conducted holistically and operates
in a responsible, ethical and sustainable manner in creating value for their customers. Provide examples in your
response.
4. Refer to Shoprite Holdings Ltd’s sustainability report. Discuss the importance of the ‘six capitals’ and provide
examples of how they intended to create value in each capital.

Discussion questions
1. Explain the concept of strategy in your own words, and brie y explain the ve Ps of strategy.
2. Distinguish between intended, deliberate, emergent and realised strategy.
3. Discuss the roles of different management levels in strategic management. In your opinion, what would be an
important consideration, given the challenges of the 21st century competitive landscape?
4. Explain competitive advantage, above-average returns and value-creating capabilities. Why are these concepts
important for an organisation’s performance?
5. Distinguish between the inside-out and outside-in perspectives in analysing strategy.
6. Explain what is meant by strategic management, and discuss the dynamic nature of the strategic management
process.
7. Critically evaluate the merits of each of the tests of a winning strategy.
8. Advise top management on how the strategic paradoxes would affect their strategic effectiveness.

Using knowledge and skills

1. Select two organisations in South Africa in different industries that you consider the best to work for and visit
their websites. You are required to identify:
a) the vision and mission statements for each organisation
b) their customer value propositions
c) how they endeavour to achieve a competitive advantage
d) the main strategies pursued by each organisation
e) how each organisation manages the conceptual t between its internal (inside-out perspective) and external
environments (outside-in perspective)
f) at least one strategic paradox for each of the organisations.
2. Read the following article on what went wrong with Kodak:
Usborne, D. 2012. e moment it all went wrong for Kodak. Independent, 20 January. [Online]. Available:
https://www.independent.co.uk/news/business/analysis-and-features/the-moment-it-all-went-wrong-for-kodak-
 6292212 [Accessed 4 February 2018].
Using the outside-in perspective of strategy, in your opinion, outline what went wrong with Kodak and
explain how they tried to reposition themselves between 1993 and 2012. You can also follow the commentary on
http://6report.com/2012/02/03/the-scale-of-Kodaks-rise-and-fall/ to assist you in your response to the question
posed.
3. Learn more about Woolworths Holdings’ sustainable strategy by visiting their website:
http://www.woolworthsholdings.co.za/corporate/sustainability.asp [Accessed 30 January 2018]. Access the Good
News Business Journey 2017 Report. You are required to:
a) comment on their sustainability indicators and recognition
b) comment on their stakeholder engagement programme
c) provide a critical review on the chief executive and chairman’s reports. Were you able to identify their value
propositions in these reports?
4. Refer to the following video clip entitled ‘African business landscape with Scenario Planner Clem Sunter’:
http://www.youtube.com/watch?v=zU-nBXSjwOw [Accessed 30 January 2018].
Prepare a brief overview on your opinion on where Africa will nd itself in the year 2040, and identify the
main external drivers of strategy that organisations would have to consider in their strategic planning.
5. To learn more about Nintendo, a Japanese multinational’s strategy, view the video clips on
https://labo.nintendo.com/. Comment on how Nintendo used the inside-out blue ocean strategy to rede ne its
value proposition to further sustain its current competitive advantage.

Further reading
Ambrosini, V. & Bowman, C. 2009. What are dynamic capabilities and are they a useful construct in strategic
management? International Journal of Management Reviews, 11(1):29–49.
Bowman, E.H. & Helfat, C.E. 2001. Does corporate strategy matter? Strategic Management Journal, 22:1–23.
Collins, J.C. & Porras, J.I. 1996. Building your company’s vision. Harvard Business Review, 74, 5: 65-77.
French, S. 2009. Critiquing the language of strategic management. Journal of Management Development, 28(1):6–17.
Guerras-Martín, L.A., Madhok, A. & Montoro-Sánchez, A. 2014. e evolution of strategic management research:
Recent trends and current directions. Business Research Quarterly, 17: 69-76. [Online]. Available:
http://dx.doi.org/10.1016/j.brq.2014.03.001 Published by Elsevier Espaňa.
Hinterhuber, H.H. & Popp, W. 1992. Are you a strategist or just a manager? Harvard Business Review, 70(1):105–
113.
Hill, C.W.L., Jones, G.R. & Schilling, M.A. 2017. Strategic management: An integrated approach. 12th ed. USA:
Cengage Learning.
Johnson, G., Whittington, R., Scholes, K., Angwin, D. & Regner, P. 2014. Exploring corporate strategy. 10th ed.
London: Pearson.
Jooste, C. & Fourie, B. 2009. e role of strategic leadership in effective strategy implementation: Perceptions of
South African strategic leaders. Southern African Business Review, 13(3):51–68.
Kaplan, R.S. & Norton, D.P. 1993. Putting the balanced scorecard to work. Harvard Business Review, 71(5):134–147.
Kaplan, R.S. & Norton, D.P. 2000. Having trouble with your strategy? en map it. Harvard Business Review,
78(5):167–176.
Kaplan, R.S. & Norton, D.P. 2006. Why system, not structure, is the way toward strategic alignment: A historical
perspective. Harvard Business Review. [Online]. Available: https://hbr.org/product/why-system-not-structure-is-
the-way-toward-strategic-alignment-a-historical-perspective/B0607A-PDF-ENG.
Kim, W.C. & Mauborgne, R. 1997. Value innovation: e strategic logic of high growth. Harvard Business Review,
75(1):103–112.
Kim, W.C. & Mauborgne, R., 1999. Creating new market space. Harvard Business Review, 77(1):83–93.
Kim, W.C. & Mauborgne, R. 2017. Blue ocean shi: Beyond competing. USA: Macmillan.
Kim, W.C. & Mauborgne, R. 2018. What is nondisruptive creation? [Online]. Available:
https://www.blueoceanstrategy.com/blog/what-is-nondisruptive-creation
Mankins, M. & Steele, R. 2005. Turning great strategy into great performance. Harvard Business Review, 83(7/8):64–
72.
Pricop, O.C. 2012. Critical aspects in the strategic management theory. 8th International Strategic Management
Conference. Procedia Social and Behavioural Sciences, 58: 98-107. [Online]. Available:
http://www.sciencedirect.com/ Open access number: CC BY-NC-ND licence. doi.10.1016/j.sbspro.2012.09.983.
p.105.
Snowden, D. 2005. Strategy in the context of uncertainty. Handbook of Business Strategy, 6(1):47–54.
ompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland III, A.J. 2016. Craing and executing strategy: e quest for
competitive advantage. 20th ed. New York: McGraw Hill Education.
Tzu, S. 1981. e art of war. London: Hodder & Stoughton.

Suggested websites
African business landscape with Scenario Planner Clem Sunter (http://www.youtube.com/watch?v=zU-nBXSjwOw)
[Accessed 30 January 2018].
Chabane, N., Roberts, S. & Goldstein, A. 2006. e changing face and strategies of big business in South Africa: More
than a decade of political democracy. [Online] Oxford Academic. Available:
https://academic.oup.com/icc/article/15/3/549/761807 [Accessed 2 May 2018].
Clem Sunter–Scenario Strategist (http://www.youtube.com/watch?v=it72H8aSRCE). [Accessed 30 January 2018].
Global Reporting Initiative (www.globalreporting.org) – A network-based organisation that has pioneered the
development of the world’s most widely-used sustainability reporting framework and is committed to its
continuous improvement and application worldwide. [Accessed 30 January 2018].
Global Awareness with Google Earth (http://www.youtube.com/watch?v=3sVgxxIETxU).
iisd2018 (www.iisd.org/sd) – What is sustainable development? Iisd 2018 is a Canadian-based policy research
institute that has a long history of conducting cutting-edge research into sustainable development. [Accessed 30
January 2018].
Rocky Mountain Institute (www.rmi.org) – An independent, entrepreneurial non-pro t think-and-do tank that
drives the efficient and restorative use of resources.
Society for Organizational Learning (www.SoLonline.org) – e purpose of SoL is to discover, integrate and
implement theories and practices for the interdependent development of people and their institutions. [Accessed
30 January 2018].
SustainAbility (www.sustainability.co.uk) – A strategy consultancy and think tank working with senior corporate
decision-makers to achieve transformative leadership on the sustainability agenda. [Accessed 30 January 2018]
e Atlantic Online (www.theatlantic.com/issues/98oct/industry.htm) – e next industrial revolution. [Accessed
30 January 2018].
e Natural Step (www.naturalstep.org) – A not-for-pro t organisation dedicated to education, advisory work, and
research in sustainable development. [Accessed 30 January 2018].
World Business Council for Sustainable Development (www.WBCSD.org) – A global association of some 200
companies dealing exclusively with business and sustainable development. [Accessed 30 January 2018].
e world 2020–2050 (http://www.youtube.com/watch?v=rU2iTUeCI) [Accessed 30 January 2018].

References and endnotes

1. Company Overview of Shoprite Holdings Limited. 2018. [Online] Bloomberg. Available:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=879703 [Accessed 8 February
2018]; Shoprite Holdings Ltd. n.d. Our mission. [Online] Available:
https://www.shopriteholdings.co.za/group/our-mission.html [Accessed 8 February 2018]; Shoprite Holdings
Ltd. n.d. Developing employees to support growth. [Online] Available:
https://www.shopriteholdings.co.za/group/staf.html [Accessed 8 February 2018]; Shoprite Holdings Ltd. n.d.
Supply chain management. [Online] Available: https://www.shopriteholdings.co.za/trade-partners/supply-
chain-management.html [Accessed 8 February 2018]; Mahlaka, R. 2017. Shoprite eyes wallets of upmarket
consumers. [Online] Moneyweb. Available: https://www.moneyweb.co.za/news/companies-and-
deals/shoprite-eyes-wallets-of-upmarket-consumers-and-africa-expansion/ [Accessed 8 February 2018];
Harding, C. 2012. Interview: Shoprite CEO talks retail in Africa. [Online] How we made it in Africa. Available:
https://www.howwemadeitinafrica.com/interview-shoprite-ceo-talks-retail-in-africa/21086/ [Accessed 8
February 2018]; Shoprite Holdings Ltd. 2012. Sustainability Report 2012. [pdf] Shoprite Holdings Ltd.
Available: https://www.shopriteholdings.co.za/content/dam/MediaPortal/documents/shoprite-
holdings/Sustainability-Report/Shoprite-Sustainability-Report-2012.pdf [Accessed 8 February 2018];
Shoprite Holdings Ltd. 2017. Integrated Report 2017. [pdf] Shoprite Holdings Ltd. Available:
https://www.shopriteholdings.co.za/content/dam/MediaPortal/documents/shoprite-holdings/integrated-
report/2017/Shoprite_Holdings_IR_2017E_Full.pdf [Accessed 8 February 2018]; Shoprite Holdings Ltd.
2017. Nurturing our capital. [pdf] Shoprite Holdings Ltd. Available:
https://www.shopriteholdings.co.za/content/dam/MediaPortal/documents/shoprite-holdings/Sustainability-
Report/Shoprite_Holdings_Sustainability_2017E_Nurturing_Our_Capitals.pdf [Accessed 8 February 2018].
Shoprite Holdings Ltd. 2019. [Online] Available at:
https://www.shopriteholdings.co.za/%20group/story.html”
https://www.shopriteholdings.co.za/group/story.html [Accessed 15 March 2019]; Shoprite Holdings Ltd.
2019. [Online] Available at: HYPERLINK “https://wwwshopriteholdings.co.za/%20group/storyhtml”
https://www.shopriteholdings.co.za/group/storyhtml and
https://www.shopriteholdings.co.za/group/brands.html [Accessed 15 March 2019]
2. Hitt, M.A., Hoskisson, R.E. & Ireland, R.D. 2007. Management of strategy: Concepts and cases. United
Kingdom: omson South-Western. 13.
3. ompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland, A.J. III. 2016. Craing and executing strategy: e
quest for competitive advantage. 20th ed. New York: McGraw Hill Education. 7.
4. ompson, A.A. Jr, Gamble, J.E. & Strickland, A.J. III. 2004. Strategy: Winning in the marketplace. Boston:
McGraw Hill Irwin.
5. Pricop, O.C. 2012. Critical aspects in the strategic management theory. 8th International Strategic
Management Conference. Procedia Social and Behavioural Sciences, 58: 98–107. [Online]. Available:
www.sciencedirect.com. Open access number: CC BY-NC-ND licence.
doi.l0.1016/j.sbspro.2012.09.983/p.105.
6. Quazi, H.A. 2001. Sustainable development: Integrating environmental issues into strategic planning.
Industrial Management & Data Systems, 101(2):64–70.
7. United Nations. 1987. United Nations Report of the World Commission on Environment and Development:
General Assembly Resolution 42/187, 11 December 1987. [Online]. Available:
www.un.org/documents/ga/res/42/ares42-187.htm [Accessed 2 May 2018]. For introductory materials on the
concept and debates surrounding sustainable development, see for instance iisd2010. 2010. [Online].
Available: http://www.iisd.org/sd [Accessed 6 May 2010]. See also Kates, R.W., Parris, T.M. & Leiserowitz,
A.A. 2005. What is sustainable development? Goals, indicators, values, and practice. Environment, 47(3):8–
21.
 Prahalad, C.K. & Lieberthal, K 2003. e end of corporate imperialism. Harvard Business Review, 81(8): 109–
8. 117.
9. e rst ve de nitions are adapted from Grant, R.M. 2010. Contemporary strategy analysis. 7th ed. West
Sussex: John Wiley & Sons. 18. e sixth de nition is from Johnson, G., Scholes, K. & Whittington, R. 2008.
Exploring corporate strategy: Text and cases, 8th ed. Essex: Prentice Hall. 3. e last de nition is from
ompson et al. Op. cit.: 3.
10. ompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland, A.J. III. 2016. Craing and executing strategy: e
quest for competitive advantage. 20th ed. New York: McGraw Hill Education. 5; Hill, C.W.L., Schilling, M.A. &
Jones, G.R. 2017. Strategic management: An integrated approach. eory and cases. 12th ed. USA: Cengage
Learning. 8.
11. Johnson et al. 2008. Op. cit.: 3.
12. Ghemawat, P. 2001. Strategy and the business landscape: Core concepts. Upper Saddle River, NJ: Prentice Hall.
1.
13. Cummings, S. 1993. Brief case: e rst strategists. Long Range Planning, 26(3):133–135
14. Heracleous, L. 2003. Strategy and organization: Realizing strategic management. Cambridge: Cambridge
University Press. 3.
15. Ghemawat. 2001. Op. cit.: 3.
16. Johnson et al. 2008. Op. cit.: 4, 10–11. Lynch, R. 2006. Corporate strategy. 4th ed. Essex: Pearson Education
Limited. 5–8.
17. Lynch, R. 2003. Corporate strategy, 3rd ed. London: Prentice Hall. 39.
18. Drucker, P. 1954. e practice of management. New York: Harper & Bros.
19. Selznick, P. 1957. Leadership in administration: A sociological interpretation. New York: Harper & Row.
20. Heracleous. 2003. Op. cit.: 4.
21. Grant, R.M. 2010. Contemporary strategy analysis. 7th ed. West Sussex: John Wiley & Sons. 17. Reprinted by
permission of John Wiley & Sons; Pricop, O.C. 2012. Critical aspects in the strategic management theory. 8th
International Strategic Management Conference. Procedia Social and Behavioural Sciences, 58:98–107.
[Online]. Available: www.sciencedirect.com/ Open access number: CC BY-NC-ND licence. doi.
10.1016/j.sbspro.2012.09.983/p.107; [Accessed 21 January 2018]; Kim, W.C. & Mauborgne, R. 2018. What is
nondisruptive creation. [Online]. Available: https://www.blueoceanstrategy.com/blog/what-is-nondisruptive-
creation/ p. 2. [Accessed 26 January 2018].
22. Ghemawat. 2001. Op. cit.: 3.
23. Ansoff, H.I. 1985. Corporate strategy. London: Penguin. 18.
24. Ibid.
25. Grant. 2002. Contemporary strategy analysis, 4th ed. Oxford: Blackwell Business. 20.
26. See Andrews, K. 1971. e concept of corporate strategy. Homewood, IL: Dow Jones-Irwin; Chandler, A.D.J.
1962. Strategy and structure: Chapters in the history of the American industrial enterprise. Cambridge, MA:
MIT Press; Ansoff, H.I. 1965. Corporate strategy: An analytical approach to business policy for growth and
expansion. New York: McGraw-Hill.
27. Sanchez, R. & Heene, A. 2004. e new strategic management: Organization, competition and competence.
New York: Johan Wiley & Sons. 28.
28. Grant. 2002. Op. cit.: 20.
29. See Porter, M. 1980. Competitive strategy. New York: Free Press.
30. Grant. 2002. Op. cit.: 21.
31. Moldoveanu, M.C. & Bauer, R.M. 2004. On the relationship between organizational complexity and
organizational structuration. Organizational Science, 15(1):98–118; Black, J.A. & Farias, G. 2000. Dynamic
strategies: Emergent journeys. Emergence, 2(1):101–113; Brown S.L. & Eisenhardt, K.M. 1998. Competing on
the edge: Strategy as structured chaos. Boston, MA: Harvard Business School Press; Kauffman, D. 1980.
 Systems I: An introduction to systems thinking. Minneapolis: Future systems; Waldrop, M.M. 1992. Complexity.
e emerging science at the edge of order and chaos. London: Penguin Books.
32. Christensen, S.M. 1997. e innovator’s dilemma: When new technologies cause great rms to fail. Boston, MA:
Harvard Business School Press.
33. Marion, R. & Uhl-Bien, M. 2001. Leadership in complex organizations. e Leadership Quarterly, 12:389–
418.
34. Black, J.A. & Farias, G. 2000. Dynamic strategies: Emergent journeys. Emergence, 2(1):101.
35. Ilbury, C. & Sunter, C. 2001. Games foxes play: Planning for extraordinary times. Cape Town: Human &
Rousseau Tafelberg; Hill, C.W.L., Jones. G.R. & Schilling, M.A. 2015. Strategic management: An integrated
approach. 11th ed. USA: Cengage Learning. 25.
36. Grant. 2002. Op. cit.: 21.
37. Hamman, R. 2013. Sustainable organisation. In Louw, L. & Venter, P. (Eds). Strategic management: Developing
sustainability in southern Africa. Cape Town: Oxford University Press Southern Africa. 84.
38. Pricop, O.C. 2012. Critical aspects in the strategic management theory. 8th International Strategic
Management Conference. Procedia Social and Behavioural Sciences, 58: 98–107. [Online]. Available:
www.sciencedirect.com. Open access number: CC BY-NC-ND licence. doi.10.1016/j.sbspro.2012.09.983.
p.107. [Accessed 12 January 2018].
39. Groenwald, A. 2012. Q&A with Professor Robert Kaplan — Translating strategy into action. August, 2.
[Online]. Available: http://www.leadershipplatform.com/author/adrian-groenewald/ [Accessed 24 January
2018].
40. Southeran, J. 2016. Disruption right here now. e uncharted territory of industry 4.0. Produced by e Buzz
Business for Time, 187(24):42. June 12.
41. Pricop, O.C. 2012. Critical aspects in the strategic management theory. 8th International Strategic
Management Conference. Procedia Social and Behavioural Sciences, 58:98–107. [Online]. Available:
www.sciencedirect.com. Open access number: CC BY-NC-ND licence.
doi.l0.1016/j.sbspro.2012.09.983/p.107. [Accessed 12 January 2018].
42. Groenwald. 2012. Op. cit.: 2.
43. Kim, W.C. & Mauborgne, R. 2017. What is nondisruptive creation? 5 December. [Online]. Available:
https://www.blueoceanstrategy.com/blog/what-is-nondisruptive-creation/ p. 2 [Accessed 26 January 2018].
44. Southeran. 2016. Op. cit.; Todd, N. 2017. Busi Skenjana’s two core rules of entrepreneurship. Leader.co.za,
May 31. [Online]. Available: http://www.leader.co.za/article.aspx?s=6&f=1&a=6664. p. 1 [Accessed 12
January 2018]; Meet the founder of stokvel academy — Busi Skenjana. 2017. tameTIMES, March, 16:1
[Online]. Available: http://tametimes.co.za [Accessed 27 January 2018].
45. Mintzberg, H. 1987. e strategy concept I: Five Ps for strategy. California Management Review, 30(1):11–24.
46. Whittington, R. 2006. Completing the practice turn in strategy research. Organization Studies, 27(5):613–614.
47. Ibid.
48. Mintzberg, H., Ahlstrand, B. & Lampel, J. 1998. Strategy safari: A guided tour through the wilds of strategic
management. New York: e Free Press. 24.
49. Mintzberg et al. 1998. Op. cit.: 5.
50. Hill, C.W.L., Jones, G.R. & Schilling, M.A. 2013. Strategic management: An integrated approach. 11th ed. USA:
Cengage Learning. 25.
51. Porter. 1980. Op. cit.
52. Heracleous. 2003. Op. cit.: 18.
53. Johnson, G., Whittington, R., Scholes, K., Angwin, D. & Regnér, P. 2014. Exploring corporate strategy. 10th ed.
London: Pearson. 21.
54. Mintzberg, H. 1994. e rise and fall of strategic planning. New York: Prentice Hall. 27–28.
55. Mintzberg, H. 1987. Op. cit.: 45.
56. Grant. 2002. Op. cit.: 26.
57. Hill, C.W.L., Jones, G.R. & Schilling, M.A. 2015. Strategic management: An integrated approach. 11th ed. USA:
Cengage Learning. 22.
58. ompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland III, A.J. 2016. Craing and executing strategy: e
quest for competitive advantage. 20th ed. New York: McGraw Hill Education. p.9
59. Grant. 2002. Op. cit.: 26.
60. Dereli, C. 2003. Strategy and strategic decision-making in the smaller local authority. e International
Journal of Public Sector Management, 16(4):252.
61. Mintzberg. 1994. Op. cit.: 25.
62. Pascale, R.T. 1984. Perspectives on strategy: e real story behind Honda’s success. California Management
Review, 26:47–72.
63. Ilbury & Sunter. 2001. Op. cit.: 15.
64. Mintzberg. 1994. Op. cit.: 25.
65. Mintzberg et al. 1998. Op. cit.: 15–17.
66. Lynch. 2003. Op. cit.: 7.
67. ompson et al. 2016. Op. cit.: 32; Hill, C.W.L., Jones. G.R. & Schilling, M.A. 2017. Strategic management: An
integrated approach. 12th ed. USA: Cengage Learning. 12.
68. Grant. 2002. Op. cit.: 24. Johnson, G. & Scholes, K. 2002. Exploring corporate strategy. 6th ed. London:
Prentice Hall, 11.
69. ompson et al. 2016. Op. cit.: 32.
70. Grant. 2002. Op. cit.: 26.
71. ompson et al. 2004. Op. cit.: 27; ompson et al. 2016. Op. cit.: 33.
72. Drucker, P. 1977. Management: Tasks, responsibilities, practices. London: Pan Books Ltd. 44.
73. Sanchez & Heene. 2004. Op. cit.: 4.
74. ompson, J. & Martin, E 2005. Strategic management: Awareness and change. 5th ed. London: South-
Western Cengage Learning. 12.
75. Hitt et al. Op. cit.: 17.
76. Christensen, S.M. & Overdorf, M. 2000. Meeting the challenge of disruptive change. Harvard Business
Review, 78(2):67–76, 67; Grant. 2002. Op. cit.: 13.
77. Hitt et al. Op. cit.: 13.
78. ompson & Martin. 2005. Op. cit.: 113; De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context, 3rd
ed. London: omson Learning. 252–253.
79. Teece, D.J., Pisano, G. & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic
Management Journal, 18(7):509–533; Prahalad, C.K. &Hamel, G. 1990. e core competence of the
corporation. Harvard Business Review, 68(3):79–91; Wernerfelt, B. 1984. A resource-based view of the rm.
Strategic Management Journal, 5(2):171–180; Eisenhardt, K.M. & Martin, J. 2000. Dynamic capabilities: What
are they? Strategic Management Journal, 21:1105–1121; Christensen & Overdorf. 2000. Op. cit.
80. Porter, M. 2001. Strategy and the internet. Harvard Business Review, 79(3):63–78.
81. Hitt et al. 2007. Op. cit.: 81–83; Wernerfelt. 1984. Op. cit.
82. Hitt et al. 2007. Op. cit.: 13.
83. Grove, A.S. 1995. A high-tech CEO updates his views on managing and careers. Fortune, September 18:229–
230, 229.
84. Willis, V. 2006. It’s a Kodak moment — leadership and innovation. e Point Leadership Development Review,
January 11; Usborne, D. 2012. e moment it all went wrong for Kodak. Independent, 20 January. [Online].
Available: https://www.independent.co.uk [Accessed 4 February 2018].
85. Jha, S. 2016. Is Kodak still around? 20 July. Quora. [Online]. Available: https://www.quora.com [Accessed 4
February 2018].
 86. Clausen, T. 2017. Kodak turn rst annual pro t since bankrupt. Democrat & Chronicle, 7 March. [Online].
Available: https://www.democratandchcronicle.com/ [Accessed 4 February 2018].
87. Prahalad & Hamel. 1990. Op. cit.
88. Sull, D. 2015. Why good companies go bad. Based on Harvard Business Review, July–August 1999 issue.
[Online]. Available: https://www.hbr.org/1999/07/why-good-companies-go-bad [Accessed 3 February 2018].
89. Collis, D.J. & Montgomery, C.A. 2005. Corporate strategy: A resource-based approach. 2nd ed. New York:
McGraw-Hill. 31.
90. ompson & Martin 2005. Op. cit.: 117.
91. Todd, N. 2017. AutoTrader: Disruptive innovation is more than shiing gear. Entrepreneur Media SA.
[Online] Available: https://www.entrepreneurmag.co.za/advice/success-stories/case-studies/how-autotrader-
anticipated-change. [8 April 2019].
92. Woolworths: e fresh food people. Vendors. Supply Chain. 2018. [Online]. Available:
https://www.wowlink.com.au/wps/portal/topic_centre?
WCM_GLOBAL_CONTEXT=/cmgt/wcm/connect/Content%20Library%20-
%20WOWLink/wowlink/topic+centre/supplychain/supplychain [Accessed 3 February 2018].
93. Eisenhardt & Martin. 2000. Op. cit.
94. Teece et al. 1997. Op. cit.
95. Sull. 2015. Op. cit.: 1–17.
96. Adapted from Hitt et al. 2007. Op. cit.: 18.
97. Doz, Y. 2017. e strategic decisions that caused Nokia’s failure. Leader.co.za, December, 4.
http://www.leader.co.za/article.aspx?s=41&f=1&a=6837 [11 January 2018]. 2.
98. Doz. 2017. Op. cit.: 1.
99. Doz. 2017. Op cit.: 1.
100. Surowiecki, J. 2013. Where Nokia went wrong. e New Yorker Today. [Online]. Available:
https://newyorker.com/currency. September. [Accessed 3 February 2018]. 1–2.
101. Murray, A. 2017. Get ready for the new disrupters. Time, November, 190(20):16.
102. Christensen & Overdorf. 2000. Op. cit.
103. Huy, Q. & Vuori, T. 2014. What could have saved Nokia, and what can other companies learn? March 13.
INSEAD Knowledge — Strategy. [Online]. Available: https://knowledge.insead.edu/strategy/what-could-have-
saved-nokia-and-what-can-other-companies-learn-3220 [Accessed 3 February 2018]. 1–4.
104. Murray. 2017. Op. cit.: 16.
105. ompson & Martin. 2005. Op. cit.: 112–113.
106. Hitt et al. 2007. Op. cit.: 15.
107. Johnson & Scholes. 2002. Op. cit.: 5.
108. Adapted from Hitt et al. 2007. Op. cit.: 16.
109. Todd. 2017. Op. cit.: 1–6.
110. Lynch. 2003. Op. cit.: 24; ompson, 2016. Op. cit.: 12
111. Senge, P. & Carstedt, G. 2001. Innovating our way to the next industrial revolution. Sloan Management
Review, 24–38, Winter.
112. Collins Cobuild English language dictionary. 1987. Glasgow: William Collins Sons & Co. 1040.
113. ompson & Martin. 2005. Op. cit.: 849–850.
114. Doz. 2017. Op. cit.: 1.
115. Ibid.
116. Hitt et al. 2007. Op. cit.: 27.
117. Todd. 2017. Op. cit.: 1–2.
118. Transformed Kodak emerges from brankruptcy. 2013. BBC News. 3 September. [Online]. Available:
https://www.bbc.com/buiness-23952800 [Accessed 28 April 2018]. 1.
119. Nintendo’s new cardboard toys launching April 2018. 24 January. [Online]. Available:
https://www.blueoceanstrategy.com/blog/nintendos-new-cardboard-toys-joke-or-genius/ [Accessed 28 April
2018].
 CHAPTER 2 The purpose and
context of
business: Key elements of
sustainable organisation
Ralph Hamann

LEARNING OUTCOMES

After reading this chapter, you should be able to:

recognise the crucial role of defining an organisation’s purpose in making and implementing strategy
recognise the implications of both short- and long-term strategic thinking for the creation of a sustainable
organisation
consider a shift from focusing only on shareholders to focusing on a broader array of stakeholders in strategy-
making, and recognise the varying salience of different stakeholders
analyse important social-ecological trends in an organisation’s context and the corresponding risks
identify the organisational opportunities associated with creating shared value and developing inclusive
business models
understand how an organisation’s context can be embedded in its strategy
consider how to approach monitoring and reporting on embedding purpose and context in strategy
implementation

KEY TERMS

context-based strategy-making
integrated reporting
organisational purpose
shared value
social-ecological context
social-ecological risks
stakeholders
strategic timeframe

OPENING CASE STUDY

Patagonia
It could be argued that Patagonia started in 1957 when its founder, Yvon Chouinard, developed and sold
climbing equipment from the boot of his car. By 2015, the outdoor clothing and equipment company received
revenues of over USD 600 million and had over 2 000 employees. But it is best known for its unusually strong
commitment to environmental issues. This commitment can be traced back to Chouinard’s original motivation.
He was a passionate climber and the first products that he developed were climbing implements that were
reusable or that did not damage the rocks when climbers clambered up.
This commitment has been retained throughout the last 50 years, as is evident in the company’s mission,
which is prominent on its website: ‘Build the best product, cause no unnecessary harm, use business to inspire
and implement solutions to the environmental crisis.’
The website goes on to illuminate the company’s reason for being: ‘Patagonia grew out of a small company
that made tools for climbers. Alpinism remains at the heart of a worldwide business that still makes clothes for
climbing – as well as for skiing, snowboarding, surfing, fly fishing, paddling and trail running. These are all silent
sports. None require a motor; none deliver the cheers of a crowd. In each sport, reward comes in the form of
hard-won grace and moments of connection between us and nature.
Our values reflect those of a business started by a band of climbers and surfers, and the minimalist style they
promoted. The approach we take towards product design demonstrates a bias for simplicity and utility.
For us at Patagonia, a love of wild and beautiful places demands participation in the fight to save them, and
to help reverse the steep decline in the overall environmental health of our planet. We donate our time, services
and at least 1% of our sales to hundreds of grassroots environmental groups all over the world who work to help
reverse the tide.
We know that our business activity – from lighting stores to dyeing shirts – creates pollution as a by-product.
So, we work steadily to reduce those harms. We use recycled polyester in many of our clothes and only organic,
rather than pesticide-intensive, cotton.
Staying true to our core values during thirty-plus years in business has helped us create a company we’re
proud to run and work for. And our focus on making the best products possible has brought us success in the
marketplace.’
The mission has influenced the company’s strategies and decisions. For instance, as mentioned above, the
company committed itself to using organic cotton to reduce the negative environmental impact of the agricultural
production of the raw materials used in clothing. This was not as easy as it may sound, because the company
couldn’t just switch suppliers but had to develop them first. There have also been other challenges. In particular,
it has not been easy for Patagonia to live up to the promise of offering the ‘best products’ – which often rely on
chemicals to make them water resistant, for instance – at the same time as behaving in an environmentally
friendly way.
Patagonia’s mission has also featured prominently in its branding and marketing strategy. One of the most
famous instances of this was its marketing campaign launched in 2011, which encouraged consumers to buy
less of its products. It included a full-page advert in a national US newspaper that showed one of the company’s
most popular jackets under the caption, ‘Don’t buy this jacket’. It added, ‘The environmental cost of everything
we make is astonishing.’ Two years later, Patagonia introduced its ‘Better than new’ initiative that allowed
customers to trade in their used goods, which the company resold or recycled. It may seem paradoxical, but in
the years following the ‘buy less’ campaign the company’s sales increased significantly. The company has
continued to grow – both as a business and as a staunch public campaigner on social and ecological issues.
The current CEO Rose Marcario is taking the company’s activism even further to directly oppose what she
considers unhelpful government policy in the United States.

Sources:
http://www.patagonia.com/company-info.html; https://www.uccs.edu/business/sites/business/files/inline-
files/Patagonia%20Case%20Study.pdf;
http://cases.haas.berkeley.edu/documents/best_case_award/2016_2_patagonia_5853.pdf
 https://www.fastcompany.com/40525452/how-patagonia-grows-every-time-it-amplifies-its-social-
missionhttps://www.fastcompany.com/40525452/how-patagonia-grows-every-time-it-amplifies-its-social-mission

Overview
This chapter focuses on two key aspects of business strategy: purpose and context. If strategy is about defining and
achieving organisational objectives, then it is important to be clear about the underlying purpose of the organisation.
Furthermore, an organisation’s purpose will need to be defined and realised in a way that responds not only to the
market but also to the organisation’s social and ecological context, which is continuously changing. This context
provides both opportunities and risks that need to be addressed in the creation and implementation of strategy.
In this chapter, we will first consider what we mean by organisational purpose and why it is important.
Organisational purpose refers to the fundamental reason and motivation for the organisation’s existence. It may be
explicit or implicit, and often it is both. It is the single most important, overarching objective of the organisation, which
determines the various other, subsidiary objectives that may be identified. We then discuss the role of different
strategic timeframes in strategy-making, and whose interests managers need to consider in this process. Strategic
timeframes refer to the period of time that is prioritised when making strategic decisions, such as investment
decisions. This includes in particular the period of time that is prioritised when considering financial returns from
such investments. Next, we focus more specifically on companies’ dynamic social-ecological context and how to
analyse salient trends, recognising both the risks and opportunities associated with this context. The social-
ecological context of an organisation refers to the social and ecological systems, and their interrelationships, on
which an organisation depends. Finally, we discuss ways of effectively embedding both purpose and context in
strategy, including ongoing monitoring and reporting on progress.

2.1 Introduction
Consider the Opening case study. Patagonia is one of the best known companies globally that has not only
emphasised a purpose- and context-driven approach to strategy, but has also reaped signi cant bene ts from this
approach. Note how the company speaks about its origins and purpose. Rather than emphasise pro ts and
shareholder returns, the focus is on a love for nature and for nature-based and adventurous activities. e case study
also speaks of the company’s commitment to not only provide environmentally friendly products, but also to ‘ ght
to protect’ nature. is is clearly not your usual corporate mission statement! It oen sounds more like an
environmental activist organisation. Nevertheless, Patagonia’s purpose and its explicit stance on its social and
ecological context have not constrained its nancial fortunes – instead, the company has steadily grown its customer
base and earnings.
To what extent do you think this case study offers guidance and inspiration for organisational strategy, more
generally? On the one hand, you might see Patagonia as an unusual oddity, reaping the bene ts of the niche
expectations of a particular segment of the market. On the other, Patagonia may be seen as just a particularly
pronounced expression of a broader trend, as companies in diverse sectors seek to create a more harmonious
relationship with the social and ecological systems, on which their value chains depend. is trend is arguably
especially visible among consumer-facing businesses, such as Woolworths in South Africa, which has gained
international acclaim for its ‘Good Business Journey’ strategy (to which we will return later in the chapter). But it is
also apparent in other companies and in other sectors, for a variety of reasons. For example, mining companies are
giving increasing attention to enhancing their relationships with surrounding communities, because they have
learnt that community and labour protests can sti e their operations, and because governments and investors also
demand that they emphasise a diligent and responsible approach to social and environmental matters.
Diverse organisations in diverse sectors are thus learning to give more careful attention to their purpose and
their social-ecological context. ese are the two important aspects of organisational strategy that we focus on in
this chapter.
2.2 Purpose
An organisation is a group of people that commit to working together to achieve certain objectives. However, these
objectives can be diverse and sometimes even at odds with each other. Strategy is about prioritising and aligning
objectives. To do this, it is important to think deeply and continuously about the organisation’s underlying purpose.
e purpose is the fundamental reason for the organisation’s existence. You could say that the purpose is the single
most important, overarching objective of the organisation, which determines other objectives that you might
identify. ese other objectives are the means to ful l the purpose.
Strangely enough, however, we do not oen stop to think or talk about an organisation’s purpose. is is also
because we oen assume that everyone knows and agrees what the purpose is. For businesses, we oen assume that
the key purpose is to make money. But is pro t the purpose of a business or the outcome of achieving its purpose?
Whose pro t or bene t are we concerned about – is it only the owners and investors, or also other stakeholders?
What time frame are we aiming for – is the pro t to be achieved in the short-term, or are we aiming for long-term
returns? ere are not always right or wrong answers to these questions, but it is important to keep asking them.
e idea that businesses exist primarily to make money for investors has not always been so dominant. One of
the reasons it has become prevalent is the work of an in uential economist, Milton Friedman.
In 1970 he argued that asking managers to address social causes is misguided for at least two reasons. First,
managers do not have a mandate from shareholders to do so. From this perspective, shareholders expect nancial
returns and do not want managers to do anything that will compromise such returns. Second, he argued that
managers are not trained or well equipped to address social issues, so such issues should be le to governments and
civil society organisations.1
What do you think – do you agree or disagree with Friedman’s argument?
One of the challenges in answering this question is that Friedman’s argument might be interpreted in different
ways. Unfortunately, in my view, many scholars and managers have interpreted his argument to justify a single-
minded focus on pro ts with little regard for the possible social and environmental costs – such as pollution – that
are generated by this pursuit of pro ts. Economists call such social and environmental costs externalities.
One of the problems with such a narrow interpretation of Friedman’s argument is that it assumes that the law is
effective and sufficient in avoiding such social and environmental costs. But we know that the law is oen too
limited or governments are too constrained in effectively implementing it.
As a result, managers have been incentivised to increase pro ts by reducing costs associated with taking care of
people and the environment. For instance, a manager may be faced with the decision to invest in a new, cleaner
production system in order to reduce water pollution of a nearby river. But this investment will reduce pro ts and
because there is little enforcement of pollution laws, the manager will be motivated to avoid this investment and
continue polluting the river.
On the other hand, it may be argued that polluting the river will create negative consequences for the business
and so the manager may be motivated to reduce pollution for other reasons. For instance, many of the organisation’s
employees might be living on the banks of the river, in communities reliant on shing. If these communities suffer,
the organisation may suffer due to decreased employee productivity. Or people may complain about the pollution,
stage protests, or even sabotage the operation. It is possible to argue that Friedman recognised such possibilities
when he referred to the ‘interests of the corporation’. In fact, elsewhere in that article he argued that an organisation
that employees many people within a small community would bene t in the long run if it provides services and
facilities to this community and has a focus on improving its management. is would make the organisation
attractive to potential employees and help to draw the best talent.
is emphasis on the long-run bene t to a corporation is related to what is sometimes referred to as an
‘enlightened shareholder perspective’. In other words, a manager’s responsibility is to ensure pro ts for investors, but
to do so for the long-term in a way that ensures the continued viability of the organisation. Taking good care of
employees and customers, neighbouring communities, and the environment is thus seen as an important aspect of
ensuring long-term bene ts for shareholders.

is perspective is becoming increasingly prominent. Even in legal terms, the duciary responsibility of directors
is not de ned as maximising shareholder pro ts, but as acting ‘in good faith and… in the best interests of the
company’ (Section 76 in the Companies Act of 2008). Similarly, the King IV Report on Corporate Governance
expects directors to act ‘in the best interests of the organisation’2 – in other words, they are meant to ensure the
ongoing viability and ful l the purpose of the organisation, not only or speci cally to increase the nancial rewards
for owners.
Prominent business leaders are increasingly expressing their strategic priorities in this kind of way, aiming for a
mutually bene cial interaction between their business operations and the social-ecological context. A South African
example of a leader of this sort is the former CEO of Woolworths, who described Woolworths’ strategy in terms of
its ‘Good Business Journey’.
e following is a statement issued by the Chairperson of the Sustainability Committee of Woolworths, Simon
Susman in 2018:

Being a values-based organisation means that doing business responsibly sits at the heart of the Woolworths
Group. We are acutely aware of our position in society and the leadership role we can play in driving positive
change. e Good Business Journey (GBJ) is our platform from which we action this change in the areas of
community development and environmental management. e programme centres around eight focus areas,
namely transformation, social development, health and wellness, ethical sourcing, sustainable farming, waste,
water, as well as energy and climate change. Now in its 11th year, the drivers behind the GBJ are more relevant
than ever before. Global ux and uncertainty across political, social, environmental and climatic spheres
requires business to take a stand on what matters. To us, this means addressing the sustainability of our business
across the entire value chain, from within our own operations, to our supply chain, customers, and products.

It is with this mind that we launched our ambitious packaging targets this year. Our vision as a Group is to
work towards zero packaging waste to land ll…e targets we’ve set ourselves are to phase out single-use
shopping bags by 2020 and to work towards making all our packaging reusable or recyclable by 2022.
 A second focus for us this year has been water. With areas of the Western, Eastern, and Northern Cape facing
the real possibility of running out of water, we stepped up our long term efforts to build resilience across the
business…During the year, we directed almost R815 million across the Group to a range of organisations and
projects as part of our commitment to community upliment through the work of the Woolworths Trust and
through donation of our surplus food and clothing.3

However, it is important to note that even the ‘enlightened shareholder perspective’ still prioritises the purpose of
business, as organisations pursuing pro ts for shareholders, even though it encourages a more careful consideration
of the social and ecological context. So, what happens if there is a direct trade-off between social or ecological
bene t, on the one hand, and pro t – even long-term pro t – on the other? Or how do managers act if the
relationship is unclear?
Some business leaders have thus identi ed social and ecological bene ts as an intrinsic good, rather than an
instrumental value. Intrinsic means that something has value in and of itself; instrumental means that it has value
because it helps you achieve something else. Such business leaders de ne their business purpose with an explicit
social and ecological orientation, and they seek to ful l this purpose even if it is not required by law and even if it
does not bene t shareholders. ere are not many examples of large organisations with such intrinsic social and
ecological purpose – the company in the Opening case study, Patagonia, is a well-known example. But their number
is increasing in part because of new laws and policies that enable managers to make social and ecological objectives
– and not just economic objectives – an explicit part of their purpose. An example of such an alternative corporate
form is the B-Corporation or B-Corp, which is a prominent movement in places like the United States but is also
gaining initial traction in South Africa.

2.3 From short- to long-term strategising

e Opening case study and the Case example in the previous section illustrate an emphasis on long-term strategy.
e interactions between social, environmental, and business dynamics can play out quickly, but they oen involve
changes over years. is is the reason why Woolworths’ ‘Good Business Journey’ was designed as a long-term
strategy – it was still being implemented in 2018, more than ten years aer it was announced, and it was still based
on ve-year reporting cycles.
e emphasis on long-term strategy cannot be taken for granted. Many investment decisions are made based on
the promise of short-term returns. Global nancial markets thus put pressure on managers to make strategies that
result in pro ts as soon as possible. Strategies with longer-term bene ts, such as Woolworths’ ‘Good Business
Journey’, are thus not always easy to design and defend. is is true in many markets. Researchers found that the
majority of executives in the USA feel increasingly constrained by a growing short-term focus, especially among
investors, and about half of them admitted to avoiding investments even though they would have long-term value-
creation bene ts.4
However, there is growing evidence that a focus on short-term results might actually be bad for an organisation’s
economic performance, not to mention its social and environmental impacts. Researchers compared US
organisations with longer-term strategic horizons with US organisations that have shorter-term strategic horizons.
ey found that revenue growth, over a 15-year period, was almost 50% among those organisations with longer-
term strategic horizons. ey also found that it was possible for leaders to shi the orientation of their companies
from a short-term to a long-term strategy, with positive business outcomes.5
Indeed, there are numerous well-known business leaders who have argued for more emphasis on long-term
strategies and decision-making. One of the best-known examples is Paul Polman, the CEO of Unilever, as described
in the Case example below.
 CASE EXAMPLE: Paul Polman’s focus on the long-term as CEO of Unilever
Paul Polman became CEO of Unilever, one of the world’s largest FMCG companies, in 2009 (and retired as CEO
end of 2018). From the outset, he emphasised that corporate strategy cannot focus only on short-term gains for
shareholders, but that it should focus on creating value for a broader array of stakeholders and that it should
adopt a longer-term perspective. The following is an extract from a newspaper article on Mr Polman’s strategy at
Unilever:
‘Mr Polman was determined to change the short-term focus at Unilever: “One of the things I had to do was to
move the business to a longer-term plan,” he says. “We had become victims of chasing our own tail, cutting our
internal spending in capital, R&D, or IT to reach the market expectations. We were developing our brand spends
on a quarterly basis and not doing the right things, simply because the business was not performing. We were
catering to the shorter-term shareholders”. So I said, “We will stop quarterly reporting, and we will stop giving
guidance.’’
When Mr Polman announced Unilever’s new policies in 2009, the company’s shares dropped 8%. Yet he
remained steadfast in his message to shareholders. “I explained to them we were going to run the business for
the longer term. We were going to invest in capital spending. We were going to invest in training and
development. We were going to invest in new IT systems. And we were going to invest back in our brand
spending.” These investments would take time to pay off, and they had the potential to skew quarterly numbers
dramatically. So Mr Polman asked his shareholders to take a longer-term view, too.
Some shareholders were willing to take the leap with Mr Polman; those who weren’t sold their shares, an
action that was fine with Mr Polman. Instead of catering to the whims of an established base of short-term
shareholders, Mr Polman was focused on getting the shareholder base he wanted – attracting the long-termers
who valued growing real returns over inflating expectations. And the policy has worked: Unilever’s top fifty
shareholders now have an average holding period of seven or more years.’

Sources: https://www.theglobeandmail.com/report-on-business/careers/management/how-unilever-won-over-shareholders-with-
its-long-term-approach/article36538572; https://www.forbes.com/sites/danschawbel/2017/11/21/paul-polman-why-todays-
leaders-need-to-commit-to-a-purpose/#5df0a2f51276

Shiing from short-term to long-term thinking is thus an important aspect of more circumspect and purpose-
driven strategizing. A second important aspect of such strategizing is a shi from focusing on shareholders to
recognising a broader array of stakeholders, whose interests need to be considered. You will recall that stakeholders
refer to individuals or groups that may affect, or may be affected, by an organisation. is is the topic of our next
section.

2.4 From shareholders to stakeholders

Reconsider the CEOs we encountered in the two Case studies above. It is clear that they still recognise their
shareholders as very important. Aer all, their organisations depend on shareholders’ money to make investments.
But it is also clear that Yvon Chouinard and Rose Marcario (Patagonia founder and current CEO, respectively) and
Paul Polman (Unilever CEO) have given a lot of attention to a broader group of stakeholders, or people that are
affected by or may affect the strategy and operations of the organisation. In other words, rather than focus strategic
attention only on the interests and expectations of shareholders, a stakeholder approach recognises and seeks to
respond to the interests and expectations of a broader group of stakeholders, including employees, neighbouring
communities, civil society organisations, and so on.
One of the best-known strategy scholars who developed this ‘stakeholder’ approach to strategy is Ed Freeman. In
a recent column co-authored with Heather Elms, he argued that the social responsibility of business is not to
increase its pro ts, but rather ‘to create value for stakeholders.’
 According to Freeman and Elms, stakeholders are at the core of what enables a company to make pro ts.
Customers buy a company’s products or services; employees cooperate and dedicate their time and energy to create
these products and services; and suppliers provide important inputs to make all this possible. All of this will
probably be constrained if the community living around the company does not see the company as a good
neighbour. So, a company can only create value for its owners or shareholders if it also creates value for these various
stakeholders; that is, the company’s customers, employees, suppliers, and communities. Sometimes there are
tensions or trade-offs between these different stakeholders and there is no formula for prioritising stakeholders or
balancing their interests. is is an important challenge for managers to address, taking into consideration the
speci c details of the situation and context.6
Similarly, South Africa’s King IV Report on Corporate Governance emphasises what it calls ‘a stakeholder–
inclusive approach’, as follows:

ere is an interdependent relationship between the organisation and its stakeholders, and the organisation’s
ability to create value for itself depends on its ability to create value for others. An organisation becomes attuned
to the opportunities and challenges posed by the [social, ecological, and economic] context in which it operates
by having regard to the needs, interests and expectations of material stakeholders… A stakeholder-inclusive
approach… takes account of the legitimate and reasonable needs, interests and expectations of all material
stakeholders in the execution of its duties in the best interests of the organisation over time. By following this
approach, instead of prioritising the interests of the providers of nancial capital, the governing body gives parity
to all sources of value creation, including among others, social and relationship capital as embodied by
stakeholders.7

From an enlightened shareholder perspective, there is no contradiction in giving attention to stakeholders. In fact,
CEOs like Marcario and Polman would argue that they can only provide long-term, reliable pro ts for shareholders
if they continue to provide bene ts to key stakeholders and thus maintain the support of these stakeholders.
However, it is apparent that any organisation has a large number of diverse stakeholders, some of whom may
have different ‘stakes’ in the organisation. For instance, it is clear that primary stakeholders that have contractual
relationships with the company, such as employees, have more direct claims than secondary, more indirect,
stakeholders, such as community organisations. But such community organisations can nevertheless become very
in uential, for instance, by staging protests that obstruct operations. e diversity and complexity of stakeholder
relationships becomes greater the larger the organisation becomes. How do managers prioritise such claims and
expectations by the various stakeholders of the organisation? ere are different ways to respond to this question.
e King IV Report on Corporate Governance suggests: ‘A decision on how to achieve this balance is made on a
case-by-case basis as current circumstances and exigencies require, but should always be done in the best interests of
the organisation over the longer term.’8
Another response involves a tool that managers use to map stakeholders on two dimensions, namely power and
interest. Power refers to the degree to which a stakeholder has in uence on the business. For instance, a government
agency that regulates the business has a lot of in uence; and so do investors, because they can sell their shares and
invest elsewhere. On the other hand, community groups that are not well-organised will, most likely, have less power
and in uence over the organisation. However, it is important to continuously re-evaluate such assessments, for
instance, if community groups become more resentful and better organised or networked, their in uence may
increase rapidly!
e second dimension is stakeholders’ interest in the organisation, or in particular initiatives of the organisation.
For instance, a community living next to a mine has a greater interest in the mining company than a community
living further away. So, if we combine these dimensions, we have four quadrants that may be used to characterise
stakeholders and identify corresponding management responses, as illustrated in Figure 2.1:
 Stakeholders that have little interest in, or in uence on, the organisation clearly do not require much
management attention. Ackerman and Eden refer to these stakeholders as ‘the crowd’9. Such stakeholders still
need to be monitored, though, because their interest or in uence may increase unpredictably.
Some stakeholders may have high levels of interest in the organisation, but not very much power. Ackerman and
Eden refer to these stakeholders as ‘subjects’10. For instance, there may be a consumer group with a particular
interest that is not widely shared by other consumers or stakeholders, and as a result this group will have high
levels of interest but not a huge amount of in uence. Managers will need to communicate with such stakeholders
to understand their concerns and to keep them informed of the organisation’s policies and practices. Managers’
responses will also depend on whether these stakeholders’ views of the business are predominantly positive or
negative. If they are positive, managers may want to strengthen their in uence by, for instance, helping them
establish coalitions with other stakeholders.
Other stakeholders may not have particularly high levels of interest in the business, but they may have a lot of
power. ese are referred to as ‘context setters’ in gure 2.1. For instance, a government agency responsible for
enforcing relevant regulations has signi cant in uence, but it may pay little attention to your particular
organisation because it has so many organisations to regulate. Managers will need to keep such stakeholders
satis ed to avoid negative attention.
Finally, the most important stakeholders are those with high levels of both interest and in uence in the
organisation, i.e. the ‘players’ in Figure 2.1. For example, labour unions are likely to have high levels of interest
because their members work in the organisation and they also have high levels of in uence because they can
in uence workers’ morale and organise strikes. Managers will need to give careful, ongoing attention to such
stakeholders.

Figure 2.1: Mapping stakeholders according to interest and power

Source: Ackermann, F., & Eden, C. (2011). Strategic management of stakeholders: Theory and practice. Long Range
Planning, 44(3), 179-196; page 183.
However, as mentioned, the status of particular stakeholders in such an interest-in uence map may change very
rapidly and unpredictably. It is thus important for managers to give some attention to all stakeholders and to
continuously scan the business context to understand trends and possible changes in stakeholders’ interests and
in uence. is is illustrated in the next Case example.

CASE EXAMPLE: Technology companies and the war in the DRC11

Until 2004, a vicious war was fought in the Democratic Republic of Congo (DRC) that involved many other
African countries and killed more than 4 million people. Armed conflict has continued sporadically, especially in
the eastern parts of the country. Women have been particularly affected because of the use of rape as a weapon
of war. In some areas, almost one in two women are victims of sexual violence. But what do rape survivors in the
DRC have to do with technology companies such as Apple?
Most managers in such technology companies did not see such women as important stakeholders. They also
gave relatively little attention to the NGOs that began, in around 2008, to identify ‘conflict minerals’ as an
underlying cause of the conflict in the DRC. Their argument was that armed militias were controlling the mining
of minerals such as titanium and tungsten and were using the income from such mines to fund their violence.
But how is this connected to a company like Apple? Well, Apple’s most lucrative business is in manufacturing
and selling cellular phones, and these phones contain some of the minerals mined in the DRC. The NGOs thus
embarked on a campaign to convince consumers and politicians, especially in the USA, that there is a direct
connection between violence to women in the DRC and the cellphones that have become such an integral part
of people’s lives. As a result, a legislator in the USA argued as follows: ‘Without knowing it, tens of millions of
people in the United States may be putting money in the pockets of some of the worst human rights violators in
the world, simply by using a cellphone or laptop computer.’
However, technology companies resisted this way of framing the problem. Industry representatives argued, ‘It
is really a security problem and a longstanding ethnic conflict’ and not something that can be addressed by
technology companies engaging in ‘supply chain initiatives.’ On the other hand, NGOs realised that technology
companies were a powerful mechanism for change and that they could be influenced: ‘If Apple is sourcing from a
mine filled with human rights abuses, then Apple’s reputation suffers. That could lead to a decrease in the stock
price.’
Eventually the US government legislated (as part of the Dodds-Frank Act) that all companies had to report
publicly on how they are obtaining these kinds of minerals. This information was then used by NGOs to put
further pressure on companies to become more proactively involved in avoiding the abuse of mineral mines for
funding violence in the DRC. For companies like Apple, this involved working in partnership with these NGOs to
identify the best ways to do this. Another prominent technology company, Motorola, explained: ‘This is the
moment for manufacturers everywhere to be powerful actors for good, to fundamentally change the way minerals
are bought.’

2.5 The dynamic business context and evolving risks

e purpose of strategy is to guide managers in making investment decisions. Every investment decision responds
to an opportunity, but it also needs to take risk into account. A strategy thus needs to clarify how much risk
managers are encouraged to take. It should also highlight the kinds of risks, and the underlying trends that need to
be taken into consideration.
is is one of the reasons why managers need to give careful attention to their organisation’s context and how it is
changing. In fact, the world is changing in rapid ways and this means that the role of context is becoming more and
more important for managers. For instance, then-CEO of Woolworths, Simon Susman, argued: ‘It is becoming
increasingly obvious to all businesses that sustainable growth can only be achieved through greater attention to the
world around us, than has been the case in the past.’12
Consider for a moment the quote from Milton Friedman, with which we started the chapter. is was written in
1970. What was the world like in 1970, and how has it changed since then?
ere are of course many ways to answer this question, but just consider the following:13
ere are now about twice as many humans on the planet
We use about three times as much food and water
We use about four times as much fossil fuel.

Because of these changes, many scientists argue we have entered a new geological epoch – the Anthropocene – in
which humans have a decisive, possibly destabilising impact on the earth as a whole. Scientists furthermore identify
nine ‘planetary boundaries’ that de ne a ‘safe operating space’ for humanity, beyond which the Earth System may
become too disrupted for societies to ourish:
Climate change
Changes in biosphere integrity (that is, reduced biodiversity and species population sizes)
Stratospheric ozone depletion (this contributes to the so-called ‘ozone hole’ that increases the intensity and health
dangers of the sun’s radiation)
Atmospheric aerosol loading (this includes air pollution with severe health impacts)
Ocean acidi cation (that is, changes in the acidity of the ocean due to, among other things, increased CO2 in the
water, with diverse negative impacts on ocean life)
Biogeochemical ows (this involves eutrophication due to too much phosphorus and nitrogen)
Land-system change (especially deforestation)
Freshwater use (that is, its over-use and pollution)
Introduction of novel entities (new or modi ed substances or life-forms that could have undesired effects).

Of these nine boundaries, the rst two – climate change and biosphere integrity – have a special status because of
their Earth System-wide nature and their in uence on all the other boundaries. Signi cantly, one of these –
biosphere integrity – has been impacted well beyond the safe operating space.14 is is relevant for organisations
because of their reliance on ecosystems for resources such as fresh air and water – oen without even realising it
until it is too late. Ecosystems provide vital goods and services to all social and environmental activities.
ey provide natural resources, including renewable resources such as sh, fertile soils, or timber, as well as non-
renewable resources such as minerals and metals. Even though natural systems normally replenish renewable
resources, such as sh stocks, the rate at which we are exploiting such resources oen means that they cannot
renew themselves. For instance, scientists estimate that 90% of the world’s sh stocks are over shed, which means
that we are taking out sh faster than they can be replenished. At a certain point, sh stocks will collapse
completely and be unable to recover; this has already happened for certain species, in some parts of the ocean.15
ey provide important processes and cycles. For instance, the way that sediment moves along the shore and
becomes trapped by mangroves or other plants plays a crucial role in buffering the coast from storm oods. e
oods in New Orleans in 2005 were more severe because many of the natural ood defences had been
diminished by inappropriate land and property development. Another important natural cycle involves the
movement of nitrogen and phosphorus through water catchments and in soils. ey play a vital role as nutrients
for plants, but because we are putting too much nitrogen and phosphorus into soils and rivers – mostly due to
fertilizing on farms – ecosystems are becoming eutrophied, which means they have too many nutrients. is
results in algal blooms that kill off other species.
Finally, ecosystems provide important sinks for our wastes. Economic activity creates waste in the form of
materials that we do not want anymore, such as used packaging, gaseous or liquid emissions, or heat. Some of the
 best-known wastes are greenhouse gases, such as carbon dioxide and methane, which contribute to climate
change. Much of these polluting gases have been absorbed by the world’s oceans, but scientists worry that the
oceans’ absorptive capacity will soon be overstretched, with the result that more of these gases will go into the
atmosphere and accelerate global warming.

Organisations face direct social-ecological risks due to these environmental impacts. For example, they may lose
reliable access to resources. Social-ecological risks refer to the risks faced by an organisation due to changes in its
social-ecological context. As a result, some organisations have decided to be proactive and to nd ways in which
they can address the degradation of the integrity of the biosphere. For example, as part of its ‘Good Business
Journey’, Woolworths is providing proactive support to farmers that supply it with fresh produce. is involves
information and techniques for sustainable farming practices that develop soil fertility while reducing the need for
water and pesticides. e company is doing so because its managers have realised that if its supplying farmers fail to
address water scarcity issues, they will fail to continuously supply Woolworths with high-quality fresh produce.16
In addition to these longer-term risks, Woolworths and other organisations may face direct costs due to natural
disasters, such as res or oods, which are increasing in frequency and severity due to climate change. is is
explained in more detail in the Strategy in action feature on Santam on the next page.
Organisations are also challenged by these environmental risks because they are closely bound up with social and
economic risks. For instance, if a drought leads to farmers struggling to produce their crops, this may give rise to
growing unemployment, as well as increasing food prices. is can contribute to growing social unrest, which
results in potentially violent protests. If protests are not well-managed by the government, they may lead to
decreasing con dence among local and foreign investors, which in turn will contribute to worsening
unemployment, and so on.
It is thus important to recognise the interrelated nature of social, ecological, political, and other risks in the
business context, and how these risks and their interconnections are continuously evolving. It is also important to
consider the longer-term social, ecological, technological and political trends that oen underlie the business risks.
e World Economic Forum publishes an annual report on what business leaders and others identify as the most
prominent business risks. ese annual reports also highlight the complex interconnections between these risks and
underlying trends. For instance, a changing climate increases the risks of extreme weather events, such as droughts
or oods, as mentioned above.
Some organisations have recognised that these negative spirals of increasing environmental and social risks can
have signi cant negative impacts on their business prospects. One such example can be seen in how Santam, South
Africa’s largest and oldest short-term insurance company, went about identifying emerging risks for the company
and exploring possible responses. is is described in more detail in the Strategy in action feature below.

STRATEGY IN ACTION: Santam’s response to a changing risk landscape

Santam is South Africa’s largest and oldest short-term insurance company. Its motto is ‘Insurance good and
proper’. In 2007-8, strategists at Santam realised that the world was changing rapidly and that the company
needed to develop a new strategic response. This was triggered by a range of events, but two were especially
important. Firstly, the depth and breadth of the financial crisis became apparent. This not only had important
implications for the company’s markets, but company leaders also noted that the reputation of finance companies
globally was being damaged, even if South African finance companies were not implicated in the same way as
those in the USA or UK. Secondly, the company’s balance sheet was impacted significantly by increasingly
severe and frequent natural disasters. This was particularly evident in the Eden District (including towns like
George and Knysna), where large-scale fires and floods caused significant insured losses.
 In response, managers organised a scenarios process with the executive leadership of the company in order
to identify and prioritise emerging risks for the company. Scenarios are plausible stories about the future,
highlighting key trends and their interrelationships. In a scenarios process, managers develop and discuss such
scenarios and their implications for the organisation, including both risks and opportunities. One of the Santam
managers explained the outcome of this process as follows:
‘After the 2008 crash happened we redid our futures scenarios. Five future shaping forces were identified and
three of them were not financial… climate change, crime, and gainful employment… and we said, oh, this is
interesting; that was the first time that that came up for us.’
Identifying these new ‘future shaping forces’ had important implications. Because they were new and
unexpected, Santam managers grappled with how best to respond to them. They realised that they had more
questions than answers. One of the responses was the establishment of partnerships with research
organisations and an NGO to explore how the company might better respond to increased risks from natural
disasters due to climate change. The result of this was a report that gained international influence. It argued:
‘A very encouraging outcome of our work was that for each of the risks we studied (i.e. wild fires, floods, and
sea storms), we were able to identify drivers of change in the local landscape that had the same if not greater
effect on risk, compared to climatic drivers. Proactive management of these local drivers of risk could therefore
offset most of the increased risk associated with climate change. This is the basis of ‘ecosystem-based
adaptation’ to climate change (IUCN 2008).
For wildfires, we identified the occurrence of invasive alien trees as a key driver in the local landscape. The
control or eradication of these fire-prone invasive trees provides a practical risk-management response that has
the potential of nullifying future increases in fire risk associated primarily with increased temperatures in this
region.
For flooding, we identified local changes in land cover, specifically clear-felling of large tracts of commercial
forestry plantations that were not replanted and large fires within these plantations, as a key driver of risk. Active
rehabilitation of natural vegetation following clear-felling, and improved fire management practices in these areas,
are therefore two practical risk management responses. While our study focused on land cover changes related
to forestry (due to data availability), it should be noted that other land cover changes such as the degradation of
wetlands and river riparian zones could have an equal effect on the risk of flooding. The active rehabilitation of
these ecosystems also provides practical risk management responses.’
Importantly, these ‘local drivers of risk’ were amenable to proactive intervention. However, Santam realised
that this was not something the company could do alone. Santam therefore established a partnership with the
District Municipality’s Disaster Risk Management unit. The objective was to identify ways in which the company
could support this unit. This resulted in a range of measures, such as increased training for local fire-fighting
departments and sharing flood-risk mapping data.

Questions
1. Why do you think the managers of Santam were surprised by the outcomes of the scenarios planning
exercise in 2008? What were the implications?
2. Why did Santam managers partner with researchers and a NGO, and why did they later partner with a
municipality – specifically, what abilities or resources did the researchers, the NGO and the municipality have
which Santam wanted to make use of?
3. What does this case illustrate about companies’ changing risk landscape and how they might respond?
4. Visit Santam’s website and try to find information about the company’s efforts in response to climate change
and in fostering community resilience. Compare this to other insurance companies.

Source: Author interview; Nel, D., Nel, J., Reyers, B., le Maitre, D., Forsyth, G., & Theron, A. (2011). Insurance in a changing risk
landscape: Local lessons from the Southern Cape of South Africa. South Africa: The Santam Group, WWF, UCT, CSIR. In
collaboration with the United Nations Environment Programme Finance Initiative.
2.6 Context as opportunity: Shared value and inclusive
business
Strategic managers analyse and respond to context not only to address possible risks, as discussed in the previous
section, but also to develop opportunities for competitive and collaborative advantage. In this section, we focus on
this mindset, which highlights the opportunities for shared value for both the organisation and its key stakeholders.
Shared value refers to the bene ts that an organisation can create simultaneously for itself and its stakeholders. e
related notion of inclusive business prioritises stakeholders that are otherwise excluded from companies’ markets or
supply chains.
Porter and Kramer develop the idea of shared value as a kind of antidote to what they call ‘an outdated approach
to value creation that… views value creation narrowly, optimizing short-term nancial performance in a bubble
while missing the most important customer needs and ignoring the broader in uences that determine their longer-
term success.’17 us, rather than separate economic objectives to ful l shareholder demands, on the one hand, and
social responsibilities, on the other, Porter and Kramer argue that economic and social objectives must be combined
in the pursuit of ‘shared value’.
is means that value is not only created for the organisation but a value for society as well as it meets the needs
and the challenges it faces.18
Porter and Kramer identify three dimensions of creating shared value, namely:
Rede ning productivity in the value chain
Enabling local cluster development
Reconceiving products and markets.

Let’s start with rede ning productivity in the value chain. Porter and Kramer explain:

A company’s value chain inevitably affects—and is affected by—numerous societal issues, such as natural
resource and water use, health and safety, working conditions, and equal treatment in the workplace.
Opportunities to create shared value arise because societal problems can create economic costs in the rm’s value
chain. Many so-called externalities actually in ict internal costs on the rm, even in the absence of regulation or
resource taxes. Excess packaging of products and greenhouse gases are not just costly to the environment but
costly to the business. Wal-Mart, for example, was able to address both issues by reducing its packaging and
rerouting its trucks to cut 100 million miles from its delivery routes in 2009, saving $200 million even as it
shipped more products. Innovation in disposing of plastic used in stores has saved millions in lower disposal
costs to land lls.

e premise of this argument is that organisations can reduce costs in the production and distribution systems,
which not only increases their competitiveness, but also reduces negative social and environmental impacts. One of
the most important and prominent ways in which organisations are doing this is by reducing their energy and water
consumption. is may involve, for instance, installing energy-efficient lighting and heating or using more efficient
machines in production systems, as well as installing renewable energy production or water recycling systems.
Managers are increasingly making such investments because the pay-offs are compelling.
Sometimes such efficiency gains are remarkably easy and quick to achieve. One of my favourite examples of this
is the logistics company UPS. At any given moment, this company has hundreds if not thousands of trucks on the
road, oen in congested urban areas. Managers came up with an ingenious way to make their trucks’ journeys more
efficient: they programmed their route planning systems to reduce the number of turns that the trucks make across
the ongoing traffic. In other words, if you are driving on the le-hand-side of the road, they made sure that as far as
possible, you would be turning le. How does this improve efficiency? If there is a lot of traffic and you need to turn
right, chances are that you will have to wait quite a long time for a chance to turn. is will delay you and it will also
contribute to increased congestion, as cars wait behind you. With this small but effective change, they saved millions
of rands linked to fuel and time, and they also helped reduce congestion on the roads.19
Other examples of enhancing productivity are more demanding, but nevertheless provide important bene ts to
the implementing business, as well as other stakeholders. A good example is Woolworths’ ‘Farming for the Future’
programme, which was mentioned above. It builds on Porter and Kramer’s emphasis on ‘the advantage of buying
from capable local suppliers20’. Woolworths had made a prominent commitment to sustainable development. It also
had a strategy of working closely with suppliers to ensure reliable access to high-quality fresh produce. In that
context, Woolworths managers noticed a trend of declining productivity on farms, despite an increase in the use of
fertilisers and pesticides. is was clearly bad news for farmers, but Woolworths managers realised that it was bad
news for Woolworths too. ey thus set out to develop a programme of direct engagement with suppliers to enhance
their productivity by combining natural farming practices with modern scienti c methods, focusing on soil-speci c
composting and irrigation techniques. e result has been a notable increase in farmers’ productivity while the use
of pesticides, fertilisers and irrigation water has been reduced.21
A second mechanism to create shared value is enabling local cluster development.
Efficient suppliers facilitate logistical efficiency. An example would be a strong transportation service that would
boost the industry’s productivity. Without this supportive cluster, the productivity would be impacted.22
e idea of cluster development emphasises that an organisation’s success relies on more than its interactions
with suppliers and customers and its efforts to stay ahead of the competition. Oen it also pays to give attention to
the broader organisational ‘ecosystem’, of which it is a part. e Santam example in the previous section is clearly a
good example of this: the organisation recognised that its long-term success relied not only on building its market
share, but in ensuring that municipalities and other key role-players are capable of ful lling their responsibilities.
However, if Santam is the only organisation making such efforts, this may give rise to unfair competitive
disadvantage, because Santam’s competitors are bene ting from its efforts without bearing any of the costs. Hence,
part of Santam’s strategy has been to involve other insurance organisations in such initiatives.
Finally, a third dimension of creating shared value is reconceiving products and markets. Important gains can be
made in developing new business opportunities by better understanding and responding to unmet social needs.
Porter and Kramer mention the example of mobile phones that help the poor not only communicate better with
friends and customers but have also enabled better access to mobile banking services, as in the well-known case of
M-Pesa.23
is is closely related to another important idea in business strategy, the ‘base of the pyramid’, or ‘those 4 billion
people who live on less than $2 a day’.24 C.K. Prahalad and Stuart Hart argue that businesses have for too long
ignored the unmet needs of the world’s poor population, and in so doing, they have also neglected important
business opportunities:

Contrary to popular assumptions, the poor can be a very pro table market – especially if [multinational
corporations] change their business models. Speci cally, [the poor are] not a market that allows for the
traditional pursuit of high margins; instead, pro ts are driven by volume and capital efficiency.25

More recent work on this idea has emphasised that the poor should not be seen only as a potential market for
business products and services, but also as providers of goods and services in corporate supply chains. Furthermore,
because most business managers have limited understanding of the lives and circumstances of the poor, they need to
engage in a collaborative process together with the people that they are trying to assist, to make sure that the
resulting business model indeed helps.
 Business leaders have been enthusiastic about the possibility of developing more inclusive business models. e
World Business Council for Sustainable Development argues that there is a strong link between business interests in
developing such inclusive business models and the United Nations’ Sustainable Development Goals (SDGs):

Companies seeking to expand in emerging markets increasingly see the 4.5 billion people living at the so-called
base of the economic pyramid… as potentially important customers, diverse new sources of supply, and strategic
distribution and retail partners. Inclusive business can create opportunities for employment and
entrepreneurship for people living at the BOP, either directly or through companies’ value chains as suppliers,
distributors, and retailers. Alternatively, companies can develop ways to supply affordable, high-quality products
and services to meet basic needs for food, water, sanitation, housing and health care. Or they can develop
innovative business models to enhance access to key development enablers such as energy, communications,
nancing and insurance. Inclusive business models provide an optimal congruence of private sector and
development policy interests and objectives around the SDG agenda.26

However, it is important to note that creating shared value and engaging in inclusive business is not just the domain
of large corporations. In fact, entrepreneurs are oen particularly adept at creating the kinds of innovations that
help address social or ecological challenges at the BOP. is is illustrated by the following Case example, which
focuses on a small business that aims to provide access to renewable energy sources to poor people living in rural
areas in Zambia. It illustrates many of the mechanisms – and challenges – of creating shared value.

CASE EXAMPLE: VITALITE in Zambia

John Fay and Samuel Bell first met in 2005 when they both started working with a natural habitat conservation
organisation based in Zambia’s Eastern Province. They quickly realised that one of the main factors causing
habitat loss was energy demand – trees were being chopped down to be converted into charcoal. A survey of
rural farmers indicated a huge gap in modern energy infrastructure: existing technology was either of poor quality
or too expensive. In response, John and Sam established a social enterprise called VITALITE Limited in 2013,
based in Lusaka. VITALITE started selling solar home systems that made solar power accessible to poor
households, combining photovoltaic panels with batteries, lamps, a phone charger, and a rechargeable radio.
Initially, they sold these using a cash-and-carry model, in which customers pay for the product upfront. But this
was unsuccessful because the poor people they were trying to help could not afford the high upfront costs. They
had to find another solution.
They thus developed a ‘pay-go’ model, which allowed customers to receive, install and use a system without
incurring the initial costs. Customers made monthly payments, which worked on a prepaid system: they received
a unique code via SMS, which they entered into their solar home system to make it work. VITALITE offered 12, 18
or 24-month rent-to-own contracts, and customers could pay daily, weekly or monthly. This approach was
mutually beneficial. It helped customers build their asset base, climb the ‘energy ladder’ and save money. It
helped VITALITE sell its product to its target market, without taking on the liquidity and credit risks plaguing many
Zambian microfinance businesses, and it created a credit history for each customer.
But there were still important constraints to growing the market for the solar home systems. Customers
generally relied on cash to make payments, so VITALITE was vulnerable to their agents – who collected
payments in far-flung rural areas – stealing some of this cash. Jon’s and Sam’s response to this challenge was to
explore whether they could use mobile payment systems, like the famous payment system developed by M-Pesa
in Kenya. However, cellphone use was not as widespread in rural Zambia as it is in Kenya. Also, VITALITE
probably would have to collaborate with an existing mobile phone operator to make this work, but this would limit
VITALITE’s access to this operator’s subscribers only. John and Sam came a long way towards make solar
energy available to poor, rural residents in Zambia, but growing their reach was clearly a challenge.

Source: “Vitalite: Shining a light on Zambia,” teaching case written by Vimendree Perumal and Ralph Hamann
2.7 The process of embedding context in strategy
us far, we have highlighted the importance for strategists of giving careful attention to the purpose and context of
their organisation, and to recognise and respond to the risks and opportunities that arise from the context in which
their organisations operate. A lot of this has to do with developing an appropriate mind-set and knowledge among
managers. However, we also need to give explicit attention to the process of strategy-making. As it turns out, it is
possible and helpful to design this process of strategy-making so that the organisation’s strategy continuously
re ects the organisation’s purpose and its dynamic context.
e rst step is to recognise your organisation as being part of a ‘nested system’, in which your strategy needs to
take into account competitive dynamics related to your industry, suppliers, buyers, and possible new entrants or
substitutes to your product or service – these are the famous ‘ ve forces’ highlighted by Michael Porter in his early
work on strategy,27 and which will be discussed in more detail in Chapter 6. Importantly, however, all of these
dynamics depend on a thriving social system, in which the organisation’s stakeholders’ well-being is taken care of.
is social system, in turn, depends on the natural environment. We have discussed this reliance on natural systems
previously in this chapter. e dependence of all our economic activities on social and natural systems is an
important foundation for Porter’s more recent work on ‘shared value’, as described in the previous section. It has also
been highlighted by prominent business leaders, when they argue, ‘business cannot succeed in societies that fail and
therefore has a vested interest in stable and prosperous societies’.28 is ‘nested system’ view of business strategy is
depicted in Figure 2.2.

Figure 2.2: A ‘nested system’ view of business strategy

Source: Bertels, S. and Dobson, R. (2017) The Road to Context: Contextualising your Strategy & Goals Guide. Embedding
Project. DOI: 10.6084/m9.figshare.3905979
However, business managers can easily become overwhelmed with the many pressing and complex social and
environmental issues that pertain to their organisations in one way or another. As noted above, it is oen
challenging to prioritise diverse stakeholders’ claims and expectations. Stephanie Bertels and Rylan Dobson thus
explain that it is important to clearly specify an organisation’s strategy to respond to social and ecological trends, as
well as to understand these trends:

A key part of integrating contextual thinking into a company’s strategy involves developing an understanding of
socio-ecological trends and their related thresholds and of the magnitude of change required to adhere to them.
But it also involves determining the portion of the change that is within the company’s responsibility to address
(and in what timeframe). Some companies are already starting to set corporate goals in line with these
principles…

So, for instance, instead of asking ‘how much could we reduce our emissions?’ the question becomes ‘how much
do we need to reduce our own greenhouse gas emissions (and in what timeframe) to do our part in meeting the
long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial
levels?’ Companies are already starting to be asked to set ‘science-based’ or ‘context-based’ goals and targets. For
instance, as part of their annual disclosure process, the CDP (formerly known as the Carbon Disclosure Project)
has started asking companies whether they are committing to greenhouse gas emissions reduction targets that
support the global effort to limit warming to 2°C.29

Bertels and Dobson go on to suggest a four-step process to guide managers in identifying and prioritising contextual
issues in their strategy-making, as summarised in Figure 2.3. e rst step is to acknowledge the need to operate
within social-ecological thresholds. As mentioned previously, such thresholds represent conditions in our social and
ecological context that may precipitate fundamental, unpredictable, and possibly disastrous changes in these
systems, giving rise to circumstances that are extremely adverse for people and organisations. is rst step thus
emphasises the basic requirement for business leaders to publicly accept that there are such thresholds and that we
all need to do what is necessary to remain within these thresholds.
e second step is to prioritise speci c focus areas that your organisation needs to give particular attention to.
is is generally based on an assessment of how the organisation impacts on its social and ecological context. It may
also be informed by analysing where and how the organisation might have the most impact in making a positive
difference. ere are useful techniques that can help such assessments, such as lifecycle analysis, which involves
analysing the social and ecological impacts associated with a particular product or service throughout its life cycle.
For instance, Woolworths has done such analyses of some of its most important products, such as milk. is has
helped them recognise that many of the most important environmental impacts associated with a bottle or carton of
milk are linked to what happens on the farm. is allows the company to focus its strategy on that part of the milk
value chain.
e third step is to set strategy and goals that transparently explain how the organisation will contribute to
bridging the performance gap between current performance and the desired endpoint. Importantly, the
performance gap focuses not only on the organisation itself, but what might be reasonably expected from the
organisation to achieve societal progress on the speci c issue. Perhaps the most prominent example is in assessing
greenhouse gas emissions targets. Many organisations have published reduction targets that correspond more or less
with what managers think they can achieve, but we are not oen told whether this reduction is aligned with what is
needed to avoid catastrophic climate change. e international community has made a shared commitment to
maintain climate change to within 2°C; so, companies need to identify their own reduction target to ensure that they
are contributing to this global priority.
 Finally, the fourth step is to transparently track performance. Once the key strategies and targets have been
identi ed, it is possible to estimate the trajectory that the organisation expects to take to achieve these targets. It thus
becomes possible to identify intermediate targets along this trajectory; these can be used to keep track of how well
the organisation is doing in achieving its higher-level targets. e challenge and opportunity of measuring and
reporting on progress will be addressed in the next section.

Figure 2.3: Four steps for developing contextual strategies and goals

Source: Bertels, S. and Dobson, R. (2017) The Road to Context: Contextualising your Strategy & Goals Guide. Embedding
Project. DOI: 10.6084/m9.figshare.3905979
Context-based strategy-making is thus a continuous process of linking broader societal ambitions and
requirements – at global, national, and local levels – to the speci c circumstances of your organisation. e Strategy
in action case on Nedbank’s Fair Share 2030 below illustrates the concept of context-based strategy-making in South
Africa.

STRATEGY IN ACTION: Nedbank’s Fair Share 2030 as an example of context-

based strategy

Nedbank is one of South Africa’s four large banks. It has a long history of incorporating environmental and social
issues into its strategies and practices. This includes the establishment in 1990 of the WWF Nedbank Green
 Trust to raise funds for conservation projects. Nedbank was also South Africa’s first signatory to the Equator
Principles, which identify social and environmental safeguards to assess projects prior to agreeing to finance
them. Nedbank also made important steps to provide funding for South Africa’s renewable energy programme.
In 2011, however, Nedbank managers realised that in order to live up to the company’s vision, ‘To be Africa’s
most admired bank’, they would need to find a way to more authentically and effectively contribute to addressing
some of South Africa’s most material sustainability challenges – those that were preventing the creation of a
flourishing society and a vibrant and resilient economy that respected environmental limits. This resulted in the
launch of ‘Fair Share 2030’ in 2014, which aims to shift Nedbank’s lending practices away from activities that
negatively impact on poverty and environmental and societal risks, redirecting those funds to helping to build
resilience and well-being in South Africa.
Nedbank managers thus acknowledged social-ecological thresholds, prioritised focus areas, and set
corresponding goals. As argued by Mike Brown, Nedbank’s Chief Executive: ‘We know not everything that needs
to be done can or should be done by a bank. So, we identified goals that we can contribute to as a bank.’ This
involved the overarching goal of lending no less than R6 billion to activities that align with eight more specific
long-term goals.
Finally, tracking progress was a vital part of this strategy, allowing for a comparison of progress achieved
against both the overarching goal and the more specific goals. This also informed a subsequent, more recent
shift in this strategy, which identified the SDGs as a vital, global set of goals informing the company’s strategy, as
explained by the company on its website:
‘In 2015 and 2016 we had set a stretching R6 billion annual lending target to encourage new and innovative
lending with deliberate social and environmental impact. While we did not meet the target in either year (R2,3
billion in 2016 and R1,8 billion in 2015), the outcome of our lending provided much-needed student
accommodation across the country and supported the rollout of additional embedded energy installations… It
also provided opportunities for the bank to learn more about sustainable development finance as a driver of
value in tough economic times, within a limiting regulatory environment.
Aligned with our purpose, a broader approach is being adopted for Fair Share 2030. One of the key changes
is that the R6 billion annual target will be replaced by a larger cumulative target for sustainable development
finance up to 2020. This cumulative target will be expressed as a set of outcomes aligned to the SDGs.30

Questions
1. Why do you think Nedbank called this strategy ‘Fair Share 2030’?
2. Why do you think Nedbank focused on its lending practices? Do you think this was a good focus?
3. Visit Nedbank’s website and see how they are reporting on progress in implementing this strategy: what can
you identify as challenges in the implementation process? Compare Nedbank to one or more other South
African or international banks.

2.8 Measuring and reporting on progress

As emphasised in the model of context-based strategy-making process above, transparently tracking progress is
vital. Indeed, reporting on the implementation of strategy to both internal and external stakeholders is a key
ingredient of most management systems, which focus on continuous improvement. e management scholar
Deming emphasised this as part of the so-called Deming Cycle – also known as the Plan, Do, Check, Act Cycle.
Take another look at Figure 2.3 and you will recognise this cyclical process of identifying objectives,
implementation, checking progress, and adjusting the strategy in response.
In other words, reporting on progress is a vital component of designing and implementing strategy. But there are
additional reasons for this as well, especially because businesses are being held to account more and more, not just
on their nancial performance but also their social and environmental performance. is has led, among other
things, to the integrated reporting movement. In the past, most publicly listed companies published an annual
report that focused on its nancial performance, and then a separate sustainability report that focused on
environmental, social, and governance (or ESG) issues. Integrated reporting requires that companies publish just
one report that integrates economic, social, environmental, and governance concerns. South Africa was the rst
country in the world in which the stock exchange made integrated reporting a requirement for all listed companies,
based on the King III Report on Corporate Governance.
At the global level, the move towards integrated reporting is being led by the International Integrated Reporting
Council. Its discussion document de nes and motivates for integrated reporting as follows:31
Integrated Reporting brings together material information about an organisation’s strategy, governance,
performance and prospects in a way that re ects the commercial, social and environmental context within which it
operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it
creates and sustains value. An Integrated Report should be an organisation’s primary reporting vehicle.
e Integrated Reporting framework goes on to identify the following key principles of integrated reporting, namely
strategic focus, connectivity of information, future orientation, responsiveness and stakeholder inclusiveness,
conciseness, reliability and materiality:32
Strategic focus: An Integrated Report provides insight into the organisation’s strategic objectives, and how those
objectives relate to its ability to create and sustain value over time, and the resources and relationships on which
the organisation depends.
Connectivity of information: An Integrated Report shows the connections between the different components of
the organisation’s business model, external factors that affect the organisation, and the various resources and
relationships on which the organisation and its performance depend.
Future orientation: An Integrated Report includes management’s expectations about the future, as well as other
information to help report users understand and assess the organisation’s prospects and the uncertainties it faces.
Responsiveness and stakeholder inclusiveness: An Integrated Report provides insight into the organisation’s
relationships with its key stakeholders, and how and to what extent the organisation understands, takes into
account and responds to their needs.
Conciseness, reliability and materiality: An Integrated Report provides concise, reliable information that is
material to assessing the organisation’s ability to create and sustain value in the short-, medium- and long-term.

Finally, the Integrated Reporting framework provides an outline of the content of an integrated report:33
Organisational overview and business model: What does the organisation do and how does it create and sustain
value in the short-, medium- and long-term?
Operating context, including risks and opportunities: What are the circumstances under which the organisation
operates, including the key resources and relationships on which it depends, and the key risks and opportunities
that it faces?
Strategic objectives and strategies to achieve those objectives: Where does the organisation want to go and how is it
going to get there?
Governance and remuneration: What is the organisation’s governance structure, and how does governance
support the strategic objectives of the organisation and relate to the organisation’s approach to remuneration?
Performance: How has the organisation performed against its strategic objectives and related strategies?
Future outlook: What opportunities, challenges and uncertainties is the organisation likely to encounter in
achieving its strategic objectives, and what are the resulting implications for its strategies and future
performance?

From these principles and content requirements, you can see that integrated reporting is based on a view of strategy
that is very much aligned with what we have been focusing on in this chapter – that is, an emphasis on purpose and
context, on associated risks and opportunities, and on the need for long-term value creation for stakeholders. In line
with this broader emphasis on an organisation’s social and ecological context, a vital aspect of integrated reporting is
that it focuses attention not only on nancial capital, but a more holistic set of six capital forms – de ned as ‘stocks
of value that are increased, decreased or transformed through the activities and outputs of the organisation34.’ Over
and above nancial capital, managers should consider:
Manufactured capital: ‘Manufactured physical objects (as distinct from natural physical objects) that are available
to an organisation for use in the production of goods or the provision of services35’ such as buildings or
equipment
Intellectual capital: Both the tacit knowledge of employees and the explicit knowledge of the organisation, such as
patents or soware
Human capital: e organisation’s access to ‘people’s competencies, capabilities and experience, and their
motivations to innovate36’
Social and relationship capital: ‘e institutions and the relationships within and between communities, groups of
stakeholders and other networks, and the ability to share information to enhance individual and collective well-
being37,’ including shared norms and values, and key stakeholder relationships
Natural capital: ‘All renewable and non-renewable environmental resources and processes that provide goods or
services that support the past, current or future prosperity of an organisation38.

ese six capital forms are inputs into an organisation’s value creation process, as well as outcomes, as illustrated in
Figure 2.4. Integrated reports should thus consider these diverse forms of capital both as inputs and outcomes. Many
of the examples that we considered in this chapter may be interpreted using this view of the ‘six capitals’ and their
role in a business model. For instance, when Woolworths managers established the ‘Farming for the Future’
programme to support suppliers by enhancing their farming practices and improving soil fertility, they recognised
that soil fertility on these farms was a crucial form of natural capital that is an input in their business model. When
VITALITE managers explored different options for their customers to pay for solar energy, they were trying to
innovate their business model to account for customers’ limited incomes. When Patagonia tried to convince
customers not to buy a new jacket but rather get their existing jacket xed instead, they were trying to reduce their
impact on the natural environment (as an output), while at the same time increasing customer loyalty (as an input).

Figure 2.4: The six forms of capital as inputs and outcomes of a company’s value creation process.
Source: IIRC (2013), page 13.

2.9 Summary
is chapter covered organisational purpose and context as vital elements of strategy. To identify strategic objectives
and priorities, we need to de ne and agree on the purpose of our organisation? To de ne our objectives and
corresponding targets, we need to understand and respond to the changing context in which we are operating? We
are now better able to design and implement strategy that shis from short-term returns focus for shareholders to
longer-term value creation for a range of stakeholders. is includes identifying and responding to diverse risks and
opportunities that arise from our context, recognising the potential for turning social problems into business
opportunities. We also understand that strategy-making is an ongoing process, in which we keep asking ourselves
key questions about our purpose and context, in order to set goals that contribute to our ‘fair share’ of achieving the
Sustainable Development Goals. Finally, we have learned that transparently tracking progress is a vital ingredient of
this strategy-making process. Organisations’ integrated reports are thus important mechanisms to transparently
communicate progress; this in turn should help managers improve their strategies.

Opening case study questions

Return to the Opening case study and consider the following:
1. How does Patagonia de ne its purpose, and how does this in uence its strategy and its distinctiveness?
2. How is the company’s purpose related to its approach to the relationship between shareholders and stakeholders,
and to its approach to short-versus long-term time horizons?
3. What risks is Patagonia trying to respond to in its strategy, and what risks might you identify for its strategy –
especially with regard to its activist stance?
4. What opportunities is Patagonia trying to develop through its strategy?
5. Read the article in FastCompany listed as the nal reference in the Opening case study. What is the company
doing to be a more inclusive business?
6. Take a look at Patagonia’s website. How well is the company reporting on its strategy and its link to context?

Discussion questions
1. Is it important for organisational leaders and other members to think and talk about their organisations’
purpose? Why?
2. How does the timeframe – that is, short- or long-term thinking – impact strategy-making? How might you
motivate for longer-term thinking to be included?
3. Shareholders are clearly a vital constituency when designing and implementing strategy, but why is it important
to also consider a broader array of stakeholders? How might you develop different approaches for responding to
different stakeholders?
4. What are some of the important social-ecological trends and the corresponding risks for businesses, both at the
global level and in South Africa?
5. What do we mean by ‘creating shared value’ and inclusive business models, and how might you go about
addressing such opportunities in business strategies?
6. What are the key steps in embedding contextual issues into the strategy-making and implementation process?
7. Why is the emerging practice of integrated reporting an important aspect of strategy formulation and
implementation? What do you think might be associated difficulties and how might you respond to them?

Using knowledge and skills

Please select an organisation of your choice. You may want to select one of the organisations that we have given
special attention to in this chapter, such as Nedbank, Santam, or Woolworths. Visit the organisation’s website and
download their most recent Integrated Report. See if you can answer the following:
1. How is the organisation’s purpose de ned and to what extent do you see it shaping the organisation’s strategy?
2. How is strategy informed by an analysis of the organisation’s context? How does the context translate into risks
and opportunities for the organisation?
3. How are strategic goals identi ed, and how do they account for context and agreed national or international
development targets?
4. How well do you think the Integrated Report ful ls the need to keep you, as a stakeholder, informed about
progress in ful lling the organisation’s strategy?

Suggested websites
https://embeddingproject.org
https://sdgcompass.org
https://www.wbcsd.org
http://www.nbi.org.za
http://integratedreporting.org
https://www.globalreporting.org
https://nbs.net
https://www.irmsa.org.za
https://www.weforum.org

References and endnotes

1. Friedman, M. 1970. e social responsibility of business is to increase its pro ts. e New York Times
Magazine (September 13, 1970). Available: http://www.umich.edu/~thecore/doc/Friedman.pdf.
2. King Committee on Corporate Governance. 2016. e Fourth King Report on Corporate Governance.
Johannesburg: Institute of Directors.
3. Woolworths Holdings Limited. 2018. Good Business Journey Report
[Online]:https://www.woolworthsholdings.co.za/wp-
content/uploads/2018/09/WHL_2018_GBJ_Report_2018. [Accessed: 13 February 2019]
4. Barton, D., Manyika, J., & Williamson, S. K. 2017. Finally, evidence that managing for the long term pays off.
Harvard Business Review, 7.
5. Op. cit.
6. Freeman, R. E., & Elms, H. 2018. e social responsibility of business is to create value for stakeholders. MIT
Sloan Management Review, January, 1–6.
7. e King IV Report on Corporate Governance for South Africa 2016, Copyright and trade marks are owned
by the Institute of Directors in Southern Africa (IoDSA). [Online] Available: http://www.iodsa.co.za/?
page=AboutKingIV
8. Op. cit.
9. Ackermann, F., & Eden, C. 2011. Strategic management of stakeholders: eory and practice. Long Range
Planning, 44(3): 179–196
10. Op. cit.
11. Reinecke, J., & Ansari, S. (2016). Taming Wicked Problems: e Role of Framing in the Construction of
Corporate Social Responsibility. Journal of Management Studies, 53(3), 299–329.
12. Woolworths Holdings. (2018. Woolworths Holdings Annual Report. Cape Town. Available:
https://www.woolworthsholdings.co.za/wp-content/uploads/2018/09/WHL_2018_GBJ_Report_2018.pdf
[Accessed 13 February 2019]
13. Von Borman, T. Personal communication. 13 February 2018. Cape Town.
14. Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M. Sörlin, S. 2015. Planetary
Boundaries: Guiding human development on a changing planet. Science, 347 (6223).
https://doi.org/10.1126/science.1259855
15. For more information on this, see for instance the website of the Marine Stewardship Council:
https://www.msc.org.
16. More information about Woolworths’ ‘Farming for the Future’ programme can be found in its annual
sustainability reports, which are available via https://www.woolworthsholdings.co.za/sustainability/reports.
17. Porter, M. E. and Kramer, M. R. 2011. Creating shared value: How to reinvent capitalism — and unleash a
wave of innovation and growth. Harvard Business Review 89(1–2): 62–77; 64.
18. Op. cit.: 64.
19. See https://theconversation.com/why-ups-drivers-dont-turn-le-and-you-probably-shouldnt-either-71432
20. Porter and Kramer.: 70.
21. Susman, S., Woolworths, presentation, 5 December 2011. Durban, South Africa. See also
http://www.woolworthsholdings.co.za/investor/gbj/2010/environment/fasp [Accessed 8 December 2011].
22. Op. cit.: 72.
23. Adapted and reprinted with permission from e Fortune at the Bottom of the Pyramid from the First
Quarter 2002 issue of strategy+business magazine. © 2002 PwC. All rights reserved. PwC refers to the PwC
network and/or one or more of its member rms, each of which is a separate legal entity. Please see
 http://www.pwc.com/structure“ \t”_blank” www.pwc.com/structure for further details. http://www.strategy-
business.com/ \t “_blank” www.strategy-business.com
24. Prahalad, C. K. 2006. e fortune at the bottom of the pyramid. Pearson.
25. Prahalad, C.K. and Hart, S. 2002. ‘e fortune at the bottom of the pyramid’. Strategy+Business 26: 5.
26. WBCSD, 2016. Delivering on the Sustainable Development Goals: e inclusive business approach. Available via
wbcsd.ch.
27. Porter, M.E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York: Free
Press.
28. WBCSD, 2016, 1
29. Bertels, S. and Dobson, R. 2017. e Road to Context: Contextualising your Strategy & Goals Guide.
Embedding Project. DOI: 10.6084/m9. gshare.3905979.
30. https://www.nedbank.co.za/content/nedbank/desktop/gt/en/aboutus/green-and-
caring/sustainability/sustainability-approach.html; [Accessed 20 March 2018].
31. International Integrated Reporting Committee, 2011. Towards integrated reporting — communicating value in
the 21st century. Available via http://www.theiirc.org/the-integrated-reporting-discussion-paper. 2.
32. Op. cit.: 13.
33. Op. cit.: 15.
34. IIRC. 2013. Integrated reporting: An international framework. International Integrated Reporting Council. 11.
35. Op. cit.: 12.
36. Ibid.
37. Op. cit.: 13
38. Ibid.
 CHAPTER 3 Strategic
direction
Mari Jansen van Rensburg

LEARNING OUTCOMES

After reading this chapter, you should be able to:

justify the indispensability of a clear strategic direction for an organisation
explain what strategic intent is
explain what a vision statement is, and justify its role as the basis of the organisation’s strategy
explain what a mission statement is, and explain how it is aligned with the vision statement
expound on the components of a mission statement
critically evaluate the way that strategic direction is expressed by an organisation
explain the alignment between an organisation’s strategic direction and strategic objectives
explain the alignment between an organisation’s strategic direction and its operational level.

KEY TERMS

balanced scorecard
mission statement
strategic intent
value statement
vision statement

OPENING CASE STUDY

King Price Insurance1, 2, 3, 4, 5

Super cheap insurance premiums and they decrease every month – is this madness?
When King Price Insurance, a new player in the short-term insurance industry, was officially launched in June
2012 many industry stakeholders and potential clients questioned the sanity of the potentially ground-breaking
insurance model employed by this company. This Opening case study tells the story of a man with a dream of
disrupting the local insurance market by providing a comprehensive insurance cover with premiums that
decrease monthly as the values of the insured cars depreciate. As the name of the company suggests, it also
comes with royal service.

I too was a disgruntled client …

In 2008, Gideon Galloway was the youngest board member of a well-established organisation and at the height
of his career. Despite his apparent success, this young man was frustrated. Like the clients served by his
company, he too was disgruntled about paying more for car and home insurance than was necessary. He
wanted to change this, but found that there was an unwillingness to change and improve. There simply was no
room for innovation due to limited resources and old system technologies. Driven by a strong conviction that he
could turn the market on its head, he took a leap of faith and left his current employment to pursue a dream
which, at the time, seemed almost impossible.

King Price: Premiums that decrease monthly

With a vision as clear as daylight, very little start-up money, and the assistance of an extraordinary crew,
Galloway built this company from a garage and created the insurance company of tomorrow. The pillars of the
new business model were the following:
A team of experts: Galloway was joined by a team of seasoned insurance experts and technology gurus who
shared his vision.
Solid market research: Market research on the short-term insurance industry found that the motor industry,
followed by property, were the largest income contributors in this sector. These sectors became the initial
focus of the company.
A highly sophisticated intelligent risk-rating system: The company engineered state-of-the-art software which
they considered to be ‘the most intelligent, accurate and fastest risk-rating engine in South Africa’. They
believe that accurate calculation of risks translates into client savings.
A world-first pricing strategy that sees comprehensive car premiums decreasing monthly as the cars lose
value.
An established global reinsurance provider: The company is underwritten by Munich Re, which is considered
to be a reinsurer of choice, hence its position as the world’s largest reinsurance firm.

The business model of King Price Insurance was developed to address the weaknesses in other insurers’ offers.
The founders of the company firmly believe that it is possible to make a reasonable profit and still cover risk at a
most competitive rate. As a result, they adopted a lean and mean policy, and an aggressive but transparent
discounted pricing policy. The bottom line for this company is that price is king.
In line with this strategic thrust, the company announced that their comprehensive car premiums would
decrease every month. The logic behind this point of differentiation was based on standard depreciating vehicle
values against which insurance premiums decrease monthly. In addition to this exciting new way of doing
insurance, King Price also removed all the frills and non-essential added benefits. What’s the point of having
insurance if you’re incentivised to not use it when you need to? We’d rather all our clients benefit from super
cheap insurance and premiums that decrease monthly, from the get-go. According to Galloway, ‘Clients don’t
realise that insurers are regulated to reserve a percentage of premiums for the “no-claim bonus” fund’. Instead of
earning this bonus, Galloway believes that it would be to the clients’ benefit to ‘reap the benefit of a substantially
discounted premium immediately’.
Following a clear strategic direction seems to have paid off, and by September 2014 more than 100 000 new
policies had been sold. However, despite impressive growth King Price did not become complacent, but instead
continued to challenge the status quo. In line with customer needs and market opportunities, they extended the
scope of insurance coverage. R1 insurance is another innovation. We grew our company by expanding our
product offering to include cover for buildings, home contents, portable possessions, motorbikes, watercraft,
caravans and trailers. We also launched value-add products like credit shortfall, car warranty, and scratch and
dent cover. One of our sayings is, you own it, we’ll cover it. We’ve also launched community and business
insurance divisions, and we cover specialised risks like agri and engineering. We opened a kingdom in Namibia
and are looking to expand into Europe soon.’ The company seemed to go from strength to strength.
Overview
An organisation’s strategic direction informs and shapes how it defines itself, and where it finds its unique strategic
advantage. It requires organisations to ask themselves: ‘What is our fundamental purpose?’ An organisation,
therefore, whether developing a new business or reformulating its current business, must determine the basic goals
and values (or philosophies) that will shape its strategic posture. If this is done correctly, it becomes much more than
words on paper – it becomes the heart and soul of the organisation! This chapter considers the tools we use to
determine the strategic direction of an organisation, namely strategic intent, and vision, mission and value
statements. This chapter also introduces another strategic tool, the balanced scorecard. This helps organisations
translate their strategic direction into operational objectives that provide direction for all levels and areas of the
organisation.

3.1 Introduction
In the Opening case study you will not nd any formal statements communicating the company’s strategic direction.
Instead, Gideon Galloway, the founder and CEO, had a vision as clear as daylight – premiums that decrease monthly
and royal service. He realised, however, that initially he had other things to concentrate on before he could set his
vision in motion. In fact, he and his team went, as they call it, ‘underground’ for almost four years to get their ducks
in a row. Before they could open their doors on 2 June 2012, they did extensive research to ensure that their
discounted premium model was sustainable and scalable. e company also developed a highly sophisticated
intelligent risk-rating system and partnered with an established global reinsurance provider. Both elements are key
requirements in a cut-throat insurance industry.
Although Galloway did not articulate these strategic views in well-formulated vision and mission statements, he
never lacked strategic direction as he clearly identi ed and communicated what the business should be about, and
how he planned to achieve his objectives. is clear direction created a central theme that became the basis of all
decisions and actions, i.e. provide insurance that makes sense?
Although this sounds relatively simple, ensuring that the behaviours of diverse people unite around a central
theme is one of the major challenges for top management.6 In this context, the most important tools management
uses to develop and convey strategic direction are strategic intent, vision, mission and value statements.7 It is
important to note that organisations do not necessarily use all these tools. Some combine them and present their
strategic direction as a credo. Others decide to use only some of them. King Price states publicly that it does not like
rules or statements, and expresses its way of doing things as values, as illustrated in the Case example about King
Price later in this chapter. Pick n Pay uses mission and value statements to convey its strategic direction, yet others
use different terminology to describe their strategic directions, for example a purpose statement instead of a mission
statement, or an organisational philosophy rather than organisational values. Regardless of the selection of tools and
terminology used, it is important to determine the strategic direction as the rst step in, and underlying foundation
of, strategic planning.
Both strategic intent and vision contain ‘a conviction to achieve a certain state of affairs in the future’.8 e
difference between a strategic intent and vision is the ‘degree of collectivity’. Strategic intent is considered to be a 10-
to 20-year quest ‘diffused at multiple organisational levels, while a vision statement is more clearly a top
management leadership tool oen ascribed to a single visionary leader’.9 A mission statement, however, re ects on
what an organisation should be to achieve its purpose. e mission statement thus stipulates the nature of the
business, and the customers it seeks to serve and satisfy. Because these statements consider the purpose of the
organisation, they can guide employee behaviour when supplemented by value statements. A value statement
re ects the future standing of the organisation, and typically comprises a set of key values or behaviours to which
employees should subscribe.10 e values espoused in the vision and mission statements, and summarised in the
value statement, can act as a powerful pull for people who identify with them, and can motivate them to perform
passionately. e value congruence between the principles of an organisation and those of its members can
transform ordinary jobs into a mission, giving employees a higher-order meaning.11 To realise the shared
conception of the future, we will introduce the balanced scorecard as a strategic tool to help the organisation deliver
results. e balanced scorecard is a framework used to translate strategic direction into actionable chunks and
nancial and non- nancial measures. As such, scorecards create a shared understanding, consensus and
commitment which are key for successful implementation.12 e discussion below explores these concepts in
greater depth.

3.2 Strategic intent

Hamel and Prahalad13 introduced the concept of strategic intent in 1989 to address different notions of competitive
strategy expressed and practised by Western and Far Eastern organisations. At the time they argued that Western
organisations focused on trimming their ambitions to match their resources and, as a result, searched only for those
advantages they could sustain. ey called this maintaining strategic t. By contrast, Japanese organisations
leveraged resources by accelerating the pace of organisational learning and tried to attain seemingly impossible
goals. To do so, Japanese organisations fostered the desire to succeed among their employees, which they
maintained by spreading the vision of global leadership. ese different approaches created an upset in the global
competitive balance.14
In a quest to understand which approach, i.e. Western or Eastern, was the most successful, Hamel and
Prahalad15 studied organisations across the world that had risen to global leadership. ey observed that these
organisations invariably began with ambitions that were out of proportion with their resources and capabilities.
However, the organisations succeeded by creating an obsession with winning at all levels within the organisation.
Hamel and Prahalad16 termed this obsession ‘strategic intent’. According to these authors, strategic intent envisions
a desired leadership position as well as the criteria to be used to measure progress. At the time, the best-known
examples were Komatsu’s intent to ‘encircle Caterpillar’, Canon’s aim to ‘beat Xerox’, and Honda that set out to
‘become a second Ford’.
Hamel and Prahalad17 also noted that strategic intent was more than an unfettered ambition as it also had to
‘encompass an active management process that includes focusing the organisation’s attention on the essence of
winning, motivating people by communicating the value of the target, leaving room for individual and team
contributions, sustaining enthusiasm by providing new operational de nitions as circumstances change, and using
intent consistently to guide resource allocation’.18 Strategic intent therefore captures the essence of winning, setting
out a 10- to 20-year quest for global leadership.
Given the accelerated pace of change in the contemporary competitive environment, it is virtually impossible to
plan for such a long-term quest. e odds of an organisation reaching a leadership position within its eld
(industry) without having a clear strategic intent are remote. e chance of falling into a leadership position by
accident is, however, also remote. Organisations therefore need a driving force, or strategic intent, that will inform
and shape how they de ne their business, and where they nd their unique strategic advantage. A clear strategic
intent gives managers a central point of departure from ‘which to make decisions about the future of their
organisation and to assess product options and market decisions’.19 is notion also applies to the public sector.
Consider, for example, the South African Vision 2030, which is included below as a Case example.
Organisations, or governments, that lack a clear strategic intent and clear leadership oen face con icting
priorities, wasted resources, indecision, frustration in the workforce, and confusion in the marketplace. ‘When
priorities con ict and scarce resources must be allocated, managers need to know how to make the tough decision.
ey need a touch point which shapes the future and explains the past’.20 Compared to a strategic intent which is a
10- to 20-year quest and diffused at multiple organisational layers, a vision statement is oen ascribed to a single
visionary leader. In the next section, we will consider the content of vision statements and the best practices used to
implement them.

CASE EXAMPLE: South African Vision 2030

The National Development Plan 2030 sets out how to achieve ‘a country that is just, fair, prosperous and
equitable. A country that each and every South African can proudly call home’. Although the plan is based on
extensive research, consultation and engagement, and sets out firm proposals to solve the country’s problems,
the execution remains the responsibility of the elected president.21 This official needs to have a shorter-term
vision for what he or she wants to achieve. Here the strategic intent is as follows:

By 2030:
Eliminate income poverty: Reduce the proportion of households with a monthly income below R419 per
person (in 2009 prices) from 39% to zero.
Reduce inequality: The Gini coefficient should fall from 0.69 to 0.6.22

3.3 Vision statements

Similarly to strategic intent, a vision statement also goes beyond mere planning and strategy by challenging
organisational members to go beyond the status quo in pursuit of a long-term goal. While a vision statement is
similar to strategic intent in its emotional effects, it goes further as it has connotations of encouraging strong
corporate values in the strategic process. ‘e most striking difference between visions and strategic intents is the
degree of collectivity, as many authors ascribe a strategic intent as a phenomenon diffused at multiple organisational
levels, while a vision is more clearly a top management leadership tool, oen ascribed to a single visionary leader.’23
Both strategic intent and vision are important as the theory of reasoned action proposes that people need a
reason for an action. us, if an organisation wants its employees to give their best performance, it should provide
them with a proper reason for doing so. e role of the leader is to set a vision and ensure that people not only see it,
but also live and breathe it in their actions. Such shared purpose could be fostered through a vision statement, which
can serve as a guide to an organisation by providing direction of progress and by indicating the core ideology to be
preserved. e core ideology de nes the enduring character or consistent identity of the organisation, and
comprises the core values and core purpose (reason for being). Vision involves answering questions about the
organisation’s identity such as who it is, where it is going, and what its guiding values are. It is important to note that
for a vision to become a reality it must be communicated and lived.24
Hitt, Ireland, and Hoskisson25 considered a vision to be a picture of what the organisation wants to be and, in
broad terms, what it ultimately wants to achieve. e vision statement should therefore articulate the ideal
description of the organisation and give shape to its intended future. ese authors also emphasised that it is
important for a vision statement to re ect an organisation’s values and aspirations that capture the hearts and minds
of all its employees, and, hopefully, many of its stakeholders. In addition, a vision stretches and challenges people by
motivating staff to contribute to a bigger picture.26 e uniqueness of each organisation determines the content of
its vision statements. Compare, for example, the vision statements of Avis and Coca-Cola presented in the Case
example below.
 CASE EXAMPLE: Vision statements: Illustrating unique approaches
Vision statements illustrate the unique approach of a company. Read the vision statements of Avis and
Coca-Cola below.
Avis: To exceed customer expectations at every interface27

Coca-Cola: 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, enduring value.
Planet: Be a responsible citizen that makes a difference by helping build and support sustainable
communities.
Profit: Maximise long-term return to shareowners while being mindful of our overall responsibilities.
Productivity: Be a highly effective, lean and fast-moving organisation.28

Although the vision statements of Avis and Coca-Cola differ in terms of length and scope of content, both seem to
adhere to the requirements set for visions, and con rm that each organisation requires a unique approach. e
discussion below focuses on different approaches used to develop a vision statement, the attributes and content of
vision statements, and how to implement them.

3.3.1 The visionary process

ere is much disagreement about the process an organisation should use to develop a vision statement. Some argue
that a vision is developed, while others maintain that it exists in the organisation and should be discovered.29
Regardless of the process followed when developing a vision statement, it is important to point out that setting the
vision is a creative process. e implication of this, of course, is that it is not possible to judge a particular vision as
right or wrong. Just as one cannot suggest that Shakespeare wrote the wrong Macbeth or that Queen composed the
wrong ‘We will rock you’, one cannot say that Eskom’s vision is ‘wrong’. While one may not like a particular vision
statement, all that really matters is whether it works for the organisation or not.
It is the responsibility of the organisation’s most important and prominent strategic leader (in most cases the
CEO) to develop a vision. Experience shows, however, that the most effective vision statement results when the CEO
involves a host of people to develop it, and when the statement is clearly tied to the conditions in the organisation’s
external and internal environment.30 A comprehensive literature review conducted by Foster and Akdere31 on this
topic revealed three basic approaches applied to develop a vision, namely the intuitive approach, the analytical
approach and the benchmark approach.
e intuitive approach is based primarily on structured introspection. e resultant visions can take many
different shapes due to differences in leaders and in leadership styles.
e analytical approach focuses on gathering information from various individuals about the direction of the
organisation. Owing to the complexity of individual perceptions, this participative approach requires strong
leadership in the process, and in the promotion and support of that vision.
Finally, the benchmark approach looks to the competition for standards, and creates a vision based on subsequent
ndings.32
3.3.2 The vision content
e attainment of a vision requires a certain level of unreasonable con dence and commitment. is is called
strategic stretch. As Collins and Porras33 emphasised that the foretold future should produce some sense of caution
and concern. is will be more evident when future activity unfolds and people realise what what to be done in
order to accomplish the goal.34 e content should thus support such a challenge.
Considering the format of the vision statement, Foster and Akdere35 provided some useful guidelines pertaining
to the attributes associated with and the proposed content of visions. First, the authors identi ed attributes
necessary for a vision to be effective. ese are brevity; clarity; abstractness; challenge; future orientation; focus;
understandability to all employees; stability; and the ability to inspire. Second, the authors researched the content
that explicitly describes what should be included in a vision. Results revealed that most authors identi ed the
organisation’s core ideology or philosophy as well as the organisation’s values to be key ingredients in vision
statements. Other descriptors associated with vision statements included action orientated; responsive to
competition; long term; purposeful; bottom-line orientated; setting audacious or ambitious goals or challenges;
product of leadership; focused; strategic; exible; and planned.36
A vision statement should be short and concise so that stakeholders can relate to it and use it to direct daily
decisions.

3.3.3 Vision implementation

In some organisations, a vision statement might grace the walls of the boardroom, or it might appear on websites
and in marketing material, but it fails to capture the hearts and minds of employees. ‘As is true for any plan, if vision
does not take on meaning for individuals and the organisation as a whole, it isn’t worth the time spent craing it.’37
Successful ‘implementation requires either an extremely clear and meaningful vision, or someone who can decode
or translate the vision into meaningful parts’.38 Without such clarity and the required leadership, a vision is indeed a
daydream, and the nightmare starts when undirected actions result in poor performance.
As a vision statement gives people a sense of meaning in their work, leaders should aim to make people excited
about their view of the future while inviting others to help crystallise that image. ‘If they realise other people aren’t
joining in or buying into the vision, they don’t just turn up the volume; they engage in a dialogue about the reality
they hope to produce. ey use stories and metaphors to paint a vivid picture of what the vision will accomplish,
even if they don’t have a comprehensive plan for getting there. ey know that if the vision is credible and
compelling enough, others will generate ideas to advance it.’39 Leaders who excel in visioning are said to ‘walk the
talk’ – their own behaviour and conduct should therefore embody the core values and ideas contained in the vision
statement.40
It is also important never to underestimate the power of a vision. It is so easy for those who are intimately
involved with the ‘hard’ aspects of the business, such as engineers and accountants, to denigrate its ‘so’ aspects,
such as people management and visions, without realising the potential effect of clear vision.
Finally, organisations must also be careful of the ‘We have arrived!’ syndrome.41 Visions are expected to be
achieved, and by the time this happens, the next vision should have been timeously set. Failure to do so will result in
complacent lethargy because a vision is the energising force of any organisation. It is also important to emphasise
that a vision is not a magic potion. All it does is provide the context for awakening the dynamism that exists in any
organisation. Building a visionary organisation requires 1% vision and 99% alignment. Notwithstanding the
importance of vision and the fact that it is the rst indispensable step of strategic management, its impact will be
negligible unless the rest of the organisation is closely aligned to and supportive of it.
 e Strategy in action feature below about Samsung shares some insights on the importance of a clear vision in
an industry where the only constant is change.

STRATEGY IN ACTION: Samsung – a clear strategic direction42

You may ask yourself if all organisations require a clear strategic direction. What about organisations building
their competitive advantage on digital success? In these organisations it seems that technology may be the key
driver to success, so which would be more important: innovation or strategy?
The 2015 Digital Business Global Executive Study and Research Project by MIT Sloan Management Review
and Deloitte identifies strategy as the key driver in the digital arena. Findings from this study indicate that
‘maturing digital businesses are focused on integrating digital technologies, such as social, mobile, analytics and
cloud, in the service of transforming how their businesses work’. This study also suggests that the ability to
digitally reimagine the business is determined in large part by a clear strategy supported by leaders who foster a
culture able to change and invent the new.43
Let us consider Samsung, a world leader in consumer electronics, information technology, mobile
communication and device solutions. This company’s success is built on being able to reinvent itself through
innovation. At the centre of its operations is a clear strategic direction and guiding philosophy.
‘The Vision 2020 is at the core of our commitment to create a better world full of richer digital experiences,
through innovative technology and products.
The goal of the vision is to become a beloved brand, an innovative company, and an admired company. For
this, we dedicate our efforts to creativity and innovation, shared value with our partners, and our great people.
We have delivered world best products and services through passion for innovation and optimal operation.
We look forward to exploring new business areas such as healthcare and automotive electronics, and
continue our journey through history of innovation.
Samsung Electronics will welcome new challenges and opportunities with joy.’

Questions
 Consider Samsung’s vision. What do you think are the core values and purpose expressed through this vision
1. (core ideology)?
2. Do you think the company’s core ideology can shape its intended future? Motivate your answer.
3. How is the core ideology of Samsung expressed in the vision statement?

In the discussion below, we consider how a vision statement relates to a mission statement, their similarities and
differences, and how they provide a basis for an organisation’s strategy-making process.

3.4 Mission statements

Since the inception of business management as a discipline, scholars have emphasised the importance of
formulating a mission statement as one of the fundamental steps in the strategic management process.44 A vision
statement forms the foundation for an organisation’s mission statement, and tends to be enduring, while an
organisation’s mission statement can change in light of changing environmental conditions.45 is makes a mission
statement in the current business environment even more important as detailed formal planning is oen considered
to be problematic in a dynamic and turbulent competitive environment, given that these plans are based on
uncertain forecasts. A clearly de ned mission statement can give executives the necessary direction to develop
strategies in line with changing trends in the form of ‘real-time planning’.46 A mission statement is thus more
concrete than a vision statement, but, similar to a vision statement, it should also establish the organisation’s
individuality, and should be inspiring and relevant to all stakeholders. Together, the vision and mission statements
provide the foundation the organisation needs to choose and implement its strategies.47
Many people throughout the organisation representing different salary levels and stakeholders are usually
involved in the development of the mission statement. Although it is recommended that just a few people who are
part of the mission committee or team be involved in the actual writing of the statement, an organisation should
encourage all stakeholders to give input and review dras. If the organisation follows this process, then everyone has
an opportunity to contribute and feel as though they had a voice in the statement’s creation.48, 49 e sections that
follow will consider the formulation of mission statements.

3.4.1 Formulating a mission statement

According to a popular American folk legend, a reporter once asked Abraham Lincoln how long a man’s legs should
be. Lincoln replied that they should be long enough to reach the ground. is is also true for a mission statement.50
Although there is much speculation about the length of such a statement, there is really no clear answer. All that
is required is for the statement to convey a clear message in order to reach the target audience. For some
organisations, a single sentence is sufficient whilst others produce lengthy documents that include vision statements,
values, philosophies, objectives, plans and strategies in supporting roles.51 Best practice suggests that a statement
should be long enough to describe an organisation’s objectives in adequate detail, and short enough so that
stakeholders can read, understand and use it. In general, the aim should be for a statement to t on one page. It is,
however, not necessary, as some suggest, for it to be short enough for everyone to memorise and recite it.52
A good mission statement should describe the fundamental objectives of the business and should include what
people variously refer to as guiding principles, credos or corporate philosophies.53 Typically, a mission statement
answers one or more of the following questions:54
Why is this organisation in business? e business activity is an indispensable component of a mission statement.
It comprises an organisation’s basic product or service, the primary market it serves, and the principal technology
used for production or delivery.55 You would typically nd that smaller or less diversi ed organisations would
formulate their mission statements around business activities. More global brands that represent a range of
diverse products and/or services would nd it more challenging to de ne their business activities within the
scope of a mission statement. Some global brands simply go back to the basics. Consider the mission statement of
Google as an example: ‘Organise the world’s information and make it universally accessible and useful’.56 On the
surface, this statement appears to be simplistic, but it clearly expresses the purpose of the company.
What are our economic goals? ree economic goals, namely survival, growth and pro tability, guide the strategic
direction of almost every organisation. e mission statement, either implicitly or explicitly, re ects the
organisation’s intention to secure survival through growth and pro tability. e mission statement of e Walt
Disney Company is ‘to entertain, inform and inspire people around the globe through the power of unparalleled
storytelling, re ecting iconic brands, creative minds and innovative technologies that make ours the world’s
premier entertainment company.’57 is statement explicitly indicates that the company seeks to offer ‘pro table
experiences’.
What is our operating philosophy in terms of quality, organisational image and self-concept? Operating philosophy
in terms of quality considers an organisation’s stance towards excellence. Organisational image and self-concept
relate to an organisation’s ‘personality’. is organisational personality extends to the personalities of its members
when guiding staff behaviour during working hours. In most cases, ‘the organisation’s self-concept per se does
not appear in mission statements. Yet such statements oen provide strong impressions of the organisation self-
concept’.58 e Walt Disney Company’s mission statement clearly expresses its stance towards excellence, i.e ‘to
entertain, inform and inspire people around the globe through the power of unparalleled storytelling, re ecting
iconic brands, creative minds and innovative technologies that make ours the world’s premier entertainment
company’.59 Coca-Cola’s mission statement clearly indicates their self-concept of making a difference, i.e:
» To refresh the world …
» To inspire moments of optimism and happiness …
» To create value and make a difference.60
What are our core competencies and competitive advantage? Mission statements may be used to position
organisations in terms of value offered, such as cost or differentiation. An example of an organisation that
conveys its core competencies in its mission statement is PEP. eir mission statement is: ‘We are the friendliest
and most trusted retailer, offering wanted products and services at the lowest prices’.61
What customers do and can we serve? Speci c target markets may be included in the mission statement. If you
review the examples listed in the Case example box on page 88, you will note that global brands typically
consider customers beyond borders and industries. Other mission statements are quite concise to convey a
speci c target market. Consider, for example, the mission statement of First Descents: ‘First Descents provides
life-changing outdoor adventures for young adults (aged 18–39) impacted by cancer’.62
How do we view our responsibilities to shareholders, employees, communities, the environment, social issues and
competitors? Mission statements frequently include primary stakeholder groups (i.e. customers, employees and
the community), communicate the organisation’s social responsibility, and emphasise the organisation’s
commitment to stakeholders.63 Microso’s mission statement conveys quite an ambitious responsibility: ‘Our
mission is to empower every person and every organisation on the planet to achieve more’.64
Analysing 798 mission statements across industries, Allison found that statements could be grouped into three
categories.65 ose statements concentrating on a product or service being provided by an organisation fell within
the producer category. Mission statements that emphasise working with customers to provide mutually bene cial
solutions and experiences were classi ed in the partner category. Lastly, the promotor category contained statements
that suggest that the organisation not only works with the client or customer, but also seeks to improve the quality of
life.66 We will consider the content of the mission statements of ve of the top global brands in the Case example on
the next page.
It is interesting to note that these matured brands mostly use shorter statements. e content differed for each
organisation and either focused on the business activity or conveyed an ambitious aspiration with a global impact.
e next section considers how South African organisations utilise vision and mission statements.

3.4.2 Adoption and practice of vision and mission statements in the

South African business environment
Van der Walt, Kroon and Fourie67 found that ‘very little research’ has been done in South Africa on the importance
and application of vision and mission statements. As a result, they conducted an exploratory study to determine to
what extent small, medium and large businesses in South Africa have existing vision and mission statements, as well
as the role thereof in the organisation. Although this study was conducted in 2004 and limited to manufacturing
businesses in the greater Pretoria area, it still provides valuable insight indicating tendencies regarding the role of
vision and mission statements in manufacturing businesses. Results revealed the following:68
Most of the respondents indicated that their business had both mission and vision statements (90% of the
respondents) or that they were in the process of formulating them (5% of the respondents).
‘e vision and mission statements of the businesses in this study were relatively short, and in most cases one
paragraph’.69
e vision and mission statements were generally not older than ve years, indicating continuous renewal.
It appeared that vision and mission statements were used as a strategic planning tool. In most cases, respondents
used these tools to assist in strategy formulation, the formulation of goals and objectives, and in strategy
implementation.

e next section takes a closer look at value statements and how they relate to mission statements.

CASE EXAMPLE: Mission statements: Considering the content from top global
brands
3.5 Value statements
A value statement or statement of an organisation’s philosophy or creed usually accompanies or appears in the
mission statement. ‘It re ects or speci es the basic beliefs, values, aspirations, and philosophical priorities to which
strategic decision-makers are committed in managing the organisation’.70 Given the diverse backgrounds of
members of staff, it is important to agree on a set of values that will guide staff behaviour during working hours.
ese values should then be internalised and used as decision criteria. When people share the same values, this
builds quality in the organisation, and if such ‘values are agreed upon, it does away with the need to monitor and
control’.71 e importance of organisational values is discussed in Chapter 13 (section 13.3.8.3) where it is noted
that organisation’s values may contribute signi cantly to its success.

CASE EXAMPLE: King Price: Our flawsome family and the values we live by72
King Price, like many other organisations, opted not to have formal statements but rather express who they
are and what they intend to achieve through the organisation’s values. They consider staff members to be
part of their family. To guide them, they recognise that rules could help. However, if you read the Opening
case study, you would have realised that they do not like rules and hence prefer the term ‘values’. That said,
they take these rules very seriously and consider them to be more than ‘just a bunch of words’. At King Price,
their values serve as a ‘guide to loving what we do and doing what we love’. Note the tone of how each value
is described in the following graphic.73 This informal, playful description expresses the essence of the
organisational culture.

Yeah, yeah… Everyone says this. We believe that a fun workplace = We don’t think that anyone ever
But we believe it and we live it. We a happy workplace, and that made a difference by playing it
treat all our clients like royalty … happy staff = happy clients. It’s safe. So, we encourage our staff
Because you are. We started off by that simple! Look, we work really to find new and better ways to do,
promising royal service and we (really, really) hard but, if we’re not well, pretty much everything! And
delivered. Really, we’ve won stuff for having fun while we’re doing it, the rewards are real. For them, for
our royal service. We take service we’re doing something wrong. us, and for you… Because
seriously. Your wish is our Because smiles are contagious… everything we do differently means
command. And we really want to make you better cover and bigger savings for
smile. you.

We look after our cents so that we We aren’t just another insurance We like our people the same way
can pass real Rand savings on to company… We’re a family. A you like your royal savings …
our clients. We’re efficient, we find bright, talented, passionate, Real. We wouldn’t have hired them
 solutions fast, and we do things committed, happy family. We put if we didn’t think they’re all special
right the first time round. We our heads, hands and hearts to start with … But mostly, we love
innovate, we improve, we adapt. together and make things happen. them because they’re one-of-a-
And we don’t waste talent or time… We’ve even heard it said that we kind. We do all we can to ensure
Because it all adds up to us being make magic happen… But we that they like what they see when
the king of price. don’t really like to boast. they look in the mirror… Because
we sure do!

Our business is insurance but

we’re also in the business of
making a difference. We don’t just
do it for profit. We are here to
change the world… For our
clients, our country and our staff.
We are all about paying it forward.
We are here to leave a legacy…
And have fun while we do it.

e value statement needs to clearly state how managers and employees should conduct themselves. It should also
provide guidelines as to how business is done in the organisation and paint a picture about the kind of organisation
that is needed to realise the vision and mission. ‘Insofar as they help drive and shape behavior within a company,
values are commonly seen as the bedrock of a company’s organisational culture: the set of values, norms, and
standards that control how employees work to achieve an organisation’s mission and goals’.74 e Case example
above illustrates King Price’s organisational approach to guide behaviours.
e discussion above focused on the tools an organisation uses, namely strategic intent, and vision, mission and
value statements, to achieve its strategic direction. We will now discuss the bene ts that a clear strategic direction
holds for an organisation, and the challenges involved in using these tools to create a clear strategic direction.

3.6 Benefits of clear strategic direction

Literature on vision and mission statements amply demonstrates the value of vision and other guiding principles.
e bene ts of a clear strategic direction as encapsulated by vision and mission statements are summarised as
follows:75, 76, 77, 78
It guides human behaviour and de nes working relationships.
It helps to shape employee relationships with each other and the external public or stakeholders, especially with
customers.
It can lead to better performance by aiding strategy formulation and implementation.
It serves as a benchmark for resource allocation.
 It creates con dence that the intended strategies will not compromise the interests of the various stakeholder
groups in the organisation.
It can inspire employees throughout the organisation and remind them of the purpose of the organisation and
each individual’s role in achieving its goals.

3.7 Challenges of creating a clear strategic direction

A contrarian belief holds that vision and mission statements have little tangible value. is school of thought argues
that vision and mission statements are nothing more than a fad and an attempt at window dressing. In some
instances, this is true if:79
the vision and mission statements are not accompanied by corresponding manager behaviour
the articulated thoughts are not communicated to stakeholders and there is lack of buy-in
the statements do not produce results unless coupled with an overall strategic education process.

To address these challenges, strategic direction should be translated into operational objectives that enable all
members of staff to understand their role in the bigger picture. is is discussed below.

3.8 Translating strategic direction into operational terms

It is oen difficult to translate strategic direction into operational terms that provide useful guidelines at an
operational level. Loy statements about becoming ‘best in class’ or being an ‘empowered organisation’ make
impressive reading material, but employees may nd it difficult to translate them into operational terms. For people
to embrace and act on the words in vision, mission and value statements, those statements should be expressed and
communicated as an integrated set of objectives and measures that describe the long-term drivers of success.80
ese objectives need to set clear guidelines and identify the individuals who will be responsible to implement the
strategies. In addition, it is necessary to state by what time the work needs to be completed as well as the resources
required to do it. Well-stated objectives are thus quanti able, or measurable, and contain a deadline for
achievement. In reality, the aspects required to be addressed in objectives will be determined by the way in which
the strategies have been developed, as reviewed in Chapter 1. In this sense, the strategy development phase and the
strategy implementation phase are interconnected.81
In essence, the managerial purpose of setting objectives is to convert the strategic direction into speci c
performance targets. ese targets could relate to nancial or strategic objectives, and time periods associated with
the delivery of performance could be short-term or long-term. Financial objectives communicate management’s
targets for nancial performance such as revenue growth, pro tability or return on investment. Financial
performance measures are oen lagging indicators that re ect the results of previous strategic and operational
decisions. In comparison, strategic objectives essentially relate to how an organisation envisages creating a
sustainable competitive advantage and also deals with the future marketing standing. Strategic outcomes are leading
indicators and project a company’s future nancial performance and business prospects. e accomplishment of
strategic objectives signals the company is well positioned to sustain or improve its performance.82
It is important to strike an optimum balance between nancial and strategic objectives to ensure both survival
and pro tability in the long term. Organisations oen use the balanced scorecard (discussed below) as a means of
translating strategic direction into operational objectives that deal with survival, growth and pro tability.

3.9 Balanced scorecard

A balanced scorecard is a strategic management tool that is useful for guiding, controlling and challenging an
organisation towards realising a shared conception of the future. Kaplan and Norton developed the balanced
scorecard in the early 1990s to extend the primary focus on short-term nancial performance to include long-term
strategic dimensions that deal with delivering results. e balanced scorecard enables organisations to achieve an
integrated, aligned and balanced focus on four perspectives that collectively underpin the achievement of the
organisational vision.83 ese perspectives are the following:84, 85
Financial perspective: is perspective is based on nancial performance that provides the ultimate de nition of
an organisation’s success. As it is the objective of every organisation to deliver maximum value to stakeholders,
the question asked here is: ‘How do we appear to our stakeholders?’
Customer perspective: To survive and grow, organisations must be able to deliver quality goods and/or services
that will satisfy customers’ needs. e question asked is: ‘How do we appear to our customers?’ Indicators of
customer success include measures such as satisfaction, retention and growth.
Internal business processes: e question here is: ‘What must we excel at?’
Identifying the key business processes at which an organisation must excel to meet strategic goals and customer
expectations can lead to subsequent improvements in customer and nancial outcomes.
Learning and growth perspectives: Learning and growth perspectives describe how people, technology and the
organisational climate can be combined to support the strategy. is perspective focuses on the root causes of
competitive sustainability, and asks the question: ‘How can we continue to improve and create value?’

ese perspectives offer a balance between nancial and non- nancial measures used to develop a framework and a
focus for many critical management decisions. e application of this tool is thus useful throughout the strategic
management process. During the planning phase, the balance scorecard is used to align strategic direction with
long-term objectives that express the organisation’s desired business strategy. e tool is used during the
implementation phase to set departmental and individual goals; to communicate the strategy throughout the
business; for business planning; to allocate capital; and to identify strategic initiatives.86 Finally, the tool is used
during the control phase to measure whether objectives were achieved and to provide feedback and learning. e
discussion to follow considers the development of the scorecard, and focuses on the processes used to align strategic
direction with short-term actions required during the implementation phase. Chapter 14 expands on this concept to
provide an overview of how an organisation can use the balanced scorecard to measure performance.
To capture the organisation’s desired business strategy, the balanced scorecard uses four processes, namely
clarifying and translating the vision into strategy; communicating and linking strategic objectives and measures;
planning, setting targets and aligning strategic initiatives; and enhancing strategic feedback and learning.87

3.9.1 Clarifying and translating vision into strategy

A gap oen exists between the vision and mission statements and employees’ knowing how their day-to-day actions
could contribute to realising the organisation’s strategy. Senior executives may also agree on the words used to
express the strategic statements, yet each person may interpret the terminology differently. For example, if you were
to ask four executives to de ne superior service, you are likely to receive four different de nitions. is difference of
opinion escalates when you repeat the exercise with lower management.88 Translating the vision into a set of
objectives and measures helps managers build consensus on the organisation’s vision and strategy.
e perspectives of the balanced scorecard require the executives to clarify the meaning of the strategy statement
by developing operational measures for the four scorecard perspectives, i.e. nancial, customers, internal business
processes, and learning and growth. e executives must state in speci c terms the ‘de nition of success’ in each of
these areas as well as their relative importance weightings. e translation of their vision into terms that have
meaning to the employees who must realise the strategy will enable the employees to embrace these requirements in
their day-to-day activities.89 In addition, the scorecard also highlights gaps in employees’ skills and other resources
required to pursue long-term objectives.90 See the Case example on page 95 for an illustration of a typical balanced
scorecard suitable for a bank. is scorecard should be read from right to le to understand the means employed to
reach the desired end goal.

3.9.2 Communicating and linking strategic objectives and measures

e second process, communicating and linking, allows managers to communicate their strategy throughout the
organisation, and to link it to departmental and individual objectives. To do this, scorecard users generally engage in
three activities, namely communicating and educating, setting goals and linking rewards to performance
measures.91

CASE EXAMPLE: The Balanced Scorecard Institute

The Balanced Scorecard Institute (BSI) provides comprehensive resources online that include examples of
scorecards, articles and videos. The company also provides consulting and training for this tool. You can view
examples of how organisations, governments and non-profit organisations worldwide developed their own
scorecards at: http://www.balancedscorecard.org/BSC-Basics/Examples-Success-Stories

To implement a strategy successfully, it is essential to communicate with and educate the employees who have to
execute it. e management team can use a broad-based communication programme to share the strategy with all
employees, as well as the critical objectives they have to meet if they want to implement the strategy successfully.
Mere awareness of corporate goals is, however, not enough to change many people’s behaviour. High-level strategic
objectives and measures must be translated into objectives and measures for operating units and individuals. To
accommodate this, the scorecard contains three levels of information.
e rst level describes corporate objectives, measures and targets.
e second level allows corporate targets to be translated into targets for each business unit.
e third level converts business units and corporate objectives to individual and team objectives that set targets
for each measure and allow up to ve performance measures per objective.92

e balanced scorecard approach links employee rewards to performance in all four areas, with suitable weightings
applied to re ect the relative importance of each one.93

3.9.3 Planning, setting targets and aligning strategic initiatives

Many organisations have separate procedures and organisational units for strategic planning, resource allocation
and budgeting. Oen, senior management is responsible for formulating the strategic plan, while the nancial
department conducts a separate resource allocation and budgeting process to set nancial targets for revenues,
expenses, pro ts and investments for the next scal year. e result is that the budget produced generally bears little
relation to the targets in the strategic plan, resulting in con icting priorities and reporting. A balanced scorecard
forces an organisation to integrate its strategic planning and budgeting processes, and therefore helps to ensure that
the budgets support its strategies. Building a scorecard thus enables an organisation to link its nancial budgets with
its strategic goals. e scorecard measures can also be used as the basis for allocating resources and setting priorities
by prioritising initiatives according to their contribution towards the long-term strategic objectives.94
3.9.4 Enhancing strategic feedback and learning
In the contemporary business environment, strategies may lose their validity as business conditions change.
However, if management systems are built on the principles of a balanced scorecard, organisations can monitor
short-term results from four different perspectives to evaluate strategies in the light of recent performance.95 ‘e
scorecard thus enables companies to modify strategies to re ect real-time learning’.96 Feedback and learning oen
stimulate executives to learn about the vitality of their strategy, resulting in what we call strategic learning. Strategic
learning occurs when feedback is used to test the assumptions on which the strategy was based. Executives then use
the ndings to make the necessary adjustments. e balanced scorecard therefore ‘provides a framework for
managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in
the organisation’s competitive, market and technological environments’.97

CASE EXAMPLE: Standard Bank: Example of a balanced scorecard98

Figure 3.1 Standard Bank’s balanced scorecard

3.10 Summary
is chapter looked at the strategic tools organisations employ to set their strategic direction. e tools considered
in this chapter include strategic intent, vision statements, mission statements, value statements and balanced
scorecards. Setting the strategic direction is an important rst step in strategic planning and management as it
informs and shapes how an organisation de nes itself, and where it nds its unique strategic advantage. By creating
a ‘bigger picture’, it also motivates and challenges organisational members to go beyond the status quo in pursuit of a
long-term quest.
e process of creating strategic direction is a creative process. Although various guidelines exist, organisations
generally apply an individual approach suited to their operational requirements. e strategic leader plays an
important role in setting the strategic direction, and is responsible for generating excitement about the future of the
organisation and for inviting organisational members to help crystallise that vision. Leaders are expected to walk the
talk, and their behaviour and conduct should embody the core values of the organisation. Finally, the executive team
should communicate the strategic direction to all stakeholders. Statements should be clear or, alternatively, be
decoded or translated into meaningful parts. Organisations can do this by applying the balanced scorecard tool.

REFLECTION BOX:

If someone asks you for directions, what use would a map be without the coordinates of the starting point or
destination? A clear strategic direction provides the coordinates that are required to reach a destination. The
mission is the starting point and the vision the destination. The itinerary and route are determined by the
strategic intent, and the group of travellers are described by the value statement. Similar to a traveller,
companies will get lost if they do not have the tools to navigate their movements.

Opening case study questions

1. How did the vision of King Price shape the strategic actions of the company?
2. Comment on the alignment between the company’s name, the vision of the founder and the business model.
3. Why is the development of a clear strategic direction important for the future success of an organisation?

Discussion questions
1. Explain why strategic intent might be regarded as the rst indispensable step in the strategic planning or
management process.
2. Expound on the similarities and differences between strategic intent and vision statements.
3. Discuss the key elements of a mission statement.
4. Distinguish between strategic and nancial objectives, and comment on why it is important to develop both
types of objectives to achieve long-term survival and pro tability.
5. Explain the role of the balanced scorecard in setting strategic direction.
6. Explain the link between an organisation’s strategic direction and its strategy.
7. How can strategic direction be translated into operational terms?

Using knowledge and skills

Use your critical abilities to analyse the strategic direction of any three listed organisations operating in the same
industry. Comment on the following aspects:
1. Which tools are used to convey strategic direction?
2. Describe the essence of each company’s strategic direction.
3. Compare the length and scope of each statement used to support the strategic direction.
4. Summarise the key differences between the selected companies, and indicate which approach you prefer.
Motivate why you prefer the selected approach.
Further reading
Akkermans, H.A. & Van Oorschot, K.E. 2018. Relevance assumed: A case study of balanced scorecard development
using system dynamics. System Dynamics, 107–132. Palgrave Macmillan, London.
Hamel, G. & Prahalad, C.K. 2005. Strategic intent. Harvard Business Review, 83(7):148–161.
Kaplan, R.S. & Norton, D.P. 2007. Using the balanced scorecard as a strategic management system. Harvard Business
Review, 85(7/8):150–161.
Sidhu, J. 2003. Mission statements: Is it time to shelve them? European Management Journal, 21(4):439–446.
Verma, H. 2009. Mission statements: A study of intent and in uence. Journal of Services Research, 9(2):153–172.
Kirkpatrick, S.A. 2017. Toward a grounded theory: A qualitative study of vision statement development. Journal of
Management Policy and Practice, 18(1):87–101.

Suggested websites
About.Com Human Resources (http://humanresources.about.com/od/success/qt/values_s7.htm) – Read more about
how to identify and live your personal values.
HubSpot (https://offers.hubspot.com/de ne-mission-and-vision-statements?hubs_post-
cta=author&hubs_post=blog.hubspot.com/marketing/inspiring-company-mission-
statements&_ga=2.12108787.69083938.1534404841-2030258184.1534404841) – Free online course that teaches
you how to de ne inspiring mission and vision statements.
Mission statements.com (http://www.missionstatements.com/) – Ideas and inspiration for de ning your own
mission statement.
SmartDraw Communicate Visually (http://www.smartdraw.com/specials/ppc/balanced-scorecard-soware.htm?
id=62353&gclid=CL3UxZjjj6ACFUYB4wodiSdYdA) – Create a balanced scorecard, or any other type of business
graphic, in minutes with SmartDraw.
Vision Statements (http://www.samples-help.org.uk/mission-statements/vision-statements.htm) – A resource centre
with all the need-to-know information about vision statements.
e Balanced Scorecard Institute (BSI) (http://www.balancedscorecard.org/BSC-Basics/Examples-Success-Stories) –
e BSI provides comprehensive resources online that include examples of scorecards, articles and videos. e
company also provides consulting and training on this tool. You can view examples of how organisations,
governments and non-pro t organisations worldwide developed their own scorecards.

References and endnotes

1. King Price Insurance. 2018. King Price Insurance. [Online]. Available: https://www.kingprice.co.za/car-
insurance/online-quote?kpcid=70002&gclid=CODg75Kh2LUCFeXKtAodGU8AEQ [Accessed 11 April
2018].
2. Barry, H. 2014. Insurers are in ating premiums says King Price. Moneyweb. 12 March. [Online]. Available:
https://www.moneyweb.co.za/archive/insurers-are-in ating-premiums-says-king-price/ [Accessed 8 April
2018].
3. King Price. 2018. Once upon a time. [Online]. Available: https://www.kingprice.co.za/about/Index/ [Accessed
8 April 2018].
4. King Price. 2018. Our award-winning royal service. [Online]. Available:
https://www.kingprice.co.za/about/awards/ [Accessed 8 April 2018].
5. Artemis. 2018. Munich Re refocusing on risk + tech + experience? [Online]. Available:
http://www.artemis.bm/blog/2018/06/21/munich-re-refocusing-on-risk-tech-experience/ [Accessed 5 August
2018].
 6. Verma, H.V. 2009. Mission statements: A study of intent and in uence. Journal of Services Research, 9(2): 153.
7. Ibid.: 153.
8. Mantere, S. & Sillince, J.A.A. 2007. Strategic intent as a rhetorical device. Scandinavian Journal of
Management, 23(4):407.
9. Ibid.: 408.
10. ompson, J. & Martin, F. 2010. Strategic management: Awareness and change. 6th ed. London: omson.
11. Verma. 2009. Op. cit.: 153.
12. Tyler, N. 2015. Why great SA business strategies fail to deliver. 11 September. Business Report. [Online].
Available: https://www.iol.co.za/business-report/opinion/why-great-sa-business-strategies-fail-to-deliver-
1914281 [Accessed 16 August 2018].
13. Hamel, G. & Prahalad, C.K. 2005. Strategic intent. Harvard Business Review, 83(7):148–161
14. Ibid.
15. Ibid.
16. Ibid.
17. Ibid.
18. Ibid.: 150.
19. Ice, J. 2007. Strategic intent: A key to business strategy development and culture change. Organization
Development Journal, 25(4):169–175, 170.
20. Ice. 2007. Op.cit.: 171.
21. National Planning Commission. 2012. National Development Plan 2030: Our future — make it work.
[Online]. Available: https://www.gov.za/sites/default/ les/Executive%20Summary-NDP%202030%20-
%20Our%20future%20-%20make%20it%20work.pdf [Accessed 9 April 2018].
22. Ibid.
23. Mantere & Sillince. 2007. Op. cit.: 408.
24. Verma. 2009. Op. cit.
25. Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2016. Strategic management: Competitiveness and globalization.
12th ed. Boston: Cengage Learning. 18.
26. Ibid.
27. Avis. 2018. Avis vision and values. [Online]. Available: https://www.avis.co.za/about-avis/visions-and-values
[9 April 2018]
28. Coca-Cola Company. 2018. Our company: Mission, vision & values. [Online]. Available: http://www.coca-
colacompany.com/our-company/mission-vision-values [Accessed 9 April 2018]
29. Foster, R.D. & Akdere, M. 2007. Effective organizational vision: Implications for human resource
development. Journal of European Industrial Training, 31(2): 100–111.
30. Hitt et al. 2016. Op. cit.
31. Foster & Akdere. 2007. Op. cit.
32. Ibid.
33. Collins, J.C. & Porras, J.I. 1996. Building your company’s vision. Harvard Business Review, 74(5):65–77, 73.
34. Ibid.
35. Foster & Akdere. 2007. Op. cit.
36. Ibid.
37. Ibid.: 107.
38. Ibid.
39. Ancona, D., Malone, T.W., Orlikowski, W.J. & Senge, P.M. 2007. In praise of the incomplete leader. Harvard
Business Review, 85(2):92–100, 96.
40. Ibid.
41. Collins & Porras. 1996. Op. cit.
42. Samsung. 2018. Vision 2020. What we believe. [Online] Available:
https://www.samsung.com/us/aboutsamsung/vision/vision2020/ [Accessed 10 April 2018]
43. Kane, G.C., Palmer, D., Phillips, A.N. Kiron, D & Buckley, N. 2015. Strategy not Technology, Drives Digital
Transformation Becoming a Digitally Mature Enterprise. MIT Sloan Management Review. [Online]. Available.
https://sloanreview.mit.edu/projects/strategy-drives-digital-transformation [Accessed 10 April 2018].
44. Sidhu, J. 2003. Mission statements: Is it time to shelve them? European Management Journal, 21(4):439–446.
45. Hitt et al. 2016. Op. cit.
46. ompson & Martin. 2010. Op. cit.
47. Hitt et al. 2016. Op. cit.
48. Abrahams, J. 2007. 101 Mission statements from top companies. Berkley: Top Speed Press.
49. Krattenmaker, T. 2002. Write a mission statement that your company is willing to live. Harvard Management
Communication Letter, March:3–5.
50. Abrahams. 2007. Op. cit.
51. Ibid.: 6.
52. Krattenmaker. 2002. Op. cit.
53. Ibid.: 3.
54. Pearce, J.A. & Robinson, R.B. 2009. Formulation, implementation and control of competitive strategy. 11th ed.
Boston, MA: McGraw-Hill/Irwin.
55. Pearce & Robinson. 2009. Op. cit.
56. Google. 2018. Our Company. [Online] Available: https://www.google.com/about/our-company/ [Accessed 11
April 2018].
57. e Walt Disney Company. 2019. e Walt Disney Company. [Online]. Available.
https://disneycompanypro le.weebly.com [Accessed 11 April 2019].
58. Ibid.: 32.
59. e Walt Disney Company. 2019. Op. cit.
60. Coca-Cola. 2018. Our company: mission, vision, values. [Online]. Available: http://www.coca-
colacompany.com/our-company/mission-vision-values [Accessed 11 April 2018].
61. PEP. 2018. PEP Facts. [Online]. Available: https://www.pepstores.com/page/ nd-out-more/pep-facts
[Accessed 14 August 2018].
62. Classy. 2018. 10 killer nonpro t mission statements to learn from. [Online]. Available:
https://www.classy.org/blog/10-killer-nonpro t-mission-statements-to-learn-from/ [Accessed 14 August
2018].
63. Bartkus, B.R. & Classman, M. 2008. Do rms practice what they preach? e relationship between mission
statements and stakeholder management. Journal of Business Ethics, 83(2):207–216.
64. Microso. 2018. About. Op. cit.
65. Allison, J., 2017. Advancing strategic communication through mission statements: Creation of a natural
language taxonomy. Academy of Strategic Management Journal, 16(3).
66. Ibid.
67. Van Der Walt, J.L., Kroon, J. & Fourie, B.J. 2004. e importance of a vision and mission for small, medium-
sized and large businesses. South African Journal of Economic Management Sciences, 7(2):206–220, 209
68. Ibid.
69. Ibid.
70. Pearce & Robinson. 2009. Op. cit.: 30.
71. Verma. 2009. Op. cit.: 155.
72. King Price. 2018. King Price: Our culture. [Online]. Available: https://www.kingprice.co.za/about/culture
[Accessed 12 April 2018].
73. Ibid.
74. Hill, C.W.L., Schilling, M.A. & Jones, G.R. 2016. Strategic management theory. 12th ed. Boston: Cengage
Learning, pp 16–17.
75. Verma. 2009. Op. cit.
76. Sidhu. 2003. Op. cit.
77. Abrahams. 2007. Op. cit.
78. Krattenmaker. 2002. Op. cit.
79. Verma. 2009. Op. cit.
80. Kaplan, R.S. & Norton, D.R 2007. Using the balanced scorecard as a strategic management system. Harvard
Business Review, 85(7/8):150–161.
81. Lynch, R.L. 2003. Corporate strategy. 3rd ed. Harlow: Pearson Education Limited. 643.
82. Gamble, J.E. & ompson, A.A. 2011. Essentials of strategic management: e quest for competitive advantage.
2nd ed. New York: McGraw-Hill Irwin.
83. Chavan, M. 2009. e balanced scorecard: A new challenge. Journal of Management Development, 28(5):393–
406.
84. Kaplan, R.S. & Norton, D.P. 2004. e strategy map: Guide to aligning intangible assets. Strategy &
Leadership, 32(5):10–17.
85. Pangarkar, A.M. & Kirkwood, T. 2008. Strategic alignment: Linking your learning strategy to the balanced
scorecard. Industrial and Commercial Training, 40(2):95.
86. Kaplan & Norton. 2007. Op. cit.
87. Chavan. 2009. Op. cit.
88. Kaplan & Norton. 2007. Op. cit.
89. Chavan. 2009. Op. cit.
90. Kaplan & Norton. 2007. Op. cit.
91. Ibid.
92. Ibid.
93. Chavan. 2009. Op. cit.: 396.
94. Kaplan & Norton. 2007. Op. cit.
95. Kaplan & Norton. 2007. Op. cit.
96. Ibid.: 159.
97. Ibid.: 161.
98. Gaydon, J. 2009. Standard Bank: A case study. QPR Webinar. 27 May. [Online]
http://www.qpr.com/Webinars/QPR_Webinar_Standard_Bank.pdf. [Accessed 15 March 2010].
PART TWO
Strategic analysis
 CHAPTER 4 Strategic
decision-making
Peet Venter

LEARNING OUTCOMES

After reading this chapter, you should be able to:

describe the nature of strategic decision-making
explain how strategic decisions are made
identify the contextual influences and their effect on strategic decisions
distinguish between the different strategic decision enablers
Identify ways of improving the quality of strategic decision-making
critically evaluate strategic decision-making in your own and other organisations.

KEY TERMS

big data analytics

bounded rationality
competitive intelligence
decision criteria
environmental scanning
geographic focus
horizontal focus
integrating mechanisms
satisfice
scope of the organisation
strategic decision enabler
strategic decisions
vertical focus

OPENING CASE STUDY

Telkom’s lesson in strategic decision-making: The Multi-Links disaster1

 In May 2007 Telkom acquired 75% of Multi-Links, a private Nigerian telecommunications operator with a
Universal Access Licence that allowed it to provide fixed, mobile, fixed-wireless, international and data services
in one of the fastest-growing telecommunications markets in Africa. It also owned an internet service provider
(ISP) licence. Multi-Links was Nigeria’s pioneer national private telecommunications operator (PTO) and was the
first telecommunications operator in Nigeria to introduce Code Division Multiple Access (CDMA) technology, a
digital fixed-mobile technology that enables the provision of more efficient and cost-effective wireless solutions.
The company’s performance following the acquisition was impressive, with its customer base growing from 262
431 to more than 1.7 million subscribers at the end of September. Multi-Links also effected network and capacity
improvements to bolster their ability to provide quality data products, especially to the corporate market.
In 2009, Telkom announced that it had acquired the remaining 25% ownership of Multi-Links for $130 million,
which Telkom maintained met its broader investment criteria and expanded its mobile capacity, an area that
Telkom was keen to invest in after it sold off its share in Vodacom in 2009. According to Telkom’s CEO at the
time, Reuben September, the deal advanced Telkom’s goal of becoming Africa’s leading ICT solutions provider,
and demonstrated Telkom’s determination to expand domestically as well as beyond South Africa’s borders into
areas of growth, healthy returns and value creation for the company’s shareholders. ‘We remain focused on
pursuing growth by diversifying our revenue streams into African markets with high growth potential,’ stated
September.
Just two years later, Telkom’s proud acquisition turned into a problem child and became the telecom
operator’s biggest investment mistake, costing Telkom R5.1bn in impairment losses of an initial investment of
about R2.8bn.
In addition, Telkom was also facing a lawsuit and arbitration case which seemed likely to lead to further
impairment losses. Blue Label Telecoms was suing to recover an unspecified amount of damages after losing an
exclusive contract with Multi-Links, while private-equity group Helios Investment Partners and SA’s Shanduka
Group filed a lawsuit to recover R1.8 billion, claiming Telkom walked away from a 10-year rental agreement after
just three years.

Where did Multi-Links go wrong?

Poor market research, over-eager investing and weak leadership were believed to have led to the downward
spiral of Multi-Links, with analysts citing the following more specific reasons for the disaster:
Telkom invested in CDMA (Code Division Multiple Access) network technology that does not have much of a
future in Africa – GSM (Global System for Mobile communications) network technology is far more popular and
more in demand on the continent.
Telkom appears to have over-invested in Multi-Links, paying far too much for the remaining 25% of the company.
In 2007, 75% of the company cost Telkom $280m and two years later it spent an additional $130m on the
remaining 25%.
Telkom also did not understand the market dynamics in Nigeria, a mistake that was ostensibly due to a lack of
proper market research. For example, they appeared to underestimate the competitiveness of the Nigerian
market, and the increased competition (four well-entrenched and about six other mobile operators in Nigeria at
the time) made it very difficult for Telkom to compete.

Telkom was struggling to diversify its revenue stream, and while Multi-Links was meant to be the start of its
diversification, it failed horribly, costing Telkom an estimated R10bn in impairments. The only hope is that Telkom
learnt some valuable lessons from its costly mistake.

Overview
Strategic decisions are the fundamental, significant decisions that shape the course of an organisation.2 They are
complex and, as we can see from our Opening case study, getting it wrong can be extremely costly. Strategic
decision-making is the cornerstone of strategic management and sustainability. In this chapter, we examine strategic
decision-making and its enablers. Most strategic management books emphasise the importance of external and
internal environmental analysis in support of strategic decision-making, but few recognise the importance of having
an infrastructure in place to support such decision-making. In its ideal form, this infrastructure is a complex network
of people, processes and technology that processes intelligence and produces insights in a form that adds value by
supporting strategic decision-making. This chapter also introduces you to these strategic decision enablers as a
prerequisite for having effective environmental scanning and analysis processes. This chapter should ideally be read
in conjunction with Chapters 5 to 7, where we address the theoretical aspects of the macro-, industry and internal
environments, respectively.

4.1 Introduction
In the Opening case study the strategic value of good information is emphasised. Aer all, those organisations that
can sense environmental changes and adapt to them in time ultimately have the best chance of survival and of
leading their industries. In strategic management, the value of scanning and analysing the internal and external
environment is clearly established. However, its relationship with strategic decision-making is not as well
understood. In order to explore this phenomenon, we will rst outline the nature of strategic decisions. While
organisations may differ greatly in how they make strategic decisions, there are some common elements of strategic
decision-making.
Strategic decisions are big decisions, typically affecting the whole organisation, and are not limited to a speci c
function or department. In addition, they require massive investments of resources that, once committed, cannot be
easily reversed, and failure has severely negative implications. In the Opening case study we can see that Telkom’s
Multi-Links failure cost them billions of rands, not to mention the impact on their market capitalisation and
reputation.
Strategic decisions are more oen than not the result of cooperation between many different people and are
accordingly a collective effort, oen with many participants inside and outside of the organisation. Only in the very
smallest of organisations might we nd that strategic decisions are made by a single individual. In other words, we
can usually refer to a decision team – a group of people who are involved with the strategic decisions within an
organisation. In the case of Telkom, this team could have comprised of the CEO and his or her top management
team, the board, internal support structures (e.g. the corporate nance team) and external consultants to conduct
due diligence and establish the purchase price.
Strategic decisions are about change in the long run. ey are future oriented and concern the long-term
direction and success of the organisation, so they can never be regarded as routine decisions. Strategic decisions are
typically about changes to the scope of the organisation in terms of its vertical, horizontal or geographic focus. e
horizontal focus of the organisation refers to the breadth of the product and service range offered by the
organisation. e vertical focus refers to the phases in the industry value chain that the organisation is active in,
whereas the geographic focus refers to the geographic scope of the organisation, for example national, regional or
global.
e problems and opportunities addressed by strategic decisions are complex, and their outcomes are uncertain.
For this reason, strategic decisions are risky. Despite Telkom’s initial con dence in their decision to acquire Multi-
Links, things went wrong rather quickly.
Strategic decisions seek to create consistency ( t) between the organisation and its internal and external
environments. For that reason, they are heavily dependent on good strategic information and analysis. However,
they are also dependent on the innovation and creativity of both individuals and teams. As such, it is oen said that
strategy (and by extension, strategic decision-making) is both art and science. To this we can add that it is also
heavily in uenced by the expectations and power of diverse stakeholders and is not a purely rational and cognitive
process.
Strategic decision-making is context dependent and is in uenced by the characteristics of the decision team and
the individuals in it, the nature of the decision itself and the circumstances under which it is made, the
characteristics of the organisation itself, and the external environment.3
Figure 4.1 is a diagrammatic depiction of the nature of strategic decision-making. Strategic decision-making
takes place in a speci c context (section 4.3), which in uences how the decision is made and what decision is made.
Both creative input and strategic information are required for strategic decision-making. e strategic decision
enablers (section 4.4) are comprised of the people (the decision team), processes and technology that, in
combination, provide the insight that enables strategic decision-making. In section 4.2 we examine strategic
decision-making in more depth.

4.2 How strategic decisions are made

Considering the complexity of strategic decision-making, it is fair to deduce that organisations may differ vastly in
how they approach strategic decision-making, what they use as decision criteria, and who is involved in the
decision-making process. Despite the tendency to regard strategic decision-making as a rational and cognitive
process, it is oen far messier than we think. In this section we examine three ways of making strategic decisions,
namely a rational, a visionary and an experimental approach.4

Figure 4.1 The nature of strategic decision-making

4.2.1 Strategic decision-making as a rational process

Strategic decision-making is oen described as a rational, linear and cognitive process. A typical process approach
to strategic decision-making may go as follows:
e organisation recognises the need for a strategic decision to be made regarding a problem or opportunity.
e decision team collects information about the problem or opportunity, which may include, for example,
conducting market research, enlisting the help of external consultants, conducting a nancial analysis and
 developing business cases. is process may be quite time and resource intensive.
Following information collection and analysis, the decision team identi es a set of alternatives for addressing the
problem or opportunity.
Based on a set of decision criteria (e.g. return on investment), the team selects the best alternative. Decision
criteria refer to the measures, principles or guidelines used to help the decision team decide. ese can be used
informally or as a formal scoring system. Decision criteria are speci c to the organisation and its context, but
may include various aspects such as nancial measures (e.g. cost, projected return on investment, lifetime cost of
ownership of an asset), the impact on the organisation’s performance and sustainability (e.g. time to implement,
reliability, risk) and its effect on key stakeholders (e.g. its impact on customer service).
e selected alternative is then implemented.

Mintzberg and Westley5 call this the ‘thinking rst’ approach, and point out that one of the problems with it is that it
disregards or even disables the insights that may arise from a more exploratory process that involves discussion,
visioning and improvisation. It favours facts and process efficiency, and is accordingly heavily skewed towards the
‘science’ of strategy.

4.2.2 Strategic decision-making as a visionary process

e ‘seeing rst’ approach, as Mintzberg and Westley refer to it, begins with a vision in mind. e organisation or a
strategic leader envisions what can be achieved or where they could be in some point in the future, and strategic
decisions are then made with that vision in mind. Elon Musk is an excellent example of a strategic leader who makes
strategic decisions based on his vision of the future (see the Case example below).

CASE EXAMPLE: Elon Musk’s vision of the future6

In 2006, Elon Musk announced in a blog his ‘master plan’ for sustainable mass transport:
1. Create a low-volume car, which would necessarily be expensive.
2. Use that money to develop a medium-volume car at a lower price.
3. Use that money to create an affordable, high-volume car.
4. Provide solar power.

Musk is known for his vision to rid the world of the use of fossil fuels, and Tesla’s electric vehicles and solar
power technologies are ways of doing just that. Over the past decade, he introduced the Tesla S, an expensive,
high-performing sports car, followed by the Tesla X and Tesla Roadster. The Tesla 3, an affordable electric car,
was announced in 2016, and reached advance orders of more than 400 000 cars. Despite problems with
implementation, the plan is forging ahead, and the master plan is seemingly on track. In the meantime, Tesla
also launched various products for residential and business solar energy production, such as the Powerwall
battery system, solar panels and a ‘solar roof’, and their SolarCity business is now the second largest solar
provider in the US. In support of its businesses, Tesla has built a Gigafactory (with Panasonic) for producing
lithium-ion batteries for use in battery farms and electric cars.

4.2.3 Strategic decision-making as an experimentation process

Sometimes, strategic decision-makers are faced with choices for which there is no existing precedent, or they are
entering new and unfamiliar territories which they are uncertain of how to assess. As a result they cannot clearly
envision a decision, and they cannot apply rational decision processes to it. e only option that remains is to act,
and to learn from doing what works and what does not work – in other words, to experiment. Mintzberg and
Westley7 describe this approach as ‘doing rst’. Honda’s entry into the US market is an example of using an
experimental approach to strategic decision-making (see the Case example below).
Rather than proposing that one approach is better than the other, strategic decision-makers can use all three
methods, oen in combination, to improve their decision-making. In the next section, we explore the context of
strategic decision-making.

CASE EXAMPLE: Honda in the USA – brilliant strategy or an experiment that

worked?8
According to Honda managers, they just tried to see if they could sell something in the US, competing with
European imports. They knew very little about the American market, and struggled to make inroads initially. The
breakthrough Honda needed came about by chance rather than careful planning. While waiting for the engineers
to upgrade the engine design of their larger motorcycles, the Honda managers used their small, lightweight bike
– the 50cc Super Cub – to run errands. These little motorcycles attracted a lot of attention from the locals to the
extent that a buyer from the retailer Sears wanted to place an order with Honda. The Super Cub became an
instant hit, especially with young buyers who wanted inexpensive, convenient, individual transportation for short
trips around town. The Super Cubs eventually became Honda’s springboard for their success in the American
market.

4.3 Contextual influences on strategic decision-making

In the following sections, we focus on the four major contextual in uences on strategic decision-making, namely:
the characteristics of the decision-makers in the form of the decision team and the individuals in it
the characteristics of the decision and the circumstances under which it is made
the characteristics of the organisation and the external environment.9

4.3.1 The characteristics of the decision-makers

While strategic decisions are most oen made in teams, and the characteristics of such teams can impact how
strategic decisions are made, those teams are comprised of individuals who also have their own characteristics. We
discuss a few of these characteristics, namely bounded rationality, politics and power, and the diversity of the team
and their in uence on the decision-making process below.

4.3.1.1 Bounded rationality

Bounded rationality refers to the cognitive limitations of managers which result in managers being unable to be
fully rational and to consider all available alternatives. e concept was developed by Herbert Simon, who described
bounded rationality as follows: ‘… the capacity of the human mind for formulating and solving complex problems is
very small compared with the size of the problems whose solution is required for objectively rational behavior in the
real world — or even for a reasonable approximation to such objective rationality’.10 Because human beings and, by
extension, managers, do not have limitless cognitive powers, they have limitations in the number of alternative
solutions they can consider. In other words, they cannot be fully rational and consider all possible solutions to a
problem; their rationality is bounded. Research in this area supports three ndings about bounded rationality:11
Strategic decision-makers have been shown to satis ce rather than to optimise. In other words, they may opt for
obvious solutions that may address the problem but may not necessarily be the most optimal one. Satis cing is a
 combination of the words ‘satisfy’ and ‘suffice’ used by Herbert Simon12 to describe the selection of an alternative
in decision-making that is not optimal due to the bounded rationality of the decision-maker. In addition,
decision-makers rarely do comprehensive research about the decisions they have to make, and may only discover
their goals in the process of searching.
Strategic decision-makers could be rational in some ways but not in others. In other words, even while rational
processes may be followed, emotions and politics may still be involved and in uence the nal decision.
Many strategic decisions follow the conventional rational decision process (see section 4.2.1) at rst, but the
complexity of the decision, con ict between decision-makers, and time pressure (the amount of time available to
make a decision) ultimately determines the decision process. For example, they may cycle through various stages
of the decision process (see section 4.2.1) repeatedly, deviate from it, or even get stuck in some stages.

e decision team is not only characterised by its cognitive limitations, but also by the political in uences and
power plays within it.

4.3.1.2 Politics and power in strategic decision teams

Human beings are political (tendency to seek power), and the quest for power very oen plays out in organisations
and in their strategic decision-making processes. Research in this area supports the following ndings:13
e members of decision teams will not all have the same preferences. Preferences regarding strategic decisions
are very oen in con ict.
Powerful people within the organisation (powerful due to their position within the organisation) very oen get
what they want, and in strategic decision-making, powerful people may in uence the outcomes of decisions.
Individuals in the decision process will use political tactics such as forming coalitions, using or withholding
information, or co-optation to enhance their power and in uence on the strategic decision-making process and
outcome.

4.3.1.3 e diversity of the decision team

e more similar people are, the less likely they are to come into con ict. Individuals from different backgrounds
and different demographic groupings approach things differently, which may lead to more con ict. For these
reasons, the diversity of the decision-making team in terms of age, gender, cultural and ethnic background,
education, functional area and corporate experience may in uence strategic decision-making.

4.3.2 The characteristics of the decision

As we have already seen in the previous section, the characteristics of the decision that must be made can also affect
the strategic decision-making process, the time devoted to it and the outcome. e following decision characteristics
(as seen from the perspective of the decision-makers) impact on how the decision is made:14
e complexity and political importance of the decision matter inherent in a strategic decision determine the
process by which a decision is made. Political importance in this sense refers to the effect of the strategic decision
on the power bases of decision-makers. For example, one could argue that the complexity and implications for
the power bases of decision-makers are much higher in the case of a decision to expand the organisation to
China than they are for the decision to open another branch in another province. In other words, the complexity
of the decision matter of the former is much higher than that of the latter. Power bases could reside in the
position the decision-maker holds within the organisation, the support he or she enjoys within it, his or her
ability to reward, etc. For example, a labour union will generally oppose retrenchments because this will erode
their power base (i.e. their support from workers).
 Level of uncertainty concerning the actions that should be taken or the information required to make a decision
may cause decision-makers to be more inclined to use political processes, such as bargaining with other decision-
makers, rather than gathering and analysing information. For example, when a speci c strategic decision is
surrounded by uncertainty, certain key decision-makers may support other decision-makers in exchange for
something in return (such as their support in another strategic decision). is process of bargaining (or trading
off) is a political process rather than a rational one based upon facts.
e importance of the decision for the organisation may result in a more comprehensive approach to decision-
making, using nancial information, involving management from multiple levels and communicating across
functions.
Time pressure may lead to more disagreements, fewer managers being involved and less communication across
departments.

In the next section, we consider the organisational characteristics that in uence strategic decision-making.

4.3.3 The characteristics of the organisation

Organisational culture, structure and systems will affect how decisions are made and determine to what extent
strategic decisions are made using formal processes or organisational power and politics (power plays within the
organisation). More speci cally, the following characteristics regarding the organisation have been found to
in uence the strategic decision-making process:15
Power centralisation: e more power is centralised in the organisation (e.g. an autocratic CEO), the more likely
the members of the organisation are to engage in political tactics such as coalition forming to establish their own
power bases, which may lead to organisational politics dominating strategic decision-making.
Structure: Informal organisations with fewer rules are more likely to have more exible decision-making
processes and greater participation of multiple different internal stakeholders. Formal organisations, with more
rules are more likely to have a formal process for strategic decision-making involving the same small number of
individuals.
Size: Large organisations tend to be more comprehensive in their strategic decision-making processes than small
ones, meaning that they will gather and analyse more information, do more nancial analyses, involve more
managers and communicate more across departments.

In addition to the internal environment, strategic decision-making is also in uenced by the external business
environment of the organisation.

4.3.4 The external environment

It is widely accepted that one of the key tasks of strategic management is to ensure a t between the organisation and
its external environment. It accordingly stands to reason that the external environment, such as the industry of
which the organisation forms part, will in uence how strategic decisions in the organisation are made. Some of
these in uences are discussed in more detail below.16

4.3.4.1 Hostile environments

In hostile and threatening environments, ineffective strategic decisions could have a severely negative effect on the
survival of the organisation. Accordingly, it could be expected that strategic decisions should be more
comprehensive and make more use of strategic information and analysis.

4.3.4.2 High-velocity, dynamic and unstable environments

High-velocity, dynamic and unstable environments are characterised by quick and unpredictable changes in trading
conditions, and high levels of uncertainty. It could thus be argued that such environments require fast yet effective
strategic decision-making. A study in the high-velocity micro-computer industry highlighted how successful
organisations within this industry used real-time information to simultaneously consider multiple strategic decision
alternatives, which allowed them to speed up the decision-making process and therefore make better decisions.17
Strategic decision-makers are also more likely to focus on the decision and the process, and less likely to become
distracted by disagreements and debates. However, there are also some studies that have suggested that rational or
comprehensive approaches to strategic decision-making are of limited value due to information that is unavailable,
incomplete or quickly outdated.

4.3.4.3 Environmental muni cence

Environmental muni cence refers to the extent to which the resources required by the organisation to execute its
strategic decisions is present (or not) in the environment in which it operates. Empirical evidence is inconclusive but
research thus far supports the view that rational strategic decision-making processes lead to more effective strategic
decision-making, in environments with both high and low muni cence.18 In other words, research so far suggests
that a rational process in terms of strategic decision-making delivers the most effective strategic decisions under all
levels of muni cence.

4.3.4.4 Environmental uncertainty

In conditions where information can be collected to mitigate the uncertainty (e.g. about customer preferences), a
comprehensive strategic decision-making process can lead to higher performance. Where information about an
uncertainty is hard to collect (e.g. technological changes), comprehensive strategic decision-making processes are of
little value, as we can see in the Case example Telkom’s decision to sell its share in Vodacom.
In the next section we examine the role of strategic information in strategic decision-making.

4.4 Strategic decision enablers

All strategic management texts highlight the analytical activities associated with obtaining an understanding of the
organisation’s strengths, weaknesses, opportunities and threats (see Chapters 5 to 7 in this book). However, just as
important as understanding the internal and external environment is the infrastructure that enables the
organisation to obtain intelligence about its environment and turn it into useful insights that enable it to make
decisions. is effort to improve the speed and quality of strategic decision-making is what we refer to as strategic
decision enablers. Strategic decision enablers refer to the combination of people, processes and technology that
enables the organisation to obtain intelligence about its environment and turn it into useful insights that enable it to
make strategic decisions.
Strategic decision-making is a complex and ongoing process. e information required for it will re ect these
complexities, as outlined below:
Forward and backward-looking information enables proactive decisions that will direct the organisation in the
future.
e organisation needs an internal and external focus to align internal resources with external opportunities and
threats.
Strategic decisions cannot focus on every single detail – it thus needs to focus on the ‘big issues’.

CASE EXAMPLE: Telkom’s decision to sell its share in Vodacom19

 Ineffective decision-making in conditions of uncertainty can be risky and costly, as Telkom found out when it sold
its 50% share in Vodacom in 2009, and opted to enter the South African mobile industry with its own brand,
Telkom Mobile. One of the key reasons for its sale of Vodacom shares was the restrictive shareholders’
agreement, which Telkom felt was hampering its ability to compete more aggressively in the mobile
telecommunications industry. The decision has subsequently been ‘recognised as one of the company’s biggest
mistakes’, said chief strategy officer Miriam Altman. ‘Would Telkom have succeeded in building Vodacom in the
same way [as Vodafone has]? I don’t know. But I think [selling Vodacom] was one of Telkom’s biggest mistakes,’
Altman said.
In the six months ending September 2013, Telkom Mobile lost R773m before interest, tax, depreciation and
amortisation. That was a deterioration from a loss of R716m in the same period a year ago. Altman said it’s ‘very
unlikely’ that Telkom Mobile will succeed if it must rely on organic growth only.

Information is obtained from many different sources. Good strategic information integrates the different types of
information from different sources to develop a ‘big picture’ of the organisation’s environment and its place in
this environment.
Information is not objective, and different managers may interpret the same information differently depending
on their personal characteristics and goals. It could thus be said that the interpretation of information has both a
cognitive and a political component.

Figure 4.2 depicts our view of strategic decision enablers. Typically, organisations engage in environment-scanning
activities, commonly known as competitive intelligence (CI), that focus on the external environment. ese
activities generate mostly unstructured data about competitors and other external factors. Internal information
systems, commonly known as business intelligence systems (BIS), provide structured information on the
organisation’s historical performance. By their nature, business intelligence systems provide structured, oen
quantitative, and historical information. In the more recent past, the notion of big data has come to the fore. Big
data refers to the very large and complex data sets in large organisations that require advanced and unique data
storage, management and analysis.20 It refers to the large amount of data that engulfs organisations as a result of
formal and non-formal data collection (including CI and BIS).
e information obtained from these sources is generally disparate and fundamentally different. e
organisation therefore requires integrating mechanisms to analyse and integrate information and present it in a
useful format to the strategic decision-making process. ese mechanisms may be people, processes or technologies
(individually or in combination) that add value to information. ese mechanisms can also help to reduce the
information overload that many managers must deal with every day, and help to improve the quality of the
information. In the following sections we discuss each of the elements of strategic decision enablers, namely big
data, competitive intelligence, business intelligence systems and integrating mechanisms (as shown in Figure 4.2) in
more detail.

Figure 4.2 A framework for strategic decision enablers

4.4.1 Big data and strategic decision-making
e large amount of data generated by every organisation, both structured (e.g. from sales transactions) and
unstructured (e.g. from environmental scanning activities), gave rise to the term ‘big data’. e process of turning
big data into useful information (big data analytics or business analytics) is one of the key challenges of
contemporary organisations. Big data presents the organisation with four problems:21
1. e sheer volume of data is astounding, with IBM estimating that 2020 will see the creation of 43 trillion
gigabytes of data (40 zettabytes) – 300 times more than in 2005. Most organisations are drowning in data that
they struggle to make sense of, with the result that they are generally data rich but insight poor.
2. Big data presents organisations with a large variety of data, from highly structured transactional data to
unstructured qualitative data in various formats, such as comments by customers on social media, emails or
telephonic complaints.
3. e velocity of data is also increasing with data constantly streaming into the organisation, and the challenge is to
analyse data that is constantly changing and updating.
4. e veracity (truthfulness) of the data is sometimes hard to verify, and IBM reports that one in three business
leaders do not trust the data that they use for business decision-making.

From a strategic decision-making perspective, we can see that strategic decision enablers are required to assist
strategic decision-makers in making sense of big data. In the next two sections, we focus on two speci c sources of
strategic information, namely CI and BIS.

4.4.2 Competitive intelligence (CI)

One of the key strategic processes of any organisation is to scan the external environment constantly. Some authors
suggest that while competitive intelligence is the body of knowledge on how to collect and use intelligence,
environmental scanning considers when an organisation should collect intelligence to support strategic decision-
making.22 Environmental scanning refers to the efforts of executives to gather intelligence to sustain their
competitive advantage.23 However, some of the later research in this eld proposes that constant, active
environmental scanning is critical.24 is suggests that the traditional conceptual boundaries between CI and other
environmental scanning activities have blurred. For our purposes, these environmental scanning processes are
collectively known as competitive intelligence or CI. Admittedly, the term ‘competitive intelligence’ is somewhat
misleading as CI has evolved to focus not only on competition but also on the broader business environment. Some
of the aspects that CI should focus on are described below:
Competitors and complementors: Who are they, what are they planning, what are their strengths and weaknesses,
and how will they react to our strategies? (e competitive environment is discussed in more detail in Chapter 6.)
Customers and distribution channels: What are their needs, values and behaviours? Which customers are at risk of
defecting to the competition?
Suppliers: How reliable are they? What ambitions do they have, and how will this affect the organisation?
Economic environment: What are the key changes in economic indicators, and how will they affect the
organisation? (e macroenvironment is discussed in more detail in Chapter 5.)
Technological environment: What new technologies are emerging that could present an opportunity or threat?
Industry regulators and legislation: What new legislation or regulation is pending, or how might future changes
affect the organisation? Who is in uencing legislation or regulation?

CI is sometimes unfairly viewed as industrial espionage. In this regard, it is important to point out that CI
practitioners should operate within a framework of strong ethical guidelines such as those provided by strategic and
competitive intelligence professionals (SCIPs). (See the Case example SCIP code of ethics for CI professionals.)
Scanning the external environment provides an organisation with the best chance of detecting early signals of
key changes or events in the external environment, and when they are likely to occur. Scanning therefore serves as
an early warning system that identi es and appraises future opportunities for and threats to the organisation. e
organisation can then focus further CI efforts on these opportunities and threats to assess them and aid decision-
making.
CI directly supports the strategic decision-making processes in the organisation. For example, if an organisation
is considering investing in a foreign country, it can use CI to assess the macro- and industry environments in the
country to appraise the viability of doing business in that market and industry.
Scanning the environment provides feedback on the strategic management process and thus enables corrective
actions if required. For example, are the assumptions that we made when formulating our strategy still valid, and
how might they change? Are competitors and customers reacting to our strategies as we expected them to? It
therefore provides important input into the strategic risk management processes (see Chapter 14).
For practical purposes, we can de ne CI as the process of systematically scanning the business environment and
identifying and assessing potential opportunities and threats. CI can support both strategic decisions, such as the
decision to acquire a competitor, and tactical decisions, for example the pricing strategy for a new product. e
focus here is on the strategic role of CI. In the next section we examine the CI process, widely known as the CI cycle.

4.4.2.1 e strategic CI cycle

As illustrated in Figure 4.3, the strategic CI cycle encompasses ve steps, namely identifying the strategic decision to
be made, identifying key intelligence topics, developing the CI collection plan, CI gathering and evaluation and CI
analysis.

CASE EXAMPLE: SCIP code of ethics for CI professionals25

To continually strive to increase the recognition and respect of the profession.
To comply with all applicable laws, domestic and international.
To accurately disclose all relevant information, including one’s identity and organisation, prior to all interviews.
 To avoid conflicts of interest in fulfilling one’s duties.
To provide honest and realistic recommendations and conclusions in the execution of one’s duties.
To promote this code of ethics within one’s company, with third-party contractors and within the entire
profession.
To faithfully adhere to and abide by one’s company policies, objectives and guidelines.

Figure 4.3 The strategic CI cycle

Step 1: Identify the strategic decision to be made

e rst step in the strategic CI cycle is to recognise the need for a strategic decision to be made.

Step 2: Key intelligence topics (KITs)

In this process, the organisation must determine the focus areas for CI, as it is impossible to monitor the entire
business environment. ese focus areas are also known as key intelligence topics (KITs). It is important to note
that the focus on KITs does not mean that normal scanning activities do not take place.

Step 3: CI collection plan

e next step is to determine the CI collection plan. is determines the data sources that will be used, the
people involved in the collection process, and how the data will be collected. ere are many potential sources of
CI. Intelligence can be collected from both primary and secondary sources.
It is generally easier and more commonplace to acquire information from secondary sources. ese sources
include market research organisations, online sources and existing company marketing research reports. In this
regard, the internet has become a widely used tool for gathering secondary information.
However, CI and environmental scanning activities should never rely on secondary information only.
Primary intelligence from human sources such as employees, customers and potential customers, distribution
channel partners, competitors, complementors, suppliers and opinion leaders are all important primary sources
of CI. e internet has also become a tool for primary intelligence gathering. For example, the rapid growth of
weblogs (blogs) presents an intelligence opportunity as well as opportunities for engaging customers and other
stakeholders in qualitative and quantitative enquiries online.
e most important sources of CI are outlined below:
 » Primary information may be obtained from competitors’ employees, regulators, customers and other
stakeholders in the form of structured or unstructured interviews. is is an area where the boundaries of
ethics are oen tested. For example, some organisations may conduct ‘job interviews’ with former employees
of competitors purely as a means of gathering information.26
» Observation of competitors’ facilities and operations to establish the level of activity can be a useful external
source of primary information.
» Reverse engineering of competitive products and mystery shopping (contacting a competitor for the purpose of
observing how they operate) are also fairly commonly used methods of gathering information about
competitors.
» Publicly available information in the press, on the internet and marketing information from competitors, for
example product brochures, is a secondary external source of information. Blogs, online customer reviews
and consumer complaints are also potential sources of useful information about competitors.
» Institutional information in the public domain, for example the patent office and Registrar of Companies, is
another source of secondary external information.
» Internal sources include intelligence obtained from employees. is is critical as many experts have suggested
that as much as 80% of what an organisation needs to know is in the heads of their employees. is also
explains the link between CI and knowledge management.
» An aspect that is oen overlooked is competitive signalling. While cartel forming is illegal, other methods,
such as media releases or interviews, can be used to communicate intentions.

Step 4: CI collection and evaluation

Data gathering then takes place as outlined by the data collection plan. At the same time, the source data is
evaluated for credibility and value.

Step 5: CI analysis and insights

e next step in the process is to analyse the CI that has been gathered. e tools for analysis that are presented
in Chapters 5 to 7 are particularly useful in this phase of the process. Possible gaps and shortcomings in the data
and ndings are also determined during this phase. e last step in the process is to provide the ndings to
strategic decision-makers. eir insights and decisions will then in uence the process again.

4.4.3 Business intelligence (BI)

Most organisations generate large amounts of data about their internal operations. ink of a retailer that is
constantly generating data about sales transactions, customer data, purchasing transactions, debtor and creditor
management, and inventory. In its raw form, this data is mostly useless to strategic decision-makers. e purpose of
BI is to convert the massive amounts of raw data into useful and actionable intelligence. Figure 4.4 presents a
simpli ed view of BIS for purposes of the discussion that follows.

Figure 4.4 A simplified view of business intelligence systems

Data on its own has limited value and must be made available to strategic decision-makers in an integrated and
usable format. is involves obtaining data from the various operational systems; extracting, transforming and
loading (ETL) data into storage systems such as data warehouses or data marts; and then making it available to
decision-makers in the format they require. Data cleansing, for example to resolve differences between data from
disparate sources, is an important part of this process.27
While the notion of BI has always included external sources of information (e.g. competitive information) and
unstructured information, much of the focus during the early years was on integrating and extracting structured
internal data. It could thus be argued that BI has not been entirely successful in integrating internal and external
intelligence.28

4.4.3.1 Source systems

One of the key challenges in BI is to obtain information from many different, oen disparate, data sources. Large
organisations may have many systems, but a few general examples of source systems are provided below:29
Legacy systems are historical and possibly outdated systems, but for some reason are still being used by the
organisation. For example, it may be too costly to redesign the system.
Enterprise resource planning (ERP) systems such as SAP are operational systems that have been developed over
years to run a business and generate operational information. e focus of ERP is typically supply chain
activities.30
Customer relationship management (CRM) systems are regarded as the marketing equivalent of ERP systems and
serve to integrate the customer-facing functions such as marketing, sales and customer service.31
Online transaction processing (OLTP) refers to those systems that facilitate and manage transaction-oriented
applications, for example a bank’s automated teller machines (ATMs).
Clickstream data is the record of an internet user’s ‘virtual trail’ that is le while sur ng the internet. It includes
details of activity on the internet, for example every website and every page of every website visited. is data is
potentially valuable to internet marketers and advertisers.32

e next step is to establish a facility to clean and store this data so that it can be accessed and analysed for decision-
support purposes.

4.4.3.2 Data warehouse

e data warehouse has become widely accepted as the ‘heart’ of the BIS. It is typically a central system where
information from diverse sources is combined to make it available to marketing and other decision-makers.
According to most authors, BI technology has coalesced around the use of data warehousing and online analytical
processing (OLAP). e data from the various sources is brought together in a central storage facility, where it is
archived and prepared for extraction by users of the information. In most organisations, this facility is known as a
data warehouse. e purpose of a data warehouse is to provide rich, timely, clean and well-structured information to
BI analysis tools.33 Similarly, data marts are small-scale data warehouses designed to meet a speci c function or
department’s BI needs.34

4.4.3.3 Data extraction and reporting

e last step in the process of adding value to the organisation’s data is data extraction for use by managers using
management information and analysis tools such as OLAP, data mining and executive information systems,
including dashboards. ese are discussed brie y below:35
OLAP provides a means for users to view the data from a data warehouse in a multidimensional format, for
example comparing data on geographic areas, product lines and time. It enables ‘slicing and dicing’, drilling down
and rolling up as ways of examining data from many different angles.36 is ability is potentially of great value to
strategic decision-makers as it allows them to analyse complex data as a means of nding solutions to complex
problems. For example, with OLAP, an organisation can determine that sales are declining in a particular region
for a particular distribution channel and use this as a basis for action.
e concept of data mining is becoming increasingly popular as a business information management tool where
it is expected to reveal knowledge structures that can guide decisions in conditions of limited certainty. Data
mining is an analytical process consisting of statistical techniques, arti cial intelligence (AI) and database
research. It is designed to explore data (usually large amounts, typically business or market related) in search of
consistent patterns and/or systematic relationships between variables. It then validates the ndings by applying
the detected patterns to new subsets of data. Bradley de ned data mining as ‘an information extraction activity
whose goal it is to discover hidden facts contained in databases, using a combination of machine learning,
statistical analysis, modelling techniques and database technology, which infers rules that allow the prediction of
future results’.37 e ultimate goal of data mining is prediction. For example, retailers may use data mining to
analyse shopping patterns and to predict what products are likely to be bought at the same time. is helps to
optimise the shop layout and merchandising.
Executive information systems (EIS) refer to operational data presented in the form of charts, tables and reports
for the use of managers.38 One particularly useful development in this regard has been the use of management
dashboards as a means of presenting layered information in a simple, actionable format. All drivers know that
they should keep their eye on certain key indicators in their car. Speed, the fuel level, engine temperature, the oil
light and rearview mirrors are a few of the indicators that can be used to drive safely, and to monitor the
performance and general well-being of the vehicle. If the oil light comes on, for example, the driver might stop at
a service station and check the vehicle’s oil level. In the same way, a dashboard allows the top management of the
organisation to keep their eyes on the key metrics that indicate the performance of the organisation. Should one
metric be in decline or out of line with the expected performance, the managers can follow up and determine
what caused the deviation, and take corrective action to ensure that performance gets back on track. Dashboards
allow managers to monitor the contribution of the various departments in their organisation using a few key
indicators. Bene ts of using digital dashboards include the following:
» e data on all critical business areas is presented in a simple visual format.
» Underlying data can be drilled into more deeply to generate detailed reports showing new trends or reasons
for deviations.
» More informed decisions can be made based on real-time business intelligence.
 Finally, with the growing availability of global positioning data, geographic information systems (GIS) are of
particular importance to strategic decision-makers. Many aspects of strategic decisions have spatial elements, for
example the placement of distribution channels that a GIS addresses comprehensively. Its ability to present data
in a map-based presentation addresses this spatial dimension and provides the data in a format that offers
effective decision support. A further strength of GIS is its ability to integrate data from disparate sources.39

Even the availability of BI in processed form is not always sufficient to support strategic decision-making. It is at this
point that people, processes and technology, discussed in section 4.5 below, can play a key role in adding more value
to BI and CI for the bene t of strategic decision-makers.

STRATEGY IN ACTION: PPC’s problems highlight challenges facing local

companies venturing into Africa40

In March 2017, PPC, southern Africa’s largest cement maker, reported that its operating income from 2016 was
down by 24%, while net profit attributable to shareholders declined by 88%. A five-year analysis of PPC’s stock
price shows the extent of the carnage, with the share price down almost 72% since 2012.
These troubling figures shine a spotlight on the analysis on which PPC’s decision-making process relied when
entering some of its African markets. According to Shiraaz Abdullah, an equity analyst at Sanlam Private Wealth:
‘They commissioned their plant two months ago in the DRC, but the environment there is tough as it is linked
to the political turmoil. Currently everyone is in limbo, the demand for cement is poor and when they
commissioned the plant they expected huge returns … Only Rwanda and Ethiopia have a pretty positive growth
story. They are ramping up production and the markets are growing. In Zimbabwe, they are also not sure what is
going to happen as elections approach.’
In South Africa, PPC is already facing difficult trading conditions, with low prices for cement, the threat posed
by cheap cement imports from Pakistan and China, and slow economic growth compounded by credit ratings
downgrades. In Africa, liquidity constraints, leadership uncertainty and a 9% fall in cement prices in Zimbabwe,
the Democratic Republic of Congo and Botswana are some of the difficulties it faces.
PPC’s ventures into Africa are a bittersweet tale of navigating difficult terrain and keeping an eye on the long-
term gains to be reaped from its investments.
Adrian Cloete, a portfolio manager at PSG Wealth, said PPC’s travails in Africa brought to the fore the extent
of the difficulty of doing business in countries in the rest of Africa ‘that have different cultures, markets and ways
of doing business’.
But when the tough times do hit African operations, the massive investments made by South African
companies in those markets make it difficult to pack up and leave. For example, PPC, across its four units in the
DRC, Ethiopia, Rwanda and Zimbabwe, has invested in cement plants with a combined project cost of $719m
(about R9.2bn). The lifespan of its limestone reserves in Africa ranges from 12 years in Rwanda to 54 years in
the DRC. Exiting these markets appears to be out of the question, so the challenge for PPC remains one of
navigating current tough times while keeping an eye on the long-term prize.

Questions
1. What are the contextual aspects that played a role in PPC’s decision to enter some of its African markets?
2. What strategic decision enablers could have assisted the organisation in its decision?

4.5 Integrating mechanisms

e value of integrating mechanisms lies in their integration of external, unstructured data (CI) with internal,
historical, highly structured data (BI) and other big data elements to develop a richer picture of the organisation’s
environment and provide insights that would otherwise not be possible. While people, processes and technology are
all integrating mechanisms, it is really in the interaction between these elements that most value is added. ere are
many different manifestations of integrating mechanisms. We discuss a few examples of each below.41

4.5.1 People as integrating mechanisms

People provide the creative insights that cannot be duplicated by technology or process. e role of people in
integrating intelligence is thus critical. In this section we discuss three manifestations of people as integrating
mechanisms, namely intelligence teams, the executive intelligence officer and intelligence specialists.

4.5.1.1 Intelligence teams

e use of multidisciplinary teams is a notion that is generally accepted in management, yet they are rarely used as a
means of adding value to CI and BI. In addition, research on the use of these teams in the context of competitive and
marketing intelligence in general is scarce.
Multidisciplinary intelligence teams are a useful mechanism to add value to the strategy-making process.
Research has shown that insight teams can make a positive contribution to strategic marketing decision-making by
combining CI, CRM, data mining and marketing research.42 Research has also shown that learning teams (such as
communities of practice where individuals with similar interests interact to improve their practice) have the
potential to improve market intelligence and market integration skills.43 Fahey and Herring provided some
guidelines for the use of intelligence teams:44
e team consists of core members (typically competitive or market intelligence professionals) and transient
members who are involved in the process only as and when needed.
Strategic decision-makers should be closely involved in the activities of the team, directly or indirectly.
e relative resource intensity means that the team will generally be used for complex strategic intelligence issues.
e team should be multidisciplinary to avoid dominance by the ideas of one discipline and should include a
range of analytical skills.
It is always useful to include one or two members who can think ‘outside the box’ and challenge conventional
wisdom. is leads to constructive tension that leads to more creative thinking.

e Case example e use of an intelligence team below describes the way in which one intelligence team was
engaged to address a particular intelligence issue.

CASE EXAMPLE: The use of an intelligence team45

Competitive context: A large corporation competed against two equally large rivals in selling and delivering
complex technological solutions to corporate, governmental and institutional customers.
Business issue: Over a six-month period, customers seemed to deploy new purchasing criteria reflecting an
underlying shift in their solution needs. The corporation failed to win two large accounts that it fully expected
to land, and lost two of its longstanding and most visible accounts.
Strategic decision: Senior managers realised that they now confronted a strategy decision without knowing
what the alternatives were. How should they reconfigure their strategy to enhance and deliver superior
customer value?
Intelligence challenge: The core intelligence challenge consisted of a number of related items. How were
customers’ needs shifting? What might their likely trajectory be over time? What forces were driving the
shifting customer needs? How might rivals’ emerging strategies affect the dynamics of rivalry?
The intelligence team: The team was led by a senior member of the organisation’s business intelligence group.
Its members included individuals from strategic planning, market research, marketing, sales and finance, plus
 two executives who participated in the team’s meetings whenever their schedules permitted.
The terms of reference: The team was given eight to 10 weeks to complete its work. It was asked to depict
how and why customer needs were changing, to explain why the organisation had lost key accounts, and to
develop action recommendations that would contribute to a winning strategy.

4.5.1.2 Executive intelligence officer (EIO)

An executive intelligence officer or EIO provides a means of bridging the ‘dysfunctional disconnect’ between the
strategic decision-making processes and the intelligence processes that exist in so many organisations. A possible
reason for this disconnect is the lack of an intelligence-focused position at the top management level of the
organisation.46 e EIO assumes responsibility for the intelligence that the CEO and executive team require to do
their jobs, and works as a collaborator with and partner to the top management team. e EIO’s responsibilities
should include the following:47
Content leadership: e EIO collaborates with the executive team to decide what issues to focus on and to
prioritise the intelligence issues facing the organisation.
Intelligence quality assurance: e EIO also evaluates intelligence sources for their dependability, consistency,
predictability and overall quality.
Decision relevance: e EIO should assist the organisation to focus on the highest priorities with regard to
opportunities, risks and vulnerabilities.
Voice of realism: e EIO uses facts and insights to provide a realistic perspective to counter the oen emotional
or even political arguments that can come to dominate top management thinking.
Education enabler: Intelligence is knowledge, and thus oen provides an opportunity for learning. e EIO can
enhance the value of intelligence by using the dissemination of intelligence as an opportunity for mutual
learning. For example, executive war games provide an excellent opportunity for sharing intelligence and also for
gaining insights into how competitors might think.
Safe harbour: e EIO should not judge any idea, opinion or question, but should rather encourage everyone to
share their views and ask questions. is is the best way of stimulating debate and creativity.
Dot connector: e EIO could ultimately be the individual with the best view of the big picture by integrating
various data sources and events, and analysing them to provide unique strategic insights.

4.5.1.3 Intelligence specialists

e role of intelligence specialists is becoming increasingly important. Although these positions are known by a
number of different job titles, for example CI officer, BI analyst, marketing intelligence officer or market
researcher,48 they have a certain intelligence role in common. ey are increasingly expected to play a key role in the
sense-making processes in the organisation by acting as intelligence ‘bricoleurs’ or builders, combining intelligence
from different sources to provide insights and to support decision-making.

4.5.2 Processes as integrating mechanisms

Although there are many different processes that contribute to the integration and dissemination of intelligence,
here we focus on three of the more important ones, namely knowledge management, the process of amplifying weak
signals and scenario planning.

4.5.2.1 Knowledge management

e concept of knowledge management or KM gained prominence with the notion of knowledge as a basis for
competitive advantage,49 and the emergence of the idea of a ‘learning organisation’ that constantly increases its
knowledge and therefore its competitiveness. KM is described as the ‘systematic process of nding, selecting,
organising, distilling and presenting information that improves an employee’s comprehension in a speci c area of
interest’.50 From this de nition, the links between CI, BI and KM become clear.
Another de nition points out the sources of knowledge: ‘Knowledge management promotes an integrated
approach to identifying, capturing, retrieving, sharing, and evaluating enterprise information assets. ese
information assets may include databases, documents, policies, procedures, as well as the uncaptured tacit expertise
and experience stored in individual heads.’51
CI and BI activities constantly generate new knowledge, both explicit and tacit, and the internalisation of this
knowledge by the organisation will ultimately be to its advantage. However, while it is oen asserted that 80% of
what organisations should know exists inside them, in the minds of employees there is also a commonly
acknowledged challenge to bring this knowledge to the fore. is is essentially a KM problem.
Knowledge is generally divided into tacit and explicit knowledge (see also Chapter 7, section 7.3.2.4 for a
discussion on the relationship between knowledge and organisational capabilities). Explicit knowledge can be easily
codi ed and transferred to others. Tacit knowledge cannot be easily transferred or copied, yet it is critical to the
success of an organisation. One of the key challenges of KM is thus to nd ways of sharing and internalising tacit
knowledge. e role of KM is summarised in Figure 4.5.

Figure 4.5 Processes for knowledge creation and sharing in an organisation52

e highest level of knowledge sharing occurs when tacit knowledge is transferred from one individual or group to
other individuals or groups. is takes place through a process of socialisation, and takes the form of observation of
practice inside and outside the organisation, the accumulation of tacit knowledge through doing, and the deliberate
transferring of tacit knowledge.
e next process is to transfer tacit knowledge to explicit knowledge to make it more widely known and easier to
transfer. e process for doing this is externalisation, and takes the form of articulating and translating tacit
knowledge in forms of communication that are readily understood.
 Once knowledge is explicit, it can easily be linked and used in combination with other explicit knowledge.
Gathering, integrating, transferring, diffusing and editing explicit knowledge facilitates the process of transferring
explicit knowledge to explicit knowledge – in other words, adding explicit knowledge to other explicit knowledge in
order to increase the explicit knowledge base.
Ultimately the goal is to ensure that explicit knowledge becomes tacit knowledge – in other words,
internalisation of explicit knowledge takes place. e mechanism for doing this could be simulation and
experiments (such as ight simulators for pilots) and, more commonly, action and practice. e Case example e
transfer of knowledge illustrates how these processes take place in practice.

4.5.2.2 Amplifying weak signals

With the deluge of information available to decision-makers, it is somewhat surprising that many industry experts
feel that organisations are data rich but poor in useful information and insights. It could thus be argued that those
organisations that are able to cut through the clutter to get to the intelligence that no or few other organisations have
will be in a better position to establish a competitive advantage. is principle is depicted in Figure 4.6, which
suggests that organisations that are able to derive insights from weak signals are in a better position than
organisations that simply react to events, or base their decisions on ‘strong signals’ that are visible and available to
everyone.
Figure 4.7 illustrates Schoemaker and Day’s process for amplifying weak signals53 that builds on the idea of
scenario analysis and planning (see also Chapter 5, section 5.5.4.5). e rst step in the process is to have
environmental scanning processes that actively search for weak signals by driving the search for intelligence down to
local levels, by organising search parties, for example teams to investigate speci c issues, and leveraging extended
intelligence networks such as suppliers and customers. Weak signals can take many forms, for example rumours or
casual remarks by a rival executive, but what differentiates them from other signals is that they are interesting, they
are not in the public domain, nor are they on anybody else’s radar.

Figure 4.6 The strategic value of CI

CASE EXAMPLE: The transfer of knowledge

A new employee in a section may initially start the knowledge transfer process by assimilating whatever is
available in the form of explicit knowledge, such as training manuals, videos, policies and procedures, and
organisation charts. Through doing and ‘practising’, he or she will become skilled, and will internalise the explicit
knowledge so that it becomes tacit knowledge. The explicit knowledge is used less and less as a reference point.
 As a skilled practitioner, the employee then exchanges ideas and experiences with colleagues and others, even
outside the organisation, and through this process of dialogue and observation will enhance tacit knowledge and
transfer it to others. At some point, the employee may transfer the tacit knowledge to explicit knowledge, for
example by writing down a new process or methodology he or she discovered that improves productivity. This is
later combined with other explicit knowledge, for example by taking up the new process in an updated training
manual.

Figure 4.7 The process for amplifying weak signals

e next step in the process is to amplify the weak signal by experimenting with different competing hypotheses and
scenarios, and at the same time canvassing a broader audience to obtain their insights. It is also important to gather
more corroborating intelligence.
e last phase is geared to support decision-making, and involves the process of further clarifying the idea. is
means encouraging constructive con ict and debate, gaining insights and intuition from seasoned managers, and
confronting the reality of what is happening in the business environment, which may differ from the organisation’s
own paradigms and mental models.

4.5.2.3 Scenario planning

e purpose of scenario planning as a strategic thinking tool is to develop different perspectives of the future with
the purpose of planning for contingencies. e power of scenarios as a learning tool for managers has also been
emphasised, especially by Shell, who can be seen as a pioneer of scenario planning. ere are four key
applications:54
To help strategic decision-makers make sense of a complex situation
To assist in developing robust strategies that will offer the best performance across a range of scenarios
Anticipating changes in situations where the future is uncertain
As an adaptive organisational learning tool for managers.

e complexity and potential cost and time implications of scenario planning means that it is not a technique suited
to every strategic decision. In addition, the purpose of the scenario planning exercise should be clear before the
process is started, and the speci c tools and techniques are selected.
ere are various processes for scenario analysis and planning, all of which share some key elements, as
discussed below:
e organisation and the decision-makers involved in the scenario planning process should agree on the purpose
of the scenario, the time horizon and the objective of the exercise.
Scenario planning requires a common understanding of participants of the organisation and the key
uncertainties and driving forces in its business environment.
e scenario planning team will have to agree on a few key drivers or key uncertainties.
e key uncertainties are used to create possible and plausible scenarios in the form of a narrative or a matrix.
ere should not be too many scenarios – typically, three or four scenarios are generated.
Depending on the desired outcome, the scenarios should be widely communicated. Having catchy names for
scenarios and using visual aids such as graphs or cartoons can help to have the best possible impact for the
communication process.
e next step in the process is to generate strategies. e best possible outcome is when there are strategies that
are robust across all different scenarios.
Finally, as part of the strategic risk management process the organisation needs to look for signals that might
indicate if one scenario is becoming more likely than the others.

While the classic outcome of a scenario planning exercise is a narrative (typically three ‘stories’ about the future),
there are also other possible outcomes that have become more popular over time. In summary, there are three
typical ones:
A narrative, typically stories about the future, such as the Dinokeng scenarios for South Africa.55 e purpose of
the Dinokeng scenarios were to present the possible futures of South Africa and its citizens by 2020, and it
presented three stories about the future, namely Walk Apart, Walk Behind and Walk Together.
e use of a two-by-two matrix (or ‘gameboard’) outlining four contingencies has become very popular in the
last few years.56
With the increasing use of computers, simulated environments have become more popular and more powerful as
ways of exploring scenarios. In conjunction with strategy war games, they can become powerful ways of
gamifying strategic planning and learning about strategies.57

Scenario planning is unique seeing as it oen combines people, processes and technology in one event, as well as
simultaneously providing a platform for learning and decision-making. In the Case example, we can see how
scenario planning can be used even at a country level. (Also refer to scenario planning in Chapter 5.)

4.5.3 Technology as an integrating mechanism

While there are many different types of technology that in uence and support strategic decision-making, in this
section we focus on two broad categories of soware, namely planning and decision-support tools, and arti cial
intelligence (AI).
Planning and decision-support tools refer to a variety of tools in several categories that may be used to support the
planning and decision-making processes in an organisation. is includes simulation tools and planning
templates.58 Strategy simulations, for example, can assist strategic decision-makers in asking ‘what if?’ questions
and testing the outcome. is is useful in strategic planning processes such as scenario planning and war gaming.
Planning soware is oen simply a productivity tool, but it does allow the integration of various types of data and
insights in one cohesive document.
 AI is a category of technology that simulates human thinking patterns. ere are three main categories of AI
applications:59
» Expert systems are computer systems with a well-organised body of knowledge that emulates expert human
decision-making within an established set of rules. is generally works better with lower-level applications
where the number of assumptions and decision rules is manageable.
» Arti cial neural networks (ANN) simulate the working of the human brain by using a large number of
interconnected ‘neurons’ to allow a computer system to ‘learn’ by example. One drawback of ANN is that it
can only use data that is numerically presented, and it is thus limited in its ability to integrate structured and
unstructured data.
» Intelligent agents are computer systems in some speci ed environment that are able to take autonomous
action to meet design objectives. In the process, agents act autonomously, interact with other entities and
agents, can reason about themselves, and can be mobile. Possible applications in strategic decision enabling
include the gathering of intelligence about speci ed topics and the ltering of intelligence to decision-makers.

While we have now considered the different aspects of strategic decision enablers, it is also useful to consider how
the strategic decision-making process takes place (especially in volatile environments) and how strategic decision
enablers can support it.

CASE EXAMPLE: Scenarios for South Africa60

On 21 June 2018, President Cyril Ramaphosa addressed the launch of Indlulamithi South African Scenarios
towards 2030 at the Kyalami Theatre on the Track in Midrand, Gauteng.
The South African Scenarios is an independent project initiated by respected academic Dr Somadoda Fikeni,
multinational Anglo American and the Mapungubwe Institute for Strategic Reflection (MISTRA), and is aimed at
framing a national conversation, beyond the current national trajectory, to answer the question: ‘What would a
socially cohesive South Africa look like, and to what degree is it attainable by 2030?’.
The Indlulamithi South African Scenarios 2030 considers, among other things, the economy, work and
society, environmental justice, reconciliation and redress, and crime and safety.
President Ramaphosa has welcomed the initiative, and last week at the briefing facilitated by the team of the
Indlulamithi South African Scenarios towards 2030 said: ‘Any nation that seeks progress and development must
be able to first envision it. The Indlulamithi Scenarios help the country understand the possible paths it can take
and what needs to be done now to ensure that it takes the path of greatest cohesion, prosperity and equality.’
The Indlulamithi project continues a long tradition of scenarios for South Africa, starting with the Anglo
American ‘High Road’/‘Low Road’ scenarios of the mid-1980s, and continuing through the Nedcor/Old Mutual
project of 1991–92, the Mont Fleur scenarios of 1991–92, and most recently the Dinokeng scenarios of 2009.

4.6 Improving the quality and speed of strategic decision-

making
Strategic decision-making is focused on the long term, and determining the quality of a strategic decision by its
outcome is almost impossible – there are simply too many other factors that could have had an impact on the nal
result. However, there are certain guidelines that strategic decision-makers can use to speed up decision-making and
improve the quality and efficiency of the strategic decision-making process, namely to build multiple alternatives, to
track real-time information, to seek the views of trusted advisors and to build consensus, but not at any cost. e
guidelines are discussed in more detail below.61
4.6.1 Building multiple alternatives
Rather than investing all the available time and effort into developing just one alternative (and risking the alternative
being rejected and having to start over), multiple alternatives should be developed and presented. is has the
additional advantage of reducing management bias that may result in certain alternatives being eliminated early on
in the decision-making process because of political reasons, for example.62

4.6.2 Tracking real time information

Instead of relying on trends and statistical analyses (which may age very quickly anyway), managers in fast-moving
environments may be more predisposed towards real-time information, which focuses on the latest information
from current operations. is is typically obtained by spending face-to-face time with key staff members and by
‘wandering around’. Using a medical analogy, the key is having a nger on the pulse all of the time, rather than
periodical check-ups.

4.6.3 Seeking the views of trusted advisors

e experience of older, more experienced managers can be very valuable, oen more so than more extensive
analyses by more junior staff members or consultants. Decision-makers in fast-moving environments will oen have
a network of such experienced managers as ‘trusted advisors’.

4.6.4 Aiming for consensus, but not at any cost

It is important to understand that searching for consensus may be a fruitless goal. It is far more important to
stimulate con ict and debate, and allocate a realistic time frame (e.g. 3–4 months) to making strategic decisions. If
the allocated time has lapsed and consensus has not been reached, a decision is made using a decision rule (e.g. by
voting, or the manager with the highest stake in the decision makes the call).63 In this way, decision pace and
rhythm can be maintained. So, while consensus should be the ‘ rst prize’, a strategic decision-maker should have the
courage to force a decision at a certain point despite the status of consensus-seeking efforts.

4.6.5 Building collective intuition

Developing a common understanding of the business and its environment among decision-makers is an important
way of reducing unnecessary con ict and disagreements, and improving decision agility. In order to do this,
managers need to share real-time information on the organisation’s internal operations and external environment at
regular compulsory meetings.

4.6.6 Stimulating quick conflict

Con ict, while oen seen as a bad thing, is necessary to obtain different viewpoints and robust alternatives. One way
to achieve con ict is to assemble decision-making teams that are diverse in their background, functional areas and
corporate experience. Using tactics such as scenario planning or war-gaming to challenge the status quo or the
obvious solutions is another way of achieving quick (yet productive) con ict). Working with multiple alternatives
also stimulates con ict and debate.

4.6.7 Defusing politics

e potentially negative effect of politicking on strategic decision-making can be reduced by emphasising common
goals, by ensuring that all managers have a clear area of responsibility where they have the nal say, and by using
humour to make the strategic decision-making process fun.

4.7 Summary
Strategic decision-making is a complex activity that differs from organisation to organisation. Because the quality of
strategic decisions is hard to link to the strategic decision-making process, it is difficult to ascribe the success of a
strategic decision to any particular approach or ‘recipe’. Every organisation needs to nd its own most appropriate
manner of making strategic decisions. In this chapter we examined the various approaches to strategic decision-
making, and the many contextual in uences on it, which further highlighted the complexity of this important
activity. It is easy to forget that the analysis of information on the macroenvironment, industry and internal
environment is ultimately the result of a process of intelligence gathering, analysis and dissemination. Many
organisations tend to focus on and use information that is close at hand, and easy and cheap to obtain, for example
internal nancial information, or online information in the public domain. However, as this chapter points out, the
quality of intelligence is related to the investment in obtaining intelligence from internal and external sources in line
with strategic direction. It is also related to the use of integrating mechanisms in the form of people, processes and
technology to add value to the intelligence for the sake of the decision-makers. is is not necessarily a cheap and
easy option, but research and experience have shown that organisations willing to do this have the opportunity to
develop a competitive advantage. Contrary to intuition, the role of information becomes even more important in
volatile environments, and we have seen that managers play a key role in interpreting and distributing information
in the organisation. We have also highlighted that managers can use simple approaches such as stimulating con ict
and developing collective intuition to improve decision quality, speed and efficiency in organisations.

REFLECTION BOX:

In a 20-year study of 80 000 predictions by experts from various fields, it was found that they were only slightly
more accurate than pure chance, and fared worse than even the most basic computer algorithms.64 What are
the implications of this finding for strategic decision-makers?

Opening case questions

1. Use the strategic decision framework in Figure 4.1 to explain what went wrong with Telkom’s Multi-Links
decision.
2. Provide a breakdown of the types of strategic market intelligence that Telkom would have found useful in the
Multi-Links decision.
3. Identify and explain the sources of intelligence they could have used.
4. Identify and explain the mechanisms they could have used to integrate and interpret intelligence.

Discussion questions
1. Describe what strategic decision-making is and what it is not.
2. Explain how strategic decisions are made.
3. Explain how context in uences strategic decision-making.
4. Is big data useful to strategic decision-making? Why, or why not?
5. In the case of a potential new competitor entering the industry, give examples of:
a) ve key intelligence topics
b) the CI activities that will assist strategic decision-making
c) the BI that will assist strategic decision-making
d) the integrating mechanisms that will be useful in integrating and analysing intelligence
e) if and how scenario analysis can be used.
6. Explain how an organisation could go about improving the quality and speed of its strategic decision-making
process.

Using knowledge and skills

1. Select an organisation of your choice. Interview three managers in this organisation to identify their strategic
decision-making processes and their use of integrating mechanisms (people, process and technologies).
a) How does this organisation make strategic decisions?
b) Given its context, do you feel that it uses an optimal strategic decision-making process?
c) What could the organisation do to improve the quality and speed of the strategic decision-making process?
2. Visit the web page of the Dinokeng scenarios. Would you say that they are useful in guiding strategic decision-
making for organisations? Motivate your answer.

Further reading
Brad eld, R., Wright, G., Burt, G., Cairns, G. & Van Der Heijden, K. 2005. e origins and evolution of scenario
techniques in long range business planning. Futures, 37:795–812.
Eisenhardt, K.M. & Zbaracki, M.J. 1992. Strategic decision-making. Strategic Management Journal, 13:17–37.
Nonaka, I. & Takeuchi, H. 1995. e knowledge-creating company: How Japanese companies create the dynamics of
innovation. New York: Oxford University Press.
Schoemaker, P.J.H. & Day, G.S. 2009. How to make sense of weak signals. MIT Sloan Management Review, 50(3):80–
89.
Shepherd, N.G. & Rudd, J.M. 2014. e in uence of context on the strategic decision-making process: A review of
the literature. International Journal of Management Reviews, 16:340–364. doi:10.1111/ijmr.12023

Suggested websites
Advanced Competitive Strategies (http://whatifyourstrategy.com/) – e website of advanced competitive strategies
that contains many publications on and examples of the use of competitive simulation.
AWARE (http://www.marketing-intelligence.co.uk) – A website with examples of strategic and tactical competitor
intelligence.
IBM Big Data & Analytics Hub (http://www.ibmbigdatahub.com/infographic/four-vs-big-data)
Indlulamithi: South Africa Scenarios 2030 (https://sascenarios2030.co.za)
SCIP (http://www.scip.org/) – e official website of Strategic and Competitive Intelligence Professionals.
e Knowledge Management Society of Southern Africa library (http://kmsa.org.za/library) – Provides a number of
useful resources about knowledge management

References and endnotes

 Compiled from Mfuphi, G. 26 May 2011. Telkom’s Multi-Links disaster: How Telkom’s Nigeria investment,
1. turned into a problem child. Moneyweb (online). Available: http://www.moneyweb.co.za/archive/telkoms-
multilinks-disaster/ [Accessed 22 March 2016]; ‘Telkom acquires full control of Multi-Links’ by Staff
Reporter, Iress © 2009. With permission of Iress.
2. Eisenhardt, K.M. & Zbaracki, M.J. 1992. Strategic decision-making. Strategic Management Journal, 13:17–37.
3. Shepherd, N.G. & Rudd, J.M. 2014. e in uence of context on the strategic decision-making process: A
review of the literature. International Journal of Management Reviews, 16:340–364. doi:10.1111/ijmr.12023
4. Based on Mintzberg, H. & Westley, F. 2001. Decision-making: It’s not what you think. MIT Sloan
Management Review, Spring: 89–93.
5. Ibid.
6. Musk, E. 20 July 2016. Master Plan: Part Deux. https://www.tesla.com/blog/master-plan-part-deux
7. Mintzberg & Westley. 2001. Op. cit.
8. Adapted from Mintzberg, H., Ahlstrand, B. & Lampel, J. 2005. Strategy bites back. Prentice Hall Financial
Times, 209–211.
9. Shepherd & Rudd. 2014. Op. cit.
10. Simon, H.A. 1976. Administrative behavior: A study of decision-making processes in administrative
organization. 3rd ed. New York: Free Press.
11. Adapted from Eisenhardt, K.M. & Zbaracki, M.J. 1992. Strategic decision-making. Strategic Management
Journal, 13:17–37.
12. Simon. 1976. Op. cit.
13. Eisenhardt & Zbaracki. 1992. Op. cit.
14. Shepherd & Rudd. 2014. Op. cit.
15. Ibid.
16. Ibid.
17. Eisenhardt, KM. 1989. Making fast strategic decisions in high-velocity environments. Academy of
Management Journal, 32(3):543–576.
18. See, for example, Goll, I. & Rasheed, A.A. 2005. e relationship between top management demographic
characteristics, rational decision-making, environmental muni cence, and rm performance. Organization
Studies, 26:999–1023; Eibanna, S. & Child, J. 2007a. In uences on strategic decision effectiveness:
Development and test of an integrative model. Strategic Management Journal, 28:431–453.
19. Adapted from McLeod, D. 25 November 2013. Telkom: Vodacom sale a ‘big mistake’. Tech Central (online).
Available: https://techcentral.co.za/telkom-vodacom-sale-a-big-mistake/45244/ [Accessed 12 April 2017].
20. Adapted from Chen, H., Chiang, R.H.L. & Storey, V.C. 2012. Business intelligence and analytics: From big
data to big impact. MIS Quarterly, 36(4): 1165–1188.
21. IBM Big Data & Analytics Hub. Available: http://www.ibmbigdatahub.com/infographic/four-vs-big-data
[Accessed 25 May 2018].
22. Makadok, R. & Barney, J.B. 2001. Strategic factor market intelligence: An application of information
economics to strategy formulation and competitor intelligence. Management Science, 47(12):1621–1638.
23. Hambrick, D.C. 1982. Environmental scanning and organizational strategy. Strategic Management Journal,
3(2):159–174.
24. For example Day, G.S. & Schoemaker, RJ.H. 2007. Seeing sooner. Marketing Management,
November/December:20–27.
25. Strategic and Competitive Intelligence Professionals. 2007. SCIP Code of Ethics for CI Professionals. [Online].
Available: https://www.scip.org/page/CodeofEthics? [6 June 2018].
26. Lynch, R. 2003. Corporate strategy. 3rd ed. London: FT Prentice Hall. 114.
27. Cody, W.F., Kreulen, J.T., Krishna, V. & Spangler, W.S. 2002. e integration of business intelligence and
knowledge management. IBM Systems Journal, 41(4):697–74.
28. Ibid.
29. Venter, P. 2009. A new look at marketing intelligence: Contemporary views and directions for future research.
Inaugural address University of South Africa, 24 March 2009 (unpublished).
30. Daniel, E., Wilson, H. & McDonald, M. 2003. Towards a map of marketing information systems: An
inductive study. European Journal of Marketing, 37(5/6):821–847, 839.
31. Ibid.
32. Internet.Com. 2010. Clickstream. [Online]. Available: http://www.webopedia.com/TERM/c/clickstream.html
[3 April 2010].
33. Chou, D.C., Tripuramallu, H.B. & Chou, A.Y. 2005. BI and ERP integration. Information Management and
Computer Security, 13(5):340–349, 344.
34. Ibid.: 347.
35. Venter. 2009. Op. cit.
36. Cody et al. 2002. Op. cit.: 839
37. Hart, M.L., Davies, K., Baker-Goldie, E-J. & eron, A. 2002. Issues affecting the adoption of data mining in
South Africa. SART/SACJ, 29:41.
38. Daniel et al. 2003. Op. cit.
39. Hess, R.L., Rubin, R.S. & West, L.A. 2003. Geographic information systems as a marketing information
system technology. Decision Support Systems, 38:197–212; Read, P., Higgs, G. & Taylor, G. 2005. e potential
and barriers to the use of geographical information systems for marketing applications in higher educational
institutions. Marketing Intelligence & Planning, 23(1):30–42.
40. Adapted from Ndlovu, R. 11 June 2017. PPC’s problems highlight challenges facing local companies
venturing into Africa. Sunday Times: Business Times. 4.
41. Venter. 2009. Op. cit.
42. Fleisher, C.S., Wright, S. & Allard, H.T. 2007. e role of insight teams in integrating diverse marketing
information management techniques. European Journal of Marketing, 42(7/8):836–851.
43. Murray, P. & Carter, L. 2005. Improving marketing intelligence through learning systems and knowledge
communities in not-for-pro t workplaces. Journal of Workplace Learning, 17(7/8):421–435.
44. Fahey, L. & Herring, J. 2007. Intelligence teams. Strategy & Leadership, 35(1):13–20.
45. Ibid.: 14.
46. Little, M. & Fahey, L. 2006. e model for integrating strategy and intelligence: e executive intelligence
officer. Strategy & Leadership, 34(6):4–10.
47. Ibid.
48. For example Trim, P.R.J. & Lee, Y. 2006. e role of marketing intelligence officers in strategy formulation
and implementation. Handbook of Business Strategy, (1):125–140.
49. For example Grant, R.M. 1997. e knowledge-based view of the rm: Implications for management practice.
Long Range Planning, 30(3):450–454.
50. Herschel, R.T. & Jones, N.E. 2005. Knowledge management and business intelligence: e importance of
integration. Journal of Knowledge Management, 9(4):45–54, 45.
51. e Gartner Group de nition in ibid.: 49.
52. Adapted from Nonaka, I. & Toyama, R. 2003. e knowledge-creating theory revisited: Knowledge creation
as a synthesizing process. Knowledge Management Research & Practice, 1:2–10, 5.
53. Schoemaker, P.J.H. & Day, G.S. 2009. How to make sense of weak signals. MIT Sloan Management Review,
50(3):80–89.
54. Brad eld, R., Wright, G., Burt, G., Cairns, G. & Van Der Heijden, K. 2005. e origins and evolution of
scenario techniques in long-range business planning. Futures, 37:795–812.
55. e Dinokeng scenarios. Available: http://www.dinokengscenarios.co.za/media_news.php [Accessed 6 June
218].
56. You can see an example of such a gameboard at http://www.mindofafox.com/
57. ValueWar© is an example of a computer tool that enables the creation of simulated environments as a means
to explore future scenarios. You can visit http://whatifyourstrategy.com/ to read more about this approach.
58. Daniel et al. 2003. Op. cit.: 839.
59. Metaxiotis, K., Ergazakis, K., Samoulidis, E. & Psarras, J. 2003. Decision support through knowledge
management: e role of the arti cial intelligence. Information Management & Computer Security, 11(5):216–
221.
60. From information on https://sascenarios2030.co.za/media/
61. is section is based on Eisenhardt, K.M. 1990. Speed and strategic choice: How managers accelerate
decision-making. California Management Review, Spring: 39–54; Eisenhardt, K.M. 1999. Strategy as strategic
decision-making. Sloan Management Review, Spring: 65–72.
62. Ibid.
63. Ibid.
64. Borchardt, W. 9 June 2017. How to make strategic decisions during tough times. Business Report. Available:
https://www.iol.co.za/business-report/how-to-make-strategic-decisions-during-tough-times-9595659.
 CHAPTER 5 Analysing the
macroenvironme
nt
Ernst Neuland

LEARNING OUTCOMES

After reading this chapter, you should be able to:

define and describe the external environment that organisations face
discuss the importance of analysing and understanding an organisation’s external environment
explain the strategic importance of macroenvironmental analysis in strategy formulation
define and discuss the macroenvironmental factors and forces of importance to organisations
describe how analysing an organisation’s macroenvironmental turbulence can be approached
explain the nine basic steps in environmental analysis
evaluate the merits of the SWOT and PESTEL approaches, the Issues Priority Matrix and Scenario Analysis in
analysing an organisation’s macroenvironment.

KEY TERMS

collectivist
economic risk
foreign direct investment
globalisation
gross domestic product
gross national income
individualistic
issues priority matrix
scenario analysis and planning
strategic myopia

OPENING CASE STUDY

MTN’s quest for growth in Africa1

 Headquartered in South Africa, MTN’s footprint spanned 22 countries in Africa and the Middle East in early
2017. It was estimated that revenues for 2017 would come mainly from the following regions: South Africa 31%,
Nigeria 28%, Iran 12%, Ghana 8%, and the Ivory Coast 6%. The remainder of the countries were expected to
each contribute 4% or less to total revenues. Despite its continued success since its listing on the JSE in1995,
MTN has shed 48% of its share price in the past few years. MTN’s new CEO Rob Shuter and his finance director
Ralph Mupita have ambitious plans to revive the company after a number of setbacks, such as a huge fine in
Nigeria, and Shuter has already implemented the ‘BRIGHT’ strategy based on the following six pillars: best
customer experience; returns and efficiency; igniting commercial performance; growth via data and digital;
hearts and minds; and technological excellence.
Referring to prospects in Africa, Shuter states that cellphones in Africa are mostly used for basic
communication (like voice and SMS messages), but with voice revenues falling globally, data and digital as well
as enterprise business are destined to become star performers. ‘Currently we have a population of around 650
million people in the countries in which we are involved, and expect that market to grow to some 700 million
people by 2020. Basically, it is like adding an entire South Africa to the current market,’ Shuter says.
The next 100 to 200 million people entering our market are expected to come from rural areas. MTN will have
to provide the right technology to them – not only regarding the networks, but also the appliances that will have
to be made available to them. ‘This market is comprised mainly of young people and they accept new
technology much more readily than their parents. MTN accordingly expects a huge upsurge in the demand for
mobile internet in Africa,’ Shuter states.
Despite the fact that MTN currently operates in six of the 10 most corrupt nations according to Transparency
International data (the countries being South Sudan, Syria, Yemen, Sudan, Afghanistan and Guinea-Bissau),
MTN also had to face huge challenges in recent years, such as the devastating US$1.5 billion fine in October
2015 against MTN’s subsidiary in Nigeria that failed to disconnect the unregistered SIM cards of some 5.2
million subscribers in order to comply with new regulations that had come into effect. However, the original
penalty of US$1.5 billion, which led to the resignation of the former CEO, was eventually settled at US$1 billion.
‘We are, however, still here, and I believe the company has a positive future despite these challenges,’ Shuter
maintains. MTN expects an improvement of the Nigerian economy mainly due to higher oil prices, while the
‘winds of change’ currently sweeping South Africa have also raised expectations regarding prospects ahead.
At Deloitte’s Conference on Africa’s Prospects for 2018 held at Woodmead, Johannesburg, in January 2018,
Shuter informed the audience: ‘We are optimistic about growth prospects in Africa and the Middle East.
However, our focus remains on our key geographical areas which include South Africa, Nigeria and Iran.’ It
appears that demands on MTN’s cash are finally easing up, which gives Rob Shuter’s new team an opportunity
to revive MTN’s African expansion drive, which had come to a halt in recent years. Shuter specifically flags
Angola and Ethiopia as two countries MTN is keen on entering. Angola has a population of around 31.2 million,
is characterised by low economic growth and has a mobile phone subscription rate of 55.3 per 100 people.
Ethiopia, with a population of around 102.4 billion, exhibits a much higher economic growth rate of 7.4 percent,
and has a mobile phone penetration of 69.9 per 100 people. However, Nick Hedley of the Financialmail poses the
question as to whether MTN’s risky foreign forays will come back to bite it again.

Overview
This chapter focuses on the external business environment and, more specifically, on the macroenvironment in which
the organisation operates. The need for and importance of macroenvironmental analysis, at times also referred to
as environmental scanning, a systematic process of collecting and analysing information for the purposes of
planning, and forecasting or choosing a preferred future will be demonstrated through discussion, evaluation and
interpretation of identified macroenvironmental factors and forces for strategic management purposes. The approach
to and methods of macroenvironmental analysis as a prerequisite for strategy formulation conclude this chapter.

5.1 Introduction
In the preceding chapters we explored the nature of strategic management and the requirements for sustainability in
a dynamic, complex and increasingly competitive external business environment. We now turn to strategic analysis,
the phase of the strategic management process that involves the evaluation of both the external and internal
environments of the organisation. While the external environment is comprised of two main components – the
macroenvironment and the industry environment – in this chapter we focus on the macroenvironment and its
analysis.
e Opening case study relates to MTN, a listed South African telecommunications company with operations in
22 countries throughout Africa and the Middle East. Different countries have vastly different political and legal
systems, are at different stages of economic development and also differ in terms of economic growth. Apart from
the need to be intimately informed regarding these factors, MTN also needs to be acutely aware of demographic and
sociocultural issues, especially when contemplating international expansion. In fact, being aware of and
understanding the implications of these environmental differences is imperative to effectively adapt an organisation’s
strategies, products, services and operations to such vastly different environments, thus the need for environmental
analysis or scanning of the relevant macroenvironments of interest to organisations. In this chapter we accordingly
focus on the structure of the macroenvironment and the importance of macroenvironmental analysis in general,
while the global implications of strategic analysis are highlighted in Chapter 11. Industry analysis and its role in the
strategic management process are explored in Chapter 6, and internal analysis of an organisation’s resources,
capabilities and competencies is addressed in Chapter 7.

5.2 Strategic relevance and structure of the external

environment
e strategic management process has evolved as an innovative way of aligning an organisation’s unique resources,
capabilities and competencies to the dynamic and increasingly competitive external environment in pursuance of its
goals, including through strategic stretch or strategic t, as highlighted in Chapter 1. As illustrated in the Opening
case study, striving to achieve such alignment has certainly been one of the main challenges inherent in MTN’s
international expansion initiatives. As we will see, external environmental forces can manifest themselves as
opportunities or threats to an organisation’s competitiveness, sustainable growth and pro tability, just as internal
forces or factors could represent inherent competitive strengths or weaknesses within an organisation. For example,
recall the devastating US$1 billion ne MTN was expected to pay because of its failure to disconnect the
unregistered SIM cards of 5.2 million subscribers in response to regulatory changes by the Nigerian authorities. is
could be seen as a political/governmental macroenvironmental threat. To respond effectively to external challenges
such as these, organisations need to know and understand their external as well as their internal environments and
pre-emptively obtain the relevant information they need for effective strategy formulation.2 Important
interrelationships between the organisation and its external environments are illustrated in Figure 5.1.
To facilitate further discussion in the chapter, the respective external environments and internal environment of
the organisation are now de ned with reference to Figure 5.1.
e external environment, comprising the macroenvironment and industry environment, includes everything
outside an organisation at global, country and industry levels that might affect the ability of the organisation to
attain its goals. e external environment includes factors beyond the control of the individual organisation such
as major global, regional and national politically and economically related events and new technological
breakthroughs, as well as industry factors that in uence its choice of strategic direction and actions.3
e macroenvironment, as a component of the external environment, includes political, legal, economic,
sociocultural, technological, demographic and natural environmental forces at global level and/or within a
 country. ese forces, whether global or related to a speci c country, originate beyond and are usually
irrespective of any single organisation’s operating situation.4
e industry environment, also a component of the external environment, includes actual and potential
competitors, suppliers, buyers (customers or distributors) and organisations that supply substitutes to those
products sold in the industry, and organisations that provide products which are complements to those sold in
the industry. Governments generally also in uence industry environments.5 (e industry environment is
discussed in Chapter 6).
e internal environment constitutes everything inside the organisation, and in particular its resources,
capabilities and competencies that might enhance or constrain the ability of managers to pursue certain actions
or strategies, and over which management typically has control.6

Figure 5.1: Structure of the external environment

e global business environment as part of the broader macroenvironment indicated in Figure 5.1 is pervasive and
provides a contextual frame of reference for the economies of individual countries and, more speci cally, for
industries and organisations within those countries. Global environmental forces that could impact countries,
industries within countries, and organisations within those industries are also classi ed into political-legal,
economic, sociocultural, demographic, technological and natural environmental categories for purposes of strategic
analysis. e above relationships are evident from Figure 5.1 and explored further in Chapter 11 where we discuss
the nature and implications of globalisation and the global business environment for international businesses and
their strategies. However, the above-mentioned forces arising from the global environment will not affect all
countries, or all industries and their organisations within countries, in the same way, to the same extent and at the
same time, once again emphasising the need for pre-emptive environmental scanning and analysis.
In the section that follows we now discuss the strategic importance of the macro-environment.

5.3 Strategic importance of the macroenvironment

e macroenvironmental factors tend to exert forces that have a major in uence on industries and hence on
organisations operating within them. As previously stated, these macroenvironmental forces will not affect all
industries, and organisations in those industries, in the same way. Forces emanating from macroenvironmental
factors indicated in the outer band of Figure 5.1 (political/legal, economic, sociocultural, technological,
demographic and natural factors at the global and individual country levels) therefore need to be identi ed,
analysed and interpreted in terms of their potential impact on an organisation’s strategic direction, competitiveness,
pro tability and, ultimately, on its survival. Since change is inevitable, and given the organisation’s existing vision
and mission, the information obtained from effective scanning of the macroenvironment and forecasting the
implications of macroenvironmental factors in the future will assist management to understand the organisation’s
preferred future better, as well as where it wants to be at a future point in time.
Palmer and Hartley7 contend that ‘[i]nformation represents a bridge between the organisation and its
environment and is the means by which a picture of the changing environment is built up within an organisation.
Management therefore needs to transform information and competitive intelligence obtained from
macroenvironmental analysis into knowledge that can be used for strategy formulation.’ Management has the
responsibility to conduct this macroenvironmental analysis in order to use this information to create strategy
formulation. As far back as 1991, Nonaka realised the importance of knowledge when he proclaimed that ‘[i]n
economies where the only certainty is uncertainty, the one sure source of lasting competitive advantage is
knowledge’.8
It should thus be evident that a clear link exists between the information obtained from comprehensive
environmental analysis of the organisation’s external (macro- and industry) and internal environments, and its
ultimate choice of strategy that effectively aligns the organisation’s internal and external environments.
e importance of assessing the organisation’s macroenvironment (and its internal environment) is furthermore
con rmed by the two approaches to strategy formulation discussed in Chapter 1, the inside-out and the outside-in
approach, both of which recognise and acknowledge the existence and importance of aligning an organisation’s
external and internal environments better than competitors do, in effect achieving superior strategic t and
sustainable competitive advantage.
Examples of how macroenvironmental forces have in uenced speci c industries and their member
organisations, which obviously required rethinking of existing strategies, include the following:9
Notwithstanding the challenges of rising international oil and petroleum prices and increasing environmental
pressures to combat pollution, recent breakthrough technological advances have resulted In the large-scale
manufacture of electric-powered vehicles and self-driving cars, leading to dramatic new competitive dynamics in
the vehicle manufacturing and transportation industries worldwide.
e ageing of the population in many countries, and especially in developed countries, has already resulted in the
recon guration of important consumer market segments to cope with changing consumer needs and buying
behaviour. Ageing populations hold implications for the healthcare industry and nancial retirement fund
sectors, as well as opportunities for the leisure and tourism industries resulting from increased affluence of the
elderly in certain communities.
Almost the opposite trend still exists in many emerging economies where, inter alia, due to relatively low
comparative life expectancy and relatively high fertility and birth rates, the youth segment is becoming
increasingly important compared to the higher age groups, presenting a potentially lucrative youth market for
more affordable products, which many multinational enterprises (MNEs) from developed countries, to their
detriment, failed to appreciate due to inadequate and poor macroenvironmental analysis.

ese examples clearly illustrate the complex nature of certain macroenvironmental forces in terms of their global
nature and potential impact on multiple industries or sectors within and across countries. ese important
relationships, where new developments in an industry frequently impact various other industries at the same time,
are discussed in section 5.4.9.
Change in the external environment in general, and the macroenvironment in particular, may occur gradually or
rapidly, with or without warning.10 Gradual change, especially in stable environments such as in the retail sector,
would typically allow organisations to timeously align and adapt their competitive strategies to new, gradually
emerging situations – generally, despite intense competition. However, change could also be rapid, discontinuous,
unanticipated, radical and disruptive, oen posing extreme challenges for organisations within such industries to
effectively adapt their strategies to the new or rapidly changing circumstances before competitors do, or disappear
from the scene. e strategic implications of environmental turbulence are highlighted in section 5.5.2. Under
conditions of environmental turbulence, the decision of adapting a blue ocean strategy comes to the fore, as we
further explain in Chapter 11. Examples of new, disruptive technological change that were mostly not foreseen are
highlighted in the following Case example.

CASE EXAMPLE: Are you really coping with radical environmental change?11
As far as radical change is concerned, Grant (2015) maintains that the perils of radical change are not difficult to
understand. At the core is the difficulty that established companies experience in developing the new
organisational capabilities demanded by new circumstances or a new area of business. Udo Gollub concurs
when stating that in 1998, Kodak had 170 000 employees, and sold 85% of all photographic paper worldwide.
Within just a few years, their photographic paper film business model disappeared with the advent of digital
photography. What happened to Kodak will happen to a lot of industries in the next 10 years – and most people
do not see it coming. Did anyone think in 1998 that three years later they would never take pictures on film paper
again? (Kodak survived extremely difficult times by eventually adopting digitisation). However, rapid unanticipated
change in macroenvironmental forces could lead to significant market expansion (as in the case of Amazon.com
rapidly capitalising on new technology, changing buyer behaviour and optimising logistics) or market contraction
(the replacement of video cassettes by extremely efficient compact disc technology within a short space of time,
while there are already signs that the same fate awaits compact discs due to digital streaming and related
techniques), and even to new levels of industry competition (as in the case of Uber providing extremely efficient
innovative, cost-effective, globally competitive civilian transport initiatives as an alternative to metered taxis at the
time of writing). Even more dramatic is the development of ‘air taxis’ or ‘flying taxis’ by Uber, Google and Geely
that will provide intra- and inter-city air transportation to commuters instead of conventional road transport. The
aforementioned examples undoubtedly serve to confirm the importance of pre-emptively scanning and analysing
the macroenvironment for trends that could impact specific industries and companies, and although such
changes are important by themselves, their implications are often not foreseen or totally ignored.

In the section that follows we take a closer look at the more important macroenvironmental factors and forces from
a strategy perspective.

5.4 Factors and forces of the macroenvironment

5.4.1 Introduction
e previous sections brie y described and illustrated the structure of the environments that business organisations
generally face, and highlighted the importance of the macroenvironment in terms of its potential in uence on
industries and their organisations. While the analysis of macroenvironmental factors and forces are referred to in
section 5.5.4, we rst highlight the nature and characteristics of the following broad categories of factors and forces
in the macroenvironment:
 Political-legal
Economic
Socio-cultural
Demographic
Technological
Environmental.

Organisations need information and strategic intelligence about these macroenvironmental factors and their driving
forces for the purposes of strategy formulation. We accordingly provide a brief overview of these factors, illustrate
the potential impact of their forces on industries and organisations, and conclude by highlighting the possible
interrelationships of these forces between and across industries.

5.4.2 Political-legal factors

It is generally accepted that there is a strong relationship between the political, legal and economic systems of a
country – this relationship is oen referred to as the political economy of a country. Political processes and
legislation de ne the legal and regulatory parameters that in uence industries and organisations within those
industries.12 Political stability and effective legal systems in a country are therefore of major importance for business
ventures with regard to successfully executing their strategies as planned.
Political-legal factors may either bene t or constrain the organisations they in uence. As an example of the
bene cial political in uence on business, refer to the Case example below, indicating the envisaged scrapping of the
rules on local mine ownership limitations instituted by the previous Zimbabwean government that required 51%
ownership by citizens of Zimbabwe, but is no longer a requirement in this regard. On the other hand, an example of
a constraining in uence is found where India’s government policy does not allow the establishment of foreign
wholly-owned subsidiaries in the Indian retail sector, but joint ventures with Indian counterparts are acceptable.
e potential effects of these forces are major issues that require serious consideration in the evaluation of the
macroenvironment. Pearce and Robinson13 state that political constraints placed on organisations could include
trade policies, competition policy, tax programmes, labour legislation, anti-pollution and pricing policies, the
regulation of e-commerce, and safety and security measures, all of which are generally aimed at the protection of the
workforce, consumers, the public and the environment. ese constraints, despite their ‘protective’ aims, typically
tend to increase costs and reduce the pro ts of organisations. Some political-legal actions, however, do serve to
protect and bene t the business sector. Laws that protect patents and other forms of intellectual property, the
provision of grants and subsidies for training and development of the workforce, and funding to encourage research
and development in strategically important areas generally tend to enhance business development. e following
case example on Zimbabwe illustrates a bene cial political-legal outcome for international mining companies in
Zimbabwe.

CASE EXAMPLE: Zimbabwe may scrap rules on local mine ownership14

During the Mugabe era the Zimbabwean government required that companies mining minerals in the country,
including platinum and diamonds, must be at least 51 percent owned by black citizens of the country. However,
while mining is Zimbabwe’s biggest source of foreign exchange and the country also has the world’s second
largest platinum reserves, this ruling on ownership law has become a serious concern for foreign investors.
During January 2018, President Emmerson Mnangagwa, who became president of Zimbabwe after Robert
Mugabe resigned, announced that the ownership requirement on all other minerals except platinum and
diamonds will be abolished. He stated that the government needed to assess these industries more carefully as
they are vital an economy that has halved in size since 2000 after a land reform program slashed the export of
 major agricultural products. The world’s two biggest platinum producers, South Africa’s Anglo-American Platinum
and Impala Platinum Holdings, who operate mines in Zimbabwe have slowed investment plans because of
concern over ownership law and that they also had to concede their concessions to the government. President
Mnangagwa went on to say that platinum and diamonds were only excluded for now. The sector experienced a
bleak first quarter. Nothing had happened and Zimbabwe’s Chamber of Mines, which presents most of the
mining companies in the country, wanted ownership restrictions on platinum and diamond mining operations to
be officially scrapped to attract more important industry players like Russian giant Alrosa PJSC. This case clearly
demonstrates how the political environment can enhance or deter international business initiatives.

Government legislation has facilitated deregulation and the privatisation of state-owned enterprises (SOEs) in many
countries – a particularly strong trend in the US in recent decades – in most cases with signi cant bene ts for the
SOEs, the industries and countries concerned. For example, deregulation of the commercial airline industry in the
US between 1978 and 1993 led to 29 new airlines entering the industry during this period, resulting in vastly
increased passenger-carrying capacity, new route networks that had to be served, more intense competition, and
price wars – all of this posing entirely new strategic and competitive challenges to the airlines concerned. is is an
excellent illustration of how macroenvironmental issues in uence organisations through their impact on the
industry in which they operate.15 In South Africa, notable successful privatisation initiatives to date include Telkom
and the Airports Company of South Africa (ACSA). Based on the generally accepted bene ts of privatisation, there
still seems to be a reluctance by the South African government to consider total or even partial privatisation of
SOEs, which include South African Airways, Eskom and Prasa (Passenger Rail Association of South Africa).
Industry-speci c regulators present a further example of an important but oen overlooked political-legal factor
in the macroenvironment that has a direct impact on an industry. Industry-speci c regulators are government
agencies or statutory bodies with the responsibility of formulating, interpreting and implementing rules and
regulations governing various elements of a speci c industry, shaping the structure and intensity of competition in
that industry, thus presenting opportunities or threats that organisations within that industry may face. A typical
example in South Africa is the Independent Communications Authority of South Africa (ICASA), a government-
controlled entity that regulates the telecommunications industry. For example, they grant licences to provide
telecommunication services as has been the case with mobile telecommunication operators MTN, Vodacom and
Cell C. Telkom and Neotel (which is in the process of being taken over by Liquid Telecom) were still the only xed-
line operators in the industry at the time of writing in early 2018. ese organisations have to operate and compete
within the regulatory framework of ICASA in South Africa.
However, MTN and Vodacom in particular have expanded their operations to other African countries and
further a eld, where they face and have to comply with, inter alia, different political, legal and sociocultural systems
in each of the foreign countries in which they are involved – aptly illustrated by MTN’s venture into Iran in 2006,
basically an Islamic country with a theocratic political system and a judiciary based on Islamic law. Despite the
numerous challenges MTN has had to face since entering Iran in 2006, its nancial expectations have been
vindicated.16 e role of industry-speci c regulators in driving industry competition is discussed in more detail in
Chapter 6.
In closing, analysis of the political-legal factors in the macroenvironment should include an assessment of the
potential for political risk. Political risk is the likelihood that political forces will cause drastic changes in an
organisation’s business environment that will adversely affect its pro t and other objectives. ese risks are
extremely difficult to forecast and usually occur unexpectedly. Notable political-legal risks that management should
be aware of are the following:
Government nationalisation of industries
Expropriation of property as well as private sector assets
Inadequate protection of intellectual property rights
 Absence of the rule of law
Unfair competition from the public sector
Government intervention in business operations and activities
Unexpected imposition of discriminatory taxation and barriers to international trade and industry investment,
oen with profound adverse economic implications for the business sector in the country concerned
Unexpected imposition or tightening of foreign exchange controls
National hostilities and military intervention, more oen in a regional or international context.

e purpose of examining political-legal factors is not only to create an awareness of their importance as regards the
extent of political stability in a country and a government’s ability to create and nurture an enhancing business
environment, but also to pre-emptively act on relevant, strategically important political-legal information.

5.4.3 Economic factors

e national economy of a country has an impact on industries, business and non-pro t sectors, consumers and
society in general.
Hill and McShane identify the following four important factors in the economic environment of a country:17
1. e growth rate of the economy Economic growth generally leads to increased consumer spending, business
expansion, pro ts and employment. In contrast, economic decline reduces consumer spending, increases
competition, and has an adverse effect on pro ts and employment, which was evident during the global nancial
crisis from 2006 to 2009 and affected all countries to a greater or lesser extent – including South Africa.
2. e level of interest rates e level of interest rates can in uence the demand for an organisation’s products or
services. Interest rate levels are particularly important when customers need to borrow money to nance
purchases, as increasing interest rates tend to inhibit purchases of luxury items and products such as appliances
and cars. is is most evident in the residential property market where transactions are extremely sensitive to
high interest rates. For organisations in this sector, high interest rates undoubtedly pose a serious threat.
3. Currency exchange rates Exchange rates re ect the differences between national currencies. Exchange rate
movements have a direct impact on the demand for an exporting organisation’s products in foreign markets. In
the period leading up to the end of 2001, the value of the rand fell dramatically against that of the US dollar, and
while some negative factors emerged, the cheaper rand boosted the export sales of South African companies,
who were more price competitive purely because of the currency exchange rate. An adverse effect at this time
was the increasing costs of imported goods and services due to a weaker rand against the US dollar, and the
potential adverse effects thereof on in ation and interest rates.
4. Price in ation In ation tends to have a destabilising effect on a national economy in terms of slower economic
growth, higher interest rates, and depreciating currency characterised by undesirable volatility in exchange rates.
High and continuous in ation, furthermore, makes it difficult to predict the future, which leads to greater
uncertainty, especially as far as xed investment decisions are concerned. For this reason, foreign investors are
reluctant to commit their funds to long-term investments under conditions of uncertainty. e combined effect
of the above-mentioned issues related to in ation will slow down an economy as well as consumer spending,
adversely affecting pro ts.

Economic performance of a country is re ected by its gross domestic product (GDP), gross national income
(GNI), and GDP or GNI per capita. GDP is a measure of the value of goods and services produced in an economy
during a speci c period, whereas GNI measures the total income received by the residents of a country. Economic
growth results from productive activities by organisations in a country which, in turn, result in an increase in these
measures for a country over time. Apart from the four economic factors discussed above, other factors or indicators
are useful in assessing a country’s macroeconomic environment. ese include the following:
Income levels within a country
Levels of disposable income
Levels of saving
Unemployment rates
National debt
Stock market indices, such as movements in the All-Share Index on the JSE over time
Con dence in a country as a destination for foreign direct investment (FDI), indicated by the global FDI
Con dence Index. FDI constitutes the direct investment in business opportunities in a foreign country.

As will be discussed in section 5.5.4.5, static data at a certain point in time with regard to all the factors discussed
above has limited value for purposes of an organisation’s strategic decision-making and strategy formulation for the
future. Trend analysis of these macroenvironmental factors over time provides more useful information, although
this method has limitations when compared to scenario analysis as discussed in section 5.5.4.4.
What is important, however, is that the timing and relative success of particular strategies can be in uenced by
changing economic conditions where adverse changes generally re ect economic risk, mainly due to the
mismanagement of a country’s economy. Government’s monetary policy has a bearing on interest rates and in ation
levels through regulation of monetary supply. Government also in uences the economic climate in a country,
mainly through taxation as well as expenditure on societal needs such as healthcare, education, welfare and
infrastructure.
Employment levels or, more importantly, unemployment levels have become a matter of grave socio-economic
concern in many countries worldwide, including South Africa. While the official unemployment rate in South
Africa was 27.5% at the time of writing in late 2018, the youth unemployment rate hovered around 40% attributed,
inter alia, to low economic growth since South Africa’s GDP remained well below 1%, over the two years to the end
of 2017.18 Looking beyond the traditional and obvious remedy for unemployment by, inter alia, attracting xed
investment to stimulate economic growth (a major challenge in itself), are there other (possibly unrelated)
macroenvironmental forces that need to be considered, given the continuous, rapidly changing global business
environment? If we keep in mind that strategising requires strategic thinking from a futures perspective, the Case
example Whence employment and careers? provides a few thought-provoking, futuristic scenarios regarding
employment.

CASE EXAMPLE: Whence employment and careers?19

IBM Watson, referred to as IBM Watson Analytics, is a smart data analysis and visualisation service in the
cloud that helps anyone to identify patterns and meanings in data. Watson is named after IBM’s first CEO,
Thomas Watson.
In the US, young lawyers are already struggling to find employment due to the computer analytics system
IBM Watson, which can provide legal advice on basic issues with 90% accuracy within seconds. As the
software develops further, the system will be able to answer more complex questions, and in future one might
require legal specialists only for very specific and complicated cases.
IBM Watson also allegedly assists qualified nurses to diagnose cancer more accurately than doctors
traditionally do.
Facebook currently has pattern recognition software that can recognise faces better than humans can, which
could render certain security-related jobs redundant.
Employment in certain sectors of insurance-related companies could be profoundly affected when self-drive
cars become mainstream after 2020, with accidents expected to drop from the current one accident every 100
 000 kilometres to one every 10 million kilometres. The current car insurance business model is bound to
disappear.

e emergence of global economic forces due to regional economic integration, resulting in the formation of trade
blocs and free trade areas, have generally become increasingly important for international business. Current trade
blocs and free trade areas such as the European Union (EU), the North American Free Trade Agreement (NAFTA)
(the name of which is due to change in the near future), the Association of South East Asian Nations (ASEAN) and
the Southern African Development Community (SADC) have had and still have a profound effect on business
involvement in the global economic landscape, where regional economic integration involves agreements among
countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free ow of
goods, services and factors of production between each other. For example, economic and trade policies enforced by
these groups could present both opportunities and threats, and affect organisations, especially those involved in
business with member countries of these groups, in terms of the ease or otherwise of entering their markets, in turn
requiring organisations to adapt their strategies to new and continually changing situations.20 ese and other
global issues, including their continuing convergence in international markets and the strategic implications of
them, are again referred to in Chapter 11.

5.4.4 Sociocultural factors

Sociocultural factors and forces in an organisation’s macroenvironment refer to the way in which changing social
values and norms, beliefs, attitudes, traditions, lifestyles and other culture-related attributes of a nation, society or a
group – its culture – affect an industry, and hence the organisations within that industry, where these changes could
create opportunities or threats.21 Sociocultural changes could occur as a result of religious, ethnic, educational,
demographic, lifestyle and ecological changes.
As social attributes of a nation, society or group change, so does the demand for different types of products and
services. Like other forces in the macroenvironment, sociocultural forces are continually changing, some more
rapidly than others, as a result of the evolving needs of individuals. Sociocultural forces oen change in response to
shiing environmental factors, including globalisation, that in uence buyer behaviour through gradually altering
values and beliefs. e strategies of organisations need to be adapted to changing sociocultural factors by creating
new products for both existing as well as new emerging markets, and adapting existing products to avoid
obsolescence. Management therefore needs to pre-empt the effects that changing sociocultural factors could have on
market size, industry competitiveness and pro tability. Generally, the only way to be pre-emptive is to scan the
macroenvironment, identify and analyse those forces relevant to the organisation and its industry, and act on the
information obtained.
Notable social trends in recent times include the following:22
Single parents, single-parent households or child-headed households, which have become increasingly prevalent
in South Africa, exhibit different buying and consumption patterns compared to other types of family units.
e increasing percentage of women in the workplace, as well as in leadership and management positions in both
the public and private sectors, in developed as well as in developing countries like South Africa, lead to higher
levels of disposable income, relatively more sophisticated lifestyles and a demand for new and different types of
products and services.
New trends in education, skills and talent development, combined with an increasing number of dual income
families, have resulted in higher basic and disposable incomes, changing lifestyles, and a demand for new,
innovative products and services.
 Increasing trends toward health and wellness present new opportunities and challenges for organisations to
provide exercise and tness centres and facilities, exercise equipment and clothing, health foods and beverages,
nutritional supplements and organic food products. In an interesting move, the Italian sweet manufacturer,
Ferrero Rocher, acquired the sweets manufacturing division of Nestlé in the US, allowing Nestlé to focus more on
the growing market for health foods, beverages, bottled water and pet food.23
New opportunities for leisure and recreation results in a growing demand for SUVs and outdoor equipment,
given the advantages of South Africa’s extremely favourable climate.
A major change in the age distribution of the population is an important trend that we will explore further in our
discussion on demographics as a macroenvironmental factor in strategy development.
e impact of HIV/Aids, from a macroenvironmental perspective, holds serious economic, socio-economic and
demographic implications, especially for the economically active population of a country – but also has far-
reaching implications for a country’s healthcare sector and its family life. is is evident from the following Case
example.

CASE EXAMPLE: HIV/Aids – an unforgiving phenomenon24

The situation regarding HIV and AIDS and selected indicators at the end of 2016 are outlined below:
The total number of people living with HIV globally was 36.7 million, of which 1.8 million were children.
Of the 36.7 million people living with HIV, around 30% of the adults were not aware of their status.
In 2016, HIV/Aids accounted for the deaths of one million people worldwide.
The vast majority of people living with HIV are located in low- and middle-income countries, with an
estimated 25.5 million living in sub-Saharan Africa, who in 2016 accounted for 44% of all new infections
globally.
Most encouraging, however, was that new infections have been declining by 16% per year from 2010 to 2016,
with 1.8 million infections in 2016, down from 2.1 million in 2015.
The number of people living with HIV in major regions of the world in 2016 was as follows:
» East and Southern Africa 19.4 million
» West and Central Africa 6.1 million
» Asia and Pacific 5.1 million
» Western Europe, Central Europe and North America 2.1 million
» Latin America and the Caribbean 2.1 million
» Eastern Europe and Central Asia 1.6 million
» Middle East and North Africa 0.23 million
Of extreme importance to business in general is the devastating effect of HIV/Aids on the economically active
segment of the population – notwithstanding a gradual decline in the number of people living with HIV/Aids,
mainly due to the availability of antiretroviral medication in recent years.

As previously stated, management should be aware that certain macroenvironmental factors or forces can present
both opportunities and threats. For example, the increasing trend toward health and wellness, which has been
identi ed as an opportunity for this sector, has become a threat to the tobacco industry because of a greater
awareness of the health risk associated with smoking.25
While most of the sociocultural changes referred to above have generally been fairly gradual, management
should be exceptionally alert to rapid and especially radical, disruptive sociocultural changes, such as those referred
to in section 5.4.6 below.

5.4.5 Demographic factors

Demographic shis are at the root of many changes in a society, and include changing trends with regard to
population size, growth and composition, rising or declining affluence in certain segments of a population, and
changes in the ethnic composition of a population over time, also as a result of the migration of people where
immigrants would probably contribute to greater ethnic diversity. More information on the regional population data
for the world in 2017 can be seen in Table 5.1.
Owing to globalisation, greater freedom of movement than before and increasing refugee streams from oen
devastated, developing countries to mainly developed countries, have accelerated in recent years.
Changes in regional or national geography and increasing urbanisation present new dynamics, also with the
potential of new opportunities and threats. Cultural diversity, differing lifestyles and levels of affluence present
signi cant strategic marketing opportunities to meet new consumer expectations and needs. Demographic criteria
or variables could further include age, life expectancy, gender, race, religion, sexual orientation, social class, level of
education, family size and orientation, and group rather than individual orientation, the latter typically found in
collectivist and individualistic societies respectively. Collectivist societies typically emphasise collective goals and
group harmony as opposed to individual goals. Individualistic societies typically emphasise the importance of
guaranteeing individual freedom and self-expression in pursuance of individual goals.
Changes in any one or more of these criteria or variables over time could have a signi cant impact on certain
industries and organisations within those industries, inter alia where one or more of these criteria or variables could
change the buying behaviour of consumers, speci cally for various age groups. In this regard, projections indicate
that between 2000 and 2050 the expected growth rates for the various age groups worldwide are as follows: 0–14
years: 0.15%;15–59 years: 0.79%; 60+ years: 2.35%; and 80+ years: 3.4%.26 It is obvious that the impacts of these
changes will vary across industries, giving rise to differing opportunities and threats that have to be timeously
identi ed.
As previously stated in section 5.3 and in terms of the projections highlighted above, it should be clear that the
ageing population has rather signi cant implications for healthcare as well as home healthcare, retirement
communities and recreation, which may once again present opportunities or threats. For example, ageing combined
with affluence with regard to a certain segment of the population could present opportunities and threats to
organisations in upmarket retirement complexes (lifestyle), the nancial sector (investments and pensions), and
travel and tourism (lifestyle, leisure and transportation).

Table 5.1 Growth in internet users (millions), 2000–201727

World internet usage and population statistics, June 30 2017

Population Internet
Penetration Growth
Population, (% of users 30 Internet
World regions rates (% (2000–
(2017 est.) world June users (%)
population) 2017)
population) 2017
Africa 1 246 505 16.6% 388 376 31.2% 8,503.1% 10.0%
865 491

Asia 4 148 178 55.2% 1 938 075 46.7% 1,595.5% 49.7%

672 631

Europe 822 710 362 10.9% 659 634 80.2% 527.6% 17.0%
487

Middle East 250 328 574 3.3% 146.972 58.7 % 4,374.3% 3.8%
123
 World internet usage and population statistics, June 30 2017

Population Internet
Penetration Growth
Population, (% of users 30 Internet
World regions rates (% (2000–
(2017 est.) world June users (%)
population) 2017)
population) 2017

North America 363 224 006 4.8% 320 059 88.1% 196.1% 8.2%
368

Latin 647 605 645 8.6% 404 269 62.4% 2,137.4% 10.4%
America/Caribbean 163

Oceania/Australia 40 479 846 0.5% 28 180 356 69.6 % 269.8% 0.7%

WORLD TOTAL 7 519 028 100% 3 885 568 51.7% 976.4% 100.0 %
970 619

5.4.6 Technological factors

We have witnessed astounding technological change in the global economy over the past two decades to the extent
that it has become unthinkable that organisations not operating at the frontier of new technological developments
will remain competitive, survive and grow. As outlined in Chapter 9, technological change has become pervasive
and can be both creative and disruptive. As previously referred to, sudden technological breakthroughs have far-
reaching consequences for speci c industries and the organisations within them. New technological products may
present unique opportunities for an organisation, or entirely new products may render existing products obsolete.
Technological innovation can create entirely new industries (e.g. the cellphone industry), alter the boundaries of
industries (e.g. each new generation of cellphones has included additional features, such as cameras, internet
connectivity and geographic positioning systems (GPS)), or lead to the demise of existing industries (e.g. MP3
players, which rendered CD players obsolete, and are in turn threatened by digital streaming of music and related
new technologies). Examples of this continuous and oen radical technological change is aptly illustrated in the
Strategy in action case below

STRATEGY IN ACTION: Technology – is there an end in sight?28

Udo Gollub (2016) summarises a number of key points regarding possible future implications of technological
developments that he gathered during a recent Futurist Conference of the Singularity University Summit held on
3 December 2016 at Messe, Berlin, in Germany. What follows is a summary of how participants envisaged the
world will operate in 10 to 20 years’ time, given the unabated technological advancement that we are already
experiencing.
Arrival of the ‘Exponential Age’ means that software and operating platforms will disrupt most traditional
industries in the next five to 10 years, as already evidenced in the case of Uber, regarded as just a software
tool that does not own any cars but is now the biggest taxi company in the world, and in the case of Airbnb,
the biggest ‘hotel company’ in the world, although they do not own any properties.
In artificial intelligence (AI), computers have become exponentially better at understanding the world.
Recently a computer beat the best Go (the abstract strategy board game) player in the world, 10 years earlier
than expected.
Certain occupations may be rendered obsolete in future due to technological advancements, as in the case of
IBM Watson now being able to provide instantaneous (basic) legal advice, and enabling nurses to diagnose
 cancer relatively effectively (as previously referred to in section 5.4.3).
Electric cars are expected to become mainstream around 2020, with substantially lower levels of air and
noise pollution.
While the first self-driving cars were expected to become available in 2018, the entire car industry will be
disrupted by 2020. Some implications: it will not be necessary to own a car anymore – people will call a car to
take them to their destination, be able to work while commuting, and will not need parking; it is expected to
change cities, fewer cars will be needed, and parking spaces and garages could be converted for productive
use; and accident rates will drop dramatically, radically affecting the vehicle insurance industry.
Most traditional car manufacturing companies may become bankrupt by not taking the evolutionary approach,
and by just continuing to build better conventional cars, while technology companies like Tesla, Google, Uber
and Apple will take the revolutionary road and build a ‘computer on wheels’. It is believed that some car
manufacturers are terrified of Tesla.
Solar energy production has been on an exponential curve for the last 30 years, but is only now starting to
have a big impact. Worldwide, the installation of solar energy has started to exceed that of fossil fuel energy
for the first time.
3D-printer prices have come down dramatically from US$18 000 to US$400 in 10 years. At the same time the
process has become 100 times faster. All major shoe producers have started 3D printing shoes, and spare
parts for aircraft are already being 3D printed at remote airports where they are needed. New smart devices
(smartphones and tablets) are expected to have 3D scanning capabilities soon. It is expected that by 2027,
10% of everything that is being produced will be 3D printed.

Questions
1. Select any three of the expectations mentioned by Gollub and for each one identify the industry or industries
that could be affected and/or disrupted should the expectation(s) materialise, and explain how they might be
affected.
2. Based on the content of this chapter, identify and discuss the most suitable environmental scanning and
environmental analysis method or methods you would consider for each of the three expectations you
identified in question 1 to obtain relevant, strategically important information regarding these potential future
developments.

e dramatic role of technological advancement cannot be ignored. However, since countries are all at different
levels of economic development and technological progress, change will obviously not occur to the same extent and
at the same rate in developing countries compared to highly industrialised countries. However, the fact that some of
the above-mentioned expectations may not be realised within the expected timeframes, or maybe not at all, is not
the question. e real issue here is whether organisations in their respective industries are scanning, analysing,
evaluating and monitoring the macroenvironment, and developing suitable scenarios which should enable them to
face future challenges better than competitors do by timeously aligning their strategies better than their competitors.
e internet, world wide web and social media have become part of everyday life. World internet users by region
as at 30 June 2017 appear in Table 5.1. e growth in internet users over the period 2000 to 2017 has been
signi cantly higher for developing than for developed regions. Growth in internet usage for Africa, the Middle East,
Latin America/Caribbean and Asia increased by 8 503.1, 4 364.7, 2 137.4 and 1 595.5% respectively from 2000 to
2017, while internet usage in Europe and North America, for example, increased only moderately by 527.6 and
196.1% respectively over this period.29 ese trends undoubtedly re ect unique and challenging investment, trade
and marketing opportunities for organisations active in or envisaging international business, especially in
developing regions. However, one should keep in mind that growth in internet users in developing regions referred
to above typically commences from an extremely low base compared to that in developed regions.
In the recent past, use of the internet required a computer. While this is still the case, new generations of mobile
phones and smartphones, as well as iPads, now also allow access to the internet.
 Information technology (IT) has become a major nancial, operational, and organisational component of
organisations’ strategies. In most industries, IT:.
neutralises traditional sources of competitive advantage such as size, location, vertical integration and
communications technology, in part depending on the industry
extends organisational reach by targeting multiple markets, domestic and international
creates virtual marketplaces through the internet and e-commerce
changes traditional modes of customer interface and distribution, such as online shopping
greatly enhances knowledge transfer, interorganisational collaboration and networking, domestically and
internationally
is neutral to traditional stereotypes such as gender, ethnicity and age.

Examples of technological developments with vast commercial potential include, but are not limited to, the
following:30
Genetic engineering
Robotics and continuous advancement in AI
Computer-aided design and manufacturing as well as 3D printing
Nanotechnology and its increasing importance in ghting cancer, transforming energy, replacing silicon in
microchips, and in space travel
Genetically modi ed food products
Manufacturing of electric and self-driving motor vehicles
Technological advanced multipurpose drones, including passenger-carrying drones.

Downsides of technological development are seen as, inter alia, its contribution to pollution and global warming in
certain instances and the impending requirement of retraining and reskilling for new emerging work and careers.

5.4.7 Factors related to the natural environment

An important factor in the macroenvironment is the delicate and oen sensitive relationship between business and
the ecology or, more speci cally, the natural environment. e term ‘ecology’ refers to the interaction among human
beings and other living things, and the air, soil and water in the natural environment that support them. reats to
the life-supporting ecology, caused predominantly by human, but especially industrial and commercial activities, are
referred to as environmental degradation.
Global climate changes have been accelerated by humanity’s activities. A change in atmospheric radiation, owing
in part to ozone depletion, causes global warming. is is caused by solar radiation, which is normally absorbed into
the atmosphere, reaching the earth’s surface, heating the soil, water and air. Other important issues which ecologists
emphasise are the extinction of important ora and fauna, and deforestation, which is occurring at an alarming rate.
Air pollution is created by dust particles and gaseous discharges that contaminate the air. Acid rain, basically rain
contaminated by sulphur dioxide, which can destroy aquatic and plant life, is believed to result from coal-burning
factories in 70% of all cases. A health-threatening ‘thermal blanket’ is created when the atmosphere traps carbon
dioxide, for example emissions from cars and factories. Also, avoiding contamination of water supplies is a major
challenge to even the most conscientious of manufacturers. Land pollution is caused by the need to dispose of ever-
increasing amounts of waste and, in recent decades, nuclear waste. Routine, everyday packaging is a major
contributor to this problem. Land pollution is also caused by the disposal of industrial toxic wastes in underground
sites.31
Global climate change is a vital issue that can no longer be ignored. One example is motor vehicle manufacturing
with implications for global warming largely due to the use of fossil fuels. e introduction of hybrid cars some time
ago and the current availability of electric cars have largely served to diminish air and noise pollution. However, the
following Case example on pollution and climate change clearly emphasises the increasing seriousness of authorities
to combat climate change and the implications thereof for commerce and industry.

CASE EXAMPLE: CDP – combating pollution and climate change32

CDP (formerly the Carbon Disclosure Project) is a registered charity headquartered in the UK, with a global
reach. Over the past 15 years CDP has created a system for engagement on environmental and climate change
issues among investors, companies, cities, states and regions worldwide, where the data gathered by CDP
enables these stakeholders not only to make better decisions, but also to measure their performance with regard
to decreasing their carbon footprint and combating climate change impacts. In 2017, more than 5 600 companies
responded to CDP’s climate change, water, forests and supply chain questionnaire. Furthermore, 71 of the
world’s states and regions now measure their environmental impact through CDP. In this regard, it is
commendable that Nedbank in South Africa became Africa’s first carbon-neutral financial organisation.
However, of critical importance to South Africa is the Carbon Tax Bill. The Bill provides a more detailed way to
quantify carbon emissions released by a company. It also provided clarity on when the Bill would first be
implemented. The carbon tax rate was established at R120 per tonne of carbon dioxide equivalent emitted. This
will increase annually by the inflation rate plus 2% until December 2022, and thereafter, at the rate of inflation.
According to Zelda Burchell, a senior consultant on carbon and energy at Cova Advisory & Associates, the
carbon tax will be a tax-deductible expense and a company’s carbon tax liability will be based on a number of
calculations. While the calculations consider a number of allowances or discounts, which would, inter alia,
depend on concepts like the ‘trade intensity’ of the sector, the tax would still have a significant negative effect for
carbon- and energy-intensive industries. However, Burchell warned that companies needed to be prepared and
be able to accurately quantify their emissions to ensure they would be paying the correct carbon tax.

e above Case example con rms that both the private and public sectors are being held responsible for eliminating
the toxic by-products of their manufacturing activities. Customers are becoming increasingly environmentally
conscious, and require products and services that are environmentally friendly. Worldwide, environmental
legislation impacts corporate strategies, which could be costly, as is evident from this Case example.
However, the natural environment may also exert a signi cant in uence on organisations. In this regard, natural
events include earthquakes, landslides, avalanches, oods, tidal waves, droughts, freezes and volcanic eruptions.
ere are two observations to be made about natural events:
eir impact upon business activity can be very powerful and, in almost all cases, the events are difficult to
predict or avoid.
e risk of certain natural events occurring varies by geographic location.

Natural in uences can occur on a scale from very small to very large. Two natural disasters of massive proportions
took place in 2010, when Haiti and Chile were devastated by earthquakes which effectively destroyed entire cities,
and hundreds of thousands of people were killed. For businesses affected by natural impacts, the effects can be
unexpected, extremely costly and devastating, as is evident in the Strategy in action case below.

STRATEGY IN ACTION: When ‘dry white’ is not a vintage but a disaster33

By January 2018, the severe drought in the Western Cape province of South Africa was taking its toll on key
industries that constituted the province’s mainstay of economic activity. In January 2018, the wine industry, which
accounted for 4% of global wine production and was the seventh largest global producer at the time, was bracing
 for its smallest harvest in more than a decade. During 2017, the wine industry generated revenues of about R9
billion and recorded a 4% increase in volume to 401 million litres despite concerns that land under tillage was
shrinking. The area under vines had been shrinking since 2007, with the total area having declined by 5%
between 2011 and 2016. Francois Viljoen, consultation service manager at Vinpro, said the drought that had
been prevalent in the province for three consecutive seasons would affect the 2018 harvest, given that most of
the industry’s large irrigation dams were only 30–40% full, but with rapidly declining volumes. This meant that
wine grape producers’ water resources were cut by 40–60%, and they could not fully meet their vines’ water
demand. Vineyards were beginning to show symptoms of water shortage and declining berry growth, a lighter
harvest, lower juice levels and thus lower volumes, resulting in higher prices. Economic observers said that other
economic sectors in the Western Cape, such as tourism, fruit farming and horticulture, would similarly take a
knock from the drought. Losses in revenue were expected to run into millions of rands. Even more profound
socio-economic effects were expected from the drought. In the third quarter of 2017, South Africa’s agricultural
sector saw 25 000 job losses, with the Western Cape accounting for 84% of them. Total job losses in 2017
numbered 109 000. The drought was also seen as an imminent concern for famers who ran the risk of losing
their farms due to debt caused by low production volumes and a long road to recovery. Interestingly, the yields of
other wine-producing countries, among them France, Italy, Spain and the US, had also been affected by natural
phenomena.

Questions
1. How important is the natural environment as a macroenvironmental factor that business organisations need to
consider from a strategic perspective?
2. Discuss the merits of scenario analysis and planning as an ‘environmental forecasting method’ for
assessment of possible climate change in the agricultural sector.

In the section that follows we conclude our overview of the external environment by looking at factors and forces
related to the global business environment.

5.4.8 Factors related to the global environment

Organisations worldwide have become increasingly involved in international business mainly through exporting,
expanding operations to foreign markets by means of foreign direct investment, licensing, and the formation of
international joint ventures and strategic alliances. e increasing trend in international involvement by
multinational enterprises has undoubtedly enhanced the ongoing process of globalisation. Globalisation has been
largely facilitated by declining barriers to international trade and investment, and generally made possible by
signi cant advances in technology – especially in communications and transportation technologies.34 To compete
internationally, organisations need to adopt viable international competitive strategies, which are discussed in
Chapter 11.
According to Hill (2014), globalisation refers to the shi away from distinctive national markets towards a more
integrated and interdependent world economy.35 Globalisation accordingly provides the context for the strategic
analysis of the external business environments – at both macro- and industry levels of the countries in which the
organisations operate, or in which they are contemplating international involvement. is involves analysis of the
macroenvironment in terms of political-legal, economic, sociocultural, demographic, technological and natural
environmental factors, including factors related to the global environment that may impact on countries, industries
and their organisations.
As stated in section 5.3, forces in the global environment will not affect macroenvironmental and industry
factors in all countries in exactly the same way and to the same extent. For example, the global nancial crisis that
emerged in 2008 and continued well into 2010 did not affect the nancial sectors in all countries to the same degree.
Financial institutions in a number of developed countries, in particular those with high-risk exposure to speci c
products such as sophisticated nancial instruments and unsecured mortgage bonds, were affected much more
seriously than those in other, mostly developing countries with much less risk exposure. As a result, it seems that
some emerging economies, including South Africa, weathered the storm much better than most developed
economies.
Owing to ongoing globalisation and increasing international competition, purely domestic organisations have to
analyse the macro- and industry environments in their home country and the potential effects of possible global
forces. Organisations involved in international business, however, also have to analyse and evaluate the
macroenvironmental and industry factors and forces for each one of the countries with which they do business.
While we use the same six macroenvironmental factors to assess the global environment, the forces related to
them are bound to differ profoundly in emphasis as well as impacts when compared to the same forces in an
organisation’s domestic macroenvironment. In this regard, Table 5.2 illustrates typical domestic environmental
factors and forces which could, however, also be appropriate for analysing the environments of other countries, but
allowing for country differences. Following is a brief exposition of the main factors to be analysed in a global
context:
Economic factors are the differences in economic systems (whether free market, mixed or command economies),
levels of economic development, economic growth rates, per capita income levels and disposable income levels,
monetary and scal policies, interest rate and in ation rate levels, wage levels and extent of exchange controls
need to be evaluated, inter alia, to determine country attractiveness for international involvement.
Political factors include political ideology, political systems (whether democratic, totalitarian or theocratic), form
of government, degree of political stability, political risk, government attitude towards foreign business
organisations, competition policy and ease of doing business.
Legal factors include legal traditions, legal systems (whether common law, civil law or theocratic legal systems),
existence of the rule of law or otherwise, effectiveness of legal systems, extent of protection of intellectual
property, treaties with other countries, and whether repatriation of pro ts and dividends to the parent country is
allowed.
Sociocultural factors include differing customs, norms and values, lifestyle, language, literacy levels, religious
beliefs and attitudes, levels of education, social unrest, frequency of strikes, and levels of crime, corruption and
fraud.
Technological factors include levels of technological development and infrastructure, availability of technological
skills, and the extent and government support of research and development (R&D).
Demographic factors refer to population size, age structure, gender, income levels, lifestyle and leisure, as well as
rate of urbanisation and other demographic shis.
Natural environmental factors include the abundance of natural resources, climate, availability of energy and
water, degree of air pollution regulations, and the extent of waste management and recycling.

While some ‘domestic’ and ‘global’ factors or forces may seem similar, organisations need to analyse and evaluate
them separately and individually for each country in which they are involved or envisage such involvement. is
applies speci cally where these factors or forces relate to and could in uence country attractiveness, industry
attractiveness and competitiveness, market size and market potential for an organisation’s products and services.
Deciding on international competitive strategies, based on sound strategic analysis, is discussed in Chapter 11.

5.4.9 Relationships among factors of the macroenvironment

us far we have only referred brie y to interrelationships between the various elements or factors of the
macroenvironment. In section 5.3, the potential impact of changes in the international oil price on the vehicle
manufacturing industry, on ecological issues such as pollution, and energy as a scarce resource were identi ed.
Likewise, the demographic issue of ageing populations was seen to hold implications for industries or sectors which
include social security, healthcare, retirement funds, retirement housing, and possibly leisure, recreation and
tourism, where the latter could in turn present an opportunity to the hospitality industry, locally and internationally,
transportation in general and the commercial passenger airline industry in particular. e discussion in section
5.4.4 clearly indicated that HIV/AIDs as a sociocultural factor has economic, social and demographic implications.
Again, technological factors such as advances in technology could improve productivity, resulting in lowering the
in ation rate (an economic factor). An increase in interest rates could decrease the demand for residential houses,
which would affect the building and construction industries, as well as the loan and mortgage divisions of nancial
institutions. However, notwithstanding the typical relationships between macroenvironmental factors outlined
above, and taking a more future-oriented, strategic perspective, a question could be which macroenvironmental
factors as well as industry considerations would possibly be relevant once ‘ ying taxis’ become a commercial reality?
Effects of or trends in macroenvironmental factors could vary from global to regional and national, and also
across industries within countries, once again affecting organisations through the effect on their industries. For
sustainable competitive advantage, management should be acutely aware of and well informed about existing as well
as envisaged macroenvironmental changes.

5.4.10 Summary
In this section we explored the more important macroenvironmental factors and forces, both globally and within
countries, and their characteristics and potential impact on industries and organisations within industries.
Information obtained from analysing these factors and forces is of vital importance for sound strategy formulation
as part of an organisation’s strategic management process. In the sections that follow, selective methods for analysing
the macroenvironment are investigated.

5.5 Analysis of the macroenvironment

5.5.1 Introduction
As forces in the external environment change, organisations need to know how to recon gure or adapt their
strategies to remain competitive. ey therefore need to continuously scan the external environment (macro- and
industry environments at global, regional and country levels) to identify emerging opportunities and threats.
Managers who developed a keen awareness of and are alert to actual and potential macroenvironmental changes,
and are able to predict the possible impact of these changes on their industries and markets with a high degree of
certainty, can be regarded as a source of competitive advantage. In the sections that follow we rst explore the
characteristics and impact of environmental turbulence, and then discuss selected techniques to assess an
organisation’s macroenvironment.

5.5.2 Assessing macroenvironmental turbulence

According to Lynch (2006),36 the environmental turbulence that organisations face can be assessed by means of the
following two measures changeability and predictability.
Changeability is seen as the degree to which the macroenvironment, or segments of it, is likely to change. For
example, changeability in the market for food products such as milk and bread is low, re ecting low
changeability, whereas the market for mobile phone handsets, characterised by rapid and continuous
technological improvements, re ects high changeability.
As a further re nement, changeability is seen as comprising of two components: complexity and novelty.
Complexity is viewed as the degree to which an organisation’s macroenvironment is affected by complex external
 factors such as continuing globalisation and rapid technological, social and political change. Novelty involves the
degree to which the macroenvironment presents an organisation with new situations and unique opportunities,
as in the case where technology has created the opportunity and made it possible to use drones to deliver
medicines to clinics in the mountainous areas of Rwanda.
Predictability involves the extent to which macroenvironmental change can be predicted. For example, change
can be predicted with some certainty in the motor vehicle market, re ecting high predictability, but it is
extremely difficult, if not impossible, to predict change in areas such as biogenetics and AI, re ecting low
predictability. Predictability can also be further subdivided into the rate of environmental change, either rapid or
slow, and visibility of the future. In terms of ‘visibility of the future’, for example, the availability and usefulness of
information for long-term weather forecasting in particular is low. is is because the information becomes
increasingly uncertain and, as a consequence, less useful the further into the future one goes. Weather forecasts,
especially long-term ones, are of critical importance for the agriculture industry.

Based on these considerations, it is possible, to categorise and assess changeability and predictability in relation to
states and degrees of macroenvironmental turbulence. Given the industry in which an organisation operates – high
or low changeability, and high or low predictability – it is assumed that management would be aware of the type of
turbulence it faces and which macroenvironmental analysis techniques would be most suitable to assess turbulence.
is brief outline on macroenvironmental turbulence accordingly provides a point of departure to analyse the
macroenvironment for a speci c organisation from the perspective of the industry in which it operates. In the
discussion below, we rst explain how macroenvironmental analysis could be approached, and follow it with a
discussion of a number of frequently used techniques for macroenvironmental analysis.

5.5.3 A guideline for macroenvironmental analysis

As one approach to macroenvironmental analysis, Lynch proposes a nine-stage process to analyse the external
environment as outlined below.37 Note that stages one and two relate partly to all organisations, irrespective of the
industries in which they are involved, while the remaining seven stages relate to a speci c industry, and hence to
organisations in it:
Stage 1: Environment basics. An initial evaluation to de ne and explore the basic characteristics of the
environment including market size, market share and market growth. e outcome of this stage is an attempt to
de ne the strategic market scope, future growth prospects, and market competition for the organisation.
Stage 2: Consideration of the degree of turbulence in the environment. General considerations including whether
change is fast or slow, repetitive or unique, unpredictable or forecastable, and whether these changes will exert
simple or complex in uences on the organisation.
Stage 3: Background factors that in uence the competitive environments. Consideration of background factors
that in uence the competitive environment, such as the macroenvironmental factors listed in Table 5.2 as well as
emerging scenarios, to identify opportunities and threats, and the predictability of these macroenvironmental
variables.
Stage 4: Analysis of the stages of market growth. Analysis of the stages of market growth as they relate to the
industry life cycle to identify the growth stage in which the industry and hence the organisation nds itself.
Stage 5: Factors speci c to the industry. Analysis of success factors speci c to the industry to identify those
factors relevant to strategy development for the organisation.
Stage 6: Factors speci c to the competitive balance of power in the industry. Analysis of factors speci c to the
power balance in the industry, based on a Five Forces industry analysis in an attempt to identify these factors
within the industry.
 Stage 7: Factors speci c to cooperation in the industry. Analysis of factors speci c to cooperation in the industry
by identifying current and future organisations for potential networking and cooperation.
Stage 8: Factors speci c to immediate competitors. Analysis of factors speci c to immediate competitors by
means of competitor and product portfolio analyses, competitor pro ling, and analysing the relative market
strengths of competitors.
Stage 9: Customer analysis. Analysis based on market segmentation studies to develop strategies targeting
existing and potential customers.

Table 5.2 Basic stages in environmental analysis38

Stage Techniques Outcome of stage

1. Environment basics – an opening Estimates of some basic factors Basic strategic analysis of:
evaluation to define and explore surrounding the environment: Scope the strategic opportunity
basic characteristics of the Market definition Establish future growth prospects
environment Market growth Begin to structure market competition
Market share

2. Consideration of the degree of General considerations: General strategic conclusions:

turbulence in the environment Change: Fast or slow? Is the environment too turbulent to
(section 5.5.2) Repetitive or surprising future? undertake useful predictions?
Forecastable or unpredictable? What are the opportunities and threats
Complex or simple influences on the for the organisation? (section 5.5.4.1:
organisation? SWOT analysis)

3. Background factors that influence PESTEL analysis and scenarios Identify key influences
the competitive environments (sections 5.5.4.1 and 5.5.4.5) Predict, if possible
Understand interconnections between
events

4. Analyse stages of market growth Industry life cycle (section 6.2.4) Identify growth stage
Consider implications for strategy
Identify maturity, overproduction and
cyclicality issues

5. Factors specific to the industry Key factors for success analysis Identify factors relevant to strategy
(section 6.2.2) (section 8.4)
Focus strategic analysis and
development

6. Factors specific to the competitive Five Forces analysis (section 6.2.3) Static and descriptive analysis of
balance of power in the industry competitive forces (section 6.2.4)

7. Factors specific to cooperation in Four Links analysis – analysing the Analysis of current and future
the industry extent of cooperation with others organisations with whom cooperation
is possible
Network analysis

8. Factors specific to immediate Competitor analysis and product Competitor profile (section 6.3)
competitors portfolio analysis (section 6.3) Analysis of relative market strengths

9. Customer analysis (section 6.3) Market and segmentation studies Strategy targeted at existing and
potential customers (section 6.3)

For the analysis and evaluation of an organisation’s macroenvironment, a number of widely used techniques are
brie y discussed in the following sections.
5.5.4 Conducting macroenvironmental analysis
5.5.4.1 SWOT analysis
Over time, the SWOT analysis method has been a popular approach to analysing the external environments of
organisations. SWOT is an acronym for strengths, weaknesses, opportunities and threats, where strengths and
weaknesses relate to internal organisational factors, and opportunities and threats relate to external environmental
factors. In this approach, a list of the organisation’s strengths and weaknesses is innovatively and appropriately
matched with concomitant environmental opportunities and threats, with the purpose of enabling organisations to
focus on their strengths, avoid their weaknesses, capitalise on opportunities and counter threats in terms of their
strategic planning.
Examples of selected macroenvironmental factors and forces appear in Table 5.3. Keep in mind that a
macroenvironmental factor, for example an economic factor, has implications known as forces, for example
in ation, volatile exchange rates, etc. Internal factors are discussed in Chapter 7. e list of external factors is not
exhaustive, but merely serves as an indication of the sources of information which, if relevant, should be considered
and preferably included for purposes of macroenvironmental analysis and strategy formulation.
Despite its popularity, SWOT analysis has a number of shortcomings that largely limit its usefulness. First, it is a
static representation of identi ed external factors, and unless it is combined with a technique like scenario analysis it
has little bearing on the future for strategic planning purposes. Second, it is imperative that identi ed SWOT factors
be prioritised to ensure that maximum impact and bene t are derived from the matching of internal and external
factors. Prioritisation will also enhance the optimal allocation of resources. e combination of external and internal
factors to produce a SWOT matrix is presented in Chapter 7.

5.5.4.2 e PESTEL approach

e macroenvironment consists of six external variables, known by the acronym PESTEL, which represents
political, economic, sociocultural, technological, ecological and legal variables. e PESTEL analysis involves the
identi cation of macroenvironmental factors for organisations. As stated before, organisations use information from
macroenvironmental analysis to develop or adapt their strategies to minimise the effects of threats, and capitalise
on opportunities. Unlike the broad list of environmental factors and forces provided in section 5.5.4.1 and Table 5.3,
which merely serve as a guideline to consider, the management of organisations requires information regarding
potential opportunities and threats speci c to their organisation. e PESTEL approach provides a useful way of
identifying factors and forces that are relevant to the organisation within the industry in which it operates. For
example, the PESTEL approach for a commercial airline within the commercial airline industry can be structured as
illustrated in Table 5.4 to obtain speci c information on the following macroenvironmental factors and forces.

Table 5.3 Examples of macroenvironmental factors and forces

Political-legal Economic
Political stability Economic growth – GDP and GNP
Regulation/deregulation of industries Monetary and fiscal policies
Trade policies – incentives and disincentives Level of interest rates
Competition policy Level of inflation
Tax laws Levels of disposable income
Exchange controls National debt levels
Labour legislation Foreign direct investment
Protection of intellectual property rights Tax systems and tax rates
Legal system/rule of law Import/export factors
Government bureaucracy Infrastructure – utilities, transportation and distribution
Employment and unemployment rates
 Sociocultural Technological
Culture – values, beliefs, norms, religion Levels of innovation and especially product innovation
Women in the workplace Levels of technology adeptness and productivity
Lifestyle changes Robotics and AI
Social welfare, healthcare and housing Technology transfer
Structure and diversity of society Government spending on R&D
Transmittable diseases, e.g. HIV/Aids E-business, internet marketing and online shopping
Levels of education General ICT levels in commerce and industry
Language and levels of literacy Technological literacy
Levels of crime, corruption and fraud Telephony, internet and wireless proficiency
Ageing populations Cloud computing and other advanced IT applications

Natural environment/ecological Demographic

Levels of pollution Population size and growth rates
Environmental protection laws Mobility and migration
Waste management Extent and rates of urbanisation
Water recycling Age distribution
Deforestation Gender distribution
Water pollution Religious orientation
Air pollution Income levels
Carbon footprints Consumer behaviour
Global warming Consumption patterns
Ozone depletion Geographic distribution

Table 5.4 PESTEL – examples of macroenvironmental opportunities and threats39

Political Economic
Government intervention and support for national carriers Interest and inflation rate levels
Security requirements and controls Economic growth rate
Effects of existing international airline treaties Exchange rates (especially in terms of the procurement of
fuel) and fuel prices

Sociocultural Technological
Increase in travel by the elderly Fuel-efficient engines and airframes
Increase in tourist and student air travel High-technology security equipment
Multilingual cabin crews Teleconferencing for business class passengers

Ecological (natural environment) Legal

Air and noise pollution controls Landing and preferential airport rights for airlines
Energy consumption controls Restriction on airline mergers
Noise pollution controls Increase in domestic and International safety regulations

e list of factors or forces highlighted in the example provided in this table is not exhaustive, and organisations
have to identify and consider all factors relevant to their own organisations. From a strategic perspective, further
analysis of the potential impact or effects of identi ed factors or forces is imperative to determine the extent and,
where possible, also the timing of any potential impact that could occur. While PESTEL analysis is extremely useful,
it should be kept in mind that it only provides information at a speci c point in time. However, the future impact of
identi ed factors and forces are of greater importance for effective strategy formulation.
Accordingly, when interpreting the outcomes of PESTEL analysis, management should be acutely aware of the
following:
As stated above, PESTEL factors or forces are ‘static’ and therefore only present a starting point for unravelling
the future implications of these factors.
 e identi ed macroenvironmental factors should not be seen in isolation, but the implications of various factors
could be interlinked, for example technologically advanced fuel-efficient engines (technological and economic
factors) also exhibit lower air and noise pollution levels (natural environmental factor).
PESTEL analysis combined with scenario analysis (see section 5.5.4.4) and planning may provide superior
strategic information which could contribute to the organisation’s competitive advantage.

e PESTEL approach, as stated, should lead to more extensive and detailed analysis of relevant
macroenvironmental factors or forces. Key to the process is identifying strategically important issues expected to
have an impact on the industry and the organisation concerned, especially with a view to the future.

5.5.4.3 e issues priority matrix

Organisations are bound to respond differently to the same environmental changes because of differences in the
ability of managers to recognise and understand external strategic issues and factors. Few organisations can
successfully monitor all potentially important external factors. Even though managers agree that strategic
importance determines what variables are consistently tracked, they sometimes miss or choose to ignore crucial new
developments. Personal values of an organisation’s managers and the success of current strategies are likely to bias
both their perceptions of what is important to monitor in the external environment as well as their interpretations of
what they perceive. is is known as strategic myopia, an embedded personal tendency to reject unfamiliar and
especially negative information. Organisations therefore may not be gathering the appropriate, vitally important
external environmental information necessary to adapt or change strategies successfully, resulting in declining
competitiveness at best, and complete failure at worst. One way to identify and analyse strategically important
developments in the macroenvironment is to use an issues priority matrix as described below, using the framework
outlined in Figure 5.2. An issues priority matrix is an approach that simultaneously assesses the extent of both the
probability of a macroenvironmental event occurring and the extent of its probable impact on an organisation.
Identify a number of likely key trends emerging in the macro- and industry environments using a technique such
as the PESTEL approach. ese are strategic environmental issues: those important trends that, if they happen,
will determine how various industries might be affected, what they will look like, and what strategic responses
could be required.
Assess the probability (from low to high) of these trends actually occurring.
Attempt to ascertain the likely impact (from low to high) of each of these trends on the organisation.

ere are three possible ratings in the issues priority matrix, namely low, medium and high. e issues priority
matrix can be used to help managers decide which environmental trends should be merely scanned (low priority)
and which should be monitored as strategic factors (high priority). Important external strategic factors of an
organisation are those environmental trends that are judged to have both a medium-to-high probability of
occurrence and a medium-to-high probability of impact on the organisation. As an example to illustrate the
application of this approach, consider the ‘sugar tax’ that the South African government has legislated. For a
company manufacturing sugar-based beverages, the probability of the legislation being introduced appeared to be
high, despite objections raised by that industry and other related ones. e probable impact on this speci c sector is
also regarded as high in terms of increased cost to the consumer, which could adversely affect demand for such
products and, in turn, sales and pro tability. is macroenvironmental factor will obviously have no consequences
for industries that do not use sugar. All relevant environmental trends judged to be of speci c importance to the
organisation are then categorised as potential opportunities or threats. is approach could be supplemented by
scenario analysis and planning for a more comprehensive outcome. e value of the issues priority matrix is that it
allows organisations to pre-emptively adapt their strategies better than competitors do. We now look at scenario
analysis and planning in the section that follows.
Figure 5.2: Issues priority matrix40

5.5.4.4 Scenario analysis and planning

Owing to the general increased pace of change in the external environment, it is reasonable to assume that over time
most organisations will have to face increasing rather than decreasing levels of uncertainty and complexity (refer to
section 5.5.2). It has thus become imperative that management adopt an innovative approach to strategic thinking
and strategic analysis to generate a dynamic, future-orientated view of evolving environmental change. Scenario
analysis and planning is an extremely useful approach in understanding future-orientated macroenvironmental
industry and competitive dynamics and change, providing plausible alternative views of how the business
environment of an organisation might develop in future. (See section 4.5.2.3.)
Scenarios, scenario analysis and scenario planning concern the medium- to long-term future and embrace the
possibility of pre-emptively providing foresight regarding possible future change. According to Hill et al., scenarios
offer plausible alternative views of how the business environment of an organisation might develop in future.41
Accordingly, scenario analysis is the identi cation and structured investigation of possible future con gurations
of the wider business environment at both global and individual country levels through consideration of political-
legal, economic, sociocultural, demographic, technological and ecological factors.42 According to Ringland,
‘scenario planning is that part of strategic planning which relates to the tools and technologies for managing the
uncertainties of the future.’43
Scenario planning involves the development of ‘what if ’ plans with regard to a range of possible alternative
futures based on different strategic assumptions. Scenario planning therefore is essentially an innovative approach to
get managers to be alert to and understand the dynamic and complex nature of the external environment, to think
strategically and to generate a range of strategic options that could be pursued under different circumstances and
varying envisaged environmental conditions, as illustrated in the following Case example of Shell Oil Company.

CASE EXAMPLE: Scenario planning and analysis – Shell Oil Company44

Scenario planning has proved its usefulness in coping with strategic uncertainty over the medium- to long-term.
Scenario planning has essentially proved to be superior to trend analysis, extrapolation of past occurrences, or
the popular high and low forecasts of future events often used in strategic planning.
 The Shell Oil Company has pioneered and refined the business application of scenario planning since the
1960s, and especially during the more turbulent and volatile period from 1970 onwards. Shell combined strategic
information and innovative assumptions about possible futures to create plausible scenarios.
‘The result of the 1973 oil embargo was a sharp increase in crude oil prices, short supplies of gasoline for
consumers, and a depressed world economy.’45 Shell’s strategic planning division at the time suggested that ‘a
more unstable environment was coming, with a shift of power from oil companies to oil producers’.46 Based on
this foresight, Shell took precautionary actions, and as a result was in a far better position than most other oil
companies when the 1973 oil embargo occurred. Shell’s strategic assumptions about the future and their
scenarios led to major new oil field investments to minimise the risk of total dependence on the oil producers.
Shell’s scenario-planning process involved the following stages:
Extensive open-ended interviews with people and experts both inside and outside the industry
Analysis of interview information by issue, to build an ‘agenda’ of potential expectations
Synthesis of each agenda to identify underlying areas of uncertainty and possible interrelationships among
issues
Workshops to explore key issues to understanding and identifying gaps for further research
Building a small number of scenarios that may occur over an identified future period of five to 10 years or
longer – Shell developed scenarios 20 years into the future
Testing strategy options against the scenarios to assess the effectiveness of strategies under more than one
scenario.

Shell’s strategies based on their scenarios aided them to cope with rising oil prices after 1973. While
expectations generally were that the oil price would just keep on rising, one of Shell’s scenarios at the time was
based on the strategic assumptions of a drop in the oil price. In 1984, crude oil was at US$28 a barrel (up from
US$3 in 1973). In February 1986, the oil price dropped to US$17 a barrel, and was at US$10 two months later.
Shell, however, was prepared for this and when it happened, adapted its strategies to investigate alternative
sources of energy and renewed its fleet of oil tankers, while its competitors’ strategies were based on continued
rising oil prices. During the 1980s, Arie de Geus and Pierre Wack had developed scenario planning at Shell to a
fine art.
According to Grant, Shell prepares its global scenarios about every four years, where economic, political,
technological and demographic trends are explored 20 years into the future, with their 2005–2025 scenarios
based on three sets of forces: market incentives, community, and coercion and regulation, as well as on three
objectives: efficiency, social cohesion and security.47

As already stated, a major bene t of scenario analysis and planning is that it avoids the limitations of traditional
planning methods such as simple forecasting, trend analysis and extrapolation methods which at best are only
appropriate in cases of short planning horizons, a limited number of variables, and relatively low risk levels. is
implies that traditional single-point forecasts can no longer provide reliable medium- or long-term data in dynamic
and uncertain external environments.
Scenario analysis and planning can also aid decision-making by providing managers with unique insights
regarding possible future environmental change. Schoemaker48 concurs, stating that ‘scenario planning enables
managers to compensate for two common errors in decision-making: the under-prediction or over-prediction of
change. Scenario planning allows charting a middle course between under- and over-prediction, expands the range
of possibilities, and prevents management from driing into unbridled science ction’. Scenario planning makes this
possible by dividing management’s knowledge into the following two areas: (1) things they believe they know
something about; and (2) elements they consider uncertain or unknowable.
e rst area takes account of the past, recognising the existence of continuity, while the second area provides
the major challenge, requiring management to make a judgement about the degree of certainty or uncertainty
involved.
 Scenario planning, which involves the structured use of managerial judgement to develop and capture multiple
possible futures for an organisation, should provide direction for and enhance the quality of an organisation’s
strategies and action plans, as is aptly re ected in the Case example Scenario planning and analysis – Shell Oil
Company.
e following guidelines for scenario analysis suggested by ompson49 as far back as 2001 are still relevant
today:
1. Clarify key external strategic issues which are likely to impact on the future that the organisation could face.
While managers internally would already have their own views that might be subjective and partial rather than
objective and future orientated, and which provide the basis for current operations, it is imperative to also
consult experts outside the organisation. ree types of issues must be considered:
» Predetermined elements – for example social change such as size, structure, lifestyle and values of the
population
» Key uncertainties – potential political change and the economic change that usually follows
» Driving forces – developments in critical areas such as technology and education.
2. Identify and examine a number of possible outcomes related to and based on strategic assumptions regarding the
various key issues – keeping in mind the importance of debating both positive and negative implications of
issues, as well as the impact of interconnectedness between them. e outcome should provide some degree of
consensus as well as the priorities in terms of plausible scenarios that can be tested further. is stage of the
analysis should generate creativity and enthusiasm. e test will require answers to the following questions:
» What has been omitted or overlooked? is questions the extent and comprehensiveness of the analysis.
» Is everyone in the organisation committed to the outcomes and do the generated scenarios provide a clearer
understanding that will more effectively inform future decisions and actions?

In scenario analysis, preferably four plausible alternative scenarios should be considered. Managers should develop
strategies across the full range of scenarios, otherwise much of the opportunity for strategic thinking will be lost.
e real value of developing scenarios does not lie in the planning process, but rather to challenge and change the
mental models and existing assumptions of decision-makers.50
In closing, sound scenario analysis and planning as part of strategy formulation will undoubtedly contribute to
sustainable competitive advantage in conditions of unpredictability and change.

5.5.4.5 e bene ts of macroenvironmental analysis

Macroenvironmental analysis has real or potential bene ts for an organisation, which could include the following:
It increases managerial awareness of environmental changes.
It increases understanding of the context in which industries and markets function.
It improves understanding of relevant multinational and global issues.
It helps improve resource allocation decisions based on strategic priorities.
It enables management to identify and reduce risk due to a greater awareness and understanding of potential
environmental threats.

Macroenvironmental analysis accordingly focuses attention on the importance of actual and potential strategic
change, particularly during the environmental scanning process, and acts as an early warning system that allows
management to identify emerging opportunities and threats, and to devise appropriate and timeous responses in
this regard.

5.5.4.6 e limitations of macroenvironmental analysis

e macroenvironment can be extremely complex, and at any one time there may be con icting and contradictory
changes taking place. Also, the pace of change in many macroenvironmental forces is increasing, with the
environment becoming more turbulent and unpredictable. Increasing change and uncertainty have, to some extent,
cast doubt on the value of conducting macroenvironmental analysis at all. Some argue that by the time an
organisation has come to terms with one major change in the macroenvironment, another change oen occurs that
requires even more attention and action. However, an approach of ‘emergent’ instead of ‘deliberate’ strategising
would largely overcome this concern.
Accordingly, managers who are concerned with strategic analysis must:
be aware of the limitations of macroenvironmental analysis since industries differ in terms of both their degree
and rate of change as well as the unpredictability of such change
understand the complexity of the environment in which they operate and the sources of information on which
the analysis is based
conduct analysis continuously (because changes occur frequently)
constantly seek to identify more appropriate sources of information and techniques for analysis
use the information as one source of organisational learning (alongside other information-gathering activities)
use the information to inform future strategy.

However, the advantages of macroenvironmental analysis far exceed any potential disadvantages. If approached
correctly, the effect of limitations can be minimised or even avoided. Macroenvironmental analysis remains an
invaluable means of increasing the strategic awareness of managers regarding the environments in which they
operate and must compete.

5.5.5 Summary
In this section we focused on a number of approaches to the analysis of the external environment. More speci cally
we considered the analysis of environmental turbulence, explained the PESTEL approach, issues priority matrix and
scenario analysis and planning approaches to macroenvironmental analysis.

5.6 Summary
e macroenvironment comprises external factors that typically affect all organisations. Changes in the
macroenvironment are of extreme importance to organisations since they are bound to in uence market expansion
or contraction, determine the level of competition within an industry, and identify potential technological advances
that could lead to the creation of new industries or the demise of existing ones. ese macroenvironmental changes
can be evaluated using PESTEL analysis to identify trends in political-legal, economic, sociocultural, technological,
ecological and legal factors and forces. Managers can then create an issue priority matrix to classify environmental
trends as low, medium or high in terms of probability of occurrence and their impact on an organisation’s strategy.
Another important approach to macroenvironmental analysis is scenario analysis. Management can use this
technique to clarify issues, identi ed in a PESTEL analysis, which may impact on the future of the organisation. e
outcomes from this analysis need to be evaluated in terms of the likelihood of their occurrence and potential
impacts on the future of the organisation. Recommendations on how to deal with each possible impact then follow.
Resources required for each recommendation need to be identi ed to enable its implementation. e purpose of
these analyses is to highlight potential opportunities on which to capitalise, or identify potential threats to be
minimised, depending on the strategy that management chooses to pursue.
Macroenvironmental analysis should be a continuous process. Managers need to be vigilant in identifying and
observing changes in the macroenvironment and adjusting an organisation’s strategies accordingly. ey need to
consider all aspects of the environment which might include factors that do not normally affect the organisation. It
is critical for an organisation to be future-orientated and anticipate environmental change. is could determine
success or failure in the choice and implementation of the organisation’s strategies.

REFLECTION BOX:

How would you view the major changes in the global business environment related to each of the
macroenvironmental factors highlighted in this chapter over the next 30 years – political-legal, economic,
sociocultural, technological, demographic and the natural environment? Also, do you think the impact of these
changes would be the same for developing countries as for developed countries from a global business
perspective?
Hint: Refer to the following video clip to stimulate your reflection: The world 2020–2050
http://www.youtube.com/watch?v=rU2iTUeCfkI [Accessed 30 January 2018]

Opening case study questions

1. Why should MTN scan the global business environment as well as the macroenvironments of Angola and
Ethiopia prior to their decision to expand operations to these two countries?
2. Identify, prioritise and discuss the major macroenvironmental factors related to both Angola and Ethiopia
relevant to MTN. Explain why these factors are important to MTN.
3. Apart from information derived from analysis of the macroenvironmental factors that you identi ed and
discussed in question 2, what other information would enhance MTN’s decision-making to expand to Angola
and Ethiopia? Provide examples to support your answer.
4. Based on your answers to the questions above, summarise your ndings and recommendations regarding MTN’s
decision to expand to Angola and Ethiopia in a report to MTN’s management.

Discussion questions
1. Why is the analysis of macroenvironmental factors and forces of such importance in strategic management?
Support your answer with practical examples.
2. Identify relevant political-legal, economic, sociocultural and technological trends that have a signi cant impact
on the South African agricultural industry, and discuss the strategic implications of the identi ed trends for
South African commercial farmers.
3. Critically discuss the following statement: ‘Major environmental opportunities and threats usually result from
interaction among key environmental trends rather than from a single external environmental factor or event.’
Do you agree with this statement? Explain your answer.
4. From a strategy perspective, why is assessment of changeability and predictability of an organisation’s business
environment of such importance? Analyse and evaluate changeability and predictability of environmental
turbulence for organisations involved in the platinum mining sector compared to the consumer retail sector.
5. Apply the PESTEL approach to identify the relevant macroenvironmental factors that a prospective low-cost
airline intent on entering the South African domestic airline sector needs to consider, and explain the
implications of each of the identi ed factors in a brief report to the company’s management.

Using knowledge and skills

e following exercise should be useful in identifying important sources of external information. A key requirement
when preparing an analysis of the external business environment is to use one or more search engines to access
relevant published sources of information on political-legal, economic, sociocultural, demographic, environmental,
technological and competitive trends and events in the external environment. External opportunities and threats
need to be identi ed and evaluated before strategies can be formulated effectively.

Instructions
Step 1: Select a company or business of your choice. Conduct an external analysis for this company. Identify
opportunities and threats from information in appropriate sources such as recent company reports,
including annual reports, media articles and special reports on the company.
Step 2: List ve opportunities and ve threats that this company faces. Be speci c in stating each factor and
provide reasons for your choice.
Step 3: Include a bibliography of your sources of information.
Step 4: Share your information with the management of the company or business in a pre-arranged interview.
Obtain information to enhance insight and support your analysis and ndings.
Step 5: Write a three-page report on your ndings and submit it to your lecturer.

Further reading
David, F.R. 2013. Strategic management, 14th ed. New York: Pearson.
Grant, R.M. & Jordan, J. 2015. Foundations of strategy, 2nd ed. Chichester, UK: Wiley.
Hill, C.W.L. 2019. International business: Competing in the global marketplace, 12th ed. Boston, MA: McGraw-Hill
Learning.
Hill, C.W.L., Schilling, M.A. & Jones, G.R. 2017. Strategic management: An integrated approach, 12th ed. United
States: Cengage Learning.
Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. 2013. e management of strategy: Concepts and cases, 10th ed. United
States: South Western Cengage Learning.
Reeves, M., Haanaes, K. & Sinha, J. 2015. Your strategy needs a strategy. Boston, MA: Harvard Business Review
Press.
ompson, A.A., Peteraf, M.A., Gamble, J.E. & Strickland, A.J. 2012. Craing and executing strategy: e quest for
competitive advantage,18th ed. New York: McGraw-Hill Irwin.

Suggested websites
e following websites contain comprehensive information on various international, regional and national
environments and strategic issues:
Business Day (http://www.businessday.co.za)
CIA World Factbook (http://www.cia.gov)
Economist (http://www.economist.com
Financial Mail (http://www. nancialmail.co.za)
Finweek (http://www.netwerk24/ nweek.co.za)
International Monetary Fund (http://www.imf.org
Internet World Stats (http://www.internetworldstats.com)
Transparency international (http://www.transparency.org)
United Nations (http://www.un.org)
World Bank (http://www.worldbank.org)
World Economic Forum (http://www.wef.org)

References and endnotes

1. Adapted from Hedley, N. 2018. Shuter’s Gamble. Financial Mail, 18–24 January, 20–24.; Hedley, N. 2018.
Angola beckons MTN. Financial Mail, 18–24 January 25; Wood, E. 2018. Hoof positief oor MTN se groei in
Afrika. Beeld Sake (free translation of content); Monteiro, A. 2018. MTN sees return to pro t aer $1 billion
loss from Nigerian ne. Bloomberg, in BIZNEWS [Accessed 30 January 2018]; Ozturk, A., Joiner, E. &
Cavusgil, S.T. 2015. Delineating foreign market potential: A tool for international market selection.
underbird International Business Review. March/April, 57(2):119–141.
2. Hill, C.W.L., Schilling, M.A. & Jones, G.R. 2017. Strategic management: An integrative approach, theory &
cases. 12th ed., Boston, MA: Cengage Learning, 18–20.
3. Ireland, R.D., Hoskisson, R.E. & Hitt, M.A. 2013. e management of strategy: Concepts and cases, 10th ed.
United States: South-Western Cengage Learning, 32–35.
4. Ireland et al. 2013. Op. cit.: 32–46; Gamble, J.E. & ompson, A.A. 2011. Essentials of strategic management,
2nd ed. New York: McGraw-Hill Irwin, 40–47.
5. Ireland et al. 2013. Op. cit.: 32–34; Gamble et al. Op. cit.: 40–41.
6. Ireland et al. Op. cit.: 61–67.
7. Palmer, A. & Hartley, B. 2009. e business environment, 6th ed. Boston, MA: McGraw-Hill, 29.
8. Nonaka, I. 1991. e knowledge creating company. Harvard Business Review, 69(6):96–104.
9. Dess, G.G., Lumpkin, G.T. & Eisner, A.B. 2008. Strategic management, 4th ed. Boston, MA: McGraw-Hill
Irwin, 45–47; Hough, J., ompson, A.A., Strickland, A.J. & Gamble, J.E. 2011. Craing and executing
strategy, 2nd ed. South African edition. London: McGraw-Hill, 57–58.
10. Hough et al. 2011. Op. cit.: 58.
11. Gollub, U. 2016. Into the future. Futures Summit. Conference held at the Singularity University, Messe,
Germany, 3 December 2016. 1. Summary of highlights available:
http://www.https://guyaneseonline.net/tag/singularity-university-summit/ [Accessed 1 February 2018];
Grant, R.M. & Jordan, J. 2015. Foundations of strategy, 2nd ed. Chichester, UK: Wiley, 176–177; Reeves, M.,
Haanaes, K. & Sinha, J.J. 2015. Your strategy needs a strategy. Boston, MA: Harvard Business Review Press, 1–
5.
12. Hill, C.W.L. 2014. International business. 10th ed. Global edition. Boston, MA: McGraw-Hill, 38.
13. Pearce, J.A. & Robinson, R.B. 2009. Formulation, implementation and control of competitive strategy, 11th ed.
Boston: McGraw-Hill Irwin, 97–98.
14. Bloomberg, 2018. Zimbabwe may scrap rules on local mine ownership. Business Day, 24 January, 2;
Bloomberg News. 2019. Zimbabwe mining rms want ownership restrictions scrapped. [Online]. Available:
www. n24.com/Economy/Africa/Zimbabwe-mining- rms-want-ownership-restrictions-scrapped-
20190421-2cnt [Accessed 8 August 2019].; www. n24.com/Economy/bleak- rst-quarter-of-2019-for-
Zimbabwe-mining- rms-20180523; www.wonline.co.za/article/191375/Zim-mining-chamber-of-
commerce-calls-for-scrapping-of-ownership-restrictions/69; www.zimbabwesituation.com/news/zimbabwe-
mine-output-subdued-in- rst-quarter-as-dollar-crunch-bites
15. Jones, G.R. & George, J.M. 2009. Contemporary management, 6th ed. Boston: McGraw-Hill Irwin, 201.
16. Hedley, 2018. Op. cit.: 20–24.
17. Hill, C.W.L. & McShane, S.L. 2008. Principles of management. Boston, MA: McGraw-Hill Irwin, 28.
18. http://www.statssa.gov.za
19. Gollub. 2016. Op. cit., https://www.watson.ibm.com/watson/; Hill. 2014. Op. cit.: 256–261.
20. Hill. 2014. Op. cit.: 256–261.
21. Ireland et al. 2013. Op. cit.: 41–42.
22. Adapted from David, F.R. 2013. Strategic management: Concepts and cases, 14th ed. Global edition, New York:
Pearson, 97–99; Hill. 2014. Op. cit.: 91–93; Ireland et al. 2013. Op. cit.: 41–42.
23. Beeld. 2018. Nestle VSA-lekkergoed na Ferrero. Sakenuus, 19 Januarie, 13 (free translation of content).
24. Avert.org. 2016. Worldwide HIV and AIDS statistics. http://www.avert.org [Accessed 12 February 2018].
25. Hill et al. 2017. Op. cit.: 70.
26. Worthington, I. & Britton, C. 2009. e business environment, 6th ed., London: FT Prentice Hall Financial
Times, 154.
27. Gollub. (nd). Op. cit.: 1.
28. Miniwatts Marketing Group. Internet World Stats. 2017. https://wwwinternetworldstats.com/stats1.htm
[Accessed February 2019]. Op. cit.
29. http://www.worldinternetstats.com [Accessed 1 February 2018]. Internet usage information comes from data
published by Nielsen-Online, by ITU (International Telecommunications Union), by GIK, by local ICT
regulators and other reliable sources. Information from this site may be cited, giving the due credit and
placing a link back to http://www.worldinternetstats.com © 2017, Miniwatts Marketing Group.
30. Baker, S. & Ashton, A. 2004. Universe in a grain of sand. Business Week, 11 October, 139–140; Gollub (nd).
Op. cit.: 1.
31. Pearce & Robinson. 2009. Op. cit.: 99.
32. Burchell, Z. 2018. Carbon tax is an imminent reality and rms must be ready. Business Day, 30 January, 7.
http://www.cdp.net/en/scores.2017 [Accessed 30 January 2018] (Note: CDP reports are available at
https://www.cdproject.net); Omarjee, L. 2018. 5 things you need to know about the Carbon Tax bill. Fin24, 24
November 2018. [Available: https://www. n24.com/Companies/Industrial/5-things-you-need-to-know-
about-the-carbon-tax-bill-20181124 [Accessed 15 February 2019].
33. Ndlovu, R. 2018. When ‘dry white’ is not a vintage but a disaster. Business Day Business Times. 21 January, 18;
Brand-Jonker, N. 2018. Droogte, wyn tekort kan tot hoer pryse lei. SakeBeeld. 19 January, 10; Fridjhon, M.
2018. Vines can resist a drought, but there is angst about quality. Business Day, 26 January, 5.
34. Hill. 2014. Op. cit.: 4–8.
35. Hill. 2014. Op. cit.: 5.
36. Lynch, R. 2006. Corporate strategy. 4th ed. Harlow, England: Prentice Hall Financial Times, 82–83.
37. Lynch. 2006. Op. cit.: 80.
38. Ibid.
39. Johnson, G., Scholes, K. & Whittington, R. 2008. Exploring corporate strategy. 8th ed. Harlow, England:
Prentice Hall Financial Times, 56.
40. Adapted and reprinted from: Long Range Planning, 17(3), June 1984. Lederman, L.L. Foresight activities in the
USA. Time for a reassessment. © 1984. Pergamon Press, with permission from Elsevier; Palmer et al. 2009. Op.
cit.: 525–527.
41. Hill et al. 2017. Op. cit.: 27–29.
42. Grant et al. 2015. Op. cit.: 174.
43. Ringland, G. 1998. Scenario planning: Managing for the future. Chichester; John Wiley, cited in Bakhru, A.
2006. Analysing the external environment. Walton Hall, Milton Keynes: e Open University, 87.
44. Martin, R. 2002. e oracles of oil. Business 2.0. 20 January, 35–39; Epstein, J. 1998. Scenario planning: An
introduction. e Futurist, September, 50–52; Palmer et al. 2009. Op. cit., 523–524; Grant et al. 2015. Op. cit.:
174–175.
45. Martin.2002. Op. cit.: 35–39.
46. Ibid.
47. Grant et al. 2015. Op. cit.: 174.
48. Schoemaker, P.J.H. 1995. Scenario planning: A tool for strategic thinking. Sloan Management Review,
36(2):25–40.
49. ompson, J.L. 2001. Strategic management. 4th ed. London: omson Learning, 270–271.
50. Grant. R.M. 2003. Strategic planning in a turbulent environment: Evidence from the oil majors. Strategic
Management Journal, 24:491–514.
 CHAPTER 6 Analysing the
industry
environment
Peet Venter

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain what the term ‘industry’ means
define the boundaries of an industry for analysis
identify industry key success factors in different industry settings
conduct an analysis of the competitive forces in an industry and identify their impact on competition and
profitability
apply the industry life cycle to an industry and identify the impact on industry dynamics and strategy
explain how a competitor analysis can be conducted
explain how strategic group analysis can be used to analyse competition in an industry
explain how a customer analysis can be conducted and its impact on competition and strategy.

KEY TERMS

bargaining power
complementor
cost leadership
differentiation
end-game strategies
industry
industry life cycle
key success factors
market
market segments
new entrants
strategic group
substitutes
 OPENING CASE STUDY

The automotive industry of the future: Are car manufacturers ready for it?1
The global automotive industry is changing, and not all of it is good news for traditional automakers and their
supporting industries. Car manufactures are already acceding that change is required. Early in 2018, North
America CEO of BMW, Ludwig Willisch, said: ‘With the introduction of every new model, there will be a plug-in
hybrid version of that, too.’ But this strategy may be too little too late, as the industry is facing fundamental
challenges to the way it has always done business.

Car design
Most car manufacturers are still bound to the fossil fuel engines that the industry was built on, and while hybrid
engines are a step in the right direction, the future seems to lie with electric cars. However, the key players in
this industry are not necessarily the traditional car manufacturers, but seem to come from other sectors, with
Tesla (energy) the most notable new entrant to the car market, achieving a great deal of success with its earlier
models, such as the Tesla S. Other key players are poised to enter the market, with Google (Waymo project)
and Apple (Titan project) both working on electric cars.
Driverless cars are also further threatening the automotive industry as we know it, with McKinsey expecting
that they will become mainstream between 2020 and 2040. While the cost of driverless cars is currently
prohibitive, this is a problem that new-generation technology companies such as Tesla, Apple and Google are
arguable better poised to solve than traditional automakers such as Ford and Toyota.

Impact on related industries

If the changes in car design we explored here come to fruition, this will also have a profound effect on the
supporting industries and those who currently benefit from it, as it will mean a move away from an oil-based
economy. For example, if the batteries can be charged wirelessly as electric cars are driven in a ‘charging lane’
(using dynamic wireless charging), service stations may become a thing of the past.
Driverless cars may have a noticeable impact on the income of governments, as the issuing of fines may
become yet another victim of profound industry change. Currently in most countries car licence fees are based
on emissions. As this becomes irrelevant, it will impact severely on government income from road users.
Roads of the future will require new materials and new planning techniques to accommodate a new
mainstream intelligent kind of vehicle, and will also require major changes to existing infrastructure at a massive
cost to taxpayers.
With driverless cars, who is at fault if an accident occurs? Can intelligent driverless cars be stolen without the
car reporting it to the authorities? These questions could have profound implications for the short-term
insurance industry, whose main source of income is car insurance premiums.
As we can see from this overview and the examples in it, industry changes do not occur in isolation – they
could have profound impacts on customers, incumbent players in the industry, regulators and supporting
industries.

Overview
This chapter focuses on an analysis of the industry environment, in which the two most important forces are
competitors and customers. The chapter begins by examining what an industry is and how the various players in it
interact and compete. It then focuses on the analysis of competitors and customers as a means of understanding
how their perceptions, actions and reactions could influence and shape strategies.

6.1 Introduction
e previous chapter examined the impact of the macroenvironment on an organisation. is chapter focuses on
the environment in which the organisation is a direct participant – the industry environment. An industry can be
described as a ‘group of rms producing products that are essentially the same’.2 In the industry environment, the
organisation deploys a competitive or business strategy that strives to attain a sustainable competitive advantage. It
should be noted that an industry is not the same as a market, which can be described as a group of customers for a
group of products and services that satisfy the same need. One industry can accordingly serve many different
markets.
As we can see from our Opening case study, there are many in uences in the immediate environment that affect
an organisation’s potential competitive position. us the organisation’s interaction with competitors, customers and
other industry role players may have a profound impact on its relative competitive advantage and pro tability, and
that of other industry players.
Understanding the industry and industry dynamics can assist an organisation to select the best strategies to deal
with industry conditions (the outside-in perspective – see Chapter 1, section 1.5.2). In examining the industry
environment, this chapter will focus on two broad areas of analysis:
Industry analysis necessitates de ning the industry, understanding industry key success factors, the effects of
industry evolution, industry structure, and competitive and cooperative dynamics.
Intra-industry analysis focuses on the analysis of competitors and customers in the industry to identify
opportunities for creating or protecting competitive advantage.

6.2 Industry analysis

e aim of industry analysis is to understand the reasons for variations in pro tability over time and, if possible,
capitalise on them. In short, the purpose of industry analysis is to identify opportunities and threats in the industry
environment. e process of analysing the industry environment comprises three broad steps. First, the industry
must be de ned; second, the key success factors of the industry should be identi ed; and nally, the relationships
that shape the industry and how they in uence pro tability should be examined.

6.2.1 Defining the industry

A question oen asked by organisations when thinking about strategy is: ‘What business are we in?’ is question
suggests that the industry should be de ned before industry analysis can take place, and that it is important to be
able to de ne the relevant players in the industry. is is generally much more difficult than it seems as it involves a
strong element of managerial judgement.
First, it is always difficult to decide whether to de ne an industry broadly or narrowly. De ning it too broadly has
the disadvantage of diluting focus and increasing complexity, while de ning it too narrowly means that important
opportunities or threats may be missed.
Second, industry convergence can change or blur the boundaries of an industry. Convergence occurs when two
or more previously separate industries begin to behave as though they are linked. For example, in our Opening case
study we can see how the automotive and information and communication technologies (ICT) industries are
merging through the production of self-driving or driverless cars.
 When considering the boundaries of an industry, three dimensions of scope can be used, namely horizontal,
vertical and geographic scope.3 ese dimensions are brie y de ned and illustrated below using the automotive
industry as an example:
Horizontal scope de nes the range of products and markets addressed. For example, we could argue that small
economy cars do not compete with expensive sports cars; therefore, a broad de nition such as the ‘automotive
industry’ is not necessarily useful in analysis.
Vertical scope de nes the range of supply chain activities the analysis will consider. For example, which elements
of the automotive industry value chain does the analysis consider – parts manufacturing, car manufacturers,
vehicle assembly, retailing or aer-sales service?
Geographic scope de nes the range of geographic analysis. For example, will the analysis consider a provincial,
national, regional or global scope? For a local car dealership, considering the entire global market may not be
useful.

It is important to note that the de nition of industry cannot be divorced from an analysis of the industry structure.
Understanding substitutability (see section 6.2.3.1) and complementarities (see section 6.2.3.2) can provide
important clues and guidelines for drawing industry boundaries.4 For example, understanding that small economy
cars will not substitute for sports cars is an important guideline in de ning the industry. e de nition of industry is
not a once-off process, but an iterative one that constantly needs to be updated and revisited as industries change.
Once the industry has been de ned, the next factor to consider in industry analysis is the identi cation of
industry key success factors.

6.2.2 Industry key success factors

To understand the external sources of competitive advantage fully, Robert Grant suggested that organisations need
to understand their industry’s key success factors.5 ese are factors in the organisation’s external environment that
determine its ability to survive and prosper. Note that key success factors apply to all organisations in an industry.
ey depend on the ‘three Cs’ as de ned by Kenichi Ohmae:6
Customers: What do customers want?
Competition: How can the organisation compete successfully?
Corporation: What unique resources does the organisation possess?

e list of key success factors should not be a long list, but should generally be those three to ve factors that are
critical to the success of the organisation. e Case example Key success factors below provides some indication of
the role of key success factors in strategic choice.

CASE EXAMPLE: Key success factors

For low-cost airlines, such as kulula.com and Mango, delivering their service at the lowest possible cost is a
key measure. To achieve this, asset utilisation is one of their key success factors. This in turn suggests that
the choice of low-maintenance aircraft, the availability of low-cost alternative airports (e.g. Lanseria) and
quick flight turnaround times are ways of maximising asset utilisation and enabling reduced fares for
passengers.
For pharmaceutical companies producing ethical (patented) drugs, the rate of approval of new drugs by the
relevant authorities is critical and could be a key success factor. To maximise the approval rate, the intensity
and scope of research and development activities, and finding multiple uses for the same active compounds
are important.7
Despite research nding organisations rating highest on key success factors outperforming their rivals, the concept
is criticised by Pankaj Ghemawat and others due to:8
Identi cation: Many factors in an industry could potentially be key success factors, making it difficult to identify
the ones to focus on.
Concreteness: It is not always clear how key success factors interact with one another and how they affect the
organisation’s performance.
Comparative advantage: Competitive advantage rests on differential performance. If all organisations in an
industry perform well on the key success factors, it does not offer any basis for competitive advantage, and may
accordingly be dangerous for organisations to base their strategy on.
Necessity: Since industry dynamics and change may offer better explanations for the dynamic aspects of strategy
and offer a better basis for competitive advantage than industry key success factors, the necessity of the concept is
.
Generality: ere is no guarantee that key success factors can be pro tably exploited by organisations, because the
bene ts from exploiting them must be higher than the cost of exploiting them. It is not always clear to what
extent these are undervalued and offers an opportunity for generating pro t.

However, we use the idea of key success factors here in much the same way as Grant suggested – as a way to
understand the industry as a prerequisite to effective business strategy. As customer requirements and competition
differ from industry to industry, so do key success factors. We now explore key success factors in three different
industry settings namely mature and declining, technology-intensive and not-for-pro t industries.

6.2.2.1 Industry key success factors in mature and declining industries

Mature industries are characterised by low growth in demand and will eventually decline. is industry growth
stage limits opportunities for differentiation factors as a source of competitive advantage and shis them to cost-
based factors. Grant identi ed the following opportunities for competitive advantage in mature industries:9
Cost advantage: is is established through economies of scale, low-cost inputs or low overheads. However, cost
leadership may be difficult to sustain as it refers to a strategy that allows an organisation to achieve superior
pro ts by producing its products or services at a signi cantly lower cost than that of competitors.
Pro table market segments: Selecting pro table market segments may increase pro tability in unattractive
markets and may extend to targeting pro table customers.
Differentiation: While opportunities in mature markets are few, this does offer an alternative to the pressure of
constant price competition. In mature industries, complementary services may provide a basis for differentiation.
For example, the automotive industry has much competition around nancing, insurance and maintenance
plans.
Strategic innovation: While mature markets offer few opportunities for product innovation, they do offer
opportunities for strategic innovation. Embracing new markets and adding products and services that offer new
but related functions present opportunities for strategic innovation. For example, when cellular telephony started
maturing in South Africa, a leading operator Vodacom announced its intention to become a ‘total
communications provider’, and increased its focus on data services.

In declining industries, there is generally excess production capacity, few competitors, lack of product innovation,
ageing products and human resources, and aggressive price competition.10 Under these conditions, key success
factors may relate to the extent to which organisations are able to plan and execute successful end-game strategies
(see Figure 6.1). is refers to one that allows an organisation to maximise its returns at the end of an industry life
cycle. In selecting end-game strategies, certain factors play a role:
 e relative competitive position of the organisation (whether it is strong or weak)
e conditions of decline, which are favourable when the decline phase still offers opportunities for pro tability
(e.g. where there are still strong pockets of demand) and unfavourable when there are few remaining
opportunities to be pro table.

End-game key success factors may include the following:

Leadership: is relates to the organisation’s ability to use competitive strengths to gain dominance in remaining
pockets of demand where industry conditions for decline are favourable – in other words, retaining attractive
segments of the market. is provides a strong position for a successful harvest strategy in future. As the world
moves towards free online content, Encyclopaedia Britannica has business units focused on serving schools,
defence forces and homeland security units, all of which have compelling reasons not to depend on free
content.11
Niche: With this strategy, the organisation uses competitive strengths to gain a strong position in a small segment
where industry conditions for decline are unfavourable, but who are not price sensitive (demand is inelastic) and
demand is relative stable. Louis Vuitton, for example, is a producer of very expensive luxury handbags and travel
cases that targets a small number of customers who are not price sensitive.
Harvest: Under similar conditions where the market is declining, maximising cash ow from existing assets while
limiting investment and reducing costs is known as harvesting an asset, and may be a key success factor in
declining industries. Fuji lm was a leading producer of lm cameras, but when digital cameras hastened the
decline of that industry, Fuji lm channelled most of their investment into digital imaging. Fuji lm still offers lm
cameras on a limited scale to niche markets (e.g. the lm production industry), but it has focused much of its
effort on developing digital imaging products such as digital cameras and optical devices.
Withdrawal: Where the organisation does not have any competitive strengths in attractive niches, and conditions
are unfavourable, withdrawal (such as a quick sale of the business or liquidation) may prove to be the best option.
1time was a South African airline operating between 2004 and 2012. When it ran into trouble and could not
obtain additional funding, the only option was to liquidate the business.

Figure 6.1 Strategies for declining industries12

Source: Adapted from Johnson, G., Scholes, K. & Whittington, R. 2005. Exploring corporate strategy 7th ed. Essex: Prentice
Hall. 86
6.2.2.2 Industry key success factors in technology-intensive industries
In technology-intensive industries, the application of new technologies plays a key role in competitive advantage,
therefore innovation is a key success factor in technology-intensive industries (see also Chapter 9 for more on the
role of innovation in strategy).
Innovators will not automatically appropriate the value of their innovation (i.e. claim the value created by the
innovation) as competitors may imitate it with more success. For example, Research in Motion invented the
smartphone with the introduction of the BlackBerry in 1999. However, it was unable to sustain its success with the
result that other players such as Apple and Samsung made far more money from their smartphones than Research in
Motion ever did.
e conditions outlined below will determine whether innovators are able to appropriate the value of their
innovation:13
e protection of intellectual property is a key success factor in technology-intensive markets. is includes
patents, copyright, trademarks and trade secrets such as recipes and industrial processes. Organisations are
becoming increasingly aware of the value of intellectual property as a strategic asset that can be used to generate
revenue, for example by licensing it.
e impact of complementary products and services may determine whether the innovator will be able to
appropriate the value from the innovation or whether the providers of complementary products will do so.
Complementary products or services in this context refer to the products or services that the innovator requires
to get the product or service successfully to market, such as manufacturing, nancing, marketing and retailing.
Should these services cost too much, this will erode the value appropriated by the innovator. On the other hand,
‘building’ the services from scratch may take too long and require a lot of capital investment. In the Case example
below, we see how Apple cleverly juggled its investment in complementary services.
Another key success factor relates to the extent to which technology can be copied; also known as codi cation.
First, the extent to which knowledge contained in the technology is codi able or tacit is important. Codi able
knowledge implies that the knowledge can be written down, for example a recipe. is type of knowledge, and
therefore invention, is relatively easy to copy. Tacit knowledge, however, is built on the knowhow, experience,
intuition and insight of employees, and is almost impossible to copy. In the second place, the complexity of the
technology may offer protection against copying.
e extent to which the innovator is able to establish a lead time over competitors and a temporary advantage as
the basis for an industry leadership position can be key to its ability to appropriate the value from its innovation.
Research in Motion, the company manufacturing BlackBerry smartphone devices, launched the rst smartphone
in 2002, and thus had an early lead and source of temporary competitive advantage in this market with its
innovative devices and services. Unfortunately, service problems and RIM’s failure to follow on the BlackBerry
with other innovations led to its being blindsided by the launch of the iPhone in 2007, resulting in a sharp decline
in its share of the worldwide smartphone market.15

CASE EXAMPLE: Apple’s complementary services14

Apple’s profitability is the envy of the industry. For example, in the fourth quarter of 2017, it captured 87% of
smartphone profits while only selling 18% of the units in that industry. While there are many possible reasons for
this success, Apple has been very astute with its use of complementary services. Let us look at three such
relationships:
Apple does not do the manufacturing of its products. Like many other electronics providers, these are
manufactured in China. One of the reasons is that manufacturing requires a different skillset than Apple
possesses, and to set up a manufacturing capability will require massive capital investment, require a long
learning curve and may cause a loss in focus on its core business.
Apple owns its own operating software, while most of its competition comes from the open source Android
platform. While open source is cheaper in some ways and offers inter-operability between many different
brands of devices, proprietary software offers higher levels of security and customisation.
Apple has increased its investment in its own retail stores sharply over the past few years, growing from 273
stores in September 2009 to over 500 in 2018. Owning retail stores means that Apple cuts out independent
retailers that take a share of the profit and put downward pressure on prices and margins. Because of its
 focus on the creation of a customer experience, Apple has shown double-digit growth in its retail sales at a
time when other retailers are struggling.

Standards have always played a key role in technology-intensive industries. In many instances, governments or other
regulatory bodies set technology standards. Winning a ‘standards war’ is generally a big step towards competitive
advantage, as Microso with its Windows operating system has demonstrated. From our Opening case example, we
can see that there will have to be standards for dynamic wireless charging so that it can be used for all vehicles. e
following are guidelines for winning the battle for industry standards:16
Assemble allies before you go to war. Enlisting the help of suppliers, customers, complementors, and even
competitors is critical for building the competencies necessary to develop a standard.
Pre-empting the market – even seeing an industry where none currently exists – can be bene cial when
competing for standards.
Manage expectations and convince allies that you will emerge victorious. In many instances, this becomes a self-
ful lling prophecy.
Perseverance may be a key factor in establishing standards – in other words, simply refusing to give up.

6.2.2.3 Industry key success factors in not-for-pro t settings

Not-for-pro t organisations, whether publicly or privately funded, generally exist for the greater good of society.
ey provide certain collective goods or services (such as a police service or museums) that pro t-making
organisations cannot or will not provide.17 In return they receive certain bene ts from society, such as exemption
from certain categories of taxes. Achieving strategic advantage oen requires not-for pro t organisations to behave
more like commercial organisations. ere are several aspects that could create strategic advantage for not-for-pro t
organisations18:
e organisation must determine whether customers would be willing to pay for goods or services closely related
to the organisation’s core activities. Museums, for example, usually sell memorabilia in a museum shop and
universities sell branded clothing and other goods.
Not-for-pro t organisations may bene t from professional management talent that would normally be required
to manage a revenue-generating business. is factor should engender a more business-like attitude to obtaining
funds and to foster innovation in combination with practical business considerations.
Trustees and Boards of not-for-pro t organisations could contain more business-minded trustees or board
members that would support more ‘commercial’ ventures.
Any business requires capital to grow, and this may be obtained from partnerships with business organisations.
For example, Public Private Partnerships (such as toll roads and the Gautrain) are becoming popular as a means
of developing infrastructure. In such partnerships, government or other not-for-pro t organisations will provide
the right to develop infrastructure to a private business, who then obtains the right (typically in the form of a
long-term contract) to operate the venture for pro t for a certain time.
Merging with similar organisations may provide struggling organisation a way of reducing costs and becoming
more efficient. For example, there are many small NGOs that provide feeding schemes for the needy. Merging
and creating a larger organisation may mean that they can increase their negotiating power and scope as a means
of reducing costs and creating more income, for example by obtaining donations from supermarkets.
Strategic alliances provide a means of temporary cooperation to enhance capacity in order to better serve clients
and generate resources. Where disaster strikes on a large scale, different charities such as the Red Cross/Red
Crescent and Oxfam oen join forces to provide relief. Alliances between not-for-pro t and business
 organisations are the next logical step. Discovery Vitality, for example, oen partners with charitable
organisations to offer the option of donating to a charity as a reward to Vitality members.

A key aspect of strategy in not-for-pro t organisations is the relative importance of stakeholders. ese
organisations have many stakeholders, oen with different expectations. Clients, trustees, donors, volunteers, the
government and management are just some of the stakeholders typically involved in a not-for-pro t organisation, all
with a certain amount of in uence and power. e challenge for these organisations is not to lose focus as so many
different stakeholders with in uence and power affecting them.

6.2.3 Relationships that shape the industry

In industry analysis, the focus is on understanding the impact of the industry’s competitive forces on competitive
advantage, and how it affects the relative pro tability of industry players. Broadly speaking, there are two categories
of relationships, namely those that reduce pro ts by negatively affecting cost and/or price, and those that enhance
pro ts. is section explores Michael Porter’s contribution to understanding industry structure, the notion of
cooperative relationships and their impact on strategy, and the role of regulation in shaping industries.

6.2.3.1 Competition and industry structure

One of the most widely adopted contributions to the theoretical understanding of industry structure is the ve
forces framework for industry analysis developed by Michael Porter. Although Porter initially developed the
framework as a means of assessing pro t potential in an industry, it also provides a useful way of identifying sources
of competition.19
e basic premise of the framework is that there are ve forces interacting in any industry, namely:
the rivalry between existing competitors
the threat of new entrants
the threat of substitutes
the bargaining power of buyers
the bargaining power of suppliers.

Before we examine the ve forces framework, it is useful to keep the following caveats in mind:20
e ve forces framework is useful at the level of strategic business units that focus on one industry (e.g. South
African Airways), and not necessarily at the level of a diverse organisation or multi-business corporation, such as
the Bidvest Group, that spans several industries.
It is important to understand the connections between the ve forces and the macroenvironment. For example,
technology changes (such as the increasing capabilities of cellular phones and mobile data communication) can
fundamentally affect traditional ‘rules of competition’ in an industry.
e ve forces are interrelated rather than independent, and pressure on one force may trigger changes or shis
in other sources of competition. For example, suppliers that are blocked or undercut may try to nd ways of
selling directly to end-users.
Some competitive behaviour may be concerned with disrupting the forces of competition, and not with simply
accommodating them. For example, in fast-moving environments, competitors may be more concerned with
disrupting competitive forces to achieve a series of short-lived competitive advantages than with building and
sustaining long-term competitive advantage.

e relationships between these ve forces are shown in Figure 6.2. e relative power of the forces describes the
structural in uences on industry pro tability. Added value in an industry is created by the difference between the
highest price that customers are willing to pay for a product or service (willingness to pay), and the lowest price that
suppliers are willing to accept for a product or service (supplier opportunity cost). Each force affects the added value
in the industry.
ere are also some basic industry structures that in uence competition and rivalry in different ways. ree
basic forms of competition are discussed below:21
Monopolies: e opposite of competition is a monopoly, where only one organisation serves the market. In many
countries, electricity generation is a monopolistic industry, for example Eskom in South Africa (at the time of
writing). Monopolists can control production, and charge what suppliers and customers will let them. ey are
generally limited only by substitutes and regulation. In the case of electricity generation, households could use
alternatives (substitutes) such as generators, solar panels, gas or even wood as a means of generating energy for
household use. In addition, Eskom has consistently asked for price increases far higher than in ation, but the
regulatory authorities have oen put downward pressure on such requests.
Perfect competition: e most intense form of competition is known as perfect competition. In conditions of
perfect competition, there are many competitors producing similar products or services, with similar market
positions. Entry into the industry is relatively easy, and there is no effective way of protecting innovations. e
result is that pro t margins are low, and as production volumes (or numbers of competitors) increase, prices may
be driven even lower. e only way to create competitive advantage, and superior pro ts, is to create and protect
market positions that are different from the competition, and even then this is likely to last only as long as the
organisation is able to protect its position.
Oligopolies: In an oligopoly, competition is limited to a few large players that dominate the market, even though
there may be many other organisations competing. In most countries, the banking industry is an example of
oligopolistic competition, with a few large banks dominating the market. Competition is therefore concentrated.
Dominant competitors are aware that their actions may have an impact on market prices and pro ts, and may be
reluctant to take drastic action. In the worst cases, such competitors may even resort to illegal behaviour such as
collusion or cartels to maintain stability.
Hypercompetition:23 Hypercompetitive industries are characterised by competitive actions that are so bold,
aggressive and frequent that this creates a constant sense of disequilibrium. Oligopolistic industries oen break
out in hypercompetition. For example, in the mobile smart-device market, dominated by Apple, Samsung and
Huawei, new smartphones, tablets and apps are constantly being launched. In 2018, for instance, Apple launched
the iPhone XS and the iPhone XS Max.

Figure 6.2 Porter’s five forces framework for industry analysis22

In these examples, we have seen some of the effects of competition (or lack thereof) on pro tability in an industry.
When conducting an analysis of the industry, the rst step should be to de ne the industry and to determine the
viewpoint of the analysis – from whose perspective is the analysis being conducted? Aer doing that, each
competitive force can be analysed using the factors driving competition, for example by rating them as high,
medium or low. e last step is then to conclude on the biggest competitive threats where they originate from, and
what the organisation can do about them. Each of the ve forces will now be discussed in more depth (also see
Figure 6.3).

e degree of rivalry between existing competitors

Rivalry among existing competitors in the market is the most obvious and immediate source of competition.
Competitive rivals are organisations with similar products and services aimed at the same customer group.24 ere
are several factors that in uence the level of competitive rivalry.25
Number and size of competitors: e more competitors there are and the more equal they are in size and power,
the more intense rivalry will be. For example, in the electronics retail industry there are several large competitors
such as HiFi Corporation, Dion Wired, Hirsch’s and Makro. is rivalry leads to intense price competition and
discounting.
Rate of industry growth: When industry growth is slow, competition may be more intense as competitors battle
for market share. erefore, as industries mature one would usually expect competitive intensity to increase. For
example, as the South African cellular industry matures, there is more competition for high-value customers
such as high-income individuals and businesses.
Differentiation and switching costs: If a product or service lacks differentiation or customer switching costs are
low, customers are not locked in, and this may lead to more intense competition. is explains why competition
in commodity markets is oen intense. Short-term insurance is an example of an industry where most
competitive products are similar and switching costs are relatively low (one phone call is oen all that is
required), leading to a high level of competition. Aggregate service providers like Hippo (www.hippo.co.za)
provide shoppers for short-term insurance with the necessary information from many short-term insurance
providers so that they can easily compare insurance quotes online. On the other hand, where certain competitors
have managed to create high levels of differentiation customers may not be willing to switch because of their
commitment to the brand or organisation, or they may be locked into contracts (e.g. in the cellular telephony
industry).
 Fixed costs or perishable products: Where xed costs are high or products are perishable, there may be pressure on
competitors to cut costs. For example, when there is excess production of perishable products such as milk or
fruit, prices will drop to sell higher volumes.
Expansion: Where production capacity can be increased only in large chunks, capacity expansion may lead to
temporary excess capacity and price cutting. For example, automotive producers can only add capacity in
relatively large chunks by installing a new production line or factory. When such capacity additions are made,
producers could use lower prices as a means of generating higher volumes, in this manner using the capacity
which has been added.
High exit barriers: Where exit barriers, such as specialised assets, are high, competitors may try to compete for as
long as possible for low or even negative returns. Given the investment that automotive producers (and the
government) have made in the industry in South Africa, producers would rather sell at a discount and lose
money for a time than close down and exit the industry too soon.
Diverse strategies: Where rivals are diverse in strategies and origins, ‘personality clashes’ may occur as they have
different ideas about how to compete and how the industry works. For example, in the short-term insurance
industry, OUTsurance, MiWay and other direct short-term insurers provide a service that eliminates insurance
brokers, whereas other organisations such as Mutual & Federal traditionally use brokers as their sales and service
points and believe that is in their best interest to continue doing so.

e threat of new entrants

Whenever an industry becomes pro table, there are incentives for other competitors to enter the market. e
success of their entry is dependent on the existing barriers to entry in an industry, of which there are several.26
Economies of scale: e economies of scale required to be successful can provide a barrier to entry in some
industries, such as manufacturing capacity in the automotive industry.
Capital cost of entry: e capital cost of entry into an industry can provide a barrier to entry. is is especially
true of capital-intensive industries such as gold mining or electricity supply.
Control of distribution channels: Where existing competitors have control over distribution channels, whether
through direct ownership or simply by virtue of customer or supplier loyalty, this can provide a barrier to entry.
Good relationships: Where existing competitors have good relationships with customers and suppliers, or where
customers and suppliers are locked into relationships with competitors, for example through contracts, new
entrants may nd it difficult to break into the industry.
Time: Because of the experience curve, existing competitors that have been in the industry for longer may have
cost or other advantages (such as customer or supplier loyalty) because of their time advantage.
Retaliation: Expected retaliation by existing competitors can deter new entrants. Unless ways are found to
compete so as not to elicit retaliation, entry into certain industries may not be worthwhile.
Legal restraints: ese can provide a whole range of barriers or deterrents to entry. Patents, copyright or even
outright regulation restricting new entrants (such as in the electricity generation industry) are all examples of
legislation or government action and its impact on new entrants.
Differentiation: Where differentiation exists – in other words, where customers perceive that a product, service or
even a product package, offers better value than the competition – entering that industry may be difficult unless
ways are found to imitate the offering or to reduce customer loyalty. However, this may require heavy spending
on advertising and promotions.

e threat of substitutes
Substitutes are those products or services that an industry’s customers can turn to, seeing as these products or
services satisfy the same basic need. is normally takes the form of new technologies or business models. e effect
of substitutes is that they place a ceiling on the prices that industry competitors can charge, and therefore limit the
industry’s pro t potential.27 In certain cases, substitute products or services can lure customers away from an
industry despite higher prices. For example, digital video disc (DVD) technology, which displaced video cassette
recorder (VCR) technology worldwide, was in turn displaced by more expensive Blu-ray disc technology.
ere are three types of substitution:28
Product-for-product substitution occurs when customers substitute existing products and services with new and
improved ones, for example Blu-ray replacing DVDs as mentioned above. is may occur because of industry
convergence, as discussed in section 6.2.1, where, for example, electric cars with advanced ICT capabilities, such
as self-driving capabilities, are substitutes for traditional or hybrid cars. Substitution may also occur because of
complementary relationships, such as the one between Windows and Intel, where products are constantly
updated, and users have access to the latest versions.
Substitution of need occurs when a new product or service renders an existing one redundant by satisfying the
same need. e substitution of digital cameras for lm cameras is an example of this category.
Generic substitution occurs when products or services compete for disposable income. For example, when
consumers have less disposable income during a recession, they may trade down or may stop buying certain
categories of products altogether.

e bargaining power of buyers

e relative bargaining power of buyers (customers) can have an impact on the prices that can be charged by
competitors in an industry (willingness to pay). Where buyers are powerful, they will negatively affect the ability of
competitors to charge high prices or to raise them. However, less powerful buyers mean that competitors have more
freedom to charge high prices. e following are determinants of the bargaining power of buyers:29
Buyer concentration: Where there is a concentration of buyers – in other words, a few large and powerful
customers or customer groups, or buyers that purchase large volumes – this may increase their bargaining power,
especially where there are a large number of suppliers. For example, large retail groups such as the Shoprite
Group, Pick n Pay, and Woolworths have a lot of bargaining power to exert downward pressure on the prices of
individual food producers (see Strategy in action e buying power of large southern African supermarket chains is
keeping small suppliers out on page 193).
Switching costs: e bargaining power of buyers is high when the cost of switching suppliers is low. is may
include situations where the product or service is undifferentiated and generic, i.e. a commodity.
Backward vertical integration: If there is a threat of backward vertical integration – in other words, the threat of a
buyer acquiring the supplier or setting up their own sources of supply – then this will increase the bargaining
power of buyers.
Ratio of purchase price to total cost: Buyers, who themselves are oen producers or providers of services, will
generally be less price sensitive, and as a result less inclined to shop around, when the purchase price of a product
or service is a small fraction of their total production cost, and is not important to the quality of their production.
Buyers who are highly pro table and interested in quality rather than price are also less price sensitive. For
example, an organisation that produces furniture may be less sensitive to the price of stationery, as it will only
represent a small portion of their total production cost and stationery also does not affect the quality of the
furniture they produce.
Information: e more information buyers have about suppliers’ pricing structures and input costs, the more
powerful they will be.

e bargaining power of suppliers

e relative bargaining power of suppliers determines the supplier opportunity cost. is affects input prices, and
therefore the pro tability, of competitors, as we can see from the Strategy in action case: e buying power of large
southern African supermarket chains is keeping small suppliers out (page 193). Similar forces to those determining
buyer power determine the bargaining power of suppliers:30
Supplier concentration: e larger and more concentrated suppliers are, the more powerful they will be. Again,
this power will be enhanced if there are many buyers. is is the case in the banking industry where there are
relatively few banks to service many customers. (Also see the Case example AB InBev below.)
Switching costs: e bargaining power of suppliers is high where the buyers’ cost of switching suppliers is high.
is may include situations where products or services are unique or so differentiated that it would be difficult to
develop alternative sources of supply.
Forward vertical integration: e threat of forward vertical integration could increase supplier bargaining power.
is threat exists when suppliers are not making sufficient pro t margins, and could acquire their own channels
or bypass existing intermediaries to sell directly to end-customers. For example, Apple and many other
electronics and appliance manufacturers (such as LG and Samsung) have invested heavily in their own retail
spaces, which increases their bargaining power with other retailers.
Lack of substitutes: If there are no substitutes available, this may increase supplier bargaining power.
Dependence on a single industry: Sometimes the fortunes of suppliers may be closely tied to a single industry or
even a single customer (such as a coalmine being dependent on a single power station). For example, the
manufacturers of car seats are dependent on the automotive industry. In this case, this will reduce suppliers’
bargaining power.

CASE EXAMPLE: AB InBev

In 2008, the Belgium-based brewer InBev acquired the American brewer, Anheuser-Busch, to become Anheuser-
Busch InBev (AB InBev). In 2016, AB InBev acquired SABMiller in a deal worth $103 billion (R1.4 trillion), sealing
the union of the world’s two biggest beer makers. The SABMiller name was dropped, but SAB still exists as an
AB InBev subsidiary.31 As a dominant player in the South African beer market with key brands such as Castle
and Black Label, and a distributor for Coca-Cola through its soft-drink division Amalgamated Beverage Industries
(ABI), AB InBev subsidiary SAB exerts a strong influence over the retailers of liquor and soft drinks. The
manufacturer thus has much influence over the wholesale as well as the retail price of beer and soft drinks, and
in-store merchandising strategies. This is a typical example of a situation where reduced buyer power means
more profit to a supplier.

Despite the widespread acceptance and usefulness of the ve forces framework for industry analysis, it has not gone
without criticism, and it has several limitations:32
It is a static framework, viewing industries as stable and shaped by external forces. In many industries today, the
reality is that industry structure and boundaries are constantly changing.
It assumes that organisations are essentially sel sh and will always put their own interests rst. is is not true of
not-for-pro t and public-sector organisations. Also, with the increasing focus on sustainability, this perspective
may be somewhat outdated.
While the framework approaches the ve forces as equal, this may not be true, especially for customers. ere are
many observers who suggest that customers are the most important component to any aspect of strategy.
Porter’s view is essentially one of the industry environment as a threat, and it focuses on those relationships that
reduce pro ts. It therefore largely ignores pro t-enhancing relationships such as cooperation.
It also mostly ignores the human elements of strategy such as the role of management skills in strategy.
e framework seems to be predisposed towards a top-down or prescriptive approach to strategy – identifying
opportunities and threats in the environment and formulating a response to them. ere is little room for
emergent strategies.
 ere has never been consensus among researchers on the effect of the industry on organisational performance.
Economists have questioned its theoretical foundation. It is based on the structure-conduct-performance
approach to industrial organisations, which has largely been displaced by game theory.

Up to this point we have focused mostly on those relationships that reduce pro ts. e value net, however,
emphasises complementary relationships that enhance pro tability.

6.2.3.2 Complementary relationships – the value net

While the ve forces framework focuses on substitutes as a competitive relationship, economic theory also identi es
complements as a relationship.33 is relationship is not addressed by the ve forces framework. However,
Brandenburger and Nalebuff emphasised the importance of complementary relationships in their value net concept.
e value net concept examined similar constructs to Porter’s ve forces framework, but also focused on value-
enhancing (complementary) rather than value-destroying relationships (such as bargaining power).34
Complementary relationships are pro t-enhancing because they increase the maximum price that customers are
willing to pay for a product or service. Many strategy authors regard complementary forces as a useful extension of
the ve forces framework, as Figure 6.3 shows.35
A complementor can be de ned as follows: ‘A player is a complementor if a customer values your product more
when they have the other player’s products than when they have your product alone.’ e value net also considers
other forces similar to the ve forces framework, namely competition, customers and suppliers. In the context of the
value net, competitors are the opposites of complementors, and are de ned as follows: ‘A player is a competitor if
customers value your product less when they have the other player’s product than when they have your product
alone’.36 For example, as we can see in the Case example Complementary relationships in the smart device industry,
the existence of apps makes smartphones more valuable to their users, and increases their willingness to buy them
and to pay higher prices for them. For that reason, we can say that smartphone manufacturers and app developers
have a complementary relationship.
Using this de nition, it is important to note that complementors are not merely suppliers, partners or allies.
ere is a speci c relationship that enhances value and pro tability for both parties. However, while relationships
with complementors can enhance pro tability, they also need to be managed with regard to the distribution of
added value among an organisation and its complementors. Some of the forces determining this are discussed
below:37
Complementor concentration: e more concentrated complementors are, the more powerful they will be.
Organisations will therefore oen deliberately establish relationships with many different complementors to
reduce this power. Nintendo, for example, makes use of many different developers of games for its gaming
consoles, meaning that no single producer of Nintendo games will become more powerful than the producer of
the console.
Switching costs: Relative switching costs may determine who controls added value. For example, when buying
short-term insurance with banking products such as vehicle nancing, it is easier and cheaper to switch
insurance companies than to switch banks. is makes the position of banks much stronger in capturing added
value.
Unbundling complementary products: A similar principle comes into play when end-users can unbundle
complementary products. For example, while apps (as a collective) add value to smart devices, the users of
mobile smart devices can buy individual apps separately. e smartphone and the apps are therefore unbundled,
which reduces the bargaining power of app developers. Conversely, DStv customers have to buy the full bouquet
of content associated with their subscription package as it is ‘bundled’.
 Integration: e threat of integration could increase complementors’ bargaining power. is threat exists when
complementors perceive that they are not receiving enough of the added value they create. A company like
Samsung, for example, could develop its own apps for its smartphones and tablets if it felt that these
complementors (the third-party developers of apps) were appropriating too much of the added value created by
the relationship. is threat is usually asymmetric, giving bargaining power to the players that can most easily
integrate – in the example above, Samsung is more likely to have the capabilities and resources to develop apps
than an app developer will have to manufacture smartphones.
Dependence on a single industry: In many cases, complementors are locked into a speci c industry, which may
reduce their bargaining power. For example, developers of games for games consoles such as Nintendo,
PlayStation and Xbox are oen tied to the gaming industry, and this may mean that they have less bargaining
power than the manufacturers of the consoles.
Visibility: Where complementors are much more visible than other players, they can come to ‘control’ the market
and added value. For example, in subscription satellite television the content providers (such as Universal
Studios, ESPN or Comedy Central) are much more visible than the signal carriers and service providers such as
Multichoice. is poses a threat to the added value of the service providers.
Market growth: e higher the market growth is, the less intense competition will be, and the less likely players
will be to exert their bargaining power.

CASE EXAMPLE: Complementary relationships in the smart device industry

With the worldwide growth in the use of smartphones and tablets (‘smart devices’), complementary relationships
are proving to be critical to the industry. The developers of apps are an especially important complementor to
smart devices, and literally millions of apps are available to their users. More apps mean more smartphones sold,
and more smartphones mean more apps downloaded. In 2017, for example, it is estimated that 178 billion apps
were downloaded worldwide, and there are 3.8 million apps available in the Google Play Store.38 Most large
banks now use apps for online banking, and one could therefore argue that apps are complementary to banking
services as well.

e next section explores the role of industry regulators in competition.

6.2.3.3 Industry regulation as a competitive force

While both the ve forces and value net frameworks consider the role of the government and industry regulators
implicitly rather than explicitly, the visibility and in uence of this force in the South African context has increased
dramatically over the last few years. ese interventions normally have broader social objectives in mind, and there
are indications that the role of the government or regulators in certain industries will increase rather than decrease.
is section serves to outline and clarify the role of the regulator as a competitive and cooperative force in the
industry, as opposed to the many different ways in which it in uences business directly and indirectly at the
macroenvironmental level. e following are examples of how the regulator can play a direct role in an industry:39
Maintaining barriers to entry: In certain industries, the government and regulatory forces may maintain barriers
to entry. e South African telecommunications, health and electricity supply industries are examples where
industry regulators generally maintain barriers to entry through exclusive licensing and accreditation systems.
Price control: To prevent monopolists and oligopolists from abusing market power, regulators may restrict their
ability to raise their prices. In South Africa, the National Energy Regulator (NERSA) has regularly restricted
Eskom to much lower price increases on the provision of electricity than they have requested.
Direct restrictions: We have seen various occasions recently where the regulatory authorities and the government
have chosen to place direct restrictions on practices that they regard as counter to the public interest. For
 example, restrictions on advertising and promotions in the tobacco industry have been in place for some time
now.
Scrutiny and control of mergers and acquisitions: e government in some instances applies policies on mergers
and acquisitions to protect competition. For example, in South Africa mergers and acquisitions are subject to
scrutiny and approval by the Competition Board. In this way, government forces can sometimes directly
in uence industry structure and, as a result, the competitive forces in an industry.
Legislation: Regulators can also cause industry disruption by introducing new legislation or regulations that
change the industry landscape completely. For example, when the South African Electronic Communications Act
was introduced in 2005, it opened up the market to much more competition and convergence. Although this
liberalisation is still hampered by access to infrastructure and lack of regulation by the Independent
Communications Authority of South Africa (ICASA), it has changed the way that industry participants think
about competition.

From the above it is clear that the role of government can serve as both a pro t-reducing force, for example when it
exerts price control, or a pro t-enhancing one, for example when it protects monopolists or oligopolists by
maintaining or creating barriers to entry. e addition of the forces of complementors (see section 6.2.3.2) and
industry regulation suggests that the ve forces framework may be limited in its approach to industry structure. One
approach for dealing with this is to consider an extended framework of industry competition.

6.2.3.4 An extended framework of industry competition

Some authors have suggested that the complementary force can simply be added to the ve forces framework as an
extension.40 In the same way, Wheelen and Hunger ‘extended’ the ve forces framework to include a force
representing ‘other stakeholders’.41 Given the speci c in uence of the government and industry regulators discussed
above, the ve forces framework has been modi ed to represent speci cally the in uence of government in
regulating barriers to entry and competition, as illustrated in Figure 6.3.

6.2.3.5 Cooperative relationships

Brandenburger and Nalebuff introduced and expanded on another key idea in the context of complementary
relationships, namely the idea of ‘co-opetition’. is is the notion that organisations may choose to cooperate in
certain markets or circumstances, and compete in others. For example, telecommunications companies may
cooperate to establish capital-intensive infrastructure such as undersea cables or bre-optic networks, but will then
compete in packaging and selling this infrastructure to end-users. Organisations such as Dell and Apple are also
more likely to cooperate with the ‘best in class’ component manufacturers to develop and manufacture their
products than to manufacture every component themselves. is is happening more and more with the growth in
strategic alliances and cooperative relationships.
ere are important limitations to cooperation between competitors as most governments do not allow collusion
or cartels that control prices and promote unfair competition. In the light of increasing evidence of this happening
in various industries, competition authorities generally investigate and prosecute companies found guilty of this
type of behaviour (see the Case example Collusion in the construction industry on page 192).

Figure 6.3 An extended framework of industry competition42

 CASE EXAMPLE: Collusion in the construction industry43
The rot appears to run deep and wide in South Africa’s construction sector following recent damning allegations
of decades-long collusion, yet prosecuting authorities may struggle with the implications of action against what
appears to be a hard-hat mafia.
With the industry in crisis as a result of investigations into a long-running construction cartel and multibillion-
rand fines on the table, many of the sector’s top executives and managers could face jail terms.
All of this is a result of the Hawks, the National Prosecuting Authority (NPA) and South Africa’s competition
authorities’ investigations into collusion in the sector. Twenty of the country’s largest construction firms are under
investigation by the competition authorities for running a cartel over a number of decades and roughly 20 more
ancillary players will also face the music after being fingered by the larger players.
Some of the country’s most prestigious construction projects, including Soccer City, the Greenpoint Stadium,
the Coega Development Project, Nelson Mandela Bridge, the Gautrain, the Durban International Conference
Centre, Nasrec Stadium, the Royal Bafokeng Stadium, Clearwater Shopping Mall and a number of large mining
and manufacturing construction jobs have been listed in the affidavits as affected by the rampant collusion that
has allegedly dominated the construction sector for at least the past two decades.

Organisations may also cooperate with buyers and suppliers, either by sharing information or by sharing resources
or capabilities.44 Sharing information, for example through joint planning or coordination of key activities, can lead
to lower costs or higher value. For example, if retailers coordinate their logistics with their suppliers, this may lead to
shorter delivery times and reduced inventories. In the same way, organisations may share resources or capabilities
with suppliers or buyers to reduce costs or increase perceived value. For example, a supplier of auto-electrical
services may co-locate mechanical support staff with operators of large earth-moving equipment on a construction
site to ensure reduced production downtime. Breakdowns can then be attended to much more quickly, which will
contribute to better service and lower costs.
To protect their competitive advantage, organisations doing the sharing should ensure that the resources and
capabilities they are transferring cannot easily be copied by competitors because of codi cation or standardisation.
ey must also ensure that some parts are unique and difficult to copy. For example, when Apple developed the
iPod, suppliers of specialist components had to know the speci cations of the components they were manufacturing,
but no supplier (or even employee) had the full picture of what they were working on.45
e ve forces and value net frameworks both have the drawback that they are ‘snapshots’ of a moment in time
rather than a changing picture of industry dynamics. In the next section, we address the evolutionary dynamics in
industry.

STRATEGY IN ACTION: The buying power of large southern African

supermarket chains is keeping small suppliers out46

Supermarkets are a key route to market for many producers of food and household consumable products. The
growth of supermarket chains in southern Africa presents important opportunities for such producers, as it
potentially opens up much larger regional markets for them. Supermarkets can therefore be a strong catalyst to
stimulate smaller producers such as food processors and fast-moving consumer goods manufacturers in
southern Africa. But even the most efficient producers with competitively priced, high-quality products are unlikely
to succeed if they cannot get their products to consumers, and this is where large supermarkets play a key role
by providing shelf space to producers. However, onerous requirements and the exertion of buyer power by large
supermarket chains can result in small- and medium-sized producers and entrepreneurs failing to enter and
participate in the economy.
The formal South African supermarket industry (as opposed to smaller, informal street vendors) is
concentrated, with only a handful of large chains holding more than 70% of the national market share. South
African supermarket chains also have a strong and growing presence in southern Africa, although recent years
have seen the emergence of other African and global chains too. Large supermarket chains therefore have
considerable buyer power, and are often able to control pricing and trading terms with producers. This can
include a range of fees and other obstacles to small producers:
Producers have to pay listing fees (also referred to as slotting fees) to get on the purchasing lists of retailers.
These fees can be prohibitive for small producers. Estimates of listing fees in South Africa range from
US$350 to $3 500 per year for a single product line of a basic food item on the shelf. They can go as high as
$17 000 to $20 000 for prime till positions for products such as sweets and lollipops for a limited time period.
In Zimbabwe, listing fees can be up to $2 500 per product line, with $50 to $100 for the introduction of
additional new product lines by the same producer.
Producers are also often required to offer supermarkets settlement discounts for paying them within the
number of days stipulated in the trading terms. This varies depending on the producer.

Long payment periods put considerable pressure on producers’ cash flow and working capital, which is
problematic particularly for small producers. Local producers in Zambia raised this as a key reason for non-
participation in supermarket value chains although it was a concern in all the countries studied.
Supermarkets get discounts off the purchase price for indirect advertising of producers’ products on their
promotional material, such as pamphlets distributed in-store or in newspapers.
Contributing towards promotions may be required. It can cost anything from $2 500 to $7 000 to promote a
single product line as a contribution to the costs of the supermarket advertising through TV, newspapers and
flyers.
 Paying to participate in different promotions held by supermarkets such as Easter and Christmas promotions
may be required.
A range of other fees also apply, varying by producer and according to industry. These include general
discounts, fixed or variable rebates based on sales volumes, transport discounts and wastage allowances.

Cumulatively, the various fees can add up to at least 10–15% of the price of the product sold to supermarkets,
placing considerable strain on producer margins. In addition, there are also other obstacles to smaller producers
obtaining shelf space:
It is critical for successful sales that products are displayed where shoppers can easily see them. Eye-level
shelf space is often taken up by dominant producers, and smaller producers have to make do with less visible
positions.
Similarly, access to refrigeration space is important for producers of cold products such as soft drinks, ice
creams and frozen food. However, in some instances dominant producers may impose exclusivity
requirements on refrigeration space, meaning that a branded refrigerator may contain only products of that
producer.
Over and above legal requirements such as compliance with national standards, food safety, labelling and
packaging requirements, producers also have to adhere to private standards imposed by supermarkets.
These can include barcoding and specific packaging requirements as well as sustainability criteria and
religious requirements (such as halal and kosher certifications). These can also include higher accreditation
standards, which often involve ongoing audits at the producers’ cost.

How can smaller and emerging producers be supported? Codes of conduct between producers and
supermarkets can be a useful way to control the exertion of buyer power. In the UK, for example, the Groceries
Supply Code of Practice was set up specifically to oversee the relationship between supermarkets and their
producers following an inquiry by the former Office of Fair Trading.
Supermarkets can also play an active role in building the capabilities of producers. Almost all supermarkets in
South Africa have some form of voluntary producer development programme in place.
Some positive outcomes for black entrepreneurs in food processing have been realised. One beneficiary,
Lethabo Milling, a new entrant producing maize meal, received around $110 000 towards refurbishing its plant,
and was able to secure a loan from a commercial bank on the back of a guaranteed route to market through
supplying Massmart stores in South Africa. The company also received further support through training, waived
listing fees and fast-tracked payments.
There is a need for more coordinated, sustainable and regionally focused interventions to increase the
participation of producers in supermarket supply chains. These should aim to reduce barriers to entry by, for
example, curbing supermarket buyer power and building capabilities of producers.

Questions
1. Conduct an industry analysis of the southern African food retailing market from the perspective of a small food
producer using the extended framework of industry competition. What industry forces have the highest current
and future impact on small producers?
2. Identify and explain what strategic alternatives other than large retailers are available to small food producers
to sell their produce?

6.2.4 Industry evolution: Competition over time

ere are various frameworks dealing with the concept of life cycles in business, or so-called S-curve analysis. For
the purpose of this discussion, the industry and technology life cycles are particularly important.
e industry or product life cycle examines how the passage of time in uences revenues and competition with
regard to a particular industry or product. e industry life cycle expands on the notion that competitive rivalry is
partly dependent on growth in the industry, and examines the levels of competition in the different phases of
growth. is suggests that there may be different key success factors for different phases of industry growth that
could necessitate different strategies. In turn, organisations should be aware of where they are in the life cycle and be
able to read the signs to develop effective strategies.
e industry life cycle, as illustrated in Figure 6.4, suggests that any product or industry moves through several
growth phases:47
Development phase: During the development phase, it is mostly early adopters that will buy the product on offer,
and there will be few competitors. ere may even be a temporary monopoly.
Growth phase: During the growth phase, early followers will begin to purchase the product, and competitors will
start entering the market to pro t from market growth. Since growth is still high, competition is likely to centre
on gaining market share rather than price. During this phase, competitors may try to gain some differentiation
advantage.
Shake-out phase: While growth rate starts declining, competitors are entering the market during this phase.
However, the increasing rivalry and resulting lower pro tability forces weaker competitors out of the market.
is phase is the early phase of industry maturity. When the number of organisations entering the industry is
lower than the number of rms exiting, this is known as the shake-out phase.48
Maturity: During maturity, growth peaks and may even start declining somewhat. Repeat sales are likely to fuel
revenues. Since growth is low, the emphasis will be on retaining market share, and the focus is likely to shi to
strategies focusing on efficiency and low-cost production. Growth is limited to late followers and laggards, and
competition is likely to turn to price cutting to achieve volumes. ere are probably many competitors. Weaker
competitors, for example inefficient producers or those without a strong foothold in pro table market segments,
may perish. During this phase, consolidation, for example through mergers or acquisitions, is also likely to occur.
Decline: During the decline phase, usage will start to drop off. Some competitors may drop out, and competition
may shi to retaining pro table niche markets.

Figure 6.4 The industry life cycle49

ere are no speci c time frames applicable to the life cycle. is may last a few months for some products and
industries, or it may stretch over decades for other industries.
Knowledge diffusion plays a critical role in the industry life cycle. In the introductory phases of an industry, there
may not be a dominant technology. Competition takes place between rival technologies. As diffusion of knowledge
takes place, a dominant technology or standard may emerge. is may be enforced by government or regulators. For
example, the GSM technology is, by regulation, the standard for cellular service in South Africa (see the Case
example Industry life cycle of the cellular industry below). One particular technology may emerge from competitive
rivalry as a de facto standard, for example Microso’s Windows operating system.

CASE EXAMPLE: Industry life cycle of the cellular industry

The South African telecommunications industry provides a good example of the industry life cycle. In 1993, the
telecommunications regulator licensed two operators to commence operations, namely Vodacom and MTN. In
the early phase of development, operators focused on rolling out their networks to achieve national coverage.
Prices were high and cellular phones were a luxury item with some status attached to them. As subscriber
numbers grew exponentially, prices began to drop, and more and more packages were introduced. The focus
shifted to the development of distribution channels.
In 2001 the regulator licensed a third operator – Cell C – and in 2009 Telkom SA entered the market with
Telkom Mobile (and the 8ta brand) after selling its share in Vodacom. As the market for prepaid cellular service is
now nearing maturity, prices are still declining (some prepaid packages are even sold below cost). Considerable
consolidation has occurred, with Vodacom and MTN integrating forward and acquiring a number of service
providers. With the introduction of number portability where customers can now retain their number no matter
who their cellular operator is, operators have to focus even more on customer retention. In a further development,
after 2005 (following new industry regulation) mobile operators have expanded horizontally, offering a much
broader range of ICT services and solutions in a bid to secure more revenue from existing customers. Currently
there is a very sharp focus on providing mobile and fixed data services. During the same time period, fixed-line
telephony subscriptions declined as customers increasingly migrated to cellular telephony, while fixed broadband
subscriptions grew sharply and then stabilised around 2014.

e idea of the industry life cycle is closely linked to the idea of a technology life cycle.50 Many industries have been
subject to the effects of new and disruptive technologies. Customer migration to new technologies is oen a key
reason why industries mature and decline. It therefore makes sense to monitor technological changes and how they
may affect growth in the industry so as to develop a coherent strategy to deal with them. For example, the growth of
the cellular industry has caused the number of xed-line subscribers in South Africa to decline.
At the same time, new innovations can extend the life of a technology. Clayton Christensen described these
technologies as sustaining and disruptive technologies.51 Sustaining technologies are consistent with the way in
which incumbents understand their business, and enhance industry growth, for example the introduction of the
prepaid cellular service. Disruptive technologies initially add no value to current customers. ey are oen ignored
by incumbents until it is too late and the technology has improved, leading to a shi in customer preferences. is
means that incumbents are oen vulnerable to disruptive technologies. For example, when digital photography was
introduced, it was dismissed by lm camera manufacturers and even diehard lm photographers as being too low in
quality compared to lm. However, as quality improved, photographers shied to the new technology en masse, and
some incumbents, like Kodak, were unable to make the switch successfully.
6.2.5 Conclusion
ere are many different factors affecting an industry. e role of industry analysis is to examine the industry
structure and forces with a view to providing an understanding of the opportunities existing in the broader industry
environment to achieve or enhance competitive advantage. However, there are also many threats in the industry
environment that an organisation must identify and deal with to achieve a competitive advantage. e next section
focuses on the analysis of competitors and customers within the industry – in other words, intra-industry analysis.

6.3 Intra-industry analysis

While industry analysis provides generalisations that are useful for understanding the external sources of
competitive advantage, much of the strategic decision-making of the organisation occurs in its interaction with
individual or groups of competitors and customers within an industry. is is the focus of intra-industry analysis. In
the next section on competitor analysis, we will focus on a framework for analysing competitors and strategic group
mass, and provide an overview of other competitor analysis techniques.

6.3.1 Competitor analysis

Competitor analysis focuses on the interaction between the organisation and its most important rivals. Many
organisations operate in situations where a small number of competitors – oen even a single one – dominate their
actions. For example, in the South African retail banking industry, ABSA, Standard Bank, Nedbank and First
National Bank will tend to focus very much on competition with each other.52 Grant suggested that this observation
also holds at the local level. For example, the local Shell service station’s strategy will probably be dominated by the
actions of the Engen service station down the road. Understanding competitors and the bases for strategic actions
involves obtaining information about competitors, and understanding what they are likely to do or how they will
react.

6.3.1.1 A framework for analysing competitors

e objective of analysing and pro ling individual competitors is to understand how they might react to strategic
initiatives or which strategic initiatives they might initiate (see Figure 6.5). Competitor pro ling is an ongoing task
especially important in fast-moving markets. An organisation normally does pro ling for those few competitors, or
groups of competitors, that it regards as a competitive threat, and therefore that warrant detailed analysis.
e basic input in competitor analysis is competitive intelligence (CI). Although most organisations gather some
form of market intelligence informally, competitive intelligence refers to a formal programme of gathering
information on competitors (see Chapter 4 section 4.3 for a more detailed discussion of CI).53
Using competitive intelligence as input, the rst important aspect to ascertain is what drives competitors’ actions.
ere are three important aspects:
eir future goals
Stakeholder expectations or demands
eir assumptions about the industry.

However, it is also important to understand what the competitor is capable of. Here, the competitor’s current
strategy and core capabilities provide important clues to determine this. Using this framework should lead to an
understanding of the competitor’s strengths, weaknesses and response pro le that could help to anticipate not only
reactions to strategic initiatives, but also potential initiatives by the competitor.

Figure 6.5 A framework for competitor analysis54

 It is, however, not always possible to examine individual competitors only. In some instances, the analysis of
strategic groups can provide an insight into the dynamics of competition in an industry.

6.3.1.2 Strategic groups

A strategic group is a cluster of organisations in an industry that are similar to each other, but distinct from other
groups in the industry because they differ in one or more key aspects of their competitive strategy.55 Fleisher and
Bensoussan56 suggested that identifying strategic groups depends on four key factors:
Mobility barriers: ese barriers determine the extent to which participants in one group can move to another
group.
Competition within groups: is is determined by:
» the number of groups in the industry and the distribution of market share between them
» the strategic distance between the groups
» the extent to which the market segments and differentiation of the groups overlap.
e impact of the bargaining power of buyers and suppliers: is can in uence strategic groups in two ways:
» First, strategic groups may all buy from the same group and sell to the same buyers. erefore, the only
difference may occur at the strategic level, and some groups may be more susceptible to bargaining power
than others.
» Second, where different strategic groups use different suppliers and sell to different customers, this may add a
dimension of differentiation based on bargaining strength.
Substitution: Different strategic groups may be more susceptible to substitution depending on where in the value
chain they focus. e emergence and success of direct short-term insurance companies, for example OUTsurance
and Budget, that eliminate short-term insurance brokers may increasingly put pressure on brokers as a strategic
group focusing on the sales and maintenance of policies.

A strategic group analysis of the global beer market is illustrated in Figure 6.6. Global producers, dominated by large
global players such as Anheuser-Busch InBev (AB InBev), Heineken, Carlsberg and Molson Coors have operations
and brands across the globe. ey typically have one or more strong global brands, supported by a wide range of
products ranging from strong regional brands (such as Castle in South Africa), to premium beers, to economy beers.
For example AB InBev has Stella Artois, Fosters, Budweiser and Corona; Heineken has the Heineken brand; and
Carlsberg the Carlsberg brand. Regional brewers such as Namibia Breweries (Nambrew) and China Resources Snow
Breweries operate in a country or region. ey have a more limited product range, but typically have at least one
brand, for example Windhoek Lager or Snow, that is strong in their country or region. Cra brewers are oen
associated with a limited geographic area, such as a local pub selling its own beer or a microbrewery such as the
Nottingham Road Brewing Company in the KwaZulu-Natal Midlands. With regard to their product range, they tend
to rely quite strongly on the authentic and unique local characteristics and novelty of the product. For example, the
Nottingham Road Brewery offers brands like Whistling Weasel Pale Ale, Tiddly Toad Lager and Pickled Pig Porter.
It is easy to see that it would be difficult for a local microbrewer to compete with regional or global brewers.
However, global brewers became global by acquiring regional brewers; for example, Heineken owns a share of
Nambrew. e strategic distance between these two groups is thus relatively small.

Figure 6.6 Strategic group map of the global beer market

Note that this example is purely for illustrative purposes and is not based on rigorous analysis.
Organisations can use strategic group analysis in the following ways:57
 To identify their most direct competitors: Competition will be most intense and direct within the strategic group,
such as between regional brewers and their brands. For example, SAB’s Castle Lager competes in Kenya with East
African Breweries’ Tusker Lager. Global brewers will compete for acquisitions to consolidate their positions
further. Microbrewers will typically dominate in very small niche markets such as in a particular pub or town.
To consider where to compete: Organisations need to consider what group or groups they would like to compete in
and how possible it would be to move from one strategic group to another. Recently, SAB entered the cra beer
market by announcing that it would be making ales at its No 3 Fransen Street Brewery (which was previously
used as a test brewery).
To identify opportunities and threats: Sometimes there may be open strategic spaces that present opportunities.
However, intense and growing rivalry in certain strategic spaces may present a threat.

6.3.2 Customer analysis

e success or failure of organisations is closely linked to the extent to which they understand customer needs, and
to what extent they address them.58 is depends on an understanding of the various segments in the industry and
customer commitment.
A market segment is a group of customers that has similar needs that are different from those of customers in
other parts of the market.59 While a detailed analysis of market segmentation methodology is beyond the scope of
this book, a review of some principles is useful:60
Segment uniqueness: Segmentation should assist in identifying segments that respond uniquely to the strategic
positioning of the organisation. Many different variables can be used in the process of identifying unique
segments. Geography, income, other demographics such as age and education, buying behaviour, needs and
attitudes are some of the variables that can be used alone or in combination to identify market segments. For
example, by combining age, education and income into life stages, certain segments emerge that explain
household earnings and expenditure patterns.
Segment attractiveness: It is important to understand the various segments’ relative attractiveness. is can be
closely aligned with the organisation’s strategic objectives. For example, if the organisation’s main objective is
pro t, the margins that can be achieved in a segment are important. Segment attractiveness is normally
determined by a combination of factors such as size, growth, pro t margins and competitive intensity.
Key success factors: In addition to understanding whether segments are attractive, it is important to understand
customer preferences and how the organisation is or could be positioned based on those preferences. ese
preferences are also known as critical or key success factors. Key success factors are normally based on price,
image, product quality, delivery, convenience and other customer preferences, and how the organisation
compares to its competition with regard to these factors.
Scope of segmentation: e number of segments to use is a matter of choice. e scope of segmentation is
normally decided by two factors. First, the similarities of key success factors, and second, the presence of shared
costs. It may be difficult for certain organisations to compete in segments that are too different from the segments
in which they traditionally compete.

6.4 Summary
In this chapter we discussed industry analysis and intra-industry analysis. e section on industry analysis focused
on de ning the industry as a unit of analysis. is was followed by a discussion on the analysis of industry structure.
Particularly important in this section was the idea of complementors as a means of increasing the value of the
products and services of the organisation. is section also examined the importance of evolution in the industry as
well as understanding how strategy has to change over time. Linked to this was the discussion on key success factors
and the idea that different industries and those in different phases of the life cycle require different approaches to
strategy.
e second section started from the assumption that understanding industry structure and competitive forces
may not be sufficient. In addition, the organisation needs to have a good understanding of both individual and
groups of competitors. is allows an organisation to exploit speci c opportunities, and identify and deal with
speci c threats. e same principles apply to customers. To target the most valuable customers, the organisation
must segment the market, and assess and target speci c segments.
e implication for organisations is that industry analysis is an ongoing task, not a single event undertaken every
year or two. It is one of the key building blocks for developing a sound business strategy. Another important
implication is that industry analysis is multidimensional. An organisation must not only understand the initiatives
undertaken by the most obvious competitors, but must also develop a complete picture of the competitive threats
and cooperative opportunities in the industry.
Unfortunately, many organisations seem to underestimate the importance of industry analysis and devote far too
few resources to it. Information that will improve the strategic decision-making of an organisation cannot be bought
or found on the internet. e quality of information and analysis makes all the difference to strategic insight and
sound strategic decisions.

REFLECTION BOX:

Many organisations make use of loyalty programmes – Discovery Vitality, SAA Voyager, FNB e-Bucks and Pick
n Pay’s Smart Shopper card are but a few examples. What role do loyalty programmes play in industry
positioning?

Opening case study questions

1. How will the key success factors of the automotive industry change in the future?
2. Would you describe the global automotive industry as an attractive one? Motivate your answer.
3. In the southern African context, should traditional car manufactures take new competitors like Tesla seriously?
Motivate your answer.

Discussion questions
1. Using the automotive industry as an example, explain how you would describe the industry if you were a local
car dealership in Cape Town.
2. What are the key success factors in the electric car industry?
3. Visit the website: www.youtube.com/watch?v=mYF2_FBCvXw and watch the interview with Michael Porter on
the ve forces. Has watching the video modi ed your thinking about the ve forces in any way?
4. Consider the extended framework for industry analysis (section 6.2.3.4). Do you agree with the inclusion of the
regulator as an industry force? Motivate your answer.
5. Identify key success factors for each of the demand growth phases in the industry life cycle.
6. In what stage of the life cycle is the global automotive industry, and how is this affecting strategy in this industry?
7. Explain how you would go about conducting a competitor analysis of a car dealership.
8. Explain how strategic group analysis can be used to analyse competition in the telecommunications industry.
9. Explain how you would go about conducting customer analysis in the telecommunications industry.
Using knowledge and skills
1. Select an organisation of your choice and identify the industry in which it operates. Use both a narrow and a
broad de nition of the industry, and write down the advantages and disadvantages of each approach.
2. Identify an organisation with which you are familiar or on which you can obtain information. Write a brie ng
document for a competitive intelligence professional in which you outline questions you want answered about
the organisation if you were to pro le it as a competitor. Suggest sources for gathering information. Visit
www.scip.org for ideas.
3. Select an organisation with which you are familiar and use the extended framework (section 6.2.3.4) to identify
key threats and opportunities in the industry environment. Advise the management of the organisation on how
they can use the information you have generated to their strategic advantage.

Further reading
Brandenburger, A.M. & Nalebuff, B.J. 1996. Co-opetition. New York: Doubleday.
Fleisher, C.W. & Bensoussan, B.S. 2015. Business and competitive analysis: effective application of new and classic
methods. 2nd ed. Upper Saddle River, NJ: Pearson Education.
Ghemawat, P.E. (Ed). 2010. Strategy and the business landscape. 3rd ed. Upper Saddle River, NJ: Prentice Hall.
Kiechel, W. 2010. e lords of strategy. Harvard Business School Press.
Porter, M.E. 1980. Competitive strategy: Techniques for analysing industries and competitors. New York: Free Press.
Rumelt, R.P. 1991. How much does industry matter? Strategic Management Journal, 12:167–185.

Suggested websites
SCIP (www.scip.org) – e official website of Strategic and Competitive Intelligence Professionals.
Strategy+business (www.strategy-business.com) – A website with news focusing on strategy and business.
Strategic Management Society (SMS) (http://strategicmanagement.net/).
Management Innovation Exchange (https://www.managementexchange.com/tags/gary-hamel) – A website with new
management ideas.

References and endnotes

1. Compiled from: Priestly. T. 12 September 2015. e car industry will change forever. But nobody is prepared
for it. Forbes. https://www.forbes.com/sites/theopriestley/2015/09/12/the-car-industry-will-change-forever-
but-nobody-is-prepared-for-it/2/#618e213332cd [Accessed 5 April 2018]; McKinsey. August 2016. Self-
driving cars and the future of the auto sector (podcast transcript).
https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/self-driving-cars-and-the-
future-of-the-auto-sector [Accessed 5 April 2018].
2. Johnson, G., Scholes, K. & Whittington, R. 2011. Exploring corporate strategy. 9th ed. Essex: FT Prentice Hall.
54.
3. Ghemawat, P.E. (Ed). 2010. Strategy and the business landscape. 3rd ed. Upper Saddle River, NJ: Prentice Hall.
67.
4. Ibid.
5. Grant, R.M. 2016. Contemporary strategy analysis. 9th ed. Oxford: Blackwell Publishing. 88–91.
6. Lynch, R. 2009. Corporate strategy. 5th ed. Essex: FT Prentice Hall.
7. Based on the Eli Lilly case and discussion in Chatterjee, S. 2005. Failsafe strategies. Upper Saddle River, NJ:
Wharton School Publishing.
 8. Amit, R. & Schoemaker, P.J.H. 1993. Strategic Assets and Organisational rent. Strategic Management Journal,
Vol. 14, 33–46. Lynch. 2009. Op. cit.: 94–95.
9. Adapted from Grant. 2016. Op. cit.: 275–280.
10. Ibid.: 333.
11. Krippendorf, K. 19 March 2012. How to plan your company’s end game. Fast Company [Online].
https://www.fastcompany.com/1825384/how-plan-your-companys-end-game [Accessed 24 October 2018].
12. Adapted from Johnson, G., Scholes, K. & Whittington, R. 2005. Exploring corporate strategy. 7th ed. Essex:
Prentice Hall. Op. cit.: 86.
13. Adapted from Grant. 2016. Op. cit.: 244–248.
14. Seitz, P. 28 February 2018. Apple rakes in 87% of smartphone pro ts, but 18% of unit sales. Investor’s Business
Daily. https://www.investors.com/news/technology/click/apple-rakes-in-bulk-of-smartphone-pro ts-but-
small-slice-of-unit-sales/ [Accessed 4 March 2018]; Bagri, N.T. 18 May 2017. Apple thinks its stores can
thrive while other retailers are dying. Quartz Media https://qz.com/986738/why-apple-aapl-thinks-it-can-
succeed-at-retail-stores-while-others-are-dying/ [Accessed 23 May 2018].
15. Heisler, Y. 25 May 2015. How BlackBerry got blindsided by the iPhone. Networkworld.
https://www.networkworld.com/article/2925488/smartphones/how-blackberry-got-blindsided-by-the-
iphone.html [Accessed 6 June 2018].
16. Adapted from Grant. 2016. Op. cit.
17. Wheelen, T.L. & Hunger, J.D. 2002. Strategic management and business policy. 8th ed. Upper Saddle River, NJ:
Prentice Hall. 327.
18. Ibid.
19. Johnson et al. 2005. Op. cit.: 86
20. Ibid.
21. Walker, G. 2009. Modern competitive strategy. 3rd ed. New York: McGraw-Hill International.
22. Ibid.
23. Johnson et al. 2002. Op. cit.: 60.
24. Walker. 2009. Op cit.
25. Adapted from Ghemawat. 2010. Op cit.: 25; Grant. 2008. Op. cit.; Johnson et al. 2005. Op. cit.; Mintzberg, H.,
Lampel, J., Quinn, J.B. & Ghoshal, S. 2003. e strategy process. 4th ed. Upper Saddle River, NJ: Prentice Hall.
26. Ibid.
27. Mintzberg et al. 2003. Op. cit.: 100.
28. Johnson et al. 2005. Op. cit.: 82.
29. Grant. 2016. Op. cit.; Mintzberg et al. 2003. Op. cit.; Johnson et al. 2005. Op. cit.
30. Mintzberg et al. 2003. Op. cit.; Johnson et al. 2005. Op. cit.
31. omas Buckley. 28 September 2016. Anheuser-Busch InBev clinches R1.4trn SABMiller deal. Fin24
[Online]. https://www. n24.com/Companies/Industrial/anheuser-busch-inbev-clinches-r14trn-sabmiller-
deal-20160928 [Accessed 20 November 2018].
32. Lynch. 2009. Op. cit.: 101–102; Grant. 2008. Op. cit.
33. Grant. 2016. Op. cit.
34. Brandenburger, A.M. & Nalebuff, B.J. 1996. Co-opetition. New York: Doubleday.
35. Ghemawat. 2010. Op. cit.: 29; Grant. 2008. Op. cit.
36. Brandenburger & Nalebuff. 1996. Op. cit.: 18.
37. Ghemawat. 2010. Op. cit.: 30.
38. Clement, J. 2017. Mobile App Usage — Statistics & Facts. Statista. 10 October 2017. [Online].
https://www.statista.com/topics/1002/mobile-app-usage/ [Accessed 13 June 2018].
39. Adapted From Lipczynski, J. & Wilson, J. 2004. e economics of business strategy. Essex: Prentice Hall. 277.
40. Ghemawat. 2010. Op. cit.
41. Wheelen & Hunger. 2002. Op. cit.: 61.
42. Adapted from Ghemawat. 2010. Op. cit.: 38; Wheelen & Hunger. 2002. Op. cit.: 61.
43. Extract from Gedye, L. 2013. Construction: collusion may be the industry’s fatal aw. Mail & Guardian
[Online]. http://www.mg.co.za/article/2013-02-08-00-construction-collusion-may-be-industrys-fatal- aw
[Accessed 24 May 2013].
44. Walker. 2009. Op. cit.: 110–111.
45. Shiu. 2005. Op. cit.
46. Das Nair, R. 9 February 2017. Big supermarket chains in southern Africa are keeping out small suppliers.
Quartz Africa. https://qz.com/906328/big-supermarket-chains-in-southern-africa-are-keeping-out-small-
suppliers [Accessed 13 June 2018].
47. Adapted from Johnson et al. 2011. Op. cit.: 65.
48. Walker. 2009. Op. cit.: 122.
49. Compiled from Johnson et al. 2011. Op. cit.: 65; Walker. 2009. Op. cit.: 133; Lynch. 2009. Op. cit.: 86–89.
50. Fleisher, C.S. & Bensoussan, B.E. 2003. Strategic and competitive analysis. Upper Saddle River, NJ: Prentice
Hall. 381.
51. Christensen, C.M. 2003. e innovator’s dilemma. New York: HarperBusiness Essentials.
52. Grant. 2016. Op. cit.: 101.
53. Wheelen & Hunger. 2002. Op. cit.: 70.
54. Adapted from Ghemawat. 2010. Op. cit.: 80; Grant. 2008. Op. cit.: 114.
55. Fleisher & Bensoussan. 2003. Op. cit.: 75.
56. Ibid.
57. Johnson et al. 2011. Op. cit.: 69–71.
58. Ibid.
59. Ibid.
60. Based in part on the process suggested by Grant. 2016. Op. cit.: 130–133.
 CHAPTER 7 Analysing the
internal
environment
Peet Venter

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain why resources and capabilities are strategically important
explain how to assess the strategic value of resources and capabilities
explain how an organisation can develop required resources and capabilities
identify the strategic resources and capabilities of an organisation
explain how an organisation can use its resources and capabilities to develop or maintain its competitive
advantage
explain the value chain of an organisation
use the value chain to identify opportunities for cost or differentiation advantage
appraise the resources and capabilities of the organisation as strengths or weaknesses.

KEY TERMS

benchmarking
capabilities
distinctive capabilities
dynamic capabilities
economic rent
individual skills and competencies
organisational routines
physical resources
resources
threshold capabilities
unique resources
value chain

OPENING CASE STUDY

Sasol: Innovation in the DNA1
Sasol Ltd is an international integrated energy and chemical company based in South Africa, and is perhaps
best known for perfecting the technology for making petrol and diesel from coal. This process started in the
1950s as a bid to make the government of the time less dependent on other nations for oil. Sasol was initially
dependent on Germany and the US for the skills required to develop and implement the technologies required
for making petrol and diesel from coal, but soon realised the necessity of investing to develop its own skills.
In the 1960s, Sasol began investing heavily in its own research and development (R&D) to start developing
the chemical catalysts to effect the conversion from coal to oil to diesel/petrol, and to refine the processes
further. It also started looking at some of the environmental issues that relate to the process.
R&D for companies such as Sasol is significantly costly, amounting to about 1% of turnover annually. While
Sasol spends relatively more money on R&D than some comparable organisations such as Shell, the company
has matured, and with it the percentage of money spent on R&D has declined to a more acceptable range.
Sasol currently focuses on both the development of new technologies and supporting existing ones. Currently,
Sasol’s strong intellectual property portfolio includes in excess of 500 registered patent families. Within Sasol,
there is a dedicated R&D team of more than 600 people, with over a third of them holding doctorates or master’s
degrees in engineering and science. Over the past 10 years, this team has been granted 210 patent families.
In addition to its in-house R&D function, based in Sasolburg and Secunda, Sasol also manages an extensive
innovation network. The two R&D hubs are complemented by research teams in Enschede in the Netherlands
and at the University of St Andrews in Scotland. In addition, it maintains strong relationships with research
councils, such as the Council for Scientific and Industrial Research (CSIR), universities, analytical laboratories,
the Department of Science and Technology, and the National Research Foundation (NRF) for research chairs,
grants and postgraduate bursaries.
The spirit of innovation that has powered Sasol extends from its technological core to all aspects of managing
a sustainable business, such as innovating to improve the efficiency of strategic business units.
Services and products have developed to address changing market needs and expectations. As a result, over
the 60+ years of its existence, Sasol has built up an impressive array of innovations that form the core of its
current and futures business. A few of these innovations are outlined below:
The Sasol Slurry Phase Distillate (SPDTM) Process transforms natural gas into energy and chemical products,
including transport fuels, base oils, waxes, paraffins and naphtha. The three-stage process combines three
proprietary technologies. Natural gas is combined with oxygen to form a syngas, which is then subjected to a
Fischer-Tropsch conversion, resulting in waxy syncrude. Finally, this is cracked down to produce the end
product. The strength of the Sasol SPDTM process is not simply in the inherent quality of the three component
technologies but more importantly how they are combined and integrated to increase efficiencies and optimise
output, a result of Sasol’s 60 years’ experience in synthetic fuels production.
In 1997 Sasol Technology Research and Development began research on the selective trimerisation of ethylene
to 1-hexene. This led to the development and patenting of six trimerisation catalyst systems. A ground-breaking
innovation was made in 2002 with the discovery of a tetramerisation catalyst that could make 1-octene in high
selectivity. This was considered impossible by international experts in the field. A first-of-a-kind plant was
commissioned in Lake Charles, Louisiana, in 2013.
Sasol’s environmental science and engineering services and products include water and waste water
processing, atmospheric modelling and solid waste handling.
Sasol is involved in developing capabilities in alternative energy, including the processing of terrestrial biomass
as well as an emerging competence in concentrated solar, photovoltaics and energy storage.
Support services include the design and execution of small projects, the operation of pilot-scale and semi-
commercial pilot plant units covering a wide range of technologies, advanced process control systems and
process safety management.
Fuels technology includes product applications research and plant/market product technical services on a range
of products including transport fuels (petrol, diesel and jet fuel), industrial heating fuels, lubricants, gas and
road-binding materials. Areas of expertise include new product and application development, product fit for
 purpose testing, alternative fuel development and certification, combustion research, exhaust emission testing,
fuels blending, the interaction of fuels with fuel systems and problem solving.

Sasol has been a frontrunner in technological innovation and excellence since their inception in the 1950s. For
over 60 years, they have developed and commercialised innovative energy-related technologies, first with coal
as a feedstock, then with gas and, into the future, with renewable energy sources. Only time will tell if they can
use their long and illustrious history as a springboard for similar success in the future.

Overview
In the Opening case study Sasol: Innovation in the DNA, we can see how Sasol is constantly looking for new sources
of competitive advantage as its legacy products (such as ‘oil from coal’) mature and decline. In this process, some
elements remained constant, but Sasol had to develop new capabilities as it grew from a government project, to a
commercial business, to a global player in energy and related chemicals. This required internal analysis to identify
the organisation’s strengths and weaknesses as a basis for competitive strategy. In this regard, two concepts play a
prominent role in strategy literature:
The idea of resources as the basis for competitive advantage, namely the resource-based view (RBV)
The analysis of comparative strengths and weaknesses.

This chapter uses these two concepts as a basis for exploring ways of identifying comparative strengths and
weaknesses.

7.1 Introduction
Many organisations use the SWOT method, typically by brainstorming, to identify opportunities and threats in the
external environment (see Chapters 4 and 5), and strengths and weaknesses in the internal environment. SWOT is
an acronym for strengths, weaknesses, opportunities and threats. However, just producing a list of strengths and
weaknesses has marked shortcomings in establishing a strategy for the future that is aligned with the internal
environment of the organisation. It is far more useful to have a framework to conduct internal analysis. In this
regard, the analysis of resources has been widely accepted in strategy literature. Resources in this context refer to the
assets, skills and capabilities over which the organisation has control.2
e rise of the so-called resource-based view (RBV) of the organisation springs from the strategic importance of
understanding why organisations differ from each other, and why certain organisations are more successful and
more pro table than others.3 Competitive advantage, or the lack thereof, is generally better explained by
understanding the distinctive resources and capabilities4 of the organisation than by understanding its external
environment only. In fact, the rise of the RBV is at least partly a reaction to the almost exclusive focus on the role of
the external environment in strategy during the 1980s.5 In addition, empirical evidence of the impact of industry on
business success is inconclusive.6
e rst part of the chapter deals with the importance of resources and capabilities in strategy, while the second
part deals with their identi cation. e last part of the chapter deals with the appraisal of resources and capabilities,
and the identi cation of strengths and weaknesses.

7.2 The strategic importance of resources and capabilities

e acceptance of the RBV rests on three important premises:7
 Resources determine the strategic direction of the organisation. An understanding of distinctive resources and
capabilities can help the organisation determine what it is capable of doing, rather than focusing on what its
current business is.
Resources are the primary source of pro t for the organisation. Pro tability is determined by two factors, namely
the attractiveness of the industry in which the organisation competes, and its ability to establish a competitive
advantage over its rivals. While industry attractiveness is generally the domain of industry analysis, the RBV can
provide signi cant insights as to why certain organisations are more successful than others – in other words, why
some organisations have a competitive advantage over others.
Industry positioning alone does not explain differences in pro tability among similar organisations with similar
products in the same industry.

e next question to explore is what makes resources valuable, and how long this advantage can be sustained.
Various authors use the terms ‘economic rent’ and ‘rent’ interchangeably to describe the ability of resources to
attract income. e value of a resource is therefore ultimately determined by its ability to generate rent. ere are
two types of economic rent commonly mentioned in strategy literature:8
Ricardian rents (named aer economist David Ricardo) are rents associated with unique resources and
capabilities. For example, Apple’s iOS soware provides Apple with proprietary mobile phone soware that can
be used to develop applications (‘apps’) for the iPhone and iPad that may contribute to exceptional returns. ere
are also examples of monopoly rents that result from skilled investment and market strategies. For example,
Microso Windows as a widely accepted standard for operating system soware allows Microso to earn
monopoly rents from its agship product.
Schumpeterian rents (named aer economist Joseph Schumpeter) are especially prevalent in volatile markets such
as certain high-technology ones. Schumpeterian rents refer to those returns appropriated by the organisation
because of a new or innovative product that allows it to charge a price much higher than the cost of production.
ese rents are normally unstable and will eventually disappear. For example, in the cellular handset market the
rst competitor to build a commercially available cellular phone with a built-in camera was the Sharp
Corporation in Japan in 2001. is advantage lasted only until the rst Nokia with a built-in camera was
launched in 2002. By 2006, half the cellular phones in the world had built-in cameras and by 2009, Nokia was the
biggest manufacturer of any type of camera.9 Today, there are very few models of cellular phones that do not have
cameras, and many of the more upmarket ones have cameras with quality as good as or better than that of
smaller handheld cameras.

Figure 7.1 provides a summary of the factors that determine the value of resources. In short, the value of resources is
determined by the following:
e extent to which resources are a viable source of competitive advantage
e extent to which such a competitive advantage is sustainable over time
e extent to which the organisation is in a position to appropriate the returns generated by the resources
e extent to which resources can be exploited for future growth.10

ese concepts are discussed below.

7.2.1 Competitive advantage

If a resource meets customer needs at a price that customers are willing to pay, there is a demand for it. However, the
resource is more valuable if it can establish a competitive advantage. is means that the resource can assist the
organisation in meeting customer needs better than the competition can. us the concept of a distinctive capability
and its role in creating competitive advantage becomes important in understanding the value of resources.
 A resource is also more valuable if it is scarce – in other words, not every organisation possesses it or can possess
it, and it should also be relevant to the key success factors in the market. us resources can only lead to competitive
advantage when they are unique and hard to come by. For example, when cellular telephony was introduced in the
early 1990s, many countries initially only licensed one or two cellular operators. is provided a unique resource and
competitive advantage to the licensed cellular operators.

Figure 7.1 The determinants of resource value

ere are four determinants of the scarcity of resources:

Physical uniqueness: In the rst place, resources can be physically unique. Real estate, mineral rights, government
licences and patents are examples of resources that cannot or may not be physically copied.
Path dependency: A second source of scarcity is path dependency. Certain resources are built over time in ways
that cannot be replicated. Brand image, organisational culture and company reputation are examples of resources
that cannot be copied unless exactly the same sequence of events is followed that led to the original resource
being created in the rst place.
Causal ambiguity: In many instances, it may be difficult, or even impossible, for competitors to work out exactly
what the truly valuable resource of a rival is or how to copy it.
Economic deterrence: e fourth determinant is economic deterrence, which occurs when economic realities
make it unattractive for rivals to invest in certain resources. is may be in evidence when unfavourable market
conditions occur, for example low market potential, or where the likelihood of an aggressive response to
competition scares off potential imitators.

7.2.2 Sustainability
To create a sustainable competitive advantage, a resource must be in short supply over a period of time – in other
words, it must be both scarce and durable. In addition, the organisation should be able to replicate the resources and
capabilities in other markets or products. e organisation must also protect the resources from imitation by rivals
by ensuring that they are not too easily transferable. However, they must be transferable enough for the organisation
to replicate.
ere are four barriers to transferability that will make it difficult for competitors to successfully transfer
resources for their own bene t:
Geographic immobility: In the rst place, resources may be geographically immobile, for example mineral
deposits.
Imperfect information: is means that competitors may nd it difficult to obtain sufficient information to
evaluate resources and capabilities, and may then end up not being sure what the appropriate price is to pay.
Resource complementarity: Separating a resource, such as a brand, from its context can cause a loss in value. us
the resource may be dependent on its context and complementary resources and will be less productive in a
different setting.
Resource dependency: is also plays a key role since capabilities are combinations of resources that work
together. Separating one aspect, for example a team of people, from the whole may reduce its efficiency.

To achieve sustainability, organisations have to exploit or leverage resources, and at the same time protect them from
imitation by competitors.

7.2.3 Appropriability
e third critical determinant of the value of resources centres on the question of who captures the value generated
by resources. Generally, the owner of the resource captures most of the value it creates. For example, Microso owns
the Windows operating standard, and although it may license the soware to hardware vendors or even to soware
developers, most of the value created ows to Microso. is concept is referred to as appropriability, and it explains
why internally developed resources are generally more valuable than those bought or used under licence. e more
embedded the resources are within the organisation, the greater the ability of the organisation to appropriate the
value owing to them.
However, if the value is seated, for example, in one or a few individuals, they will be able to attract much of the
value created by the resources. For example, if a star soccer player moves to a new team, and his move creates more
value for the team such as increased gate revenues and sponsorships, it is likely that the player will be able to attract
a substantial portion of this value.
ere are four aspects that determine the potential of an organisation to capture the rent generated by its
resources and capabilities:
Protection of intellectual capital: First, to what extent can the intellectual property and intellectual capital of the
organisation be protected against imitation?
Relative bargaining power: is can play a role when complementary services have high bargaining power as they
can then appropriate more of the rent. ink of the massive salaries that some movie stars are able to command.
is is due to their power to draw crowds to the box office, which gives them bargaining power.
Embeddedness: In some instances, the resources and capabilities are so embedded in the organisation’s structures
and processes that they cannot be separated, causing the organisation to be in a position where it can appropriate
most of the value generated.
Resource exploitation: Also important when considering this aspect is the issue of resource exploitation, which is
discussed in the next section. Some organisations (such as Disney, in the Case example on page 215) are better at
leveraging their resources, which enables them to capture more of the value generated.

7.2.4 Exploitability
An organisation’s ability to exploit or leverage its valuable resources and capabilities lies at the heart of the RBV.
(Also see Figure 7.4.) Hamel and Prahalad suggested that resources can be leveraged by concentrating,
accumulating, complementing and conserving as discussed below.11

7.2.4.1 Concentrating resources

Concentrating resources refers to the principle of the selective allocation of resources. is involves three elements:
Converging resources on a few selected strategic goals that will contribute to the attainment of the organisation’s
vision
Focusing the efforts of each organisational unit on single priorities sequentially, which prevents the dilution of
resources by trying to do too many things at the same time
Targeting those activities rst that have the highest impact on customers’ perception of value.

Lack of concentration can lead to poor performance and resource wastage.

7.2.4.2 Accumulating resources

Accumulating resources refers to the principle of building up resources as quickly as possible using the following
methods:
Mine experience to learn as quickly as possible. is involves activities like joint problem solving in forums such
as quality circles, and benchmarking against best practice.
Borrow from other organisations by means of arrangements such as strategic alliances, joint ventures and
outsourcing activities. e Joule electric car developed in South Africa was shelved when the company could not
nd suitable partners to mass-produce the vehicle,12 and they did not possess the resources themselves. In such a
case, a strategic alliance with a suitable production partner might have saved the Joule.

7.2.4.3 Complementing resources

Complementing resources refers to the process of increasing the value of resources by linking them to
complementary resources and capabilities:
Blending by, for example, linking technical or R&D capabilities to the marketing capabilities required to get the
product to market
Balancing to ensure that limited resources and capabilities in one area do not limit the value of resources and
capabilities in other areas. e South African-developed Joule electric car was by all accounts a very promising
product, but its lack of mass production capabilities eventually caused the project to be abandoned by the South
African government.13

7.2.4.4 Conserving resources

Conserving resources refers to the principle of using resources and capabilities to the fullest extent:
Recycling: Resources can be recycled through different products, markets and product generations (see the Case
example below on Disney).
Co-opting: Resources can be co-opted by collaborating with other companies.

CASE EXAMPLE: Growing the magic kingdom

When Disney acquired comics publisher Marvel and science fiction franchise Star Wars, it was obvious that the
marketing prowess of Disney would be brought to bear on these acquisitions. So far, we have seen this in a
number of different ways:
 Leveraging characters such as Iron Man, Spider-Man and Han Solo through multiple products (computer and
console games, films, graphic novels, and toys)
Collaborating with gaming studios and toy manufacturers to co-opt resources and capabilities that Disney
does not possess
The creation of new storylines for existing characters and prequels for existing storylines, such as Rogue One:
A Star Wars Story
Disney ventured into new media such as television series (e.g. Marvel is Agents of S.H.I.E.L.D.) and product
expansion (such as Toy Story Land and Star Wars Galaxy’s Edge).

Disney paid approximately $4 billion for the Star Wars franchise and Lucasfilm Ltd. The deal closed in December
2017, nearly 7 years ago.14

When organisations do not have the resources to exploit, their only option is to acquire the resources. is is the
focus of section 7.2.5.

7.2.5 Developing resources and capabilities

When organisations decide to enter new markets or introduce new products and services, and they do not have the
resources and capabilities to match the required key success factors, they need to acquire them in some way.
Christensen suggested that there are three ways in which organisations can do this:15
Acquisition: An organisation can acquire a different organisation that does possess the required resources and
capabilities. is is oen a cost-effective way of obtaining resources and capabilities. However, it can also prove to
be a costly mistake if the acquired resources and capabilities cannot be successfully integrated into the acquiring
organisation. For example, the merger between American automotive giant, Chrysler, and the German icon,
Daimler-Benz, had to be disbanded when the merged company, DaimlerChrysler, failed to leverage the value of
the merger.
Internal creation: Creating new capabilities internally is a possibility, but it is also a risky proposition. Oen the
capital raised, new people hired and new processes created are simply absorbed into existing processes and
structures, and disappear without a trace. In 2008, Telkom SA sold its 50% share in cellular provider Vodacom
and announced that it would invest R1.7 billion in building its own mobile business (Telkom Mobile). By 2013, it
was clear that Telkom had made a mistake, and that the Telkom Mobile business was not succeeding to the extent
that it had hoped or anticipated it would.16
Creation of a spin-out organisation: Capabilities can also be created through a spin-out organisation where a
separate, small start-up organisation is established as a mechanism for developing the required resources and
capabilities. is type of venture only has a chance of success where the CEO oversees the start-up closely,
ensures that it has the required resources, and where it does not have to compete head-on with the mainstream
organisation and projects for funding. For example, when Telkom SA had the opportunity to enter the cellular
market in 1993, it formed Vodacom SA, but due to government’s insistence that the Telkom shareholding be
limited to 50% of the new venture, Vodacom was established as a spin-off. e shareholding agreement
contributed greatly to Vodacom’s independence, and offered the organisation access to resources such as the
marketing and branding knowledge of another key shareholder at the time, the Rembrandt Group. It is unlikely
that Vodacom would have been as successful as it has been if it had simply been established as an operating
division of Telkom.

CASE EXAMPLE: Using resources and capabilities to establish competitive

advantage
 Chris Zook from Bain & Company17 describes four pillars of strategic advantage and renewal that were identified
during 20 years of studying successful corporate transformations:
Unique resources: The importance of unique resources is underscored by the transformation of Marvel
Entertainment Inc., which resulted in Marvel being acquired by Disney for $4 billion in 2009. Marvel based its
renewal on its strongest unique assets, namely a loyal customer base; a stable of 5 000 comic-strip
characters, for example Spiderman; a library of 30 000 stories that have been market tested; and the Marvel
brand. Marvel recently produced a breakout hit with the critically acclaimed Black Panther movie (distributed
by Walt Disney Studios Motion Pictures), with box office takings of $1.3 billion.18
Dynamic capabilities: These rely on ‘following the money’. In the case of Marvel, the organisation had to shift
from focusing on channels such as magazines to proprietary content, for example the copyright on characters
and stories. The proprietary content then shifted from analogue media such as graphic novels, to digital
media such as TV, films and gaming.
Resource replication: One of the ways to create value from resources is to replicate or repeat a successful
formula in new situations or markets. For example, Marvel can make a successful character or story available
on film or DVD, in a television series, in a computer game, game console and toys. The organisation can also
use characters in multiple situations and storylines; for example, the Iron Man and Spider-Man movie
franchises have resulted in multiple successful sequels. Disney has already indicated its intentions to produce
the final Star Wars trilogy with young director JJ Abrams at the helm, and has announced a deal with gaming
producer Electronic Arts to produce Star Wars games.
Hidden resources: In some instances, hidden assets can be adapted to a new environment and can create
value that was not previously recognised. For example, Apple Inc.’s software interface and young, loyal
customers ultimately led to a differential advantage in the music download business.

These findings support the importance of unique resources and dynamic capabilities in establishing competitive
advantage.

7.3 Identification of resources and capabilities

Many organisations are good at identifying the physical resources that they own, and can give detailed accounts of
their nances, production facilities, information technology and other physical assets. However, they are oen
unsure of the value of their intangible assets, and even more so about the true value and sustainability of their
capabilities. is section explores the different types of resources and capabilities as a basis for identifying resources
and capabilities.
Because of the differences between resources and capabilities, we will consider their identi cation separately.
Section 7.3.1 addresses the identi cation of resources, while section 7.3.2 focuses on the identi cation of
capabilities. Figure 7.2 provides a summary of the RBV framework for identifying resources and capabilities.

7.3.1 Identifying resources

Any organisation possesses certain strategic resources. ese can generally be categorised into three broad classes,
namely physical resources, intangible resources and human resources.

7.3.1.1 Physical resources

Physical resources are typically the tangible assets that appear on the organisation’s balance sheet. ey include
property, raw material, production facilities, and many other resource categories. Organisations can use tangible
assets to create value either by using these assets more economically or by using them more pro tably.

7.3.1.2 Intangible resources

Intangible resources include brand value, culture and intellectual capital. Intellectual capital is an important part of
intangible resources, and includes patents, brands, business systems and customer databases.
In most successful organisations, the value of intangible assets such as brand value far outstrips that of physical
assets (see Figure 7.2). us intangible assets play an important role in creating value and establishing competitive
advantage. In an economy based on knowledge, intangible assets and intellectual capital are the major resources of
the organisation.19
Intangible assets (even brand value) are oen not extensively measured nor reported in organisations’ balance
sheets. e value of intangible assets lies in the fact that, unlike tangible assets, they grow in value the more they are
used.20 Intangible assets, such as brand names, can be leveraged in value creation by extending the product and
market scope of the brands.

7.3.1.3 Human resources

Human resources refer to the individual skills and competencies to which the organisation has access. Human
resources provide the productive services that all organisations require to survive and prosper.21 Human resources
are also unique in the sense that organisations can never own them. rough their individual skills, knowledge, and
learning and thinking abilities, human resources can contribute signi cantly to value creation in the organisation.
Collectively, organisational culture is determined by the leadership and employees of the organisation and can, in
some instances, provide a valuable resource and defence against competition and value erosion.

7.3.2 Identifying capabilities

Resources as such are not particularly productive, but add value when they combine to form unique capabilities. e
term ‘organisational capabilities’ refers to the organisation’s capacity to combine resources into productive
activities.22 erefore, organisational capabilities are a higher-order resource than mere factor inputs, such as raw
materials, that can be relatively easily acquired. Capabilities represent complex combinations of assets, people and
processes that organisations use to transform inputs into outputs. is suggests that organisational capabilities
require highly complex interactions between people and people, and between people and resources, as shown in
Figure 7.2.23 Figure 7.2 also illustrates another important concept, namely the hierarchy of resources. Some
resources are worth relatively little on their own, but in combination with other assets and resources they create
valuable capabilities.

7.3.2.1 Types of capabilities

ere are three broad categories of strategic organisational capabilities, namely threshold capabilities, distinctive
capabilities and dynamic capabilities.

reshold capabilities
reshold capabilities are the minimum capabilities needed by the organisation to compete in a market.24 ey do
not provide competitive advantage since all competitors need them. For example, all producers of fast-moving
consumer goods need effective distribution channels and logistics to get their products to market.

Figure 7.2 A summary of the RBV

CASE EXAMPLE: Capitec and FirstRand’s superior return on equity25
For the past decade, Capitec Bank and the FirstRand Group (which houses First National Bank (FNB) and Rand
Merchant Bank) have consistently outperformed the rest of the banking industry in terms of their return on equity
(ROE), a key measure of banking performance (see graph below). It is no coincidence that both of these
organisations have certain distinctive capabilities that drive their success. Capitec is arguably the only bank to
have addressed the low-income market in South Africa successfully and profitably by offering simple, affordable
and accessible banking to lower-income customers. Their success rests on their innovative business model that
enables higher accessibility and lower costs than their competitors. On the other end of the spectrum, FNB offers
innovative, technology-driven banking and complementary services (such as the e-Bucks loyalty programme)
that enables the organisation to develop long-lasting and value-adding relationships with their customers.
Distinctive capabilities
Distinctive capabilities are also referred to by some authors as core competencies.26 ese capabilities are unique
and valuable, and provide a basis for competitive advantage. Rivals will generally also nd distinctive capabilities
difficult to imitate. ey are important because they require organisations to focus not only on what they do well,
but also on what they do better than competitors. Hamel and Prahalad de ned distinctive capabilities (core
competencies) as those that:27
make a disproportionate contribution to customer value or the efficiency of delivering that value
provide a basis for replication, i.e. entering new markets or creating new market offerings.

Distinctive capabilities form the basis of strategic innovation – the ability to develop new markets and products.
Note that successful organisations generally have only a few distinctive capabilities, and that organisations may end
up with no distinctive capabilities, and accordingly no competitive advantage.

Dynamic capabilities
Dynamic capabilities refer to those capabilities that enable the organisation to develop new ones. is describes the
organisation’s ability to integrate, build and recon gure internal and external competences to address rapidly
changing environments.28 Since most sources of competitive advantage are temporary, organisations that are able to
develop new capabilities will have an advantage over their rivals in the long run. Dynamic capabilities can be
summarised as comprising three underlying capabilities. Firstly, the ability to make sense of opportunities and
threats in the external environment; secondly, the ability to seize opportunities or respond to threats by altering the
operating capabilities and resources of the organisation; and thirdly, maintaining an organisation’s competitive
advantage by ensuring ongoing alignment between its resources and capabilities and the changing demands of the
environment.
Dynamic capabilities are oen described in vague terms that make them hard to identify in practice. Eisenhardt
and Martin tried to overcome this limitation by describing them as identi able and speci c routines:29
 Resource integration, such as product development routines, where managers combine their varied skills and
functional backgrounds to create revenue-producing products and services
Strategic decision-making, which is a dynamic capability in which managers pool their various business,
functional, and personal expertise to make the choices that shape the major strategic moves of the rm
Recon guration of resources within rms, by copying, transferring and recombining resources, especially
knowledge-based ones
Resource allocation routines, which are used to distribute scarce resources such as capital and manufacturing
assets from central points within the hierarchy, such as a corporate head office
Coevolving, which involves the routines by which managers reconnect webs of collaborations among various
parts of the organisation to generate new and synergistic resource combinations among organisations
Patching, which is a strategic process in dynamic markets that centres on constantly remapping the organisation
in such a way that it matches up to changing market opportunities. It can take the form of adding, splitting,
transferring, exiting or combining chunks of businesses.30 Alphabet (formerly Google) is an example of a
company that is constantly patching to match market needs. Google Maps, YouTube, Chrome and Android are all
part of the patchwork of tightly focused businesses that make up the Alphabet family, while the company is also
experimenting in health technology with companies like Life Sciences (that works on glucose-sensing contact
lenses), and Calico (focused on longevity).31
Knowledge creation routines, whereby managers and others build new thinking within the rm
Alliance and acquisition routines, which bring new resources into the rm from external sources
Exit routines that eliminate resource combinations that no longer provide a competitive advantage. As markets
undergo change, it is necessary to adapt and eliminate resource combinations that no longer provide a
competitive advantage.

We will now explore three frameworks for identifying distinctive capabilities, namely functional analysis, Porter’s
value chain, and the architecture, reputation and innovation framework. Functional analysis and Porter’s value
chain are commonly used frameworks for identifying capabilities. ese two frameworks are subsequently discussed
along with a discussion of three key capabilities, namely architecture, reputation and innovation. In section 7.3.2.5
we discuss the important relationship between knowledge and capabilities.

STRATEGY IN ACTION: How Discovery keeps innovating – the perspective of

CEO Adrian Gore32

When we formed Discovery, we asked the question ‘How do you innovate and build a health-insurance system
that can work in this kind of environment?’
Our gut instinct was that if you can make people healthier, you can offer more sustainable insurance. It turns
out that three lifestyle choices (smoking, poor nutrition, and poor physical activity) contribute to four conditions
(diabetes, cancer, heart disease, and lung disease) that drive over 50% of mortalities every year. So, lifestyle
choices are fundamental to any social-insurance system. Behavioural science tells us that people need
incentives to make a change. But that wasn’t universally known at the time; we were just a start-up acting on a
hunch.
When we were starting out, a massive gym chain approached us with the idea to sell our health insurance to
their membership base—a classic cross-sales strategy. Our breakthrough came when we flipped this idea
around: What if you can use the gyms when you get your insurance from us? But we couldn’t figure out how to
afford it.
Then we thought, ‘Well, what if you earn points by doing healthy things? Then those points give you access to
cool rewards and a discount on your premium?’ That idea was the catalyst for everything, which I think is true of
innovation. It’s a moment in time. It’s not always a revelation in a laboratory. In my experience, it’s right there in
front of you. Once you get it, you run with it.

The genesis of Vitality

That initial idea was the genesis of our Vitality program, which has evolved into a complete wellness system that
tracks everything from physical activity to nutrition over the course of a person’s life. For instance, customers earn
points by logging their workouts with fitness devices from Nike+, Fitbit, and others. These sync up with Vitality
directly, through a computer, or with mobile apps on smartphones. When you go to our partner grocery stores,
the healthy food is clearly demarcated on the shelf, and you get a 25% discount at the register when you swipe
your Vitality card. When we first launched the program, we were criticized for wasting healthcare dollars on
incentives, but customers went berserk for it.
Today, Vitality is the foundation of our business model, driving every one of our offerings. Take life insurance.
It seemed to us that the system was broken. What happens when you fill out an application? They basically cut
you in half for a detailed health analysis—blood tests, medicals. From that, they derive a very sophisticated rating
that often comes with a rate guaranteed for life. But how does it make any sense to set a rate at a certain point in
time, when a change in your behaviour could shift the underlying risk throughout your life?
So, we decided to offer a new, competitive model. The beauty of it is the shared value it creates for our
customers, our company, and society. Our customers are given an incentive to become healthier, lowering their
premiums. And we are able to operate with better actuarial dynamics and profitability.
In 2001, we rolled out Discovery Life on this basis, and soon became the number one provider of life
insurance in South Africa. Our competitors have been around for more than a hundred years, but they don’t have
Vitality. If you understand the scale of the program, you can see it’s not a capability that could easily be copied.
We log 70 000 gym visits per day; people have bought a hundred million dollars’ worth of healthy food in the last
few years through our structure. Vitality has provided a competitive advantage that has served us well both inside
our home country and beyond it.
The flexibility of Vitality’s structure allows us to enter markets where we could never become the main insurer;
the barriers to entry are just too high. We can instead partner with established insurers in those markets by
scaling our Vitality model as needed. In the United Kingdom, we worked with Prudential initially but recently
acquired full ownership of our health- and life-insurance businesses there. In the Asia–Pacific region, we are now
rolling out our model across some of AIA’s markets. We also have an equity stake in Ping An Health, working
with one of China’s largest insurers, Ping An. Just this year, we’ve established a new partnership with John
Hancock Life Insurance in the United States, and we’re developing one with Generali in Europe, as well.

The model that keeps on giving

Just as Vitality has allowed us to expand geographically, it has also been an additive model that can
accommodate other dimensions.
We saw an opportunity to develop a standard vehicle-tracking device that monitors not only the location of a
car but also how people are driving—the acceleration and G forces. Rory Byrne, a South African engineer who
designed cars for the racing driver Michael Schumacher, has helped us with the telematics to build a Formula
One–level analysis of a person’s driving behaviour. But that requires a complex black-box installation in the car.
So, we’ve been working with a company founded by two MIT professors to build an application that also works
directly through your smartphone. It has given us some amazing insights into what we call ‘driving DNA.’ We can
immediately tell if someone else is driving your car or if you’ve gotten into an accident, just by the deviation in
data, which raises a red flag. The Vitality Drive program allows us to track our customers, to reward them for
good driving with a lower premium and a discount on gas, and to provide real-time emergency assistance.

A cycle for innovation

We’re often asked, ‘Can you keep innovating?’ The truth is, I find that the more you innovate, the more you can
innovate. Most innovation in companies is event based. A competitor comes up with something, and the
company responds. We do the opposite. Our leaders are always on a treadmill to create and launch new ideas.
For example, every year we have a rock-star launch where we’re presenting something new to thousands of our
 intermediaries who own sales. Our guys know the date is booked. The concert’s happening. You just better write
the music.
To push ourselves to find the next idea, we have an internal competition every year called Inspiring
Excellence, where our top one thousand leaders break into teams of two to four people and work on new
concepts. Throughout the year, we hold contests until we’ve narrowed down to the top five teams, who present at
our annual management conference. Even ideas that don’t win often prove to be winners later on, when we roll
them out. This program provides us with a strong inventory of possibilities, which are continually replenished.
Twice a year, our remuneration committee looks at each business and gives it an innovation score. So, the
take-home bonus of a thousand people is based on a subjective review of the success of their launches. But
even beyond that pool, all our employees are involved in this time-based cycle, working on projects. Across the
organisation, there’s a natural metronome of our innovation.

Questions
1. Identify the key resources and capabilities of Discovery.
2. Conduct an analysis to determine the value of the resources and capabilities. Which are most valuable,
according to your analysis?
3. What evidence of dynamic capabilities can you identify from the case study?
4. How sustainable is the success of Discovery from an RBV perspective?

7.3.2.2 Functional analysis as a framework for identifying distinctive capabilities

Each organisation has certain principal functional areas according to which it operates. Typical functional areas that
can be used in such an analysis include the following:
Corporate management (corporate head office functions)
Research and development
Human resources (HR)
Finance
Marketing
Customer care
Sales
Production or operations
Logistics or supply chain management.

A functional division depends on a vertical cross-section of the organisation. For example, the marketing function is
responsible for all aspects related to product development, promotional activities and advertising, pricing policies
and distribution channel strategy, while the HR function is responsible for all aspects relating to recruiting,
developing and retaining human resources. An organisation can use the functional division as a basis for identifying
capabilities (see Table 7.1 for examples of functional capabilities). e key question to consider is what distinctive
capabilities the organisation has (if any) in each of the functional categories it considers.
While the functional framework provides a framework for analysis that can easily be understood and applied by
most managers, it does not explicitly consider the value of cross-functional coordination, which might be a source
of competitive advantage. In the Strategy in action case, for example, we can see that Discovery’s success lies in its
ability to coordinate innovation across the whole organisation, rather than in one speci c functional area.

7.3.2.3 e value chain (Porter’s value chain) as a framework for identifying capabilities
Porter’s value chain is an expansion of the idea of the business system originally developed by McKinsey & Co. It
describes the chain of activities in which an organisation engages to add value to a product. is chain ranges from
R&D to marketing and aer-sales service. Porter identi ed two categories of activities in the value chain (see Figure
7.3):33
Primary activities that contribute directly to the transformation of inputs and the adding of value to the end
product. For example, a car manufacturer will buy raw materials and components from its suppliers, assemble the
vehicles, do quality control, and deliver them to dealerships to sell at a pro t. Primary activities thus contribute
directly to the pro tability of the organisation.
Support activities that do not directly add customer value. In the example of a car manufacturer, they will need to
do (among other things) nancial management, HR management and public relations that may be necessary for
the organisation but do not contribute directly to its end product and pro tability.

Table 7.1 Examples of functional analysis of capabilities

Functional Examples of distinctive capabilities

area
Corporate Bidvest is a South African-based conglomerate that manages more than 300 diverse
management businesses and 130 000 employees worldwide. The corporate philosophy of Bidvest is that
‘entrepreneurship, incentivisation, decentralised management and communication are the keys.
We turn ordinary companies into extraordinary performers, delivering strong and consistent
shareholder returns in the process.34

Research and From its roots in the production of synthetic fuel from coal, Sasol has developed into one of the
development leading producers of fuel and chemicals in the world, adding value to coal, oil and gas reserves
to produce products for industrial and consumer use.

Marketing South African retailer Shoprite’s marketing efforts to rebrand Checkers, using, for example,
celebrity chef Gordon Ramsay and South African celebrity Nataniël to sing the praises of
Checkers’ meat, have been very successful, contributing to Shoprite’s being regarded as the
most valuable retail brand in South Africa in 2016.35

Product design Bell Equipment achieved a strong position in the global articulated dump truck (ADT) market
with its proprietary technology developed over decades.

Operations Namibia Breweries Ltd brew their beer brands such as Windhoek Lager and Tafel Lager
according to the Reinheitsgebot, the German Purity Law dating from 1516.36

Logistics or Amalgamated Beverage Industries (ABI), the soft-drink division of South African Breweries, is
supply chain the leading bottler for Coca-Cola products in South Africa. They also have a distribution
management agreement with Appletiser. ABI serves a customer base of more than 106 000 retailers with more
than 260 fast-moving stock units.37

Although value chains may differ greatly in complexity and the number of activities involved, typical primary
activities are described below38 and in Figure 7.3:
Inbound logistics are those activities concerned with receiving, storing and distributing inputs to the product or
service the organisation is going to produce.
Operations are concerned with transforming the inputs to the nal product or service. is may include activities
such as manufacturing, assembly, quality control and packaging.
Outbound logistics describe the processes relating to the collection, storage and distribution of the nal product
or service to customers. For products, outbound logistics may involve activities such as warehousing, materials
 handling and distribution. For services, the activities may relate to bringing customers to a venue and delivering
the service there, for example attracting customers into a movie theatre in time to view a screening.
Marketing and sales provide the channel that makes customers aware of the product or service so that they
purchase it. Advertising, sales activities and distribution channels are all examples of activities in the marketing
and sales function.
Aer-sales service includes installation, repair, training and spares. is channel maintains the value of the
product or service.

Figure 7.3 The value chain39

Typical support activities may include the following:40

Procurement is the process of acquiring the various resources required as inputs for primary activities.
Human resource management is a critical activity that supports all functions. It involves those activities that
recruit, manage, train, reward and develop people in the organisation.
Technology development is concerned with developing and maintaining the know-how or other key technologies
that are required for producing and delivering a product or service. is function is critical to the innovative
capabilities of the organisation.
Infrastructure provides the structures and routines of the organisation. For example, systems for planning,
nancial management, quality management, and even culture and leadership form part of the organisation’s
infrastructure.

Most organisations do not have strong capabilities throughout the whole value chain, but tend to perform better
than competitors in one or two areas of the value chain.

7.3.2.4 Architecture, reputation and innovation

John Kay highlighted architecture, reputation and innovation as particularly important types of strategic
capabilities.41 He suggested that relationships – with employees, suppliers, customers and other stakeholders – form
the basis of distinctive capabilities. ese relationships provide the organisation with three major ways in which it
can distinguish itself from competitors:
 Architecture: is refers to the network of relationships and contracts both inside and outside the organisation.
Long-term relationships can engender an ability to create knowledge and routines, and to respond to market
changes. For example, South African company Bidvest manages more than 300 companies with 130 000
employees worldwide. Being able to manage this complex network of corporate functions and subsidiaries
provides it with a competitive advantage that cannot easily be duplicated by competitors.
Reputation: Some organisations have the ability to communicate favourable information about themselves to
customers. is ability to enhance reputation is particularly bene cial in long-term relationships that take time to
build, and is also difficult to imitate. For example, cellular operators Vodacom and MTN have become two of the
most admired brands in South Africa due to their ability to create advertising and other marketing
communications that resonate with South Africans and, in the case of MTN, Africans.
Innovation: Some organisations base their success on innovation. eir ability to innovate builds on their
structure, culture, innovation processes and rewards. For example, Sasol holds more than 500 patent families in
the energy and chemicals industries. In the Strategy in action case, we can also see how Discovery’s relentless
focus on innovation has led to great success.

Most organisations have some of the components of the capabilities described above. However, few have managed to
develop one or more of these capabilities into a real basis for competitive advantage.
e topic of knowledge and knowledge management has enjoyed much interest in management literature
recently. e next section explores the relationship between knowledge and capabilities.

7.3.2.5 Knowledge and capabilities

Few topics in the eld of management have enjoyed such growth in interest as the area of knowledge management
and the importance of knowledge to the organisation. In the context of this chapter, we are not going to attempt a
detailed discussion of the nature of knowledge. However, it is important to understand the role of knowledge as one
of the key building blocks of organisational capabilities.
Organisational knowledge is described as ‘the collective and shared experience accumulated through systems,
routines and activities of sharing across the organisation’.42 In this regard it is important to understand that there are
essentially two types of knowledge present in any organisation:43
Knowing about, or explicit knowledge, can be codi ed by writing it down or demonstrating it. is type of
knowledge can therefore easily be transferred to others. For example, instructions on how to operate a machine
used in production are easily transferred.
Knowing how, or tacit knowledge, is expressed in its performance, for example playing a piano. However, because
the underlying skills are tacit, they cannot be easily transferred or copied. Using the machine example again, it
may be less easy to articulate the speci c quirks of the machine known only to the operator.

e concept of Ricardian rents (see section 7.2) suggests that tacit knowledge gained through years of experience
forms the basis for competitive advantage since it cannot easily be copied by competitors.
One of the key challenges for an organisation is to integrate the specialist knowledge of individuals. One way of
doing this is by means of organisational routines that form the building blocks of organisational capabilities.44 is
creates an organisational memory, and eliminates the need to reinvent a task every time it has to be performed. For
example, in a McDonalds franchise, every worker knows exactly what to do to prepare the food, serve customers
and perform other tasks without referring to a manual every time.
Figure 7.4 summarises the role of knowledge as building blocks in the organisation. e knowledge of
individuals is integrated by way of routines, rules and directives, task sequencing, and group problem solving and
decision-making. Knowledge integrated in this way forms the basis for organisational capabilities. However, in new-
to-the-world organisations (such as internet service providers or dotcoms when the internet became a commercial
prospect), learning oen has to take place by trial and error since there are few individuals with specialist knowledge
relevant to the business to help with knowledge integration.45

Figure 7.4 Knowledge as building blocks of organisational capabilities

7.4 Internal analysis and industry key success factors

In Chapter 6 Analysing the industry environment we examined the role of key success factors (KSFs) as external
measures of success, determined mostly by what customers want and what competitive conditions dictate (see
section 6.2.2). e value of resources and capabilities is enhanced if they have a good t with ‘strategic industry
factors’.46 Various authors have used the terms ‘key success factors’, ‘critical success factors’ and ‘strategic industry
factors’ to describe external measures of success.
From Chapter 6 we have seen that KSFs can play an important role in determining which capabilities to develop.
e use of industry KSFs to determine which capabilities to focus on is depicted in Figure 7.5. is suggests that
organisations need to have a clear understanding of their current resources and capabilities, as well as those that
they will need in the future. Understanding the gap between the current reality and future requirements provides
important inputs in the strategic decision-making process. e organisation may need to build on existing resources
and capabilities, for example by developing new products or markets (see section 7.2.4), or it may need to develop
new ones (see section 7.2.5). As we have seen in the opening case, Sasol is already investing in alternative energy as a
focus area for the future.

Figure 7.5 Using key success factors to identify capability gaps47

7.5 Dynamic views of strategy
Various authors view dynamic capabilities (see Figure 7.2) as a higher order of resource.48 e reason for this is that
dynamic strategies strive to develop new distinctive capabilities rather than focusing only on what the organisation
can do well now or could do well in the past. Ghemawat suggested that a pure resource-based view could create a
focus on the past, and therefore proposed a dynamic view of strategy as a higher-order view of competitive
advantage than the RBV.49 is view rests on two principles:
Distinctive capabilities can and must change over time.
e volatility of the environment is a strong indicator of the need for and tempo of change required.

e concept of the capability life cycle (CLC) builds on the idea of dynamic capabilities. It suggests that capabilities,
like industries and products, are subject to internal and external forces that cause them to evolve.50 ree stages of
capability evolution are suggested, namely:
founding
development
maturity.

Capabilities may ultimately branch out into other capabilities, or ‘die’ and be replaced by other capabilities.
Ghemawat suggested that the dynamic approach attempts to link the organisation’s past to its future, and in this
way tries to answer three questions:51
What did the organisation do well in the past?
What can the organisation do well today?
What must the organisation be able to do well in the future?

In Figure 7.6, the current resource position (the value of resources and capabilities) provides the means for the
organisation to make new strategic resource commitments. ese commitments generate new resources to
strengthen the current resource position. ey also provide the organisation with the opportunity to learn new
capabilities as it integrates new resource commitments and performs the activities required to make its investment
successful.
 Central to Ghemawat’s concept of dynamic strategy is economic commitment theory and the notion of ‘lumpy
commitments’. ese are strategic commitments that are extremely resource intensive and not easily reversed. ey
can cause substantial positive changes in the organisation’s resource base if successful, but negative changes if not.
From the perspective of dynamic capabilities, commitments form the basis for learning new organisational
capabilities.

Figure 7.6 A dynamic view of strategy52

ere are two other concepts that Ghemawat associated with dynamic theories of strategy:
Lock-in occurs when an organisation is locked into a strategic direction by virtue of a ‘lumpy commitment’, and
cannot turn back or change course, for example when Disney bought the Star Wars franchise for $4 billion.
Lock-out occurs when a decision is delayed, and then cannot be implemented because the opportunity has
passed. For example, when Vodacom decided not to go ahead with its plans to enter Nigeria as a mobile operator,
this resulted in a situation where it was effectively locked out of the Nigerian mobile telephony market.

7.6 Identifying strengths and weaknesses

e previous sections dealt with the identi cation of resources and capabilities as a rst step. However, as input into
strategic decision-making, it is also important to identify the strengths and weaknesses of the organisation.
Strengths are those resources and capabilities that provide an organisation with an advantage with regard to the
competition, while weaknesses are those aspects where the organisation is at a disadvantage against the competition.
e value chain provides a useful tool for identifying the organisation’s relative strengths and weaknesses.

7.6.1 Value chain analysis

e value chain (see section 7.3.2.3) is a useful tool for identifying strengths and weaknesses, especially in two areas:
cost analysis and differentiation analysis. In the area of cost analysis, the value chain can contribute as follows:53
Determining the relative importance of each activity with respect to total cost
Identifying the cost drivers of each activity and how efficiently the organisation performs each one compared to
competitors
Understanding the in uence of the cost of one activity on the cost of other activities (e.g. savings in one area may
lead to increases in others)
 Identifying activities that can possibly be outsourced (e.g. where other organisations can perform the activities at
a lower cost).

e process of using the value chain for cost and differentiation analysis for the purpose of identifying strengths and
weaknesses can be outlined as follows:54
Step 1: Identify the component activities of the value chain – in other words, the primary and support activities
that make up the organisation’s value chain.
Step 2: Establish the cost of each activity, and focus on those that are the most important contributors of cost. In
the same way, identify the activities in the value chain that are the most important contributors to differentiation.
In other words, which activities contribute most to customers’ willingness to pay more for a product or service?
Step 3: Compare costs and differentiation drivers per activity with competitors to establish competitive
benchmarks.
Step 4: Identify cost and differentiation drivers – in other words, those things that have the most impact on the
cost of the activity or on the perception. Linkages are important as costs may be caused by the way in which
certain other activities are performed. In the same way, differentiation may be in uenced by the way in which
certain other activities are performed. For example, performing a 100% quality check may be much more
expensive than performing a quality check on a sample of 10% of production. However, the savings on customer
returns and repairs, and the resultant increase in the perception of quality may more than make up for the
additional cost. An organisation must therefore examine linkages carefully and ensure that it fully understands
the implications of each decision to reduce costs or to increase differentiation.
Step 5: Identify opportunities for reducing costs or for improving quality.

CASE EXAMPLE: Cost and differentiation advantages in the wine industry value
chain
When analysing cost and differentiation advantages – in other words, competitive strengths – it is important to
understand the drivers of uniqueness in each activity in the value chain. The organisation should identify the
most promising areas on which to focus. In other words, the organisation must establish where it can achieve the
greatest differentiation at the lowest possible cost.
It is also important to identify potential areas for profitably linking the organisation’s value chain with that of
customers. By allowing customers to ‘create’ or customise their own product, an organisation can create
opportunities for increasing value and revenue at a low incremental cost. For example, a wine estate can offer
customers the opportunity to have customised labels that replace the wine estate’s name with their own.55 This
provides good value and additional income at a relatively low additional cost. Figure 7.7 is a simplified value chain
for a South African wine producer. It contains some examples of opportunities for cost reduction or differentiation.
However, when using the value chain and other means of establishing competitive strengths and weaknesses, it
is important to understand the role of benchmarking.

7.6.2 The role of benchmarking

All identi cation of strengths and weaknesses is relative. In other words, it depends on how well the organisation
measures up to competitors or to its own performance in the past. e objective is to change behaviour and gain
momentum for improvement and change. Benchmarking provides a tool for identifying relative strengths and
weaknesses.
Johnson et al.56 identi ed three types of benchmarks that organisations can use as a means of comparison:
 Historical benchmarking occurs when an organisation compares its performance to that of previous years. is is
an indication of relative performance, and is generally used in, for example, nancial reporting. e danger of
relying purely on history is that it is an internal measure and does not account for any external changes.
Industry benchmarking is used to compare the organisation’s performance and processes across a number of
performance indicators with the industry or other similar organisations. While this is a more useful comparison
than using only historical data, the inherent danger is that the industry may be underperforming or using
outdated practices.
Best-in-class benchmarking may be used to seek comparisons more widely than just the industry. e idea is to
compare the organisation’s performance against the ‘best in class’. is is also commonly referred to as ‘best
practice’. A common objective for comparing the organisation with best practice is to move beyond continuous
improvement, and to achieve dramatic improvements in performance. For example, if the public sector wants to
improve their quality of service dramatically, best-in-class benchmarking may help them to learn from other
industries such as banking and telecommunications.

Figure 7.7 Cost and differentiation advantages in the wine industry value chain57

Using the benchmarking process is not without danger. Johnson et al.58 warns that it can lead to a preoccupation
with the measure instead of the behaviour. is may be directly counter to the objective of the benchmarking
exercise, which is to encourage strategic change. In addition, benchmarking will not reveal the underlying reasons
for the difference in performance between organisations.

7.6.3 A practical framework for the appraisal of resources and

capabilities
ere are several different approaches to identifying an organisation’s strengths and weaknesses in practice. Grant59
proposed one of the most practical and easy-to-use ones. e process is illustrated with a real but disguised example
from a medium-sized industrial manufacturer producing safety materials for the industrial market. Let us call the
organisation CSM for the purposes of the illustration.

Step 1: Identify key resources and capabilities

Grant suggested that the rst step in the process can be performed using both demand side and supply side
approaches. e supply side (organisational) approaches of functional analysis and value chain analysis are useful
tools for identifying possible key resources and capabilities. For demand side analysis, the organisation can use key
success factors and the resources and capabilities they imply. For example, Capitec Bank has been very successful
using innovative means of cutting costs in the value chain, for example by moving towards paperless banking. At the
same time, they focus on their target markets with simplicity and affordability – two key success factors when
dealing with lower-income customers. See Table 7.2 for a list of resources and capabilities identi ed for CSM.

Step 2: Appraisal of resources and capabilities

Once the organisation has identi ed its resources and capabilities, it should appraise them using two criteria:
Strategic importance can be assessed using key success factors and customer decision criteria as guidelines. When
appraising resources and capabilities in terms of their strategic importance, the organisation should appraise
them individually on their importance for long-term survival and prosperity. ey are typically rated on a scale
of 1 to 10, where 10 means that the resource or capability is of critical importance, while 1 suggests that it is not
at all important for the long-term survival of the organisation.
Relative strength is used to appraise resources and capabilities relative to competitors. While objective appraisal of
the relative strength of a resource or capability is oen tricky as managers nd it difficult to be objective about
their own organisations, benchmarking can help to provide an objective view of relative performance. Once
again, a scale of 1 to 10 can be used, where a score of 10 implies that the organisation is far superior to its
competition, while a score of 1 implies a far inferior performance.

See Table 7.2 for an illustration of CSM’s rating on the two criteria.
e next step in the process is to identify the key strengths and weaknesses by combining the two ratings for
each of the resources and capabilities in a grid display (see Figure 7.8).

Step 3: Developing strategy implications

e visual depiction of strengths and weaknesses provides a strong message about the future strategic direction of
the organisation.
Key strengths are those resources and capabilities that are critical to the future success of the organisation. ey
should therefore be nurtured and used as a basis for building and extending competitive advantage. In our example,
CSM’s production facility (R2) is substantially better than that of the competition. However, given our knowledge of
resources and capabilities, capabilities are generally more sustainable sources of competitive advantage. erefore,
CSM’s relative strength in technology research and development (C2) could be further enhanced and used as a
means of overcoming their weakness in product innovation and development (C1).

Table 7.2 Appraisal of CSM’s resources and capabilities

Resources/Capabilities Strategic Relative Comments

importance strength
 Resources/Capabilities Strategic Relative Comments
importance strength
Reputation (R1) 10 5 Good reputation in some regions,
unknown in others

Own production facility (R2) 10 8 Owns a good production facility

Exclusivity agreements with 8 1 Only one exclusivity agreement in

key suppliers (R3) place

Strong brands (R4) 8 5 One or two strong brands

Strategic alliances (R5) 8 1 Little progress in establishing

strategic alliances

Product innovation (C1) 10 3 Innovative in only one product line

Research and development 10 7 Little product innovation, but has a

(C2) strong R&D team

Industry value chain (C3) 3 6 Has relatively strong influence over

the industry value chain, with some
downstream and upstream activities

Sales and key account 10 5 Limited staff, limited activity

management (C4)

International market 7 2 Some exports, but generally little

development (C5) international marketing activity

Note: R denotes resources and C denotes capabilities.

Key weaknesses are areas that are critical for future success, but where the organisation underperforms when
compared with its competition. is therefore provides clues to identify the resources and capabilities that need to
be addressed. In the case of CSM, its lack of exclusivity agreements with key raw material suppliers (R3) and its
relative weakness in product innovation (C1) make it vulnerable to competition. e organisation should develop
strategies to overcome these weaknesses.
CSM has one super uous strength in the form of its integration of the industry value chain (C3). How should
super uous strengths be handled? On the one hand, the organisation could decide to de-emphasise it and focus
resources on key strengths and weaknesses. On the other hand, if ways could be found to make a virtue or
differentiating aspect of it, the organisation could leverage this to its advantage.

Figure 7.8 Appraising CSM’s resources and capabilities – a visual summary

7.7 Summary
e crux of internal analysis is the understanding of the strategic value of resources and capabilities, and their role
in establishing competitive advantage. Many organisations do not seem to have a clear picture of their own or their
competitors’ resources and capabilities. is is particularly important as recent developments in strategic thinking
suggest that distinctive capabilities form a more lasting basis for strategic success that simply striving for a strong
position in the industry.
Various frameworks are useful for identifying distinctive resources and capabilities. In this chapter, we explored a
functional framework and the value chain as useful frameworks for identifying distinctive resources and capabilities.
We also explored the roles of architecture, reputation, innovation, and knowledge as key drivers of capabilities.
e concept of dynamic capabilities emerged as a critical topic. is concept implies that organisations cannot
rely on their past and present capabilities for success, but constantly need to develop new capabilities as sources of
competitive advantage.
When developing strategies based on distinctive resources and capabilities, the key challenge is to identify
strengths and weaknesses relative to the competition. In this regard benchmarking is a useful tool, and a practical
framework for identifying strengths and weaknesses was also illustrated.
For managers, the implications are that internal analysis is not a periodic or once-off event. An ongoing
understanding of the distinctive resources and capabilities of the organisation is required, and the implications for
strategic direction. One of the key problems in this regard is the objectivity of managers, who oen nd it difficult to
provide objective appraisals of the organisation’s resources and capabilities. is suggests that the use of
benchmarking and other practical frameworks can provide a more objective means of identifying relative
performance of resources and capabilities.
Once an organisation has identi ed its strengths and weaknesses, it must focus on identifying strategic initiatives
to build on its strengths and to mitigate its weaknesses. If this is not done as part of a constant process of building
capabilities and developing new ones, a deterioration in capabilities may result, accompanied by a decline in
competitive advantage.

REFLECTION BOX:

One of the key tenets of the resource-based viewpoint is that ‘history matters’, yet many management gurus say
that organisations should constantly ‘destroy’ and ‘reinvent’ themselves. What are the implications of ‘destroying
and reinventing’ a company from an RBV perspective?

Opening case study questions

1. What are the key reasons for Sasol’s success from a resource-based perspective?
2. How sustainable do you think Sasol’s success is?

Discussion questions
1. Differentiate between resources and capabilities, and explain the relationship between them.
2. Assess the importance of a strong brand for an organisation from a resource-based perspective.
3. In the Opening case study we saw that Sasol is building a capability in the alternative energy industry, because
they believe that this should be part of their future capabilities. What options do they have for developing this
capability?
4. Compare and contrast the four methods for identifying resources and capabilities discussed in this chapter.
5. Compare and contrast threshold, distinctive and dynamic capabilities, and give an example of each.
6. Explain the importance of knowledge in establishing competitive advantage.
7. Explain three ways in which you would go about identifying strengths and weaknesses for an organisation.

Using knowledge and skills

1. Select an organisation with which you are familiar. Develop a value chain for it, and identify opportunities for
obtaining cost and differentiation advantages.
 Use the same organisation identi ed in the previous question. Use the methodology developed by Grant60 (see
2. section 7.6.3) to identify key strengths and weaknesses.
3. Conduct a quick survey of three to four managers in any organisation to establish:
a) whether they conduct internal analysis
b) if they do, how they do it
c) whether they can name what they believe are their organisation’s distinctive capabilities.

Further reading
Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1):99–120.
Grant, R.M. 2002. Contemporary strategy analysis. 4th ed. Oxford: Blackwell Business.
Grant, R.M. 1996. Toward a knowledge-based theory of the rm. Strategic Management Journal, 17:109–122.
Hamel, G. & Prahalad, C.K. 1990. e core competence of the corporation. Harvard Business Review, May–June:79–
91.
Porter, M.E. 1986. Competitive advantage: Creating and sustaining superior performance. New York: Free Press.
Teece, D.J., Pisano, G. & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management
Journal, 18(7):509–533, 514.

Suggested websites
1000 Ventures – A website with various references to the resource-based view
(http://www.1000ventures.com/business_guide/mgmt_stategic_resource-based.html).
e Value Chain – A lecture on using the VC to identify resources and capabilities
(https://www.coursera.org/lecture/uva-darden-foundations-business-strategy/value-chain-KEUPJ).
Southern African Institute for International Affairs (http://www.saiia.org.za/value-chains-in-southern-africa).
A video with Robert Grant and J-C Spender discussing the knowledge-based view of the rm
(https://www.youtube.com/watch?v=KiWvlo-ZtXM).

References and endnotes

1. CNBC Africa. 24 March 2014. Research and development at the heart of innovation: Sasol. Available:
https://www.cnbcafrica.com/news/southern-africa/2014/03/24/research-at-the-heart-of-sasols-innovation/
[Accessed 19 June 2018]; Sasol. n.d. Innovation at Sasol. Available:
http://www.sasol.com/innovation/innovation-sasol
2. Collis, D.J. & Montgomery, C.A. 2005. Corporate strategy: A resource-based approach. 2nd ed. New York, NY:
McGraw-Hill. 13.
3. Ibid.: 27.
4. e terms ‘organisational capabilities’ and ‘organisational competencies’ can be used interchangeably (Grant,
R.M. 2016. Contemporary strategy analysis 9th ed. Chichester, West Sussex: Wiley. 123), although in the
context of this text we use the terms ‘organisational capability’ and ‘individual competencies’.
5. Grant, R.M. 1991. e resource-based theory of competitive advantage: Implications for strategy formulation.
California Management Review, 33(3):114–136, 114.
6. Grant, R.M. 2016. Contemporary strategy analysis. 9th ed. Chichester, West Sussex: Wiley. 116; Johnson, G.,
Scholes, K. & Whittington, R. 2005. Exploring corporate strategy. 7th ed. Essex: Prentice Hall.
7. Grant. 1991. Op. cit.; Lynch, R. 2009. Corporate strategy. 5th ed. Essex: FT Prentice Hall.
8. Lynch, R. 2003. Corporate strategy 3rd ed. Harlow: FT Prentice Hall; Collis & Montgomery. 2005. Op. cit.
 Webdesigner Depot. 2009. e evolution of cell phone design between 1983–2009. Webdesigner Depot.
9. [Online]. Available: http://www.webdesignerdepot.com/2009/05/the-evolution-of-cell-phone-design-
between-1983-2009 [Accessed 15 October 2009]; Wikipedia. 2009. Camera phone. Wikipedia. [Online].
Available: http://en.wikipedia.org/wiki/Camera_phone [Accessed 15 October 2009]
10. Amit, R. & Schoemaker, P.J.H. 1993. Strategic assets and organizational rent. Strategic Management Journal,
14:33–46; GRANT. 1991 & 2016. Op. cit.; Collis & Montgomery. 2005. Op. cit.
11. Grant. 2016. Op. cit.
12. Alfreds, D. 2012. SA Joule is not dead, NRF says. News24. [Online]. Available:
http://www.news24.com/Technology/News/SA-Joule-is-not-dead-NRF-says-20121105 [Accessed 24 April
2013].
13. Ibid.
14. Lansner, J. 15 December 2016. e business of ‘Star Wars’: How Disney has cashed in. Mercury News.
Available: https://www.mercurynews.com/2016/12/15/the-business-of-star-wars-how-disney-has-cashed-in/
[Accessed 3 May 2018].
15. Christensen, C.M. 2003. e innovator’s dilemma. New York: Harper Business Essentials.
16. McLeod, D. 25 November 2013. Telkom: Vodacom sale a ‘big mistake’. TechCentral. Available:
https://techcentral.co.za/telkom-vodacom-sale-a-big-mistake/45244/ [Accessed 20 June 2018].
17. Adapted from Zook, C. 2009. How Marvel went from bankruptcy to $4B buyout. Harvard Business School
Publishing. [Online]. Available:
http://blogs.harvardbusiness.org/cs/2009/09/marvels_hairraising_adventures.html?cm_mmc=npv-_-
TOPICEMAIL-_-SEP_2009-_-STRATEGY1. [Accessed 30 September 2009];. Nath, D. Monday 6 May 2013.
Star Wars, Disney and EA sign exclusive multi-year publishing deal. VG247 [Online]. Available:
http://www.vg247.com/2013/05/06/star-wars-disney-and-ea-sign-exclusive-multi-year-publishing-deal/
[Accessed 18 July 2018].
18. Ibid.
19. Johnson et al. 2005. Op. cit.: 118.
20. Collis & Montgomery. 2005. Op. cit.: 30.
21. Grant. 2016. Op. cit.
22. Ibid.: 135.
23. Collis & Montgomery. 2005. Op. cit.: 30; Grant. 1991. Op. cit.: 122.
24. Johnson et al. 2005. Op. cit.: 119.
25. Compiled from public domain data available in the annual reports of Capitec Bank (www.capitecbank.co.za);
FirstRand Group (www. rstrand.co.za); and the ‘other’ banks, which consist of Standard Bank
(www.standardbank.co.za); Nedbank (www.nedbank.co.za); ABSA (www.absa.co.za); Sas n
(www.sas n.com); and Investec (www.investec.com).
26. Ibid.: 121.
27. Grant. 2016. Op. cit.; Hamel, G. & Prahalad, C.K. 1990. e core competence of the corporation. Harvard
Business Review, May–June:79–91.
28. Teece, D., Pisano, G. & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic
Management Journal. 18(7):509–533.
29. Eisenhardt, K.M. & Martin, J.A. 2000. Dynamic capabilities: what are they? Eisenhardt, K.M. & Martin, J.A.
2000. Dynamic capabilities: what are they? Strategic Management Journal, 21:1105–1121., 21:1105–1121.
30. Eisenhardt, K.M & Brown, S.L. 1999. Patching: Restitching business portfolios in dynamic markets. Harvard
Business Review. May–June.
31. Compiled from information on https://abc.xyz/
32. Adapted from Gore, A. May 2015. How Discovery keeps innovating. McKinsey Quarterly. Available:
https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/how-discovery-keeps-
innovating [Accessed 23 May 2018].
33. Porter, M.E. 1985. Competitive advantage: Creating and sustaining superior performance. New York: Free
Press.
34. Compiled from information on http://www.bidvest.co.za
35. Fin24. 10 October 2016. Shoprite remains SA’s top retail brand — survey. Available:
https://www. n24.com/Companies/Retail/shoprite-remains-sas-top-retail-brand-survey-20161010 [Accessed
23 May 2018].
36. According to http://www.nambrew.com
37. Compiled from information available on http://www.abi.co.za
38. Johnson et al. 2005. Op. cit.
39. Adapted from Collis & Montgomery. 2005. Op. cit. & Porter, M.E. 1985. Competitive advantage: Creating and
sustaining superior performance. New York: Free Press.
40. Ibid.
41. Lynch. 2009. Op. cit.
42. Johnson et al. 2005. Op. cit.: 133.
43. Grant, R.M. 1996. Toward a knowledge-based theory of the rm. Strategic Management Journal, 17:109–122;
Grant. 2008. Op. cit.
44. Bakhru, A. 2004. Managerial knowledge to organizational capability: New e-commerce businesses. Journal of
Intellectual Capital, 5(2):326–336; Johnson et al. 2005. Op. cit.; Grant. 1996 & 2008. Op. cit.
45. Bakhru. 2004. Op. cit.
46. Amit & Schoemaker. 1993. Op. cit.
47. Adapted from Grant, R.M. 2016. Contemporary strategy analysis 9th ed. Chichester, West Sussex: Wiley. 139
& 175.
48. Collis & Montgomery. 2005. Op. cit: 31.
49. Ghemawat, P. 1994. Strategy and the business landscape. Reading, MA: Addison Wesley Longman, p 119.
50. Helfat, C.E. & Peteraf, M.A. 2003. e dynamic resource-based view: Capability life cycles. Strategic
Management Journal, 24(10):997–1010.
51. Ghemawat. 1994. Op. cit.
52. Adapted from ibid.: 120.
53. Grant. 2016. Op. cit.: 124.
54. Based on Grant. 2016. Op. cit.: 124; Wheelen, T.L. & Hunger, J.D. 2002. Strategic management and business
policy 8th ed. Upper Saddle River, NJ: Prentice Hall. 86–87.
55. Wine value chain based on Wilson, M.J. & Goddard, R.W. 2004. Creating value in the New Zealand wine
industry. International Journal of Wine, 16(2):62–73.
56. Johnson et al. 2005. Op. cit.: 145–147.
57. Based partly on Wilson, M.J. & Goddard, RW. 2004. Creating value in the New Zealand wine industry.
International Journal of Wine, 16(2):62–73.
58. Ibid.
59. Grant. 2016. Op. cit.
60. Grant. 2016. Op. cit.
PART THREE
Strategic development and
formulation
 CHAPTER 8 Business level
strategy
Annemarie Davis

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain what business level strategy is
comment on the strategic management process and when business level strategies are crafted
distinguish between the different types of business level strategy
discuss the criteria to consider when evaluating business level strategies
identify and discuss the business level strategies in an organisation
critically evaluate the business level strategies in an organisation from a strategic fit perspective.

KEY TERMS

business level strategy (also referred to as competitive strategy)

corporate level strategies
cost leadership strategy (also referred to as low cost provider strategy)
differentiation strategy
focus strategy
low-cost focus
operational strategy (also referred to as functional strategy)
sustainable competitive advantage
strategic direction

OPENING CASE STUDY

Competing in South Africa’s airline industry – only the fittest survive

Collapsing airlines, rising fuel prices, economic recessions, increased airport and landing charges, robust
competition among low-cost airlines, price sensitivity in the market – these are all challenges that operators in
the airline industry face. The International Air Transport Association (IATA) predicted that aviation on the African
continent would make zero profits in 2012 (Summit TV, 20121). The South African airline industry has
experienced changes that have shaped the face of airline travel substantially. In the last eight years since 2010,
the industry saw the collapse of Velvet Airlines and 1time as well as the grounding of SA Express’s 29 planes
due to poor maintenance of aircraft.2 In terms of new entrants to the market since 2015, the industry saw the
introduction of FlySafair and CemAir. The national carrier, South African Airways (SAA) hit another low when
role players called for it to be placed under business rescue with a clear undertaking that the airline would be
privatised.3 By 2018, SAA had had an operating loss for six consecutive years.4 As part of its turnaround
strategy, the financially embattled airline commenced discussions in search of aviation industry investors to help
it return to profit and avoid further government bailouts.5
Despite being knocked by a sluggish travel market, airlines need to take stock of their business models and
strategies. It is against this backdrop that the strategic management teams at the airline operators in South
Africa need to develop their competitive strategies to sustain their operations and ensure wealth for their
stakeholders.
The airline operators serving South Africa are grouped according to full-service airlines and low-cost airlines.

Full-service airlines
Full-service airlines provide a range of facilities to make the journey comfortable and stress free. In full-service
flights, meals and travel insurance are included, and provision is made for different seating classes.

South Africa’s full-service airlines

South African Airways
SAA is the national flag carrier and the largest airline in South Africa. Founded in 1934,6 the airline was initially
overseen and controlled by South African Railways and Harbours. In 2006, SAA split from its parent company
and now operates as an independent airline. SAA is considered one of the leading carriers in Africa and offers
the biggest route network in Africa and flies to more destinations, both overseas and within South Africa, than
anyone else.7 SAA made it onto the list of the World’s Top 100 Airlines and is ranked at number 45 globally.
Regionally, it was voted the Second Best Airline in Africa.8 SAA offers economy, business and first-class cabins.
SAA envisions a future of being Africa’s leading world-class airline through offering commercially sustainable
world-class air passenger and aviation services in South Africa and the African continent to its tourism and
trading partners.9
As a full-service airline, SAA caters for leisure as well as business travellers. Within the South African
domestic market, the competitive conditions called for trading down to low-cost carriers. Despite launching its
own such carrier subsidiary Mango in 2006, SAA still has a disproportionate percentage of its premium capacity
allocated to the increasingly price-sensitive domestic market.10

South African Express Airways

SA Express Airways started operating in 1994 and is one of the fastest-growing regional airlines in Africa. It is a
wholly owned subsidiary of the Department of Public Enterprise.11 SA Express caters for business and leisure
travellers offering flights in economy, business and first class, aimed at a range of 12 South African and regional
destinations in Namibia, Botswana and the DRC. The SA Express philosophy is to combine safety and comfort
with the convenience and time savings of direct regional routes.12 Since taking to the skies in 1994, SA Express
has differentiated itself by offering seamless connectivity between small cities and major economic hubs.13 The
differentiated services offered by SA Express is built on coordinated flight schedules and alliances with SAA
Alliance airlines to provide hassle-free services in areas such as ticketing, check-in facilities, mutual branding
and shared flight codes, as well as rewarding customers with Voyager benefits. Their fleet of aircraft offers high
levels of services with leather seating and superior design.14
During May 2018, SA Express experienced major challenges which led to the grounding of 29 aircrafts, which
was due to its deficient safety management system. Since the suspension, SA Express underwent a stringent
and rigorous process to meet the safety standards.15 Towards the end of July 2018, the Civil Aviation Authority
lifted the suspension and allowed two SA Express aircraft to continue operations while the others are still up for
inspection.16

Airlink
Airlink is a privately owned carrier and has a passenger profile of 40% leisure and 60% business.17 It is the
largest independent regional airline in southern Africa, linking more customers to the smaller towns, cities and
regional centres than any other local airline.
Airlink is a regional feeder airline.18 Airlink is a regional feeder airline19 that flies to smaller towns, cities and
regional centres in southern Africa and offers flights in economy, business and first class. The airline is known
for its strategic alliance with SAA and SA Express, which led to the establishment of the aviation network in
Africa.
SA Airlink won the St Helena government contract to run a weekly flight service to St Helena because it has
jets small enough to properly use the runway where the wind shear makes it impractical for anything bigger than
the 98-seater Embraer E190 jet,20 and in October 2017 celebrated its first flight there. Based on increased
demand during 2018, SA Airlink introduced new aircraft to service the Cape Town–Victoria Falls route, where it
offers increased capacity as well as business class travel.21 Using its resources to exploit opportunities in the
industry contributed to its competitive advantage and strengthened Airlink’s position in the South African aviation
industry.

Comair Limited – British Airways

Comair Limited began its operation as Commercial Air Services in 1945 with flights between Rand Airport in
Germiston and Durban International Airport. Comair entered domestic operations in 1992, targeting leisure
passengers. Later, Comair Limited became a franchise partner with British Airways.22 Under the Comair
umbrella are a number of airline and travel-related brands including Kulula.com, British Airways, SLOW, Comair
Travel, Comair Training Centre and Food Directions.23
In 1996, Comair joined British Airways as a franchise partner and became known as British Airways Comair,
taking on the colours and livery of British Airways International. The British Airways brand brought with it a rich
heritage of stylish travel, reputation for service excellence and a wide range of products such as the prestigious
Executive Club frequent flyer programme. As a franchise partner of British Airways and a member of the
oneworld® alliance, Comair offers seamless connections to the international route network, and continues to
serve local premium customers with the same standards in mind.24 British Airways is a premium, full-service
airline operating domestic routes in South Africa, offering flights in economy, premier economy, business and
first class. Comair tells the story of a successful airline with an unbroken record of profit for the company since
its inception 71 years ago. The company continues to benefit from its fleet renewal programme, which enables it
to operate more competitively than airlines operating older, less fuel-efficient aircraft.25

CemAir
CemAir is a privately owned air carrier with experience in operating and supporting aircraft with an emphasis on
maintaining First World standards in Third World environments.26 CemAir offers flights to smaller destinations in
South Africa targeting airports not regularly serviced by other operators and offers only one class of travel.
CemAir has experience in operating and supporting its own aircraft in a variety of conditions. The company
strives to achieve high levels of reliability through the application of constantly evolving internationally
recognised standards. It has operating and leasing experience throughout Africa and the Middle East, including
Afghanistan, Tunisia, Libya, Sudan, South Sudan, Nigeria, the DRC, Kenya, Mali, Gabon, Ghana, Tanzania,
Namibia, Botswana, Mozambique, Madagascar and South Africa.27
CemAir has also faced turbulent times in the South African aviation industry. During February 2018, 12
planes operated by CemAir were grounded due to a documentation issues identified by the Civil Aviation
Authority in the annual audit of the CemAir aircraft maintenance organisation. The suspension was lifted later in
the month and CemAir jumped at the opportunity in May 2018 to step into the shoes of the grounded SA
Express domestic link between Johannesburg and Richards Bay. As part of its growth strategy, in November
2017 CemAir ordered two Q400 Bombardier Turboprops and signed a lease agreement for a used Q400.
According to the CEO of CemAir, the airline enjoyed significant growth based on its focused approach to
selecting the right aircraft for its operations. Through the procurement of the new aircraft, CemAir plans to
expand their scheduled operations beyond South Africa and continues to support new opportunities across the
continent. With these Q400 aircraft, CemAir will increase its current fleet of Bombardier aircraft to 17 – including
five Q Series turboprops and 12 CRJ Series aircraft. CemAir recently added a used CRJ900 aircraft to its fleet,
the first in South Africa.28

Low-cost airlines
Low-cost airlines (also known as no-frills, discount or budget airlines) generally offer lower fares and fewer
comforts with a single passenger seating class. Prepacked foods and snacks are available on board for
travellers to purchase. In many cases, travel insurance is charged separately and at the discretion of the
traveller, whereas with full-service airlines, this is part of the offering and included in the ticket price.

Comair Limited – Kulula.com

Comair Limited introduced their low-cost carrier, Kulula.com, in 2001. Since taking off, Kulula.com has been on a
tremendous growth drive, offering, through its partnerships, travel additions to its customers, such as car hire,
accommodation and holiday packages. The Kulula.com brand is associated with humorous marketing
campaigns and providing best value to customers. Kulula.com offers low-cost, single-class flights.

Mango
Mango started operating as a low-cost airline towards the end of 2006, targeting the price-sensitive market. It is
a no-frills airline carrier operated by SAA and offers competitively priced, single-class flights. Mango’s mandate
is to make air travel accessible and affordable.29

FlySafair
FlySafair began operations in October 2014 and is considered a specialist aviation organisation offering a wide
range of specialist airlift services. FlySafair responded to the opportunity to open the skies to many who had
never flown before. They offer great fares and a reliable on-time service. During 2017, FlySafair was again
named the most on-time airline in the world by air travel intelligence specialist OAG.30 When FlySafair launched
its maiden flight on 16 October 2014, their low fares disrupted the market, bringing down the average cost of
flying by as much as 32% on some of the routes it operates.31 FlySafair offers a range of options to their
customers – from a seat and limited carry-on luggage for the lowest possible fare to additional perks to allow
customers to customise their travel experiences to meet their needs and budget.32

Fastjet
Fastjet focuses on air travel throughout East and southern Africa. Fastjet followed easyJet’s business model and
it was launched in 2012. It offers low-cost travel solutions for all people, which resulted in a loyal customer base
of which 80% are repeat flyers.33 Their philosophy is simple: the lowest possible fares with options to choose
pay-as-you-go travel extras such as check-in luggage and assigned seating.

The future of South Africa’s low-cost airline industry

With the demise of 1time airlines, the grounding of aircraft, liquidity challenges and turmoil in the global low-cost
airline industry, the sustainability of local low-cost airlines is questioned. When asked what is needed for future
sustainability, Comair CEO Erik Venter explained that airlines need to make massive investments in planes to
stay in business. These investments require airlines to get more revenue per flight and the only way to do so is
 to fly bigger and more efficient airplanes. He also explained that the demand in the low-cost airlines is price
sensitive at the lower end of the market.34
To expound the challenge in the South African low-cost airline industry is the threat of new competitors
entering African skies. During June 2012, easyJet founder Stelios Haji-Ioannou indicated his backing of a new
budget airline, dubbed Fastjet, to take to the African skies, promising to bring low-cost flights to millions of
people on the continent.35 In the South African budget airline industry, Mango added two new routes after the
demise of former rival low-cost airline 1time. Mango communications manager Hein Kaiser confirmed that those
additional routes have always been on their radar, and implementation of the plan was brought forward36 with
the collapse of 1time. During February 2018, the Competition Commission prohibited the proposed merger
between SA Airlink and Safair Operations as the transaction was likely to result in a substantial prevention of
competition.37
Another complication to the industry is the number of management changes and appointments. Mango is
operating under an acting CEO Nic Vlok. Former Mango CEO Nico Bezuidenhout is now with Fastjet, and SAA
welcomed a new CEO in November 2017. Management and leadership changes further exacerbate the
complexities of the airline industry.

Mango’s competitive strategies

Mango’s CEO Nic Vlok confirmed that Mango scheduled more flights as the number of SAA’s domestic flights
reduced in 2018. Nic Vlok also confirmed that ‘Mango remains committed to service excellence and our brand
values of innovation, operational efficiency and excellence in customer service’.38 The former CEO Nico
Bezuidenhout explained during his tenure that Mango is able to survive even the worst market conditions as it
has lowered its fuel consumption. Mango operates the most fuel-efficient fleet in the domestic skies and in some
instances burns up to 25% less fuel than aircraft a couple of decades older. ‘Significant savings are realised in
this manner alone, given that fuel could represent up to 35% of an airline’s operational cost’.39 Mango’s success
is ascribed to its low-cost structure and efficient operations. Mango’s asset use is 25% higher than its
competitors, and its productivity – the number of passengers carried per employee – is almost double. In the first
year of Mango’s operation, their four aircraft carried 1.6 million passengers, whereas 1time’s 12 aircraft carried
just under 2 million.40
Only time will tell which airline operators are fit enough to survive.

Overview
In any strategic management process, the choice of business level strategy forms an integral part of strategic
decision-making. In essence, the strategy formalises the route that the organisation will take to reach its end
destination. When strategic decision-makers decide on a business level strategy, or a combination of these
strategies, they have to consider the various factors that affect this choice. These factors include the organisation’s
overall strategic direction, strengths and weaknesses, its capabilities, opportunities and competitive forces in the
industry. Once the strategic decision-makers have selected potential strategies, they need to evaluate these options
to choose the most appropriate strategy or combination of strategies. This assists them to make the correct choices
that will ensure sustainability and survival in the long term.

8.1 Introduction
Business level strategies deal with an organisation’s plans to compete successfully. ey are oen referred to as
competitive strategies because they relate to the organisation’s deliberate decisions on how to meet its customers’
needs, how to counter the competitive efforts of its rivals, how to cope with the existing market conditions, and how
to sustain or build its competitive advantage.
 As can be seen from the Opening case study Competing in South Africa’s airline industry, organisations are faced
with many challenges, speci cally in the competitive market environment. e Opening case study describes the
competitive challenges for full-service airlines as well as those of the low-cost airlines. Ultimately, survival and
growth for the competitors in the airline industry require strategic decisions that match the organisation’s strengths
with the opportunities in the environment. e challenges in the South African low-cost airline industry include the
declining economy, increasing fuel costs, increasing landing and airport charges, and leadership challenges with
changes to management structures. Existing competitors in the industry are competing for market share while
possible new competitors consider entering the industry despite these challenges. Intentions between airlines to
merge further complicate the competitive environment. e Opening case study showed how the demise of one
competitor enables another to take advantage of it and take on new destinations and routes. Winning in the
marketplace is, in most cases, a result of the actions an organisation takes to seek and secure a sustainable
competitive advantage. An organisation has a competitive advantage whenever it has an edge over its rivals in
attracting buyers and coping with competitive forces. e Opening case study Competing in South Africa’s airline
industry showed that competition in the airline industry is rife. Full-service airlines like SAA and British Airways
are competing for market share in the business travel segment, and Mango competes against Kulula.com and
FlySafair for the price-sensitive segment.
It is therefore vitally important that the strategic decision-makers of the airline operators choose the most
appropriate strategies to ensure that their competitiveness in the industry remains in line with their strategic intent.
In the process of choosing their business level strategies, strategic decision-makers can use a range of criteria to
evaluate the appropriateness of the various strategic options. is chapter also includes a section that describes the
criteria for evaluating strategies – not only business level strategies, but also corporate level ones.
Before discussing the theoretical principles of business level strategy, it is necessary to link strategic choice with
the theoretical principles already covered. e process of strategic management was explained with the use of a
framework in Chapter 1 section 1.6. is framework indicated that the strategic intent, stakeholders, and the
variables in the internal and external environment affect the choice of strategies (Chapters 4, 5, 6 and 7).
Chapter 2 linked strategic management with a focus on sustainability to ensure the long-term survival of the
organisation. is chapter also discussed the strategic management process in terms of business ethics and
corporate governance with speci c reference to the role of stakeholders.
We then analysed the environments in which any organisation operates. Chapters 5 and 6 considered the
external environment. Because organisations operate in a changing environment, and an interdependent
relationship between the organisation and its environment exists, an organisation needs to conduct a detailed
analysis of the threats and opportunities, and its strengths and weaknesses (Chapter 7). Strategies are courses of
deliberate action that strategic decision-makers take to match the organisation’s unique strengths and capabilities
with the opportunities in the external environment.
is chapter deals with the various strategic choices at the business level and how to evaluate them, followed by
Chapter 9, which addresses strategic innovation. Business level strategies are also referred to as competitive
strategies and are commonly associated with leading strategy scholar and professor at Harvard Business School,
Michael Porter. Chapter 10 discusses corporate level strategies, while Chapter 11 covers strategies for global
competitive advantage (i.e. international strategy). e strategies to compete internationally form an important
component of business strategies.

8.2 Levels of strategies

Strategic decisions are made at three levels (also see section 1.3.2). Figure 8.1 depicts the three levels of strategies.
each of which has a different focus. Different parties in the organisation are involved in the development of the three
different levels of strategies, which are as follows:
 Corporate level strategy is concerned with the overall scale and scope of the organisation. It deals with the
purpose of the organisation. Chapter 10 discusses corporate level strategies.
Business level strategy is also referred to as competitive strategy, and describes how to compete successfully in
particular markets. Business level strategies deal with the products and services that an organisation needs to
develop and position in the market to achieve competitive advantage and long-term survival. e Opening case
study described South Africa’s airline industry and the competitors. It also described the plans by Mango’s
executives to remain competitive – they follow business level strategies that are based on a low-cost base.
Speci cally, Mango builds its competitive advantage on a combination of business level strategies that aim to offer
value for money to customers through a low-cost structure and efficient operations with an above-average use of
their assets. is chapter focuses on business level, or competitive, strategies. Some authors refer to business
strategies as ‘battle plans’.
e third level of strategy is functional or operational strategy. For the most part, this is concerned with how
the component parts of an organisation deliver the corporate and business level strategies. Operational strategies
are also referred to as functional strategies, and deal predominantly with strategies in the shorter to medium
term. Chapter 13 discusses functional strategies within the context of strategy implementation.

e focus of this chapter is on the business level strategies, in other words, the section with a border drawn around it
in Figure 8.1.

Figure 8.1 Levels of strategy

8.3 Factors influencing strategic choice

When considering the strategic management framework introduced in Chapter 1, the choice of strategy follows the
analysis of the environment and the setting of strategic intent. As we now know, a strategy is a deliberate course of
action to gain competitive advantage. A good strategy is a strategy that generates such advantages. e strategic
decision-makers aim to match the organisation’s resources and capabilities successfully with the opportunities in the
environment by deliberately choosing a speci c strategy or a combination of strategies. Some of the factors that the
strategic decision-makers consider in deciding on the strategies include:
the available resources
the skills of the staff
unique capabilities within the organisation
experience
the organisation’s competitive advantage
the market conditions and the strengths of the competitors
the customer needs and changing demands
the opportunities in the industry
the threats in the industry.

ese factors are identi ed through a systematic process to analyse the environment, assess these factors, make
sense of the context and content of the strategic plan and match the strengths with the opportunities. When an
organisation chooses and implements the correct strategy, it can realise above-average returns that enable it to
maximise wealth and survive in the long term. Hence, a simple explanation of strategy is that it is the route the
strategic decision-makers believe will take them to their destination – the strategic intent.
Business level strategies, or competitive strategies, deal with how an organisation intends to compete in a speci c
industry by positioning itself in an environment that brings a competitive advantage for the organisation. Typically,
when strategic decision-makers opt to compete on price or value, they decide on a type of business strategy.
Many strategy authors posit that business level strategies are more speci c to organisations in single business
lines, speci c to those operating with a single line of business such as Mango or FlySafair. However, the strategic
decision-makers can also opt for business level strategies for a portfolio of businesses. ey are not mutually
exclusive with corporate level strategies. e Opening case study Competing in South Africa’s airline industry referred
to Comair which follows speci c business level strategies in each business unit (British Airways and Kulula.com).
British Airways is a full-service airline that offers value-added services to business and leisure travellers, and intends
to outperform their competitors by offering a premium service. For this airline to sustain its value proposition, it
needs to continually offer a superior service for which customers are prepared to pay. Kulula.com, on the other
hand, is a low-cost airline that offers lower fares and fewer comforts to travellers, with the aim of beating
competitors by offering value for money at a reasonable price. To sustain their value proposition, Kulula.com needs
to keep costs as low as possible.
Corporate level strategies seek to determine the appropriate blend of business ownership or corporate scope as a
means of maximising stakeholder value. ese strategies deal with the organisation’s choices for products and
markets. Corporate level strategies specify actions that organisations take to gain a competitive advantage by
selecting and managing a group of different businesses competing in different markets. For example, Anglo
American Corporation owns enterprises in mining, retail, media and other sectors. Another example is Barloworld
Holdings, which owns enterprises in transport, logistics, equipment and automotive business segments.
In reviewing the various strategic options, the strategic decision-makers base their reviews on a set of
assumptions or hypotheses about the way competition in the industry is likely to develop, and how the organisation
can exploit those developments to create a competitive advantage. e greater the extent to which these assumptions
and hypotheses accurately re ect how competition in this industry develops, the more likely it is that an
organisation will gain a competitive advantage from implementing its strategies.41 If these assumptions or
hypotheses turn out to be inaccurate, then an organisation’s strategies are unlikely to be a source of competitive
advantage.
Unfortunately, because of the volatility and oen unpredictable nature of an industry and the organisation’s
competitors, it is challenging to know for sure that an organisation is choosing the right strategy, hence it is
necessary to consider the factors that may in uence the choice. Before an organisation evaluates its various strategic
options, it is already familiar with its unique resources and capabilities, its weaknesses, the potential sources of
competitive advantage, and the opportunities and threats in the environment. e organisation’s strategic intent, as
captured in its vision and mission, also affects the strategic choice. Ultimately, the organisation’s strategic intent is its
purpose and its nal destination. If an organisation’s intent is to grow and become a global competitor, it will choose
strategies to reach this long-term goal. e Opening case study referred to the competitive strategies of the various
airline providers. Mango’s CEO explained that the airline was created to get more South Africans to y and to
stimulate economic activity. Mango’s objective is to reduce the cost of air travel as far as possible while remaining
nancially sustainable, which contributes to the decision to pursue a cost leadership strategy. Another example
from the Opening case study is from FlySafair. is new entrant to the low-cost airline industry also builds its
business level strategies on keeping costs per seat as low as possible. One of the actions to achieve this purpose was
to make the seats on the aircra lighter and thinner, which reduces fuel costs.42
Another factor that affects the strategic choice is the nature of the competition in the industry. Chapter 4
explained how competitive intelligence can entrench a stronger competitive position. When the strategic decision-
makers know what the competitors’ strengths and weaknesses are, they can devise plans and strategies to
outperform their competitors. If a major competitor has a competitive edge in its logistics and can provide its
product at a cheaper rate, faster than all competing organisations in the industry, and if this edge is durable and
inimitable, then the strategic decision-makers should choose a strategy that the organisation can implement through
the optimal match between its resources, capabilities and opportunities.
e impact of the chosen strategy on the organisation’s stakeholders is also a factor that the organisation needs to
consider. Other factors that affect the choice of business level strategies are what goods or services the organisation
wants to offer to its customers, how it will manufacture goods or provide the services, and how it will distribute
these goods to the marketplace. e Opening case study described how Mango uses a more fuel-efficient eet than
its competitors. Using the most fuel-efficient eet is a tactic employed by Mango to lower costs and ensure its
competitive edge. is cost-efficiency tactic is similar to what FlySafair follows as well.

8.4 Business level strategies

Business level strategies are also called competitive strategies. Michael Porter introduced the business level strategies
in 1980 and these are commonly known as the ‘generic strategies’ of cost leadership, differentiation and focus. Cost
leadership and differentiation strategies can also become focused cost and focused differentiation strategies – which
are depicted in Figure 8.2. In essence, these strategies inform how the organisation competes in the industry.
Generic strategies are based on the breadth of the target market and the type of competitive advantage. Each of these
generic strategies offers the organisation the potential to outperform competitors in the industry. e generic
strategies that the strategic decision-makers can choose from are overall cost leadership, differentiation and focus
strategies.
What is important to recognise is that organisations are unique entities. is means that each organisation’s
strategic approach consists of custom-designed actions to t its own circumstances and industry environment. is
implies that there are many variations in business level strategies. Strictly speaking, there are as many competitive
strategies as there are organisations. It is highly unlikely that different organisations, even those competing in the
same industry, will employ strategies that are exactly alike in every detail.
Overall cost leadership is a strategy that is built on low input costs. As the name implies, this strategy is built on
de nite efforts to reduce the costs at which the organisation is able to offer its products and services, while still
making a pro t. e savings from the lower costs are then transferred to a large, price sensitive market. e
Opening case study Competing in South Africa’s airline industry described how Mango, FlySafair and Kulula.com
compete in the low-cost airline industry. e competitive strategies of all three airlines are different, but they all
compete for the same customers. ey are clearly competing on cost, and their strategies are identi ed as cost
leadership strategies.
Differentiation is a strategy that is built on unique and valued offerings. e target market tends to be smaller,
but is willing to pay more for the unique offering. Further, the differentiation offers a level of value creation that
makes it difficult for competitors to match. e Opening case study described how British Airways targets
customers industry wide and aims to provide a superior service which customers are prepared to pay for, which is
an example of a differentiation strategy.
Focus is a strategy followed by organisations that direct their competitive efforts to a speci c niche in the
marketplace. Figure 8.2 depicts Porter’s generic strategies as well as the ‘focused’ versions of the cost leadership and
differentiation strategies. ese versions essentially offer the same thing, but the scope is narrow. Organisations
pursuing a focus strategy can gain competitive advantage in the niche area. In practice, these three generic strategies
are translated into ve strategies according to the breadth of the market and the type of competitive advantage being
pursued. In the Opening case study the airline operators Airlink and CemAir were described. Both of them y to
smaller towns, cities and regional centres, and serve markets not pursued by other airlines. ey can both charge
higher prices for providing a niche service to a particular segment of the market, namely business travellers. e
market segment is fairly narrow and the competitive advantage is created through routes to destinations not served
by other airlines. is is an example of a focused differentiation strategy.
As can be seen from Figure 8.2, leadership strategy or a differentiation strategy strive to attain competitive
advantage industry wide, targeting a large customer base. Organisations that pursue a focused strategy, whether on
cost or value, have a particular market segment in mind. Although these strategies were initially pursued as
mutually exclusive, organisations soon came to realise that competitive conditions may require an integrated
approach to business level strategising. e centre part of Figure 8.2 depicts the integrated cost
leadership/differentiation strategies. Integrated strategies combine the features of cost leadership and differentiation
aimed at offering the best value to the customers. Such an integrated strategy is also referred to as strategies stuck in
the middle or middle of the road strategies.

Figure 8.2 Porter’s generic strategies and the focused strategies43

e following is a discussion of each of these business levels or competitive strategy options. Sections 8.4.1 and 8.4.2
discuss the broad generic strategies. e focused versions of these strategies are discussed in section 8.4.3 – it is
recommended to refer to Figure 8.2 when reading through these sections.
e strategic decision-makers in an organisation will de ne their scope of operations according to the market it
aims to serve. Each organisation will consider the strategic decision enablers before opting for one business level
strategy over another. For example, it does not make business sense to pursue a cost leadership strategy in a small
market because volumes and, accordingly, pro t margins are low. However, it makes business sense for organisations
like Kulula.com or Mango to pursue a cost leadership strategy aimed at a large market.
Consideration for choosing between the business level strategy options can also be in terms of cost and price,
and the perceived (or real) quality or value. e quality or value can be perceived or real as long as customers are
willing to pay for it. An organisation is pursuing a best-value strategy when the cost to manufacture a product is
comparatively low, and the market considers it as high value.
When one strips away the details to reach the real substance, the biggest and most signi cant differences among
generic strategies are:
whether an organisation’s target market is broad or narrow
whether the organisation is pursuing a competitive advantage linked to low-cost or product differentiation
a combination of the above.

8.4.1 Low cost leadership strategy

Organisations that choose cost leadership strategies aim to build and sustain their competitive advantage by
reducing their costs, or keeping them lower than those of their competitors. e advantages of a lower cost base give
an organisation an edge over its competitors, provided that it offers a product or service that customers want to buy.
If an organisation is so intent on reducing costs and thereby produces low-quality products that no one wants to
buy, the potential advantages of the cost leadership strategy are lost. ere are many examples of organisations that
have successfully pursued cost leadership strategies.
e Opening case study Competing in South Africa’s airline industry described how Comair Limited pursues
competitive advantage linked to low cost through Kulula.com. Comair Limited also pursues competitive advantage
linked to product differentiation through British Airways. When deciding to make a reservation with Mango,
FlySafair or Kulula.com, customer choice will be in uenced by the price of the service, the value and the bene ts
offered. Customers may choose to purchase from one source rather than another because either the price of the
product or service is lower than a competitor’s, or the customer perceives the product or service to provide better
‘added value’, such as on-board internet connectivity, mobile boarding passes or bene ts that are not available
elsewhere.
e Opening case study Competing in South Africa’s airline industry introduced Kulula.com. is airline’s choice
of business level strategy is a low-cost provider strategy with the aim of serving a large market that is price sensitive.
e main motivation for choosing this strategy is to gain a competitive advantage over competitors by maintaining a
lower overall cost base. is implies a competitive edge. However, this can only be realised if the organisation’s
product or service appeals to a broad spectrum of customers (large market size as shown in Figure 8.2) since it is
generally dependent on the economies of scale resulting from high volumes of production or owning cost-saving
technologies.
is strategy is about underpricing competitors, and is also referred to as the no-frills strategy. It combines a low
price, low perceived added value, and a focus on a price-sensitive market segment. It can be viable because there
may well be a segment of the market which, while recognising that the quality of the product or service might be
low, cannot afford or chooses not to buy better-quality goods.
e strategy may also be a viable means of competing in an industry in which major organisations are following
different strategies. For example, Kulula.com grabbed an unoccupied position in the airline industry when it entered
the market in August 2001, and established itself as the market leader in the South African low-cost airline market.
e organisation uses a variety of cost cutting strategies to effect a no-frills strategy, which has proven to be effective
and attractive to its customers.
e Case example Chery QQ3 0.8 TE is still the cheapest car in SA below describes how Chinese car manufacturer
Chery chose a cost leadership strategy to cater for demand in a price-sensitive market.

CASE EXAMPLE: Chery QQ33 0.8 TE is still the cheapest car in SA

Cheap cars are the way forward for many South African motorists. In an effort to identify the cheapest new cars
in South Africa, BusinessTech44 put together a list of the cheapest cars on the South African market with basic
prices ranging from R99 995 to R149 990.
Twelve years after introducing the Chery QQ33 to the South African market, it remains the cheapest car
available. This Chinese five door super-mini car offers a rock-bottom price offering without airbags, ABS or
seatbelt tensioners,45 nor does it have niceties such as a radio or air conditioner. Consumers literally get what
they pay for: a tiny three-cylinder 812cc car with no impressive performance record, and a bodyshell integrity
rated as ‘unstable’.

When deciding whether to follow a business strategy based on cost, an organisation typically considers the potential
advantages of following such a strategy. Cost advantages are possible even when competing organisations offer
similar products or services. Sources of cost advantage include the following:
In most cases, organisations choose a cost-leadership strategy because of market size and the inherent cost
advantages owing from economies of scale in manufacturing, marketing, distribution, or any other function of
 the organisation. Economies of scale exist when the production cost per unit decreases as the number of units
produced increases.
Another source of cost advantage can be obtained when an organisation owns specialised machines, as in the
case of Mango’s eet of fuel-efficient aircra, to enable high levels of production. Oen, these specialised
machines cannot be kept in operation by small organisations.
In many cases, the organisation’s cost advantage lies in its low overhead costs – an organisation with high
volumes of production can spread its overhead costs over more units and thereby reduce the overhead costs per
unit.

However, low cost in itself is not a basis for competitive advantage if competitors can also achieve the same low
costs. is implies that there is a need for a low cost base that competitors cannot match. e key challenge is how to
reduce costs in ways that others cannot match so that a low price strategy might give sustainable advantage. PEP
Stores formed a joint venture with Abacus Insurance to maintain a low-cost base. PEP broadly proclaims that they
keep their margins low and have a low-cost culture throughout their organisation. e low-cost strategy is thus
reinforced throughout their offerings. Another example of an organisation pursuing a low-cost strategy is the
Botswana-based retailer, Choppies. is retailer avoids the costs of expensive shop ttings and wide ranges of
products. Rather, the costs saved through offering items in bulk in a no-frills shopping environment are transferred
to the customers and thereby sets Choppies apart from a retailer such as Spar.
e Case example Low price insurance for the people below refers to off-the-shelf, cash prepaid insurance policies
aimed at PEP Stores customers who do not have bank accounts. PEP Stores is well known for value for money and
lower prices. By introducing the insurance policies, PEP Stores management has extended their offering, and now
offer a low-cost alternative for insurance.

CASE EXAMPLE: Low price insurance for the people

By using the PEP distribution network, which includes more than 1 504 retail stores in southern Africa,46 handset
insurance is made easy, convenient and affordable by PEP. Given that PEP sells more prepaid handsets in South
African than all the other retailers combined,47 it made business sense to join forces with Abacus Insurance to
offer cover for loss, theft or accidental damage for handsets worth R495 or more. This venture into handset
insurance follows on the initiatives with Hollard Insurance to offer comprehensive funeral plans to individuals and
families who do not have a bank account. When the funeral policies were launched, PEP offered insurance
starter packs at R19.99 per month that contained a barcoded insurance card with a dedicated insurance hotline
number so that clients can talk to trained insurance professionals in their home language. Clients get immediate
cover and pay premiums at till points in any of the PEP stores.

8.4.1.1 Advantages of cost leadership strategy

Hill and Jones48 mentioned that the advantages of the business level strategy are best discussed in terms of Porter’s
ve forces model. ese:
threats from competitors
powerful suppliers
powerful buyers
substitute products, and
new entrants.

When pursuing a cost leadership strategy, the cost leader is protected from industry competitors by its cost
advantage. If there are powerful suppliers, the cost leader’s lower costs also mean that it will be less affected than its
competitors by increases in the price of inputs. Moreover, since cost leadership usually requires a big market share,
the cost leader purchases in relatively large quantities, increasing its bargaining power over suppliers. Further, if the
bargaining power of buyers is high, the cost leader is less affected by a fall in the price it can charge for its products.
If substitute products start to come into the market, the cost leader can reduce its price to compete with them, and
retain its market share. Finally, the cost leader’s advantage constitutes a barrier to entry since other organisations are
unable to enter the industry and match the leader’s costs or prices.
e cost leader is therefore relatively safe as long as it can maintain its cost advantage, and while price is the key
for a signi cant number of buyers.

8.4.1.2 Disadvantages of the cost leadership strategy

We have already stated that organisations are faced with challenges presented by change in the competitive
environment. e principal dangers of the cost leadership strategy can be identi ed in competitors’ abilities to nd
ways to produce at a lower cost and beat the cost leader at its own game. Keep in mind that the rival organisation
also engages with the various strategic options, and devises ways to outcompete its competitors. For example,
competitors may also draw a cost advantage from labour cost savings. Foreign competitors in developing countries
have low labour costs. Many organisations now assemble their products abroad as part of their low-cost strategy –
many are forced to do so simply to compete. Competitors’ ability to easily imitate the cost leader’s methods is
another threat to the cost leadership strategy.
e cost leadership strategy carries a risk that the cost leader may be so focused on reducing costs that it may
lose sight of what the customers actually want. us, an organisation may make decisions that decrease cost but
dramatically affect demand for the product. e cost leader cannot abandon product differentiation, and even low-
cost, low-priced products cannot be too inferior to the more expensive products if the low-cost, low-price policy is
to succeed.49

8.4.2 Differentiation strategy

e differentiation strategy, which is also referred to as the premium strategy aims to produce products and
services considered unique across the industry. A differentiation strategy may be achieved in a number of ways. For
example, the uniqueness may be based on dimensions widely valued by the customers. e aim is to achieve higher
market share than competitors, which in turn could yield cost bene ts by offering better products or services at the
same price. Alternatively, the aim could be to enhance margins by pricing slightly higher. is strategy may be
achieved through improvements in products that render them unique. is requires an investment in research and
development (R&D) and design expertise. Another approach is to demonstrate how the product or service meets
customer needs better than that of the competitor. is approach builds on the power of the brand and can use
powerful promotional approaches. e last approach is for the organisation to base its differentiation efforts on the
organisation’s own competencies.
e extent to which these approaches will be successful is likely to be dependent on a number of factors, such as
the customer and what they perceive as value that they are prepared to pay for, competitors and inimitability. It is
important to clearly identify the customer. For example, for a newspaper business is the customer the reader of the
newspaper, the advertiser, or both? ey are likely to have different needs and values. In deciding to follow a strategy
of differentiation, the organisation needs to consider on what to base the strategy. It is also important to have a clear
understanding of what is valued by customers or what customers are willing to pay for. Organisations may pursue
strategies either on the basis of traditional ways of operating and taken-for-granted assumptions rooted in
experience, or on the basis of resources and skills that the organisation has. Before choosing to follow a strategy of
differentiation, an organisation needs to ask the basic question: what does the customer value? e organisation may
conceive of a strategy of differentiation in technical terms, for example as a better-engineered product. While the
uniqueness may be real in technical terms, it is of no more value to the user than products or services of
competitors. Indeed, a differentiating factor for an organisation may be the ability of the strategic decision-makers
to be closer to the market than competitors so that they can better sense and respond to customer needs.
Another factor to consider when deciding on a differentiation strategy is the competitors. For example, is the
business competing with a wide competitor base or with a much narrower one, perhaps within a particular market
segment? In the case when an organisation differentiates for a broad range of customer preferences, the strategy is
referred to as broad-based differentiation. Broad-based differentiation is applied across an industry in markets with
a broad range of customer preferences. A good example of a company that successfully pursues broad-based
differentiation is Starbucks. Not only is the coffee brewer known for tailoring variations of coffee according to broad
customer preferences, but it is also recognised for its quality products and service levels, for all of which customers
are prepared to pay a premium. If the competitor base is narrow, a strategy of focused differentiation (see section
8.4.3.2) may be appropriate.
A further problem in identifying relevant competitors occurs as markets globalise. For example, a company may
nd its bases of differentiation eroded by another company that it did not previously see as a competitor because it
did not share common geographic markets. As the two organisations increase their geographic scope, they may
become competitors. Another possibility is that a competitor develops a basis of differentiation in one market and
then enters another market on the basis of this. An example in the South African fashion industry is the luxury
design brand Jo Borkett. Previously, Jo Borkett clothing was only available in its few boutique outlets but by entering
into a sales agreement with Edgars, Jo Borkett designs are available in more geographic regions than competing
luxury designs. is challenges an established organisation’s strategic position.
Another important factor to consider is the extent to which the basis of differentiation is difficult to imitate. An
organisation needs to base its decision on the sustainability of the competitive advantage. It may have to reconsider
its strategic options if the bases of a speci c strategy can be easily imitated by competitors. Although one can nd a
wide range of camping equipment manufacturers offering lanterns, stoves or sleeping bags, Coleman has
differentiated itself from competitors by continuously offering a more superior product. Not only does Coleman
own patents that protect the uniqueness of its products, but competitors also nd it difficult to imitate the reliability
and durability offered by Coleman. Cheaper brands are likely to have problems – at a time when a camper needs it
most.
Figure 8.2 distinguished between differentiation and focused differentiation – the main difference is the market
size being targeted. Traditionally, when describing differentiation across a large market, scholars refer to broad
differentiation. When describing differentiation across a narrow market, they refer to focused differentiation. e
following two sections offer a description of these two types of differentiation.
As stated above, a differentiation strategy aimed at a large market depends on meeting customer needs in unique
ways. e uniqueness of the offering offers a competitive edge over competitors. One way of achieving a
differentiated product is to incorporate tangible features that increase customer satisfaction. Examples in the
cellphone industry testify to added features that enhance functionality and become the deciding factor between a
Sony Experia, Samsung or Apple iPhone. ese cellphone manufacturers are in a constant race to introduce and
offer functions that outdo those of rivals. e added value can also be based on intangible features. For example, the
function of a motor vehicle is to offer transport, yet by opting to purchase a vehicle with low carbon dioxide
emissions, the satisfaction of the environmentally conscious driver is achieved in an intangible way along with the
basic requirement of transport. is implies a product offering that contributes to the environmental sustainability
cause while appealing to an environmentally conscious market that is prepared to pay more for the reduced carbon
dioxide features.
To be successful in a broad differentiation strategy, the organisation needs to possess strengths and capabilities
that create superiority that customers are willing to pay for. e most successful approaches to differentiation are
those that are difficult to duplicate by competitors. e brand image of the Ford Mustang is built on a rich history
and tradition. A new entrant to the performance car market may need to nd another source of differentiation as
the Ford Mustang brand is difficult to imitate. Differentiation that is linked to high switching costs also warrants
further attention. For example, there are a number of open source soware packages available for office products
such as word processing and presentations, yet the market for Microso Office products continues to grow as they
offer superior features and easier integration than the free open source products do.

8.4.2.1 Advantages of differentiation strategies

When organisations pursue a differentiation strategy, the organisation experiences some protection against
competitors to the degree that customers develop brand loyalty towards its products. Customers may become so
used to the added features that any other product offering less is not good enough. Many can identify with
Discovery Health, which offers additional bene ts and features such as Vitality, discounts on selected items at some
retailers, car insurance, life insurance and now banking. Having to switch to an alternative medical aid might imply
a loss of these bene ts, hence Discovery has established brand loyalty on the part of the customers. Brand loyalty is a
valuable asset that can offer a competitive advantage over competitors. Powerful suppliers are rarely a problem
because the differentiated organisation’s strategy is geared more towards the price it can charge than towards the
costs of production. Customers are price insensitive because they want the added features of the differentiated
product, and are prepared to pay for them. A differentiator can thus tolerate moderate increases in the prices of its
inputs better than the cost leader, who needs to keep prices as low as possible. An organisation pursuing a
differentiation strategy is also unlikely to experience problems with powerful buyers because the differentiator offers
the buyer a unique product which translates in brand loyalty. Differentiators can pass on price increases to
customers because customers are willing to pay the premium price. e threat of substitute products depends on the
ability of competitors’ products to meet the same customers’ needs as the differentiator’s products and to break
customers’ brand loyalty. For example, a customer may have been a loyal Apple customer because of its unique
features and simple interface, yet that same customer may opt to switch to an Android-based platform as it offers
similar features that integrate more easily with some other platforms. e issue is how much of a premium price can
an organisation charge for uniqueness before customers switch products? In a period of economic recession,
customers may reconsider their preparedness to pay for added features and switch to a cheaper brand. Finally,
differentiation and brand loyalty also create a barrier to entry for other organisations seeking to enter the industry.
New organisations are forced to develop their own distinctive competency to be able to compete, and doing so is
expensive.50

8.4.2.2 Disadvantages of differentiation strategies

e main problems with a differentiation strategy centres on the organisation’s long-term ability to maintain its
perceived uniqueness in customers’ eyes. It became evident in the last 10 years how quickly competitors move to
imitate and copy successful differentiators. For example, in 2005 OUTsurance was one of the rst short-term
insurers to introduce a no-claim bonus in South Africa. Soon aer, Budget Insurance and MiWay introduced similar
concepts, closely followed by 1st for Women, which introduced differentiated insurance packages.
A strategy of differentiation, then, requires the organisation to develop a competitive advantage by making
choices about its product, market and distinctive competency that reinforce each other and together increase the
value of a good or service in the eyes of the customers. When a product has uniqueness in customers’ eyes,
differentiators can charge a premium price.
When differentiation stems from the design or physical features of the product, differentiators are at great risk
because imitation is easy. Over time, the product features may not be worth the premium price in the eyes of the
customers, thus the importance of differentiation diminishes as customers become more price sensitive. ink about
Tupperware and its wide range of products that have become household items over the last 50 years. Tupperware
offers innovative products with practical designs and a lifetime guarantee. Over the years, many organisations
introduced similar products with similar features, but at a lower price. Some organisations even offer disposable
plastic ware at a very low cost.
 When differentiation stems from an intangible source, such as the quality of service, reliability or prestige, an
organisation is much more secure. It is difficult to imitate intangibles, and the differentiator can reap the bene ts of
this strategy for a long time. Nevertheless, all differentiators must watch out for imitators, and be careful that they do
not charge a price higher than the market will bear.

8.4.3 Focused strategies

In some cases, neither a low-cost leadership strategy nor a differentiation strategy is possible for an organisation
across the broad range of the market, as discussed in sections 8.4.1 and 8.4.2 above. An organisation may nd itself
in a situation where the funds to invest in specialised machinery or high volume production are not available.
Similarly, an organisation may nd the costs of differentiation too high. For these and related reasons, it may be
better to adopt a focus, also called a niche, strategy. Focus strategies are typically followed when the organisation
focuses on a speci c niche in the marketplace, and develops its competitive advantage by offering products
especially developed for the niche. Figure 8.2 depicted the ‘focused’ versions of cost leadership and differentiation.
is section describes the focused cost leadership strategies and the focused differentiation strategies.
A focus strategy aimed at securing a competitive edge based either on low cost or offering best value becomes
increasingly attractive when the target market niche is big enough to be pro table and offers good growth potential.
e focus strategy is also attractive when industry leaders do not see that having a presence in the niche is crucial to
their own success. In this case, focusers can oen escape battling head-to-head against some of the industry’s biggest
and strongest competitors.
Focus strategies are also viable options when it is costly or difficult for organisations that compete in multiple
markets to put capabilities in place to meet the specialised needs of the target market niche and, at the same time,
satisfy the expectations of their mainstream customers. is implies that an organisation opts to ‘focus’ on a speci c
product, market or service offering. When the industry has many different niches and segments, such as the motor
vehicle industry, an organisation has the option to focus on a competitively attractive niche suited to its resource
strengths and capabilities. For example, Rolls Royce speci cally focuses on the luxury end of the industry whereas
Chery opts for the lower end. With more niches, there is more room for focusers to avoid each other in competing
for the same customers. Another example of a focus strategy is the intercity transport service provider, African
People Mover (APM). e Case example describes how APM developed a service model that revolves around the
passenger, and offers great value for money.
e strategic decision-makers will also consider the focus strategy when there are few, if any, other rivals
attempting to specialise in the same target segment – a condition that reduces the risk of segment overcrowding. A
nal consideration in choosing a focus strategy deals with the focuser’s ability to resist challengers. e focuser can
compete effectively against challengers based on the capabilities and resources it has to serve the target niche and the
customer goodwill it may have built up.

CASE EXAMPLE: Africa People Mover

Established in 2014, Africa People Mover (APM) entered the intercity transport market with a desire to offer
passengers safe arrival on time. Their philosophy is simple: affordable, safe and simple travel through the
commitment of their drivers, technicians and mechanics. APM launched its first service from Pretoria to Durban
on 12 December 2014. Not only did this day represent the launch of their intercity service, but also the promise of
a clean bus driven by a courteous and uniformed driver that departs on time from a well-located sales office,
travels safely and arrives on time without incident.51 Within their first 365 days of operations, they had no
accidents and no injuries to the over 54 000 passengers they ferried.52 What makes APM a unique organisation
is its focused approach to offering transport at a reliable and affordable rate – taking on the added responsibility
of making sure the jobseeker makes it on time for his interview, an entrepreneur clinches that game-changing
 deal, a senior citizen can access a healthcare facility in a metropolitan area, a student can travel back to
university, a single mother travelling with an infant feels welcome in any of their services53 … APM confirms that
they will not sacrifice safe operations in favour of high turnover – their strategy is to focus on the market that
needs safe, reliable and on-time travel.

8.4.3.1 Focused cost leadership

When choosing a focused strategy based on low cost, the strategic decision-makers choose to concentrate on a
narrow buyer segment and attempt to outcompete competitors by having lower costs. e focused cost leadership
strategy is an attractive strategy when the target market is interested in the lower price product or service. e
organisation is therefore able to serve niche customers at a lower price. Ultimately, organisations following a focused
cost leadership strategy create better value for their customers. A number of examples of such strategies are found in
the hotel and tourism industry. Within the Tsogo Sun Hotel group, the StayEasy hotel chain offers smaller rooms
with fewer features than the SunSquares and Garden Courts. e price is adapted to re ect the number of features,
services and amenities. e most budget-conscious offering is through SUN1 that offers an option for travellers
seeking comfortable hotel accommodation at the cheapest rates. SUN1 hotels offer simple comfort, great value and
convenient locations around South Africa. Overall, SUN1 offers hotel accommodation for up to three people
sharing at less than R600 per night.54 As alluded to earlier, competitors will respond to focused cost leadership
strategies through their own attempts at securing the narrow market segment. For example, within the City Lodge
Hotel Group, the Road Lodge hotel chain also targets customers seeking comfortable accommodation at the
cheapest rates – competing against Tsogo Sun’s SUN1.

8.4.3.2 Focused differentiation strategies

With a focused differentiation, the market size is small and distinguished. e market is a well-de ned group of
buyers, and the product or service is designed to appeal to them. With this strategy, the aim is to concentrate on a
narrow buyer segment and to outcompete competitors by offering niche customers customised attributes that meet
their requirements better than the competitors’ products. Successful use of a focused differentiation strategy
depends on the existence of a buyer segment that wants special product attributes or seller capabilities and on an
organisation’s ability to stand apart from rivals competing in the same target market niche. For example, Edcon
Group’s Charter Club brand is an example of a high-quality, exclusive range for a narrow market. Another example
is the emergent boutique hotel industry – hotels not affiliated with a hotel chain and offering luxury facilities of
varying size and stylish appearance, with impeccable amenities in unique settings.
Another example of an organisation that pursues a focused differentiation strategy is Harley-Davidson. With
such a strategy, Harley-Davidson gained a competitive advantage and concentrated on niches such as customised
touring and standardised motorcycles in the heavyweight motorcycle market. Harley-Davidson manufactures and
sells custom cruiser and touring motorcycles that feature leading-edge styling, innovative design, a distinctive sound
and superior quality with the ability to personalise.55

8.4.3.3 Advantages of focus strategies

According to Hill and Jones,56 and using Porter’s ve forces model, a focused organisation’s competitive advantages
stem from the source of its distinctive competency efficiency, quality, innovation or responsiveness to customers.
e focus strategy creates a barrier to the organisation against its competitors to the extent that it can provide a
product or service they cannot. is ability also gives the organisation pursuing a focused strategy power over its
buyers because they cannot get the same thing from another organisation in the industry. With regard to powerful
suppliers, a focused organisation is at a disadvantage because it buys in small volumes and thus is in the suppliers’
power. However, as long as it can pass on price increases to loyal customers, this disadvantage may not be a
signi cant problem. e development of customers’ loyalty also lessens the threat from substitute products. Finally,
potential entrants have to overcome the customer loyalty that the focuser has generated.
is protection from the ve forces allows the focuser to earn above-average returns on its investment. Another
advantage of the focus strategy is that it permits an organisation to stay close to its customers and respond to their
changing needs. e difficulty a large differentiator sometimes experiences in managing a large number of market
segments is not an issue for an organisation with a focused strategy.57

8.4.3.4 Disadvantages of focus strategies

ere are some disadvantages inherent to focus strategies. e rst deals with the production costs: since a focuser
produces in small volumes, its production costs oen exceed those of a low-cost organisation. Higher costs can also
reduce pro tability if a focuser is forced to invest heavily in developing a distinctive competency to compete with a
differentiated organisation. However, once again, exible manufacturing systems are opening up new opportunities
for organisations pursuing a focus strategy because small production runs become possible at a lower cost.
Increasingly, small specialised organisations are competing with large organisations in speci c market segments in
which their cost disadvantage is much reduced. An example is a boutique fashion designer competing against
boutique offerings through large retailers such as Zara and Woolworths. A second problem is that the focuser’s niche
can suddenly disappear because of technological change or changes in consumers’ tastes. Unlike the more generalist
differentiator, a focuser cannot easily move to new niche markets, given its concentration of resources and
competency in one or only a few niches. For example, a Mexican restaurant would nd it difficult to move to serving
Chinese food if customers’ tastes changed.
Finally, there is the prospect that differentiators will compete for a focuser’s niche by offering a product that can
satisfy the demands of the focuser’s customers. A focuser is vulnerable to attack, and therefore has to defend its
niche constantly.

8.4.4 Integrated cost leadership/differentiation strategies

In some cases, neither a low-cost leadership strategy nor a differentiation strategy is possible for an organisation that
competes across the broad range of the market, and it is necessary to combine the best of both strategies. Referring
back to the motor vehicle industry, one can nd many examples of one supplier offering cars for the lower as well as
the luxury end of the market. An organisation may nd itself in a situation where the funds to invest in specialised
machinery or high-volume production are not available (cost leadership strategy). Similarly, an organisation may
nd the costs of differentiation too high (differentiation strategy). Oen, the complexity of the competitive
environment may force an organisation to offer a differentiated product or service while also operating with low
costs, hence an integrated strategy. Integrated strategies combine low-cost strategies with differentiation strategies.
Pursuing an integrated strategy depends on the organisation’s ability to develop capabilities and competencies across
all its functions. Figure 8.2 depicted the integrated strategies in the middle of the diagram, hence such integrated
strategies are oen also referred to middle ground business strategies or stuck in the middle business strategies. e
integrated strategies aim to reach a large group of value-conscious buyers who are looking for a very good product
at an affordable price. is implies an orientation towards best value (i.e. added features at a reasonable price) and
not lowest price. Originally it was thought that business level strategies should be pursued as mutually exclusive, but
the business environment offers many examples of organisations that could successful pursue a combination of these
strategies. For example, Toyota uses its low costs to provide greater differentiation and then reinvests those pro ts to
lower its costs even further, while still offering a differentiated product for which customers are willing to pay more.
With integrated strategies, the organisation needs the resources and capabilities to add attractive attributes to
their products or services at lower costs than competitors. Sorbet Beauty Salons South Africa58 entered the market
in 2005 with six stores and in 10 years the brand grew to 116 stores. Sorbet Beauty Salons is a strong example of an
organisation that successfully pursues integrated strategies – while offering a wide range of products at affordable
prices, it also appeals to the customers by being involved in communities, empowering female entrepreneurs and
rewarding loyal customers through earning loyalty points.

8.4.4.1 Advantages of integrated strategies

Integrated strategies offer a number of advantages to the organisation that is able to pursue them successfully. If an
organisation is able to integrate cost leadership and differentiation, it is able to establish, build and strengthen its
competitive advantage over its competitors. Essentially, the competitors may nd it more difficult to imitate. As with
the Toyota example mentioned above, the organisation is able to reduce its costs while continuing to charge a
premium for its products – this impacts positively on the pro t margins and bottom line. e bene t of being
known as the best value provider in a market also adds to the success of the organisation in terms of its image.

8.4.4.2 Disadvantages of integrated strategies

As stated earlier, it is risky to pursue integrated strategies, and many organisations have failed in their attempts. e
biggest disadvantage is the vulnerability of the organisation as it is competing on a number of fronts and may lose
focus. It is also possible that an organisation nds itself stuck in the middle by not being great at offering a
differentiated product nor keeping costs low. Pursuing integrated strategies oen ends up in failure because the
organisations succeed at neither a differentiation nor a cost leadership strategy. Improved product features,
customisation and customer service come at a higher cost while offering no-frills products comes at reduced
perceived value. e Opening case study Competing in South Africa’s airline industry included SAA and SA Express.
Some may argue these airlines nd themselves stuck in the middle, trying to compete against competitors with
differentiated products while their costs continue to increase and they struggle to offer the real value that customers
are willing to pay for.

STRATEGY IN ACTION: Capitec – providing cheap and simple banking solutions

Capitec entered the South African banking industry in 2001 knowing that it would be a David against four
Goliaths – Absa, Standard Bank, Nedbank and First National Bank. Yet within 16 years, Capitec not only
disrupted the market, but also conquered some of the Goliaths. During 2017, Capitec was rated the world’s best
bank by the Lafferty Group’s Global Bank Quality benchmarking study. Also, in the same year Capitec overtook
Nedbank as the country’s fourth largest bank by value. Capitec’s business model is structured on low costs, and
it provides cheap, simple banking solutions mostly at a lower cost than its competitors. The bank is innovative in
terms of keeping the costs low – such as offering a paperless banking experience, using biometrics to secure
and verify client details, issuing cards and credit in real time with no waiting period, and using machine-learning
techniques in its risk-based credit models.59 Its overall aim is to create sustainable value over the long term for
all who have an interest in its business. Capitec aims to achieve this sustainable value by providing a unique
service, enhancing its products, growing the transaction income, managing the cost of credit to its clients, and
responsible management of regulatory and compliance risk.60
Capitec sets out to help clients manage their financial lives better through its focus on providing them with the
ability to make better decisions and better manage their money. Capitec offers clients transparency in terms of
what they get and what they pay for. For example, Capitec offers Global One – a single solution to money
management. Clients get the entire Global One offer at a monthly fee of R5.25. This means that every client can
open and operate a transaction account and four savings accounts, gain access to credit, cellphone banking and
internet banking for this fee, with a fixed fee per transaction. Capitec offers extended branch hours, and branch
managers are located on the branch floor to ensure they remain in touch with both client needs and service
 logistics. The combination of a simplified product offer and a simplified service process means the bank can
deliver on client needs at an efficiency level well above the norm. This in turn means that Capitec remains
aggressive on its pricing strategy, enabling it to be a price leader in the industry. By the end of 2016, Capitec had
not increased fees on remote banking for two years and increased cashless transaction fees by less than 5% for
the past three years.61

Questions:
In addition to the information provided above, use the internet to gather more information on Capitec and the
South African banking industry. Answer the following questions:
1. Comment on the business level strategies pursued by Capitec. Identify the strategies and comment on the
factors that influenced the strategic choice.
2. Are the strategies pursued by Capitec in line with the strategic direction of Capitec Bank Holdings Limited
group? Why or why not?
3. Can these strategies easily be copied by competitors? Why or why not?
4. Comment on how Capitec can prepare itself against the threat of new entrants to the banking industry.

e contents of this section on the business level strategies is best summarised as shown in Table 8.1. When
reviewing Table 8.1, keep in mind that business level strategies deal with the organisation’s plans to compete
successfully. e strategic decision-makers may decide on a business level strategy or a combination of these
strategies. When choosing a strategy, the strategic decision-makers can evaluate each strategy option based on a set
of criteria that considers the organisation’s strategic direction, goals, resources, capabilities, the opportunities in the
environment and the competitors.
Table 8.1 summarises the distinctive features of business level strategies. e rst column shows the feature, and
the actual features within the strategies are given in the same line under each new column.
Section 8.4 discussed business level strategies. As can be seen from the discussion, these strategies deal with how
the organisation competes in the industry. Choosing strategies requires careful consideration of the organisation’s
resources, capabilities, products and services, and matching these with the opportunities in the customer market.
e following section deals with the criteria to consider when evaluating strategies.

Table 8.1 Distinctive features of business level strategies62

Type of Overall cost Differentiation Focus Integrated cost

feature leadership leadership/differentiation
(best value)
Strategic target A broad cross A broad cross A narrow market Value-conscious buyers
section of the section of the niche where buyer
market market needs and
preferences are
distinctively
different from the
rest of the market
Type of Overall cost Differentiation Focus Integrated cost
feature leadership leadership/differentiation
(best value)
Basis of Lower costs than An ability to offer Lower cost in Give customers more value for
competitive competitors buyers something serving the niche the money
advantage different from (focused low cost)
competitors or an ability to
offer niche buyers
something
customised to
their requirements
and tastes
(focused
differentiation)
Product line A good basic Many product Customised to fit Good to excellent attributes,
product with few variations, wide the specialised several to many upscale
frills (acceptable selection, strong needs of the features
quality and emphasis on the target segment
essential chosen
features) differentiating
features

Production A continuous Invent ways to Tailor-made for the Incorporate upscale features
emphasis search for cost create value for niche market and attributes at low cost
reduction without buyers, strive for
sacrificing product superiority
acceptable
quality and
essential features

Marketing Try to make a Build in whatever Communicate the Under-price rival brands with
emphasis virtue of product features buyers are focuser’s ability to comparable features
features that lead willing to pay for satisfy the buyer’s
to low cost specialised
Charge a premium requirements
price to cover the
extra costs of
differentiating
features
 Type of Overall cost Differentiation Focus Integrated cost
feature leadership leadership/differentiation
(best value)
Sustaining the Economical Communicate the Remain totally Unique expertise in managing
strategy prices/good points of difference dedicated to costs down and
value. in credible ways serving the niche product/service calibre up
better than other simultaneously
All elements of Stress constant competitors; do
strategy aim to improvement and not blunt the
contribute to a innovation to stay organisation’s
sustainable cost ahead or imitative image and efforts
advantage – competitors by entering
manage costs segments with
down, year after Concentrate on a substantially
year, in every few key different buyer
area of the differentiating requirements or
business features; tout them adding other
to create a product categories
reputation and to widen market
brand image appeal

8.5 Evaluating strategies

As stated earlier, an organisation bases its choice of strategy on various factors. e strategic decisions-makers will
consider the various strategic options in conjunction with the strategic direction and objectives of the organisation.
Once the strategic decision-makers have selected potential strategies, they need to evaluate these options to choose
the most appropriate strategy or combination of strategies. e content of these strategy options needs to be
evaluated for its contribution to the organisation’s objectives. Because organisations are unique entities, the strategic
decision-makers may develop their own set of criteria to evaluate the strategy options. is section considers how
the strategic decision-makers may assess whether or not a business or corporate level strategy is effective or likely to
be effective. e criteria discussed here are used to evaluate strategies for innovation (discussed in Chapter 9) as well
as corporate level strategies (discussed in Chapter 10).
ompson and Martin63 offered three criteria to evaluate a strategic option, namely concern appropriateness,
feasibility and desirability. According to these authors, some of these criteria are likely to con ict with each other,
and consequently an element of judgement is required when making a choice. e most appropriate or feasible
option for the organisation may not be the one that it regards as the most desirable. Lynch64 expanded on these
three criteria by adding additional considerations, namely consistency, especially with the strategic intent of the
organisation, validity and attractiveness to stakeholders.

8.5.1 Appropriateness
Appropriateness of a strategy is also oen referred to as the suitability of the strategy. A strategy should be
appropriate to the context of the organisation, both internally and externally. Appropriateness is concerned with
whether a strategy addresses the key issues of the organisation’s strategic position. According to Johnson, Scholes
and Whittington,65 when considering whether a strategy is appropriate, the organisation needs to assess:
the extent to which a strategy option ts with key drivers and expected changes in the environment
 whether the strategy option exploits strategic capabilities
whether it is appropriate in the context of stakeholder expectations and in uence, and cultural in uences.

As stated earlier, the organisation will already have considered the capabilities and stakeholder expectations during
the preceding stages in the strategic management process. It will also have identi ed the environmental in uences
and taken these into account when considering strategic options. Hence, before an organisation can test a strategy
for appropriateness, many of the issues addressed in this test will have been raised earlier in the strategic
management process.
ere are several tools an organisation can use to test a strategy for appropriateness. ese include the SWOT
(strengths, weaknesses, opportunities and threats) matrix, decision trees and scenarios. Chapters 4, 5, 6 and 7
discussed the processes for strategic analysis that provide input to the tools discussed below.

8.5.1.1 e SWOT matrix

e SWOT matrix requires involvement of managers and stakeholders in various sectors of the organisation. is
matrix builds directly on the information gathered during the internal and external environmental analyses. From
the internal analysis of resources and capabilities (Chapter 7), the organisation identi es its relative strengths and
weaknesses. From the external analysis (Chapters 5 and 6), it identi es opportunities and threats.
Figure 8.3 depicts the SWOT matrix. e organisation uses each quadrant of the SWOT matrix to identify
options that address a different combination of the strengths, weaknesses, opportunities and threats. It generates
strategic options by determining suitable strategies for each of the four quadrants. e SWOT matrix does not give
an indication of which strategic option to choose, but it does guide the organisation as to its viable options.
Clockwise, the quadrants are numbered 1 to 4:
Quadrant 1 is characterised by strengths and opportunities (SO).
Quadrant 2 has weaknesses matched with opportunities (WO).
In quadrant 3 the organisation is both weak and externally threatened (WT).
Quadrant 4 features strengths and threats (ST).

What does this all mean? Simply, the most attractive area in which to operate is quadrant 1. Businesses operating
here are the most fortunate and deserve strategic attention. However, in the real world, it may not always be as clear
cut as this. Organisations may operate mostly in one quadrant while being positioned in parts of the others.
Ultimately, the SWOT matrix is an analytic tool to inform business decisions. e organisation operating in
quadrant 2 needs to overcome its weaknesses before embarking on opportunity exploitation. Quadrant 3 is the
worst possible scenario, while there is a question mark in quadrant 4 since the organisation is threatened by, say,
competition despite internal strengths. Strategically therefore strategists can map their businesses on Figure 8.3 and
act accordingly.

Figure 8.3 The SWOT matrix66

8.5.1.2 Decision trees
A decision tree offers a graphical presentation of the various strategic options available. It is used to estimate the
outcome of the possible strategies. Organisations use decision trees to eliminate options by progressively
introducing requirements that must be met, such as growth, investment, or diversity.
For example, an organisation may decide to pursue a differentiation strategy. Some events may occur such as new
competitors entering the market, legislative changes that affect the organisation’s product, or the economy going into
a recession. e organisation then needs to make a subsequent decision about the strategy. is decision may be to
invest more in research and development to design added features to pursue the differentiation.
Decision trees assist organisations to make the initial decision and then to consider the range of events and
subsequent decisions that may occur or be necessary. A decision tree is a method to break down decisions into
smaller subsets. It can also be used for forecasting. Figure 8.4 illustrates an example of a decision tree. To draw a
decision tree, one starts with the decision (growth or no growth). From Figure 8.4, the growth decision implies a
further set of scenarios (high or low growth). Each of these then leads to further options to consider with potential
outcomes. A decision tree provides an effective method to enhance decision-making as it clearly lays out the
problem (strategic option) and the possible options to deal with it.

Figure 8.4: An example of a decision tree

8.5.1.3 Scenarios
Scenario analysis (Chapter 4) is a useful tool that forms part of the basic strategic management process in many
organisations. It explores ‘what if ’ questions for their impact on the strategy under consideration. A good example
of scenarios set for the contemporary South African business environment is found in the Indlulamithi South Africa
2030 scenarios.67

8.5.2 Feasibility
Feasibility means that the organisation is capable of carrying out the proposed strategies. Questions that the
organisation needs to ask when considering the feasibility of a strategy include the following:
Is the strategy capable of achieving the objectives that it addresses?
Can the strategy be implemented effectively and efficiently?
Do we have the resources to implement this strategy?
When testing a strategy or strategies for feasibility, the organisation evaluates it in terms of the nance and resource
availability, its ability to meet the industry and customer demands, and if the strategy can lead to and/or sustain
competitive advantage. An organisation may lack the technical skills for the strategic option, or the success of the
strategic option may depend on government approval. For example, when Telkom Media considered the strategic
option to diversify into the pay television market, the feasibility of this strategy was dependent on the granting of a
broadcast licence by ICASA. Because of the uncertainty with regard to the granting of this licence, then CEO
Reuben September decided not to follow this strategy. Later, Telkom revisited the decision and opted to partner with
DStv to bring Showmax to its customers – a feasible strategy given that it had the necessary resources to pursue it.
Another example, as described in the Opening case study Competing in South Africa’s airline industry, is Fastjet.
e founder of easyJet, Stelios Haji-Ioannou, indicated his backing of a new budget airline to serve the African
continent. Given that up to 2011, low-cost carriers only occupied 9% of the African market, the potential for a new
airline to serve the African skies is high. Further, Fastjet can start operations using existing networks in Ghana,
Kenya, Tanzania and Angola, which makes this a feasible strategy to consider.

8.5.3 Desirability
Desirability relates to assessing the ability of the strategy to produce results in either the short or the longer term in
light of the needs and priorities of the organisation. Desirability also relates to the risk in terms of vulnerability and
timing. ompson and Martin68 stated that where an organisation identi es an opportunity and needs to act
quickly, the danger exists that it may overlook some considerations. ere may be inherent risks in the possible
retaliation of competitors, or there may be risks involved in overstretching resources through diversi cation.
Another risk may be the cash ow and the organisation’s borrowing requirements that are sensitive to the
organisation’s ability to forecast demand accurately.

8.5.4 Consistency
When an organisation considers consistency, it looks at whether the strategy option is in accordance with the
strategic intent and objectives of the organisation. For example, Telkom’s strategic direction is to be a leading
customer- and employee-centred information communications and technology (ICT) solutions service provider.
Diversifying into the pay-TV industry may be a strategic option, but it is not consistent with Telkom’s overall
strategic intent and objectives.
If a strategy option is not consistent with the organisation’s strategic intent and objectives, the organisation has
two options. It can either change its strategic intent and objectives, or it can reject the strategy option. If the
organisation has carefully considered its strategic intent, and developed it through a consultative process of
stakeholder engagement, it will most likely reject a strategy option which is not consistent with the organisation’s
strategic intent.

8.5.5 Validity
According to Lynch,69 validity means that the calculations and other assumptions on which the strategy is based are
well grounded and meaningful. ese assumptions can be based on valid and relevant business information.
However, some of the assumptions may be based on business information that is doubtful in its nature. For example,
some of the information Vodacom has about its competitors is rmly based in competitive intelligence and public
sources of information, such as the market share data, but some of the information is likely to be more open to
question, such as the future plans and strategies of MTN. In practice, there is some overlap between the
considerations for suitability of the strategic option. e organisation’s collective experience and business
judgements play an integral part in considering the validity and suitability of a strategic option.

8.5.6 Attractiveness to stakeholders

When evaluating a strategic option to determine its attractiveness to stakeholders, the organisation needs to
determine if the strategy is appealing to those people that it needs to satisfy. As discussed in Chapter 2, stakeholders
include shareholders, employees, the community, suppliers, customers and the government. e stakeholders are
interested in the strategic options that are under consideration because they may be affected by them. Because an
organisation aims for long-term sustainability, it should consider the impact of potential strategies on stakeholders.
It is important to note that stakeholders may not nd the strategic options equally attractive, and the organisation
may need to prioritise stakeholder claims and interests.

8.6 Summary
As part of the strategic management process, an organisation needs to choose a speci c strategy, or combination of
strategies, to achieve its overall strategic intent and objectives. Each organisation consists of a unique bundle of
resources and capabilities. As such, a strategic option may be appropriate for one organisation in the industry and
completely inappropriate for a competing organisation in the same industry.
e chapter commenced with a discussion of the levels of strategies – functional or operational strategies,
business level strategies and corporate level strategies. e focus of this chapter is on business level strategies that
deal with how the organisation intends to compete in the industry. e business level strategy options discussed in
this chapter link in with Porter’s original generic strategies. e chapter covered ve generic strategic options linked
to the source of competitive advantage and the size of the target market. e bases for business level, or competitive,
strategies are cost, differentiation and focus:
e rst option is a cost leadership strategy. When an organisation pursues this strategy, it aims to gain a
competitive advantage over competitors by maintaining a lower overall cost base. e cost advantage can only be
realised if the organisation’s product or service appeals to a broad spectrum of customers. e best value strategy
seeks to achieve a lower price than that of competitors while trying to maintain a product or service of similar
value to that offered by competitors.
Second, a differentiation strategy where the organisation seeks to provide products or services that are unique or
different from those of competitors. e differentiation strategy is viable in markets where the customers are
price insensitive.
With a focus or niche strategy, the organisation develops its competitive advantage by offering products
especially developed for the identi ed niche market. Focus strategies can be either on the basis of low costs
(focused cost leadership) or on the basis of differentiation (focused differentiation).
Finally, an organisation may opt to combine the features of a cost leadership strategy with the features of a
differentiation strategy, making it an integrated strategy.

An important implication for strategic managers presented in this chapter is that the appropriate choice of strategy
is critical to the success of the organisation. To succeed in building a competitive advantage, an organisation’s
strategy must aim to provide customers with what they perceive as superior value. is translates into performing
activities differently to rivals, and building competencies and resource capabilities that are not readily matched. e
organisation needs to evaluate each strategic option. is chapter offered several considerations that an organisation
could use to evaluate the strategy such as feasibility, desirability, consistency, validity and attractiveness to
stakeholders.
Opening case study questions
1. Explain the levels of strategies and discuss the key differences between them. Explain what business level
strategies entail.
2. Identify the business level strategy of FlySafair and explain why the other business level strategies would not have
led to the attainment of its mission. What makes the choice of FlySafair business strategy appropriate?
3. Consider the competitive nature of the airline industry and identify the sources of competitive advantage for
each operator. Use the criteria for evaluating strategies and comment on the appropriateness of each operators’
business level strategies.

Discussion questions
1. Differentiate business level strategy from corporate level strategy.
2. Comment on the strategic management process and when business level strategies are craed.
3. Provide examples of organisations pursuing the various business level strategies. Justify your answer.
4. Explain how you would evaluate the choice of a strategy in an organisation.
5. Differentiate between the business level strategies and explain why some of them work better in certain kinds of
competitive conditions than others.
6. Explain some of the disadvantages associated with each of the business level strategies.
7. Can organisations combine cost leadership and differentiation strategies? Why or why not? Provide examples to
strengthen your argument.

Using knowledge and skills

1. Find information on PEP Stores and Mr Price. Compare their strategic directions and business level strategies.
Use the criteria to evaluate strategies and then comment on their strategic choices.
2. You are invited to consult on the business level strategy choices in an organisation. e CEO advises that they
have identi ed several possible strategies. You are required to advise them on why it is unwise to pursue too
many strategies at once. How would you explain this to them?
3. Use the annual report of three organisations in the same industry and identify the competitive strategies of each
one. Find reasons why the different organisations have chosen those speci c strategies.
4. Identify the key competitive resources of the Dis-Chem Group, and comment on whether the choice of business
level strategy is appropriate.
5. Which of the ve business level strategies is your organisation pursuing? What are the strategies employed by
your organisation’s competitors?

Further reading
Badal, A. 2005. Using interdisciplinary thinking to improve strategy formulation: A managerial perspective.
International Journal of Management, 22(3):365–375.
Bowman, C. & Ambrosini, V. 2007. Firm value creation and levels of strategy. Management Decision, 45(3):360–371.
Morris, D. 2005. A new tool for strategy analysis: e opportunity model. Journal of Business Strategy, 26(3):50–56.
Petruza-Ortega, E.M., Molina-Azorin, J.F. & Claver-Cortes, E. 2009. Competitive strategies and form performance:
Acomparative analysis of pure, hybrid and ‘stuck-in-the-middle’ strategies in Spanish forms. British Journal of
Management, 20(4):508–523.
Salavou, H.E. 2015. Competitive strategies and their shi to the future. European Business Review, 27(1).
Shuk-Ching Poon, T. & Waring, P. 2010. e lowest of low-cost carriers: e case of AirAsia. International Journal of
Human Resource Management, 21(2):197–213.
Sharp, B. & Dawes, J. 2001. What is differentiation and how does it work? Journal of Marketing Management,
17(7/8):739–759.
Vorhies, D.W., Morgan, R.E. & Austry, C.W. 2009. Product-market strategy and the marketing capabilities of the
rm: Impact on market effectiveness and cash ow performance. Strategic Management Journal, 30(12):1310–
1334.

Suggested websites
Tony Manning Strategy (http://www.tonymanning.com) – Competitive strategy and change management
Solution Matrix Limited (http://www.business-case-analysis.com/business-strategy.html)
Advanced Competitive Strategies (http://whatifyourstrategy.com/) – Publications and examples of the use of
competitive strategy simulation

References and endnotes

1. Transcript Service. 2012. Turbulence in African aviation. BDLive. (Online). Available:
http://www.bdlive.co.za/business/transport/2012/12/10/turbulence-in-african-aviation accessed 09-01-2013.
2. Child. K. 2018. SA Express can y two planes again but 19 remain grounded. Sunday Times. (Online)
Available: https://www.timeslive.co.za/sunday-times/business/2018-07-26-sa-express-can- y-two-planes-
again-but-19-remain-grounded/ [Accessed 19 July 2018].
3. African News Agency (ANA). 2018. Put SAA under business rescue as liquidity crisis continues, says DA. e
Citizen. (Online) Available: https://citizen.co.za/news/south-africa/1844151/put-saa-under-business-rescue-
as-liquidity-crisis-continues-says-da/ [Accessed 19 March 2018].
4. Lowman, S. 2018. AG airs SAA dirty laundry: Questions ability to operate as going concern. BizNews. 9
March 2018. (Online) Available: https://www.biznews.com/sa-investing/2018 March 09/saa-dirty-laundry-
going-concern/[Accessed 19 March 2018].
5. Bowker, J., Odeh, L., Bloomberg. 2018. Emirates rules out investing in struggling South African Airways.
MoneyWeb. 23 July 2018. (Online) Available: https://www.moneyweb.co.za/news/south-africa/emirates-
rules-out-investing-in-struggling-south-africa-airways/ [Accessed 29 July 2018].
6. South African Airlines. Wikipedia. 2013. (Online) Available:
http://en.wikipedia.org/wiki/South_African_Airlines [Accessed 18 February 2013].
7. Brief History. South African Airways. [Online]. http://www. ysaa.com/za/en/about_us.action [Accessed 18
February 2013].
8. AFP RelaxNews. 2018. Worlds Top 100 Airlines 2018: how does SAA rank? Times Live. 19 July 2018.
(Online) Available: https://www.timeslive.co.za/sunday-times/lifestyle/travel/2018-07-19-worlds-top-100-
airlines-2018-how-does-saa-rank/ [Accessed 29 July 2018].
9. South African Airways. 2018. South African Airways: Our Vision, Mission, Objectives and Values. (Online)
Available: https://www. ysaa.com/about-us/leading-carrier/our-vision/our-vision [Accessed 29 July 2018].
10. South African Airways. 2016. SAA Corporate Strategy. (Online) Available: http://pmg-assets.s3-website-eu-
west-1.amazonaws.com/151118SAA.pdf [Accessed 29 July 2018].
11. South African Airlines. 2019. Partner Airline - SA Express. (Online) Available:
http://www. ysaa.com/za/en/footerlinks/aboutUs/SAExpressAirways.html [Accessed 18 February 2013].
12. SA Express. 2018. SA Express. (Online) Available: http://www. yexpress.aero/index.php [Accessed 29 July
2018].
13. SA Express. 2018. SA Express: About us. (Online) Available: http://www. yexpress.aero/content/about-us
[Accessed 29 July 2018].
14. SA Express Airways. 2018. SA Express: Partner Airlines. (Online) Available: https://www. ysaa.com/about-
us/partner-airlines/south-african-express [Accessed 29 July 2018].
15. NJobeni. S. 2018. Airline set to be airborne again. Business Report. 13 July 2018.
https://www.iol.co.za/business-report/companies/airline-set-to-be-airborne-again-15988121 [Accessed 29
July 2018].
16. South African Express. 2018. South African Express to take ight with only 2 aircra. 27 July 2018. (Online)
Available: https://www.iol.co.za/business-report/companies/sa-express-to-take- ight-with-only-2-aircra-
16272337 [Accessed 29 July 2018].
17. Traveller 24. 2018. SA Express grounded as safety management processes questioned. [Online]. Available:
https://www.traveller24.com/News/Flights/update-9-sa-express-planes-grounded-as-safety-management-
processes-called-into-question-20180524 [Accessed 15 February 2019]; Chambers, D. 2018. SA Express
grounded, ‘overwhelming evidence’ safety compromised. Times Live. [Online]. Available:
www.timeslive.co.za/news/south-africa/2018-05-24-sa-express-grounded-overwhelming-evidence-safety-
compromised [Accessed 15 February 2019].
18. Airlink. 2018. Airline pro le. (Online) Available: https://www. yairlink.com/pro le/airlink-pro le [Accessed
29 July 2018].
19. Airlink. 2013. Airlink homepage. (Online) Available: http://www. yairlink.com/ [Accessed 18 February
2013].
20. Ritchie, K. & Moodley, C. 2017. SA Airlink celebrates rst St Helena ight. Weekend Argus. 15 October 2017.
(Online) Available: https://www.iol.co.za/weekend-argus/sa-airlink-celebrates- rst-st-helena- ight-11581103
[Accessed 29 July 2018].
21. Zimbabwe Broadcasting Corporation. 2018. SA Airlink upgrades aircra for Vic Falls-Cape Town route. 11
July 2018. (Online) Available: http://www.zbc.co.zw/sa-airlink-upgrades-aircra-for-vic-falls-cape-town-
route/ [Accessed 29 July 2018].
22. Comair Limited. 2018. Comair Limited: About us. (Online) Available:
http://www.comair.co.za/html/about_us.asp [Accessed 18 February 2013].
23. Comair Limited. 2018. Comair Limited home page. (Online). Available: http://www.comair.co.za/ [Accessed
29 July 2018].
24. Comair Limited. 2018. Comair Limited: About us, the Comair story. (Online) Available:
http://www.comair.co.za/about-us/the-comair-story [Accessed 29 July 2018].
25. Blom. N. 2018. Comair keeps its unbroken pro t record. Business Day. 13 February 2018. (Online) Available:
https://www.businesslive.co.za/bd/companies/transport-and-tourism/2018-02-13-comair-offers-lower-
dividend-despite-growing-its-revenue/ [Accessed 29 July 2018].
26. CemAir. 2018. About us. (Online). Available: http://www. ycemair.co.za/general/about_us.php [Accessed 19
March 2018].
27. Ibid.
28. defenceWeb. 2017. CemAir orders two Q400s. 1 December 2017. (Online) Available:
http://www.defenceweb.co.za/index.php?option=com_content&view=article&id=50059:cemair-orders-two-
q400s-&catid=114:civil-aviation&Itemid=247 [Accessed 29 July 2018].
29. SAA Annual report. 2012. SAA Annual report 2012. p.5. (Online). Available:
http://www. ysaa.com/za/en/Documents/Financials/SAA_annual_report_2012.pdf
30. FlySafair. 2017. FlySafair once again the worlds most on-time airline. IOL.co.za. 17 October 2017. (Online)
Available: https://www.iol.co.za/travel/travel-news/ ysafair-once-again-the-worlds-most-on-time-airline-
11600643 [Accessed 29 July 2018].
31. FlySafair. 2018. About us: History of FlySafair. (Online) Available: https://www. ysafair.co.za/about-
us/history-of-safair [Accessed 19 March 2018].
 FlySafair. 2018. FlySafair extras. (Online) Available: https://www. ysafair.co.za/travel-tools/extras [Accessed
32. 29 July 2018].
33. fastjet. 2018. fastjet About us. (Online) Available: https://www.fastjet.com/en/footer-about/about-
fastjet/about-us [Accessed 19 March 2018].
34. Leith, G. 2012. Mango ‘was direct cause’ of demise of Nationwide and 1time. BDLive. [Online]. Available:
http://www.bdlive.co.za/business/2012/11/12/mango-was-direct-cause-of-demise-of-nationwide-and-1time
[Accessed 09 January 2013].
35. Kermeliotis, T. 2012. EasyJet founder to launch low-cost airline in Africa. e Guardian. [Online]. Available:
http://www.guardian.co.uk/business/2012/jun/13/sir-stelios-low-cost-african-airline-fastjet [Accessed 9
January 2013].
36. Magubane, K. 2012. Mango snaps up Port Elizabeth routes aer 1time’s demise. BDLive. [Online]. Available:
http://www.bdlive.co.za/business/transport/2012/11/20/mango-snaps-up-port-elizabeth-routes-aer-1times-
demise [Accessed 9 January 2013].
37. https://citizen.co.za/news/1832455/1832455/ [Accessed 19 March 2018].
38. https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-12-14-saa-to-have-less-domestic-
ights-as-mangos-increase/ [Accessed 19 March 2018].
39. Mokgata, Z. 2012. Fuel efficiency the key. Financial Mail. [Online]. Available:
http://www.fm.co.za/business/2012/09/10/fuel-efficiency-the-key [Accessed 9 January 2013].
40. Ensor, L. 2012. Is it so difficult to believe Mango can be an efficient carrier? BD Live. [Online]. Available:
http://www.bdlive.co.za/business/transport/2012/11/12/is-it-so-difficult-to-believe-mango-can-be-an-
efficient-carrier [Accessed 9 January 2013].
41. Barney, J.B. & Hesterly, W.S. 2012. Strategic management and competitive advantage — concepts and cases.
International edition, 4th ed. Upper Saddle River, NJ. Pearson.
42. https://www. n24.com/Companies/Industrial/Safairs-special-seats-will-make-business-soar-new-CEO-
20150715 [Accessed 19 March 2018].
43. Porter, M.E. 1980. e competitive advantage. New York: e Free Press. 39.
44. BusinessTech. 2017. ese are the 10 cheapest cars for sale in South Africa right now. 6 August 2017.
(Online). Available: https://businesstech.co.za/news/motoring/190508/these-are-10-cheapest-cars-for-sale-
in-south-africa-right-now/ [Accessed 19 March 2018].
45. Bubear. R. 2017. Global NCAP crash-test: SA-spec Chery QQ3. CarMag.co.za. (Online). Available:
http://www.carmag.co.za/news/global-ncap-crash-test-sa-spec-chery-qq3/ [Accessed 19 March 2018].
46. PEP Facts. 2013. [Online]. Available: http://www.pepstores.com/who-we-are/pep-facts.html [Accessed 28
April 2013].
47. Ibid.
48. Hill, C.W. & Jones, G.R. 2012. Essentials of strategic management 3rd ed. Mason, OH: Cengage.
49. Op. cit.
50. Op. cit.
51. APM Bus, 2018. Half red. APM Bus. (Online) Available: http://www.apmbus.co.za/half-red/ [Accessed 19
March 2018].
52. APM Bus. 2018. Red Bus is one today. APM Bus. 27 March 2017. (Online) Available:
http://www.apmbus.co.za/red-bus-is-one-today/ [Accessed 19 March 2018].
53. APM Bus. 2017. Enormity of the Red responsibility. 10 August 2017. (Online) Available:
http://www.apmbus.co.za/enormity-of-the-red-responsibility/ [Accessed 19 March 2018].
54. https://d2qk001qea2413.cloudfront.net/tsogosun.com-
146798522/cms/pressroom/sun1_rates_valid_sept_2017_march_2018.pdf [Accessed 19 March 2018].
55. Harley-Davidson. 2018. Harley-Davidson: About us. (Online) Available: https://www.harley-
davidson.com/aa/en/about-us/company.html [Accessed 29 July 2018].
56. Hill & Jones. 2009. Op. cit.
57. Hill & Jones. 2013. Op. cit.
58. Sorbet. 2018. Sorbet Beauty Salons South Africa. (Online) Available: https://www.sorbet.co.za/salons/
[Accessed 5 August 2018].
59. Holmes. T. 2017. New kids disrupt SA banking. 13 October 2017. Mail & Guardian. (Online) Available:
https://mg.co.za/article/2017-10-13-00-new-kids-disrupt-sa-banking [Accessed 5 August 2018].
60. Capitec Bank. 2016. Capitec Bank: Our strategy and leadership. (Online) Available:
https://www.capitecbank.co.za/downloads/08.Our_strategy_and_leadership.pdf
61. Ibid.
62. Adapted from ompson, A.A. & Strickland, A.J. 1999. Strategic management: Concepts and cases, 11th ed.
Boston, MA: McGraw-Hill, 137.
63. ompson, J. & Martin, F. 2010. Strategic management: Awareness and change, 6th ed. London: omson
Learning.
64. Lynch. 2012. Op. cit.: 376–386.
65. Johnson, M.W., Christensen, C.M. & Kagermann, H. 2008. Reinventing your business model. Harvard
Business Review, 86(12), December.
66. Adapted from ibid.: 219.
67. South Africa Scenarios 2030. 2018. South African Scenarios. (Online) Available: http://sascenarios2030.co.za/
[Accessed 5 August 2018].
68. ompson & Martin. 2010. Op. cit.
69. Lynch. 2012. Op. cit.: 376–386.
 CHAPTER 9 Strategic
innovation
Chris Callaghan

LEARNING OUTCOMES

After reading this chapter, you should be able to:

relate innovation theories to opportunities for strategic innovation
explain strategies a manager can use to mitigate and manage the threats of disruptive innovation, while at the
same time taking advantage of opportunities that result from it
discuss how value innovation can be applied to achieve competitive advantage
compare and contrast red and blue ocean strategies
explain how to develop a business model
relate the principles of ‘bottom of the pyramid’ (BOP) innovation to real-life South African opportunities for
innovation
explain the role of leadership in supporting innovation in an organisation
discuss the fuzzy front end of innovation and design thinking
discuss individual characteristics and how to build on individual strengths and mitigate individual weaknesses in
building an innovative organisation.

KEY TERMS

ambidexterity theory of leadership

applied design thinking
blue ocean strategy
bottom of the pyramid (BOP) innovation
business model innovation
creative destruction
disruptive innovation
dominant design theory
fuzzy front end of product development
long wave theory
red ocean strategy
technology S-curve
transformational leadership
OPENING CASE STUDY

Blue ocean and value innovation strategies in the hotel industry1

As of 2018, AccorHotels had 4 300 hotels worldwide, with about 620 000 rooms in 100 countries.2 It had 14 438
rooms and 54 hotels in 19 countries on the African continent and a plan for rapid expansion. One of the pillars of
the success of this organisation has been the performance of its chain of ‘super-budget’ Formule 1 hotels.
Things were not always this way. Based in France, AccorHotels faced a hotel industry in the 1980s that seemed
to be in decline.3 It was in this context that they tried a new way of doing things. The development of Formule 1
was the result of a radically new type of strategy. This type of strategy was identified later by the researchers
Kim and Mauborgne from their research of successful organisations in different industries. The strategy is now
called value innovation. But key to this strategy was also another approach, whereby it sought to create new and
uncontested market space, a strategy Kim and Mauborgne termed ‘blue ocean’, instead of competing within the
existing industry and fighting for the same customers as others, or following a ‘red ocean strategy’.4
Faced with serious problems of overcapacity and stagnation, the organisation tried an innovative new
approach to strategy. Staff were told to not base their new strategy on anything that limited them or to what the
industry typically did. This blue ocean strategy sought to avoid competing in red ocean categories, or
overcrowded categories with shrinking profit and growth prospects, where accommodation was being
commoditised.
Blue oceans are often created by established businesses within their core businesses.5 The budget hotel
industry offered two service categories; of zero- or one-star hotels that were purely price-driven in their strategy;
and two star hotels that offered slightly higher levels of quality. AccorHotels did not limit themselves to the
existing assumptions or practices of the budget hotel industry. Instead, they looked for what was common to all
the customers of these hotels. AccorHotels framed their strategic approach by looking for:
services that the industry provided that they felt should be eliminated, such as those that did not add value to
customers (these were often found to be the result of unnecessary benchmarking which did not take into
account how customer needs were changing)
services that did not need to meet the industry standards, or that could be reduced below these standards (in
many cases, products and services are ‘overdesigned’ in order to ‘beat’ the competition)
factors that needed to be raised above the standards of the industry, such as those that address the
compromises that customers in an industry are forced to make
factors that had never been offered by the industry but that needed to be created in a way that was no longer
constrained by the ‘boundaries’ of the industry.

The Formule 1 model no longer had restaurants and lounges to maintain. Accor believed that these were not
justified in terms of the additional value they contributed to customers. The management reasoned that zero-
and one-star hotels were offering too much surplus value by using receptionists at all times, and by having
closets, dressers and other features. In the Formule 1 model, these were no longer offered. Even receptionist
services were only offered at check-in and check-out times. Further, a modular construction process was
introduced for the manufacture of the rooms, which allowed for standardisation and quality control. The cost of
building these rooms was halved.
Charging a little more than one-star hotels, the value added to customers was more in line with that of two-
star hotels. This synthesis of blue ocean and value innovation strategies was a success. Customers got more of
what they wanted most and less of what they were prepared to do without. A value curve shows the extent to
which the specific features of a service provision align with the existing key success factors for a particular
product category or industry. Formule 1 represented the creation of a new value curve; more value was offered
 to customers in terms of hygiene, bed quality and other value attributes, which they really wanted. Less value
was offered in other areas. In other words, AccorHotels challenged the value curve of the industry by changing
the areas of their service provision.
AccorHotels did not let their competitors lead in setting the parameters of their strategy. Instead, rather than
compete on the strengths and weaknesses of their competitors, AccorHotels changed the game itself by
changing their value curve. By making the competition irrelevant, AccorHotels was applying a principle of blue
ocean strategy. AccorHotels did what seemed to be the unthinkable; instead of growing their customer base
through more specific segmentation according to customer differences, they looked for what was common
across customers and their needs. Instead of limiting their strategic options to their existing assets and
capabilities, they took a fresh look at their options. This included the option of starting from a clean slate in
terms of their strategy. AccorHotels also did not limit their strategic thinking to offering the types of goods and
services that other hotels were offering. Neither did they follow industry definitions of what should or should not
be offered. By applying a synthesis, or a mixture of blue ocean and value innovation strategies, AccorHotels was
able to turn a difficult situation into an opportunity.

Overview
The case of Formule 1 provides certain lessons for how to apply value innovation, and how to create new blue ocean
markets without going ‘head to head’ with established competitors or ending up in a red ocean. In developing
contexts like South Africa, large and typically untapped markets exist. It is in these contexts that bottom of the
pyramid (BOP) innovation can be extremely rewarding. These opportunities do not exist in isolation, however, and
need to be understood within the innovation context. Innovation within organisations, or organisational innovation, is
dependent on the interactions between innovative individuals, a supportive organisation and innovation
opportunities. These elements exist within a global and national context that influences innovation in organisations.

Figure 9.1 The innovation context and its constituent elements

In Figure 9.1 the components of the innovation context, namely innovative individuals, supportive organisations
and innovation opportunities, are located within the overarching global and national context. The relationships shown
in Figure 9.1 are used as an organising framework for this chapter. First, section 9.1 provides a brief introduction to
the chapter. Next, innovation opportunities are introduced in section 9.2. An important source of opportunities in the
South African or any other context is knowledge of the theories of innovation, and the chapter starts off with an
overview of certain of these theories in section 9.2.1. Next, innovation opportunities associated with value innovation
(section 9.2.2) and blue ocean strategies (section 9.2.3) are explored, with a focus on the innovation opportunities
they present for achieving competitive advantage. Business model innovation (section 9.2.4) and bottom of the
pyramid innovation (section 9.2.5) are then considered in terms of the opportunities they offer.
Section 9.3 introduces and discusses the importance of ensuring supportive organisations for the success of
innovation in organisational contexts. The role of leadership (section 9.3.1) is considered as an important contributor
to organisational innovativeness through its contribution to enabling a supportive organisation. Key activities and
roles involved in setting up and maintaining processes of innovation (section 9.3.2) are then introduced, with specific
reference to increasingly important topics in the strategic innovation field, namely the fuzzy front end of innovation
and design thinking. This discussion caps off the supportive organisations section of the chapter. This section
provides you with an important management ‘toolbox’ of useful ideas for how you can improve organisational
innovativeness through developing an organisation supportive of innovation.
Finally, the topic of innovative individuals is introduced (section 9.10). In this section, certain theories are explored
that predict the characteristics of innovative employees in the workplace, with the rationale that knowledge of these
differences may help you as a manager to build on the unique strengths of staff as well as to be aware of individual
differences so as to be able to empower and build on these as well.

9.1 Introduction
e achievement of sustainable growth, or growth in above-average returns, is challenging. is is particularly so in
a globalised context of increasing uncertainty and global competition. Any competitive advantage at a point in time
is, by de nition, temporary. Nevertheless, continuous improvement is necessary in order to survive and to prosper.
is is the natural order of things, whether in South Africa or anywhere else. Natural limits in the way things are
done, or in the technologies that organisations use, impose constraints, or barriers, to continuous improvement.
Innovation, or doing new and different things, can in such cases become more important than simple improvement,
or doing the same things more efficiently. As shown in the Opening case study, Blue ocean and value innovation
strategies in the hotel industry, value innovation, as a form of strategic innovation, can be used to create new
markets, and in doing so, one can create blue oceans, or uncontested market spaces where the competitors are made
irrelevant.6 ere are countless opportunities available to an organisation, but these need to be recognised. is
chapter will seek to help you to do this. To be able to apply blue ocean or other innovative strategies, managers need
to have a grounding in the principles of innovation itself. Another name for these principles is theory. Innovation
theory is a set of principles that explain how things work in the real-world context of applied innovation. A theory
can be seen as a roadmap, or a key to unlocking the potential of an innovation opportunity.
A sound knowledge of innovation theory is therefore important for every strategic manager who has to apply the
principles of innovation in a business. To seize innovation opportunities, it is important to be able to apply
knowledge of the threats of disruptive innovation, whether to use this to your advantage as a disruptor, or to
protect yourself from disruption. Disruptive innovation relates to new ways of doing things (innovation) that can
create a new market and value network, which displaces, or disrupts, an existing one. Innovation has been found to
exhibit patterns in how it changes over time, and in the way it occurs or behaves. For example, Schumpeter’s theory
of creative destruction suggests that disruptions are to be expected (as the rule rather than the exception). Foster’s
technology S-curve explanations offer useful insights into how to avoid being disrupted by new technologies, and
what strategies you can employ to counter the effects of technological disruption. Insights into human behaviour
show us that under certain conditions people can reject innovations even when there is clear evidence that they
work, as shown by the Semmelweiss innovation paradox. Markets can also change as they begin to accept a certain
standard (as it was with the adoption of the format of the QWERTY typewriter). Organisational learning can also be
a form of innovative competitive advantage, whereby if an organisation stops investing in its accumulation of
absorptive capacity, it can fall behind its competitors. Absorptive capacity is the ability of an organisation to identify
valuable information, and to harness it and bring it into the organisation to use pro tably. By investing in its ability
to absorb information and knowledge, an organisation can gain a competitive advantage over its competitors. e
section that follows takes you on a journey of learning that brings together these topics, offering a holistic
perspective of how a manager can use and apply this knowledge to obtain a competitive advantage in the South
African real-world business context.
In a world in which technology is able to more frequently disrupt business models, it is important to understand
both the dangers and opportunities associated with disruptive innovation. ere is no substitute for a good
grounding in innovation theory. is is because theory provides you with predictions about what can happen to
your business under different conditions. It also gives you important principles that can be useful to guide your
decision-making. Kondratiev’s long wave theory of innovation is helpful to understand how innovation changes in
its effects over time as opposed to how the business cycle occurs. Schumpeter’s theory of creative destruction
provides a realistic view of how organisations continually face a process of creative destruction or changes in the
economic structure itself. It is important to realise how vital knowledge of strategic innovation is to survive in
turbulent conditions, and Schumpeter’s ideas help to focus our attention on this. Foster’s warnings about the dangers
of disruptive innovation provide useful knowledge about how to map your organisation onto the technology S-curve
and how to deal with the threat of technological disruption. It is important, however, to keep in mind ndings that
show that people can resist innovations. An example of this is the Semmelweiss Effect, which will be discussed in the
chapter. An understanding of dominant design theory is also important, because market structure can change
when industry standards become accepted, and the ‘rules of the game’ change. An organisation can be caught
unawares if not prepared for such changes, and needs to be able to manage external and internal knowledge, and
continually increase its absorptive capacity to enhance its innovative capabilities.
As stressed in the Opening case study, two extremely important channels through which you can pursue
innovative opportunities are through the application of principles of value innovation and blue ocean strategies.
Competing in industries or market segments that are overcrowded is problematic, and this is particularly so when
commodi cation is increasing, or where products become undifferentiated, and the only way to compete is on price.
In this way, ‘red oceans’ emerge. A red ocean strategy relates to highly contested market space. For example, when a
business competes on price, it will go head to head with pre-existing competitors, and the competition can be
damaging to everyone involved, but one can avoid this by applying a blue ocean strategy. By doing so, new sources
of competitive advantage are created. Market share strategies that are about today’s issues (such as decisions about
what marketing mix to use, or other tactical decisions that are aimed at increasing the organisation’s share in
markets that already exist), are not enough. Tomorrow’s issues are also important, and market creation, or the
development of new markets, also needs to occur. Market creation not only ‘changes the game’; it creates a new one,
because it can make existing competitors irrelevant.
e engine of your business strategy can be your use of business model innovation to set you apart in the market.
South African organisations like Discovery Health have used business model innovation to rede ne the nature of
their business, and now compete on the international stage. As a strategic manager, you will need to apply the
principles you learn in this chapter in the real-world context. In South Africa, substantial opportunities exist for
bottom of the pyramid (BOP) innovation, or innovation that uses certain principles of business model innovation
to target a huge and untapped market of low-earning customers and providing for their needs more effectively and
cost efficiently than the way existing products can. In the South African context, application of BOP innovation
strategies can offer an organisation important opportunities to enhance competitive advantage. In order to be able to
seize innovative opportunities, a supportive organisation needs to exist. Developing and maintaining an
organisation that can convert innovation opportunities to competitive advantage is a complex task, and key to
making this happen is leadership.
All the tools and techniques needed to capture innovative activities need to be complemented by a leadership
approach that maintains a constant state of innovativeness within an organisation. Two leadership theories stand out
in the way they provide useful principles for strategic managers who need to maintain innovativeness. e rst is the
ambidexterity theory of leadership, which differentiates between exploration (seeking new ideas) and exploitation
(implementation) behaviours. Both of these behaviours are forms of organisational learning. Knowledge of
ambidexterity theory helps to focus managers on enhancing the quality of exploration behaviour of individuals to
improve innovativeness. e second is transformational leadership theory, which offers useful principles a strategic
manager can use to motivate staff to achieve visionary goals related to change and innovation through increasing
their motivation, understanding and self-worth.
Leadership is not enough, however, to ensure an organisation maintains its innovativeness. One also needs to
understand how to set up and maintain processes of innovations within the organisation. It is therefore important to
understand how to begin the innovation process, and knowledge of the principles of the phase known as the fuzzy
front end of product development is useful, particularly because this phase is so different from those that follow it
in the development process. Similarly, there are very useful ideas that have emerged in other elds that are now
increasingly being applied in strategic innovation practice. An important example of this is found in applied design
thinking, which applies the methods and mindsets that have resulted in successful design in elds like engineering,
industrial design and architecture. Using these principles it is possible to design products based on a deep
understanding of the customer, while using the talents of staff through collaboration.
e chapter concludes with a consideration of individual innovativeness. It is through the efforts of individuals
that you will need to achieve organisational goals, and this section gives you an overview of personality and
individual values theory. Knowledge of individual strengths and weaknesses is important, so that strengths can be
built on and weaknesses can be improved. Only through knowledge of one’s strengths and weaknesses can one
improve.
By taking you through these topics, this chapter seeks to offer you a useful ‘learning journey’ that will give you
conceptual tools, techniques and principles that you can apply in the real-world context. To bene t fully from this
important knowledge, you will need to constantly think of how you would apply this knowledge critically in the
real-life context. A critical approach is necessary in strategy because under different conditions you will have to
make different decisions.

9.2 Innovation opportunities

9.2.1 Innovation opportunities presented by innovation theories
eories can help one to derive practical implications and predictions. is is particularly important with regard to
recognising disruptive innovation and the use of these predictions as an aid to managing it. A failure to manage
disruptive innovation using strategic innovation can result in the potential disruption or destruction of markets and
the failure of the organisation. As discussed, a disruptive innovation is an innovation that creates a new market, and
changes the way a market or industry functions. An example is the cellphone, which has had a game-changing
in uence on telecommunication markets.
Why is knowledge of disruptive innovation important? Risky choices are made all the time in strategic
management. Risk, however, can be quanti ed or calculated.7 Using probabilities, it is possible to estimate the
chances of different outcomes occurring. Uncertainty, on the other hand, relates to conditions where no estimates
can be made of different outcomes occurring. Disruptive innovation is associated with uncertainty. Worryingly,
people are found to be less sensitive to uncertainty than to risk. For example, managers can manage risk (as it can be
measured), but decisions are oen made when risk is confused with uncertainty. It is always important to try to
quantify the risks associated with decision-making in a business. Businesses typically avoid uncertainty as they
cannot accurately estimate its consequences. e business still needs to be managed, however, even in the face of
uncertainties that, unlike risks, cannot be estimated or calculated. A strategic manager needs to also be sensitive to
the potential of disruptive innovation to destroy markets. With no real way of measuring or estimating the
probabilities involved in managing potential disruptive innovation, knowledge of theory can be useful as it provides
knowledge with regard to how to manage this uncertainty.
 Whereas the focus of value innovation is the development of new markets and the creation of new value for
customers, disruptive innovation is the way in which innovations can change how competition occurs in an
industry, and how value is lost by incumbent organisations. According to Markides, although it is primarily new
business models that disrupt markets,8 they can use technology and changes in technology to do so. Christensen
initially argued that disruptive technologies were the cause of the disruption of markets, but then turned his focus to
the role of business models in the process, and coined the term ‘disruptive innovation’.9 eory that relates to the
role of technology in disruptive innovation can be used to provide insight into strategic innovation decisions. A
theory can be taken to be an explanation of the way things relate to each other in the real world. Strategic
management, whether facing risky or uncertain conditions, requires practical or applied actions, and knowledge of
the predictions of theory can help to guide such actions.

9.2.1.1 eories of innovation

is section provides an overview of certain seminal theories that offer an understanding of how markets can be
disrupted. A seminal theory is typically an important theory that has changed the way in which a eld is studied. In
light of the need to use theory as a guide to change, section 9.2.1.2 introduces Kondratiev’s long wave theory of
innovation, which can offer useful insights into how innovation opportunities can change over time. Kondratiev’s
theory provides an overview of the role of technological change, which is closely related to innovation-based change.
is theory provides predictions of how technology changes over time. Section 9.2.1.3 presents Schumpeter’s theory
or creative destruction. Schumpeter argued that the destruction of markets is not unusual, but is a natural part of
market systems. Strategic innovation is therefore an important aspect of strategic management, as it is necessary to
deal with the forces of disruption.
Foster’s technology S-curve theory is introduced in section 9.2.1.4. e technology S-curve can be used to
predict when a technology can no longer deliver value to customers, and when disruptive innovation in its markets
can be expected. When organisations enter new markets, competitors typically follow. Knowing how to plot an
organisation on its technology S-curve is a useful technique when new technologies can disrupt markets. Section
9.2.1.5 provides a discussion of dominant design theory. A dominant design, or standard type of product offering,
typically emerges in new markets. Dominant design theory offers insight and predictions that help us understand
how this process occurs in certain industries. e way that knowledge is used in strategic innovation is also critically
important. Finally, section 9.2.1.6 closes the section on theories of innovation with a review of absorptive capacity
theory, which provides a perspective of how information and knowledge can be harnessed within an organisation.
is theory is particularly important in a world in which knowledge is a factor of production and can provide
competitive advantage. Having derived practical predictions for strategic innovation in conditions of uncertainty
from these theories, the next section looks at how disruptive innovation occurs in business contexts.

9.2.1.2 Kondratiev’s long wave theory of innovation

A study of the history of innovation reveals that innovation does not typically happen in a consistent way.10
Innovations typically ‘group together’ at the end or start of long wave cycles. Kondratiev long wave cycles relate to
how economic activity (prices and interest rates) change over time. By understanding how these cycles may behave,
a manager can use these insights for decision-making. e large-scale innovations associated with the internet
boom in the 1990s are similar to other periods of large-scale innovation. High levels of innovation typically disrupt
incumbent or existing industries. Business cycles seldom extend beyond a decade. In contrast, according to
Kondratiev, innovation cycles typically follow a 50-year cycle.11 Since the Industrial Revolution, there have been ve
50-year Kondratiev cycles, each of which has been associated with a different technology: (1) a cycle associated with
cotton, iron and water power; (2) a cycle associated with railways and steam power; (3) a cycle associated with
electricity, chemicals and steel; (4) a cycle associated with automobiles, electronics, oil and aerospace; and (5) a cycle
associated with computers, telecommunications and the internet. According to Kondratiev, each long wave of
innovation generally follows four stages.
e rst stage is the recovery phase where economic activity starts to increase.
In the second phase, the prosperity stage, economic activity rises to its peak.
In the third phase, the recession phase, economic activity begins to drop off.
In the fourth phase, the depression phase, economic activity drops to very low levels.

It is at the peak of the prosperity phase that speculative ‘booms’ can occur, which typically end with some sort of
crash in markets, leading to the recession and depression phases.
Surplus capacity and diminishing returns create the conditions for phase three – the recession phase. Price
competition can begin to dominate in the recession phase, as the limits of the technology are approached. In this
phase the focus of innovations changes, moving away from new products and toward process innovations, which
increase productivity. However, in the depression phase, market saturation and price competition become
increasingly intense and pro ts decline. In response to these conditions, mergers and acquisitions may increase as
consolidation occurs. Certain predictions of long wave theory apply to disruptive innovation:
Changes in long wave cycles can result in disruptive innovation on a large scale. ese disruptions can occur
across the different markets that are associated with a particular technology.
Radical innovations typically occur at the start of new long wave cycles; as the conditions for their creation tend
to arise at the end of the previous cycle.
Long wave cycles can have an in uence on the economic and social system, and institutional changes in
education and training, industrial relations, corporate structures, management systems, capital markets and legal
systems can result.12

Kondratiev’s long wave cycle theory can be used as a framework to analyse an organisation’s markets and to place it
in relation to potential long-term changes. If you can ‘map’ an organisation or an industry in relation to long wave
cycles, then you will be better prepared for such large-scale changes. Schumpeter used Kondratiev’s long wave
theory as a basis for his work on the destruction of markets, and it was from this work that Schumpeter’s theory of
creative destruction emerged.

9.2.1.3 Schumpeter’s theory of creative destruction

According to Schumpeter, the market system, by naturally growing developing economies at rates of at least 2% per
year, can eliminate poverty.13 Schumpeter stresses that uncertainty, however, is an inherent aspect of these systems.
Organisations face a process of ‘creative destruction’, or a process of ‘industrial mutation…that incessantly
revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new
one’.14 Similarly,‘revolutions periodically reshape the existing structure of industry by introducing new methods of
production’.15 e market system is therefore ‘never stationary’ as it keeps re-organising itself.16 What this means in
simple terms is that businesses will face a process of creative destruction where many will fail and others will
succeed. e resources of failed businesses then get channelled back into the system, and the system (of markets)
itself changes, or is continually revolutionised. is reorganisation, however, results in growth and is for the bene t
of society. erefore, for Schumpeter, ‘[e]very piece of business strategy acquires its true signi cance only against
the backdrop’ of creative destruction.17 Strategy therefore must ‘be seen in its role in the perennial gale of creative
destruction: it cannot be understood irrespective of it’.18 What Schumpeter means here is that all strategy needs to
take into account the dynamic nature of the market system, which is inherently a system in which many businesses
fail, and that one cannot assume that a business will not be subjected to these winds of change, or gales of creative
destruction. While society bene ts from the more efficient production of goods and services (what you buy tends to
get cheaper and better over time due to competition), the strategic management of a business needs to be able to
take into account disruptive innovation in order to survive. Society bene ts from creative destruction through the
innovations it produces that keep offering improvements in value to customers.
e Industrial Revolution changed production and society, as a fundamental change in the economics of
production occurred. Adam Smith’s notion of the ‘division of labour’ had revolutionary results.19 An example of the
division of labour, given by Smith, is of pin makers. Whereas 10 pin makers could make a certain number of pins
each if they worked alone, when the tasks are split up between them a great deal more can be made. In Smith’s own
words, ‘[t]he greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity,
and judgement with which it is anywhere directed, or applied, seem to have been the effects of the division of
labour’.20 e Industrial Revolution fundamentally restructured not only productive capacity, but also society.
Different value curves were made possible. Many industries also faced ‘creative destruction’. If such changes can be
viewed as strategic opportunities, and if change is expected, then organisations might be better prepared for them.
Indeed, other revolutions have also happened, and are happening, which support Schumpeter’s predictions of
how creative destruction can result in societal bene ts, even if old ways of doing things were made obsolete and
certain rms went out of business. e knowledge revolution, caused by the advent of the personal computer and
the internet, is another revolution that offers us a useful example of how society has bene ted from creative
destruction.21 Before the knowledge revolution, organisations could only produce according to calculations of
where marginal cost met marginal revenue; the ‘marginal principle’. For example, if R1 000 spent on marketing a
product resulted in R10 000 in pro t over a period, then for the next period another R1 000 would be allocated. e
R1 000 spent in the next period might only bring in R5 000, but this process would be continued until the R1 000
spent brought back only R1 000. However, the knowledge revolution has changed the underlying economics of
production for certain industries. ere is no longer a marginal cost to send one soware package or one digital
music album to a customer via the internet. is change in the underlying economics faced by industries is playing
itself out in organisations and in societies every day. As Schumpeter predicted, more revolutions are coming. ree-
dimensional (3D) manufacturing, or printing, is a way that goods can be manufactured by machines.22 In fact, as
discussed in the Strategy in action case below, some suggest that 3D printers will even be able to ‘print’ human
organs one day. As Schumpeter stresses, ‘every piece of strategy’ is only effective against an understanding of the
backdrop of creative destruction.

STRATEGY IN ACTION: The case of 3D manufacturing23

Three-dimensional (3D) manufacturing, or additive manufacturing, might have the potential to introduce
disruptive innovation on a global scale. Body parts such as bone replacements and dental implants are already
being made, and some suggest that human organs may one day also be ‘printed’ using this technology. Less
wastage occurs – using conventional manufacturing, up to 90% of materials can be wasted in the process. This
process uses computer-aided design to print 3D objects, layer by layer, until the object is ready. Off-the-shelf 3D
printers are now available, and software can be used to manufacture items. The size of these machines is also
increasing, and larger components for aerospace industries are being produced. Conventional, or subtractive,
manufacturing faces a challenge from this form of additive manufacturing. Logistics and supply chains face a
revolution. Established markets and incumbent industries may face the prospect of disruptive innovation on a
large scale.

Questions
1. Can you think of new value curves that can be developed for organisations based on this new technology?
2. Can you think of markets that will face potential destruction, or disruption, based on the impact of this new
technology?
 3. Explain how Kondratiev’s predictions may relate to the impact of this new technology.
4. Analyse Schumpeter’s predictions in relation to the global influence of this new technology.
5. At the moment, China might be seen to dominate world trade in exports.
What do you think would happen to world trade if 3D manufacturing eventually replaced conventional
manufacturing?
How do you think these changes would affect businesses in South Africa?
How might this affect the strategic management of South African organisations; particularly in terms of
their supply chains?

9.2.1.4 e technology S-curve and disruptive innovation

According to Foster, when changes in technology occur, industry leadership can change hands.24 ese changes,
however, follow a pattern. According to Foster, every technology has a limit, which can be represented by an S-
curve, which represents the performance of the technology over the engineering, or research and development
(R&D) investments made in the technology.25 Typically there is a ‘natural limit’ associated with a technology. For
example, a silicon chip can hold only a nite amount of information, and is limited by the amount of heat that is
generated in the process. is is a constraint eventually experienced by Moore’s law. Moore’s law predicts that
integrated circuits will have about double the components every two years.26 Although Moore’s law has predicted
technological advancements in this area for a number of years now, the natural limits of a certain process will
ultimately be expected to halt these advances unless a new technology can emerge.
e potential performance of a technology is termed its ‘technical potential’.27 If an organisation is able to nd
out where the limits of their technologies are, the payoff can be signi cant. IBM, for example, evaluated the limits of
their computer technology, and discovered that the design of the chip package was an important one. ey were able
to change the design, and this helped them to continue to dominate in their markets. It is inevitable, according to
Foster, that the technology with the most potential will end up dominating the market. Changes in the dominance
of a technology are therefore usually associated with changes in the leadership of the industry. e return on R&D is
key to achieving market leadership.
How can S-curve theory be used to obtain a competitive advantage? e point at which the existing technology
reaches maturity is termed the in ection point. Strategic managers need to be proactive and be able to map the
technologies that are used by the organisation, which can act as an ‘early warning’ system. e approaching maturity
of a technology that might lead to a new radical innovation or to a successor technology might be detected this way.
If a new successor technology can be identi ed and developed, this can lead to competitive advantage. However, if
an organisation fails to identify and anticipate new technologies, it can itself fail. Organisations should also not limit
their R&D to developing just one technology, because this would limit the progress of technologies to just one S-
curve.

Figure 9.2 S-curves of the performance of materials used in tyre manufacture28

In Figure 9.2, the S-curves re ect the changes in the tyre industry caused by the adoption of different materials in
tyre manufacturing. Rayon initially promised more potential than nylon, but diminishing returns set in before they
did for nylon.29 Nylon then also realised diminishing returns and reached its natural limit. A radical innovation
entered the market in the form of polyester. is radical innovation was able to provide higher levels of performance
and dominated the market. Discontinuous innovation occurs when a new technology has reached the point at
which it produces higher performance than the ‘old’ technology for the same cumulative engineering effort and
when the new technology replaces the old. is is called ‘discontinuous’ because there has been an end to the
continuity associated with the use of the old technology.
As can be seen in Figure 9.2, the S-curve has an S-shape, as diminishing returns to investments are shown as an
S-shape over the curve. Increases in engineering effort are seen to result in diminishing marginal performance over
time. is means that although initial increases in engineering effort produce increasing performance, this does not
continue, as over time more engineering effort produces less and less performance per unit of effort. Technical
discontinuities, or changes in a market (such as the emergence of a competing technology), are, however, oen not
discovered in time because organisations have different incentives.30 An incumbent organisation (an existing
business) has a lot to lose if its technology is replaced by another one introduced by a competitor, yet organisations
introducing a new technology may have less to lose by innovating more aggressively. Incumbent organisations can,
however, be so committed to their technology that they do not acknowledge that competitor technologies are a
threat. ey might be overcon dent, or they might not notice the new technology introduced by their competitors
before it is too late. Foster describes the failure of a business to identify (see) the threat posed by another technology
as ‘technological blindness’.31
According to Foster, this ‘blindness’ to the advantages of other technologies has had a signi cant effect on ‘almost
all industries at one time or other’.32 Examples of how new technologies introduced by competitors disrupted
technologies used by incumbent rms can be found in the electronics industry. In this industry, vacuum tubes were
replaced by transistors, which were, in turn, replaced by microprocessors. Another example is the use of two-piece
cans to replace three-piece cans in the metal packaging industry. In each case, these changes in technology resulted
in changes in the leadership of the industry.
A way of avoiding the consequences of discontinuous innovation and market destruction associated with radical
innovation is to be able to manage the transition to new technologies that have more potential; to ‘cross
discontinuities’ effectively.33 Whereas the continuity of the old technology is disrupted when the new technology
takes over (and discontinuous innovation then occurs), being able to cross discontinuities refers to the ability to
manage the transition from the old technology to the new. As a strategic manager it is important to be able to
identify and ensure that your organisation can cross discontinuities effectively. Being able to make the change
between technologies represents a technical strategy. Foster considers certain strategic errors to generally be the
cause of organisation’s market losses in the face of technological changes. ese are ‘technological myopia’, the
misreading of market signals, and the ‘culture trap’:34
Technological myopia: Myopia means short-sightedness. In order to avoid technological myopia, Foster
recommends shiing the focus of R&D further out. Many new technologies can be foreseen. A technical strategy
of defending a technology can fail, which can simply lead to the new technology being developed unchallenged.
An example of this is sail technology. When steamships emerged as a challenge to sailing ships, the sailing ship
industry chose to defend the technology; it invested in more efficient improvements to sail power, yet these were
to no avail – steamships replaced sail technology despite all their efforts. ey were short-sighted, and did not
realise that the technology had reached its natural limit. is strategic error can, however, be remedied by
surveillance of emerging technologies.
Misreading market signals: Organisations oen miss out on the information that the market provides about a new
technology. is can occur because new technologies are oen introduced in niche markets, and are more
difficult for incumbents to see. In growing markets, incumbents oen misinterpret a levelling off in sales in a
market as a sign of market maturity instead of technology substitution, or the advent of a new technology.
Misreading market signals is related to the problem of de ning a market, according to Foster. Any new product,
and especially one that is related to a new technology, essentially rede nes a market. A strategic mistake in
misreading market signals is to assume that an organisation has the luxury to wait for market research cues
before allocating resources or funds to a new technology.
e culture trap: For Foster, cultural weaknesses are the most serious constraints to the strategic management of
technological innovation. Choices of products and production methods, and the technology used in production,
are a function of an organisation’s corporate culture. In fact, the technology that an organisation uses shapes
other strategic choices an organisation can make when opportunities are encountered. erefore, when the
technology changes, the entire corporate culture may have to change. is is an extremely difficult process.
According to Foster, the change from vacuum tubes to solid-state technology forced a new culture on
organisations in the industry; engineers, for example, needed to understand a new eld of mathematics. Cultural
resistance to change can make it very difficult to change to a new technology. New skills are needed, and new
recruits into the organisation might come from different academic and commercial elds. Changes in shared
values and management style are needed. In order for a manager to manage strategic innovation, knowledge of
how to manage culture is therefore critically important.

Having considered S-curve theory and how it can help one to understand when disruptive innovation can occur,
and how to try to avoid it, the challenges associated with surviving in a new industry are now explored.

9.2.1.5 Dominant design theory

Dominant design theory, according to Suarez and Utterback, addresses certain reasons why some organisations do
not survive in innovative environments.35 is theory was developed in the context of assembly manufacturing
industries. Apple, Samsung, Sony and Nokia are examples of organisations in these industries. e emergence of a
dominant design in such an industry can dictate the survival or failure of organisations. A dominant design is a
speci c path according to which an industry develops, that is in uenced by technical and market factors, and which
achieves acceptance in a market over other competing designs.
A dominant design is reached through the management of technological, economic and organisational factors.36
A dominant design forces a standard on a market. Such standardisation typically allows economies of scale to
develop. is fundamentally changes the industry because cost, as well as product performance, can then become
the basis for competition between organisations. e emergence of a dominant design therefore marks a transition
point, or milestone, in an industry’s life cycle.
Because the survival of an organisation is in uenced by the density of an industry, or how many organisations
are in the industry, and because the density of an industry is in turn dependent on the technology life cycle of an
industry, the survival of organisations is also related to the technology life cycle of an industry.37 Before stakeholders
settle on a speci c dominant design, there are likely to be many different competing designs in an industry. When a
dominant design emerges, the competencies required for survival will usually change, as those organisations that
can produce by taking advantage of economies of scale will tend to survive. e emergence of a dominant design
changes the rules of the game.
A dominant design can comprise a set of standards that are related to each other.38 An industry standard is
usually formed when one standard is accepted in a market over other standards. Usually this occurs aer a battle
between competing technical alternatives. Examples of industry standards are Blu-Ray and the compact disc, which
achieved market acceptance aer intense competition with other alternatives. Dominant designs act as industry
standards, and can develop when certain of the following conditions exist:39
e presence of collateral assets: Collateral assets are assets that offer an organisation advantages like market
channels, brand image or other factors that make it more difficult for a customer to switch to a competitor. If an
organisation has these, then it is easier to achieve a dominant design. e value of these collateral assets will
typically increase aer the dominant design is accepted by the market.
e in uence of government regulation or intervention: Governments can approve a standard, and can in uence
the acceptance of standards through regulation. Government purchases at the early stages of the industry can
also support the development of standards. An example of government intervention was the case of the US
government’s acceptance of RCA’s broadcast standard, which became the dominant standard in broadcasting
because of this.
Strategic actions taken at the organisation level: e application of strategy can be the difference between failure
and success in a standards war. An example of the impact of strategy on the battle for an industry standard is the
case of the clash between NC’s VHS and Sony’s Betamax video standards. NC used alliances and contracts to
deepen their network of sales, but Sony avoided this by trying to produce in-house in order to capture a greater
share of the pro ts. However, Sony lost out when the market adopted VHS due to its deeper market penetration.
e lesson here, according to Suarez and Utterback, is that it was the strategy applied by NC that ‘won’ the
standards war, and not collateral assets, government intervention or technological advantages that contributed to
this decisive victory.
Bandwagon effects or network externalities in the industry: Generally, when an industry standard develops then
economies of scale become very important. Why? Because of the stability that follows the emergence of the
standard. Bandwagon effects, or network externalities (bene ts that are related to networks, or groups of people
that are interconnected), occur when a product or service is more valuable to a customer the more that others
also buy the product or service. An example here is the way Facebook has become more valuable as more people
have joined the platform, as the bene t to someone increases as more acquaintances come on board.

What actions can an organisation take to establish a dominant design? An organisation can test different features of
the design using different products in different niches.40 A dominant design can also be developed from different
technological innovations in a cumulative way. Suarez and Utterback give the example of the dominant design of the
typewriter. Earlier designs used only capital letters, but slowly incorporated different features such as having a shi
key that could use both lower case and capital letters. Further innovations allowed the operator to see the paper
being typed, unlike earlier models. Innovation in this case followed a trial-and-error, or experimental, process. e
dominant design of the typewriter eventually emerged in 1909, in the form of the Underwood Model 5 typewriter.
 Suarez and Utterback also stress that in industries such as assembly manufacturing, the later an organisation
enters the industry aer a dominant design has emerged, the greater the chance that the organisation will not
survive.41 e reason for this is the erection of industry barriers. Entry barriers are erected by organisations that
have successfully mastered the new design and that now are able to build up collateral assets while developing
economies of scale. According to Suarez and Utterback, organisations should enter markets as early as possible in
order to experiment in them and try to come up with the dominant design. As stressed by Foster, knowledge is at
the heart of an organisation’s ability to successfully manage innovation. Absorptive capacity theory offers important
insights into how knowledge can be used for strategic innovation.

CASE EXAMPLE: South Africa and its role in relation to ‘exponential

technologies’42 and the ‘Fourth Industrial Revolution’43
As a student of strategic management you may ask: ‘Why is strategic innovation so critically important and why
are so many people increasingly interested in it?’ And particularly: ‘Why is it so important in South Africa at this
time?’
According to the World Economic Forum Global Competitiveness report,44 in 2012 South Africa was rated as
140th out of 144 countries, or fifth lowest in the world, for the quality of its education system. In stark contrast,
according to the same survey, the country was ranked 15th best in the world for the quality of its business
schools; 41st for its capacity for innovation; 34th for the quality of its research institutions; 30th for university–
industry collaboration in R&D; and 37th for patent applications weighted per population size. There seems to be
a big contrast between these rankings. The country has one of the world’s worst-rated education systems, yet it
is rated as being one of the best countries in the world in innovativeness? Innovativeness has an important
relationship with exponential technologies, which are technologies that can have very high societal impacts. They
are called exponential because their impacts can be curvilinear (exponential) when plotted on a graph. South
Africa needs to ensure that it is well placed to take advantage of the rise of the exponential technologies
(education is the primary driver of a country’s knowledge capacity), or it might be left behind. As predicted by
absorptive capacity theory, once left behind it is difficult to catch up. The country stands at the brink of a
revolution in technologies, which it needs to be ready to take advantage of. This revolution is in the area of
exponential technologies.
For the period 2017/2018,45 South Africa’s national competitiveness, or the indexed measure of the ‘set of
institutions, policies and factors that determine [its] level of productivity’ placed it 61 in the world (down from 47th
in the previous year period) out of 137 countries, and with one of the highest levels of income inequality in the
world. The five most problematic factors for doing business in the country were identified as inefficient
government bureaucracy (5th), high tax rates (4th), government instability (3rd), crime (2nd) and corruption (1st).
An inadequately educated workforce was 8th on this list.
In order to provide employment and to solve societal problems, the strategic management of the exponential
technologies is critically important for South Africa. On a worldwide basis, ‘knowledge has replaced the
traditional assets of land, capital, labour, and entrepreneurship as a basis for competitive advantage’.46 To
achieve innovation as a country, a strong education system is needed. Strategic innovation is a critically
important field as technological advances are increasingly changing markets and creating new ones. Rapid
developments in medicine, robotics, artificial intelligence, synthetic biology, 3D printing and nanomaterials
(engineering at a very small level) are occurring at an exponential rate.47 The price of these technologies is also
decreasing, as they become more powerful. New value curves, business models and markets will follow. Societal
problems will be solved in areas such as energy, health education, and security. Smaller businesses will be able
to do what in the past only very large organisations could. This is the era of ‘exponential technologies’. As a
strategic manager, it is important that you are able to apply the principles of strategic innovation to any
opportunities that you identify. Technological opportunities are an important source of competitive advantage that
can help local organisations to challenge world leaders.
 STRATEGY IN ACTION: The innovation paradox48

In 1847, Ignaz Semmelweis discovered how to dramatically reduce the mortality rate in the maternity ward in
which he worked.49 At that time doctors used to perform surgery without washing their hands. Semmelweis had
the staff wash their hands in a solution of chlorinated lime. Despite the dramatic drop in the mortality rate, and
despite clear evidence of the success of his innovation, his peers rejected his methods. After he left, things went
back to how they were before. This is an example of the ‘Semmelweis effect’, or ‘innovation paradox’. Another
example is the QWERTY keyboard.50 Before typewriters were electronic, they were mechanical. If someone
typed too fast, keys used to stick together. To avoid this, the designers had to come up with a keyboard that
would slow human typing down, which required the more awkward key strokes. It worked. However, now that
electronic keyboards have been with us for quite a while (and alternative keyboards, such as the Dvorak, are
available), the QWERTY keyboard remains the dominant design, or the form of keyboard that is still extensively
used. Knowledge of the innovation paradox is important in strategic innovation, because it can help one to be
aware of resistance to change. Often, people will resist innovations and change, even if there is clear evidence of
the benefits of such innovation. Knowledge of the innovation paradox might help you to develop a dominant
design.

Questions
1. Relate the predictions of dominant design theory to the innovation paradox.
2. How do you think you can use your knowledge of the innovation paradox to achieve competitive advantage?

9.2.1.6 Absorptive capacity

According to Cohen and Levinthal, successful innovation depends on the ability of an organisation to notice the
value of external information that is new, to incorporate it and apply it to commercial goals; a capability termed
‘absorptive capacity’.51 Much evidence shows that external sources of innovation are usually critically important for
innovation, but oen under-utilised. External sources include those outside the organisation or from other sources
within the organisation but outside the R&D unit. However, the use of this knowledge is dependent on the existence
of prior knowledge, or knowledge that the organisation already has. An example of such knowledge is knowledge of
the ‘front line’ of scienti c or technological developments in a eld.
What insights can absorptive capacity theory offer a strategic manager? For Cohen and Levinthal, for a
organisation to create new knowledge, prior knowledge is needed.52 is has two components: knowledge that is
similar to the knowledge being developed, and knowledge that is relatively more diverse, or different, from the
knowledge that is being produced. According to Cohen and Levinthal,53 there are two ways in which absorptive
capacity can act to increase the innovative learning of an organisation: through ‘cumulativeness’ and through its
in uence on expectation formation.
e accumulation of absorptive capacity allows an organisation to more easily accumulate additional knowledge
(cumulativeness).54 e more knowledge an organisation has of a eld, the easier it will be to pick up and evaluate
signals that relate to technological changes, which can contribute to the organisations’ expectations about change in
a climate of uncertainty (expectation formation).
Because of the cumulativeness and expectation-related effects of the accumulation of absorptive capacity, path
dependency can be created.55 In other words, for another organisation to know the same they would have to follow
the same ‘path’ of learning.
An important implication of path dependency is that if an organisation stops learning, or investing in its
absorptive capacity in a eld that is developing quickly, then it might lose out to other organisations.56 It might not
be able to recover from these losses in knowledge accumulation; a case of ‘lock-out’ might occur. For Cohen and
Levinthal, because lock-out can happen it is more costly to invest in absorptive capacity later. Opportunities might
be lost because the organisation is less able to take advantage of them if they have lost ground in this way.
Organisations might not develop their absorptive capacity because they may not have enough of it to know that
such development is necessary.
A competency trap can also develop; where an organisation achieves performance with an inferior process and
then stops learning about what might be better processes.57 e ‘not-invented-here’ syndrome, where external
knowledge is rejected because it is from an external source, can also be an indicator of lock-out. Organisations with
higher levels of absorptive capacity, according to Cohen and Levinthal, are more likely to be proactive and able to
exploit opportunities that they nd in the environment. In contrast, other organisations with lower levels of
absorptive capacity may be forced to be reactive, and be limited to their response to challenges, in that they might
not have technical options.
Cohen and Levinthal offer an example of Schumpeter’s process of creative destruction in the case of the change
from electromechanical to electronic devices.58 Many organisations that were established in the industry faced
radical changes in the market structure, and experienced competence-destroying technical change. It is a core
argument of Cohen and Levinthal that organisations that do not have sufficient knowledge in an industry might not
ever be able to develop sufficient absorptive capacity because of its cumulative nature. An organisation’s R&D
activity can not only generate new knowledge, but can also generate absorptive capacity. Absorptive capacity theory
predicts that if learning stops, an organisation can immediately start to fall behind competitors that continue to
learn. An important aspect of this theory is that it places knowledge above other resources in the management of
strategic innovation. is knowledge can be put to use to seize innovation opportunities by applying principles of
value innovation to achieve competitive advantage.

9.2.2 Innovation opportunities: Value innovation and competitive

advantage
Kim and Mauborgne studied different organisations in different industries, and found certain differences between
these organisations that accounted for differences in both their pro ts and revenue.59 Overall, the differences
between these organisations related to one underlying factor: their strategy. Applying a value innovation strategy
overlaps with some aspects of blue ocean strategy.
Less successful organisations were found to follow ‘conventional strategies’; they focused on ‘beating’ their
competition on different measures.60 In contrast, the more successful organisations were found to follow a strategy
of ‘value innovation’, which sought to do something ‘new and different’; a process which was less focused on their
competitors. e core principle of this ‘value innovation’ was that uncontested market space, or blue ocean, could be
found in existing industries.61 Organisations applying this principle effectively made competition irrelevant by
providing a ‘quantum leap’ in value, or vastly improved levels of new and better value, to customers.
is principle therefore goes far beyond the continuous improvements in products and services that
organisations typically make. On the basis of their research, Kim and Mauborgne identi ed ve fundamental
differences between more and less successful organisations, based on dimensions of strategy. ese are discussed as
follows:62
Industry assumptions: e conventional strategic view tends to regard the conditions of an industry to be given.
In other words, the conventional strategic view does not take into account how differences in industry
assumptions can themselves be used to develop strategy, even in mature industry stages. In contrast, the value
innovation logic stresses that ‘blockbuster ideas’ and ‘quantum leaps’ in value can provide an organisation with
opportunities; even in industries that are mature. In the Opening case study, it is shown how Formule 1 rede ned
 their value curve, or the value contributed by different products and services in their portfolio of offerings, by
breaking away from the existing conditions and assumptions of the hotel industry.
Strategic focus: By comparing their strengths and weaknesses with competitors, organisations tend to let
comparisons with competitors dictate their strategy choices. Kim and Mauborgne give the example of CNN,
which did not follow the industry’s format of new programming, but provided a ‘quantum leap’ in value; 24 hours
of news at a fraction of the cost of news per hour. Competitors were monitored but were not used as benchmarks.
Such organisations need to know which factors deliver superior value; they do not simply offer products and
services simply because their competitors do. ey will rather use these resources to look for, and offer customers
entirely new sources of value, and in so doing will be more likely to achieve competitive advantage. is was the
strategy chosen by Formule 1, as discussed in the Opening case study.
Customers: Whereas organisations that usually look to keep and grow their customer bases tend to end up
segmenting offerings to meet more and more specialised requirements of customers, those that apply value
innovation look for shared features that customers value. e logic behind this approach is that more customers
will appreciate considerable improvements in the value they are offered more than they will appreciate a focus on
their speci c needs. Some customers will be lost, however, but the majority of the market may be captured.
Formule 1 designed their value curve, or the value dimensions that they offered, based on customer needs that
they had in common.
Assets and capabilities: Organisations typically rstly look at their assets and capabilities, and then from there
look at what they can do based on these. In contrast, value innovator organisations do not limit themselves to
their assets and capabilities; they consider starting again from scratch if they can nd a way to offer a quantum
leap in value to customers. Kim and Mauborgne give the example of the Virgin Group, who sold off their entire
chain of small music stores and started music and entertainment megastores. Existing assets and capabilities can,
and should, still be leveraged, but they must not limit the organisation’s choices in nding and providing value to
customers.
Product and service offerings: In most industries, the products and services that are offered tend to structure how
competition occurs. Value innovators, however, do not necessarily compete with competitors based on existing
products or services, but look at the ‘total solution’ that customers want; how value can be added along the ‘total
chain’ of what adds value to customers. For value innovators, the industry’s de nition of what products or
services should be offered is yet another constraint to the provision of value to customers.

Despite the spectacular successes of organisations that have applied value innovation, such success does not last
forever.63 Competitors will inexorably begin to imitate the new value curves of value innovators. Kim and
Mauborgne stress that organisations should not become caught up in the trap of ‘conventional strategic logic’; they
should not begin to defend their markets along the same value curve. Kim and Mauborgne give the example of the
way Compaq entered the personal computer market in 1983 aer IBM had established the industry’s value curve.
Compaq introduced a new value curve and achieved spectacular success. However, drawn into competing with
Compaq, IBM defended itself by focusing on beating Compaq at what it did. Over-engineered products that cost
more to manufacture were produced by both organisations. According to Kim and Mauborgne, what both
organisations failed to realise was that a convergence of value curves was occurring; other organisations were
starting to produce along the same value curve. Both IBM and Compaq faced difficulties. What was needed was
another ‘quantum leap’. Value curves are based on offering value, not on technology or competencies. ere are
implications for an organisation’s management of innovation that derive from the organisation’s value curve. If the
value curve differs from that of the industry, then the organisation should ‘harvest’ its advantage in the industry, and
should avoid innovation. By using geographic expansion and improvements in operations, imitation by competitors
can then be controlled.
 Value innovation, however, places equal emphasis on value and innovation.64 Value without innovation tends to
result in incremental improvements for the buyer. Innovation without value tends to result in improvements that are
too futuristic and beyond the consumer’s comprehension or foresight. For example, initially, the microwave oven
was ahead of its time. When rst developed, consumers were unconvinced that it had any value or relevance for
them. Now, of course, most households see microwave ovens as indispensable.
Another way of looking at the link between value and innovation is that an emphasis on value places the
consumer at the centre of strategic thinking, while the emphasis on innovation pushes the organisation towards
totally new ways of doing things, rather than simply incremental improvements.
In line with the widely recognised constituent elements of value, according to Kim and Mauborgne, value
innovation can take place on one or more of three platforms:65
e product platform: e physical product
e services platform: Support services such as maintenance, customer service, warranties, and training for
distributors and retailers
e delivery platform: Logistics and the channel used to deliver the product to customers.

When attempting value innovation, organisations tend to focus on the product platform, and neglect the services
and delivery ones. Kim and Mauborgne stress that value platforms should be rotated in the same way that farmers
rotate their crops.66 ey provide the example of Compaq, who looked at customer needs across the industry and
launched a simpli ed server, with good performance at a third of the price. When competitors began to copy their
value curve, Compaq changed it again. Customer value was then added through innovative soware that saved
customers time in con guring server networks. is was very successful because the server hardware actually
contributed only 10% to the customers’ costs, unlike the costs of servicing networks, which were much higher.
Continuing to focus on the value that could be added to customers rather than on beating competitors at what they
did, Compaq worked on developing yet another value curve, this one based on meeting customer speci cations
while shipping within 48 hours of a customer placing an order. e lesson here is to use all three platforms to keep
an organisation’s value curve different from those of competitors.
Over and above keeping an organisation’s value curve different from those of competitors, there are other
opportunities offered by contexts like South Africa. An especially important way to take advantage of innovation
opportunities is by using blue ocean strategies. ese are now discussed.

9.2.3 Innovation opportunities offered by blue ocean strategies

What are the speci c differences between red and blue ocean strategies? Kim and Mauborgne67 found that
organisations they studied differed in the strategies they used. Certain organisations used their competition as a
benchmark. ese organisations found themselves in existing market space, which tends to become overcrowded,
which Kim and Mauborgne termed a red ocean strategy. In contrast, organisations that chose a blue ocean strategy
sought to create a leap in value for both buyers and the organisation itself by rejecting the core idea of conventional
strategy. is core idea is that there is a trade-off between cost and value, or between cost leadership and
differentiation. eir research found that successful organisations were focusing on how to achieve low cost and
differentiation strategies at the same time.

Table 9.1 Red versus blue ocean strategies68

Red ocean strategy Blue ocean strategy

 Red ocean strategy Blue ocean strategy
Having to compete in market space that exists already Creating uncontested market space (creating new
markets)

Having to beat the competition to succeed Making the competition irrelevant

Having only existing demand to exploit Creating and capturing new demand

Having to make value/cost trade-offs Being able to break the value/cost trade-off

Having to align the entire system of an organisation’s Aligning the entire system of the organisation’s activities
activities with its choice of either differentiation or low to a focus on both differentiation and low cost
cost

According to Kim and Mauborgne,69 a blue ocean is created in the overlap between an organisation’s cost structure
and the value proposition it offers to buyers. As shown in the example of Formule 1, costs savings result from cutting
away and reducing certain factors that the industry or industry segment competes on. But this is only one side of the
approach. At the same time, buyer value is increased by raising and creating elements that have never been offered
in the industry or industry segment before. Over time, scale economies will develop, which further drive down costs
due to high sales volumes that come as a result of the superior value that is offered. Figure 9.3 shows this dual
process of blue ocean creation.

Figure 9.3 The dual impact blue ocean process70

Whereas red ocean strategies might be associated with military metaphors of strategy related to attacking the
market share of a competitor, or focused on competitors, Kim and Mauborgne stress that blue ocean is about doing
business where there are no competitors.71 Even the term ‘competitive advantage’ brings to mind images of
outperforming rivals and competitively capturing greater shares of the market. Although competition still matters,
the focus of blue ocean strategy is to identify and develop markets where little competition exists, and to exploit and
protect these blue oceans.
 Blue ocean strategies can be based on the use of technology. According to Markides, strategic innovation is not,
however, the same as technological innovation, which is the use of new processes, machinery or applications that
embody knowledge of how to do or make things.72 Notwithstanding this difference, knowledge of the in uence of
technology is very important because market creation and market destruction can both be strongly in uenced by
the use of technology, according to Markides. In developing a blue ocean strategy, you need to be able to view
technology as a tool, or view changes in technology as an important source of new opportunity.
In creating a strategy, you need to be aware of the fact that technology acts through its in uence on markets, as
organisations can use this technology to develop new business models, or strategies that develop entirely new
markets. is technology can also be used to replace existing markets. e importance of technology in market
creation or disruptive innovation does not necessarily imply that you need to use the latest technology. Many market
disruptions have been caused just by using new ways of combining relatively old technologies. In fact, certain
technologies might not diffuse, or be adopted, until time has passed; or even not at all.73 Notwithstanding this, new
technologies can be very powerful ‘game changers’ in industries.
e gap between innovations and new technologies is reducing over time, as innovations lead to developments in
technology and developments in technology lead to further innovations. ree important schools of academic
thought are associated with strategic innovation: (i) value innovation; (ii) disruptive innovation; and (iii) bottom of
the pyramid innovation.
It is important to understand that the different discussions in this chapter should not be considered, or applied in
isolation. In the real-world context you will have to weigh up what strategies are best suited to different conditions.
A ‘silo’ mentality, or having a perspective of one aspect of a business or a phenomenon, without taking into account
its relationships with other aspects, is problematic. It is therefore important to be able to synthesise or bring together
theoretical principles and to critically decide on appropriate strategies in the real-world context. Having discussed
blue and red ocean strategies, the discussion now moves to business model innovation.

CASE EXAMPLE: Cirque du Soleil and the success of its blue ocean strategy
Kim and Mauborgne74 offer the example of Cirque du Soleil to highlight the effectiveness of a blue ocean
strategy. Cirque du Soleil is a ‘circus’ that invented a new industry segment by combining certain characteristics
of a traditional circus with those of sophisticated theatre. It was able to catch up to the level of revenues of the
best circus operators such as Ringling Bros and Barnum & Bailey in just 20 years. Importantly, this was done in
an industry that was in decline, as sports, television and video games posed threats to the circus market.
According to Kim and Mauborgne, these challenges were aggravated by public sentiment that was hostile to
the use (abuse) of animals,75 thus demand was suffering. Supply, however, also posed problems, as star
performers could charge what they wanted as they had market power. Cirque du Soleil sought to avoid the red
ocean characteristics of the industry with its declining audiences and increasing costs, creating instead an
uncontested market space and making the competition irrelevant. This attracted an entirely new category of
customers, such as adults and corporate clients that were used to theatre, opera or ballet, and to paying more for
their entertainment. This strategy has all the hallmarks of a blue ocean strategy. Red ocean strategies are
associated with a known market space, where industry boundaries are defined and accepted, and the ‘rules of
the game’ are typically well understood. The traditional circus industry was in such a state, and the only way to
succeed in such an industry is to compete for a greater share of existing demand, but because this space will,
over time, simply become more and more crowded, products tend to turn into commodities.
In overcrowded industries, it becomes increasingly difficult to differentiate brands, both in economic upturns as
well as downturns. According to Kim and Mauborgne, this increasing intensity of competition ‘turns the water
bloody’,76 hence the red ocean analogy. It is innovation that offers the potential of a blue ocean strategy, and blue
oceans have been the engine of growth over time. Industries such as mutual funds, cellular telephones,
biotechnology, discount retailing, express package delivery and home videos are all examples of blue ocean
 innovation. Blue oceans will also be the growth engines of the future. Thus, whereas the incremental extensions
of existing lines associated with red ocean strategies contribute to revenues, it is investments in new markets and
industries that contribute strongly to total profits.
According to Kim and Mauborgne, Cirque du Soleil found that they could strip away many of the traditional
elements of the circus offering, doing away with animals and three-ring-circus acts, and keeping only three,
namely clowns, the tent and acrobatic acts.77 They focused on the elements that were kept, increasing the
sophistication of the performances and trappings, and added theatrical content, with a coherent theme and story
line for each performance. In so doing, Cirque du Soleil dramatically reduced its cost structure while at the same
time achieving differentiation and adding value to customers (see Figure 9.1). The whole system of Cirque du
Soleil’s price, value and cost activities was successfully aligned, making this blue ocean strategy sustainable.

9.2.4 Innovation opportunities provided by business model innovation

What is business model innovation? A business model describes the reason, or rationale, for how a business creates,
delivers and captures value.78 A business model can answer the questions: (i) Who is the customer? (ii) What does
the customer value? (iii) How do we make money in this business? (iv) What is the economic reason that explains
how we deliver value to customers at an appropriate cost?79 A business model can be taken to comprise of two
elements, namely:80
the value proposition; and
the operating model.

e business model and its components are shown in Figure 9.4.81 ese components are explained as follows.

Figure 9.4 The business model82

 e value proposition can be considered in terms of the question: what are we offering to whom? is question,
in turn can be considered in terms of three elements, or choices:83
What target segment to target? Which customers and what needs do we focus on?
What product or service offerings do we offer to customers?
What revenue model to use? How are we paid for what we provide?

On the other hand, the operating model provides an answer to the question of how the offering is delivered in a
pro table way, and relates to three elements or choices:84
Value chain: How is the business designed to deliver on demand to customers? How do we divide up what we do,
to either do it in-house or to outsource?
Cost model: How do we plan the structure of our assets and costs to deliver our value proposition pro tably?
Organisation: How do we allocate our people and develop them to maintain and improve competitive advantage?

Apple’s approach in the late 1990s was based on the design of its own hardware and soware, which was making it
difficult to be price competitive.85 What was a game changer for the organisation was its successful development of a
business model for music downloads, notwithstanding the fact that previous attempts (e.g. by others in the music
industry) had been unsuccessful. Because of their effective use of product innovation and business model
innovation, from 2001 onwards products and services such as the iPod, the iTunes service and the iPhone allowed
the organisation to capture a market about 30 times larger than their original market.
Why is Apple’s example so important in today’s business environment? Disruption now occurs more frequently
in different industries, and business model lifecycles are becoming shorter.86 ere is increasingly more
competition, and businesses are off-shoring, or moving to where costs, particularly labour costs, are cheaper.
Another problem businesses are facing is their exposure to systemic risk, or risk that is related to the fact that
businesses are increasingly interconnected. If businesses are highly interconnected, then the impact of a shock to the
market can spread to the system itself. An example of this is the nancial crisis of 2009, where a crash in the housing
market affected the entire nancial industry. e pressure on businesses to be socially and environmentally
responsible, together with all these challenges mentioned, also make it increasingly important for businesses to rely
on innovation, and to use business model innovation as a way to renew competitive advantage and achieve growth
in an increasingly challenging environment.

CASE EXAMPLE: How Discovery in the South African context shook up its
industry through business model innovation
Drawing from an interview with Adrian Gore, McKinsey87 explain how, through the use of business model
innovation, the South African organisation Discovery overtook its competitors in the health insurance industry,
and grew into a global player with a market cap of over $8 billion. Central to this success is the alignment of
rewards and risk, whereby an innovation score is part of every manager’s performance evaluation. There is also
an annual competition to come up with creative new ideas. It was the South African context in which its founder,
Adrian Gore, developed his innovative strategy. South Africa was facing its transition to democracy and faced
serious healthcare challenges. The new democratic government was focused on removing discrimination, and a
healthcare insurer could not discriminate against customers on the basis of pre-existing conditions. There was
also no public health-insurance system to cover any of the risk faced by a healthcare insurer. These conditions
forced the starting organisation to undertake a strategy of innovation.
They focused on a core idea that the healthier people are, the more profitable health insurance could be.88
Over 50% of mortality was associated with three core lifestyle choices, namely smoking, poor nutrition and lack
of physical activity. They were approached by a gym chain who wanted to sell memberships and they came up
with the idea of reversing this approach by offering points and rewards together with discounts on their premiums
to those using gym memberships. Gore explains that this developed into their Vitality programme, a complete
wellness system tracing physical activity and nutrition across time. Points can be earned by logging workouts
with application devices, such as those offered by Nike+ and Fitbit, which synch across computers, mobile apps
and smartphones. Healthy food purchased at partner grocery stores provide opportunities for discounts. The
success of this model is the power of incentives. By incentivising customers to behave more healthily, they will
make fewer claims – and Discovery makes greater profits. This is an excellent example of a powerful business
model.
According to Gore, this model creates value for customers, the organisation and society.89 Discovery Life is
another successful product which after its launch in 2001 became the top provider of life insurance in the country.
With the value creation that is generated by Vitality, Discovery benefits from a competitive advantage that its
competitors lack. Vitality’s business model structure allows Discovery to enter global markets – it is scalable, and
can be used to partner with other insurers until strong enough to operate on its own.
The Vitality business model can be applied to other areas of human behaviour – it is an additive model.90 For
example, the organisation has extended it to motor insurance, given that people ‘underconsume wellness’, and
neglect safe driving in much the same way as they can tend to neglect their health. The Vitalitydrive programme
tracks driving behaviour via smartphones, rewarding good behaviour with lower premiums and discounts on fuel.
Real-time emergency assistance is also provided.
According to Gore, the more one innovates, the more one can innovate.91 Whereas most organisations
innovate as a response to competition, Discovery has launches every year where new product ideas are
presented. Even though it is important to watch the costs, the key to success is to invest in innovation even when
it is not clear what will come out of it. The internal competition held every year is termed ‘Inspiring Excellence.’
The top 1 000 leaders form small teams and work on innovative concepts. Then contests are held across the
year until there are five teams left, which present at the annual conference. This process ensures a continuous
 supply of innovative ideas, many of which when rolled out become big winners. The use of incentives extends to
remuneration, as each business is given an innovation score, which determines take-home bonuses.
An important aspect of Discovery’s business model is that it creates real value that can literally be lifesaving. It
also contributes to South African society and the health of its people in addition now to those of others
throughout the world!

Chesbrough explains certain opportunities and pitfalls of business model innovation.92 New ideas and technologies
have to be commercialised by using a business model. Many organisations, however, do not have the capacity to
innovate their business models. is can be costly, because the same ideas commercialised through different
business models can have different economic outcomes. Indeed, a relatively poor technology commercialised
through a good business model can be more pro table than a better technology commercialised through a poor
business model. e printer and ink model is a good example of an effective business model. Chesbrough found that
Xerox’s copier/printer business made most of its pro ts on the paper and ink that it sold users of their copiers. He
found that organisations oen had at least as much to gain from developing a new business model as from a new
technology.
Innovations within an organisation also need to t with the organisation’s business model to be successful,93
otherwise they might only be able to ourish outside the organisation in another environment. In contexts of
disruption, an organisation can use this as an opportunity to experiment with different business models.
Chesbrough gives the example of the band Radiohead, which decided to experiment with a different model to
release its album, ‘In Rainbows’ on the band’s website instead of through the conventional process with its record
organisation, EMI.94 Visitors to the site could download their album, and could pay whatever they wanted to.
According to Chesbrough, surprisingly, of three million visits to the site within 60 days of the release, two-thirds of
visitors paid on average £4, with a net value of £2.67 on average, which was more than the band would have received
if they had released it conventionally. Although the album was then licensed and sold through conventional
distribution networks, the publicity received from this experiment led to greater exposure, and their album debuted
at number one in the US and the UK, and performed better than their earlier ones. ere are certain downsides to
the use of innovative business models, however, of which a manager needs to be aware.

9.2.4.1 Business model innovation pitfalls95

According to Chesbrough, there are certain pitfalls associated with business model innovation. New models can
con ict with traditional structures of organisation assets. ere can be resistance to experiments that are seen to
threaten the ongoing value of traditional models. is can be especially problematic when the gross margins of the
emerging business model are initially much lower than those of the traditional one. ese models might have
different customers or distribution channels. e new model might be starved of resources which are instead
channeled to the still more pro table established technology. It is also necessary to know when to change your
business model.

9.2.4.2 When to change a business model

Johnson, Christensen and Kagermann explain that business model innovations have changed or reshaped entire
industries.96 ere are certain times when an organisation may need to change its business model. ere are ve
strategic triggers for business model change, according to Johnson et al.:97
1. If there are large numbers of potential customers who are locked out of a market because solutions are too costly
or complicated, then there is an opportunity to apply disruptive innovation. is is also an example of where
bottom of the pyramid (BOP) principles can be used. BOP strategies (to be discussed later in this chapter) are
 strategies that target the poor as consumers ‘at the bottom’ of the demographic pyramid. Successful innovations
that achieve a low-cost focus can tap into this market. An example of this is Tata’s Nano, a very low-cost car.
2. An opportunity may arise to take advantage of a new technology by using a new business model. Examples of
this are Apple’s products and MP3 players, which took advantage of new technology to offer customers new ways
of listening to music, and being able to carry large libraries of music with them as they moved around. Another
way to do this is to leverage a technology that already exists by entering an entirely new market. An example of
this is microwave technology, which was an offshoot of the space programme. In this case, the technology
developed for the space programme was applied to an entirely different market.
3. An opportunity might exist for a ‘job to be done’ focus, or a focus on a need that can rede ne an industry. An
example of this is the way FedEx competed through meeting the customer need for quicker and more reliable
deliveries of packages. In this case, this need forced a rethink of the way things were done in this industry, and a
new way of doing things emerged as a new business model.
4. A change in business model may be necessary to protect against low-end disrupters. An example of such a threat
is that faced by auto manufacturers needing to compete against the Tata Nano. Low-end disruptors are
competitors that compete on the basis of low cost, typically by cutting out all unnecessary features. As a result of
this disruption of markets, it may be necessary for an organisation to change its business model to fend them off.
5. A business model change may also be required if the basis of competition shis. If leading core market segments
commoditise, the entry of low-end entrants may require a response. For example, if the basis of competition is
quality with high prices, but the segment shis to compete on price, or low cost commodi cation has occurred
(i.e. commodities are not differentiated – one unit is much like another), the organisation will need to change its
business model to compete under these new conditions.

It is important to avoid business model reinvention unless the opportunity is big enough to make it worthwhile. It
would also need to be not only new to the organisation but also to the industry. However, creating a new model
should not mean threatening or changing the current one. e new model can also reinforce and complement the
core business. e Case example of Dow Corning is now discussed to illustrate how principles of business model
innovation can be applied to the real-life business context.

CASE EXAMPLE: How Dow Corning built a successful new business model from
scratch98
Johnson et al. give the example of Dow Corning who built a new business model from scratch. Dow Corning sold
silicone-based products and technical services to different industries, but found product areas to be stagnating.
They found that the low-end product segment was commoditising. Their problem was that their existing business
model was based on highly priced innovative products and services. A new business model was developed that
sought to drop the price point by 15%, and to formulate a new customer value proposition.
According to Johnson et al., this was found to need a fundamentally lower cost structure, which would only be
possible with another IT system, and the use of the internet to automate processes and reduce overheads. This
meant breaking the rules that had previously made it successful, and a change from a high-touch (much
personal attention), high-quality service and differentiated experience to one that was low-touch, self-service and
standardised.
But this meant an entire culture change would be necessary, and entrenched habits would be difficult to
change. Because of this they decided to develop a new business unit with a new identity so that the old model
could also be protected. After the new customer value proposition was articulated, and a new profit formula
developed, sets of required new competencies, key resources and processes were identified.
 Key to the success of this project, according to Johnson et al., was how existing expertise was leveraged,
using key staff within the organisation that were less risk averse. Most successful new businesses typically revise
their business models about four times or so in their pursuit of success. Trial and error is part of the process.
Dow Corning launched the new business model, named Xiameter, and the investment in this new model was
paid back in three months. Importantly, most of the new customers were new to the organisation, and the new
model complemented the main business, and did not interfere with their ability to use premium pricing in the
primary business. New technologies alone may not be enough. It is important to ‘envelope’ a new technology in
an appropriate, powerful business model.

9.2.5 Innovation opportunities at the bottom of the pyramid

According to Prahalad, BOP markets can be a source of radical innovation.99 e BOP market refers to the over
four billion people in the world that live on less than $2 (about R23.50) per day. is group of people is made up of
different cultures, ethnicities, literacy levels, capabilities and needs, and as a market it is largely untapped and
serviced by inefficient providers. It is possible to establish an organised private sector market in this ‘space’. As
countries develop, it is this market that will shi into the middle-class demographic.
To apply BOP innovation, one has to think outside of technology and product perspectives of innovation and
instead focus on total delivery of value.100 Examples of products for this market include a $2 000 (about R23 500)
car, $50 (about R587.50) cataract surgery, and airtime that costs $0.01 (about R0.12) per minute. is is an
important market in South Africa and sub-Saharan Africa. Pralahad uses the terms ‘micro-consumers’, ‘micro-
producers’ and ‘micro-investors’ to suggest a more precise focus on smaller groups of consumers, producers and
investors than are usually found in other markets. In this way, one can understand consumers with smaller budgets,
producers that produce smaller quantities and investors that invest smaller capital shares. is is necessary to be able
to tap the very large market that is made up of the poor. According to Pralahad, converting the BOP market into
groups of micro-consumers, micro-producers, micro-investors and innovators requires a focus on the following four
As (as opposed to the 4 Ps we know from marketing):101
Awareness needs to be created, of the product and services.
Access needs to be provided, so that even in distant areas consumers are able to get the products/services.
Affordability is necessary, as world-class quality at very low prices is not negotiable. Quality is not the same thing
as luxury.
Availability is key, as a consistent supply cannot be disrupted. Building trust is important so as to be able to build
a loyal base of customers.

Each of the four As has its own challenges, such as the need to create awareness without access to high-cost
advertising, to access rural areas and deliver products and services in an economical way, to achieve the low costs
necessary to achieve affordability, and to keep supply consistent without access to a high-cost delivery system.102
ese challenges, however, are key to the development of breakthrough innovations, and must be accepted as
constraints to work within, which Prahalad terms working ‘within the innovation sandbox’.103
Developing a detailed and in-depth understanding of consumers, and their needs, is key to this. Pralahad gives
the example of developing a stove for the BOP market in India, using a video to document the cooking process
visually from start to nish. is process was followed, again and again, to document the cooking process
repeatedly, using different families from different areas of the country. is allowed for immersion into customers’
life and work styles (the rst stage shown in Figure 9.5). Content analysis and a clustering of the results allowed a
‘deep dive’ into the decision processes of the consumer (the second stage shown in Figure 9.5). is allowed the
development team to start creating broad speci cations for design and development (the third stage shown in Figure
9.5).
Figure 9.5 The BOP process for developing business specifications104

e constraints the research team identi ed formed the ‘boundaries’ of the innovation sandbox in which they
had to work, and the requirements to develop the business model became clear.105 ese included the need for a
modern stove that was smokeless and easy to use, but it also needed to be aspirational (people would need to want
it) and to meet global safety standards by design. Developing these aspects together with the necessary logistics
provided the core delivery system (the fourth stage shown in Figure 9.5).
Prahalad stresses that it is important to understand that innovation in BOP markets is a continual process of
learning and experimentation.106 In the development of the stove for the Indian market, certain changes needed to
be made along the way, but in the end it all came together. Innovation is therefore a learning process, and this
process is key to the evolution of a business system – the system will evolve through different milestone points
where changes will be made.
To meet the necessary awareness, access, affordability and availability requirements, it was important to build an
ecosystem or network that was cost effective and scalable, and included the skills and knowledge to make a success
of the business.107 is is shown as the h stage in Figure 9.5. To do this, Prahalad explains that collaborations
were formed with the Indian Institute of Science, who helped to develop the product, and non-governmental
organisations to develop village-level entrepreneurs to stock the stoves and form the basis of the logistics system. A
manufacturer was also identi ed.
From the discussions above, it can be seen that BOP implementation is also about reconceptualising how we
think about business. To reconceptualise businesses and potential business models, Prahalad suggests the following
guidelines:108
BOP can be seen as reducing the capital intensity of the business, so as to be able to spread capital needs (such as
xed assets and working capital) over the ecosystem so that one business does not carry all the load.
BOP requires specialism within an ecosystem, as a business system needs to be created.
Volume and scale need to be the basis of affordable pricing. According to Prahalad, to achieve pro tability, large
volume, low capital intensity, low margin per unit and high returns on capital are necessary. is is very different
from the way most business work, or ‘gross margin’ thinking.
Understanding the work ow is very important in building an innovative business system. Work ow and business
processes are important, as work ow provides the guidelines you need to choose which partners to use for
collaboration and to build the ecosystem.
Unlike thinking related to better serving existing markets, to create a new market it is necessary to develop
ecosystems for acquiring new customers.
According to Prahalad, with upwards of four billion new micro-consumers and micro-producers, BOP innovation
allows us to access a largely untapped market.109 However, Prahalad stresses that this requires a shi from product-
centric focus to one on business model innovation, of which a product is just one aspect.110 Systems thinking is
important to be able to do this. Innovation takes the form of developing an ecosystem. Many international
organisations use BOP markets as a laboratory for innovation to help them to develop products for different
markets, including wealthier ones. BOP innovation can be an important source of learning about how to improve
price performance, how to use different technologies, and how to tap markets that, due to systematic structural
change, are due to become middle class. Key to harnessing these abilities, however, is knowledge of how to develop
an organisation so that it is supportive of innovation. e role of leadership in developing an innovation-supportive
organisation will now be discussed.

9.3 Supportive organisations

9.3.1 The role of leadership in creating an organisation supportive of
innovation
According to Rosing, Frese and Bausch,111 the key challenge with leadership theory is that it oen fails to take into
account how complex the innovation process is, and that along the research process there are changing
requirements. ese changes primarily relate to the need for leadership to be able to switch between the exploration
and exploitation modes of the innovation process. e ambidexterity theory of leadership for innovation therefore
offers useful insights for leadership that is explicitly suited to the context of innovation. Whereas the ambidexterity
theory of leadership provides useful insights through differentiating between two complementary forms of
innovative leadership behaviour, transformational leadership theory holds the key to creating an organisational
climate that supports innovativeness.

9.3.1.1 e ambidexterity theory of leadership for innovation

ere are two different and complementary sets of leadership behaviour that enable exploration and exploitation,
both in individuals and teams.112 Exploration is related to increasing the variance of behaviours (different types of
behaviours), experimentation, the search for different alternatives or solutions, and risk taking. ese characteristics
are very different from those associated with exploitation, which is typically characterised by reduced variance
(fewer types of behaviours), following rules, alignment of processes and avoiding risk. Rosing et al. de ne
ambidexterity theory of leadership as a form of leadership that can switch between these two complementary
leadership behaviours. It is not enough to simply demonstrate a leadership style, but one has to exibly adjust
leadership behaviours to the nature of innovation tasks. Both of these processes, however, are forms of
organisational learning. is theory has important implications for maintaining innovativeness in an organisation,
as it suggests that not all behaviours are the same.
Ambidextrous leadership comprises three elements.113 Leaders can apply (i) opening behaviours to support
exploration; (ii) closing leader behaviours to enable exploitation; and (iii) temporal exibility so as switch between
(i) or (ii) as needed. Exploration relates to increasing variance in employee behaviour. Opening relates to breaking
up routines and thinking in new directions, and is de ned as ‘a set of leader behaviours that includes encouraging
doing things differently and experimenting, giving room for opening leader behaviours’.114 is means that when
employees need to show creativity and high levels of innovativeness, opening leader behaviours are appropriate.
Examples of opening leader behaviours include allowing different ways of completing tasks, and encouraging
experimentation, independent thinking and decision-making.
 Exploitation relates to reducing variance in employee behaviour.115 Closing leader behaviour is de ned as ‘a set
of leader behaviours that includes taking corrective action, setting speci c guidelines, and monitoring goal
achievement’.116 Examples of closing leader behaviour include monitoring and controlling the attainment of goals,
encouraging standardisation in task behaviours, and sticking to predetermined plans.
Evidence has been found to support the predictions of ambidexterity theory in working contexts.117 Another
important theory that offers useful principles for how innovativeness can be maintained in an organisation is
transformational leadership theory.

9.3.1.2 Transformational leadership

Transformational leadership is needed to proactively create an organisational climate that supports
innovativeness.118 Bass de nes the transactional–transformational leadership paradigm as either leading on the
basis of contextual requirements (transactional leadership) or leading people ‘beyond their self-interests for the
good of the group, organisation, or society’ (transformational leadership).119 On the one extreme of the spectrum is
transactional leadership, and on the other is transformational leadership. e de nition of transformational
leadership in an organisational context is therefore a leadership style that leads people to go beyond their self-
interests, prioritising the good of the organisation. Transactional leadership is de ned as a leadership style that uses
rewards and punishments to ensure compliance of employees. is style typically achieves compliance in the short
term, as it might not motivate employees to commit themselves to the organisation in the same way that
transformational leadership attempts to do.
Transformational leadership can contribute to innovation in ways other leadership styles cannot, as it is
speci cally concerned with change and innovation.120 Transformational leadership seeks to increase the motivation,
understanding, maturity and self-worth of staff.121 Whereas individuals might compete with each other in
transactional groups, transformational groups are about shared goals. Similarly, whereas transactional organisations
are characterised by rules and regulations, transformational organisations are well suited to innovativeness because
they are more adaptable.
How does leadership work to encourage innovation? Leaders and followers typically enter into an exchange,
which starts with a process of negotiation.122 Leaders can reinforce these transactional exchange commitments
through their power, but there is a better way. A transformational leader motivates followers to work for
transcendental goals that go ‘beyond immediate self-interest’.123 ere are four interrelated components of
transformational leadership.124
Idealised in uence (charisma), according to Bass, relates to how a transformational leader shows charisma – a
type of force of personality that inspires others – and also displays conviction, stresses the importance of trust,
and is not afraid to take a stand on issues, even when this is uncomfortable. is component also relates to how a
transformational leader can motivate others around a shared purpose.
Inspirational motivation is a characteristic that describes how a transformational leader articulates a compelling
vision for the future while expecting high standards. is calls for enthusiasm, optimism and encouragement
while making the achievements of goals meaningful.
Intellectual stimulation, according to Bass, relates to how a transformational leader challenges assumptions,
traditions and beliefs, and gets others to appreciate new perspectives and new ways of doing things. Key to this is
the way such a leader encourages the expression of ideas and reasons. is component is especially important for
the creation of a climate of innovativeness in an organisation.
Individualised consideration takes the form of treating others as individuals, considering their individual needs,
abilities and aspirations, as well as being a coach and a mentor to contribute to their development.
On the other hand, according to Bass, the following are four behaviours that characterise transactional leaders in
the way they achieve their goals.125
Contingent reward behaviours follow the principle of constructive path-goal transaction rewards, whereby
expectations are made clear, and promises and resources are exchanged for leader support.
Active management by exception. Leaders will monitor performance, but intervene only when deviations from
standards occur, enforcing rules to ensure standards are met.
Passive management by exception. is relates to the failure of a leader to intervene until problems grow and
become serious, or only taking action when issues are brought to their attention.
Laissez-faire leadership relates to a non-leadership component of transactional leadership behaviour, where
leaders are unengaged, and do not intervene when necessary, allowing issues to occur ‘on their own’. is ‘hands-
off ’ approach re ects disengagement from the leadership process.

Strategic innovation needs to occur in an organisational climate of innovativeness. You will need these leadership
theories to provide principles for how you can ensure that an organisational climate becomes, and stays, innovative.
ere are certain important concepts that can help you to set up and maintain processes of innovation. e fuzzy
front end of innovation and design thinking are two of these important concepts. ese are considered next.

9.3.2 Supportive organisations: Setting up and maintaining processes

of innovation
A strategic innovation manager needs to set up and maintain processes of innovation. Two important topic areas
that provide useful insights into how to do this are the ‘fuzzy front end of innovation’ and ‘design thinking’. ese
concepts are considered as follows.

9.3.2.1 e fuzzy front end of innovation

Front end innovation is the beginning point in an innovation process where one needs to come up with
opportunities and concepts before the formal development process is undertaken.126 e fuzzy front end (FFE)
phase of new product development (NPD) is usually unstructured, dynamic and uncertain, as it is at this stage that
idea development happens, followed by a stage of idea selection. Fuzziness relates to uncertainty about the extent to
which an idea holds promise for commercialisation. ere are many different reasons for this uncertainty, such as
required technology, markets, resources, organisation t, organisational capabilities, or other constraints and limits.
Given this fuzziness, what then is the best way to approach this state of the development process?
e key is to reduce the uncertainty of the planning process, particularly by reducing technological and
marketing uncertainty.127 As the NPD process progresses, the level of fuzziness reduces. When it reduces enough
for a decision to be made about proceeding, then the approval level is reached. e decision to proceed will usually
depend on certain factors, such as tolerance for risk taking, strategy, technological readiness, whether enough
resources are available, and other internal and external criteria. Differences between the fuzzy front end phase and
the development phase are highlighted in Table 9.2.
As can be seen from Table 9.2, the nature of the FFE phase is very different from that of the development phase.
To achieve success in the product innovation process you will need to successfully meet the objectives of this phase,
and ensure the challenges associated with it are met. e consequences of not resolving these challenges can be
costly. Projects that proceed to the next phase that have not been properly managed in the FFE phase can experience
project delays, budget escalations and performance problems
What are the outcomes to strive for in the FFE phase? Or, in other words, what are the outcomes that you need to
achieve to be able to move the project on to the next phase? Kim and Wilemon’s outcomes are considered as
follows.128
 Project selection and de nition: e most important objective of the FFE is to gain an understanding of project
requirements and to create a clearly de ned product. e development phase needs to proceed on the basis of a
clear product de nition. e main challenge, however, is that it is usually very difficult to clarify the product
concept at the front end in a way that the product de nition is clear and stable. Planning in the development
stage requires this, and if this de nition is not clear costs can escalate in the development phase, and once in the
development phase projects can be ‘costly to kill’ or to stop.
Managing the time dimension: Total FFE process cost is strongly in uenced by the cost of delay. ere are certain
obstacles to achieving rapid and effective FFE performance. ese include failure to plan properly, poor
leadership, ineffective communication and poor allocation of staff. Sometimes, a delay at the FFE stage can lead
to cost savings later if this results in a higher standard of work. is is not to say that losing time is good, and it is
important to save time wherever it is possible. It is also important to match the speed requirements of fast-
moving markets, where the costs of delays can be high.
Managing the people dimension: Management behaviour and attitudes can in uence the innovative performance
of staff. is is particularly true of the FFE phase. Support and rewards can be effective in in uencing the morale
and behaviour of project members. is can be especially important in terms of transferring FFE learning to
development teams, developing relationships that will be carried through to the development process, and also to
solve problems in the FFE stage so that they do not cause further con icts between functional departments in the
development phase.

Table 9.2 Differences between the fuzzy front end phase and the development phase129

Characteristic Fuzzy front end phase Development phase

An idea Probable, fuzzy, changeable Clear, specific, difficult to change

Information for decision-making Qualitative, informal, not exact Quantitative, formal, specific

Outcome or actions A blueprint, reducing ambiguity to A product, making it happen

make yes or no decisions

Focus Broad and shallow focus Narrow and detailed

Idea rejection Easy More difficult

Degree of formalisation Low High

Involvement of personnel Individual or small project teams Full development team

Budget Small or no budget Large or designated budget

Management methods Unstructured, experimental, a need Structured and systematic approach

for creativity

Costs of abandoning the project Typically low cost High cost

CEO commitment Negligible Generally high

When the development phase begins, those working in this phase will usually perform activities that are based on
these three outcomes, or product de nition, time and people dimensions, so it is particularly important to pay
attention to them in the FFE phase. What also needs to be recognised, however, is that these outcomes are not
achieved in isolation, but they can be interlinked. Lastly, it is also important to vary the stress on each outcome
according to speci c project and market requirements. Over time, learning that has occurred in the engineering and
design elds has been found to be very helpful in strategic innovation. is is termed ‘design thinking’ and is
considered next.

9.3.2.2 Design thinking

Design thinking relates to the creative process used by designers during the designing process, which when applied
to innovation plays an important role in strategic innovation. According to Beckman and Barry,130 design theory
has emerged from different disciplines that relate to the design process, as the complexities of new technologies that
were changing human lives required a rigorous and explicit process for embedding these technologies in useful
artefacts or products. ‘First generation’ design theories and methods used optimisation techniques from operations
research as well as systems thinking approaches from the eld of cybernetics, which apply principles of
communication to control and feedback systems. However, ‘second generation’ design theories focused more on the
social aspects of design, or on design as a social process that was less ‘top down’ and drew more people into
problem-solving processes, including from different disciplines.
Over the past decades, however, the innovation process has become codi ed, and formalised, and in new
product development typically follows a ‘stage-gate’ process, or a process which concentrates on whether an
innovation can move from one stage to the next. e problem with this is that the innovation challenges faced by
organisations today are increasingly broad and complex, and following formulaic strategies is simply not enough.
What is needed is an understanding of ‘the more fundamental principles underlying innovation’.131
What is different about design thinking? Design thinking is based on abductive reasoning, or reasoning that is
empathic, personal, subjective and interpretive.132 It seeks to move from what is known to explore what could be.133
Abductive thinking is used for problem solving in a way that balances needs for efficiency and predictability with
those of experimentation. It is about thinking beyond what you see in front of you and imagining a radical solution
to unmet customer needs.
How does one use design thinking to ensure successful innovation? To think like a designer, you would imagine
solutions that meet customer needs, and then build entire systems to optimise customer satisfaction based on
this.134 Design thinking can be used as a way to see, shape and build. ere are three phases to the design thinking
process. ese are the inspiration, ideation and implementation stages. ese stages are not linear, and can be
undertaken in different orders and repeated. e goal is to develop a deep understanding of what people want in
their lives, and what they like about products, and how they are made, packaged, sold and supported. People
develop ideas by failing, and failure is encouraged so that trial and error can be used to accelerate development.
Certain principles behind the application of design thinking in the real-world context are now discussed.

9.3.2.3 Applied design thinking

According to Fraser,135 the methods and mindsets behind excellent design in elds like engineering, industrial
design and architecture can be just as effective in designing how a business can be modelled. Business design is
therefore aimed at delivering market value and enterprise value. e key principles behind this approach are the
following:
A focus on enabling multidisciplinary collaboration
Developing new ideas and possibilities rather than innovating incrementally, or slowly building on what had
been done before.
Sourcing creativity from constraints or challenges
Early prototyping and quickly iterating, or making repeated changes to prototypes speedily, both in the lab and in
the market
Creating new and better models through systems thinking or paying attention to interrelationships.
Fraser suggests a methodology, or a method to use when applying design thinking, termed the ree Gears of
Business Design.136 e ree Gears of Business Design refer to how there are three processes that are interlinked
in the way they drive successful business model design. is framework, brings together empathy and deep user
understanding (Gear 1), which drives concept visualisation, ideation, prototyping and user evaluation (Gear 2).
Concept visualisation in turn drives strategic business design, which comprises activity system design and
evaluation (Gear 3). is is not a linear process or one that happens in a perfect sequence, but rather one that can be
repeated by teams as they cycle through these three gears again and again to generate breakthroughs faster. It is
important to note that this process starts with the rst gear, in that without empathy and a deep user understanding
of the customer there will be nothing to drive the other two gears. is requires knowledge of the context in which a
customer uses a product or service.
Having discussed certain of the concepts that enable a manager to create an organisation that is supportive of
innovation, our attention now turns to the management of the individuals that is necessary both to create supportive
organisations as well as to take advantage of innovation opportunities. Indeed, it is the effort of the individuals you
manage that will dictate the success or failure of your innovation efforts!

9.4 Innovative individuals

Innovation is highly dependent on individuals that feel con dent in their ability and are organisationally enabled to
be creative and innovative. As a starting point, one might ask, what makes an individual innovative in an
organisational setting? Certain individuals are more inclined to be innovative than others. What then are the most
important aspects of innovativeness at the individual level that a manager needs to know about? If we take
individuals to be different and essentially unique, then we rst have to ask how these differences relate to individual
innovativeness. What theory can then be used to give us a recipe or a set of principles that we can use to understand
this relationship? Firstly, personality theory suggests that individuals have different personalities, and that this has
different implications for innovation in an organisation. Diversity is positively related to innovation, and it is
important to empower individuals to be innovative. Personality theory is rst introduced to develop an
understanding of how individual differences relate to innovativeness. Next, building on the previous chapter and its
explanation of how important values are for the management of organisational innovativeness, individual values will
be discussed. Schwartz’s values theory137 predicts which individual values are most aligned with innovativeness, and
which are not. Knowledge of individual values theory can help a manager to understand how individual behaviour
can contribute to innovation in an organisation.

9.4.1 The unique individual

To understand innovative behaviour at the individual level it is important to understand that although they can
share values, attitudes and beliefs, individuals are unique. A manager needs to respect all employees, and to also
recognise that an acceptance of diversity and difference is key to developing an innovative organisational unit. ere
are also different personality theories. However, the one we will look at now is also a comprehensive theory, in that
its dimensions arise from studies of people across different contexts. e personality theory discussed here is the Big
Five theory.
Costa and McCrae138 developed the Revised NEO Personality Inventory to measure personality according to the
Big Five dimensions. Each of these dimensions is associated with different work behaviour. Costa and McCrae’s
dimensions are now each considered.139

Neuroticism
Neuroticism (together with conscientiousness) has not been found to predict career choices as well as the other
dimensions of extraversion, openness to experience and agreeableness. According to Costa and McCrae, individuals
high in neuroticism have been found to experience higher levels of distress and dissatisfaction irrespective of their
actual life situation. Individuals high in neuroticism are usually better suited to work that has low levels of stress and
that require less emotional control, particularly in interactions with others. Knowledge of personality theory is
particularly important for a manager who needs to improve organisational innovativeness because it allows him or
her to better identify an individual’s speci c strengths and to build on them.

Extraversion
According to Costa and McCrae, extraversion is associated with gregariousness, a preference for engagement with
others and social stimulation. Individuals high in extraversion typically display social skills, have numerous
friendships, and tend to participate in team sports and social activities. Managers and sales roles have been found to
be well suited to extraversion. Given that more innovative work is team oriented, it is important for a manager to
support individual engagement in group work contexts, and knowledge of an individual’s personality can be useful
in matching task roles to individual strengths. Different personality types are suited to different roles and tasks.

Openness to experience
Openness to experience is related to a wide set of interests and to innovativeness. When building on the strengths of
staff, a manager can build on the innovative strengths of individuals with high levels of openness. Such individuals
usually have a need for variety, novelty and change. An individual low on openness may tend to be resistant to
change and innovative ideas. ese individuals might need more support to contribute to innovation in an
organisation.

Agreeableness
According to Costa and McCrae, individuals high in agreeableness are expected to demonstrate compliance, or to
defer to others during interpersonal con ict, and to display higher levels of cooperation. Someone low in
agreeableness might tend to seek to dominate in group contexts, and be prone to con ict. us, managers need to be
aware that group tasks differ from individual tasks, and that an increasing proportion of today’s work is performed
by teams. ey need to understand the traits of individuals so as to support them and build on their strengths.

Conscientiousness
Individuals high in conscientiousness are typically hard working, dedicated and committed. is is the personality
characteristic that has been found to be associated with success in work tasks and work performance across
contexts. ese employees usually receive higher performance reviews, and will contribute to the success of the
organisation. ey are particularly well suited to demanding jobs that require initiative, drive, persistence and
organisational skills. A manager also needs to be aware that these employees achieve career success, but this can be
at a cost to personal growth in other areas of their lives. Individuals that are low in conscientiousness may have
lower levels of ambition, and they need to choose an appropriate type of job and work that is better suited to their
motivation levels.
Individual behaviour is to some extent a function of personality, but this is only one aspect of what drives an
individual’s behaviour.

9.4.2 Innovativeness and individual values

Schwartz140 developed a comprehensive values theory that offers us another individual-level theory that can explain
certain aspects of individual behaviour in an organisation, particularly in terms of innovativeness. As an individual-
level theory, it relates primarily to the individual as the unit of analysis. As with the Big Five theory, Schwartz’s
values theory is also a comprehensive theory. Whereas the Big Five theory is a comprehensive theory because it
categorises all personality types (predicting that they all fall into ve primary categories), Schwartz’s theory
categorises almost all the values found in different cultures into one of 10 motivational types of goals, which in turn
fall within four overarching domains. ese domains are in opposition to each other, and derive from different
aspects of human motivations.
Schwartz’s values theory is important because it integrates three aspects of human motivations, namely:141
biological needs
needs related to coordinated social interaction; and
needs associated with group survival and functioning.

us, there are biological, psychological and social components to individual motivational values. As a manager,
knowledge of how individuals differ in their individual values can provide useful information as to which
individuals may need more support to be able to be innovative and productive in different contexts.
Schwartz’s values are de ned as motivational goals that serve as guiding principles in a person’s life.142 ese
typically transcend context, or are not shaped by it, and are differentiated by the motivational goals they express.
ese 10 motivational goals, or values, form a structure with four oppositional domains. e structure of these 10
motivational values is illustrated in Figure 9.6. Each value is located along a circular shape, which is called a
circumplex.
Each value has a relative position in relation to the other values.143 As such, a value is oppositional to another to
the extent that the other value is facing it on the other side of the circumplex. us, for example, the conservation
domain values relate to motivations of security, conformity and tradition, and are associated with low levels of
innovativeness, but openness to change domain values (which oppose conservation domain values) are associated
with high levels of innovativeness
e four overarching domains are comprised of openness to change values, which relate to innovativeness;
conservation values, which are low in innovativeness; self-transcendence values, which relate to how an individual
might prioritise the needs of others over his own; and, self-enhancement values, associated with achievement and
power, or the prioritisation of the individual over the needs of others.144
A manager can use this knowledge to understand the motivational values of others, as these are expected to
re ect in individual behaviour. According to Schwartz, those who score highly on one dimension will score low on
the opposite dimension, thus his values theory has a structure as well as content. Certain values are more strongly
correlated with others, and these form a circle (as discussed, they have a circumplex structure) in the way they relate
to each other. His individual values constructs are now discussed in more detail, beginning with the most important
constructs in terms of innovativeness:145

Figure 9.6 Schwartz’s values structure146

1. Openness to change values147
Openness to change values comprise two values orientations that are related to innovativeness in different ways,
namely self-direction and stimulation. Self-direction values are associated with independent thought and a drive
toward action, decision-making and exploration. Individuals high in this motivational value orientation are typically
independent, innovative and autonomous. According to Schwartz, these motivational goals derive from biological
and social interaction needs.
Stimulation values are associated with excitement, novelty and challenge in life, and derive from a purely
biological origin. Knowledge of whether individuals fall into this group is useful for a manager as it is they who will
be more likely to support innovative change and to be more suited to driving innovative projects and tasks.

2. Conservation values148
According to Schwartz, conservation values are oppositional to open to change values. Whereas openness to change
values are associated with innovativeness, conservation values relate to the subordination of the self to socially
oriented external expectations. e three motivational values falling into the conservation values domain are
conformity, tradition and security values. Conformity values are related to subordination to those who are regularly
encountered, or those with whom one is in regular contact. Tradition values relate to subordination to religious or
cultural customs, or traditions in general. Security values prioritise safety, harmony and the stability of relationships.
In work contexts, these values are expected to manifest in behaviour.

3. Self-transcendence values149
Self-transcendence values, according to Schwartz, are oppositional to self-enhancement values in that they prioritise
the welfare of others, as well as nature. ere are two dimensions within this category, namely universalism and
benevolence. Universalism is related to an appreciation for broadmindedness, social justice, equality and the
protection of nature and the environment. Benevolence relates to the preservation and enhancement of the welfare
of those with whom one is regularly in contact. Self-transcendence values are roughly equidistant from the high
innovativeness pole of openness to change values and the non-innovativeness pole of conservation values. Where
group goals contribute to innovative performance, individuals higher in self-transcendence values might be better
matched to contextual requirements.

4. Self-enhancement values
Individuals with higher self-enhancement values are usually motivated to prioritise their own interests over those of
others.150 e category of self-enhancement values is made up of three motivational values, namely power,
achievement and hedonism. It is important for a manager to be aware of the different motivational values of
individuals, so as to be able to provide support and empowerment. Individuals with high self-enhancement values
might prioritise their own interests above those of the group, and might need support to be able to contribute to
group goals. Differences between people typically enhance the innovativeness of teams, however, and no trait should
be considered negative, as every individual can make a contribution to the innovative performance of an
organisation by building on their strengths and by improving any points of concern.
Power values are associated with prioritising social status, prestige, control or dominance over other people and
resources. Schwartz’s theory echoes the work of McClelland,151 who differentiates between a need for achievement
values and a need for power, whereby managers have been found to have a higher need for power, whereas those
that seek to achieve in an area have high achievement values. For Schwartz,152 achievement values are associated
with motivational goals of success, competence and accomplishment, but differ from those of power in that the need
to achieve does not necessarily extend to the need to have power or control over others or resources. e third self-
enhancement motivational values orientation is hedonism, related to one’s own pleasure, grati cation and
immediate grati cation. Individuals with high hedonism values are expected to prioritise immediate and not
delayed grati cation. Delayed grati cation has been found to be an important determinant of performance over
time.153 e value of hedonism shares certain characteristics with stimulation and achievement, which are on each
side of it on the circumplex, Hedonism values are on the border of the self-enhancement and openness to change
values.154

Workplace implications
It is useful for a manager to be knowledgeable about an individual’s strengths and weaknesses, and knowledge of
Schwartz’s theory can complement knowledge of personality theory in this regard. In some cases, individuals
become less innovative as they progress in their careers and as they settle into roles shiing from openness to
change values toward conservation values.155 However, education can increase innovativeness through its positive
association with openness values. Interestingly, students studying economics, accounting and business
administrative subjects have also been found to have higher power and achievement values, whereas those studying
language, literature, history, philosophy and religious studies were higher in tradition values.156 Differences in
values have also been found to relate to different political preferences.157 To enable innovation in an organisation, it
is necessary to understand what motivates groups and individuals, and to empower individuals to build on their
strengths and to be aware of their weaknesses and address these too.
ere are many facets of individual behaviour. ese are re ected in the many psychological constructs that you
have encountered over the course of your management studies. ese are also re ected in the interactions of the
individual with others and with the culture of the group, and of the organisation itself. is section has sought to
give you an overview of the individual, and to provide you with useful theory to be able to harness the different
talents and motivations of those you work with.

Putting it all together

is chapter sought to provide a potential strategic manager with a toolbox of theories and guidelines to be able to
develop and maintain an innovative organisation or organisational unit in the South African business context. is
section built on the previous sections, as innovation opportunities were initially presented, with a special focus on
opportunities associated with disruptive innovation. Aer this our attention turned to how to develop supportive
organisations to support these opportunities. Finally, in this section we explored theory that identi ed innovative
individuals, providing useful knowledge of how to build on the different dimensions of individual strengths and
how to mitigate individual weaknesses. e nal lesson of this chapter is that the knowledge presented here is not
enough to prepare you to manage innovativeness in an organisation. You will have to be able to source knowledge as
and when you need it in your role as a manager. In today’s world, knowledge is just a click away, but to use it you
will need to have a good grounding in the theory of innovation or its basic principles. Hopefully this chapter has
provided you with such a grounding!

9.5 Summary
In this chapter, we have come to understand that there are different aspects of strategic innovation, which together
provide us with the knowledge we need to make different types of strategic choices. We also came to understand that
the application of strategic innovation principles can follow a systematic process. First, opportunities for innovation
were the subject of the initial portion of the chapter. In order to survive and prosper in an increasingly competitive
global context, a business manager needs to understand the patterns and regularities that underlie the forces of
innovation, and those of disruptive innovation in particular. Certain seminal innovation theories were therefore
introduced to provide certain of these insights. Kondratiev’s long-wave theory was outlined as a theory which helps
us to predict the long-term changes in technology and innovation faced by organisations. Schumpeter’s theory of
creative destruction was then explained, which allowed us to see that uncertainty and disruptive innovation is a
natural characteristic of the market system. Aer this, Foster’s S-curve theory was considered, which showed how to
map an organisation onto its technological S-curve, and to understand when disruptive innovation might be more
likely to occur in an industry. Dominant design theory was explained in terms of how it can be used to identify
factors that can enable organisations to establish a dominant design in certain industries. Absorptive capacity theory
was then discussed, which stresses the role and importance of knowledge in dealing with disruptive innovation.
Value innovation was explored in terms of how it can help an organisation seize opportunities. e characteristics of
blue versus red ocean strategies were then considered, and the advantages of blue ocean strategies were discussed in
terms of their unique strategic bene ts. Given South Africa’s substantial potential for BOP innovation, examples of
BOP innovation were used to highlight how one could apply these principles in a real-life business context. In order
to be able to seize innovative opportunities, a supportive organisation needs to be able to provide the leadership,
processes and systems to support innovation. As a manager, one needs to manage people, and leadership theory was
therefore introduced, with speci c reference to two leadership theories, namely the ambidexterity theory of
leadership for innovation and transformational leadership theory. To successfully apply strategic innovation it is
necessary to set innovation in motion and to maintain its momentum in an organisation. e fuzzy front end of
innovation was therefore introduced in order to better understand how to set the product development phase in
motion, and design thinking was explained as a method to show how the innovation process can bene t from
informed design processes. e chapter closed with a discussion of personality theory and individual values theory
as it relates to innovative individuals. e chapter sought to provide you with useful principles that you can use to
seize innovative opportunities, build supportive organisations, and manage the innovative individuals you will nd
in the real life South African business context. Now it is up to you to put all of this into practice!

REFLECTION BOX:

Can you think of any products you consume that might have been developed using a blue ocean strategy?
Can you think of others that are associated with a red ocean strategy?
Think of a BOP innovation opportunity that exists close to where you are. What do you think prevents
someone else from taking up this opportunity?
Reflect on how your views have changed, considering that disruptive innovation and ‘creative destruction’
may be a natural part of life in business.
How do you feel about being a strategic manager in a context where 3D manufacturing and other innovative
changes not only change the rules of the game, but can also change the very nature of the game itself?
How do you feel about the possibility, in the future, of creating your own value curves using value innovation
in almost any context?
Think of a business that no longer exists due to disruptive innovation. Now think of another that you think will
be disrupted by technological innovation.
Think of your own strengths and weaknesses, and make a list of them. Now relate them to personality theory
and individual values theory. Do you agree that self-knowledge can give you a better idea of how to build on
your strengths and work to improve on your weaknesses? Now think of how you can apply these insights in
the workplace.

Opening case study questions

1. Relate the principles behind the changes in strategy made by Formule 1 to another organisation’s launch of a new
product.
2. Explain the value of this new product.
3. Explain the differences between the value innovation strategy applied by Formule 1 and conventional strategy.
With reference to your explanation, discuss certain weaknesses associated with conventional strategy.

Discussion questions
1. Compare and contrast the theories of innovation with the help of practical examples.
2. Explain what is meant by value innovation and how it can be used to establish competitive advantage.
3. Explain why following a blue ocean strategy might be considered to be a rejection of a central tenet of historical
strategic management practice.
4. With reference to a business example of your choice, critically evaluate their application of value innovation.
Give speci c real-life examples.
5. Explain exponential technologies and identify how organisations could use them to develop new value curves.
What are the potential consequences of the development of these innovations on markets?
6. Give three examples of businesses that have successfully applied BOP innovation. Identify their products and
discuss how they were developed.
7. Describe a time that you were under a leader who had characteristics associated with transformational
leadership. How did this affect your innovative performance under this leader?
8. With regard to three products of your choice, try to describe the fuzzy front end process that was used to initiate
the development phase for these products.
9. Explain how you would use design thinking in the innovation process.
10. Explain why it is so important to use an S-curve to know when a technology may be facing radical innovations.
11. Critically discuss how an organisation can apply the principles of dominant design theory to establish their
standard in an industry.
12. Explain how absorptive capacity can be used to maintain competitive advantage in conditions of uncertainty.

Using knowledge and skills

1. Visit a business that makes a range of products. From your research at this business, identify which of the
products are associated with blue or red ocean characteristics.
2. Also, from your research, identify which products have been developed using the principles of value innovation.
3. Visit another business that has successfully applied BOP innovation. From your research, plot the processes they
used to develop the BOP product offering.
4. Visit a business that sells technological products. Identify which of their products might have disrupted the
market.
5. For the same organisation, draw the S-curve related to the underlying technology of the industry it is in, and
make recommendations for how the organisation can avoid being disrupted by new technology.
6. For the same organisation, for a product, identify the dominant design in the industry, and explain what factors
typically associated with the achievement of a dominant design are present for this organisation.
7. For the same organisation, explain how they manage knowledge in order to maintain their competitive
advantage.
8. ink of what your own leadership style is or would be in an organisation. How does your style compare to those
discussed in this chapter? How would this knowledge help you to improve the innovativeness of an
organisational unit you are managing?
9. Identify an existing organisation of your choice and compare its innovation-supporting processes to those
described in this chapter. What recommendations would you make for the organisation?
10. What are your own most important individual values? In order of importance, list the most important six. ink
of how these values relate to innovativeness. What insights from this exercise would you use to improve your
innovativeness in the workplace?

Further reading
Christensen, C.M. 2003. e innovators dilemma. New York: HarperBusiness Essentials.
Christensen, C.M., Johnson, M.W. & Rigby, D.K. 2002. Foundations for growth: How to identify and build
disruptive new businesses. Sloan Management Review, Spring.
Kim, C. & Mauborgne, R. 1997. Value innovation: e strategic logic of high growth. Harvard Business Review,
January–February.
Kim, C. & Mauborgne, R. 1999. Strategy, value innovation and the knowledge economy. Sloan Management Review,
Spring.
Kim, C. & Mauborgne, R. 1999. Creating new market space. Harvard Business Review, January–February.
Kim, C. & Mauborgne, R. 2000. Knowing a winning business idea when you see one. Harvard Business Review,
September–October.
Prahalad, C.K. 2005. e fortune at the bottom of the pyramid. Upper Saddle River, NJ: Wharton School Publishing.
Rogers, E. M. 1976. New product adoption and diffusion. Journal of Consumer Research, 2(4):290–301.
Schumpeter, J. 2011[1947]. Can capitalism Survive? Mans eld Centre: Martino Publishing.
Skarsynski, P. & Gibson, R. 2008. Innovation to the core: A blueprint for transforming the way your organisation
innovates. Boston: Harvard Business School Press.
Smith, A. 2003[1776]. e wealth of nations. New York: Bantam Dell.

References and endnotes

1. Accorhotels. 2018. Overview. [Online]. Available:
http://www.accorhotels.group/-/media/Corporate/Home/Documents/Publications/PDF-for-
pages/AccorHotels_OVERVIEW_EN_Feb18.pdf [Accessed 19 March 2018].
2. Ibid.
3. Kim, W.C. & Mauborgne, R. 1997. Value innovation: e strategic logic of high growth. Harvard Business
Review, 103–112.
4. Kim, C. & Mauborgne, R. 2004. Blue ocean strategy. Harvard Business Review, October, 71–79.
5. Ibid.
6. Ibid.
7. Tversky, A. & Fox, C.R. 1995. Psychological Review, 102(2):269–283.
8. Markides, C. 1997. Strategic innovation. Sloan Management Review, 38(3):9–23.
9. Christensen, C. 2007. Disruptive innovation: Dilemmas persist. Leadership Excellence, 24(9):7.
10. Hall, P. 1981. e geography of the Fih Kondra eff Cycle. New Society, 535–537.
11. Ibid.
12. Freeman, C. 1986. e role of technological change in national economic development. In Amin A. &
Goddard, J.B. (Eds). Technical change, industrial restructuring and regional development. London: Unwin &
Hyman.
13. Schumpeter, J. 1947. Can capitalism survive? Mans eld Centre: Martino Publishing. 6.
14. Ibid.: 23.
15. Ibid.: 8.
16. Ibid.: 22.
17. Ibid.: 23/24.
18. Ibid.: 24.
19. Smith, A. 1776. e wealth of nations. New York: Bantam Dell. 11.
20. Ibid.
21. Ellison, G. & Ellison, S. F. 2005. Lessons about markets from the Internet. e Journal of Economic
Perspectives, 19(2):139–158.
22. Donnelly, L. 2013. Want it? Make it. at’s the possibility of 3D printing. [Online]. Available:
http://mg.co.za/article/2013-01-04-00-want-it-make-it-thats-the-possibility-of-3d-printing. [Accessed 26
April 2019].
23. Ibid.
24. Foster, R.N. 1985. Timing technological transitions. Technology in Society, 7: 127–141.
25. Ibid.
26. Murphy, M. 1996. Betting on Moore’s Law. Wired, June: 88.
27. Foster. Op. cit.
28. Adapted from Foster. Op. cit.: 130.
29. Foster. Op. cit.
30. Ibid.
31. Ibid.
32. Ibid.
33. Ibid.
34. Ibid.
35. Suarez, F.F. & Utterback, J.M. 1995. Dominant designs and the survival of rms. Strategic Management
Journal, 16:415–430.
36. Ibid.
37. Ibid.
38. Ibid.
39. Ibid.
40. Ibid.
41. Ibid.
42. Wadhwa, V. 2013. Five innovations that will de ne tech in 2013. [Online]. Available:
https://venturebeat.com/2013/01/12/innovations-2013/ [Accessed 26 April 2019].
43. Schwab, K. & Samans, R. 2016. Preface. e future of jobs. World Economic Forum. [Online]. Available:
http://www3.weforum.org/docs/WEF_Future_of_Jobs.pdf
44. World Economic Forum. 2012. e Global Competitiveness Report. World Economic Forum. [Online].
Available: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
45. World Economic Forum. 2017/8. e Global Competitiveness Report. World Economic Forum.
http://www3.weforum.org/docs/GCR2017-
2018/05FullReport/eGlobalCompetitivenessReport2017%E2%80%932018.pdf
46. Huang, J. 2009. e evolutionary perspective of knowledge creation: A mathematical representation.
Knowledge Based Systems, 22(6):430–438.
47. Wadhwa. 2013. Op. cit.
48. Compiled from information available on: History Learning Site. History of Medicine. [Online]. Available:
http://www.historylearningsite.co.uk/ignaz_semmelweis.htm [Accessed 22 December 2012].
49. Ibid.
50. Tani, R. 7 reasons to switch to the Dvorak keyboard layout. [Online].
http://workawesome.com/productivity/dvorak-keyboard-layout. [Accessed 24 April 2019].
51. Cohen, W.M. & Levinthal, D.A. 1990. Absorptive capacity: A new perspective on learning and innovation.
Administrative Science Quarterly, 35(1):128–152.
52. Ibid.
53. Ibid.
54. Ibid.
55. Ibid.
56. Ibid.
57. Ibid.
58. Ibid.
59. Kim & Mauborgne. 1997. Op. cit.
60. Ibid.
61. Ibid.
62. Ibid.
63. Ibid
64. Ibid.
65. Ibid
 66. Ibid
67. Kim & Mauborgne. 2004. Op. cit.
68. Adapted from Kim & Mauborgne. 2004. Op cit.:76.
69. Kim & Mauborgne. 2004. Op. cit.
70. Adapted from Kim & Mauborgne. 2004. Op cit.:77.
71. Ibid.
72. Smith, D. 2010. Exploring innovation. Berkshire: McGraw-Hill. Compiled from information available on:
History Learning Site. History of Medicine. [Online]. Available:
http://www.historylearningsite.co.uk/ignaz_semmelweis.htm [Accessed 22 December 2012].
73. Rogers, E.M. 1976. New product adoption and diffusion. Journal of Consumer Research, 2(4):290–301.
74. Kim & Mauborgne. 2004. Op. cit.
75. Ibid.
76. Ibid.: 72.
77. Ibid.: 71–79.
78. Magretta, J. 2002. Why business models matter. Harvard Business Review, May.
79. Ibid.
80. Lindgardt, Z., Reeves, M., Stalk, G. & Deimler, S. Boston Consulting Group (BCG). 2009. Exhibit 1A.
Business model innovation. e Boston Consulting Group. [Online]. Available:
le://zacapdcs01/User_Data/nicola.vanrhyn/My%20Documents/Strategic%20Management%204e/ le36456.p
df [Accessed 26 April 2019].
81. Ibid.
82. Ibid.
83. Ibid.
84. Ibid.
85. Ibid.
86. Ibid.
87. Mckinsey & Company. 2015. How Discovery keeps innovating.
88. Ibid.
89. Ibid.
90. Ibid.
91. Ibid.
92. Chesbrough, H. 2010. Business model innovation: Opportunities and barriers. Long Range Planning, 43:354–
363.
93. Ibid.
94. Ibid.
95. Ibid.
96. Johnson, M.W., Christensen, C.M. & Kagermann, H. 2008. Reinventing your business model. Harvard
Business Review, 86(12), December.
97. Ibid.
98. Ibid.
99. Prahalad, C.K. 2012. Bottom of the pyramid as a source of breakthrough innovations. Journal of Product
Innovation Management, 29(1):6–12.
100. Ibid.
101. Ibid.
102. Ibid.
103. Ibid: 7.
104. Ibid.
105. Ibid.
106. Ibid.
107. Ibid.
108. Ibid.
109. Ibid.
110. Ibid.
111. Rosing, K., Frese, M. & Bausch, A. 2011. Explaining the heterogeneity of the leadership-innovation
relationship: Ambidextrous leadership. e Leadership Quarterly, 22:956–974.
112. Ibid.
113. Ibid.
114. Rosing, Frese & Bausch. 2011. Op. cit.: 967.
115. Ibid.: 956–974.
116. Ibid.: 967.
117. Alghamdi, F. 2018. Ambidextrous leadership, ambidextrous employee, and the interaction between
ambidextrous leadership and employee innovative performance. Journal of Innovation and Entrepreneurship,
7(1):1–14.
118. Bass, B.M. 1997. Does the Transactional-Transformational leadership paradigm transcend organizational and
national boundaries? American Psychologist, 52(2):130–139.
119. Ibid.
120. Chen, M.Y., Lin, C.Y., Lin, H. & McDonough III, E.F. 2012. Does transformational leadership facilitate
technological innovation? e moderating roles of innovative culture and incentive compensation. Asia
Paci c Journal of Management, 29:239–264.
121. Bass. 1997. Op. cit.: 130–139
122. Ibid.
123. Ibid.
124. Kim, J. & Wilemon, D. 2002. Op cit.: 130–139.
125. Ibid.
126. Kim, J. & Wilemon, D. 2002. Focusing the fuzzy front-end in new product development. R&D Management,
32(4), 269–279.
127. Ibid.
128. Ibid.
129. Ibid.
130. Beckman, S.L. & Barry, M. 2007. Innovation as a learning process: Embedding design thinking. California
Management Review, 50(1):25–56.
131. Beckman & Barry. 2007. Op. cit.: 28.
132. Serrat, O. 2017. Design thinking. In Knowledge solutions. Springer: Singapore. 129–133.
133. Fraser, M.A. 2009. Designing business: New models for success. Design Management Review, 20(2):57–65.
134. Serrat. 2017. Op. cit.
135. Fraser. 2009. Op cit.
136. Ibid.
137. Schwartz, S. 1994. Are there universal aspects in the structure and contents of human values? Journal of Social
Issues, 50(4):19–45.
138. Costa, P.T. & McCrae, R.R. 1992. e revised NEO Personality Inventory (NEO PI-R) and NEO Five-Factor
Inventory (NEO-FFI) professional manual. Odessa: Psychological Assessment Resources.
139. Ibid.
140. Schwartz. 1994. Op. cit.
141. Ibid.
142. Ibid.
143. Ibid.
144. Ibid.
145. Schwartz. 1994. Op. cit.
146. Schwartz, S. H., & Boehnke, K. (2004). Evaluating the structure of human values with con rmatory factor
analysis. Journal of Research in Personality, 38, 230–255.
147. Ibid.
148. Ibid.
149. Ibid.
150. Ibid.
151. McClelland, D. 1975. Human motivation. Cambridge: Cambridge University Press.
152. Schwartz, 1994. Op. cit.
153. Peck, M.S. 1978. e road less travelled: A new psychology of love, traditional values, and spiritual growth. New
York: Simon & Schuster.
154. Schwartz. 1994. Op. cit.
155. Schwartz, S.H., Melech, G., Lehmann, A., Burgess, S., Harris, M. & Owens, V. 2001. Extending the cross-
cultural validity of the theory of basic human values with a different method of measurement. Journal of
Cross-Cultural Psychology, 32(5):519–542.
156. Ibid.
157. Ibid.
 CHAPTER 10 Corporate level
strategy
Annemarie Davis

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain what corporate strategy entails
comment on the strategic management process and when corporate strategies are crafted
differentiate between the corporate strategic options
explain the role of the corporate parent
critically evaluate the corporate strategies in a multi-business organisation
comment on the use of matrices in managing the corporate portfolio.

KEY TERMS

bankruptcy
consolidation strategy
cooperative strategies
corporate parent
cost cutting (or downsizing)
defensive strategies
diversification strategies
divestiture strategies
greenfield venture strategy
harvesting strategy
joint ventures
liquidation
market development strategies
market penetration strategy
organic growth strategies
parenting advantage
product development strategy
recovery strategies
related diversification strategies
retrenchment
strategic alliances
unrelated diversification strategies
unfriendly takeovers
OPENING CASE STUDY

Super Group – complementary acquisitions are key to its success

Super Group is an integrated mobility business and listed on the JSE. Founded in 1986, Super Group has an
international footprint1 and is known for its success in integrating supply and demand management within and
across companies. It aims to be the leading transport logistics and mobility group, and offers end-to-end supply
chain solutions, fleet management and dealership services to a diversified customer base in Africa, Australia,
the UK, Europe and New Zealand. Its strategic focus is to expand internationally through market development
into selected African countries, securing long-term business contracts and building on its world-class
competencies. The Super Group stable is structured around supply chain, fleet solutions and dealerships.
Super Group Supply Chain Africa includes transportation, warehousing and distribution, and comprises SG
Freight, SG Coal, Legend, Phola Coaches and African Logistics. On the warehousing and distribution side,
Super Group has SG Consumer, Super Park Warehouse, SG Convenience, SG Mobility and Digistics.
Super Group Fleet Africa offers fleet solutions within southern Africa.
Super Group Dealerships SA consists of franchised dealerships based in the provinces of Gauteng, North
West and Western Cape. The table on the next page offers a description of the Super Group business model.2
Super Group’s business did not always run smoothly, however. In 2009 it hit an all-time low and its founder
resigned. A year later, Super Group appointed a new CEO and CFO, and returned to profitability. From 2010
onwards, Super Group restructured its fleet and set off towards acquiring interests in Fleet Africa Eastern Cape
and acquiring the Volkswagen and Audi Rustenburg dealership. In 2012, Super Group acquired Haulcon (SG
Bulk), a specialised bulk dry powder and liquids distribution business. This was followed with acquisitions of the
Chrysler, Jeep and Dodge East Rand dealership. In 2013, Super Group expanded even further with the
acquisition of 75% interest in Safika Oosthuizens, a logistics services company that provides hauling of dry bulk
goods such as coal, chrome and ‘run of mine minerals’ in tipper trucks. This acquisition was followed by another
acquisition in 2014 when it ventured into vehicle distributorship with a 50.1% interest in GWM Southern Africa.
By 2015, Super Group increased its footprint further by acquiring a 75% interest in the passenger transport
solutions provider, Phola Coaches. This was followed with further acquisitions – Biggest SA Trading and Ice
House Liquor Merchants with more dealerships in Mpumalanga, Roodepoort and the East Rand.3
During February 2018, Peter Mountford, CE of Super Group, confirmed that the group was open to
acquisitions in South Africa and the right opportunities in Europe after a period of consolidation. The success of
its acquisitions can be attributed to the detailed analysis of opportunities. He stated that the group looks at the
right strategic opportunities, whether they were in southern Africa or elsewhere, and that it was looking at further
acquisition opportunities in SG Fleet in Australia and also in South Africa.4 Super Group’s future strategy is to
continue to explore investment opportunities internationally and in South Africa to maintain its position as an
innovative, integrated mobility solutions company.5
Overview
Strategy formulation is not an optional extra in the strategic management process – as stated earlier, it is a deliberate
course of action chosen to create or sustain a competitive advantage. Strategies are the routes that will take the
organisation to its destination – the strategic intent of the organisation. This chapter explores various corporate level
strategies and offers insight into the strategic options available to an organisation to gain competitive advantage by
operating several businesses simultaneously. Corporate level strategies are aimed at growing the business or
defending it in a multi-business context. Corporate level strategies are also referred to as grand strategies or
strategies for the multi-business organisation. Choosing the most appropriate corporate level strategies forms part of
the strategic decision-making process. Business level strategies were discussed in Chapter 8. In that chapter, they
were described as strategies to decide how to compete and build strategic competitive advantage in organisations
that mostly operate in single industries. Corporate level strategies, on the other hand, entail strategies that extend
beyond single-industry businesses, and deal with the organisation’s choices for products and markets. When
developing corporate level strategies, strategic decision-makers, or corporate parent, answer questions such as
whether or not the organisation should focus on just a few products and markets, or whether it should have a much
broader focus in terms of its scope by offering diversified products or services and/or serving diversified markets. The
corporate parent represents the organisational headquarters of a diversified group of companies. With growth
strategies, the strategic decision-makers, or corporate parent, can opt to grow the business through internal
expansion, such as reaching new markets with existing products. Another option is to grow the business or
businesses through buying other organisations, such as an acquisition or forward integration.

10.1 Introduction
e Opening case study Super Group – complementary acquisitions are key to its success explained the growth in the
Super Group business portfolio through acquiring related and unrelated businesses. As with multi-business
organisations, the Super Group business portfolio comprises business units that devise their own strategies, function
under their own pro t centres and with their own management team – all under the oversight of the corporate
parent. With the Super Group, the business portfolio is grounded in mobility within supply and demand
management. However, corporate strategies aimed at growing the business are not always based on businesses and
industries that are related. It is possible for a corporate parent to venture into unrelated industries. e Bothongo
Group,6 for example, started off as a commercial property owner and then branched off into agriculture and
hospitality divisions as well as environmental cleaning products, furniture, events and décor services, and aviation
services. e Case example PEPmoney describes how PEP Stores entered a line of business not related to its existing
offering of clothing and homeware.

CASE EXAMPLE: PEPmoney

PEP, the biggest single brand retailer in Africa, lauds its customers as remarkable people who, on a very small
budget, make it possible for their families to live with dignity and pride. Over the years, PEP expanded its offering
from clothing and footwear to homeware, fast-moving consumer goods (FMCG), and cellular and airtime
products. One of the latest additions is PEPmoney. The newly launched PEPmoney debit card is the cheapest
bank card in the country. It is a full transactional card that also gives customers interest on their balance.
Through the app or USSD string, customers can check their balances, buy airtime and electricity, pay bills and
transfer money. A PEPmoney to PEPmoney transfer is the cheapest money transfer in South Africa.7 Not only
did PEP diversify its business, but it also offered a solution for those who had left their families and loved ones
and trekked to cities to look for employment. In the past, the families left behind might go for months without
receiving any form of financial assistance. PEP answered this need by offering a reliable money transfer service
that allows working people in cities to send money back home to their families through a brand that has been a
trusted household name since 1965.8

Strategic choice is an ongoing process rather than an event, and requires exibility. As explained in Chapter 1,
strategies can be deliberate or emergent. Prudence requires the tweaking of plans ahead of predicted change. us,
tough times ahead may trigger a change from a growth to a defensive posture. From time to time, multi-business
corporations restructure themselves by creating new divisions or subsidiaries while scaling back in other areas. As
discussed in the Case example Business overview of Naspers, the Naspers Group operates at several business levels of
print media, pay television and internet trading. Each subsidiary, like Media24, MultiChoice, Showmax,
takealot.com and Remitly, has its own competitors and makes strategic decisions at the business level, as described
in Chapter 8. e Naspers Group headquarters (or Naspers corporate parent) operates at the corporate level when it
makes decisions across all the various subsidiaries. Such corporate decisions may be about diversi cation strategies
into new markets.
In this chapter, most ideas and examples involve the private sector. However, the principles of corporate strategy
also apply to the public sector. Government-owned Transnet, for example, continues to turn its business around,
while Broadband Infraco, a licensed state-owned company in the telecommunications sector, is growing through
market and product development.

CASE EXAMPLE: Business overview of Naspers

Founded in 1915, Naspers is a leading multinational media group and was listed on the JSE in September 1994.
The company is also listed on the LSE (London Stock Exchange). Naspers operates in more than 120 countries
 and markets with long-term growth potential.9
Over the past three decades the group has evolved from a traditional print media business in one country to a
broad-based e-media company in multiple markets addressing societal needs in markets that offer the greatest
growth potential.
The Naspers Group is organised into six business areas: Classifieds, Payments, B2C eCommerce, Ventures,
Video Entertainment and Media.10 Most of Naspers’s businesses hold leading market positions, which adds
value to shareholders through a stronger share price. The Naspers Group typically focuses on large consumer
trends where they try to identify changes early, adapt suitable business models for the high-growth markets on
which they are focusing and leverage their position to build great businesses that have scale, are profitable and
generate a healthy cash flow.11
The Classifieds business provides mobile and digital marketplaces that connect more than 300 million buyers
and sellers every month in 40 countries around the world. Their payment platform, PayU, focuses on markets
with long-term growth, and has leading positions across Africa, the Middle East, Central and Eastern Europe,
India and Latin America. PayU offers 250 payment options that enable safe transactions for more than 160 000
merchants. Their B2C eCommerce segment contains their consumer e-commerce companies and investments,
and include eMag, Flipkart, Longa and Takealot. The Naspers Ventures team hunts for new opportunities to back
high-potential internet businesses and help their founders to scale globally. Video Entertainment offers, through
MultiChoice South Africa and MultiChoice Africa, quality entertainment anytime, anywhere and on any device to
more than 10 million subscribing households in around 50 countries across sub-Saharan Africa. Their Media
business offers more than 40 magazines and 80 newspapers, and reaches more than 13 million monthly unique
browsers across its digital platforms.12
The Naspers operating model is unique, which, some argue, is what adds value to its owners. Naspers invests
in and runs leading companies, and aims to add value at all life stages. They create their own businesses or
invest in early-stage companies, grow them to scale and hold investments in listed companies with significant
upside.

is chapter deals with corporate level strategies and includes a discussion on corporate parenting and matrices to
use in managing the corporate portfolio.

10.2 What corporate strategy entails

Corporate strategies are also referred to as grand or master strategies. ese provide direction, and represent
roadmaps that the organisation can use to achieve its strategic goals. Porter13 argues that corporate strategies are
those strategies that make the corporate whole add up to more than the sum of its parts. Porter also warned that
organisations may opt for inappropriate corporate strategies that can dissipate rather than create shareholder value.
e business environment offers many cases of failed corporate strategies, such as unsuccessful mergers and
acquisitions. During 2017, South African mergers and acquisitions deals halved,14 which may be indicative of
cautious strategic decision-making amidst uncertainties in the industry and recognised complexities related to
mergers and acquisitions. Some organisations (such as Naspers or Super Group) operate two or more strategic
business units and require an overarching strategy for building value for their owners. Value is added when synergy
is created – in other words, when the organisation as a whole is valued in excess of the sum value of its component
units. Value can also be added through unrelated diversi cation, as is seen in the Case example of PEPmoney. Other
organisations, such as Apple Inc, elect to focus on a single business instead of diversifying. While seemingly risky,
specialisation enables organisations to hone their skills, understand consumers better, and offer customised
products and services, unlike those who spread themselves thin. Organisations who want to grow their market share
may choose to do so through creating more value with their existing operations or by buying additional capacity to
add more value, as was described in the previous Case example about Naspers. Again, the decision whether to make
use of existing resources and markets to grow the business, or to buy other businesses or form alliances with other
organisations is in uenced by a range of factors. e various corporate strategy options also need to be evaluated
against the criteria described in Chapter 8 to ensure that the most viable strategies are chosen.
Corporate strategy addresses two basic questions:
1. What and how many businesses and industries should we operate in?
2. How can we build synergy and competitive advantage among business units? In other words, how should the
corporate headquarters (parent) manage the portfolio of businesses to create value?

To illustrate the corporate strategy questions, we refer again to the Naspers Group. Firstly, the strategic management
team would ask what and how many businesses and industries they should operate in. Naspers started as a printer
and publisher of newspapers and magazines in 1915.15 e strategic management team later opted to expand the
business to book publishing, and later incorporated pay television, video entertainment, internet platforms and
classi eds. e corporate level strategy was to grow the Naspers business through related diversi cation. In
answering the second question about synergy and competitive advantage, the strategic management team opted to
organise and rebrand its print media under the Media24 umbrella in 2000. rough this corporate strategy, synergy
was created among the various subsidiaries, and the Media24 brand was developed into a strong brand that makes it
difficult for smaller competitors to compete against. Table 10.1 offers the considerations to making strategic
decisions. e focus of this chapter is mostly on the content on the le side of Table 10.1 and deals with corporate
level strategy.

Table 10.1 Considerations when making strategic decisions

CORPORATE LEVEL BUSINESS UNIT LEVEL

STRATEGY CONSIDERATIONS STRATEGY CONSIDERATIONS
What and how many businesses and What is our purpose? What is our source of competitive
industries should we operate in? advantage and how can we use it to
What is our mission?
Do we want to specialise on related compete successfully?
products or services? Why do we exist? Who are our customers?
Do we have the competencies and What are our competitors doing?
What are the best strategies to
resources to expand our markets and Is our target market broad or narrow?
achieve this?
the industry in which we operate in?
Where do we see ourselves in the
future?

Figure 10.1 shows the corporate strategies and the strategic options. Corporate level strategies can be broadly
divided into:
growth strategies (organic growth and growth through diversi cation); and
defensive strategies (retrenchment or recovery, divestiture and liquidation).

Defensive strategies are oen also referred to as turnaround or decline strategies, while cooperative strategies are
also referred to as corporate combination strategies. Cooperative strategies (joint ventures, consortia and strategic
alliances) are sometimes seen as a third type of corporate strategy. However, we position cooperative strategic
options within the corporate growth strategies.
e choice of strategy depends on the strategic t between the organisation’s internal strengths, capabilities and
resources, and the external opportunities. Corporate level strategy decision-making cannot be considered without
also recognising the corporate parent (headquarter) and its stance towards overall organisational purpose.

Figure 10.1 Corporate goals of growth and defend with the corporate strategies and actions
10.3 An overview of corporate strategy options
Following on from Figure 10.1, the next section provides an overview of the corporate strategy options. With multi-
business organisations, the corporate parent management team considers the factors that affect the entire business
portfolio before making corporate level strategic choices. e Case example on the Naspers Group describes how
Naspers matches its experience in mergers and acquisitions with growing its portfolio and investing in new ventures
with high growth potential. When an organisation chooses and implements the correct strategy, it can realise above-
average returns which will enable the multi-business organisation to maximise wealth and contribute to the survival
of the various business units in the long term.
Multi-business organisations’ decisions about its corporate strategies ow from its corporate goals: either to grow
the business or to defend it when it nds itself in a vulnerable position. Whether opting for growth or defence goals,
organisations have various corporate strategies and actions to choose from, as shown in Figure 10.1. Growth
strategies are broadly distinguished between internal growth (i.e. growth from within the organisation, such as
developing products) or external growth (i.e. growth outside the organisation, such as acquiring another company).
e rst option is to grow the business organically through market penetration or consolidation. e second option
is to grow it either by entering new markets (market development) or by expanding its product range (product
development). e third option is to diversify the business, similar to what Naspers and Virgin are doing. Finally,
organisations can also opt to grow the business through integration strategies. Diversi cation and integration
strategies are oen referred to as external growth strategies. Within growth strategies, organisations can choose
from a range of corporate actions to achieve their corporate growth goals. ese corporate actions include the
cooperative or corporate combination strategic actions that are especially appropriate for organisations that operate
globally or in technology-driven industries.
When the organisation nds itself in a vulnerable position due to new competitors, an increase in existing
competitive rivalry or an internal organisational weakness, multi-business organisations will opt for defence
strategies. e defensive strategy options include turnaround strategies or strategies to manage the end game (i.e.
divesting or exiting the market).

10.4 Growth strategies

Growth strategies are viable when opportunities exist and the organisation is in a position to exploit them. As Figure
10.1 indicates, growth strategies can be divided into organic growth such as market penetration, and market
development, product development and innovation. Growth strategies can also be divided into external growth
strategies such as diversi cation and integration. Diversi cation strategies are further divided into related
diversi cation (also referred to as concentric) or unrelated diversi cation (also referred to as conglomerate).
Organisations seek growth for a range of reasons. For many, expansion boosts pro tability and business
valuation. Others opt for growth strategies as this improves their competitive position. Some organisations merge
with other organisations to tap new markets or to expand their market reach, which is an external growth strategic
action. See the Case example Bidvest expands Commercial Products division through Brandcorp acquisition on the
next page. Others leverage existing technologies into fresh markets, lowering costs – this refers to internal growth
strategies like market development. Growth may also help secure a presence in burgeoning markets such as the
BRIC countries (Brazil, Russia, India and China). However, irrationally, some organisations grow to indulge
managerial egos or to boost executive compensation whenever pay is linked to organisational size. Some may argue
that the retail company, Steinhoff International, pursued growth beyond its ability with its aggressive acquisitions
outside South Africa.16 Pursuing a growth strategy only makes sense if it is linked to corporate goals. e criteria for
evaluating strategies were discussed in Chapter 8, and management egotism is not a viable criterion for
consideration.
Growth strategies also pose some problems that the strategic decision-makers need to consider. When pursuing a
growth strategy, the overall control of the business may be diluted and mismanaged. It is possible to compromise
exibility if funds and other resources are overcommitted. Organisational bureaucracy and higher overhead costs
may plague the potential bene ts that such a growth strategy offers.

CASE EXAMPLE: Bidvest expands Commercial Products division through

Brandcorp acquisition17
JSE-listed Bidvest has acquired industrial and consumer products supplier Brandcorp from Ethos Private Equity
for an undisclosed amount.
In a statement released on Friday, Bidvest said the acquisition presented an attractive investment opportunity
that was aligned with Bidvest’s strategy of expanding its business operations through value-accretive
acquisitions. The acquisition would enable Bidvest to add niche industrial and consumer products, including the
Cellini brand, into its portfolio.
Brandcorp would be included in the Bidvest Commercial Products (BCP) division, which already comprises
various industrial and consumer businesses such as G.Fox, Plumblink, Home of Living Brands, Berzacks,
Yamaha and Academy Brushware.
‘The acquisition of Brandcorp allows us to add scale to BCP, as well as [providing] access to an existing client
base that can be leveraged for synergies and other possible opportunities across the Bidvest group. Brandcorp
brings strong, well-known and niche brand offerings into Bidvest, which are difficult to replicate in this market.
There is a natural fit between our two companies as we have similar decentralised management operating
models and in instances our product offerings and customer base is complementary,’ commented Bidvest CEO
Lindsay Ralphs.
Ethos Fund V acquired Brandcorp in 2007 with the intention of strategically repositioning the company.
Brandcorp has since made strategic acquisitions, including that of Renttech and Burncrete; introduced a black
economic-empowerment shareholding; expanded its warehouse capacity; enhanced its management; and
undertaken a comprehensive strategic review of the business.
Ethos also recapitalised Brandcorp through a R750 million high-yield bond placement in 2010.
‘Such initiatives reaffirm Ethos’ ability to identify attractive opportunities and work with management teams to
create long-term value that is predominantly derived from earnings and revenue outperformance. Our ability to
grow companies, even during challenging times, has made Ethos the partner of choice for successful
management teams who have a desire to explore corporate change and growth,’ commented Ethos partner
Shaun Zagnoev.18

Many organisations aim to grow their businesses, yet many fail to achieve their growth targets. When organisations
have clear corporate goals and accompanying growth strategies, their chances for successful growth are improved.
Organisations can opt to grow their portfolio of businesses through various strategies, as alluded to earlier. When
corporate parents, or the strategic team in the case of a single-business organisation, want to grow market share,
they will choose from a range of corporate growth strategies and actions. e following section describes the
corporate growth strategies. We suggest you refer to Figure 10.1 while working through the sections that follow.

10.4.1 Organic growth strategies

Organic growth strategies focus on growth in the internal environment of the organisation and are discussed in
detail below.

10.4.1.1 Concentrated growth or market penetration

e rst option for an organic growth strategy is concentrated growth or market penetration. Some authors also
refer to it as internal growth (growth from within) or intensive growth. With this type of strategy, the aim is to
remain within the organisation’s current range of products or services while attempting to attract customers from
directly competing products. e starting point of this strategy is existing customers, as retaining them is cheaper
than attracting new ones.
Market penetration is a viable option if the market is growing because existing customer loyalties may be less
secure, and new customers entering the market may still be searching for the most acceptable product. With the
launch of Virgin Mobile in South Africa in 2007, Vodacom launched an aggressive marketing campaign to attract
new customers in the existing market. is is a prime example of a concentrated growth strategy. Market
penetration strategies have a high rate of success with low risk as the organisation’s product and marketing skills
are concentrated on specialised products and concentrated markets. Another example of a company that has
successfully grown its business through market penetration is Kellogg, the multinational food manufacturing
company known for its breakfast cereals. Kellogg entered the South African market in 1923 and opened a
manufacturing plant in Springs, South Africa in 1948.19 Kellogg offers an extensive product line of differentiated
brands designed to appeal to speci c market segments. For example, Kellogg targets the health- and weight-
conscious female market segment with Special K, and children with the Rice Krispies brand. In line with an
innovation strategy, Kellogg periodically has new additions, such as the Special K Red Berries cereal or cereal bars.

10.4.1.2 Consolidation
When an organisation follows a consolidation strategy, its focus is on maintaining its market share in existing
markets with its existing products. It is important to realise that consolidation does not mean that the organisation
takes no action at all – the market environment is constantly changing and may force the organisation to reshape or
innovate to improve the value of its products or services.
Consolidation may take two forms, namely reshaping through downsizing or maintaining market share.
Reshaping may require the organisation to withdraw or downsize. One of the key determinants of a consolidation
strategy is the product life cycle. Even if demand for the organisation’s product is strong, the ability to compete
pro tably will change through the different stages of the life cycle. Organisations that have a high market share are
in a better position than their competitors to maintain market share. High-market-share organisations may bene t
from economies of scale that lead to improved purchase or sales turnover, and research and development (R&D) or
sales ratios. ese organisations are oen able to spend more on R&D, which may lead to the development of
strategies of higher price or higher quality compared to low-market-share competitors. Gaining and maintaining
market share during the growth phase of the product life cycle leads to bene ts during the maturity phase.

10.4.2 Market development

Another form of a growth strategy is to explore new markets with the aim of meeting needs with current products.
For example, South African beer and other products have found favour in African markets and abroad. Retail chains
such as Shoprite, Checkers and OK have become household names in South African homes. e Botswana retail
chain, Choppies, opened several stores in the North West province in South Africa. is is an important source of
opportunity. RCL Foods,20 a leading African food producer, started as a small family-owned business, and now
operates in South Africa, Uganda, Zambia, Swaziland, Namibia and Botswana. RCL continues to offer the same line
of products, but to different markets.
 A market development strategy is an option in a situation where there are limited opportunities in the current
market segments. One of the market development options is thus to develop new uses for existing products. is
strategy increased the rate of use by an organisation’s own market, and attracted customers from its rivals. Another
option is to spread the existing product over new geographic areas, as is the case with RCL Foods mentioned above.
Another example is when the South African cellular phone provider MTN made substantial inroads into the rest of
Africa, predominantly in Nigeria and Uganda, and other countries. e South African parastatal Eskom has also
moved across the African continent. Geographic spread also refers to entering new regions in the same country,
such as Mango, the airline that took over the Johannesburg to Port Elizabeth route when rival 1time exited the
industry. Another example of a market development strategy is in the South African retail industry. Walmart, the
American mass retailer, entered the South African retail industry. H&M, the Swedish retailer, entered the South
African market in 2015 and placed pressure on South African fashion retailers. e H&M entry was followed by
other global brands like Australia’s Cotton On, Spain’s Zara and the UK’s Topshop.
Market development is a suitable strategy when new channels of distribution are available that are reliable and of
good quality. Organisations that are very successful in a speci c line of business may nd it easier to explore
different markets, such as Burger King’s launch in Cape Town in May 2013. Burger King is the world’s second-largest
hamburger chain and has successfully ventured into international markets. Market development is also a viable
option when an organisation has the needed capital, expertise and resources to manage expanded operations. An
example of market development is in the retail clothing industry. During 2012, the Foschini Group acquired the
luxury menswear brand, Fabiani. is strategy gave Foschini entry to the high-end customer segment where they
did not operate previously.21

10.4.3 Product development

Over and above penetrating markets, maintaining existing market share and developing new markets, the strategic
decision-makers may also consider modifying existing products and/or pioneering new ones. Product development
is where organisations deliver modi ed or new products to existing markets. is usually involves large R&D
budgets and can be a costly strategy. When existing products of organisations are in their maturity stage, this oen
prompts strategic decision-makers to explore product development or offer an improved product. e rationale is to
attract satis ed customers to try new products as a result of their positive experiences with the organisation’s
existing products. A product development strategy oen goes hand in hand with investments in research,
development and innovation. A good example is Waymo – a subsidiary of Google’s parent company Alphabet Inc.
Waymo began as a the Google self-driving car project in 2009 and is now an independent self-driving technology
company with a mission to make it safe and easy for people to get around – without a driver.22
Another example of reaching an existing and established market is found in the Foschini Group and its
introduction of cellphones in its Totalsports, Sportscene and DueSouth stores, which led to an increase in turnover.
Product development is a viable option for organisations competing in high-growth industries.
New products seek to replace outmoded versions or to reach new prospects. A product line is oen extended to
draw in new segments. is is exempli ed by motor manufacturers who introduce a hybrid range of vehicles to their
existing product line. As customers are becoming more environmentally conscious, and the natural resources are
depleting, motor manufacturers are investing in product development to cater for these changes.
It is important to develop products to meet customers’ expectations – it does not make business sense to do so to
such an extent that customers become disinterested with the product modi cations and choose to buy a competing
product with fewer modi cations. For example, many cellular phone manufacturers add so many new features that
in the process they lose its ease of use, possibly causing customers to switch to a more user-friendly product with
fewer features.
 In some cases, following a product development strategy may require an organisation to develop new
capabilities. As a strategy, product development can entice new consumers while retaining existing ones. Also,
organisations may be forced to develop their products because the consequences of not developing new products
could be unacceptable. In these cases, performance may become poor in relation to that of competitive products.

10.4.4 Diversification strategies

An organisation may add new businesses to its current portfolio through diversi cation or external growth. A
diversi ed business is synonymous with a multi-business organisation operating in two or more industries.
Examples of diversi cation include new products in new markets, and franchising. Diversi cation strategies may
also involve organisations or activities that are indirectly related or unrelated.
e main aim of diversi cation strategies is to secure additional market share that may lead to increased power
and, ideally, improved pro tability. It is important to realise that even when an organisation is not overdiversi ed, a
high level of diversi cation may be risky and may negatively affect the organisation’s long-term performance.
Diversi cation strategies are divided into the following options:
Related diversi cation
Unrelated diversi cation.

10.4.4.1 Related diversi cation

An organisation seeking new opportunities in linked industries engages in related or concentric diversi cation.
Relatedness may be in terms of the market or industry as well as the strategic assets – for example, a motor
manufacturer may purchase a spare-parts dealer or a service provider. Related diversi cation is when the new
business is related to the existing one. For instance, Naspers, as discussed above, is a great example of related
diversi cation, starting as it did as a printer and publisher of newspapers and magazines, diversifying into book
publishing, and then incorporating pay television during the 1980s, followed by internet platforms.23 One of the
bene ts of related diversi cation is the existing expertise and knowledge about the market, the competitors and the
overall industry. When an organisation chooses to grow its business through related diversi cation, it could bene t
from economies of scale and scope. e Opening case study Super Group – complementary acquisitions key to its
success illustrated the Super Group portfolio within logistics – ranging from vehicle dealership to bulk haulage to
eet management. ese related businesses increase Super Group’s presence in the market and allow for shared
activities in the value chain, such as transferring capabilities and competencies from one part of the group to
another.
Linked to the strategic option of acquisitions, organisations can also consider green eld ventures. A green eld
venture strategy is appropriate when an organisation aims to create subsidiary businesses in foreign markets. A
great example of a green eld venture strategy is from Hyundai Motor Company, the South Korean multinational
automotive manufacturer with manufacturing plants outside Korea. During 2006, Hyundai announced that it would
set up one in the Czech Republic and by 2017 it had produced 357 000 cars.24 is green eld venture strategy held
bene ts not only for Hyundai but also for the Czech Republic and its people.
As South Africa has opened up to the world, investors have ventured aggressively into the rest of Africa and
across the world. Another example of an organisation following a growth strategy is MTN. is organisation has
been far more aggressive in entering emerging markets than its rival, Vodacom. MTN is active in, among others,
Nigeria, Iran, Ghana, Ivory Coast, Cameroon, Uganda, Sudan, Syria and Botswana. In fact, with a subscriber base of
232.5 million, 79% of MTN’s revenue is generated outside South Africa.25 e MTN group structure indicates how
MTN’s interests outside South Africa form key pillars of its business model, enabling more focused management
and better execution of strategies across the various business units in support of MTN’s growth goals.
 Another example of a growth strategy through related diversi cation can be found in the banking industry. In
2007, Standard Bank secured a controlling stake in Nigeria’s IBTC Chartered Bank Plc. e strategic decision-
makers at Standard Bank would have considered diversi cation into Nigeria a viable option as Nigeria is the most
populous country and largest oil producer in Africa with signi cant potential to be a leading player on the African
continent.26
e Opening case study on Super Group describes how Super Group expanded its business when it acquired
businesses the bulk dry powder and liquids distribution business and then later in the dry bulk goods hauling
market.
A related diversi cation strategy is a viable strategy option when the industry is in a slow growth stage and
where the objective is to increase sales in a particular market by increasing the number of products consumed by
each individual customer. For example, Absa followed a related diversi cation strategy when it introduced short-
term insurance, life insurance and funeral packages in addition to its normal banking services. is strategy opened
the door to Absa’s existing customers to bring more of their business and money to Absa.

10.4.4.2 Unrelated diversi cation

When the strategic decision-makers choose to take the organisation into an entirely new territory, it follows an
unrelated or conglomerate diversi cation strategy. Value can also be added through unrelated diversi cation by
using expertise and resources in one line of business to enter into an unrelated line of business. During 2018,
Discovery launched Discovery Bank. e plans for a retail bank by Discovery were already shared in 2015. is
move of Discovery introduces a bank in direct competition with Absa, FNB, Capitec, Nedbank and Standard Bank.
Diversifying into retail banking builds on Discovery’s existing credit card business, with around 300 000 active
clients in 2017.27 is growth strategy promises to extend the Discovery Group’s existing market share and footprint
in the nancial services sector. When one compares where Discovery started as a medical aid to where it is now as a
nancial services provider, one can see how this organisation made the most of unrelated diversi cation from
medical aid into banking.
An unrelated diversi cation strategy is a viable strategy option when the basic industry of the organisation is
experiencing declining sales and pro ts, or the organisation has the capital and managerial talent to compete
successfully in a new industry. Organisations that diversify too much will risk increased transaction and
bureaucratic costs, and additional managerial complexity. e diversi ed multi-business organisation is more
complex to manage. e role of the corporate parent increases in importance as the complexity of the business
operations increases because of the diversi cation strategy.

10.4.5 Integration strategies

Organisations oen acquire other enterprises similar to their business. Growth through integration may occur
through the acquisition and amalgamation of competitors (horizontal integration), or suppliers or distributors
(vertical integration). Figure 10.2 depicts these integration options.

Figure 10.2 Integration strategies

Vertical integration may entail expansion into the supply of an organisation’s inputs – this is called backward
vertical integration. Forward vertical integration entails expansion into the distribution of its outputs. Integration
strategies involve organisations at different stages of the production or distribution chain. For example, should a
steakhouse chain purchase a cattle ranch (i.e. one of its inputs), this would represent backward integration. Forward
integration would occur if a book publisher bought a chain of book stores to distribute its own (and others’)
products. Another example is when clothing brand Jeep opened its chain of stores – previously, Jeep had sold its
merchandise through retailers such as Edgars. Nowadays, one can purchase a limited range of Jeep clothing in retail
stores, and a wider range at the Jeep store itself. is is an example of a growth strategy aimed at reaching customers
and potential customers directly. Another means of implementing forward vertical integration is through
franchising. Car manufacturers like Volkswagen or Audi integrate more closely with the customer through
franchised dealerships that only stock their range of vehicles. ese dealerships promote the vehicles through local
media and marketing campaigns. e strategic decision-makers will consider forward integration as a viable
strategic option when the organisation’s present suppliers or distributors are especially expensive or unreliable.
Instead of sharing retail space in Edgars with competing brands, Jeep clothing is now sold through direct stores
staffed with experts who have direct links with the manufacturer. Forward vertical integration also offers the
organisation the bene t of cutting out the retailer who may have a high pro t margin. If the organisation can
pro tably distribute its own products with competitive prices, then forward integration is a viable option.
As depicted in Figure 10.2, backward vertical integration takes the organisation closer to its suppliers. It is a
strategy aimed at gaining ownership or more control over suppliers. is strategy is especially viable when the
current suppliers are unreliable, too expensive or not able to meet the organisation’s needs. For example, Anheuser-
Busch InBev SA/NV, an American brewing company that acquired SABMiller, is investing in agricultural
development in South Africa in order to increase hops production.28 is integration strategy ensures a steady
supply of hops for brewing. One of the bene ts of backward vertical integration is that the organisation is not
subject to unreliable delivery from the supplier and is not affected by the suppliers’ high pro t margins.
 Horizontal integration, as depicted in Figure 10.2, aims to increase market share through merging with or
acquiring another organisation. One example that many may be familiar with is Facebook’s acquisition of
Instagram.29 Both social media organisations operate in the same industry and share similar technologies in photo-
sharing services. By acquiring Instagram, Facebook not only eliminated a competitor, but also acquired the
technology and expertise. is move made Facebook the dominant player in social media photo-sharing services.
Acquisition entails purchasing the assets and skills of a takeover target. e form of purchase may vary, and one
option is for an acquiring organisation to use its cash reserves identi ed through the internal environmental analysis
to purchase a target organisation. Another purchase option is to go into debt to buy the target organisation. e
organisation may also use its own equity to purchase the target organisation.
e purchase transaction itself can also take several forms. e acquiring organisation may purchase all or a
majority of the target organisation’s assets, or a controlling share of them.
Acquisitions are divided into two forms – friendly or unfriendly. A friendly takeover occurs when the
management of the target organisation wants its organisation to be acquired. For example, in 2008 Tata Motors
acquired Jaguar Land Rover for $2.5 billion (R20 billion). Many economists thought that the acquisition of the
money-losing British operation was an unnecessary burden for Tata. Since the acquisition, Tata has been working
on turning Jaguar Land Rover around with plans to launch several new vehicles, including a hybrid or electric
version of its models,30 e Tata acquisition of Jaguar Land Rover translated into new opportunities and a better
product mix.
An unfriendly takeover occurs when the management of the target organisation does not want its organisation
to be acquired. Unfriendly acquisitions are also known as hostile takeovers. During March 2013, the Bidvest Group
made an unsolicited bid for 60% of Adcock Ingram, South Africa’s second-largest pharmaceutical company. Bidvest
was likely attracted by Adcock’s cash-generating potential and this bid was in line with Bidvest’s growth strategies.31
During 2015, South Africa’s largest private education group, Curro Holdings, made a bid for rival Advtech. Curro
Holdings attempted a hostile takeover to create an education company valued at more than R18.6 billion.32 Aer an
initial attempt, however, Curro dropped its bid in the same year.
e Opening case study on Super Group described the range of acquisitions from 2009. ese enabled Super
Group to enter new markets – within South Africa and in Europe, the UK and New Zealand. Acquisitions or
mergers enable organisations to enter new markets or segments at short notice. e Case example Bidvest expands
Commercial Products division through Brandcorp acquisition describes the Bidvest acquisition of Brandcorp. An
example that illustrates that regulatory involvement may form part of a potential merger transaction is found in the
proposed merger between SA Airlink and Safair operations. During February 2018, the Competition Commission
prohibited the proposed merger as the transaction was likely to result in a substantial prevention of competition.33
Reasons for acquisitions include the attempt to increase market power which is usually derived from the size of
the organisation, and its resources and capabilities to compete.
Other reasons why a takeover organisation may consider merging with or acquiring another one include possible
tax advantages or to eliminate inefficient management at the target organisation. It may also consider mergers or
acquisitions to adopt more efficient production or organisational technology. e two organisations, compatible in
terms of technology, skills, brands, products or markets, combine complementary core competencies and resources
to achieve synergy.34 ey are said to enjoy strategic t. During February 2014, Facebook acquired WhatsApp for
$19 billion – Facebook and WhatsApp35 have complementary offerings and markets, and the strategic t is clear.
During 2017, the locally produced cra beer, Soweto Gold, was bought by brewing giant, Heineken.36 Earlier in
2017, Heineken also bought Stellenbrau, a South African cra brewery. is acquisition seems to make business
sense as the strategic t is clear. Local press quoted Heineken South Africa managing director Ruud van den Eijnden
as saying that Stellenbrau offers a natural t with Heineken with shared values – a love of and pride in producing
great beer and an entrepreneurial spirit. ‘Heineken wants Stellenbrau to keep doing what it does best, as the group
has no plans to “corporatise” the brewery. If we combine forces, we can do so much more together. e best thing
you can do for us is to keep your identity. We can learn as much from you as you can from us.’37

10.4.6 Cooperative or corporate combination strategies

In a global economy where competitive pressure increases daily, cooperative strategies enable different
organisations to form partnerships to share resources, capabilities or technical knowhow to build a competitive
advantage. Cooperative strategic options form part of the corporate growth strategies of organisations. Within the
corporate growth strategies, organisations can opt for cooperation or corporate combination strategies. Cooperation
strategies relate to situations where organisations join hands with rivals for mutual bene t. Cooperation strategies
achieve similar ends as acquisitions or mergers, but without the heavy investment. ese strategies may involve the
outsourcing of short-term contracts, joint ventures, strategic alliances or licensing agreements. When an
organisation does not or cannot possess all the resources and capabilities needed to achieve its strategic objectives,
then cooperation strategies become logical options. e value of one organisation’s product or service is enhanced
through the existence of the other organisation’s product or service. It is necessary to recognise at this point that
these cooperative or corporate combination strategies can also be seen as vehicles to carry out corporate strategies.
Oen these cooperative strategies are used for corporate expansion and not necessarily corporate strategies on their
own.

10.4.6.1 Joint ventures

A joint venture is the creation of a new organisation owned by two or more partners. Most joint ventures involve
two partners. ey are typically formed to exploit opportunities in areas that co-owners nd attractive but which,
for various reasons, neither wants, nor is able, to develop individually. e project may simply be too big or too
complex for one organisation. Projects such as dams and other mega-sized construction projects invite joint
ventures or consortia.
Alternatively, the opportunity is not core to either party so that only a joint effort will attract the partners. An
organisation seldom invites outsiders to share in its core projects.
Joint ventures also feature in new industries and technologies requiring a multiplicity of skills and other
resources that no one organisation possesses. is is the case, for example, in the development of new fuel
technologies where otherwise erce motoring rivals cooperate. e technology industry offers many examples of
joint ventures, such as those between Tesla and Panasonic. ey have been strategic partners for several years, with
Panasonic supplying the batteries for Tesla’s vehicles from its overseas factories and then with the construction of
Gigafactory 1.38
In a joint venture strategy, two or more organisations create an independent organisation that shares some of its
resources and capabilities to develop a competitive advantage. A joint venture does not imply a change in shares or
ownership. For example, Isuzu Truck South Africa (Pty) Ltd is the result of a joint venture between General Motors
South Africa and Isuzu Motors Japan.39 e joint venture between diamond company De Beers and listed mining
company AngloGold Ashanti involved an agreement to explore the mining of minerals from deposits located on the
continental shelf. e establishment of this joint venture allowed AngloGold Ashanti to take rst-mover advantage
of the opportunity of partnering with a world leader in the eld of marine exploration and mining with a view to
targeting minerals from mineral deposits located on the continental shelf.40 A more recent example is Netcare’s R1.3
billion acquisition of Akeso Clinics. Netcare is South Africa’s second-largest private hospital rm and it received the
go-ahead in March 2018 from the Competition Tribunal to acquire a chain of psychiatric health facilities under
Akeso Clinics.41 An example of a joint venture in the hospitality industry is that between Regent Hotels & Resorts
and the InterContinental Hotel Group (IHG). Under this joint venture, the Regent properties are joined with the
IHG global online reservation system and loyalty programme. which promises to accelerate the growth of both sales
and pro ts. is mutually bene cial venture allows Regent to streamline its growth and offers IHG development in
the fast-growing luxury segment.42
Finally, joint ventures may be the logical avenue into countries such as China that require them for incoming
investors. e Case example PSA announces car-making joint venture in Namibia describes how the French
automotive manufacturer known for the Peugeot brand gained entry into the Namibian automotive industry
through a joint venture strategy.
Joint ventures leapfrog border restrictions, permitting an organisation to gain a foothold in foreign markets.
ey also lower business risk by partnering with local entrepreneurs who have knowledge, contacts and experience
of the domestic market.
Joint ventures do have limitations, not least the division of responsibilities, rights, control and bene t sharing.
Con icts surround operational and policy issues. Initially, however, joint ventures may be bene cial and
inescapable.

CASE EXAMPLE: PSA announces car-making joint venture in Namibia43

PSA Group and the government of Namibia signed an investment agreement facilitating the joint venture
between the French automaker and the Namibia Development Corp to assemble Opel and Peugeot vehicles in
the southwest African country.
The joint venture is set to launch in the second half of 2018 at a facility in Walvis Bay on the Atlantic Ocean.
Annual volume is targeted at 5 000 units, with the initial products being the Opel Grandland X and Peugeot 3008.
Other products will follow to meet consumer demand in the five countries comprising the South African Custom
Union. The agreement is part of PSA’s ‘Push to Pass’ growth strategy that aims to satisfy customer expectations
in all the regions in which the automaker operates.
Part of that plan calls for directly producing within the Middle East and Africa 70% of the vehicles sold in those
regions. The announcement also comes less than four months after Opel announced a separate strategy called
Pace, which aims to make the former General Motors subsidiary and its Vauxhall sister brand profitable by 2020.

10.4.6.2 Strategic alliances

Strategic alliances are based on commercial collaborations where organisations form partnerships in order to
achieve shared goals for a de ned period. A contract is signed under which partners provide reciprocal services or
facilities. Organisations share the costs, risks and bene ts of the business opportunity. An advantage is that
companies remain separate and independent, with low bureaucratic costs.
Unlike joint ventures, stock ownership is not essential to a strategic alliance although it can be should the
partners so decide. Like joint ventures, strategic alliances allow partnering organisations to group capital, resources,
facilities and expertise in an effort to reduce costs and to respond more rapidly to other competitive forces. One
partnering organisation may, for example, provide factory space, while the other contributes shelf space. us
alliances and partnerships build critical mass and provide group security.
Another example of a strategic alliance is the one between Toyota, Peugeot and Citroen with the production of
their small city cars or ‘micro cars’. e Toyota Aygo, the Citroen C1 and the Peugeot 107 share most of their interior
components. e Czech components manufacturer Peguform Bohemia persuaded Toyota to outsource the
production of its major components such as dashboards and bumpers, and use Saudi Basic Industries Corporation
(SANBIC) materials in the production of these components. Peguform Bohemia’s decision to align with SANBIC on
this project was based on SABIC’s experience, dedication, technical support, excellent portfolio and competitive
prices.44 A strategic alliance involves more than one organisation, but the parties do not take ownership of one
another. ese partnerships exist for a limited period of time. For example, as cyber-threats become a reality across
the world, global audit and advisory rm BDO opted to strengthen its cyber-security capabilities through a strategic
alliance with Panda Security. is strategic alliance allows BDO access to technology (Adaptive Defence) developed
by Panda Security.45
Increasingly, the face of competition is changing with a trend towards co-opetition. e airline industry, for
example, is characterised by networks that share booking and marketing facilities (code-sharing). A case in point is
South African Airways that boasts alliances with Luhansa, Air France, British Midland, Cathay Paci c, Delta
Airlines, El Al, Emirates, ai Airways, Varig, Quantas and others, enabling it to ‘serve over 500 destinations’.46
What needs to be noted is the need for careful selection of a strategic alliance partner. e alliance partner needs
to offer complementary skills and assets, and be prepared to share costs. Strategic alliances require mutual trust, and
managing the alliance is an organisational capability that develops over time, experience and learning.

10.5 Defensive strategies

Multi-business organisations may nd themselves, or some of their business units, in a vulnerable position where
they need to make decisions about the future of those business units. e strategic decision-makers have several
strategic options to consider when a business unit no longer meets the objectives set for it by its stakeholders, or if it
produces outputs that are no longer desired or required. Defensive strategies are not only considered in cases of
business failure, but also when industries are in a decline and the growth and nancial sustainability prospects for
those organisations or business units competing in that industry are low. Defensive strategies also apply to
organisations or business units that have potential but have suffered setbacks in recent times. e emphasis of a
defensive strategy is on speed of change, and rapid cost reduction and/or revenue generation. Defensive strategies
usually have short time horizons and are designed to yield immediate returns.
Figure 10.1 indicates that defensive strategies are divided into two groups:
Turnaround
Managing the end game.

When the failure or the decline of the business unit reaches a certain level, or continues for a certain length of time,
the organisation has no option but to consider remedial action, either by turning the business unit around or
managing the end game and preparing it to exit the market. Remedial action can be through improved marketing
effectiveness and competitiveness, or better management of the organisation to reduce costs. Another form of
remedial action can be to withdraw from a speci c industry or appointing a new management team in the hope that
the new strategic leaders will turn the business around. Poor strategic leadership, insufficient nancial control,
recession, inefficiency and non-competitiveness are generally factors that spur turnaround strategies.
Defensive strategies aim to transform organisations into more potent competitors. Defensive strategies provide
the organisation with a second chance, provided that the strategic management team and major shareholders believe
that the business has positive long-term potential. Defensive strategies also offer the option of removing the
struggling business units from the corporate portfolio. During 2016, local technology group Altron announced that
it planned to sell the subscribed base of Autopage – a division that sells phone contracts on South Africa’s major
mobile networks. e decision was informed by the ongoing mobile termination rate reductions and continued
industry and consumer de ationary pressures.47 At the time, the CEO, Boyd Chislett, explained that the decision to
sell Autopage was in the interest of protecting shareholder value at a time when some of the opportunities started
dissipating.48
Opting for a defensive strategy is not indicative of business failure. In the Autopage example above, the parent
company, Altron, looked at Autopage very carefully and felt it would be better served by exiting the business and
investing the gains in other areas.49 Altron continues to operate in the telecommunications, multimedia,
information technology and power electronics industries. Another corporate action that forms part of the
divestiture strategies is to sell off part of the business. For example, SABMiller Africa sold their 20% stake in Kenya
Breweries in 201150 in order to refocus on other, more viable markets.
An organisation subjected to years of hardship will need rejuvenation before it can grow again. Recession,
inefficiency and non-competitiveness are customary factors spurring turnaround. If an organisation nds itself in a
situation where a turnaround strategy is the only viable option, the strategic decision-makers need to prioritise the
factors that give quick and signi cant improvements. Defensive strategies are aimed at transforming organisations
into more potent competitors. e efforts to defend can be based on improved productivity, quality or
competitiveness. e most successful turnaround strategies focus more on reducing direct operational costs and
improving productivity gains. Whereas turnaround strategies are aimed at internal efforts in turning the business
around to be more pro table, managing the end game strategies are aimed at withdrawing investment in some
business units or exiting the market altogether.
When considering a defensive strategy, the strategic decision-makers have several options. e rst type of
defensive strategies is called turnaround and is divided into retrenchment, recovery and revenue growth.

STRATEGY IN ACTION: Edcon – turning things around

Edcon is the largest non-food retailer in South Africa and has been in operation for more than 80 years. Edcons
offers over 1 100 stores51 and operates across South Africa, Namibia, Botswana, Lesotho, Swaziland,
Mozambique, Ghana, Zimbabwe and Zambia. As a retail group, their portfolio spans over four principal brands:
Edgars, Jet, CNA and Thank U. Each of these brands targets a different group of customers.
The South African retail industry is experiencing a number of challenges – one of which is the dividend drop
and vacancies in the retail property sector. More and more retailers are forced to downsize or put extension plans
on hold while trying to cope with tougher trading conditions.52 During 2017, Stuttafords closed down and some
argue this was the beginning of the end for retailers that are not adapting to changing customer needs and
buying behaviour. In response to these tough trading conditions, Edcon announced a recovery plan that included
closing down chains like Red Square cosmetics, Boardmans and La Senza.53 However, Edcon Holdings
confirmed that CNA will stay – despite claims that CNA is in a terminal decline.54 The market expects Edcon to
reduce its South African footprint by a third, potentially closing up to 500 000 m² of retail space over the next 12–
18 months.55 Edcon has also ended its international joint venture agreements with some of the House of Busby
stores such as Mango, Nine West and River Island.56 Yet Edcon is betting its future on the old department store
format by going back to the basics and focusing on the original 89-year-old department store format of Edgars.

Questions:
In addition to the information provided above, use the internet to gather more facts on Edcon and the South
African retail industry. Answer the following questions:
1. Comment on the conditions that lead to defensive strategies. Use examples from the South African retail
industry to support your answer.
2. Do you think Edcon’s decision to reintroduce the old department store format is appropriate? Why or why
not?
3. Consider the growth in online retailers. How do they compare to the traditional brick-and-mortar retailers in
terms of corporate strategies?

10.5.1 Turnaround
10.5.1.1 Retrenchment
Retrenchment is a strategy that takes remedial action in response to prolonged deterioration among business units.
It takes two forms, namely cost cutting and reducing non-core assets.

Cost cutting
is is a popular strategy in the absence of, or in conjunction with, revenue growth. It is also referred to as
downsizing. is form of turnaround strategy is an intentional, proactive management strategy to reduce the
number of an organisation’s employees or operating units in the multi-business organisation. Reducing the number
of employees does not mean the elimination of key employees from the primary business processes because such
action can result in the loss of a core competency. As such, the business units that are not feasible for long-term
competitiveness will be the ones considered for turnaround. Options to reduce costs include removing non-essential
items or improving productivity through automation. Mango reduced their operating costs by using fuel-efficient
aircra. Organisations may also choose to postpone projects or infrastructure upgrades. Organisations can also opt
to establish factories in low-wage-settlement countries like India or the Philippines in an effort to curb their costs.
Another option to reduce costs is to lease equipment rather than to buy it. An unpopular option is to freeze salaries
or reduce perks of staff members. During 2017, Pick n Pay decided not to pay bonuses to its executives. is
decision, which was the result of poor turnover growth and failure to meet working capital targets,57 follows in the
footsteps of others. During 2013, Maria Ramos, CEO of Absa, announced that she would forego her bonus because
the bank published disappointing results. During 2012, Absa paid out 23% less in bonuses and decreased its staff
costs by 4% during that year.

Reducing non-core assets

Reducing non-core assets involves selling vacant land, equipment and buildings. However, this may happen even
among companies not turning their operations around in an effort to function more efficiently. is form of
turnaround strategy helps the organisation to focus on its core businesses. For example, the US parent, General
Motors, considered the sale of the Hummer vehicle brand in an attempt to raise cash and cut costs.
By refocusing on the core business, the strategic decision-makers can manage more effectively. Because the
organisation is less diversi ed, the management team can better understand and manage the remaining business
units. e cash-strapped construction rm Basil Read entered the second stage of its turnaround strategy in January
2018. Growth in the construction industry had tapered off and the market remained competitive, which forced the
organisation to enter into turnaround strategies and to focus on the areas where it is competitive and has the skills.
e rst course of action in the turnaround attempt was to dispose of non-core assets,58 which would yield about
R150 million, offering more liquidity to the listed construction group.59 e case example on the following page is
an example of such a shedding.

CASE EXAMPLE: Selling non-core assets60

The business environment offers many examples of shedding non-core assets as part of business turnaround.
During 2018, Ascendis Health, a South African healthcare provider that generates the bulk of its profits outside
South Africa, announced the selling of its sports nutrition business, its direct selling and network marketing
business as well as a production plant in Johannesburg. During May 2019, Ascendis sold its three businesses
within its biosciences division to a consortium for R480 million. Ascendis sold Efekto, Marltons and Afrikelp after
a strategic review that determined the Bioscience division as noncore to the groups’ strategy. Another example is
Aveng, a construction engineering company, who has during 2018 and 2019, reviewed its strategy and opted to
dispose of non-core assets and properties. The proceeds from the sales would be used to strengthen the
financial position of the group. More recently, EOH, an IT service management company, opted to sell non-core
businesses to generate R1bn to quash its debts.
10.5.1.2 Recovery
When following a recovery strategy, the strategic decision-makers attempt to stabilise the business. In this case, the
organisational problems are externally induced, and the aim of a recovery strategy is to introduce new
entrepreneurial blood in the form of turnaround specialists or a new leadership team, who bring new ideas and
explore new opportunities.61 For example, Avon found itself in a vulnerable position aer years of management
missteps and a complacent board of directors.62 Attempted takeovers and buy-outs haunted the cosmetic company
during 2011. Problems with the implementation of Avon’s growth plans led to the decision by the board to ask the
then CEO, Andrea Jung, to step down. Under Jung’s leadership, the door-to-door roots of Avon were not embraced,
and Jung wanted Avon to compete with blue-chip consumer packaged-goods companies such as L’Oréal and Procter
& Gamble. At that time, analysts painted a picture of a company that was uncertain of what it wanted to be and
therefore unsure of how to move forward.63
To illustrate, shiing from a cost-based to a differentiation strategy may raise the pro le of product quality and
revitalise a product. Internally, the organisation may streamline operations and revisit functional strategies such as
marketing and human resources. Some of these could pro tably be outsourced. Recovery is therefore a process of
nursing a business back to health.

A recovery strategy may not always be successful. In the case of Avon, during 2016 the cosmetic company saw an
improvement in its performance with most of its strategic initiatives going according to plan.64 However, by 2018
Avon was back in a slump with weak nancial performance and its direct selling model losing relevance with the
digital revolution in the market space.65

10.5.1.3 Revenue growth

ere are various ways to grow sales, particularly during a recession. ese include dropping prices, increasing
promotions, product modi cations, more sales staff and attentive customer service. In the short term, products or
services that generate cash quickly may be attractive opportunities even if their gross margin is small. Ironically,
additional marketing becomes essential when it is least affordable in order to revive sales. If the strategic decision-
makers opt to reduce prices in an effort to sell more products, the marginal costs must at least be covered. For
recovery to be sustained, stability must endure. is is accomplished through efficiency continuation and business
restructuring. Revenue can also be increased through improving certain management control systems. If stock-
holding costs and pilferage can be kept to a minimum through a stock management system, then cash is freed.
e second type of defensive strategy is called managing the end game and is divided in divestiture and exit.

10.5.2 Managing the end game

10.5.2.1 Divestiture
e intention of a divestiture strategy is to focus on healthier divisions or raising cash rapidly. e corporate
strategic actions that can be employed in divestiture strategies are internal divestiture, selling part of the business,
harvesting or focusing on a niche. Divestiture may be internal or external. e reasons for opting for internal or
external divestiture may be similar, but the main aim is to reallocate the resources saved or generated. Reasons may
include declining demand or technological substitution, for example cassette recorders and photographic lm.
Another reason to consider divestiture may be due to increased foreign competition, for example the textile industry
in the Eastern Cape that struggles to compete with Asian competitors, or changes in customer preferences, for
example iodised salt versus Maldon salt.

Internal divestiture
Internal divestiture may, for example, entail the closure of a plant as part of a rationalisation programme. Internal
divestiture is closely related to reducing non-core assets discussed in section 10.5.1. Divestiture strategies may be
considered when organisations want to cut their losses or to raise cash to fund other business units by closing one of
their business units.

Selling part of the business

In a multi-business organisation, external divestiture refers to the sale of part of the business. A likely candidate for
sale is a business unit that is not performing well or in which the investments required to maintain it are not viable
in terms of the potential pro ts. Another reason why the strategic management team may consider selling a business
is if it no longer ts with the strategic direction of the parent organisation. For example, during 2018 Imperial
Holdings sold off its automotive business with the establishment of Motus. Essentially, Imperial can now continue its
focus on logistics while Motus focuses on its motor business.66 Another example is found within Naspers. During
2018, Naspers announced the selling of its Brazilian e-commerce business Buscapé as part of a strategy to focus its
portfolio on classi eds, food delivery and nancial technology startups, or ntechs.67

Harvesting
Divestment may be voluntary and may take the form of harvesting a business that lacks synergy or is non-core.
Harvesting is also termed asset reduction as the organisation disposes of a subsidiary once it has maximised returns
from it. Harvesting is slightly different from selling part of the business – with harvesting referring to the
termination of investments into a product, product line or subsidiary. e Virgin Group, known for its diverse
portfolio of businesses, invested in a line of so drinks, which was introduced to the market in 1994. For years the
group continued to invest in this, with the Virgin Cola brand competing against Coca-Cola and Pepsi. Aer 16
years, Virgin Cola ceased to exist. At that time it was clear that the Virgin Group’s plans to become a major player in
the cola market did not warrant further investment.68 hence it harvested the Virgin Cola range. When a corporate
parent wants to withdraw from a declining industry, the harvesting option is most appropriate. Another factor to
consider when choosing a business unit for divestiture is the current position in the product life cycle and the likely
potential for future growth and pro tability.
An example of a harvesting strategy can be found in Sasol, a South African integrated energy and chemical
company. In 2010, Sasol announced that it would divest ve of its fertiliser blending facilities located across the
country.69 e sale of the ve fertiliser blending facilities enabled Sasol Nitro to increase its focus on upstream
activities of its fertiliser value chain.70

Focus on niche
A multi-business organisation may also redirect its energies into one or more niches. A niche strategy targets
segments or ‘pockets of demand’ that remain promising or better suited to its talents.71 ‘Niching’ may also result
from a downsizing exercise. However, divestment may be forced by market indifference. Non-core units that no
longer t the corporate pro le may be ‘spun off ’ to outsiders or current employees. e latter is termed a
management buyout. During 2012, a group of investors led by RMB Ventures and Stockdale Street Ltd completed a
management buyout of JoJo Tanks, South Africa’s largest provider of containers used to harvest rainwater.72 e
buyout deal would enable JoJo Tanks to fund its expansion while making a difference to people affected by lack of
water security.73

10.5.2.2 Exit
Organisations have three options to exit the industry:
Sell the business,
Liquidate the assets of the business; or
Declare bankruptcy.

Selling the business is considered the best option as an exit strategy because the situation can still be salvaged by the
potential buyers. CNA has been around for decades but appears to be in terminal decline, and liquidation may be
the best option. Over the years its store base has shrunk from around 200 at the start of the decade to 185. Large
agship stores have been downsized but the pro t margins keep falling.74 With liquidation, the assets of the business
are sold, and shareholders may still get some return. Bankruptcy equates to permanent closure of the business, and
creditors are compensated with the sale of the assets.

Selling the business

e strategic decision-makers may decide to exit the market by selling the business as a going concern. An example
of such a strategy is in the telecommunications and media industry. Telkom, South Africa’s largest
telecommunications provider, attempted to venture into the pay-television industry. Initial investments were made
and Telkom Media was established. Later, the Telkom management team reconsidered their decision and sold
Telkom Media to Shenzhen Media South Africa. Company insiders at Telkom explained at the time that the venture
into broadcasting had limited chances of success. e sale of Telkom Media enabled Telkom to remain focused on
their core business of telecommunications.75 Selling the business may be the last option before a business is formally
liquidated.

Liquidation
Liquidation is the ultimate exit strategy. Here, the entire business is sold off either as a whole or in pieces,
sometimes by auction, but not as a going concern. With liquidation the management sees no future prospects for the
organisation and wants to salvage some value. is is seen as a last resort where the assets are sold, oen at a loss.
Sometimes the liquidation is prompted by the strategic decision-makers simply wanting to harvest the organisation
and move on. Even where the motive is to cut one’s losses, there will usually be buyers who believe that they can
acquire the organisation and turn it around, provided the price is low enough. During 2012, the airline 1time led
for liquidation aer deciding that business rescue was not viable. All of its operations were grounded aer a business
rescue practitioner advised the board that there were no reasonable prospects of survival.76

Closure/bankruptcy
In the case of bankruptcy, where the business can no longer repay its debts, the selling of assets may be dictated by
legal requirements. Bankruptcy is considered as business failure. e organisation has no hope of turning its
activities around and closes its doors for business. With bankruptcy, all the assets of the organisation are sold for
their tangible worth, and the proceeds are then used to compensate creditors. An example of business closure due to
bankruptcy can be found in the airline industry: Velvet Sky, a low-cost airline that was established in 2008, was so
indebted to creditors by 2012 that it was liquidated and then closed for business.
In the previous section we considered the strategic options available to the owners of a multi-business
organisation. However, the management of such organisations is complex and challenging, and more oen than not
leads to the unnecessary destruction of value. In the next sections we focus on the role of corporate management.

10.6 Managing the multi-business organisation

Managing a multi-business organisation comes with a level of complexity not found in single-line ones. A multi-
business organisation needs strategies at corporate level that are formulated in addition to the strategies at the
business level. As we know from Chapter 8, strategies at the business level deal with the products or markets. e
preceding sections in this chapter con rmed that strategies at the corporate level deal with decisions on what and
how many businesses and industries to operate in. Such strategies require careful analysis to ascertain if the requisite
resources, competencies and capabilities exist to expand markets. e following section deals with the corporate
parent, commonly referred to as the headquarters, and its role in managing the multi-business organisation.

10.6.1 The role of the corporate parent

In its most basic form, corporate strategies seek to de ne how the organisation will create value in the various
business units. A multi-business organisation’s strategic decision-makers need to manage the portfolio of its
businesses. e basic premise of managing such a portfolio is that competition occurs at the business level and this
is where competitive advantage is developed. is means that the organisation’s headquarters, or corporate parent,
must seek attractive (potentially highly pro table) business opportunities, t them into the organisation, assess the
requirements and allocate strategic resources.
e headquarters of multi-business organisations are oen referred to as the corporate parent. Using the analogy
of a parent company with several children (the business units) is commonly accepted in the academic and business
spheres. Just like a family unit, the relationships between parents and children are complex and oen challenging.
While many of these businesses (children) exist independently, it is the corporate parent who decides if new
business ventures should be entered into, decides on the corporate structure, and de nes the budget and capital
expenditure. e corporate parent makes the corporate strategic decisions. Oen, the corporate parent acts as an
intermediary that in uences the decisions and strategies pursued by the businesses and provides capital for use by
the business units. Good communication and well-established and de ned roles are needed to ensure optimal
business performance.
One of the criticisms of corporate parents is that the corporate parent loses touch with the business units. e
business units of multi-business organisations create value through direct contact with customers. Many theorists
and business practitioners feel that it is at the business level where real competitive advantage is developed, and the
corporate parent is not in touch with the events and circumstances at that level. Some corporate parents adopt a
hands-off approach for the reason that acquired companies are well run and in the best position to add value. Even
so, the corporate parent has supervisory and some advisory responsibilities. Between the two polar opposites, many
corporate parents opt for varying mixes of involvement and detachment, even in the same organisation. Arguably,
control may be tighter over struggling business units than with stronger-performing ones. e key is to harmonise
business units’ strengths with the parent’s resources and capabilities. is harmony contributes to the creation of
unique advantages for the multi-business organisation.
Parenting advantage refers to the synergy and bene ts created in a multi-business organisation where more
value is created for an organisation because of the parent. is essentially means that the business is more successful
than its competitors because of the corporate parent. It is recognised that the biggest challenge facing multi-business
organisations is to perform better in aggregate under the parent’s ownership than they would if they were
independent entities, and that the parent creates sufficient value to more than offset its cost. e corporate parent
should aim to be the best possible parent for its businesses. e businesses under its stewardship should perform
better than they would as stand-alone entities, but also better than they would under the stewardship of any other
parent. Parenting advantage should guide decisions about the nature of the businesses in the portfolio, and about the
structure of the parent, and its activities and relationships. Competitive advantage has become the touchstone for
successful business strategies, guiding strategic analysis and providing a basis for assessing alternative action plans.
e corporate parent’s decision to intervene or not depends on the parent’s understanding of business units
(children) and its ability to help.77 is is amply demonstrated by the parenting matrix or Ashridge portfolio display,
depicted in Figure 10.3.
Figure 10.3 illustrates that a corporate parent that clearly understands the dynamics and markets of its business
units has a greater chance of adding value than one without such knowledge. Figure 10.3 may be interpreted as
follows:
With ballast businesses, the parent understands the business unit’s business but is in a poor position to help. In
this case, business units should be le to operate with minimal supervision.
By contrast, alien businesses combine a poor understanding of business units and a limited capacity for parental
help. Clearly, the corporate parent should steer clear of these.
Value trap businesses are dangerous. ey appear attractive because there are opportunities for the corporate
parent to add value, but there is a high level of danger that the parent’s attentions will result in more harm than
good. Value trap businesses should only be included in the future strategy if they can be moved into the
heartland.78
e ideal scenario is that of heartland businesses where the parent understands the business units and is in a
solid position to advance their cause. A South African example of a heartland business is the Naspers Group.
Naspers is a broad-based e-media company that operates in multiple markets. e group’s principal operations
are in internet platforms (focusing on commerce, communities, content, communication and games), pay
television and the provision of related technologies, and print media, including the publishing, distribution and
printing of magazines, newspapers and books. Most of Naspers’s businesses hold leading market positions.79

Figure 10.3 The parenting matrix80

Figure 10.3 illustrates the strategic implications for corporate parents. In particular, if the parent neither
understands a business unit nor is in a position to help out, it should step aside. It is also wasteful to retain experts to
oversee business units that require little help.81 Increasingly, organisations are removing management levels to
hasten the decision-making processes to gain rst- or early-mover advantage. While judicious intervention can yield
dividends, care must be taken not to overwhelm business units. Assistance must be selectively applied rather than in
blanket fashion. Competitive advantage may well hinge on de ning the appropriate role of corporate parenting in a
diversi ed organisation. Oen enough, value is best delivered independently by strategic business units.

10.6.2 Managing the corporate portfolio

A portfolio refers to the mix of businesses in a corporate entity. As discussed in this chapter, many organisations
operate businesses in different industries. Portfolio strategies are used to guide corporate policy. Two-dimensional
matrices in particular, represented by a table of rows and columns, provide a snapshot view of an organisation’s
investments. Action is then tailored to the circumstances facing each business unit. Optimistic scenarios call for a
different set of strategies than those required for companies facing decline and decay, for example. A matrix is a
framework, tool or map used in strategic decision-making. Matrices can be useful to structure strategic information
to enable better decision-making, or to evaluate past decisions.
Critics, however, regard matrices as simplistic, blunt instruments. For example, two-dimensional matrices
obscure the complexity of underlying variables. In other words, strategic choice depends on an intricate set of
variables whose association is far from obvious. Selecting two variables as decision criteria may therefore be
misleading.
As mentioned, the portfolio’s size and makeup changes over time. But on what basis? For all their faults, matrices
continue to underpin portfolio management. is is largely attributed to their intuitive appeal. e following section
considers the Boston Consulting Group matrix used in managing a portfolio of businesses. In practice, there are
many more. Chapter 9 discussed the SWOT matrix – it also nds useful application in multi-business organisations.

10.6.2.1 e original BCG framework

e Boston Consulting Group designed the BCG matrix in the early 1970s. is matrix considers market share and
market growth, and is built on a number of premises:
First, the margins earned by a product and the cash generated by it are a function of market share.
Second, sales and revenue growth require investment.
ird, no business can grow inde nitely. As such, a product will at times be less pro table because the amount of
money being spent to develop it exceeds its earning potential.

e BCG matrix consists of four quadrants that enable the strategic decision-makers to plot the organisation’s
products or business units in terms of market share and market growth rate:82
Q1 is the most promising, with subsidiaries (or products) labelled as stars.
Q2 contains the question marks (or problem children) so-called because of their low market share. Depending
on how they are nurtured and on the surrounding environment, they may turn into either stars or dogs.
Q3 refers to subsidiaries or products labelled as dogs – they have little to recommend them.
Q4 represents cash cows – subsidiaries or products that are ripe for harvesting to feed stars and deserving
problem children.

e Boston Consulting Group re ned the original BCG matrix and developed the BCG environments matrix83 that
proposed that there are four different types of industry based on the potential size of the competitive advantage
available to leaders and how many ways there are to create advantage.

Figure 10.4 The BCG matrix

As mentioned above, the use of matrices is oen criticised. Speci cally in the case of the BCG matrix, pro tability is
ignored as a criterion when the matrix recommends divestiture of the dogs on the basis of their low market share
and low growth. For instance, Rolls Royce may well qualify as a dog in this analysis, but it remains pro table and
need not be discarded. Other products rejected by portfolio analysis can be turned around by experienced
managers. Besides, growth in market share can be spurred by lower prices and unpro table sales.
Matrices also ignore potential volatility in markets. For example, there was rapid growth in the Croc shoes range,
but this was followed by a sharp decline in demand. Today’s star may transmute into tomorrow’s dog, thus
perpetuating a transient fashion on the strength of a single assessment could prove costly. In an attempt to stimulate
more market growth, Crocs introduced additional ranges that prolonged their status as stars.

10.7 Summary
is chapter described the corporate level strategy options. An organisation’s strategic decision-makers need to
choose a speci c strategy, or combination of strategies, to achieve its overall strategic intent and strategic objectives.
Although the grand or corporate strategies are more applicable to organisations that have a variety of business units,
they are, however, also applicable to those with single lines of business.
e strategic decision-makers of multi-business organisations need to make decisions on the number and type of
industries and businesses they want to compete in. ese decisions are made at the corporate level and are an
ongoing process rather than an event. Corporate level strategies deal with questions such as whether or not the
organisation should focus on just a few products and markets, or whether it should have a much broader focus in
terms of its scope by offering diversi ed products or services and/or serving diversi ed markets.
e selection of a corporate strategy, or combination of strategies, forms part of the strategic planning or
formulation stage. Again, the choice of strategy is in uenced by all the factors identi ed during the environmental
analysis stages as well as the overall strategic direction of the organisation. Referring to the strategic management
framework introduced in Chapter 1, the stakeholders and their claims would also be considered in the selection of
the strategy.
For corporate strategy, organisations can choose either to grow or defend their businesses. To recap, growth can
occur internally in the form of organic growth, namely market penetration or consolidation. Other growth options
include market development, product development and innovation. Externally, the organisation can diversify into
related or unrelated elds, or it can integrate vertically or horizontally. ere are various corporate strategic actions
that can be employed to achieve the corporate goals. Organisations can also use a range of cooperation strategies to
achieve their goals, such as joint ventures and strategic alliances. With defend strategies, the strategic decision-
makers must choose between turnaround or managing the end game.
is chapter also discussed the role of the corporate parent, whose decisions and actions affect all the business
units that comprise the multi-business organisation. ere are different levels of involvement, and it is important to
be aware of and understand the role of the corporate parent. Finally, the chapter discussed the use of the Boston
Consulting Group matrix for managing the portfolio. It was con rmed that matrices have some value, but their use
is oen criticised due to their static nature.
Strategic choice is therefore fundamental to survival or prosperity. As the chapter clearly spelt out, for example,
attempting growth during troubled times is a recipe for failure. By contrast, when opportunities match strengths, the
temptation to expand should not be missed. Either way, organisations must continually ne-tune themselves in line
with the evolving environment.

REFLECTION BOX:

Mergers and acquisitions often end up destroying business value and are often associated with high failure
rates and high risks. Why do you think this is? Do you believe mergers and acquisitions can add business value
if they are executed correctly? If so, what are the criteria for successful mergers and acquisitions?

Opening case study questions

1. Gather more information on Super Group and identify the corporate strategies that it is pursuing.
2. Comment on the appropriateness of corporate strategies in terms of Super Group’s growth objectives.
3. Explain the criteria Super Group should consider to identify an appropriate strategic alliance partner.
4. Discuss the role of the Super Group corporate parent in creating synergy and parenting advantage.

Discussion questions
1. Explain how corporate strategy differs from business strategy.
2. Use the annual report of an organisation of your choice to identify the corporate strategies that the organisation
has chosen.
3. Under which conditions should organisations undertake the following strategies:
• Vertical integration
• Liquidation?
4. Describe the potential dangers of unrelated diversi cation.
5. Explain how the BCG matrix can assist with strategic choice.
6. Comment on the role of the corporate parent.

Using knowledge and skills

1. Consider the corporate portfolio of a multi-business organisation that you are familiar with. Visit its website to
read about its business and the integrated reports. Identify the corporate strategies pursued in the last ve years.
Has this organisation reconsidered its strategies and opted for defensive strategies in the last year? Why do you
think it was necessary to reconsider their strategic choices?
2. If you had to design a corporate strategy for your preferred banking institution, what factors would you consider
and what strategies would you recommend?
3. If you were required to advise on corporate strategies for the South African retail industry, what factors would
you consider? Use the BCG matrix to position the industry players and make recommendations.

Further reading
Andreo, P.C., Louca, C. & Petrou, A.P. 2016. Organizational learning and corporate diversi cation performance.
Journal of Business Research. 69(9):3270–3284.
Campbell, A., Goold, M. & Alexander, M. 1995. Corporate strategy: e quest for parenting advantage. Harvard
Business Review, March–April:120–132.
Coi, S. 2009. Global luxury brands’ strategies to ght recession. SERI Quarterly, 2(4):108–114.
Collis, D. & Montgomery, C.A. 1998. Creating corporate advantage. Harvard Business Review, May-June.
Ellis, K.M., Lamont, B.T., Reus, T.H. & Faifman, L. 2015. Mergers and acquisitions in Africa: A review and an
emerging research agenda. Africa Journal of Management, 1(2):137–171.
Endenich, C., Hoan, A., Schlicting, T. & Trapp, R. 2016. Harmonizing management accounting in international
subsidiaries: Beyond national borders. Journal of Business Strategy. 37(1):27–33.
Guerras-Martin, L.A., Madhok, A. & Montoro-Sanchez, A. 2014. e evolution of strategic management research:
recent trends and current directions. BRQ Business Research Quarterly, 17(2):69–79.
Hambrick, D.C. & Frederickson, J.W. 2001. Are you sure you have a strategy? Academy of Management Executive,
15(4):48–59.
Lyon, D.W. & Ferrier, W.J. 2002. Enhancing performance with product-market innovation: e in uence of the top
management team. Journal of Managerial Issues, 14(4):452–469.
Martin, J.A. & Eisenhardt, K.M. 2017. Rewiring: Cross-business-unit collaborations in multi-business organizations.
Academy of Management Journal, 53(2).
Menz, M., Kunisch, S. & Collis, D.J. 2015. e corporate headquarters in the contemporary corporation: Advancing
a multimarket rm perspective. e Academy of Management Annals, 9(1):633–714.
Monier, J. 2013. Keeping multi-business companies running smoothly. McKinsey & Company, December.
Pleshko, L.P. & Heiens, R.A. 2008. e contemporary product-market strategy grid and the link to market
orientation and pro tability. Journal of Targeting, Measurement & Analysis for Marketing, 16(2):108–114.
Schraeder, M. & Self, D.R. 2003. Enhancing the success of mergers and acquisitions: An organizational culture
perspective. Management Decision, 41(5/6):511.
Snihur, Y. & Tarzijan, J. 2019. Managing complexity in a multi-business-model organization. Long Range Planning,
51(1):50–63.

Suggested websites
Africa Academy of Management (https://www.africaacademyofmanagement.org/) – A global organization for
academics and practitioners interested in advancing management education and research in Africa
e Boston Consulting Group (http://www.bcg.com) – A global management consulting rm and the world’s
leading advisor on business strategy that partners with clients in all sectors and regions to identify their highest-
 value opportunities, address their most critical challenges, and transform their businesses
e Australian and New Zealand Academy of Management (https://www.anzam.org/) – A professional body for
management educators, researchers and practitioners
Corporate Executive Board (http://www.corporatestrategyboard.com) – is enables superior business outcomes by
delivering authoritative data and tools, best practice research and peer insight to the leaders of the world’s great
enterprises
Strategic Management Society (http://www.strategicmanagement.net) – Membership, composed of academics,
business practitioners, and consultants, focuses on the development and dissemination of insights on the
strategic management process, as well as on fostering contacts and interchange around the world
Harvard Business Review (http://hbr.harvardbusiness.org/) – Journal of the Harvard Business School
Easy-Strategy.com (http://www.easy-strategy.com) – Osama El-Kadi: Sun Tzu Art of war strategist and motivational
speaker for business
McKinsey Quarterly (http://www.mckinseyquarterly.com/home.aspx) – e business journal of McKinsey &
Company, a global management consulting rm used by the world’s leading businesses, governments and
institutions
Bain & Company (http://www.bain.com/consulting-services/strategy/corporate-strategy.aspx) – is website shares
valuable resources on corporate strategies from one of the leading management consultancies
Institute of Management Consultants and Master Coaches of South Africa (http://www.imcsa.org.za/) –
Publications and certifying body of management consultants

References and endnotes

1. Super Group. 2018. About us. [Online]. Available: http://www.supergroup.co.za/company/about-us [Accessed
9 August 2018].
2. Super Group. 2018. 2017 Integrated Report. [Online]. Available:
http://supergroup.co.za/2017_integrated_report/downloads/Super%20Group%20business%20model.pdf
[Accessed 9 August 2018].
3. Ibid.
4. Independent Online. 2018. Super Group looks to expansion. [Online]. Available:
https://www.iol.co.za/business-report/companies/super-group-looks-to-expansion-7856941 [Accessed 9
August 2018].
5. Super Group. 2018. 2017 Integrated report. [Online]. Available:
http://supergroup.co.za/2017_integrated_report/downloads/overview_of_super_group.pdf [Accessed 9
August 2018].
6. Bothongo Group. 2018. About Bothongo Group. [Online]. Available: http://www.bothongo.co.za/about-
bothongo-group [Accessed 19 March 2018].
7. Pep Stores. 2018. Pep facts. [Online]. Available: https://www.pepstores.com/page/ nd-out-more/pep-facts.
[Accessed 19 March 2018].
8. Ibid.
9. Naspers. 2018. About us. [Online]. Available: https://www.naspers.com/about [Accessed 19 March 2018].
10. Ibid.
11. Naspers. 2018. Naspers 2017 report. [Online]. Available: http://www.naspers-
reports.com/2017/ebook/iar/ les/assets/basic-html/page-2.html [Accessed 19 March 2018].
12. Naspers. 2018. About us. Op. cit. 10–11.
13. Porter, M. 1987. From competitive advantage to corporate strategy. Harvard Business Review, May–June:43–
59.
 Businesstech. 2018. South African mergers and acquisitions deals have halved in 2017. [Online]. Available:
14. https://businesstech.co.za/news/business/212149/south-african-mergers-and-acquisitions-deals-have-halved-
in-2017/ [Accessed 9 August 2018].
15. Naspers. 2013. Company history. [Online]. Available: http://www.naspers.co.za/company-history.php
[Accessed 22 March 2013].
16. Biznews. 2018. Steinhoff Christo Wiese shares. [Online]. Available: https://www.biznews.com/sa-
investing/2018/02/12/steinhoff-christo-wiese-shares/ [Accessed 20 March 2018].
17. Engineering News. 2018. Bidvest expands commercial products division through Brandcorp acquisition.
[Online]. Available: http://www.engineeringnews.co.za/article/bidvest-expands-commercial-products-
division-through-brandcorp-acquisition-2016-06-17 [Accessed 20 March 2018].
18. Ibid.
19. Kelloggs. 2013. About. [Online]. Available: https://www.kelloggs.co.za/about_timeline.aspx [Accessed 16
March 2013].
20. RCL Foods. 2018. Our history. [Online]. Available: https://www.rclfoods.com/our-history [Accessed 20
March 2018].
21. Foschini Group. 2012. Group annual report. [Online]. Available:
http://www.tfg.co.za/investor/annual_reports/ar_2012/downloads/messages.pdf [Accessed 16 May 2013].
22. Waymo. 2018. Self-driving concept. [Online]. Available: https://waymo.com/ [Accessed 9 August 2018].
23. Naspers. 2010. History and development. [Online]. Available:
http://www.naspers.co.za/Company_History.cfm?
content=2651&intParentContentid=2636&CFID=25438531&CFTOKEN=83318754&jsessionid=f03019a09cf
ee074cd44e23b253051582955 [Accessed 9 May 2010].
24. Radio Prague. 2018. Czech Hyundai car plant expects drop in 2018 output. [Online]. Available:
https://www.radio.cz/en/section/business/czech-hyundai-car-plant-expects-drop-in-2018-output [Accessed 9
August 2018].
25. MyBroadBand. 2016. How much money MTN makes in each country. [Online]. Available:
https://mybroadband.co.za/news/business/157327-how-much-money-mtn-makes-in-each-country.html
[Accessed 20 March 2018].
26. Standard Bank. 2013. Country pro les. [Online]. Available:
http://corporateandinvestment.standardbankco.za/sa/country_offices/nigeria.jsp [Accessed 16 March 2013].
27. MoneyWeb. 2018. Discovery to integrate FNB credit card joint venture into own bank. [Online]. Available:
https://www.moneyweb.co.za/news/companies-and-deals/discovery-to-integrate-fnb-credit-card-jv-into-
own-bank/ [Accessed 20 March 2018].
28. Bizcommunity. 2018. SABMiller, AB InBev to increase South African hops production and export. [Online].
Available: http://www.bizcommunity.com/Article/196/358/158554.html [Accessed 9 August 2018].
29. Tech Crunch. 2018. Facebook to acquire Instagram for 1 billion. [Online]. Available:
https://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/ [Accessed 19 December
2018].
30. BusinessLive. 2018. Tata motors unveils turnaround strategy. [Online]. Available:
https://www.businesslive.co.za/bd/companies/industrials/2018-10-31-tata-motors-unveils-turnaround-
strategy-jaguar-land-rover/ [Accessed 19 December 2018].
31. Business Day. 2013. Dramatic bid to buy Adcock. [Online]. Available:
http://www.bdlive.co.za/businesstimes/2013/03/24/dramatic-bid-to-buy-adcock [Accessed 24 March 2013].
32. Fin24. 2018. Curro may go hostile with R6bn bid for Advtech. [Online]. Available:
https://www. n24.com/Companies/Investment-Holdings/Curro-may-go-hostile-with-R6bn-bid-for-
Advtech-20150723 [Accessed 20 March 2018].
33. e Citizen. 2018. SA Airlink to challenge Safair merger prohibition. [Online]. Available:
https://citizen.co.za/news/1832455/1832455/ [Accessed 19 March 2018].
 ompson, A.A. & Strickland, A. J. 2003. Strategic management: Concepts and cases. Boston. MA: McGraw-
34. Hill/Irwin.
35. Forbes. 2018. Facebook closes 19 billion WhatsApp deal. [Online]. Available:
https://www.forbes.com/sites/parmyolson/2014/10/06/facebook-closes-19-billion-whatsapp-
deal/#398581785c66 [Accessed 20 March 2018].
36. Talk702. 2018. Locally produced cra beer Soweto Gold partner with Heineken. [Online]. Available:
http://www.702.co.za/articles/275061/locally-produced-cra-beer-soweto-gold-partner-with-heineken
[Accessed 20 March 2018].
37. Foodbev Media. 2017. Heineken acquires South African cra brewery Stellenbrau. [Online]. Available:
https://www.foodbev.com/news/heineken-acquires-south-african-cra-brewery-stellenbrau/ [Accessed 20
March 2018].
38. Field, K. 2018. Panasonic capitalised on Tesla Partnership, eyes expansion in China & beyond. [Online].
Available: https://cleantechnica.com/2018/05/14/panasonic-capitalizes-on-tesla-partnership-eyes-expansion-
in-china-beyond/ [Accessed 9 August 2018].
39. Isuzu. 2013. Overview. [Online]. Available: http://www.isuzutruckssa.com/isuzu/view/isuzu/en/page61
[Accessed 16 May 2013]
40. Njobeni, S. 2009. AngloGold, De Beers strike marine deal. Business Day. [Online]. Available:
http://www.businessday.co.za/articles/Content.aspx?id=83219 [Accessed 9 May 2010].
41. Independent Online. 2018. Netcare’s R1.3bn acquisition of Akeso Clinics approved by Competition Tribunal.
[Online]. Available: https://www.iol.co.za/business-report/companies/netcares-r13bn-acquisition-of-akeso-
clinics-approved-by-competition-tribunal-13908564 [Accessed 20 March 2018].
42. Hospitalitynet. 2018. FIH announces strategic alliance with IHG. [Online]. Available:
https://www.hospitalitynet.org/news/4087508.html [Accessed 20 March 2018].
43. WardsAuto. 2018. PSA announces car making joint venture. [Online]. Available:
http://wardsauto.com/industry/psa-announces-car-making-joint-venture-namibia [Accessed 20 March
2018].
44. Sabic. 2013. Cases. [Online]. Available: http://plastics.sabic.eu/cases/_en/crossbordercollaboration.htm
[Accessed 23 March 2013].
45. Consultancy South Africa. 2018. BDO forms strategic alliance to obtain EDR capabilities. [Online]. Available:
https://www.consultancy.co.za/news/447/bdo-forms-strategic-alliance-to-obtain-advanced-edr-capabilities
[Accessed 20 March 2018].
46. South African Airways. 2010. South African Airways is a proud member of Star Alliance. [Online]. Available:
http://www. ysaa.com/Utility_Navigation/About/index.html [Accessed 20 May 2010].
47. MyBroadband. 2018. Shutting down Altech Autopage has been tough. [Online]. Available:
https://mybroadband.co.za/news/cellular/146133-shutting-down-altech-autopage-has-been-tough-md.html
[Accessed 20 March 2018].
48. Tech Central. 2018. e inside story of Autopages demise. [Online]. Available: https://techcentral.co.za/the-
inside-story-of-autopages-demise/61367/ [Accessed 20 March 2018].
49. ITWeb. 2018. Autopage nally draws curtains on an era. [Online]. Available:
https://www.itweb.co.za/content/nG98YdqLr2r7X2PD [Accessed 20 March 2018].
50. Fin24. 2013. East African group agrees to SABMiller deal. [Online]. Available:
http://www. n24.com/Companies/Industrial/East-African-group-agrees-to-SABMiller-deal-20110606
[Accessed 23 March 2013].
51. e Edcon Group. 2018. About us. [Online]. Available: http://www.edcon.co.za/ [Accessed 9 August 2018].
52. BusinessLIVE. 2018. Woes for retail property sector worsen. [Online]. Available:
https://www.businesslive.co.za/fm/money-and-investing/2018-08-02-woes-for-retail-property-sector-
worsen/ [Accessed 9 August 2018].
53. Talk702. 2018. Edgars to transform Boardmans, Red Square, La Senza in a bid to stay alive. [Online].
Available: http://www.702.co.za/articles/310575/edgars-to-transform-boardmans-red-square-la-senza-in-a-
bid-to-stay-alive [Accessed 9 August 2018].
54. Cape Business News. 2018. CNA appears to be in terminal decline. [Online]. Available:
https://www.cbn.co.za/news/cna-appears-to-be-in-terminal-decline [Accessed 9 August 2018].
55. BusinessLIVE. 2018. Op. cit.
56. BusinessLIVE. 2018. Edcon chooses to stick with old store format in modern retail world. [Online]. Available:
https://www.businesslive.co.za/bd/companies/retail-and-consumer/2018-07-25-edcon-chooses-to-stick-with-
old-store-format-in-modern-retail-world/ [Accessed 9 August 2018].
57. BusinessLIVE. 2018. No bonuses for Pick n Pay executives. [Online]. Available:
https://www.businesslive.co.za/bd/companies/retail-and-consumer/2017-07-20-no-bonuses-for-pick-n-pay-
executives/ [Accessed 20 March 2018].
58. Fin24. 2018. Rebuilding Basil Read. [Online]. Available:
https://www. n24.com/Finweek/Featured/rebuilding-basil-read-20180301 [Accessed 20 March 2018].
59. Independent Online. 2018. Basil Read to raise R150m from a non-core asset disposal. [Online]. Available:
https://www.iol.co.za/business-report/companies/basil-read-to-raise-r150m-from-a-non-core-asset-disposal-
13172198 [Accessed 20 March 2018].
60. Business Report. 2019. Ascendis sells noncore Bioscience businesses for R480m. [Online] Available at:
https://www.businesslive.co.za/bd/companies/healthcare/2019-05-02-ascendis-sells-noncore-bioscience-
businesses-for-r480m/ [Accessed 18 May 2019].
61. Pearce, J.A. & Robinson, R.B. 2007. Strategic management: Formulation, implementation and control, 10th ed.
McGraw-Hill: New York.
62. Kowitt, B. 2012. Avon: e rise and fall of a beauty icon. Fortune. [Online]. Available:
http://management.fortune.cnn.com/2012/04/11/avon-andrea-jung-downfall/?section=magazines_fortune
[Accessed 23 March 2013].
63. Ibid.
64. Seeking Alpha. 2018. Avon’s third quarter performance looked promising, with most of its strategic initiatives
going according to plan. [Online]. Available: https://seekingalpha.com/article/4020287-avons-third-quarter-
performance-looked-promising-strategic-initiatives-going-according-plan [Accessed 19 December 2018].
65. Nasdaq. 2018. Will Avon be able to rise from its slump in 2018? [Online]. Available:
https://www.nasdaq.com/article/will-avon-be-able-to-rise-from-its-slump-in-2018-cm908711 [Accessed 19
December 2018].
66. Biznews. 2018. Motus Holdings JSE listing. [Online]. Available:
https://www.biznews.com/sponsored/2018/11/23/backstory-motus-holdings-jse-listing [Accessed 19
December 2018].
67. Reuters. 2018. Naspers puts Brazil e-commerce unit Buscap on the block. [Online]. Available:
https://www.reuters.com/article/naspers-divestiture-brazil/naspers-puts-brazil-e-commerce-unit-buscap-on-
the-block-sources-idUSL1N1TS1MN [Accessed 19 December 2018].
68. Stead, M. 2018. e quiet death of Virgin Cola. [Online]. Available:
https://marcussteaduk.wordpress.com/2011/02/20/virgin-cola/ [Accessed 20 December 2018].
69. Business Day. 2013. Sasol divestment opens up fertiliser industry. [Online]. Available:
http://www.bdlive.co.za/articles/2010/07/06/sasol-divestment-opens-up-fertiliser-industry---fawu [Accessed
24 March 2013].
70. Icis. 2013. Sasol Nitro to divest South African fertilizer blending plants. [Online]. Available:
http://www.icis.com/Articles/2010/09/06/9391136/sasol-nitro-to-divest-south-africa-fertilizer-blending-
plants.html [Accessed 24 March 2013].
71. Hill, C.W. & Jones, G.R. 2004. Strategic management theory: An integrated approach. Pennsylvania: Houghton
Mifflin.
 MoneyWeb. 2013. RMB Oppenheimers lead management buy-out of JoJo Tanks. [Online]. Available:
72. http://www.moneyweb.co.za/moneyweb-south-africa/rmb-oppenheimers-lead-management-buyout-of-jojo-
ta?sn=2009%20Detail [Accessed 24 March 2013].
73. Business Day. 2013. RMB led group buys JoJo Tanks. [Online]. Available:
http://www.bdlive.co.za/articles/2012/05/02/rmb-led-group-buys-jojo-tanks [Accessed 24 March 2013].
74. Cape Business News. 2018. Op. cit.
75. IT Web. 2018. Telkom Media sold. [Online]. Available:
https://www.itweb.co.za/content/KA3WwMdYmKnqrydZ [Accessed 20 December 2018].
76. MoneyWeb. 2013. 1 Time les for liquidation. [Online]. Available: http://www.moneyweb.co.za/moneyweb-
south-africa/1time- les-for-liquidation [Accessed 24 March 2013].
77. Johnson, G. & Scholes, K. 2002. Exploring corporate strategy: Text and cases. Edinburgh Gate, Essex: Pearson
Education Ltd.
78. Johnson, G., Scholes, K. & Whittington, R. 2008. Exploring corporate strategy, 8th ed. Edinburgh Gate, Essex:
Pearson Education Ltd. 284 (adapted from Goold, M., Campbell, A. & Alexander, M. 1994. Corporate level
strategy. Canada: John Wiley & Sons. 341).
79. Ibid.
80. Naspers. 2010. Company pro le. [Online]. Available: http://www.naspers.co.za/index.cfm?
content=2641&intParentContentID=2636&currentpage=2641 [Accessed 20 May 2010].
81. Johnson, G., Scholes, K., Whittington, R. 2005. Exploring Corporate Strategy: Text and Cases, 7th edition.
Pearson Education Limited.
82. Campbell, A., Whitehead, J., Alexander, M. & Goold, M. 2014. Strategy for the corporate level: Where to invest,
what to cut back and how to grow organisations with multiple divisions. San Francisco, CA: Jossey-Bass.
83. De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context. An international perspective. London:
omson. 320.
 CHAPTER 11 Strategies for
international
competitive advantage
Ernst Neuland

LEARNING OUTCOMES

After reading this chapter, you should be able to:

define globalisation and identify the drivers of globalisation
explain why and how organisations internationalise
evaluate the meaning of international competitive advantage
discuss the international strategies that organisations can pursue
explain under what circumstances the different international strategies are appropriate
identify and compare the various modes of foreign market entry
explain the steps in an integrated international strategic management process.

KEY TERMS

country-specific advantages (CSAs)

culture
economic systems
firm-specific advantage (FSA)
foreign direct investment (FDI)
foreign market entry modes
foreign portfolio investment (FPI)
geopolitical forces and events
global companies
global strategy
globalisation
globalisation of markets
globalisation of production
international business
international competitive advantage
international enterprise
international management
international strategic management process
international strategy
international trade
legal systems
liability of foreignness
macro political risk analysis
micro political risk analysis
multidomestic or localisation strategy
multinational enterprise (MNE)
national competitive advantage
political system
regional economic integration (REI)
strategic orientation
transnational strategy

OPENING CASE STUDY

Standard bank to expand footprint in francophone Africa1

Standard Bank, South Africa’s largest bank, announced in April 2018 that it had opened a fully licensed bank in
Abidjan, Côte d’Ivoire, to focus on the needs of corporate and investment banking clients and thereby cementing
its presence in the Francophone West African region. Until now, the Standard Bank Group only had a presence
in Anglophone West African countries such as Nigeria and Ghana.
The Standard Bank Group, now present in 20 African markets, will operate as Stanbic Bank Côte d’Ivoire,
and will serve multinational enterprises, many of which the bank says have existing relationships with the group.
The group’s Africa business tripled to more than R26 billion in 2017, up from R10 billion in 2010. Standard Bank
says it began scoping the market of Côte d’Ivoire as far back as 2013, opening a representative office with a
small core team in 2014. The bank was awarded its banking licence in 2016. Given Côte d’Ivoire’s current annual
GDP growth rate of around 8% and GDP per capita in terms of purchasing power parity of $3 900 appears to
have vindicated Standard Bank’s decision to expand operations to Côte d’Ivoire. Commenting on the launch in
April 2018, Stanbic Bank’s CEO for Côte d’Ivoire, Herve Boyer, said: ‘We look forward to partnering with our
clients in Côte d’Ivoire. Côte d’Ivoire with its vibrant financial services sector and competitive banking industry is
an excellent launch pad for Standard Bank to expand its services and we look forward to being able to contribute
to the economic development of the country.’
‘Our strategy is focused on sectors driving Africa’s growth through proactive client partnerships that deliver
relevant solutions. We continue to utilise our presence in, and deep knowledge of the Africa markets to support
our clients’ growth aspirations across the continent and link them to global trade corridors and key financial
centres’, Kenny Filha, Standard Bank’s chief executive for corporate and investment banking said. The West
Africa Economic and Monetary Union (WAEMU), of which Côte d’Ivoire is a member, also offers Standard Bank
substantial business advantages stemming from its stable single currency pegged to the euro, and a shared
central bank and stock exchange, as well as its harmonised business legal structures. The country is ideally
positioned as a hub for the region, which also includes Benin, Burkino Faso, Guinea-Bissau, Mali, Niger,
Senegal and Togo. Sola David-Botha, Standard Bank’s chief executive for Africa regions, said of the opening:
‘Having an operational presence in Côte d’Ivoire supports Standard Bank’s strategy of being Africa’s leading
financial services organisation and our drive to broaden and deepen our footprint on the continent. Standard
Bank aims to support the growth of our clients and in so doing, drive inclusive economic growth across the
region. Ultimately, that will support sustainable job-creating growth and wealth creation, and deepen integration
of African markets into the global economy.’
 The bank has said its operations elsewhere in Africa, including in oil-rich Angola and Nigeria, delivered a
robust performance while its home market suffered as a weak economy hit by both consumption and investment
spending. However, having just established itself in Côte d’Ivoire, Standard Bank was already casting its eyes to
Senegal, seeking a banking licence in that country to entrench its footprint in Francophone West Africa. Senegal
was seen as Standard Bank’s next destination for growth.

Overview
This chapter examines the motives for internationalisation and the strategic options available to organisations intent
on expanding their operations to foreign markets. The chapter first looks at the phenomenon of globalisation as the
context for international business, briefly considers the dynamic global business environments that international
organisations face, and identifies the more important sources of international competitive advantage. The chapter
then discusses the relevant international competitive strategies and foreign market entry modes that organisations
pursue in their quest for international competitive advantage, and concludes with an integrated strategic
management framework for organisations that compete internationally.

11.1 Introduction
International business occurs through trade and direct investment across national borders, and hence differs
profoundly from purely domestic business that is con ned to doing business within a speci c country.2 Based on
the fundamental concepts of strategy and strategic management discussed in earlier chapters, this chapter now
extends strategic thinking and strategising to the global business arena. However, for any degree of success in
international business, international managers need a fundamental understanding of globalisation and its
implications for international business, why and how international expansion takes place, the extent to which global
business environments typically differ from domestic ones, and how international competitive advantage is
derived. International managers should furthermore know how to identify foreign markets, which international
strategies to pursue in speci c circumstances, how to enter foreign markets, and how to recon gure a rm’s
organisational architecture to effectively support its international strategies. Ideally, a multinational enterprise
(MNE) should integrate all these initiatives in an integrated international strategic management process, as outlined
in section 11.8 For example, it is clear that Standard Bank’s decision to enter the Côte d’Ivoire market pro led in the
opening case highlights some of the unique issues and challenges of international expansion that we will explore
further.
e main aim of this chapter, therefore, is to provide an integrated international strategic management
framework for multinational enterprises intent on expanding internationally. Aer de ning selected concepts
uniquely related to international business, an overview of globalisation as the context for international business is
provided.

11.2 Concepts in international business

Strategic management forms a unique approach to innovative organisational management. Although some concepts
related to international business were already introduced in Chapter 5, we need to de ne the more important
concepts related to the dynamics, strategies, structures and environments of international business.
We introduced international business as comprising of international trade and foreign direct investment (FDI).
International trade occurs when a rm exports goods or services to consumers in another country. Whereas
foreign direct investment involves direct investments in a foreign country for productive business purposes, the
related concept of foreign portfolio investment (FPI) refers to investments in negotiable nancial instruments –
shares, stocks, bonds, options and futures – in off-shore nancial markets. While an international enterprise could
be involved in any international business activity, such as importing from and exporting to other countries, sourcing
from or outsourcing to other countries, or involvement in a strategic alliance with a foreign partner, a multinational
enterprise (MNE) involves ownership and control of productive cross-border business operations through FDI.
(Multinational enterprises are also referred to as multinational corporations, multinational companies or MNCs.)
Global companies in turn are MNCs characterised by extensive global networks of operations. (Global companies
are at times also referred to as transnational or globally integrated companies.) International management is the
process of applying management concepts and techniques in a multinational environment and adapting
management practices to different political, legal, economic and cultural contexts. e concept of ‘international
strategy’ can be viewed generically (meaning any strategy involving international business), but it also has a speci c
meaning as one of the following four competitive international strategies available for international involvement:
International strategy: a strategy to increase pro tability by transferring core competencies to foreign markets
where indigenous competitors lack those competencies
Multidomestic or localisation strategy: a strategy to increase pro tability by customising products and services
to comply with the tastes and preferences of customers in distinct foreign markets
Global strategy: a strategy involving global standardisation to increase pro tability through cost reductions from
experience curve economies derived from decreasing costs over time as experience is gained and from location
economies, derived from operations in low-cost foreign locations
Transnational strategy: a strategy pursued by globally networked companies to increase pro tability by
exploiting experience-based cost and location economies while simultaneously complying with local
responsiveness in foreign markets.

However, while the concepts ‘international’, ‘multidomestic’, ‘global’ and ‘transnational’ have speci c meanings when
referred to as strategies, they could also refer to industries, organisations, products and services, depending on the
speci c context in which these terms are used.3 e four international strategies, and their characteristics and
implications for international, multinational and global business enterprises are discussed in section 11.7. In the
section that follows we focus on the concept of globalisation and its implications for international business.

11.3 Globalisation: The context of international business

Although we brie y referred to the global business environment in Chapter 5 (sections 5.2 and 5.4.8), and broadly
de ned globalisation as the shi away from distinctive national markets towards a more integrated and
interdependent world economy,4 it is an elusive concept to de ne, and means different things to different people. We
therefore need to consider that globalisation could be de ned from diverse perspectives.
From an economic perspective, globalisation is a process primarily associated with increasing economic
openness, growing interdependence among countries and regions, and ongoing integration of the global economy.
is is, inter alia, re ected in the increasing cross-border ow of goods, services, capital, information and knowhow,
as well as by the rapidly increasing number of MNEs worldwide in recent years. We thus refer to globalisation as a
shi in the world economy away from national economies and distinct national markets to a largely interdependent
and interlinked global economic system.5 However, the economic de nition of globalisation could also be expanded
by giving it a political, social, cultural and geographic dimension.6
e scope of one’s focus when de ning globalisation could also in uence the de nition – do we consider
globalisation from the perspective of the entire world, a single country, a speci c industry, an individual
organisation, or even a particular line of business? At the worldwide level, as already stated, globalisation refers to
the growing economic interdependence involving increased cross-border trade and investment, information and
technology transfer, and global business networking.
According to Segal-Horn,7 a starting point for understanding the phenomenon of globalisation from a strategy
perspective is realising that it is rms within industries that globalise by expanding internationally, and not
countries. An industry can be de ned as global ‘if there is some competitive advantage in integrating industry
activities on a worldwide basis’,8 while a market is de ned as global ‘if consumers worldwide can be treated as
homogeneous within such markets’.9 However, it is much more common for market segments to be global than
entire markets.
Since rms will obviously compete in the same industry or industries overseas as at home, globalisation at the
level of a speci c organisation in a speci c industry refers to the extent to which the organisation’s competitive
position in its industry at home is interdependent on that of the same industry in another country. Global
companies are therefore companies that compete in the main markets of the world in an integrated and coordinated
way, as in the case of Coca-Cola, IBM, Sony, Philips, Nokia, Intel, Canon and Anheuser-Busch InBev (the new name
of the Anheuser-Busch InBev and SABMiller merger announced in November 2017). Not surprisingly,
organisations in the same industry invariably confront each other as competitors in one nation aer another.10
e virtues of globalisation have been the topic of (oen heated) debate in recent times, involving arguments in
support of globalisation and its perceived bene ts on the one hand, and serious concerns regarding its adverse
implications on the other. Arguments supporting globalisation include promoting free trade, which enhances socio-
economic development, provides greater consumer choice, and creates more and better jobs. Concerns include its
threat to national sovereignty, producing uneven results across nations and people, adversely affecting labour and
labour standards in many countries, and contributing to a decline in environmental and health standards across
countries, more oen in developing countries.11
In the sections that follow we discuss two strategically important facets of globalisation in international business
– the globalisation of markets and the globalisation of production – and identify the strategically important forces
that drive globalisation as opposed to those that drive localisation.

11.3.1 The globalisation of markets and production

Two sets of opposing forces – those of globalisation and localisation – are continuing to shape the competitive
structures of industries and markets across the world. Globalisation forces induce international organisations to
align their international business systems and strategies along global lines, which requires them to compete on cost
and price by offering standardised products on a worldwide basis. In contrast, localisation forces require
international organisations to customise and adapt their products for each foreign market for reasons that include,
inter alia, cultural differences and host country demands. As explained in sections 11.7.3 and 11.7.4, unlike
globalisation forces, localisation forces compel organisations to view each national foreign country market as a
distinctly separate market.12

11.3.1.1 Globalisation of markets

In the early 1980s, eodore Levitt visualised the globalisation of markets as the merging of traditionally separate
national markets into one huge global marketplace over time as a result of converging national value systems,
consumer needs and preferences on a worldwide scale,13 is trend has been occurring in product categories such
as consumer goods, industrial products, electronic products and many business services, which has resulted in
bene ts for MNEs such as economies of scale and reduced marketing costs as well as new market opportunities,
especially in the digital e-business domain.14 However, signi cant differences in consumer needs and preferences
for many products and services still exist worldwide, mainly as a result of embedded differences between national
cultures and their value systems. As will be shown in sections 11.7.2 and 11.7.3, these inherently con icting forces of
globalisation and localisation are decisive in an international organisation’s choice of strategy for speci c foreign
markets.

11.3.1.2 Globalisation of production

e globalisation of production has mainly been facilitated by declining barriers to trade and investment in recent
decades, allowing international organisations to bene t from:
lower costs and/or improved quality: by sourcing goods including raw materials, products for assembly, and
services from low-cost countries; and
location economies: dispersing production facilities or certain value chain activities to optimal cost-effective
foreign locations around the world through off-shoring, or outsourcing speci c activities to such low-cost
locations. Nike is a good example in this regard. While Nike’s headquarters is in the US, it has no manufacturing
facilities there, and these operations have all been located in countries with low labour and production costs,
mainly in Southeast Asia.

As with the globalisation of markets, substantial impediments to the globalisation of production still exist. For
example, formal and informal barriers to trade and investment between countries, high levels of economic and
political risk, unfavourable exchange controls as well as government interference continue to impede the
internationalisation activities of organisations in many countries. However, notwithstanding these constraints, the
growing number of MNEs in recent years and their continuing expansion to foreign locations have undoubtedly
contributed to the ongoing process of globalisation.15 Against this background of the globalisation of markets and
production, we brie y consider its main drivers.

11.3.2 Drivers of globalisation

Identifying the drivers of globalisation with a view to assessing their implications for MNEs in increasingly
competitive global business environments has become imperative for any degree of success. We accordingly explore
the following two main drivers as well as other drivers of globalisation:
e ongoing phasing out of barriers to international trade and investment
Unprecedented advances in communications and transportation technologies

11.3.2.1 Declining barriers to trade and investment

Governments have traditionally imposed tariff and non-tariff barriers on imports for reasons that include the
protection of domestic industries and the generation of income. e General Agreement on Tariffs and Trade
(GATT), established in 1948, and the World Trade Organization (WTO), its successor since 1995, have been
instrumental in the successful promotion of free trade in goods. Likewise, the General Agreement on Trade in
Services (GATS) has served to promote free trade in services, and the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) has enhanced equity in international property rights, while the WTO has also
greatly enhanced FDI worldwide in recent decades.16 Declining barriers to trade, and the gradual phasing out of
tariff and non-tariff barriers imposed by governments on imports have undoubtedly encouraged a freer ow of
goods and services internationally, thereby enhancing world trade and also globalisation. Average tariff rates
decreased markedly from more than 20% in 1950 to around 4% by 2010 for most developed countries.17 e main
purpose of the WTO therefore is to help the free ow of trade and investment, to review trade policies, to
administer trade agreements, and to settle trade disputes among its members.18
International trade grew signi cantly since the 1950s due, inter alia, to the gradual decline in barriers to trade. By
2012, the volume of world trade was 31 times larger than in 1950, while the world economy was 8.7 times larger (in
real terms, adjusted for in ation), most decidedly a driver of globalisation. Worldwide, the stock of outward FDI
increased by a factor of 13 between 1998 and 2014.19
Likewise, increasing regional economic integration (REI), which refers to the growing economic
interdependence that results when two or more countries within a geographic region form an alliance aimed at
reducing or eliminating barriers to trade and investment, has also contributed to expanding international trade and
investment through the formation of trade blocs and free trade areas among groups of countries. is has largely
resulted in the elimination of barriers to trade and investment between member countries as in the case of the North
American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, and the 28-member European
Union (EU). Bilateral and multilateral agreements and treaties such as the bilateral agreement between the Southern
African Development Community (SADC) and the EU will undoubtedly bene t countries in the SADC region,
including South Africa, as is evident from the Case example e European Union and South Africa.

CASE EXAMPLE: The European Union and South Africa20

The EU and South Africa concluded a Trade, Development and Cooperation Agreement (TDCA) which came into
effect on 1 January, 2000, according to which 95% of South African exports to the EU were duty free, as were
86% of all EU exports to South Africa. Since 2000, the TDCA has provided significant opportunities for South
African organisations doing business with the EU. However, the TDCA ‘Trade Chapter’ was to be replaced by the
SADC–EU Economic Partnership Agreement (EPA), which was signed by both parties on 10 June 2016 and
provisionally became operational on 10 October 2016. Both the TDCA and EPA packages contain agricultural
products to be exported by South Africa into the EU market under the so-called Transformation Regime Quota
(TRQ). For example, South Africa stands to benefit from the improved market access on wine, sugar and
ethanol, among others, whereas some of the EU’s meat products will enter the SADC under new TRQs.

11.3.2.2 Advances in technology

Increasing advances in information and communications technology (ICT), as well as in transportation and related
technologies over the last four to ve decades have also enhanced the trend toward greater globalisation. Low-cost,
rapid computing and data processing have revolutionised worldwide telecommunications, information ows,
nancial activities and transactions, as well as global logistics and sourcing. Exponential growth of the internet, the
World Wide Web and social media has vastly increased the scope, speed and reach of international businesses.
While an estimated 1.6 billion users were connected to the internet in 2009, this number grew to over 3.8 billion by
June 2017, re ecting a global internet penetration rate of 51.7%, which is still growing.21
Furthermore, the traditional constraints of geographic distance and location, scale of activity and time zones
have largely been eliminated due to increasing e-commerce and digital networks. It has been estimated that over half
of all retail e-commerce worldwide in 2018 would have been done in China, a pacesetter in mobile shopping.22
As far as telecoms are concerned, many companies including SK Telecom, China Mobile and T-Mobile were
preparing for the arrival of the vastly improved 5G technology by 2018.23
Ongoing developments in transportation such as large-scale commercial jet aircra, technologically advanced
freight ships, containerisation, and highly effective airport and harbour infrastructures have likewise aided the
globalisation process with regard to speed, capacity, efficiency, increased load factors and rapid turnaround times,
enabling, inter alia, the rapid and efficient worldwide transportation of perishable products. However, the
emergence of electric vehicles, self-driving cars and trucks, air taxis and an astounding array of drones is bound to
irrevocably change the characteristics of mobility in both the global business landscape as well as in communities. A
number of such innovative, and at times dramatic, technological trends, developments and products with profound
implications for international business and ongoing globalisation were discussed in Chapter 5 (section 5.3)
11.3.2.3 Other drivers promoting globalisation
Apart from the two main drivers of globalisation discussed in the previous section, others within and across
industries and countries include the following:24
Multinational enterprises: MNEs have contributed signi cantly to globalisation through their increasing numbers
and continued establishment of subsidiaries in foreign countries, as in the case of Toyota’s subsidiaries in South
Africa and in other countries, Anheuser-Bush InBev’s global network of brewing operations, and the four major
South African banks into Africa (see the Opening case Standard Bank to expand footprint in Francophone Africa).
Global competition, cost-reduction pressures, and economies of scale and scope: Organisations in capital-intensive
industries such as in steel and motor vehicles are increasingly forced to export part of their production output to
attain economies of scale, tending to accelerate globalisation of the industries concerned (see section 11.9.1,
Strategy in action Mahindra plans assembly in South Africa).
Escalating costs of research and development (R&D): e need to recover rising costs of R&D in certain industries
such as commercial aircra production and in the pharmaceutical industry compels organisations in these
industries to sell their products globally.
Cultural homogenisation: As highlighted in section 11.3.1.1, traditionally different cultures are gradually
becoming more alike due to, inter alia, increased international travel, global communication, entertainment and
advertising. Cultural homogenisation therefore has the potential for the gradual convergence of markets and
consumer needs.
Industrialisation, economic development and modernisation: Industrialisation implies that economies in emerging
market regions such as those in Asia, Latin America and Eastern Europe are moving from being low-value-
adding commodity producers to relatively sophisticated, competitive producers and exporters of high-quality
products such as soware (India), motor vehicles (Czech Republic) and aircra (Brazil). ese developments
have facilitated the spread of ideas, products and services across the globe.
Integration of world nancial markets: e integration of world nancial markets has made it possible for
internationally active organisations to obtain capital from international nancial markets, invest in foreign
markets, and engage in foreign exchange transactions. Globalisation of nance has greatly enhanced world-scale
production and marketing operations.
Government and industrial policies: Government policies can accelerate or impede the trend towards
globalisation. Within WTO guidelines, government encouragement in the form of subsidies and preferential tax
treatment in selected industries such as steel, motor vehicles, semiconductors, telecommunications, chemicals
and agriculture to stimulate both inward FDI and exporting also provide further stimulus for globalisation. South
Africa’s current Automotive Production and Development Programme (APDP) has been a major and extremely
successful export incentive for the country’s vehicle manufacturing industry.25

11.3.3 Summary
Globalisation, the globalisation of markets and production, and the drivers of globalisation discussed in this section
provide a useful frame of reference for MNEs having to decide on their international strategies. International
managers therefore need to consider relevant trends in or elements of globalisation, for example such as offshoring
production facilities to low factor cost countries to capitalise on location economies. However, such trends or
elements will have different effects in different circumstances, depending, inter alia, on the company, its line of
business and the countries in which it is involved. In the section that follows we establish why international business
is different, why business organisations expand internationally, and how they do it.

11.4 The global business imperative

In a world of globalisation, freer trade and investment, rapidly changing technologies, and the emergence of new
competitors from newly developing markets, organisations in almost all industries are compelled to consider
international expansion.26 Managers therefore need to understand how international business differs from domestic
business, why they would consider international expansion and, once decided to internationalise, how they should
do so. e discussions that follow will relate primarily to MNEs as the main actors in the global business arena,
notwithstanding the continued importance of small- and medium-sized enterprises (SMEs) in this regard.

11.4.1 Why international business is different

As we know, international business implies trading with and/or investing in other countries. According to Collis,27 a
rm that considers expanding internationally needs to have a superior domestic competitive advantage at the outset,
referred to as its rm-speci c advantage (FSA). is refers to a distinctive bundle of resources resulting in a
superior domestic competitive advantage that allows the rm to consider international expansion. is superior
competitive advantage is then exploited internationally, with the potential of bene ting from country factors in the
foreign countries concerned, where these bene ts could, for example, result from lower tax rates, lower nancing
costs and more inexpensive labour than in the organisation’s home country. ese are referred to as country-
speci c advantages (CSAs). us, given an MNE’s involvement in different countries, managers have long since
realised that international business differs signi cantly from purely domestic business, and managing international
operations is more demanding, which is patently clear from the opening case on Standard Bank. e main reasons
why international business differs from purely domestic business are discussed below.

11.4.1.1 Differences between countries

Countries differ regarding their political, legal, economic and social systems, as well as their cultures, demographics,
physical characteristics, levels of economic development, extent and quality of their infrastructure, and levels of
technological pro ciency. Differences in these country factors, especially if they are sources of country-speci c
advantages (CSAs), are critically important when MNE’s have to devise their international strategies. e most
important of these macroenvironmental factors, relating to international business operations are highlighted in
section 11.5. For international business, the more important country differences include those discussed in the
following sections.

11.4.1.2 Complexity of international business

International business is undoubtedly much more complex than domestic business, mainly for the following
reasons:
ere is the need to decide to which foreign country or countries to expand operations.
It is necessary to decide how to operate in any number of foreign countries, all with vastly different political,
legal, economic and sociocultural systems.
It is necessary to decide on an appropriate international strategy, or strategies.
It is necessary to decide how to enter foreign markets.
It is important to decide how to adapt a rm’s organisational architecture, including its organisational structure in
terms of centralisation or decentralisation, and its business, managerial, coordination, operational, information,
networking and reporting systems to support its international strategies.

e greater complexity of international business stems mainly from the above-mentioned decisions that are of no or
little concern to a purely domestic organisation.

11.4.1.3 e role of international organisations and agreements

International business involvement requires a sound understanding of the international trade and investment
environment, the role and functions of international organisations such as the World Trade Organization (WTO)
discussed in sections 11.3.4.1 and 11.5.2.1, and the implications of international agreements on trade such as the
GATT, GATS and TRIPS. An important challenge for international management is to operate effectively within
these global regulatory frameworks.

11.4.1.4 Government restrictions and intervention

A knowledge and understanding of any restrictions such as tariff and non-tariff barriers, quotas on imports into
foreign countries, investment restrictions, foreign exchange controls imposed by foreign governments, local
ownership requirements and ease or otherwise of establishing a business are of vital importance to international
management, but again of no direct concern to a domestic organisation.

11.4.1.5 Exchange of foreign currencies and foreign exchange risk

Cross-border transactions require that money be converted from one currency into another. Foreign exchange rates
are oen extremely volatile and unpredictable, and have high inherent risk that, if possible, has to be effectively
managed by using various mechanisms such as forward contracts and currency swaps to hedge foreign exchange
risk.
While other factors could also account for differences between international and domestic operations, those
mentioned here are by far the most important. We now turn to the reasons or motives for internationalisation, and
why organisations would consider international expansion at all.

11.4.2 Motives for international business involvement

As previously stated, a company that has a superior domestic competitive advantage and superior resources and
capabilities can consider international involvement by:
exploiting export opportunities; or
enhancing its scope and pro tability by investment in one or more foreign countries to bene t from CSAs in
those foreign markets.28

However, despite the above rationale, organisations evidently also consider internationalisation for motives that
could be either reactive or proactive,29 as explained below.

11.4.2.1 Reactive reasons

Typical reactive reasons for internationalisation include the following:
Saturation of domestic markets: no or, at best, limited domestic growth prospects
Globalisation of competition: foreign competitors’ intrusion into domestic markets.

11.4.2.2 Proactive reasons

e increasing trend toward international business suggests that the economic opportunities associated with
operating in multiple foreign markets are signi cant. MNEs could capitalise on these opportunities through market
seeking and/or bene ting from location economies while at the same time diversifying their risk geographically.
Proactive reasons for internationalisation are therefore closely aligned with the strategic growth imperative of
organisations and new opportunities in the global marketplace. MNEs thus proactively leverage their core
competencies and competitive advantage by means of:
expansion of markets and sales through market-seeking product differentiation with the potential to realise
economies of scope and scale
 realising location economies by moving operations to low factor-cost countries and, where required, acquiring
resources internationally from such countries
diversifying risk geographically.

To conclude, it is imperative that domestic organisations considering internationalisation also proactively revise
their vision (what they seek to become over the long term), their mission (in pursuance of their vision), their
objectives (both domestic and international in terms of speci c targets to be achieved in pursuing their mission),
and their strategies (their domestic and international action plans to achieve their objectives, including resource
allocation and implementation plans) to re ect their envisaged international strategic intent.30 ese aspects are
discussed in more detail in sections 11.7, 11.8 and 11.9.

11.4.3 The process of internationalisation

Having looked at differences between domestic and international business as well as the motives for international
expansion, we now turn to the internationalisation process as such. According to the classical phases theory of
internationalisation, domestic organisations intent on international involvement gradually progress through a
number of phases to eventually become a fully- edged MNE, as illustrated in Figure 11.1.

Figure 11.1 The typical evolution of a multinational enterprise31

However, not all organisations go through each of these stages, while some stop short of full integration as an MNE,
depending on their speci c internationalisation objectives and strategies. Although the process in Figure 11.1
explains the phases through which organisations traditionally evolve to become MNEs, it does not explain what
MNEs need to do to overcome the liability of foreignness that results from venturing into unknown territory. e
liability of foreignness typically results from the following:32
Unfamiliarity: this involves mistakes due to lack of local country knowledge and information (including
political/legal requirements, economic and cultural issues, and infrastructure)
Relational: there are additional and oen unanticipated costs of managing a foreign operation (including
expatriate travel and locating costs as well as subsistence costs for the duration of the expatriate’s foreign
assignment), and reluctance of locals to do business with the MNE
Discrimination: this results from the typical practice of consumers favouring local rms over foreigners.

e key requirement for MNE success therefore is that the bene ts of value creation from internationalisation
should exceed the disadvantages of the liability of foreignness. With reference to the opening case, the question can
be asked to what extent Standard Bank faces these challenges, if at all. According to Collis,33 at least three conditions
must exist if MNEs are to create value through international expansion:
An intrinsic competitive advantage of the rm
An economic advantage derived from the rm’s international presence
 A cost advantage to the rm by conducting the international business itself, rather than contractually through a
third party.

ese requirements clearly present real challenges to international management in increasingly competitive global
business environments.

11.4.4 Summary
In this section we explained why international business differs from domestic business, and elaborated on both the
reactive and proactive motives for internationalisation. A brief overview of the process of and requirements for
successful internationalisation concluded our discussion. While Chapter 5 examined the external business
environment predominantly from a country perspective, we now brie y re ect on selected aspects of the global
business environment facing international business organisations.

11.5 The business environment in a global context

Given the increased complexity of international business, it has long since become imperative to examine and
understand the dynamic and rapidly changing macro business environments at the global, regional, country and
industry levels in terms of potential opportunities and threats. In fact, Collis34 emphatically states that international
managers need to be acutely aware of, understand and know how to manage change in dynamic global business
environments. ‘If you are to develop a viable long-term international strategy, it is vital to be aware of the broad
drivers of change in the global environment and the issues from those changes, however far removed from your
current concerns they might appear – unless you understand the tectonic forces shaping our world, you will be
oblivious to factors that determine long-term rm performance.’ Since the macro business environment and
industry environments in general were discussed in Chapters 5 and 6 respectively, we merely illustrate a few selected
factors and trends of speci c importance to international management.

11.5.1 Importance and structure of the global business environment

Domestic organisations basically only have to deal with environmental trends and factors in their national economy,
while admittedly having to remain informed of global and international trends that might be relevant to their own
operations, for example the implications of a rising oil price and hence a higher fuel price on domestic
transportation costs. However, MNE managements should have an intimate knowledge of the macroenvironment at
the global level as well as at the country and industry levels of each of the countries in which it is involved. A brief
overview of selected macroenvironmental factors at the global level is followed by looking at relevant
macroenvironmental factors at the level of individual foreign countries that are arguably of more immediate
importance to international management.

Figure 11.2 The international organisation and its external environments

e purpose of our discussion in this section is not to provide a detailed exposition of all possible environments and
environmental factors that international managers should be aware of and analyse, but, with reference to Figure
11.2, provide an illustrative framework for such analyses in any organisation’s own unique circumstances.

11.5.2. Macroenvironment at the global level

e macroenvironment at the global level is characterised by pervasive trends and forces that include global
political-legal institutions and forces, and economic, sociocultural, demographic, technological and natural
environmental forces. At the global level, supranational institutions help to manage, regulate and police the global
marketplace mainly by means of multinational agreements and treaties that govern global trade, investment and
other international business-related activities. e more important role players, forces, trends and events at the
global level can be broadly categorised in terms of their political-legal, economic, sociocultural and technological
impacts as outlined below, while the implications of the macroenvironmental factors and forces at the level of
individual countries are highlighted in section 11.5.3

11.5.2.1 Political-legal
Global or supranational political institutions and agreements: e UN, through the World Bank (WB) and
International Monetary Fund (IMF), aims to improve economic and social development worldwide.35 As
previously indicated, the main aim of the WTO is to promote free trade and investment. By July 2016, the WTO
comprised of 164 member states and 29 observer states, accounting for more than 98% of total world trade.36
However, despite the efforts of the WTO, by 2018 barriers to trade and investment still prevailed in many
countries.
Geopolitical forces and events: Continuing con ict in the Middle East, and especially in Syria at the time of
writing in early 2018, have been the cause of pervasive and widespread global and regional disruptions that
 seriously affect political, business and sociocultural relations. Such geopolitical forces and events signi cantly
increase the risk of doing business with countries in affected regions.37 Evaluation of a MNE’s strategic
international options should therefore include an assessment of the political risk of those countries or regions in
which it is involved, or contemplate such involvement. e various types of exposure to political risk can be
classi ed according to government actions or those events caused by actors outside government control, as
presented in section 11.5.2.2 below.
Political risks: ese risks, especially at the global level, oen have far-reaching economic and nancial
consequences, are real and largely impossible to predict, and are extremely difficult to assess. Examples include
the terrorist attacks on the World Trade Center in New York in 2001, in Mumbai during 2008 and in Paris in
2015. Another example is the attacks on commercial shipping by pirates along the coast of Somalia in recent
years. While difficult to predict, scenario analysis, as discussed in Chapter 5, possibly provides the best approach
to envisage possible future outcomes in uncertain environments. MNEs clearly should continuously assess the
international political environment and, by extension, the geopolitical environment.
International law: International law comprises a set of norms and rules that prescribe patterns of behaviour,
including illegal conduct such as the expropriation of a foreign organisation’s property without fair
compensation, or the invasion by one country of another to expand its territory. Primary sources of international
law are treaties and conventions, and can originate from ‘custom’ (international practice accepted as law) and
recognised general principles or ‘natural law’ (the basis of human coexistence). e International Court of Justice
in e Hague in the Netherlands is the principal judicial organ of the UN, and can adjudicate on issues between
two countries. Since the Court has no formal authority to impose punitive measures, a system of sanctions exists
that contributes to the coercive enforcement of international law.
Regional economic integration (REI): REI, discussed in section 11.3.2.1 as a driver of globalisation, refers to
groupings of countries in a region forming trade blocs or free trade areas (FTAs) by agreement. ese groupings
secure trade bene ts for the participating member states through tariff-free or tariff-reduced cross-border
movement of goods, services and resources, while imposing barriers on trade with non-members or third
countries. e major strategic bene ts of regional economic integration for international business include
increase in market size, the free ow of resources and production factors among member countries, and common
trade policies with regard to outsiders or non-member countries. By 2017 the EU included 28 countries, subject
to Britain’s impending withdrawal post-Brexit. e EU is currently the world’s largest economic trade bloc with
around half a billion people with an annual GDP far exceeding $14 trillion. Trade and investment in the EU has
become much easier since member states allow investors from other member countries to invest freely in and
conduct business with organisations in their countries. Also, delivery times and transportation costs have been
signi cantly reduced due to the elimination of customs controls at the borders between member countries.38

Having brie y considered the more important political issues at the global level, political systems of individual
countries and their importance for international business involvement are discussed in section 11.5.3.1

11.5.2.2 Economic
Economic growth or recessionary cycles worldwide or in major regions, global trade and investment trends, and
evolving developments in the IMS all contribute to a global economic framework for identifying and evaluating
emerging trends that are of strategic importance for international business operations. e global nancial crisis
experienced between 2007 and 2011 had a devastating effect on investor con dence, consumer demand and
economic growth. e ensuing global recessionary cycle had far-reaching implications for business worldwide,
including South Africa. However, it is well known that South Africa and most other emerging markets weathered
the storm much better than most developed countries.39 An important economic trend involves the ongoing growth
in the number of MNEs with increasing FDI and networks of subsidiaries worldwide (see section 11.3.2.3). From a
global economic perspective, between 2000 and 2020 the value of world trade would have increased 3.3 times,
whereas the world economy is expected to increase 2.6 times. is implies that by 2020 the value of world trade is
expected to be 167 times greater than in 1960, while the world economy will only be 6.5 times larger. Average
annual cross-border investment in terms of FDI also increased from $14 billion in 1970 to $1.45 trillion by 2016.40

11.5.2.3 Sociocultural
Gradually changing national cultural values and norms as well as converging consumer preferences for many
products and services globally have necessitated MNEs to adapt their international strategies to accommodate these
changes, notwithstanding the fact that profound cultural differences between countries still prevail. Accordingly,
cultural literacy and a global mindset have become indispensable for successful global cross-cultural leadership in
the dynamic competitive global business environment. According to Cavusgil et al.,41 a vital element for the
competitive advantage of an organisation, is to create a tolerant and empathetic environment when managing cross-
cultural diversity.
is can be facilitated by researching and gathering accurate information about the culture of foreign colleagues.
At the global business level, therefore, effective cross-cultural leadership is imperative in situations that require, for
example:
effectively communicating and interacting with foreign partners
negotiating and structuring international business ventures effectively
effectively interacting with current and potential customers abroad.

Culture and its implications for international business at the level of individual countries, including an overview of
the determinants of culture and the implications of culture in the workplace, are explored further in section 11.5.3.4

11.5.2.4 Technological
Advances in technology at the global level were identi ed as one of the two main drivers of globalisation in the new
economy (section 11.3.2). e internet, the world wide web, computer technology, biotechnology, genetic
engineering, laser-optic technologies and arti cial intelligence (AI) have revolutionised the ways in which industries
are developing and international businesses operate.42 e implications of such developments are that they can
render existing technologies and industries obsolete, but even more serious is the devastating effect of technology
and, in particular, arti cial intelligence (AI) on employment, as illustrated in the Case example Five million jobs will
be lost to AI by 2020 – WEF.

CASE EXAMPLE: Five million jobs will be lost to AI by 2020 – WEF43

The World Economic Forum (WEF) predicts that five million jobs will be lost by 2020 as the Fourth Industrial
Revolution continues to transform labour markets. Many of the casualties will be repetitive manufacturing and
mining tasks, and those considered dangerous for humans to perform, but white-collar jobs in banks and other
services industries are also under threat. Robots and artificial intelligence (AI) can do these jobs faster and with
greater precision than humans could ever hope to, leading to higher productivity and lower costs – the Holy Grail
of business.
A study by Citi and the Oxford Martin School at the University of Oxford suggests that two-thirds of jobs in
South Africa are at risk of being replaced by robots. We’re already seeing South African financial services
institutions such as Rand Merchant Bank and Nedbank replace thousands of hours of human labour with robotic
process automation, a form of intelligent software automation. As these jobs disappear, we’ll need to manage the
transition to a new world carefully, especially in a country such as South Africa, with its rampant unemployment.
The good news is that robotics and AI, like every technological revolution before them, will create new and higher
paid jobs. We’ll still need humans to operate these machines, to programme them and tell them what to do, after
 all. And the productivity gains they create could be harnessed for the benefit of all. We’ll need humans to create
bigger, better robots and to make sense of the data the machines churn out. The organisation of the future can’t
operate without humans. Rather, it will be a safer, more efficient space where machines and AI augment the
abilities and skills of humans, to increase output and reduce human error and injury. However, this means that
skills such as communication, emotional intelligence, strategy, people management, stakeholder interactions,
leadership, creativity and innovation, entrepreneurship, analysis and decision-making will become more in
demand, across all industries.

Advances in information and communications technology have made the knowledge economy a reality, especially
with regard to global communication, a critically important aspect in the coordination and control of global
business operations. For example, communication internationally has become cheaper through data services such as
WhatsApp and video calling using data services, such as Skype, WhatsApp calling and Apple Facetime. While both
expensive and slow, South African internet bandwidth and speed are improving.
In summary, the macroenvironment at the global level in the political-legal, economic, sociocultural and
technological areas has been selectively addressed merely as an indication of environmental trends and forces at this
level. It is obvious that many political-legal, economic and social factors, including demographic trends, natural
environmental issues and physical factors are interrelated, and that these forces and trends affect some industries
more than others at any given point in time.

11.5.3 Macroenvironmental analysis of countries

Countries have their own unique political, legal, economic and sociocultural systems, and also differ as far as
demographics, geography and physical characteristics are concerned. Based on our earlier discussions (section 5.2
in Chapter 5), we now focus on country-level analyses of importance in international strategic planning.44

11.5.3.1 e political environment

Almost without exception, governments have a profound impact on the success or otherwise of international
organisations operating in their countries. Governments may encourage foreign business involvement by means of
attractive opportunities for investment and trade, or discourage such involvement for whatever reason through
unfavourable legislative and policy restrictions. Importantly, a government’s attitude toward foreign business
involvement is largely determined by its political ideology as well as its political and legal systems, which in turn
shape a country’s economic system.
A political system is de ned as a system of government in a nation, and political systems are characterised
according to two dimensions: (1) the degree to which they emphasise individualism as opposed to collectivism; and
(2) the degree to which they are democratic or totalitarian. Individualism is an ideology characterised by an
emphasis of the primacy of the individual’s freedoms within the political, economic and cultural contexts of a
country. Individualism leans towards an advocacy for democratic ideals and free market economics. Collectivism,
in contrast, is an ideology that sees the needs of society as being more important than those of individuals.
Collectivism leans towards an advocacy for state intervention in economic activity and, in the case of communism, a
totalitarian dictatorship. ese dimensions are interrelated – individualism tends towards democracy, whereas
collectivist systems tend towards totalitarianism.45 e dominant political systems in the world today include
democracy, totalitarianism, socialism, communism and theocratic totalitarianism, de ned as follows:
Democracy: a political system where government is by the people, either directly or indirectly through elected
representatives (the South African political system is based on a constitutional democracy)
Totalitarianism: a form of government in which one person or political party exercises absolute control over all
spheres of human life and prohibits opposing political parties
 Socialism: a system where the state owns the means of production and manages state-owned enterprises to the
bene t of society rather than individual capitalists or entrepreneurs
eocratic totalitarianism: a system where political power is monopolised by a party, group or individual that
governs according to religious principles.46

e political philosophies and systems of countries referred to above represent the potential for varying degrees of
government intervention and hence political risk. e various types of exposure to political risk can be broadly
classi ed according to legitimate government actions and those events caused by actors outside government control.
Actions of legitimate government authorities may include:
military con ict
nationalisation of industries or industry sectors
expropriation of land and assets, including the violation of intellectual property rights
forced divestiture and con scation
restrictive licensing policies
restricting access to nancial, labour, commodity and materials markets
restricting repatriation of capital and pro ts to parent companies in their home country
exchange controls
value-added or export performance requirements.
unexpected changes in laws and regulations unfavourable to foreign businesses, evident from the Case example
DRC’s new mining code is in force.
absence of the rule of law
poor law enforcement, unforeseen contractual disputes and unfair cancellation of contracts, as evidenced from
the Case example DRC’s new mining code is in force.

Events caused by actors outside government control may include:

war and revolution
terrorism
extortion
strikes and civil disorder
threats or disruptions to operations by hostile groups
externally induced nancial constraints
externally imposed limits on imports or exports
illegal occupation of property.

Information gained from environmental scanning should enable international managers to decide on issues such as
a foreign country’s degree of political stability, its potential political risk, the government attitude towards foreign
business, the ease of doing business, and whether enhancing industry incentives exist in the foreign countries
concerned. Approaches to identify, assess, respond to and manage various types of political risk are discussed below.

CASE EXAMPLE: DRC’s new mining code is in force47

Miners operating in the Democratic Republic of Congo (DRC) would not secure substantial concessions in talks
with the state about changes to the industry code, a senior mining official said. Mining companies, including
Glencore and Randgold Resources, are pressing the government to row back on some of the reforms President
Joseph Kabila signed into law earlier in March 2018.
The modifications will raise taxes and other costs for operators in the DRC, Africa’s top copper producer and
the world’s main source of cobalt. ‘There can be no renegotiation on any point once the code has been
 promulgated,’ Albert Yuma, the chairperson of state-owned mining company Gecamines, said in an e-mailed
response to questions later in March. Kabila met top executives from major foreign investors in early March to
discuss their objections to the new law, which was approved by parliament in January 2018. The president
signed the code on 9 March 2018, but assured miners that ‘their worries will be taken into account’ in talks with
government. Representatives of Glencore, Randgold, China Molybdenum, Ivanhoe Mines, MMG, Zijin Mining
Group and AngloGold Ashanti attended the meeting. The revised code removed a measure protecting mining
licence holders from complying with changes to the fiscal and customs regime for 10 years, which meant that all
mines would face higher royalty payments and new taxes. The new law also introduces a 50% tax on so-called
super profits and hikes royalty rates on metals, including copper, cobalt and gold. It also allows the government
to raise royalty payments on cobalt five-fold to 10% if it opts to categorise the metal as a ‘strategic substance’.
‘The taxes and royalties to be paid have been fixed in the code by law,’ said Yuma, who took part in the meeting
on 7 March. ‘No one can any longer change or remove them, or create new ones.’
The companies that met Kabila sent a team to the DRC capital, Kinshasa, ahead of the talks with the mining
industry, according to a joint statement on 15 March. The ministry is required to produce regulations within 90
days of the law’s promulgation, which will dictate how the code will be implemented. The companies said Kabila
assured the industry their questions would be resolved through ‘transitional arrangements’ and the regulations.
The miners expected that the negotiations would ‘give priority to the recognition’ of the decade-long stability
clause contained in the previous legislation which was adopted in 2002 and which ‘formed the basis of many
investment decisions’ taken by the companies. They also said they confirmed to Kabila ‘their willingness to
negotiate additional royalties and changes to other taxes’ during the talks. Such wide-ranging was not up for
discussion, according to Yuma. ‘The mining regulations do not have the vocation or the power to modify the
articles of the code,’ he said. After Kabila met the executives, Mines Minister Martin Kabwelulu told reporters that
the government ‘will take the measures of the code and put them in regulations’ and that ‘the law cannot be
contradicted’. Kabwelulu did not immediately respond to a request for clarification about what issues will be on
the table in the upcoming talks. His chief of staff, Valery Mukasa, declined to comment before the discussions
have started.

As far as effectively coping with political risk, MNEs should be able to identify, assess and manage political risks at
the global level and especially at individual country level, since political risks around the world typically originate
from unanticipated interventions by governments and the unpredictability in political systems. However, as stated
above, risks could also originate from external, non-governmental related forces around the world. One approach is
to develop appropriate strategies based on macro political risk analysis and micro political risk analysis.48 Macro
political risk analysis reviews all major political decisions likely to affect all enterprises in the country, for example
India’s prohibition of foreign wholly-owned subsidiaries in the retail sector, yet allowing joint ventures with local
Indian counterparts, and China’s restriction on foreign exchange transactions, both examples where all MNEs are
affected. Micro political risk analysis is directed towards government policies and actions that in uence selected
sectors of the economy or speci c foreign businesses within an industry or industries in the country, for example
restrictive regulations of a country’s telecommunications industry, and restrictive labour laws in selected industries
such as mining and exploration.
Given the typical unpredictability of political risk, MNEs could mitigate potential risks before they appear by
proactively fostering good relationships with foreign governments. In this regard, Luthans and Doh have identi ed
three related strategies that should be considered: (1) relative bargaining power analysis; (2) integrative, protective
and defensive techniques; and (3) proactive political strategies.49
Relative bargaining power analysis relates to the MNE attaining a stronger bargaining power position than the
host country by, inter alia, providing proprietary technology or expertise that will be lost to the country should the
company have to withdraw for whatever reason. e second strategy (integrative, protective and defensive
techniques) involves integrating the company’s operations to become part of the country’s infrastructure, or
adopting protective and defensive techniques designed to discourage host government interference by limiting local
production, conducting research and development elsewhere, limiting the responsibility of local personnel, raising
capital from local banks, and diversifying production over a number of countries. e third strategy (proactive
political strategies) basically relates to situations where many developing country governments are still characterised
by dictatorships clinging to power and overturning or reneging on past deals and contracts. e Case example DRC’s
new mining code is in force above would fall in this category. is third strategy rstly requires pre-emptive building
of good relationships with governments through lobbying and identi ed stakeholders, as well as community
involvement where risks cannot be insured against. In addition to building relationships and lobbying, proactive
political risk strategies include partnering with local rms; leveraging bilateral, regional and international trade and
investment agreements; using bilateral and multilateral nancing; and using project nance structures to minimise
rm risk. As part of this strategy, MNEs can also turn to campaign nancing and related interventions to shape and
positively in uence political decisions prior to their impact on the company.50
e success or failure of international organisations largely depends on how well their international strategies
have been adapted to effectively accommodate the implications of political risks in foreign markets.

11.5.3.2 e legal environment

e legal system of a country is in uenced by the prevailing political ideology and political system since the
government de nes a country’s legal framework within which organisations conduct business. e context of the
legal environment that international organisations face comprises of the following:
e domestic laws of the international organisation’s home country (see Chapter 5)
e legal systems of the countries in which the organisation is involved
International law (discussed in section 11.5.2.1).

A domestic company will rarely, if ever, be affected by the latter two dimensions, but international organisations
have to contend with the complexity of different legal systems in their foreign locations. Differences in legal systems
among countries can in uence the attractiveness of a country as a destination for foreign investment and trade.
Hill51 states that collectivist-inclined totalitarian states tend to enact laws that severely restrict private enterprise,
while laws enacted by democratic governments where individualism is the dominant political philosophy tend to
favour private enterprise and a free market system.52 International managers must therefore be familiar with the
legal systems of the countries in which they operate as well as other legal relationships that may exist between
countries, such as bilateral and multilateral agreements or treaties to which a country is partner, for example
reciprocal tax treaties between countries.
e three prominent legal systems, approaches and traditions in use around the world – common law, civil law
or code law, and theocratic law – are de ned as follows:53
Common law: e common law system is practised in the British Commonwealth (including South Africa), the
US and most other Anglo-Saxon countries. It is based on tradition, precedent, and custom, and interpretation of
the law is an important aspect in this system.
Civil law or code law: A civil law system is based on detailed sets of laws organised into codes. More than 80
countries in Western Europe, parts of Asia, and Russia have a civil law system that is much less exible than
common law. Also, application of the law is more important than its interpretation when compared to common
law.
eocratic law: A theocratic law system is based on religious principles and teachings, with Islamic law the most
widely practised theocratic law system worldwide. e Qur’an (Koran) forms the foundation of Islamic law. e
payment or receipt of interest is considered usury and is unacceptable according to the Qur’an, as illustrated in
the Case example Islamic banking and nance. In Islam, theology and law are totally integrated, and also
permeate economic ideology.
 CASE EXAMPLE: Islamic banking and finance54
Pakistan’s Federal Sharia Courts, its highest Islamic legislative body, pronounced that interest is un-Islamic and
therefore illegal. As a result, the government had to amend all financial laws accordingly. In 1999, Pakistan’s
Supreme Court ruled that Islamic banking methods should be used as from July 2001. By 2008, some 500
Islamic financial institutions in the world, including those in the Gulf States, Egypt and Malaysia, already
managed more than $500 billion in assets. By 2010, the total assets of Islamic banking exceeded $1 trillion. In
2006, Absa Bank announced the introduction of Islamic banking procedures, and was soon followed by other
major commercial banks in South Africa. By 2018, South African banks that offered Islamic banking included
Absa Bank Limited, Standard Bank, FirstRand Bank Limited, elBaraka Bank, and 4B2 Bank Limited. The
worldwide initiative to introduce Islamic banking confirms the importance of accommodating different customs in
the interest of international business.

International law as discussed in section 11.5.1 provides broad guidelines for international business conduct in
keeping with generally accepted customs and rules.

11.5.3.3 e economic environment

Chapter 5 discussed the economic environment and its importance in strategic planning for international
businesses. Analysis of the economic environment at the global and, more speci cally, at the country level is
necessary to assess the potential bene ts, costs and risks of locating some of a MNE’s productive operations in other
countries, and to identify economically viable opportunities for the MNE’s products and services in those countries.
e potential bene ts of doing business with or investing in another country is therefore largely determined by a
country’s:
market size (essentially the size of its population)
current wealth (purchasing power of the population)
future economic prospects.55

International management needs to understand the prevailing economic systems in foreign countries, and evaluate
economic growth, employment levels, income levels, monetary and scal trends, as well as industry and market
trends for each country in which the organisation is involved. Where rapid economic growth is experienced, sales
prospects for consumer goods are generally more promising.
Typical economic systems include market economies, command economies, and mixed economies as explained
below:
Market economy: In a market economy, the majority of a nation’s land, productive facilities and other economic
sources are privately owned.
Command economy: In command or centrally planned economies, land, productive facilities and other economic
resources are owned by the government, which also plans most of the country’s economic activity. e collapse of
many command economies since 1989 is attributed to poor economic performance and the failure to create
wealth.
Mixed economy: A mixed economy is an economic system in which land, productive facilities and other resources
are more equitably distributed between the private sector and government ownership compared to a command
economy. is largely applies to South Africa.

Gross national product (GNP) and gross domestic product (GDP) are relatively similar measures of a country’s
economy. As stated in Chapter 5, GNP and GDP are not suitable for the direct comparison of country economies
because countries differ in terms of the size of their economies, level of economic development, and size of their
population. While nominal GNP and GDP per capita (not adjusted for cost of living) do provide comparable data,
these measures, adjusted for cost of living or purchasing power parity between countries, provide much more useful
data in terms of GNP and GDP per capita for comparison purposes.
e classi cation of countries by level of income is important when evaluating the economic attractiveness of
countries. Table 11.1 illustrates the World Bank classi cation of economies in terms of per capita GNI (GNP),
adjusted for purchasing power parity.

Table 11.1 Classification of countries in terms of per capita GNI, adjusted for purchasing power parity, 201656

Classification Per capita GNI

Low-income countries $1 025 or less

Lower middle-income countries $1 026 – $4 035

Upper middle-income countries $4 036 – $12 475

High-income countries $12 476 or more

Analysis of the economic environments of those countries in which an organisation is involved provides important
information, oen identifying country-speci c advantages (CSAs) for international strategic planning.

11.5.3.4 e sociocultural environment

Chapter 5 introduced the sociocultural environment. is section focuses on a concise interpretation and evaluation
of the cultural environments facing international business by de ning what culture is, identifying the determinants
of culture and their implications for international business, and exploring how culture relates to values in the
workplace.
For our purposes we de ne culture as the outcome of human behaviour based on pervasive and shared norms,
values, attitudes and beliefs that people use to interpret experience and generate social behaviour that guides their
lives as individuals or as members of a group. e most important determinants of the culture of a nation, society or
group are political philosophy, economic philosophy, social structure, religion, language and education, as
illustrated in Figure 11.3.

Figure 11.3 The elements of culture57

While these determinants in uence the values and norms of a culture, they are interrelated and are, in turn,
in uenced by culture as it evolves over time. Important implications of culture for international business based on
the in uences of its determinants are selectively summarised below:58
Political philosophy
» Political philosophies and systems of countries shape their legal and economic systems.
» e political philosophies of countries such as Switzerland, Canada, Cuba, Iran and Zimbabwe clearly differ
in many respects, also with regard to perceived political risk.
Economic philosophy
» Whether a country has a market economy, a mixed economy or a command economy affects economic,
investment, social and ethical behaviour differently.
» Countries adhering to a free market philosophy and democratic principles that encourage individual initiative
and an entrepreneurial orientation, and that also protect property rights are decidedly more attractive for
foreign investments and international business compared to a command or even a mixed economy.
Social structure
» Countries characterised by distinct social strata such as the caste system in India, with little or no mobility of
people between strata, pose serious challenges for, inter alia, international human resource management in
areas such as staff appointment, promotion and reward.
Religion
» By 2016, major religions and their following in the world were Christianity with 2 200 billion, Islam with 160
billion, Buddhism with 535 million, Judaism with 18 million and Hinduism with 1.1 million followers.
» Religion in uences a society’s attitude towards initiative, work and wealth creation. For example, there is the
Protestant ethic of entrepreneurship, hard work, productivity, saving and wealth creation. Hinduism
emphasises spiritual accomplishments rather than wealth and material well-being. Islam supports capitalism,
has a strong emphasis on social responsibility, and prohibits the receipt or payment of interest. Buddhism
emphasises both spiritual accomplishment and material well-being.
» In Muslim countries, for example, religion is a constraint on gender issues to date, limiting career
opportunities and the mobility of women, as well as subordinating them to men.
» Religion in uences dietary habits and consumption patterns. For example, pork products and alcohol are
forbidden in Muslim countries, as is beef in India.
Language
» It is estimated that there are more than 6 000 different languages and more than 10 000 dialects spoken
worldwide with Chinese the mother tongue of the largest number of people worldwide, followed by English
and Hindi. English is the most widely spoken language in the world, in uenced, inter alia, by the internet.
» Language involves both spoken (verbal) and unspoken (non-verbal) communication. Non-verbal
communication is believed to constitute 80–90% of all communication, and includes hand gestures, facial
expressions and interpersonal distance.
» Language is of extreme importance to international business in areas such as international negotiations and
contracts, marketing, promotion and advertising, where incorrect translations of advertisements and notices
could damage the image of an organisation, as highlighted in the Case example Signs from all over the world.

CASE EXAMPLE: Signs from all over the world59

Signs and notices in English found in various countries throughout the world:
In a Bucharest hotel lobby: The lift is being fixed for the next day. During that time we regret that you will be
unbearable.
 In a Paris hotel lift: Please leave your values at the front desk.
In a Japanese hotel: You are invited to take advantage of the chambermaid.
Outside a Hong Kong tailor shop: Ladies may have a fit upstairs.
In a Rome laundry: Ladies, leave your clothes here and spend the afternoon having a good time.
In a Copenhagen airline ticket office: We take your bags and send them in all directions.
In a Norwegian cocktail lounge: Ladies are requested not to have children in the bar.
In the office of a Romanian doctor: Specialist in women and other diseases.
At the reception desk of a Greek hotel: We will execute customers in quick rotation.
In a Czech tourist office: Take one of our horse-driven city tours – we guarantee no miscarriages.
In a Bangkok dry cleaner’s shop: Drop your trousers here for best results.

Education In the context of international business, education is important for reasons that include the following:
» Both formal and informal education are extremely important in shaping culture and passing it on from one
generation to the next.
» Porter60 maintains that education is a determinant of national competitive advantage.
» In international business, the extent and levels of education are important because they re ect the knowledge
and sophistication levels of a society. is is important for marketing, as well as the availability of skills and
competencies for MNEs in deciding where to locate foreign operations.

Since the culture of a nation, society or group determines the behaviour of their members, based on their norms and
values, international leaders and managers should possess profound cross-cultural literacy and adapt their strategies
to meet the needs and buying behaviours of people from different cultures.
However, how culture relates to values in the workplace is of critical importance to a MNE involved in a number
of different countries, Hofstede investigated how a society’s culture affects the values in the workplace which would
aid international managers to adapt their processes and practices to accommodate cultural differences in the
workplace. Hofstede ultimately identi ed the following six cultural dimensions, which we now brie y discuss:61
Individualism versus collectivism: A society characterised by individualism emphasises individual freedom and
self-expression, individual achievement, recognition and reward, as found in the US, whereas collectivism
emphasises collective societal goals as opposed to individual goals, pursuing group achievement and group
recognition, mainly for the greater good of society, and striving for group harmony, as found in China and
countries in the Middle East.
Power distance: is describes how a society deals with the unequal distribution of power among people.
Societies characterised by high power distance are typically autocratic, and the difference between the more
powerful and less powerful is accepted. In societies with low power distance, the gap between the powerful and
the less powerful is played down as much as possible and greater openness exists. Brazil and India are
characterised by high power distance, while low power distance is found in countries like New Zealand, Sweden
and the US.
Uncertainty avoidance: is determines the extent to which societies accept and tolerate risk and uncertainty as
opposed to those that are predominantly risk averse, avoid ambiguity and favour. security. Whereas the US is
characterised by low uncertainty avoidance, Japan is characterised by high uncertainty avoidance.
Masculinity versus femininity: is dimension refers to the relationship between gender and work roles where
masculine societies favour material wealth and are ambitious and assertive, whereas societies characterised by
femininity emphasise interdependence, interpersonal relationships, caring and nurturing. High masculinity
prevails in countries like Japan and Germany, while the Netherlands and Sweden are characterised by low
masculinity.
 Short-term versus long-term orientation: is dimension differentiates between societies, including groups and
organisations within societies that adhere to short-term objectives, results and timeframes as opposed to longer-
term perspectives and objectives, based on the future rather than the present. e US and Australia are
characterised by having a short-term orientation, whereas a long-term orientation prevails in countries like Brazil
and Japan.
Indulgence versus restraint: is cultural dimension of a nation or society is closely related to the short- and long-
term perspectives, where indulgent societies favour instant social and nancial grati cation compared to
societies with a long-term orientation exhibiting restraint through patience, delayed grati cation and intent on
saving for the long term. Most Western countries are seen as indulgent, while most Eastern and Southeast Asian
countries are seen to exhibit restraint.

ese dimensions have been widely accepted, and although cultures do evolve over time, the above dimensions
provide a useful framework for managing foreign operations, especially as far as organisational behaviour and
human resource practices in international settings are concerned.
In this section we highlighted the importance of understanding culture in international business, and of
scanning the international cultural environment when devising international strategies. We concluded by
highlighting the importance of culture and its implications in the workplace for international business.

11.5.3.5 e technological environment

Chapter 5 covered this topic extensively. Section 11.3.2 identi ed technological development as one of the major
drivers of globalisation. It is imperative that international management be acutely aware of technological advances,
especially those related to their speci c industries and keep the following, inter alia, in mind:
Dramatic innovations may render an organisation’s own technologies obsolete, resulting in a serious competitive
disadvantage.
Advances in transport vehicle technology, such as electric and self-driving cars (these developments were brie y
discussed in Chapter 5) must be taken into consideration.
Innovation could lead to the creation of entirely new industries, requiring management to be aware of the four
possibilities of industry change, namely radical change, intermediating change, creative change and progressive
change.62 Technologies, such as the internet, related ICT developments, robotics and arti cial intelligence, have
increased the importance of the knowledge economy exponentially.
e internet has revolutionised many business practices from design, access and production to distribution,
while eliminating political and other barriers to trade.
A sub- eld of AI – machine learning – has come to be used for everything from working out how best to aim
advertisements at web surfers to how to develop self-driving cars. In fact, it seems that the inconceivable may
become reality where, for example, fully automated surgery is expected around 2050, independent AI research by
2104, and full automation of labour by 2140.63

In summary, the ability to create, develop and apply new technologies, or revolutionise existing ones, is fundamental
to organisations of every size and type, and should be part of an organisation’s strategic intent, vision and scenarios
for the future.

11.5.4 The industry environment

Porter’s ve forces model (potential entrants, substitutes, suppliers, buyers and competitive rivalry) to determine the
long-term pro t potential of an industry has been extensively covered in Chapter 6, section 6.2.2. While two other
forces, that of complementary products or services and government, have been added to Porter’s ve forces.
Government regulators and intervention, as the last-mentioned force, especially have become increasingly
important in the international domain for the following reasons:
Government licensing policies and other regulatory factors increase barriers to entry.
ere is greater protection of suppliers’ bargaining power in protected economies where materials could be in the
hands of state monopolies.
Buyers’ bargaining power may also be greater where distribution networks are tightly controlled.
Government actions such as discriminatory or selective taxation and price controls may in uence the
pro tability of some industries compared to others.64

11.5.5 Summary
In this section we noted that the macroenvironment manifests itself at the global level and at the level of individual
countries. Environmental scanning and analysis in international business should therefore include evaluation of the
global, country and industry level environments for international strategic planning purposes. We now turn to the
all-important concept of competitive advantage in an international business context.

11.6 International competitive advantage

As previously stated, organisations that have a distinctive domestic competitive advantage and possess a valuable set
of resources that can be leveraged into new markets can consider becoming active international players by either
exploiting or enhancing their existing domestic competitive advantage.65 is discussion is followed by Porter’s
concept of national competitive advantage as a framework for internationalisation.

11.6.1 International competitive advantage in a global context

Irrespective of whether an MNE pursues a differentiation or a low-cost generic competitive strategy in its home
market, its international competitive advantage is the result of either one or both of the following two
motivations66 (see sections 11.4.1 and 11.4.2.2):
By exploiting its distinctive domestic competitive advantage, also referred to as its rm-speci c advantage (FSA)
– which could include a superior product or service, unique processes, or capabilities that are superior to those of
the MNE’s competitors in its foreign markets – to increase its scope and pro tability through market seeking
which includes successfully exporting its products to foreign markets.
By enhancing the MNE’s distinctive domestic competitive advantage through the location of its subsidiaries and
thus its production activities in foreign countries by means of FDI, motivated by resource seeking rather than, or
in addition to, market seeking. e focus here is on factor markets in foreign countries, such as the cost-effective
availability and potential bene ts of resources such as capital, labour and raw materials (the factor endowments)
in order to capitalise on lower factor costs in these foreign countries to attain country-speci c advantages
(CSAs).

However, an MNE’s foreign subsidiary could serve other foreign markets, and even its home market, by exporting
the products or services it produces from its foreign location.
Closely aligned to the combined effect of FSAs and CSAs is Dunning’s Eclectic Paradigm, based on ownership-
speci c advantages (O), location-speci c advantages (L) and internalisation advantage (I) – his so-called OLI
paradigm.67 Ownership-speci c advantages derive from an organisation’s knowledge, skills, capabilities, processes
and physical assets, and are similar to FSAs. Location-speci c advantages derive from factor endowments in
individual foreign countries which include natural resources, skilled labour, low-cost labour and low costs of
nancing, and are comparable to CSAs. Internalisation advantages stem from the organisation’s involvement in
optimising and controlling its activities, and keeping some of its international value chain operations within the
control of the rm.
Given that an MNE’s subsidiaries would compete in the same industry abroad as at home, the competitiveness of
these subsidiaries, located in the various foreign countries, would largely depend on the extent to which they
perform better than their immediate competitors in those foreign countries in terms of relevant industry key success
factors (KSFs). e relationship between FSAs, CSAs and industry competitiveness, in terms of KSFs as sources of
an MNE’s international competitive advantage, is illustrated in Figure 11.4.

Figure 11.4 Competitive advantage in an international context68

For viable international strategies, international managers should be acutely aware of the sources of international
competitive advantage relevant to their own speci c situations.

11.6.2 National competitive advantage

Porter69 found that the success of nations, industries and individual business organisations were closely linked and
that national competitive advantage originates from the internal strengths of successful domestic organisations
that innovate and continually improve their processes and re ne their strategies within their industries to the extent
that their superior product and service offerings become internationally competitive. However, according to Porter,
national competitive advantage is determined in combination with the following four attributes that he originally
identi ed, and the additional two that he subsequently included in his model:
Factor conditions
Demand conditions
Related and supporting industries
Organisational strategies, structures and rivalry in the organisation’s domestic environment.

Porter subsequently included the role of government and chance events as two additional attributes in his model of
national competitive advantage, as illustrated in Figure 11.5.

Figure 11.5 Porter’s diamond of national competitive advantage70

11.6.2.1 Factor conditions

Porter71 distinguished between basic and advanced factors in a country. Basic factor endowments comprise natural
resources, climatic conditions and the basic skills of the workforce, whereas advanced factor endowments include
the high-level skills of the labour force, knowledge resources, capital, infrastructure and advanced technologies.
A country such as Japan has minimal basic factors, especially raw materials necessary for manufacturing, most of
which it has to import. However, it has an abundance of advanced factors that include highly skilled people and
high-level technologies which are continuously improved, especially in vehicles, robotics and consumer electronics,
to enhance national and international competitiveness.
South Africa is richly endowed with basic factors such as minerals and has ample basic workforce skills. It also
has an encouraging endowment of advanced factors such as highly skilled people in commerce and industry, a
world-class nancial infrastructure and banking system, and cutting-edge technologies in deep-level mining and
oil-from-coal production technologies where Sasol is a world leader.

11.6.2.2 Demand conditions

According to Porter, national competitive advantage is also strengthened by a strong local demand for industries’
goods and services, and the degree of sophistication of that demand. ese conditions are the primary drivers for
innovation, quality improvement and competitiveness in the domestic market, and provide rms with an excellent
springboard for expanding competitively into international markets.
11.6.2.3 Related and supporting industries
e presence of related and supporting industries that are internationally competitive can help organisations to
increase their competitive advantage through innovation and quality improvement. ese are typically industries
that supply components and are generally located near producers, are able to provide inputs at lower costs compared
to more distant suppliers, and can adapt rapidly to the changing needs of producers.

11.6.2.4 Organisation strategy, structure, and rivalry

Porter’s research con rmed that nations tend to do well in those industries characterised by intense rivalry where
management practices and strategies of organisations are closely aligned to the industry’s key success factors and
sources of competitive advantage. is attribute of Porter’s diamond relates directly to the quality of strategic
management of individual organisations.

11.6.2.5 Government and chance events

In addition to these four attributes, Porter72 subsequently added the role of government and chance events as
attributes that could affect national competitive advantage. We have seen that governments can enhance or restrict
international business. Restrictions could result from unacceptable delays in the issuing of licences and permits for
involvement in certain industries abroad such as telecommunications, air transport and the liquor industry.
Unanticipated regulatory changes, for example related to a country’s mining industry, illustrated in the Case
example DRC’s new mining code is in force in section 11.5.2.2 would have a serious negative impact on attracting
foreign investors. However, governments can also create an enhancing environment by way of incentives such as the
alleviation of taxes and the provision of export incentives.
Examples of chance events include the earthquakes in Haiti in January 2010 and in Chile in March 2010.
Atmospheric ash from the volcanic eruption in Iceland in April 2010 had a disastrous effect on the global airline
industry when airports in the UK and across Europe were closed for more than a week. is resulted in losses of
hundreds of billions of rand for, inter alia, commercial airlines serving the affected destinations. Such events
typically have catastrophic effects on business in a speci c region or even further a eld, as is evident from the
example of the volcanic eruption in Iceland.
Importantly, the four original attributes need to be positive and support each other to provide the ideal business
climate for organisations to internationalise. While Porter’s work has not been free of criticism, it is still extensively
used in the context of international strategy.

11.6.3 Summary
International competitive advantage of MNEs, on the one hand, typically commences with domestic competitive
advantage through unique product differentiation and superior customer value creation, performance, quality and
branding, or, on the other hand, from value creation and competitiveness through greatly efficient low-cost
leadership, enhanced by mutually supportive, positive attributes of national competitive advantage. e extent to
which MNEs are able to capitalise on country-speci c advantages (CSAs) in their foreign markets will further
contribute to their overall sustainable international competitive advantage, as is evident from the interrelationships
in Figure 11.4.
International competitive strategies to exploit these advantages are discussed in the section that follows.

11.7 International competitive strategies

In the previous section we identi ed the more important sources of competitive advantage for organisations
involved in international business. To succeed in the dynamic and competitive global business environment,
organisations need to have viable strategies based on a clear strategic intent, vision, mission and long-term
objectives that are aligned to and re ect the organisation’s intended international involvement.
We now consider the different international strategies that organisations can pursue in their quest for
international competitive advantage. ese include:
an international strategy
a multidomestic or localisation strategy
a global strategy
a transnational strategy; or
combinations of these strategies.73

Before proceeding, we brie y consider the strategic orientation (DEF30) of international organisations as a frame
of reference for international strategic planning. e strategic orientation involves an organisation’s cultural strategic
predisposition, whether an ethnocentric, polycentric, regiocentric, or geocentric predisposition toward its
international business involvement as a frame of reference for its international strategic planning and operations.

11.7.1 Strategic orientation of international organisations

Multinational enterprises typically display one of four orientations, sets of beliefs or mindsets toward their
international and global activities. ese include an ethnocentric orientation, a polycentric orientation, a
regiocentric orientation or a geocentric orientation:74
An organisation with an ethnocentric orientation believes that everything that originates from its home country
is best, and that the values and priorities of the parent organisation must guide the strategic decisions regarding
all its foreign operations. Control is mostly centralised, products standardised where feasible, and subsidiaries
generally staffed with key managerial personnel from the parent organisation in the home country.
In a polycentric orientation, the culture of the country in which a subsidiary or foreign operation is located
receives priority and dominates decision-making. Foreign subsidiaries accordingly enjoy relatively greater
freedom, the entire MNE is highly decentralised, and subsidiaries are predominantly staffed with people from the
host country familiar with local market and operating conditions.
In a regiocentric orientation, the predisposition of the parent organisation is largely blended with those of its
subsidiaries or operations in other countries within a region, thus accommodating regional in uences.
An organisation with a geocentric orientation adopts a globally integrated systems and networking approach to
strategic decision-making, exhibits a worldwide attitude, and encourages multiculturality and global learning.
Decisions are made at the parent organisation level as well as in foreign subsidiaries as circumstances dictate. In
this orientation the best person for the job is appointed in host country subsidiaries, regardless of nationality,
race, religion and gender.

As will be clear in our exposition on international strategies, strategic orientation plays an important role in the
strategic priorities and the structuring of international organisations.

11.7.2 Competitive advantage and strategy

Pursuing international strategies successfully can dramatically help organisations to extend their competitive
advantage to new foreign markets, resulting in greater pro tability. As outlined in section 11.6.1 above, this is
achieved by MNEs effectively leveraging their distinctive competencies, capabilities and resources, and capitalising
on factor market advantages in their foreign markets. As previously stated, Porter’s competitive generic low-cost and
differentiation strategies pursued in an MNE’s home market provide the basis for the four international strategies,
depending on the types of product or service involved – whether products or services could be sold worldwide
without any customisation or adaptation, or whether they need to be customised or adapted for distinct national
markets.
In the former case, organisations are bound to experience pressures for cost reductions, since they will be
competing on cost and price rather than on differentiated features of products or services. However, where an
organisation’s products or services will not be accepted without customising them for local preferences, the
organisation will be subject to, and will need to accommodate the pressures for local responsiveness to be
competitive. ese pressures and their implications for deciding on appropriate international strategies are
highlighted in the section below.

11.7.3 Pressures for cost reduction and local responsiveness

According to Hill,75 organisations that compete internationally generally face two types of con icting competitive
pressures, namely pressures to be locally responsive and pressures for cost reductions.
Pressures for local responsiveness are found in multidomestic industries and originate from differences in
consumer tastes and preferences, infrastructure, distribution channels and host government relations in a foreign
country. Of these pressures, differences in consumer preferences that primarily result from cultural differences
between countries are by far the most important of the above factors. is requires that, to be competitive,
organisations need to adapt, differentiate and customise their products to unique customer preferences and tastes in
each of their foreign markets. However, customising products and services for each national country market
conceivably results in substantial duplication of activities across national country markets, does generally not allow
product standardisation, and leads to higher costs. Such organisations therefore cannot realistically bene t from
economies of scale and accordingly do not compete on the basis of low cost and price, but rather on desired
differentiated product features. Examples of products and services that typically have to be adapted for local
conditions in individual foreign markets are non-durable consumer goods, processed foods and nancial services.
e second type of competitive pressure, that for cost reductions, which inherently relates to products in global
industries, requires an organisation to reduce costs through mass production of standardised products to bene t
from economies of scale. e organisation can only achieve this where products need little or no adaptation to
satisfy different foreign market requirements. Under these circumstances, organisations can realise location
economies, and increase pro tability by readily leveraging core competencies across different global markets. is is
particularly the case in industries producing low-cost commodity-type or globally standardised products for price-
sensitive buyers. Examples include chemicals and steel, as well as electronic products such as microchips and
personal computers.
ese two types of competitive pressures clearly place con icting demands on an organisation. In the sections
that follow we indicate how they in uence the choice of an organisation’s international strategy.

11.7.4 Competitive strategies for international business

When competing internationally, organisations can use any of the following four strategies:
International
Multidomestic or localisation
Global
Transnational.

While each of these strategies has its advantages and disadvantages, the question of appropriateness of a strategy
depends on an organisation’s type of product or service, and whether it is subject to pressures for cost reductions or
local responsiveness in a speci c foreign market or markets. e answer to this question, in effect, basically indicates
which of the four international strategies will be appropriate in a speci c international situation. e
appropriateness of each strategy in relation to the two pressures is illustrated in Figure 11.6. We now discuss these
strategies, their appropriateness and their importance in international operations.76

Figure 11.6 Four international competitive strategies77

11.7.4.1 International strategy

An international strategy is appropriate where organisations have valuable core competencies that indigenous
competitors in foreign markets lack, and where organisations face relatively weak pressures for both local
responsiveness and cost reductions. is is the case with Microso worldwide. Organisations pursuing an
international strategy therefore generally tend to:
centralise R&D, product design and product development functions at home
establish manufacturing and marketing functions over time in each major country in which they are involved
limit customisation of products for different foreign markets due to weak pressures for local responsiveness
retain tight head office control over product and marketing strategies.

Competitive advantage and value creation thus come from transferring core competencies and products to markets
where these are lacking. Firms intent on exporting from their home country generally adopt this strategy, which
does allow economies of scale to be attained. However, when establishing operations abroad, the duplication of
manufacturing facilities in various foreign markets over time might not allow economies of scale to be achieved,
resulting in higher costs, and making this strategy inappropriate in markets with high pressures for cost reduction.
A worldwide product division organisational structure with a predominantly ethnocentric orientation and staffing
policy to allow for the effective transfer of core competencies could be appropriate here. is strategy has been
successfully deployed by organisations such as Toys‘R’Us, IBM, Kelloggs and Microso. Products in this category
include stationery, packing materials, toys and some domestic appliances.

11.7.4.2 Multidomestic or localisation strategy

Hill states that multidomestic strategies are most appropriate when high pressures for local responsiveness and low
pressures for cost reductions exist. Organisations pursuing this strategy accordingly customise their products and
marketing strategies from one national market to the next to meet the speci c preferences and tastes of consumers
as well as the marketing and distribution requirements in their different foreign markets. Key characteristics of a
multidomestic or localisation strategy include the following:
Customisation or frequent adaptation of products for each separate foreign market is required.
ere are few, if any, system-wide opportunities to realise economies of scale.
Value-creating and value-adding activities, including production, marketing and R&D, are decentralised by
country and duplicated in each national market.
Competition in each country is essentially independent of competition in other countries, and competitive
advantage is inherent in each separate national market.
Organisational decision-making is decentralised, national subsidiaries function in a largely autonomous manner,
and coordination of marketing and sales is localised and takes place in each national market.
Limited organisational learning and no or minimal leveraging of core competencies across countries occur
within the MNE.
Cost structures are high, and with higher-priced, differentiated and customised products, organisations compete
in terms of product features for which consumers are willing to pay, and not on the basis of cost and price.

As a result of decentralised decision-making and distinct, autonomous national markets, a worldwide area structure
and a polycentric orientation and staffing policy would be most appropriate for organisations pursuing a
multidomestic or localisation strategy. Organisations marketing consumer non-durable products, processed food
and nancial services typically deploy multidomestic strategies.

11.7.4.3 Global strategy

Hill maintains that a global strategy should be adopted where pressures for cost reduction are strong and demands
for local responsiveness are minimal. Global strategies focus on increasing pro tability by bene ting from cost
reductions obtained from experience curve effects, economies of scale, economies of scope and location economies.
Key characteristics of a global strategy include the following:
Mutually interdependent subsidiaries in the various foreign countries concerned
Marketing of standardised products worldwide to price-sensitive consumers
Global economies of scale in key activities
Leveraging rm technology across many markets
Global coordination of sales
Centralised decision-making, control and reporting activities
Production, marketing and R&D functions concentrated in a few favourable locations.

Organisations using a global strategy require a strong organisational culture to aid system-wide coordination and
networking across many markets. A worldwide product division organisational structure and both geocentric and
ethnocentric orientations and approaches to staffing are appropriate, with strong coordination and control systems
in place. Microchips, personal computers, general consumer electronics, machine tools, jeans and audio equipment
as well as commodity-type products like cement, basic steel products and sugar are examples of typical global
products that are generally standardised, mass produced, have low switching costs and are sold worldwide.

11.7.4.4 Transnational strategy

Transnational strategies are appropriate where MNEs simultaneously face high pressures for cost reductions and for
local responsiveness, and where signi cant opportunities exist to leverage valuable skills in an MNE’s global network
of operations. e competitive pressures described here imply that these MNEs have extensive global networked
operations where core competencies do not ow only from the parent organisation to subsidiaries, but also from
subsidiaries to the parent organisation as well as between foreign subsidiaries. ese MNEs bene t from a process of
global learning, and require a strong organisational culture, extremely effective global coordination, and a
geocentric orientation and approach to staffing. Key characteristics include the following:
ese organisations establish manufacturing facilities in a few favourable locations to attend to customisation
where required. ey also pursue low costs by using multipurpose, universal components across countries where
possible. Transnational organisations such as Caterpillar and Walmart have successfully achieved this with their
global logistics and distribution capabilities, and car manufacturers like Toyota use vehicle production platforms
globally, adapting body and other con gurations to suit local preferences where necessary.
Decision-making is both centralised and decentralised. Structures are complex and usually require a matrix
organisational structure with a complex dual reporting system.

Organisations such as Caterpillar, Walmart, Unilever and Asea Brown Boveri (ABB) are successfully pursuing
transnational strategies, while those such as Nestlé, Anhauser-Busch InBev and Sasol have developed into
transnational organisations.

11.7.5 Summary
International expansion requires that an organisation develop appropriate strategies, keeping in mind that it has to
contend with two types of pressures, namely for local responsiveness and cost reductions. It is therefore important
to note that industry characteristics, the type of product or service, and related consumer needs will largely
determine the type of pressure with which an organisation has to contend, and hence the appropriate international
strategy to adopt. Having discussed international, multidomestic or localisation, global and transnational strategies
and their appropriateness in speci c circumstances, we now turn to strategies for foreign market entry. In section
11.9 we explain how these two sets of strategies, inter alia, are integrated into a global strategic management process.

11.8 Strategies for entering foreign markets

Having decided on an appropriate strategy for international expansion, management has to consider the following
important questions when deciding on how to enter foreign markets:
Which markets to enter: is question requires extensive international country and market research
When to enter the selected markets: e question of timing
On what scale to enter: Envisaged foreign market scope, dependent on the extent of an organisation’s resource
availability, readiness and commitments for international expansion
How to enter the selected markets: Which mode of foreign market entry.78

e rst three issues require extensive country, industry and market research, including in-depth analysis of
potential bene ts and risks as a basis for strategic planning and resource allocation. However, the fourth issue
regarding the best way for the organisation to enter foreign markets requires extensive knowledge of international
business strategy in general, and foreign market entry modes in particular.

11.8.1 Foreign market entry modes

e following entry modes as illustrated in Figure 11.7 are available to organisations expanding internationally:
Exporting
Licensing
Strategic alliances, which include short- to longer-term contractual agreements.
Joint ventures
 Franchising
Wholly-owned subsidiaries in one or more foreign countries (an equity-based mode of entry).

While not included in Figure 11.7, international turnkey projects are also regarded as a mode of foreign market
entry, as explained below. Furthermore, foreign market entry modes are generally classi ed into equity- and non-
equity-based modes, as shown in Figure 11.7. An equity mode is a mode of entry that involves taking full or partial
ownership and control in a foreign rm, where full ownership constitutes a wholly-owned subsidiary, and partial
ownership a joint venture in a foreign country. In contrast, non-equity modes of entry are based on contractual
arrangements between two or more organisations and do not involve owning equity in a foreign rm.
We now discuss the above-mentioned market entry modes, and their unique advantages, disadvantages and
risks.

Figure 11.7 A hierarchical model of foreign market entry modes79

11.8.1.1 Exporting
Exporting is a non-equity entry mode. Manufacturing rms in particular oen begin their international expansion
by exporting and only later switching to another more appropriate entry mode. Exporting can be indirect, direct or
involve international intra- rm transfers or trade. In indirect exporting, the organisation is in the hands of a
domestic export agent and has little control over the process. With direct exporting, the organisation is in control of
the exporting process, and gains exporting experience through this involvement. However, the organisation has little
or no control over what happens in the foreign market. International intra- rm transfers or trade involves trade
between two subsidiaries in two countries controlled by the same MNE.
Advantages of exporting include the potential to realise economies of scale at home as a result of a larger
potential market, and avoiding the cost of setting up manufacturing facilities in another country. Increased
production in the home country typically results in higher domestic employment, and export sales generate valuable
foreign exchange. Disadvantages may include high transportation costs, trade barriers to imports in the foreign
country, and problems with foreign marketing agents. Overall, exporting is a low-risk market entry mode with little
or no capital requirements.

11.8.1.2 Licensing
Licensing is a non-equity contractual arrangement. In a licensing agreement, a licensor grants the rights to
intangible property to a licensee (foreign licensed organisation). e main advantages of licensing are that the
licensee pays a licence fee or royalty to the licensor, and bears all the costs and risks of setting up foreign markets.
Also, no capital investment by the licensor in facilities or operations is required. Disadvantages are that the licensor
has no control over the licensee to promote and market its products, that global coordination of activities is difficult,
and that there is a risk of losing technological knowhow to the licensee, thus creating a potential future rival. An
example of licensing in an international context includes the pharmaceutical company Aspen who obtained the
exclusive rights for nutritional products from Nestlé for the South African market.

11.8.1.3 Turnkey projects

Turnkey projects are non-equity contractual agreements generally found in engineering and processing industries.
e advantages are that they allow organisations to export their knowhow pro tably to countries that may restrict
FDI. Turnkey projects are less risky than conventional FDI, especially in politically unstable countries.
Disadvantages are that turnkey projects are of limited duration with no permanent market presence, and the
organisation may create a future competitor. e construction of oil re neries, hydroelectric schemes, airports and
harbours are typical examples of turnkey projects.

11.8.1.4 Strategic alliances and joint ventures

In many countries, political considerations make strategic alliances and joint ventures the only feasible mode of
market entry.
Strategic alliances are non-equity collaborative agreements between two organisations working towards some
common purpose. ey are oen in the same industry, but not necessarily in the same country. Advantages of
strategic alliances are that they allow organisations to bene t from a local partner’s knowledge of country
conditions, and that they allow alliance partners to share risks and costs associated with research and development,
including new product development. Major disadvantages are that organisations may:
Relinquish control over their technology and intellectual property
Have insufficient control over their subsidiaries that operate under alliance agreements
Have incompatible management styles, organisational cultures and control systems that could lead to con ict.

e international commercial airline industry is characterised by numerous successful alliances worldwide. e

strategic alliance between KLM and Northwest Airlines was one of the pioneering ventures in this eld, and the
alliance between Comair and British Airways in South Africa is highly successful. South African Airways (SAA) is
one of 28 members of Star Alliance.
Joint ventures differ from strategic alliances in several respects, as shown in Figure 11.7. A joint venture is an
equity mode of entry and involves establishing an entirely new legal entity that is jointly owned by two or more
partners, is is referred to as an equity joint venture (EJV), whereas strategic alliances, as previously stated, are
based on collaborative contractual agreements. e advantages and disadvantages of EJVs are similar to those of
strategic alliances, except that a joint venture implies a permanent arrangement with equity holdings (partial
ownership) by all joint venture partners. With reference to Figure 11.7, a ‘minority equity joint venture’ means that a
partner has less than a 50% ownership share in the joint venture, an ‘equal share equity joint venture’ means that
partners each have a 50% ownership share, and a ‘majority equity joint venture’ means an ownership share of more
than 50% up to and including 99%. As in strategic alliances, con icts may arise from incompatible leadership styles
and cultures, and insufficient clarity on long-term goals and objectives. Mutual trust between strategic alliance
partners as well as between joint venture partners is generally acknowledged as a critical requirement for success. In
both strategic alliances and joint ventures, it is difficult to coordinate diverse global operations.

11.8.1.5 Franchising
Franchising, a non-equity mode, is somewhat similar to licensing. e main advantages of franchising include low
development costs, and the fact that the franchisee bears the costs and risks of opening up a foreign market.
Disadvantages of franchising for the franchisor include the maintenance of standards and quality control of distant,
foreign franchise operations, and that global strategic coordination is oen difficult. Well-known franchise
operations include McDonald’s, KFC and Starbucks, while South Africa’s Nando’s has been successful in expanding
its franchise to numerous foreign markets, including the UK and Australia.

11.8.1.6 Wholly-owned subsidiaries

As an equity mode of entry, a wholly-owned subsidiary, whether established by means of an acquisition or a
green eld venture, means that the organisation owns 100% of the shares. Wholly-owned subsidiaries in foreign
markets involve FDI and can be established in two ways:
An organisation can set up a new venture, generally referred to as a green eld venture
It can acquire or take over an established organisation in the foreign country, also referred to as a brown eld
venture.

It is assumed that the parent company would have done extensive country attractiveness and market research prior
to the decision to establish a foreign subsidiary, whether a green eld or a brown eld venture.
A green eld venture occurs where an MNE decides to establish a new subsidiary in a foreign country, developing
it from the ground up as opposed to merging with or acquiring an existing rm in the foreign country. e main
advantage of a green eld venture is that the subsidiary can be constructed in total accordance with the company’s
requirements and expectations. Major challenges for a green eld venture are that it still has to develop a market in a
competitive foreign business environment, decide on a staffing strategy, identify suppliers and establish a viable
distribution strategy, to name but a few. It could also take a long time before a pro t is realised.
An example of an acquisition is where the international Mittal Group acquired the South African steel producer
Iscor to form Ispat Iscor, subsequently renamed Mittal Steel, and more recently Kumba Resources, rather than
establishing a new steel-producing operation in South Africa.
e main advantages of wholly-owned subsidiaries as a mode of foreign market entry include the following:
e MNE retains effective control over its core capabilities, especially in high-technology industries.
e MNE has a means of effective control over its operations in various countries, which simpli es global
strategic coordination.
Taking over a current business generally implies having an established market to exploit further.
An acquisition basically eliminates a competitor when acquiring or taking over a foreign rm.
It is possible for the MNE to locate its subsidiaries in the most cost-effective countries or regions.

Disadvantages of wholly-owned subsidiaries include the following:

It is the most costly way of entering foreign markets as it requires huge amounts of capital.
 e risk of loss is signi cant, especially for green eld ventures in unproven markets.
When acquiring established foreign organisations, the merging of different cultures, structures and systems could
give rise to further problems.

11.8.2 Selecting an optimal foreign market entry mode

Organisations considering international involvement should carefully weigh the bene ts, costs and risks of each
entry mode. However, the following broad guidelines could be considered:
If an organisation’s competitive advantage is predominantly in technological knowhow, licensing and strategic
alliances may not be appropriate, and a wholly-owned subsidiary could be preferable.
When an organisation’s competitive advantage resides in managerial knowhow, for example McDonald’s or
Nando’s, franchises or joint ventures may be preferred to licensing and wholly-owned subsidiaries.
When deciding to enter politically unstable markets, strategic alliances or joint ventures could provide some
assurance due to the involvement of local partners.

11.8.3 Summary
In this section we explored the strategic importance of the various modes of foreign market entry in terms of their
characteristics, advantages and disadvantages, as well as their appropriateness in a variety of international business
situations.

11.9 International strategic management in a global context

In the previous sections, we identi ed the generally accepted international strategies and market entry modes
available to organisations involved in or considering international business involvement. Here we develop a
framework for strategic management in a global business context.

11.9.1 Developing an international strategic management framework

e three main phases of a generic strategic management process – strategy formulation, strategy implementation
and strategy evaluation and control, as outlined in Chapter 1 – apply to both domestic and international
organisations. However, as we have seen, international involvement signi cantly adds to the complexity of the
strategic management process and the demands on management. With the process illustrated in Chapter 1 (see
Figure 1.6 as our point of departure, we now outline the international strategic management process with
reference to Figure 11.8, which clearly indicates the added complexity resulting from international involvement.80
e various phases in Figure 11.8 are numbered to re ect the sequential decision-making steps in the process
that has evolved from both the theory and practice of international management and strategy in recent decades.
ese steps are as follows:
Step 1: Evaluate the current pro le of the MNE in terms of its vision, mission, strategic intent, long-term
objectives (LTOs), organisational culture and values as a point of departure for global strategic planning.
However, long-term objectives are typically nalised only aer analysis of the organisation’s external and internal
environments and SWOT analysis (see step 4 below)

Figure 11.8 The international strategic management process81

 Step 2: Align the strategic assumptions on which the current business strategy (domestic and/or international) is
based with the envisaged international involvement or expansion. is phase also includes alignment of the
vision, mission and long-term objectives of the organisation.
Step 3: Analyse the domestic and global external environments as well as the organisation’s internal environment.
» Scanning the external environment involves identifying important and relevant political, legal, economic,
sociocultural, technological, demographic and natural environment forces in both the domestic and
international business environments as potential opportunities or threats. In international strategic
management, external environmental scanning is also the starting point for the analysis of country
attractiveness, country risk and foreign market potential, all of which have little or no relevance to domestic
operations.
» Analyse the internal environment of the MNE in terms of strengths and weaknesses in its value chain to
identify its internal competitive advantage related to its capabilities and resources, and to assess its readiness
for internationalisation, also taking into account the home country’s national competitive advantage as related
to the industry key success factors.
Step 4: Conduct a SWOT analysis on the outcomes of the external and internal analyses to identify the impact
that potential opportunities, threats, strengths or weaknesses may have on the achievement of the organisation’s
envisaged domestic and international strategic objectives. It is important that the outcomes of the SWOT
analysis, in turn, serve to realign and nalise the vision, mission and long-term objectives of the organisation.
Steps 5 and 6: Strategy formulation and choice of strategy here are much more complex than for a domestic
organisation as three distinct strategic decisions have to be considered. ese involve deciding on:
» the appropriate generic strategy for domestic operations should any change of the existing strategy be
required (low cost, differentiation or focus)
» the appropriate international strategy (international, multidomestic (localisation), global or transnational)
» the mode of foreign market entry (exporting, licensing, turnkey project, forming a strategic alliance or joint
venture, franchising or establishing a wholly-owned subsidiary in a foreign country).
Based on revised long-term objectives, the strategy formulation in Step 5 thus involves the decisions in Steps 6,
6a, 6b and 6c, as outlined above. With regard to mode of entry, if the organisation decides on a wholly-owned
subsidiary, it must make an additional decision with regard to the countries in which to locate the organisation’s
subsidiaries, as in Step 6b. e choice of appropriate generic and international strategies will depend largely on
the industry characteristics, the MNE’s products or services, and the extent of pressures for cost reductions or
local responsiveness. To bene t from economies of scale, most organisations rely initially on marketing their
existing products or services internationally through exporting.
Steps 7 and 7a: Implementing the three distinct types of strategies is considerably more complex than strategy
implementation domestically. Country differences (political, legal, economic, sociocultural, technological,
demographic, physical and natural environments) and geographic distance are complicating factors in this
regard. Revision and/or adaptation of organisational structures, systems and procedures, including reporting
procedures in Step 7a are required to facilitate strategy implementation. Marketing, nancing, staffing and
operations as well as information systems typically need review and adaptation to the international dimension.
Step 8: Once implemented, ongoing monitoring, evaluation and control of both the domestic and the
international strategic processes are required to ensure satisfactory performance.

International organisations will obviously have to adapt the above strategic management framework to their own
unique situations, which could include aspects such as the extent to which the parent organisation is diversi ed
across industries, and how many foreign markets it wants to enter.
 STRATEGY IN ACTION: Mahindra plans assembly in South Africa82

The economic downturn on the African continent, fuelled by a steep decline in commodities, has seen new
vehicle sales in Africa drop from a peak of 1.72 million vehicles in 2014 to 1.2 million vehicles in 2017. However,
while the continent’s motorisation rate of 42 vehicles per 1 000 people compared to the global average of 180
vehicles per 1 000 people remains the lowest of any region in the world, it does signal the significant potential for
the continent’s automotive market to grow. Although South Africa manufactured 601 178 units or 56.4% of
Africa’s vehicle production in 2017, the industry was ranked 22nd with a global market share of 0.62%, remaining
relatively small in global terms.
However, South Africa’s automotive manufacturing sector contributed 6.9% to South Africa’s GDP in 2017,
down from 7.4% in 2016, and total South African export earnings reached R164.9 billion in 2017, comprising
13.9% of South Africa’s total export earnings, although lower than the R171.1 billion in 2016 that represented
15.6% of total export earnings in that year. On the other hand, the value of vehicle imports into South Africa
increased from R56.2 billion in 2016 to R59.8 billion in 2017. India, at 88 110 units or 19.9% of total light vehicles
imported, was the top country of origin in volume terms in 2017. Given its export achievement, Indian vehicle
manufacturer Mahindra, in its 14th year of business in South Africa, in early May 2018 was set to announce
details about its plans to assemble its vehicles in South Africa. The Mahindra Group is a diversified multinational
company headquartered in Mumbai, India, with operations on over 100 countries around the world. Newly
appointed chief executive Rajesh Gupta said the company would start with the assembly of the Mahindra Pik-Up.
‘This will offer us a sound footing on which to further entrench our South African sales success,’ he said. The
assembly would be supported by the expansion of Mahindra’s products and services. Mahindra South Africa has
not yet disclosed where its assembly plant will be located. There has been speculation over the past few years
that Mahindra would assemble one or more of its models in the planned new greenfield multi-model vehicle
manufacturing plant in the East London industrial development zone that was to be operated by an outsourced
assembler. However, industry sources have indicated the pick-up will be assembled in Durban. At this time chief
financial officer Avinash Bapat said Mahindra was gearing up for a new phase of growth and expansion in South
Africa. ‘Measured in terms of our sales over the past five years and removing smaller brands with annual sales of
less than 1 000 units, Mahindra is one of the five fastest growing brands in South Africa,’ he said. Mahindra, a
dominant manufacturer of sport utility vehicles and pick-ups in India, achieved year-on-year growth of 12.7% in its
financial year to March 2018, representing a compound annual growth rate of 19% over the past two years.

Questions
1. In your view, why would Mahindra consider investing in an automotive assembly plant in South Africa if they
seem to have been relatively successful in exporting their vehicles from India to South Africa over the past 14
years or so?
2. What are the advantages that South Africa inherently holds for Mahindra regarding this investment? What
are possible drawbacks that South Africa holds in this regard?
3. Why does Mahindra prefer establishing a wholly-owned subsidiary through foreign direct investment rather
than a joint venture with a local South African vehicle manufacturing company?
4. Evaluate the attractiveness of the South African light-vehicle manufacturing industry in terms of Porter’s five
forces model of industry competitiveness (presented in Chapter 6), Based on your evaluation, what are the
prospects of this initiative for Mahindra?

11.9.2 Summary
Although much the same fundamental strategic management logic, processes and frameworks apply to both
domestic and international business operations, there are distinct differences in content and context, as well as in a
number of important decision-making steps, capturing the relatively greater complexity of international strategic
management in a global context.
11.10 Summary
Given the increasing trend in the globalisation and internationalisation of economic and business activity in recent
decades, expanding internationally has become imperative in many industries. Organisations need to develop viable
international competitive strategies to internationalise in an increasingly competitive global environment. In the
context of a rapidly changing global business environment, this chapter explored the motives for international
expansion, the sources of competitive advantage for such expansion, and the relevant international competitive
strategies that organisations can pursue to enter and compete in foreign markets. Essentially, this chapter focused on
extending strategic thinking, planning and management to the global business environment.
Because countries differ in terms of their political, legal, economic, sociocultural, technological, and
demographic environments, it was shown that international business differs profoundly from, and is considerably
more complex than, domestic business, posing extreme challenges to management and leadership. e approach in
this chapter was to explain why international business is different, why both the organisation and the environment
are sources of competitive advantage, how to develop international strategies to cope with various industry and
environmental forces in foreign markets, and how to enter foreign markets within a framework of integrated
international strategic management.

REFLECTION BOX:

How would you view envisaged major global changes in the technological environment related to the following
industries?
1. The transportation industry, from an individual as well as a commercial perspective, given the recent
advent of electric self-driving cars and commercial vehicles as well as air taxis. What other industries
might be affected by such developments? How might such developments impact the strategies of
companies involved in the traditional vehicle manufacturing industry?
2. The renewable energy industry, from the perspective of an entrepreneurial firm envisaging entering this
industry with a view to expanding internationally over time. What could the major challenges be for such a
venture, also given the generally accepted motives for internationalisation?

Opening case study questions

1. As the largest and extremely competitive South African commercial bank already operating in some 20, mostly
Anglophone, countries throughout Africa, the case provides very little macroenvironmental information about
Côte d’Ivoire in support of Standard Bank’s decision to establish itself in that country. Conduct a PESTEL
analysis of Côte d’Ivoire (evaluation of political, economic, sociocultural, technological, ecological and legal
macroenvironmental factors) to assess the attractiveness of the country for a nancial services company like
Standard Bank.
2. Despite Standard Bank’s experience in almost exclusively Anglophone countries thus far, could it merely
‘transplant’ its existing strategies that worked in South Africa and these other Anglophone African countries to a
Francophone country? Why or why not?
3. If you were requested to advise the management of Standard Bank about analysing Côte d’Ivoire’s political risk,
what approach to analysing this would you recommend? Explain your recommended approach fully.

Discussion questions
1. Discuss and compare the advantages and disadvantages of the four international competitive strategies. Explain
which of these strategies will be most appropriate for international organisations producing the following
products and why:
a) Cement
b) Computer keyboards
c) Instant coffee
d) Motor vehicle batteries.
2. Analyse and de ne the concept of competitive advantage. How would the competitive advantage of a domestic
organisation typically differ from that of an organisation involved in international business? What are the reasons
for this difference? Is the knowledge that such a difference exists of importance to an international manager?
Why or why not?
3. Discuss and evaluate Porter’s diamond of national competitive advantage. Of what value is Porter’s approach in
this regard for an international manager? Explain and substantiate your views.

Using knowledge and skills

1. Your South African-based organisation, involved in manufacturing sophisticated world-class medical equipment,
plans to market a technologically advanced, high-value laser-optic device for use in surgery in the EU where a
demand for this product has already been established. e CEO of your company has requested you to make
recommendations with regard to the following:
a) e choice of a suitable EU member country, based on macroenvironmental political, economic, legal,
cultural, demographic and technological considerations, noting that a free trade agreement exists between the
EU and South Africa. Use various sources, including the internet, to answer this questions.
b) e appropriate international strategy to be deployed in this case
c) e appropriate mode of foreign market entry that should be considered.
Write a three- to four-page report on your ndings, motivating your recommendations on each of the above
aspects. (It may be useful to review Chapters 4, 5 and 6 in this regard.)
2. Identify a South African organisation involved in international business with which you are familiar or from
which you can obtain information. Given the organisation’s industry pro le and standing, as well as its product
and/or service pro le, write a brief report that outlines and substantiates the following:
a) e industry characteristics (Porter’s ve forces analysis)
b) e perceived strategy or strategies pursued by the organisation (which of the four ‘international’ strategies)
c) e mode or modes of foreign market entry that the organisation adopted.
Conclude your report by brie y commenting on the future strategic expectations of the organisation. (It may be
useful to review Chapters 4, 5 and 6 in this regard.)

Further reading
Bartlett, C.A. & Ghoshal, S. 2009. Transnational management: Text, cases and readings in cross-border management.
Boston, MA: McGraw-Hill Irwin.
Cavusgil, S., Knight, G. & Riesenberger, J. 2017. International business: e new realities, 4th ed., Global Edition,
New York: Pearson Education.
Collinson, S., Narula, R. & Rugman, A.M. 2017. International business, 7th ed. United Kingdom: Pearson Education.
Collis, D. 2014. International strategy: Context, concepts and implications. Chichester, United Kingdom: John Wiley
& Sons.
Daniels, J., Radebaugh, L. & Sullivan, D. 2019. International business, 16th ed. Global edition, United Kingdom:
Pearson Education.
Hill, C.W.L. & Hult, G.T.M. 2019. International business: Competing in the global marketplace, 12th ed. New York:
McGraw-Hill Education.
Luthans, F. & Doh, J.P. 2015. International management: Culture, strategy, and behavior, 9th ed. New York: McGraw-
Hill Education.
Peng, M.W. 2009. Global business. United States: South-Western Cengage Learning.
Wall, S. & Minocha, S. 2015. International business, 4th ed. United Kingdom: Pearson Education.
Wild, J.J. & Wild, K.L. 2019. International business: e challenges of globalization, 9th ed. United Kingdom: Pearson
Education.

Suggested websites
Department of Trade and Industry (http://www.thedti.gov.za) – For information relating to South Africa’s exports
and FDI programmes
Europa (europa.eu/index_en.htm) – e official website of the European Union
Financial Times (http://www..com) – One of the world’s leading business news organisations, and recognised
internationally for its authority, integrity and accuracy
e Economist (http://www.economist.com) – e leading source of analysis on international business and world
affairs
e World Bank (http://www.worldbank.org) – Working for a world free of poverty

References and endnotes

1. Adapted from Mchunu, S. 2018. Standard Bank to expand footprint in Francophone Africa. Business Report.
11 April, 15; Moonier, O. 2018. Standard Bank eyes West Africa growth. Bloomberg. [Online.] Available:
http://www. n24.com [Accessed 11 April 2018].
2. Grant, R.M. 2013. Contemporary strategy analysis, 8th ed. Chichester, United Kingdom: Wiley, 317.
3. Hough, J. & Neuland, E.W. 2007. Global business: Environments and strategies, 3rd ed. Cape Town: Oxford
University Press, 175–176.
4. Hill, C.W.L. & Hult, G.T.M. 2019. International business: Competing in the global marketplace. 12th ed. New
York: McGraw-Hill Education, 6.
5. Govindarajan, V. & Gupta, R.K. 2001. e quest for global dominance. San Francisco: Jossey-Bass, 4.
6. Woods, N. 2000. e political economy of globalisation. London: Macmillan, 2–3.
7. Segal-Horn, S. 2006. International and cross-cultural strategy. Walton Hall, Milton Keynes: e Open
University, 28.
8. Ibid.
9. Ibid.
10. Hill et al. 2019. Op. cit.: 7; Rugman, A. 2005. e regional multinationals. Cambridge: Cambridge University
Press, 14.
11. Hill, et. al. 2019. Op. cit.: 24–31.
12. Lasserre, P. 2007. Global strategic management, 2nd ed. New York: Palgrave Macmillan, 22–26.
13. Levitt, T. 1983. e globalisation of markets. Harvard Business Review, May/June, 92–102.
14. Wild, J.J. & Wild, K.L. 2012. International business: e challenges of globalization, 6th ed. Boston: Pearson,
28–29.
15. Peng, M. & Meyer, K. 2016. International business, 2nd ed. United States: Cengage Learning, 18–21; Collis, D.
2014. International strategy: Context, concepts and implications. Chichester, UK: Wiley, 7–8.
16. Cavusgil, S.T., Knight, G. & Riesenberger, J.R. 2014. International business: e new realities. 3rd ed. New
York: Pearson, 47–49; 94–96.; Wild et al. 2012, Op. cit.: 31–32.
17. Hill et al. 2019. Op. cit.: 11–12; Peng et al. 2016. Op. cit.: 224.
18. Cavusgil et al. 2014. Op. cit.: 63–65.
19. Hill et al. 2019. Op. cit.: 17–22.
20. Tralac. 2016. South Africa’s transition from TDCA to EPA: Agricultural market access. Tralac Newsletter. 4
November. Accessed Online 26 March 2019 (https://www.tralac.org/news/article/10734-south-africa-s-
transiyion-from-tdca-to-epa.html); Tralac. 2016. SADC-EU Economic Partnership Agreement Documents
and Resources. Tralac Newsletter. Accessed Online 26 March 2018 (https://www.tralac.org/resources/by-
region/sadc/sadc-eu-economic-partnership-agreement.html).
21. Internet World Stats. 2017. [Online.] Available: http://www.internetworldstats.com/stats1.htp (30 June).
Copyright. 2000–2017. Miniwatts Marketing Group. All rights reserved.
22. Economist Intelligence Unit. 2017. e World in 2018. London. Economist Newspapers Ltd, 121.
23. Ibid.
24. Louw, L. & Venter, P. 2013. Strategic management: Developing sustainability in Southern Africa. 3rd ed. Cape
Town: Oxford University Press, 373–374.
25. Cokayne, R. 2018. BMW issues strong warning on policy. Pretoria: Pretoria News Business Report, March 23.
[Online]. Available: https://www.iol.co.za/business-report/companies/bmw-issues-strong-warning-on-policy-
13999949. [Accessed 4 March 2019].
26. Collis et al. 2014. Op. cit.: 50–51.
27. Ibid.
28. Ibid.
29. Deresky, H. 2002. Global management. Upper Saddle River, NJ: Prentice Hall, 161–162.
30. Daniels, J.A., Radebaugh, L.H. & Sullivan, D.R 2004. International business. 10th ed. Upper Saddle River, NJ:
Prentice Hall, 6.
31. Adapted from Bartlett, C.A. 1992. How multinational organisations evolve. Journal of Business Strategy.
Summer, 20–32; Phatak, A.V., Bhagat, R.S. & Kashlak, R.J. 2005. International management. Boston, MA:
McGraw-Hill, 168.
32. Denk, N., Kaufman, L. & Roesch, J.F. 2012. Liability of foreignness revisited: A review of contemporary
studies and recommendations for future research. Journal of International Management. 8(4):322–334, in
Collis. 2014. Op. cit.: 42–43.
33. Collis. 2014. Op. cit.: 42
34. Collis et al. 2014. Op. cit.: 7–8.
35. United Nations. [Online.] Available: http://www.un.org
36. World Trade Organization. [Online.] Available: http://www.wto.org
37. Brooks, I., Weatherston, J. & Wilkinson, G. 2011. e international business environment, 2nd ed. Harlow,
England: Financial Times Prentice Hall (imprint of Pearson), 7–11.
38. European Union. [Online.] Available: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
39. Mminele, D. 2017. e performance of and outlook for the South African economy. Address by the Deputy
Governor of the South African Reserve Bank at the Government Corporate Network Event, Johannesburg, 30
October, 1–11.
40. Hill et al. 2019. Op. cit.: 11–15.
41. Cavusgil, S.T., Knight, G. & Riesenberger, J.R. 2012. International business: e new realities. New York:
Pearson, 130.
42. Cavusgil et al. 2012. Op. cit.: 67–73.
43. Kibby, M. 2018. Five million jobs will be lost to AI by 2020 — WEE Pretoria News Business Report. 22 March.
Available: https://www.iol.co.za/business-report/opinion/ ve-million-jobs-wil-be-lost-to-ai-by-2020-wef-
13972217. [Accessed 26 March 2018].
44. Wild et al. 2012. Op. cit.: 64.
45. Hill et al. 2019 Op. cit.: 41–47.
46. Ibid.
47. Clowes, W.2018. DRC compleying new mining regulations, ignoring companies’ key concerns. Business Day.
9 May. Accessed Online 26 March 2019. Available: (https://www.businesslive.co.za/bd/world/africa/2018-05-
09-drc-completing-new-mining-regulations-ignoring-companies-key-concerns/)
48. Luthans, F. & Doh, J.P. 2009. International management: Culture, strategy and behavior, 7th ed. New York:
McGraw-Hill, 314–319.
49. Luthans et al. 2009. Op. cit.: 321–328.
50. Ibid.
51. Hill et al. 2019. Op. cit.: 41–46.
52. Ibid.
53. Hill et.al. 2019 Op. cit: 49–50.
54. Adapted from Hill et al. 2019. Op. cit.: 104–109; Anon. 2006. Islamic banking methods. Pretoria: Pretoria
News Business Report, 2 March; Economist Intelligence Unit. 2009. e World in 2010. London. Economist
Newspapers Ltd, 127.
55. Hill et al. 2019. Op. cit.: 82–86.
56. World Bank. [Online.] Available: http://www.worldbank.org
57. Hill et al. 2019. Op. cit.: 93–97.
58. Ibid.
59. Adapted from McFarlin, D.B. & Sweeny, P.D. 2002. International management: Strategic opportunities and
cultural challenges. Boston, MA: Houghton Mifflin, 186; Phatak et al. 2005. Op. cit.: 162; Wild et al. 2012. Op.
cit.: 83–84.
60. Porter, M.E. 1990. e competitive advantage of nations. New York: Free Press, in Hill et al. 2019. Op. cit.:
120–121.
61. Hill et al. 2019. Op. cit.: 114–117.
62. McGahan, A.M. 2004. How industries change. Harvard Business Review. October, 82(10):86–87.
63. Cross, T. 2017. Human obsolescence. e World in 2018. United Kingdom:e Economist Newspaper
Limited. 144. All rights reserved.
64. Lasserre. 2007. Op. cit.: 171–172.
65. Collis. 2014. Op. cit.: 50–56.
66. Ibid.
67. Cavusgil et al.2012. Op. cit.: 199–200.
68. Adapted from Grant. 2013. Op. cit.: 319.
69. Porter. 1990. Op. cit.
70. De Wit, B. & Meyer, R. 2010. Strategy: Process, content, context. 4th ed. United States: South Western Cengage
Learning. Copyright 2010, South Western, a part of Cengage Learning Inc, 576.
71. Porter, M.E. 1990. Ehe competitive advantage of nations. Harvard Business Review. March–April, 77–79, in
Hill et al. 2019. Op. cit.: 180–183.
72. Ibid.
73. Hill et al. 2019. Op. cit.: 382–383.
74. Luthans et al. 2009. Op. cit.: 129–133; Rugman, A. & Hodgetts, R.M. 2000. International Business, 2nd ed.
London: Financial Times Prentice Hall, 128.
75. Hill et al. 2019. Op. cit.: 377–382.
76. Ibid.
77. Op. cit.: 383.
78. Ibid.: 433–437.
79. Adapted from Pan, Y. & Tse, D.K. 2000. e hierarchical model of market entry modes. Journal of
International Business Studies. 31(4):535–554, 4th quarter; Peng et al. 2016. Op. cit.: 334–350; Griffin, R.W. &
Pustay, M.W. 2010. International business, 6th ed. Boston: Pearson, 361.
80. Venter, D.J. & Neuland, E.W. 2004. e European Union and South Africa. Johannesburg: Richard Havenga &
Associates, 224–228.
81. Adapted from Venter et al. 2004. Op. cit.: 226.
82. Adapted from Cokayne, R. 2018. Mahindra plans assembly in South Africa, Pretoria News Business Report, 4
May, p. 11; Venter, I. 2018. Auto exports earned South Africa R165 billion in 2017, Craemer Media’s
Engineering News. Accessed Online, 7 May 2018 (www.engineeringnews.co.za).
PART FOUR
Strategic implementation
 CHAPTER 12 Strategic
leadership
Trevor Amos

LEARNING OUTCOMES

After reading this chapter, you should be able to:

explain the responsibility and role of top management in strategy implementation
explain what is meant by the term ‘strategic leadership’
advise on the value of strategic leadership in successful strategy implementation
identify and explain the key responsibilities of strategic leadership.

KEY TERMS

core competencies
corporate governance
emotional intelligence
leaders
leadership
organisational culture
organisational climate
strategic leadership
strategic thinking
strategy implementation
ubuntu

OPENING CASE STUDY

Strategic leadership in action at AutoTrader

Chapter 1 introduced the case of AutoTrader where the CEO, George Mienie, and his management team
successfully transformed the business from a print company to a disruptive tech and digital business positioned
‘for growth in the digital market of buying and selling cars’.1 The entire trajectory and revenue model of the
 business was changed. Currently, ‘AutoTrader.co.za’s online customer base is exponentially greater than the
size of its print readership at its height’.2
The forward thinking of the CEO and his management team, and their willingness to disrupt their own
business model, together with their ability to implement their thinking, made the difference to AutoTrader,
providing an example of strategic leadership in action.
It all started with looking into the future and thinking that ‘… even though South Africa wasn’t quite ready for
the internet in 2007, there would come a time when it would be, and AutoTrader could either have a market
solution that was an industry leader, or be one more business behind the innovation curve and entering
permanent stasis’. However, ‘successful disruption doesn’t lie in recognising you need to be disruptive, or even
coming up with bold, innovative ideas — it’s all about execution,’ insists George. ‘I get bored in a room full of
“ideas people”. The world is full of great ideas and idea people. But successful execution is extremely rare and it
accounts for nine tenths of success. You can’t stay ahead of the curve without being an innovative organisation,
and that all comes down to how well you execute your ideas.’
‘It’s an ongoing process. The moment you stand still, you become a template for others to follow. We are
copied all the time, we change something, and competitors follow suit. You grow, plateau, decline; that’s the
innovation S-curve that business courses love to discuss. But innovators understand that when one S is
declining, another is conjoined and on the upward swing. The trick is to recognise when you’re going to plateau
so that you’re already planning for your next business model shift. There’s a lull between the two. I call it the
valley of tears. It’s painful. It requires serious change, and if you stay there your business is in trouble — but it
also gives you the gift of time to re-engineer the business.’
Because execution is so important, the processes and team supporting innovation, and particularly business
model adjustments, are crucial. ‘Balanced scorecards play a big role for us,’ says George. ‘When we began this
process, top management had a vision that needed to be executed by the whole team. The balanced scorecard
was our link, our sounding board for execution. It takes a lot of work. You have to break up what you want to do
into little parts to ensure people and activities are all working together. It’s particularly challenging breaking old,
established silos apart, but we managed to do it. The whole organisation is open plan. Different departments are
encouraged to work and socialise together, ensuring no silos are created, and information and advice is shared
freely.’
Innovation is not a once-off activity. It is a process that needs to become entrenched in the organisation.
Integral to this is the constant re-evaluation of what the business has that adds value to its customers. ‘The
business needs to view change as a constant, not just as a concept, but something deeply entrenched in our
people’s DNA,’ explains George.3

Overview
Once an organisation has selected and developed its strategies, it then has to implement them, which is the
responsibility of top management. To successfully do so, top management needs to fulfill the role of strategic
leadership, which consists of a number of key responsibilities. These are the specific tasks and duties that top
managers need to fulfill as a function of their role as strategic leaders.
The chapter begins with identifying the need and value of strategic leadership in an organisation, and outlines
what is meant by strategic leadership. The key responsibilities of strategic leadership are then identified and
explained.
Strategic leaders need first to understand organisations as a whole, which requires strategic thinking.
They need to lead organisations effectively and ethically for strategic results. Effective ethical leaders are
individuals who have a clear sense of right and wrong, respect human dignity and rights, and are results driven.
They are emotionally intelligent with a range of behaviours or leadership styles at their disposal to apply wisely in
order to influence people and achieve results constructively. In applying leadership styles, they acknowledge that the
feasibility of these styles depends on the cultural conditioning of subordinates.
A compelling vision need to be developed and communicated by strategic leaders
Strategic leaders create an integrated organisational system aligned with the strategy to enable
implementation. Creating this requires that strategic leaders understand the organisation as a whole, and design and
implement appropriate organisational structures and relevant enabling systems, processes and policy; staff the
organisation with talented people and ensure their behaviour is aligned to the requirements of strategy; ensure
appropriate leadership within the organisation; create organisational culture; and set climate.
Strategic leaders also need to:
build on existing or develop new distinctive organisational capabilities,
ensure ethical practices and good governance, and
initiate and lead strategic change, ensuring the allocation of resources to key strategic change initiatives.

Successfully engaging in the key responsibilities enables top management to lead strategically for successful
strategy implementation.

12.1 Introduction
e formulation and choice of a strategy is important, but unless there is a conscious and active effort to implement
the chosen strategy across the organisation. e strategy is of little value if the ability of the organisation to adapt
and survive is threatened. As David Kneale, CEO of Clicks Group Limited, said, ‘success is 10% strategy and 90%
execution’.4 For organisations to succeed and be sustainable, strategy clearly needs to be successfully implemented.
Although ‘all managers become strategy-implementers in their areas of authority and responsibility, and all
employees are participants’,5 top management is ultimately responsible for the successful implementation of strategy.
is means that top management has the task of creating a true whole that is larger than the sum of its parts, a
productive entity that turns out more than the sum of the resources put into it. One analogy is the conductor of a
symphony orchestra. e instrumental parts are limited. But the conductor has the composer’s score; he is only the
interpreter. e manager is both composer and conductor. is task requires the manager to bring and make
whatever strength there is in their resources – and above all in the human resources – and neutralise whatever
weaknesses there are. e task of creating the genuine whole also requires that the manager simultaneously
considers the performance and results of the enterprise as a whole and the diverse activities needed to achieve a
synchronised performance. e second speci c task of the manager is to harmonise, in every decision and action,
the requirements of both the immediate and the long-term future.6
A key factor in successfully implementing strategy is strategic leadership. In fact, ‘a lack of leadership, and
speci cally strategic leadership, at the top of the organisation has been identi ed as one of the major barriers to
effective strategy implementation’.7 Without effective strategic leadership, ‘the probability that a rm can achieve
superior or even satisfactory performance … will be greatly reduced’.8
Strategic leadership is about the leadership of entire organisations by top-level executives, as compared to
leadership in organisations, which is the responsibility of all other managers at the middle and lower levels, and
which focuses on operational or tactical aspects of leadership.
Strategic leadership is the ability of a person to anticipate, envision, maintain exibility and think strategically.9 It
is also the ability to in uence and work with others to make day-to-day decisions and to initiate changes that will
create a viable future for the organisation and enhance its long-term viability while maintaining its short-term
stability.10, 11 Strategic leadership is the ability to:
understand an organisation as a whole with its various interrelated components in its broader, changing and
volatile environment and industry, including stakeholders;
envision a viable future for the organisation and the path or strategy to that future;
work with and through people and other resources to lead movement towards its future; and
recognise the current reality of the internal environment of the organisation and, where necessary, initiate and
manage necessary strategic change to position the internal environment of the organisation as an integrated
 system, ensuring it is enabled to implement strategy both for short-term stability and long-term performance and
sustainability.

As illustrated in the Opening case study, the forward-thinking CEO George Mienie and his management team,
together with their ability to implement their thinking made the difference, and provides an example of strategic
leadership in action. When thinking of strategic leaders, a few iconic names come to mind.12 Sol Kerzner conceived
an idea and realised his dream in the form of the Sun City resort and other top luxury hotels in South Africa and
worldwide. e late Pam Golding founded Pam Golding Properties and grew it into one of the biggest real estate
property groups in the country. Adrian Gore founded Discovery Health, an organisation that changed health
insurance with innovative products such as its Vitality programme. Another example of a strategic leader who
thinks big and dreams even bigger is South African-born Elon Musk, who is revolutionising transportation by
bringing fully electric vehicles to the mass market: ‘[H]e only wants to solve bigger, worldly problems like the
existence of humanity – create sustainable energy, provide clean transportation, and discover interplanetary space
travel. His track record includes founding … SpaceX to discover interplanetary co-existence; Tesla [to transform]
sustainable energy for humanity, and [co-founding] Paypal, which revolutionised online payment.’13 All of these
individuals are strategic leaders.
e chapter now moves on to identify and outline seven key responsibilities of strategic leaders:
Understand the organisation as a whole
Lead effectively and ethically for strategic results
Develop and communicate a compelling vision to lead change
Create an integrated organisational system to enable the implementation of the strategy
Build and use distinctive organisational capabilities aligned to the strategy
Ensure ethical practices and good governance
Initiate and manage strategic change.

12.2 Understand the organisation as a whole

A key responsibility is for strategic leaders to understand the organisation as a whole. is responsibility:

… involves the ability to see the enterprise as a whole; it includes recognizing how the various functions of the
organisation depend on one another, and how changes in any one part affect all the others; and it extends to
visualising the relationship of the individual business to the industry, the community, and the political, social,
and economic forces of the nation as a whole. Recognising these relationships and perceiving the signi cant
elements in any situation, the manager [sic] should then be able to act in a way which advances the over-all
welfare of the total organisation.14

is is strategic thinking and ‘of all the components inherent in leading an organisation in developing and
implementing a strategic planning process, none is more important than the capacity for strategic thinking and
creative thinking’.15 In fact, ‘organisational failure throughout the global business world is replete with examples of
how the lack of strategic and creative thinking were among the root causes of many of these failures’.16

12.2.1 Strategic thinking

Strategic thinking is the mental process of reasoning applied by an individual to achieve success in any task. ink
of the reasoning applied when your car suddenly loses power and you pull over and open the bonnet. You stand
looking over the engine observing the reality of the situation. You identify that the coolant level is below minimum.
You diagnose the situation to understand it better. Your diagnosis reveals that there is coolant dripping from under
the car and that it is coming from the bottom of the radiator. You wonder what to do … you consider a few options
but decide that the solution is to seek expert advice. You implement this solution by checking the directory on your
phone and calling the dealership to explain the problem. Strategic thinking requires that one identi es the reality of
the situation, and diagnoses it in order to de ne and understand it better. On the basis of this diagnosis, one then
generates and implements solutions to create the ideal situation necessary to successfully implement the strategy.17
is mental process strategic thinking is about engaging in a strategic reasoning process and this process consists
of two cognitive activities required to de ne strategic problems, namely identifying problems and diagnosing them
to understand their nature as shown above the line and two activities to solve problems, namely conceiving solutions
and realising the solutions by implementing the solutions.

Identifying is the mental activity necessary to determine the current situation and recognise a problem. In simple
terms it is about seeing and connecting the dots, creating a picture of the situation from which a problem can easily
be identi ed. e problem can be a discrepancy between what is and what should be for the strategy to be
successfully implemented. For example, it can be that the strategic leader recognises that the structure of the
organisation is not what it should be to implement the strategy or there could be misalignment between subsystems
or elements of the organisation. e leadership style within the organisation may not be in uencing people to
perform in line with its strategic goals and objectives. To be successful in this reasoning process requires the use of
increasingly complex mental processes, referred to as cognitive complexity18 or complicated understanding.19 is
is the cognitive ability to apply multiple, complementary perspectives to describe and analyse events. It ‘increases
the probability that individuals will perceive events (especially complex events) more accurately, synthesise diverse
perceptions and experiences more completely, and generally behave more effectively … make choices and sustain
commitments in the face of ambiguity, relativism, and multiple interpretations of situations’.20 To identify a
problem, the strategic leader needs information regarding the current reality of the organisation to make sense of
this information and determine any discrepancies (problems).
Once the strategic leader has identi ed any discrepancies through recognising and sense making, they now need
to diagnose. is is a more detailed process of determining the nature (the essence) of what is being faced. is is
necessary because we oen identify a problem by observing a symptom (a sign or indication of a problem or
situation) which is a mere manifestation (expression) of the problem and not necessarily a true re ection of the real
problem which needs to be managed and dealt with. is can be illustrated by a medical example where
experiencing severe headaches is a symptom or mere expression or another problem which could be high blood
pressure. High blood pressure in this case would be the real problem which needs to be managed and dealt with. See
the high absenteeism example later in this section for an example relevant to an organisation.
Diagnosis is done through the mental processes of analysing and re ecting. Analysing is the mental process of
breaking the problem down into its component parts and determining its most distinctive elements. Important in
analysis is to ask the right questions, such as: ‘what is this all about?’, ‘why is it happening?’, ‘what is causing it?’, ‘who
is involved?’. Conceptual or mental models in uence and guide the questions we ask, and assist in distinguishing
between cause and effect (symptoms). Such models are simpli cations of reality. ey are abstractions of reality and
assist us in making sense of the complexity and ambiguity of organisational reality and guide us in what to do.
Models identify key elements and the relationships between them. ey are like maps that depict key elements or
features (physical such as oceans, rivers, mountains; political such as countries, cities, towns; and other features such
as roads, monuments, places of interest) of a territory. Maps help us see the bigger picture, navigate, nd our current
and desired location. and help nd other points of interest like a recommended restaurant. In the case of strategic
leaders, the organisation is the territory. Just as automotive technicians have mental conceptual models of how an
engine ideally works to assist them in being effective in their work, so too do strategic leaders need conceptual
models of how organisations should ideally function to implement particular strategies. See section 12.2.1.1 for
more on mental models.
Having broken the problem down into its component parts, the strategic leader re ects (thinks through), which
may result in being able to identify causes and interrelationships between the components of the problem. High
absenteeism is an example of a symptom that can be identi ed as a problem. To deal effectively with absenteeism,
management needs to de ne and understand the nature of the problem to determine its cause. Knowing this means
that solutions can be generated and actions taken to eliminate or reduce the problem.
Having de ned the strategic problem by engaging in the cognitive activities of identifying and diagnosing,
strategic leaders need to solve the problem by engaging in the activities of conceiving and realising.
In conceiving, the leader needs to imagine how to address the problem and formulate actions to address it. When
conceiving, leaders use mental models to assist in providing them with a picture of the ideal situation and guide
them in formulating actions to achieve it. e leader is, however, oen required to formulate unique solutions as
generic solutions are rarely available. While logical thinking is important, strategic leaders also need to think
laterally to be able to generate an innovative solution. is requires managers to move from a reductionistic model
of the world that depicts it as machinelike, linear, predictable and controllable21 to one of complexity.22 ey need
to ‘abandon the … belief that the world is merely a puzzle to be solved, a machine with instructions waiting to be
discovered, a body of information to be fed into a computer’.23
Puzzles are well-structured problems with only one correct nal solution, which can be guaranteed by using a
speci c known and effective procedure or formula.24 Responding to strategic problems as puzzles results in leaders
simply plugging available information into a speci c formula and acting on the basis of the solution that emerges.
Ill-structured problems, however, are those for which there is no single, unequivocal solution that can be
determined at the present moment by employing a particular decision-making procedure or following steps or rules.
Ill-structured problems are typical of the type of problems encountered in a complex, ambiguous, rapidly changing
environment where there is seldom a single right or wrong answer. ese are the problems strategic leaders are
increasingly facing25 and need the skills to deal with. Such problems can also be termed ‘wicked problems’:
ese are challenging to describe
ere is no way of knowing when the solution is found
 e solution is neither right nor wrong
ere is no way to test the effectiveness of the solution
Solutions cannot be undone as each one has consequences
ere are countless possible solutions
Every problem is unique with no previous similar problems to inform addressing it
e problem is interlinked with other problems with no singular root cause
It involves numerous stakeholders with different views on the nature and cause of the problem
Because of the wide impact of the consequences of solutions, strategic leaders cannot afford to be wrong because
they are held liable for the consequences.26

Strategic leaders in these situations need to be able to think outside the box to develop unique innovative actions or
solutions to implement strategy. is requires creative thinking, which is not only needed when conceiving and
realising strategic solutions, but also when identifying and diagnosing strategic problems.27
Once a manager has conceived how to address the problem, the focus is on practically implementing the actions
to realise its solution and to evaluate the implications of the actions. In cases where action is required, the strategic
leader essentially becomes a change agent, responsible then for initiating and managing change.
ese strategic thinking activities need not follow a structured and orderly process as presented above. To engage
successfully in this process, the manager needs absorptive capacity, adaptive capacity and managerial wisdom:28
Absorptive capacity is the capacity to learn, the ability to ‘recognise new information, assimilate it, and apply it
toward new ends,29 challenging and even restructuring worldviews or mental models used to make sense of the
world.
Adaptive capacity is the ability to be open to and accept change.30 In order to even engage in the strategic
reasoning process, the manager rst needs to be open to change (willing to deal with or consider it) and
intellectually curious and inquisitive about what is happening within and around an organisation.
Managerial wisdom is being able to perceive both external and internal disparity in the environment, understand
the stakeholders and their relationships, and take appropriate action at the right time.31

All three of these characteristics require an openness to sense what is happening in the organisation and its
environment, to transform and make sense of these observations, and to act appropriately on them.
In the reasoning process, the current reality of an organisation needs to be identi ed and diagnosed. is must
then be compared to the manager’s mental image of what is ideally needed to successfully implement the strategy.
Any gaps/discrepancies (problems) need to be recognised, and solutions conceived and realised to close the gap.
Strategic leaders need to be comfortable conceptualising, working with the abstract, theorising and hypothesising in
this reasoning process. Mental/conceptual models can be useful in assisting the leaders here.

12.2.1.1 Mental models

A model is a theory which indicates which factors (in an organisation, for example) are most critical or
important. It also indicates how these factors are related or which factors or combination of factors cause other
factors to change. In a sense, then, a model is a road map that can be used to make sense of the terrain … e
models we use are critical because they guide our analysis and action.32

We all have some sort of implicit models that we have developed over time from our experiences. ese models
assist us in making sense of the world around us and guiding us in what actions to take, but differ in validity and
quality. For example, think of your mental model of how the engine of a car works. is will in uence and guide you
in what to do when your vehicle fails to start, when it breaks down or what to do to improve the performance or fuel
efficiency of the engine. How effective (doing the right thing) or efficient (doing the right thing in the right way) you
are in dealing with the issues or problems with your vehicle’s engine will be in uenced by the mental model you
have of how the engine works. Your mental model may be that you do not even recognise that there is a problem
until it is too late. A trained technician with a more valid mental model of how the engine works may be more
effective and efficient in dealing with starting problems and breakdowns, or with improving the performance or fuel
efficiency of the motor.
Mental models guide strategic leaders in what they consider to be relevant and important or not when engaging
in the strategic reasoning process. ese models in uence what they ‘see’ and what they do not. Whether or not a
manager even identi es a problem will depend on the person’s mental model. Similarly, mental models will
in uence how a manager analyses and de nes the nature of a problem or opportunity, as well as how they conceive
the action to be taken and its execution.
In addition to the implicit mental models guiding strategic leaders, there are more explicit models that have been
scienti cally developed and based on theory and/or research. Knowledge of such models and skill in using them is
developed typically in management and leadership development and training. is specialised knowledge and skill
in the use of models is critical in assisting strategic leaders to deal with ill-structured or wicked problems, and the
conceptualising necessary for the implementation of strategy.
Mental models re ect our beliefs, guide our senses, provide an interpretive lter of the importance of issues and
the cause and effect relationships between them, and direct behaviour.33 Strategic leaders need to work with mental
models, starting with ‘turning the mirror inward; learning to unearth our internal pictures of the world, to bring
them to the surface and hold them rigorously to scrutiny’.34

One thing all managers know is that many of the best ideas never get put into practice. Brilliant strategies fail to
get translated into action. … We are coming increasingly to believe that this … stems … from mental models. …
New insights fail to get put into practice because they con ict with deeply held internal images of how the world
works, images that limit us to familiar ways of thinking and acting. at is why the discipline of managing
mental models – surfacing, testing, and improving our internal pictures of how the world works – promises to be
a major breakthrough …35

Put another way:

e difficulty though, is that in managing mental models, they are seen to be proven and to make sense. is
will be to the point that it does not make any logical sense to change them. Changing times do require that our
longstanding mental models change. Changing these mental model requires strategic thinkers to be imaginative
and to break away from the conventional.

When it comes to being imaginative and breaking away from the norm, or accepted way of doing things, think of
Elon Musk and his achievements mentioned earlier.36

When it comes to breaking with the orthodox and making leaps of imagination, think of Elon Musk and his
achievements mentioned earlier.
Strategic leaders clearly need to be able to work with mental models, being aware not only of their bene ts but
also of their potential limitations. ey need to be able to think logically as well as laterally to be creative. is,
however, does require emotional intelligence, particularly being self-aware of their feelings about uncertainty and
ambiguity. Taking leaps of imagination and abandoning rules, steps, logic and the familiar to be creative requires
one to be comfortable with uncertainty and ambiguity.
Other than using models in the reasoning process of diagnosing and solving strategic problems, strategic leaders
also construct unique business models to represent simply how the organisation will create value and deliver on its
purpose and vision (i.e. the strategy). e statement by Old Mutual Emerging Markets interim CEO, Iain
Williamson, clearly highlights the role of a business model in delivering: ‘Our strategy is rooted in our vision and
brand promise of “enabling positive futures”. Our customers span all income segments and include both retail and
corporate relationships. Our business model uniquely positions us to deliver on this vision’.37

12.2.1.2 Business model

e business model can be de ned as:

… an abstract representation of an organization, be it conceptual, textual, and/or graphical, of all core

interrelated architectural, co-operational, and nancial arrangements designed and developed by an
organization presently and in the future, as well as all core products and/or services the organization offers, or
will offer, based on these arrangements that are needed to achieve its strategic goals and objectives.38

Oen included in such models are inputs, processes and activities, stakeholders and their roles, and outputs. e
statement made by the Foschini Group, below, provides insight into what a business model does, namely describing
activities that guide an organisation towards its vision. For the Foschini Group39 ‘[o]ur business model describes the
activities that transform our resources, through a range of business processes, into outputs and outcomes that guide
us towards our vision of being the leading fashion lifestyle retailer in Africa whilst growing our international
footprint’.
Business models are unique to particular organisations, and require the lateral thinking identi ed earlier to be
able to generate them for a particular strategy and its implementation. ey can be presented as textual and/or
graphic. Below is an example of a business model in textual form.

CASE EXAMPLE: Lewis Stores’ business model spelt out40

Lewis Group continues to operate its proven decentralised, store-based business model which remains
appropriate for the group’s lower to middle income target market. The model is based on the principle that the
sale of furniture and the granting of credit are largely interdependent as the group’s customers are reliant on
credit to buy products. All aspects of the customer relationship are managed by the staff in the stores, except for
the granting of credit which is managed centrally to ensure consistent decision-making and prudent credit risk
management. The personal and relationship-based interaction with customers in the stores creates trust and
confidence while also generating high levels of loyalty and repeat sales. This process is supported by leading
technology which removes the administrative burden at store level and enables real-time management reporting.
The business model was enhanced in 2016 with the launch of a specialist call centre for South African stores.
The call centre aims to further improve compliance, transparency and oversight of the in-store sales and credit
application process and limit any potential misunderstandings of the costs, services and fees to be paid by
customers. The call centre is housed at the company’s head office and employs 60 consultants who are able to
engage with customers in English, Afrikaans, Xhosa, Zulu, Sepedi, Sesotho, Setswana and Xitsonga.

Strategic leaders clearly need to be comfortable in working with mental models, in not only applying them when
dealing with strategic problems but also in conceptualising, designing, communicating, interpreting and translating
their own unique business models into day-to-day action.
As mentioned, to implement strategy successfully, strategic leaders need a clear conceptual understanding of the
organisation as a whole and what is required to ensure that it is enabled to implement the strategy successfully. is
requires that strategic leaders think strategically and use models to guide them in making sense of the organisation
and formulating the strategic change initiatives required. In the next section we discuss the second responsibility of
a strategic leader, namely to lead the organisation effectively and ethically.

12.3 Lead ethically and effectively for strategic results

Strategic leaders need to get the ball rolling to lead the organisation effectively and ethically for strategic results. e
King IV Report on Corporate Governance41 advises that:

… ethical and effective leadership should complement and reinforce each other. Ethical leadership is exempli ed
by integrity, competence, responsibility, accountability, fairness and transparency. It involves the anticipation
and prevention, or otherwise amelioration, of the negative consequences of the organisation’s activities and
outputs on the economy, society and the environment and the capitals that it uses and affects. Effective
leadership is results-driven. It is about achieving strategic objectives and positive outcomes. Effective leadership
includes, but goes beyond, an internal focus on effective and efficient execution.

Effective leaders ‘are alike in one crucial way: they all have a high degree of emotional intelligence’42.

In the lower reaches of job complexity there is a more or less direct ratio between a person’s cognitive ability and
performance, in that a smarter clerk or machine operator will do better than one who is not so bright. But at the
higher levels of job complexity – in executive or managerial ranks – IQ and expertise do not predict who will be
the standout performers. e immense difference between top and bottom performers in high-complexity jobs
makes emotional intelligence not simply additive with cognitive ability, but multiplicative: arguably, the hidden
ingredient in star performance.43

Emotional intelligence is clearly critical for effective strategic leadership.

12.3.1 Emotional intelligence

Emotional intelligence can be understood in terms of the ability to manage both ourselves and our relationships.44
e ability to manage ourselves consists of the following competencies:
Self-awareness means being able to identify and understand our own emotions, values and goals, and their impact
on others. It is also about knowing our strengths and weaknesses. Self-aware leaders know where they are going
and why, understand their competencies, and have a strong sense of self-worth.
Self-regulation is about being able to control our impulses and behave appropriately in a range of situations. It
involves displaying honesty and integrity, taking responsibility for our own performance, being open to change,
and being comfortable with novelty and ambiguity.
Motivation is about passion and energy, striving for improvement, readiness to act on opportunities, and
pursuing goals despite difficulties. It is also about working for reasons other than nancial gain and status.

When handling relationships, the following competencies are relevant:

Empathy is about being aware of and understanding other people, as well as being able to respond appropriately
to them according to their reactions. It is about the development of other people, being sensitive to diversity, and
anticipating, identifying and meeting the needs of others.
Social skills concern eliciting appropriate responses from people. ey include the ability to listen and
communicate effectively, and build rapport and networks. e leader with good social skills initiates and
manages change, in uences others, and promotes teamwork and cooperation.
Emotional intelligence assists leaders in achieving desired results by employing the right type of leadership style
(behaviour) for any business situation, in essence demonstrating what is termed behavioural complexity.45

12.3.2 Leadership style (behaviour)

To get the ball rolling and to achieve results, strategic leaders need to act. A leadership style is a set of characteristic
behaviours or the characteristic manner in which a leader will go about ful lling his or her role in order to achieve
results, for example the manner in which a leader provides direction, implement plans or in uences people to
achieve results. Part of effective strategic leadership is having the wisdom to select the appropriate behaviour from a
range of behaviours (styles) for each speci c situation. In other words, strategic leaders need to be able to behave in
a complex manner, meaning that they need a range of behaviours at their disposal, and the ability to apply them in
the right combination at the right time in the right context.
In explaining the idea that leaders need to use a collection of leadership styles in the right measure at the right
time to achieve results, Goleman used the game of golf as an analogy:

Imagine the styles as the array of clubs in a golf pro’s bag. Over the course of a game, the pro picks and chooses
clubs based on the demands of the shot. Sometimes he has to ponder his selection, but usually it is automatic.
e pro senses the challenge ahead, swily pulls out the right tool, and elegantly puts it to work.46

e various golf clubs referred to by Goleman in the quote above can be likened to various leadership styles. A
leadership style is a set of behaviours, which refers to the way or manner in which a leader goes about ful lling his
or her responsibility, be it, for example, providing direction, motivating people, communicating with people, making
decisions or implementing strategy.
One way to understand leadership styles is to consider the seven styles identi ed by Bass and Avolio,47 and
classi ed as either transactional or transformational leadership:
Transactional leadership is based on an exchange (a transaction or agreement) between the leader and follower
whereby the leader clari es what is required of the follower and the consequences of the requirements being
met.48 Transactional leadership typically results in expectations being met.
Transformational leadership results in the follower being motivated to achieve more than intended or even
thought to be possible.49 is is achieved by the transformational leader behaving differently from the
transactional leader.

e behaviours or styles of both transactional and transformational leaders can be understood in terms of Figure
12.1.
To be effective, strategic leaders need to apply the full range of leadership styles described by Bass and Avolio
with a focus on the transformational styles. e various styles are described on the next page.

Figure 12.1 Full range leadership development theory50

Figure 12.1 illustrates leadership styles in terms of the extent to which each is active, passive, effective and
ineffective, as well as in terms of the extent (frequency) to which they are exhibited by a leader. Transformational
leadership is an extension of transactional leadership, and should be exhibited more frequently if the leader is to
improve the effectiveness of an organisation.
In Figure 12.1, the transactional factors include contingent reward (CR) and management-by-exception (MBE):
Contingent reward (CR) is an active and effective component of leadership as the leader compensates or rewards
a subordinate appropriately for meeting agreed-upon objectives.
Management-by-exception passive (MBE-P) occurs where leaders react and intervene in the work of
subordinates only when mistakes occur or standards are not met.
Management-by-exception active (MBE-A) occurs where the leader actively monitors and seeks out deviations
and mistakes in the work of subordinates, and intervenes personally to take corrective action. is approach
tends to generate tension and fear. MBE-A is more active and more effective than MBE-P.

Laissez-faire (LF) is an absence of leadership and is not seen to be part of transactional or transformational
leadership. is leadership behaviour is both passive and ineffective as the leader remains uninvolved and avoids
leading.
Transformational leadership has produced improved employee outcomes in many different types of
organisations51 and consists of the four Is, namely idealised in uence, inspirational motivation, individualised
consideration and intellectual stimulation:52
Idealised in uence occurs where leaders consider the needs of others over their own, demonstrate high standards
and ethical and moral conduct, and are consistent. e leader generates admiration, respect and trust in others
who want to emulate the leader. Idealised in uence with its focus on ethical and moral conduct and others
wanting to emulate the leader has an ethical component.53 Ethical conduct is critical within organisations and
leaders are ‘a key source of ethical guidance for employees’.54 is requires ethical leadership on the part of
strategic leaders, which is ‘exempli ed by integrity, competence, responsibility, accountability, fairness and
transparency’.55
 Inspirational motivation occurs where leaders provide meaning and challenge to followers by articulating and
communicating a clear, concise and persuasive vision of the future. ey delegate power and are able to establish
a sense of team spirit in an exciting and challenging work environment. is behaviour inspires and motivates
followers.
Individualised consideration occurs where leaders pay special attention to people as individuals and consider their
individual needs and competencies as opposed to treating everyone alike. e leader encourages two-way
communication, and listens and delegates to individuals as a means of development. is behaviour of leaders
demonstrates that they accept differences.
Intellectual stimulation occurs where leaders stimulate followers to think for themselves and to think differently
about situations. Leaders challenge followers to question, rede ne problems, question assumptions, be creative
and innovative in their work, and to respond to old situations in new ways. ey are encouraged to solve
problems themselves. Mistakes are not criticised, but are seen as opportunities for learning.

Similar to the argument outlined above for a combination of transactional and transformational leadership, Rowe56
argued that strategic leadership synergistically combines both managerial and visionary leadership, as outlined in
Table 12.1. Managerial leadership concerns day-to-day activities and the short-term focusing on operational
excellence, and can be likened to transactional leadership. It involves stability, order and the preservation of the
existing order of the organisation with a low level of emotional involvement with others. Visionary leadership,
however, can be likened to transformational leadership, and is future orientated, proactively shapes ideas, and relates
to people in empathetic ways to ensure the future of the organisation. Effective strategic leaders need to be able to, in
terms of Rowe’s conceptualisation of leadership, combine both managerial and visionary leadership. is is similar
to the idea of Bass and Avolio outlined earlier – that effective strategic leaders need to be able to apply the full range
of leadership styles, both transactional and transformational, with a focus on the transformational styles.

Table 12.1 Strategic, visionary and managerial leadership57

Strategic leaders
Have a synergistic combination of managerial and visionary leadership.
Emphasise ethical behaviour and value-based decisions.
Oversee operating (day-to-day) and strategic (long-term) responsibilities.
Formulate and implement strategies for immediate impact and the preservation of long-term goals to enhance
organisational survival, growth and long-term viability.
Have strong, positive expectations of the performance they expect from their superiors, peers, subordinates and
themselves.
Use strategic and financial controls, with emphasis on the former.
Use and interchange tacit and explicit knowledge on individual and organisational levels.
Use linear (logical – following steps) and non-linear (multidirectional) thinking.
Believe in strategic choice, i.e. their choices make a difference in their organisations and environment.
Strategic leaders includes visionary leaders and managerial leaders.

Visionary leaders Managerial leaders

Are proactive, shape ideas and change the way people Are reactive; adopt passive attitudes towards goals;
think about what is desirable, possible and necessary. goals arise out of necessities, not desires and dreams;
Work to develop choices and fresh approaches to goals are based on the past.
longstanding problems, and work from high-risk View work as an enabling process involving some
positions. combination of ideas and people interacting to establish
Are concerned with ideas, and relate to people in strategies.
intuitive and empathetic ways. Relate to people according to their roles in the decision-
Feel separate from their environment; work in, but do making process.
not belong to, organisations; their sense of who they are See themselves as conservators and regulators of
does not depend on work. existing order; their sense of who they are depends on
 Influence attitudes and opinions of others in the their role in the organisation.
organisation. Influence actions and decisions of those with whom
Are concerned with ensuring the future of the they work.
organisation, especially through the development and Are involved in situations and contexts characteristic of
management of people. day-to-day activities.
Are more embedded in complexity, ambiguity and Are concerned with, and more comfortable in, functional
information overload; engage in multifunctional, areas of responsibilities.
integrative tasks.

Know less than their functional area experts. Are experts in their functional area.
Are more likely to make decisions based on values. Are less likely to make value-based decisions.
Are more willing to invest in innovation, human capital, Engage in and support short-term, least-cost behaviour
and creating and maintaining an effective culture to to enhance financial performance figures.
ensure long-term viability. Focus on managing the exchange and combination of
Focus on tacit knowledge, and develop strategies as explicit knowledge and on ensuring compliance with
communal forms of tacit knowledge that promote standard operating procedures.
enactment of a vision. Use linear thinking.
Use non-linear thinking. Believe in determinism, i.e. the choices they make are
Believe in strategic choice, i.e. their choices make a determined by their internal and external environments.
difference in their organisations and environment.

As noted earlier, effective strategic leadership is having the wisdom to select the appropriate behaviour from a range
of behaviours (styles) for each speci c situation. e next section addresses the need for strategic leaders to be
sensitive to the culture of people when leading.

12.3.3 Cultural conditioning of leadership behaviour

Strategic leaders need to be aware though that they ‘cannot choose their style at will; what is feasible depends to a
large extent on the cultural conditioning of the leader’s subordinates’.58 South Africa, with its cultural diversity and
11 official languages, is known as the ‘Rainbow Nation’. Understanding and being sensitive to the culture of people is
important for leadership effectiveness. is is because ‘one of the most important tasks of leadership in business
involves connecting the internal culture of the enterprise to the social and cultural values of the people who work
there’.59 In light of this, strategic leaders need to be aware that there is increasing criticism of the assumption that
Western leadership theory and models are universal. e argument is that if a leader is to be successful, the style
adopted by that leader needs to be congruent with prevailing values. is has implications for business leaders not
only in South Africa, but also for those expatriates in managerial roles in countries outside South Africa. It is
important to understand the prevailing national cultural value system before simply applying ‘foreign’ leadership
theory.
In South Africa, the notion of ubuntu provides insight into the prevailing philosophical values system ‘as a mode
through which reality is constructed and shared’.60 is philosophy is ‘captured in the Zulu expression umuntu
ngumuntu ngabantu, or “I am because you are, you are because we are” ’.61 is clearly conditions us as South
Africans and is an important consideration for strategic leaders seeking to lead effectively. ‘Ubuntu is characterised
by such values as caring, reciprocity, sharing, compassion, hospitality, cohabitation, cooperation and tolerance’62
is implies humanness and that strategic leaders should show humility, compassion and tolerance.63 Ubuntu also
supports the ‘idea of interdependence between organisations and society’64 and that the organisation has corporate
citizen status by virtue of being an integral part of society.65 Top management then ‘takes account of the legitimate
and reasonable needs, interests and expectations of all material stakeholders in the execution of its duties in the best
interests of the organisation over time’.66 Adopting a stakeholder-inclusive approach means that management needs
to see the big picture and balance stakeholder interests.
In South Africa, it is argued that this community concept of leadership is required. Wendy Lucas-Bull, former
FNB Retail CEO, writes:

ough the Western style of leadership tends to favour the powerful and sometimes arrogant, who assert their
individuality and thrive in a hierarchical environment, the African leader … is completely different. Such
leaders have a different agenda from their Western counterparts, favouring communal solutions, where trust
and consultation form the basis for negotiations and the interests of the whole community far transcend
individual interests. It takes a remarkable leader to put aside the desire for personal power and glory and
instead, in the style of a true African leader, focus on the needs of all people. Such a leader can inspire
unimaginable feats of reconciliation through humility, a willingness to serve others and a true love and concern
for the people.67

Nelson Mandela is an icon of African leadership, which has ‘a strong philosophical base in the concept of ubuntu’.68
According to ubuntu, a person is a human being only because of the existence of other people. See the following
example of leadership through ubuntu.

CASE EXAMPLE: Leadership through ubuntu69

Like no other modern leader, Nelson Mandela personifies the defining characteristics of a uniquely African style
of leadership built on the concept of ubuntu. This philosophy of African humanism – which is not unique to Africa,
but has long been in sad decline in the developed world – is based on integrity, compassion and humility, which
are all founded on the sense of self-worth that comes from belonging to an integrated community. Whether in
social life or political structures, the culture of African social organisation has always embraced collective effort
guided by what Reuel Khoza has called ‘servant leaders’. What Mandela challenged us to do is to rediscover the
roots of Africa’s leadership principles and to lead the world to embrace a more humane and more effective style
of leadership. Mandela’s approach to leadership is more than an organisational principle or a contrived ideal – it
is predicated on a moral philosophy that places the community at the centre of our worldview. Moreover, the
centrality of people in Mandela’s approach underscores a deep-seated belief in the importance of relationships –
in our personal life and in business. Business is always about people, and we should emulate his approach
because people should always be treated with dignity, respect, and compassion. It promotes the community as
one supported by the intimacy of close-knit interpersonal relationships and group interactions welded together by
a feeling of security and harmony on the part of all its members. However, this is not to say the individual is an
unimportant automaton submerged in the anonymity of the collective, since respect for the individual remains of
paramount importance as an affirmation of human dignity within the community. It is also expressed in the South
African Constitution. Ubuntu is at one with the constitution in its rejection of people’s exploitation by people and
of discrimination based on race, gender, or creed. In its broadest sense, ubuntu is an endorsement of the unity of
humankind, an insistence that government is based on the will of the people, and that all men and women are
equally protected before the law, entitled to equal opportunity and the freedom to make political choices, and to
participate in the cultural life they choose.
To nurture and protect the tenets of ubuntu, leaders of consequence must be the custodians of a nation’s
ideals, the values it cherishes, and the confidence that makes a nation out of individuals and classes. In playing
this unifying role, the value of the symbolic gesture is inestimable. Given Mandela’s grasp of this truism, it is no
surprise that in his hands such gestures are profoundly honest. When he visited Betsie Verwoerd, there was
never a suggestion that this was the hollow show of a politician. And on that glorious afternoon in the winter of
1995 when he wore the Springbok rugby jersey, it was a gesture that achieved more than a thousand stirring
orations. When he held aloft the soccer World Cup in Zurich after South Africa had won the bid to host the 2010
competition, the whole world took notice. In those moments, Madiba was one of us, the embodiment of all our
 hopes and aspirations for a common homeland. But there is also a hard and uncompromising edge to Mandela’s
leadership. The rigidity of his self-discipline, the spartan nature of his life, the fearlessness with which he
intervenes in sensitive international issues, all demonstrate a man whose adherence to principle and conviction
is immovable. It was a characteristic of his presidency that he left the day-to-day business of government to
others, but his insistence on the moral qualities of rule and the virtues of selfless service were impressed on all
to whom he had entrusted the gift of leadership. The notion that African leadership means service to humanity –
servant leadership – has found its highest expression in the person of Mandela.

For successful strategy implementation, strategic leaders are responsible for in uencing others, requiring them to
behave appropriately and ethically to achieve positive results. Part of this leadership responsibility is to develop and
communicate a compelling vision to lead change and to translate the direction into clear concrete deliverables and
measures, as discussed in the next section.

12.4 Develop and communicate a compelling vision to lead

change
It is people who ‘contribute individually and collectively to an organisation’s achievement of its strategic objectives
and its maintenance of a competitive advantage’.70 Strategic leaders need to work with and through the people of an
organisation to implement strategy and ensure its continued survival and success. People need to know what to do
and to be supported in getting it done.
For strategy to be successfully implemented, people need to be directed, inspired and motivated to act (behave)
in ways to implement strategy successfully. Strategic leaders need to steer and set strategic direction with regard to
the organisation’s strategy.71 Recall from earlier in the chapter that inspirational motivation occurs where leaders
provide meaning and challenge to followers by articulating and communicating a clear, concise and persuasive
vision of the future and that this behaviour inspires and motivates followers. Recall also the concept of visionary
leadership.
Getting the ball rolling all starts with a dream that envisions the future. An example of this is the Murray &
Robert’s Dream of 2025:72 ‘By 2025, we strive to be a leading multinational engineering and construction group that
applies our project life cycle capabilities to optimise xed capital investment’.
‘In some ways leaders live their lives backward. ey see pictures in their mind’s eye of what the results will look
like even before they’ve started their project, much as an architect draws a blueprint or an engineer builds a model.
eir clear image of the future pulls them forward.’73 Leaders cannot achieve their dreams alone. ‘A person with no
constituents is not a leader, and people will not follow until they accept a vision as their own.’74
Strategic leaders need to envision how things can be and paint a clear picture of this for everyone in the
organisation to see, understand and be inspired to act on. A vision needs to clarify the direction in which an
organisation needs to move, beckon the organisation in that direction and energise people for the action necessary
to implement the vision. Given the important role of a vision in creating action for implementation, it is important
for strategic leaders to cra a vision speci cally to create the action, commitment and inspiration necessary for
implementation. A good vision consists of two major components:
Core ideology
Envisioned future.75

Core ideology is comprised of core values and core purpose.76 Core values are essential in developing a sense of
what the organisation stands for, and need to be asserted explicitly and made real. Another component of core
ideology is core purpose. Purpose is an outgrowth of core values, explicitly stating the organisation’s reason for
existing and is therefore always worked towards, but never fully achieved,77 Ghoshal and Bartlett78 argue that
because organisations in modern society play a role as the most important forums for social interactions and
personal ful lment, top executives need to see themselves not simply as the designers of corporate strategy but as
the shapers of institutional purpose. For Ghoshal and Bartlett,79 ‘strategies can engender strong, enduring emotional
attachments only when they are embedded in a broader organisational purpose’. e authors80 go on to argue that
‘today, the corporate leader’s greatest challenge is to create a sense of meaning within the company, which its
members can identify with, in which they share a feeling of pride, and to which they are willing to commit
themselves’. e purpose transcends the narrow self-interest of a company and is linked to broader human
aspirations worthy of long-term pursuit.
e second major component of a good vision is envisioned future, which consists of a 10-to-30-year Big, Hairy,
Audacious Goal (BHAG) as well as a vivid description of what it will be like to achieve it. As a catalyst for team
spirit, a BHAG serves as a unifying focus of effort.81 As such, it needs to be clear and persuasive, requiring little to
no explanation so that staff grasp it immediately.82 Refer to Chapter 3 for a more detailed discussion of strategic
direction.
Nutt and Backoff83 identify four criteria that can be used to guide the craing of a vision:
Possibility: Offering an innovative and energetic image of the future
Desirability: Alignment of the vision with organisation values and culture
Actionability: Indicating the role of organisational members and what they can do to accomplish the vision
Articulation: Ensuring clarity and using powerful imagery to create a picture in the minds of organisational
members of what is wanted.

Critical here is communication in, rstly, building a shared vision. Communication needs to be effective throughout
the organisation across functional and hierarchical levels using a variety of channels or media, and tailored to the
different audiences with feedback channels built in. What and how strategic leaders communicate is very much
in uenced by who they are as individual leaders and their skills, but it is important to listen and be open to receiving
feedback.
Strategy, vision and long-term strategic goals need to be translated and cascaded throughout the organisation.
Not only must the strategic direction be communicated to educate and inspire people but also to guide them on
what to do practically in the here and now in order to implement strategy. A useful tool assisting here is the
balanced scorecard,84 which helps translate rather abstract strategic direction into more concrete operational
objectives and measures for all the various functions, divisions, departments, sections, teams and individuals as
performance indicators and measures. is then helps managers monitor and control progress towards
implementing strategy, and guides managers within the organisation and staff on what is expected of them and what
to do. e age old saying ‘what you measure is what you get’ implies that what is measured and how it is measured
communicates expectations and in uences what people do. e balanced scorecard importantly alerts us to the idea
of balanced controls, that nancial measures alone are limited to successful strategy implementation and that
additional measures are required to guide people and provide performance feedback. ese areas include but are not
limited to customers (eg customer satisfaction), internal business processes and staff satisfaction.85 See Chapter 3
for more on the balanced scorecard as a tool for translating strategic direction into operational terms.
Strategic thinking is required for top managers to visualise the practical implications of the strategy for all the
functional areas of the organisation (marketing, nance, human resource management, production and so on) and
to ensure that each functional area individually and collectively contributes to what is required to action the
strategy. Each functional area needs to have their own strategy aligned to the overall strategy of the organisation and
ensure that the strategy is implemented to drive corporate strategy.
 It must be remembered that managers at the various managerial levels have an important role to play in
communicating direction. Communication is not the exclusive responsibility of strategic leaders. All managers need
to know and understand the strategy and vision, and be able to translate this into clear day-to-day actions. Strategic
leaders need to ensure that there is appropriate leadership within the organisation to achieve this, a responsibility on
which section 12.4.2 focuses. Knowing to ask the following questions can assist managers at all levels in clarifying
what needs to be done practically to implement strategy, especially within their particular functions:
What are we doing today?
Why are you doing the work you are doing? Why now?
How does what we are doing today align with the bigger picture?
What does success look like for our team?
What else could we do to achieve more, better, faster?86

Successful implementation requires more than developing and communicating a compelling vision and translating
the strategic direction into more concrete operational objectives and measures. We now consider the responsibility
of strategic leaders to create an integrated organisational system to support strategy implementation.

12.5 Create an integrated organisational system to enable

strategy implementation
Strategic leaders need to visualise the organisation as a whole to be able to implement strategy across cross-
functional activities in the organisation. As Higgins87 cautions:

… because most organisations and business units are structured along functional lines – marketing, operations,
nance, human resources, R&D, information, logistics – cross-functional execution issues are sometimes
overlooked when strategy is changed. For strategy to succeed, cross-functional organisational factors such as
structure, systems and processes, leadership style, staff, resources, and shared values need to be aligned requiring
cross-functional thinking on the part of top management.88

Top managers need to identify and understand the various elements (structure, systems and processes, leadership
style, staff, resources and shared values) of an organisation and their interrelationships with the aim of aligning these
cross-functional organisational factors, not only with each other, but also with the overall strategy of the
organisation89 in order to implement the strategy. For successful implementation, leaders need to establish t or
congruence, which is ‘the degree to which the needs, demands, goals, objectives and/or structures of one component
are consistent with the needs, demands, goals, objectives and/or structure of another component’.90
is activity can be likened to the job of a watchmaker. e person needs to manufacture a number of
components, each different with its own function. e watchmaker then assembles each part to work together with
every other component to create an internal mechanism to work as an integrated whole in order to turn the hands
on the dial for an accurate timepiece, measuring the passage of time. As discussed earlier, conceptual models play a
useful role in assisting leaders with this activity – to see the big picture, make sense of the organisation as a whole,
and identify, diagnose, formulate solutions and initiate required change to create an organisational system that will
enable successful strategy implementation.
In creating the integrated organisational system, the following tasks need to be ful lled by strategic leaders:
1. Design and implement an appropriate organisational structural subsystem.
2. Staff the organisation and ensure social capital.
3. Ensure appropriate leadership within the organisation.
4. Create organisational culture and in uence climate.
5. Build, use and grow distinctive organisational capabilities aligned to the strategy.
We will now look at each one of these tasks in more detail.

12.5.1 Design and implement an appropriate organisational structural

subsystem
e structural subsystem refers to how the work that needs to be done is allocated to various jobs and departments,
as well as the policies and procedures that direct how the organisation operates. is subsystem concerns
consideration of the elements of organisational structure such as the degree of differentiation or specialisation in
terms of different forms of departmentalisation, the degree of standardisation of procedures, coordination
procedures and the distribution of authority. e structural subsystem is usually graphically represented in the form
of an organisational chart (organigram) that displays various jobs and how they are arranged. From this, one
observes various levels and relationships within an organisation. Chapter 13 focuses on this subsystem in more
detail. Also, as part of the structural subsystem, organisations design frameworks depicting their value creation
process or sustainability framework.
Strategy determines the task of the organisation, meaning the work the organisation needs to do.91 Strategic
leaders need to enable the execution of the work. ey do this by designing and implementing an appropriate
organisational structure (typically depicted as the organisational chart). is entails breaking the work into jobs that
de ne the tasks, duties, responsibilities and output expected from someone occupying a speci c job and arranging
the jobs in the form of a structure to direct activity towards the implementation of strategy. In designing the
structure, typical organisational structure considerations such as division of labour, departmentalisation or
functional arrangements, span of control, delegation of authority, line versus staff authority, and decentralisation
compared to centralisation need to be considered.
Part of organisational structure is the structuring of the functional areas of the organisation such as marketing,
human resource management, nance, production and others to enable the implementation of strategy. It may also
be that a strategy requires exible production con gurations and networks. See Chapter 13, section 13.3.4 for more
on organisational structure. It is important for strategic leaders to provide strategic direction for all the functional
areas in the organisation to ensure that each is not only vertically aligned with the strategy, but also horizontally
aligned with the other functional areas to create a mutually supportive integrated system.
An example of the need for strategic leaders to consider and structure each functional area appropriately is
provided by Woolworths Holdings Limited. eir talent requirements have implications for the strategy and
structure of the HRM function for example, and strategic leaders need to see this and design and implement
appropriate structures aligned with the strategy to enable successful implementation.
is implies that the HRM function has a critical role to play in the implementation of strategy, and needs to be
structured to ful l its strategic role to support it. e HRM function not only needs to be vertically aligned with the
organisation’s strategy, but all HR activities also need to be aligned with each other to act as an integrated whole
aligned with the other organisational factors.
From a good governance perspective (see section 12.7), governing structures should also be established with
appropriate committees such as an audit committee, a committee responsible for nominations of members of the
governing body (board), a risk governance committee, a remuneration committee, and a social and ethics
committee.92 Part of this is determining ‘if and when to delegate particular roles and responsibilities’.93
Essentially, top management needs to see the bigger picture, apply the principles and associated practices of good
governance, and design and implement the structure necessary to implement the strategy. An example that
illustrates structuring at the strategic level is Old Mutual,94 who changed their structure to unlock and create value:
‘In March 2016, we announced a new strategy for Old Mutual plc that seeks to unlock and create signi cant long-
term value for our shareholders. is will be achieved through the separation of the four underlying businesses –
Old Mutual Emerging Markets (OMEM), Old Mutual Wealth (OMW), Nedbank and OM Asset Management
(OMAM) – from each other.’
Systems and processes as mechanisms to facilitate coordination also need to be designed and implemented to be
aligned to the strategy and other organisational factors. Processes facilitate organisational functioning and can be
categorised according to management, and operational and support processes. Examples of processes may include
the supply chain, stock system, budgeting, quality control, governance, knowledge management, organisational
learning, internal communications, strategic planning, the manufacturing process, the information technology
infrastructure (with its mail system, nancial record system, and stakeholder engagement process to name a few),
and the point of sale system. See Chapter 13, section 13.3.3 for more on processes. is also entails formulating and
approving policy relevant to these areas, considering the need for policy to give effect to the strategy. As was noted
earlier, the King IV Report on Corporate Governance identi es the responsibility to approve policy and planning
that give effect to the strategy and the set direction.95
e next section addresses the staffing of an organisational structure as another task to be ful lled by strategic
leaders in creating an integrated organisation.

12.5.2 Staff the organisation and ensure social capital

People are critical to all organisations. For successful strategy implementation, the right number of staff with the
right talent is required as highlighted in the examples below. e importance of attracting and retaining people is
evident in the statement below from Woolworths Holdings Limited.96

We recognise that attracting and retaining talented employees is critical to delivering our strategy. Competition
for talented employees is intensifying, with targeted recruitment and poaching of core talent by local and
international retailers offering above market-related salaries. In South Africa, we have a further obligation to
transform WSA in line with the revised BBBEE Codes of Good Practice. Similarly, attracting and retaining
people is regarded as a key differentiator at Sanlam Group.97 Diligent execution on the strategy has been, and
remains, a key differentiator for Sanlam, and is enabled by our ability to attract and retain the best skills
available in the market.

Top management is ultimately responsible for staffing the organisation and managing social capital so that strategy
can be successfully implemented. ey need to make sure that the organisation is able to attract and retain talented
employees and that people behave in a way aligned to successfully implement the strategy.
Different strategies though, for example cost or differentiation, require different numbers and types of employees
with different types of skills, attitudes and behaviours.98 ey also require different types of HRM strategies, systems
and processes. Take, for example, the strategy of differentiation through innovation. e behavioural imperatives for
innovation include behaviours such as ‘experimentation, risk taking, accepting failure as normal, project
management and team work … that lead to the birth of new ideas as well as behaviours that lead to developing new
ideas into usable products or services that can be delivered to the market in a timely manner’.99 Learning and the
development of knowledge are critical for innovation. ey may require the organisation to become a learning
organisation that is able not only to acquire, create and transfer knowledge, but also to change behaviour to re ect
the new knowledge.
e strategy of differentiation through quality, for example, requires staff to provide a quality service by assisting
customers, instilling trust, providing individualised attention, and being able to diagnose and solve problems to the
satisfaction of the customer.100 However, behavioural imperatives relevant to a cost leadership strategy include
accepting part-time or shi work, minimal fringe bene ts and performing efficiently.101
 To ensure that the organisation is appropriately staffed and led, strategic leaders need to structure and develop
the HRM function to ensure not only the availability of the right number of people with the right skills, but also, in
collaboration with line managers, that they display the behavioural imperatives of a particular strategy. is can be
achieved through the appropriate management of HR activities, systems and processes, and the creation of an
enabling environment to leverage the human capital. Such HR activities, systems and processes include HR
forecasting and planning, job analysis, job design, recruitment, selection, on-boarding of staff, training and
development, performance management, compensation and rewards, as well as labour relations systems such as
grievance, disciplinary and dispute procedures. Examples of the key role of HRM and its activities in enabling
strategy can be seen from the Strategy in action cases that follow on the next page.

STRATEGY IN ACTION: Sasol and Woolworths Holdings Limited

Key
strategy
enabler
at
Sasol
–
human
capital
management102
Human capital management is key in enabling the execution of our Group business strategy. We continued to
focus on building a resilient and engaged workforce. By leveraging the skills, experience, diversity and
productivity of our people, we are able to operate our facilities safely, reliably and sustainably, and deliver on our
growth objectives. To this end, we continued to invest in sponsored study, technical learning programmes, as well
as leadership, career, succession development interventions and critical skills development to secure a pipeline
of future talent.

Retail
skills
required
by
Woolworths
Holdings
Limited103
The Group’s business model is built on differentiation through product and customer experience. This means that
the Group requires talent with deep technical and specialist retail skills which are not always readily available in
the market. Our transformation strategy is therefore premised on a philosophy of ‘retain, develop and grow from
within’. Skills development continues to be a key focus area for us as an enabler of this strategy.

From the two examples above it is clear that the talent required by the Woolworths strategy is not always readily
available in the market and that the execution of the Group business strategy of Sasol requires a resilient and
engaged workforce.

Questions
1. Discuss why HRM activities can be critical to enabling strategy with reference to the Sasol and Woolworths
examples.
2. Identify the responsibilities of strategic leaders with regard to staffing and organisation, and ensuring human
capital for strategy implementation. Use examples from the Strategy in action case to illustrate your points.

In managing human capital, strategic leaders also need to ensure that they consider and at least comply with
relevant legislation. Important in South Africa is legislation pertaining to employment equity and skills
development, which has implications for HRM practices relating to, in particular but not limited to, staffing and
development. Organisations need to report on employment equity and skills development. On diversity and
inclusion, the Barloworld Social, Ethics and Transformation Committee ‘[a]pproved the revised diversity and
inclusion targets for the group for 2018, 2020 and 2022 by gender, race and grade. e strategy involves identifying
and eliminating any employment barriers, perceived or real, and to promote demographic representation in the
workplace that more closely resembles that of the communities in which we operate’.104

12.5.3 Ensure appropriate leadership within the organisation

Top management is ultimately responsible for guiding organisations (leadership ‘of ’) and ensuring that strategy is
implemented successfully. For successful strategy implementation, there needs to be leadership not only ‘of ’ the
organisation. Strategic leaders need to ensure that there is appropriate leadership ‘in’ the organisation at various
levels – leadership able to in uence people and elicit behaviour aligned to the successful implementation of strategy.
To implement strategy successfully, strategic leaders need to surround themselves wisely with the necessary
leadership throughout the organisation able to in uence people appropriately to implement strategy. In fact, it
would not have been possible for Harry Oppenheimer to have built Anglo American into the world giant it is today
had he not wisely surrounded himself with young executives with that special quality of leadership. Similarly,
Donald Gordon could not have built Liberty Life, or Anton Rupert the great Rembrandt group without employing
and empowering other leaders.105
Middle managers and operational managers, including supervisors, all need to be able to work with and make
practical sense of strategy and communicate direction. Middle managers need to be able to interpret the corporate
strategy and formulate functional strategy, translating it into more concrete operational objectives and measures.
ese are communicated down to operational managers and supervisors to implement at the so-called coalface of
the organisation. ese managers then need to communicate and clarify performance indicators and measures for
their teams and individual staff members, ensuring that they know what they are expected to do. It is here that
managers apply the performance management system of the organisation and enter into performance agreements
with staff members, which assist in ensuring that they are trained and developed to do their jobs and know what is
expected of them. is managerial work also requires strategic thinking and being able to use the balanced
scorecard106 as a tool in translating strategy into practical performance indicators and measures. Strategic
awareness, then, should not be limited to the top echelons of the organisations, but should be pushed deep down.107
ese managers at the coalface are the ones who execute strategy at the operational level and need to engage staff
fully. ey work with and through staff at the operational level, leading them to act in line with their individual
performance indicators and measures. ese managers monitor performance, provide feedback and ultimately
manage the performance of the workforce.
Middle managers responsible for functions (functional managers) in an organisation are responsible for the
strategic leadership of their functions. ey are guided by the overall strategic direction provided by top
management. ese functional managers (eg HRM, marketing nance, production managers) all need to ensure
that they achieve strategic integration (vertical integration) and coherence (horizontal integration) in the
development of the policies and practices of their functional area.108 Strategic integration refers to management
ensuring that functional strategies are integrated with and support the overall strategy of the business, while
coherence refers to the need for uni ed and mutually supportive policies and practices.
Top-level managers need to be able to in uence others, and so too must managers at the various levels in the
organisation. e best organisations are said to have effective leadership demonstrated at all levels.109 e metaphor
of rowing, where a crew propels a boat (racing shell) on water using oars, illustrates the important role of leadership.

Despite the rowers’ best efforts to move the shell, the crew’s success depends on the coxswain to steer the boat to
the nish line and to coordinate their efforts. Without the leadership of the coxswain, greater effort by the crew
could simply result in the shell going round and round, but ever faster. e steering and coordinating of team
efforts is the task of the organisational leader, a process that is best done through strategic planning. Without
such leadership exercised throughout the strategic planning process, the organisation most likely will be
directionless.110

ere are many de nitions, theories, and interpretations of what leadership means. In spite of the many de nitions
of leadership the similarity among the various de nitions permits the following description:
 Leadership has been conceived as the focus of group processes, as a matter of personality, as a matter of inducing
compliance, as the exercise of in uence, as particular behaviours, as a form of persuasion, as a power relation,
as an instrument to achieve goals, as an effect of interaction, as a differentiated role, as an initiation of
structure, and as many combinations of this de nition.111

Simply put, leadership is the ability of one person to in uence and enable another to move in a certain direction.
Since all employees are participants in strategy implementation,112 leadership is about in uencing the behaviour of
staff throughout the organisation to be aligned to the strategy. is is critical to successful strategy implementation,
as behaviour drives strategy. e managers within the organisation need to develop the leadership required by the
strategy of the organisation. In addition to strategic awareness, they need to develop emotional intelligence and be
able to employ the right leadership style for a situation, congruent with the prevailing value system and the strategy.
ey also need to demonstrate transformational leadership.
Strategic leadership must not only ensure that there is strategic direction but also that supportive policies,
procedures, guidelines and systems are in place to assist managers to implement the strategy. Succession planning
and leadership development are important strategic actions to secure a pipeline of not only appropriate leadership
but also future leadership talent. A useful model in helping make sense of the leadership requirements within an
organisation and its development is the leadership pipeline model,113 which describes six leadership passages as
managers take on the work of increasing complexity and scope, requiring different leadership skills and values:
1. From managing self to rst-line management (managing others)
2. From managing others to managing managers
3. From managing managers to functional manager (managing a function or department)
4. From functional manager to business manager (managing multi-functions)
5. From business manager to group manager
6. From group manager to enterprise manager.

Having designed and implemented appropriate organisational structural subsystems, staffed the organisation and
ensured social capital, and established appropriate leadership within the organisation, strategic leaders also need to
create an organisational culture and in uence the organisational climate to create an integrated organisation.

12.5.4 Create organisational culture and influence climate

Each organisation has its own unique organisational culture or personality that in uences the behaviour of
individuals in it. Top management needs to accept that as the leaders of the organisation, they act as primary
transmitters of organisational culture, and they must be aware of the implications of this role. Creating an
organisational culture and values supportive of the strategy is important in building an integrated system to enable
the successful implementation of strategy. According to Schein, organisational culture is a collective assessment of
an organisation based on the:

… pattern of shared basic assumptions that the group [has] learned as it [has] solved its problems of external
adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be
taught to new members as the correct way to perceive, think, and feel in relation to those problems.114

Culture simply refers to how things are done in the organisation,115 re ecting the way in which people perform
tasks, make decisions, set objectives and manage resources to achieve them.116 Climate, however, although also a
collective assessment of the organisation, refers to ‘people’s collective assessment of an organisation in terms of
whether it is a good or bad place to work, whether it is friendly and warm, cold, hard-working, easy-going, and so
forth’.117 It relates ‘to the prevailing atmosphere surrounding the organisation, to the level of morale, and to the
strength of feelings or belonging, care and goodwill among members’.118 Culture is based on deeper, relatively
permanent, oen unconscious, values, norms and assumptions119 and is more enduring than climate, although both
affect the behaviour of organisational members.
In implementing strategy, it is important that strategic leaders analyse the culture of the organisation to
determine its appropriateness and to create, manage and sometimes even change the culture.120 is implies that the
strategic leader needs to be able to understand and work with the culture of the organisation. Culture can be
understood from different levels, where levels refer to ‘the degree to which the cultural phenomenon is visible to the
observer’:
e rst or surface level, termed ‘artefacts’,121 is the most visible one, although it is the most difficult to make
sense of. It represents what one would see, hear and feel when encountering an organisation, such as the
architecture of the physical environment, language used, technology, products, clothing, myths, rituals,
ceremonies, stories and publications.
e second level, or the ‘espoused values’ level,122 represents what ought to be, as distinct from what is. ese
values in uence how to deal with new tasks, problems or situations. If the solutions work, the value can become a
belief.
e third level, termed the ‘basic underlying assumptions’123 level, is least visible and represents those
assumptions that guide behaviour.

See Chapter 13 section 13.3.8 for more on organisational culture.

In creating the integrated organisational system to implement strategy, it was noted earlier that strategic leaders
need to ful l a number of tasks, four of which have been described above. e nal task is the one of building, using
and growing distinctive organisational capabilities aligned to the strategy.

12.6 Build, use and grow distinctive organisational

capabilities aligned to the strategy
e successful implementation of strategy requires that top management mobilise the necessary resources to
identify, cultivate and exploit the distinctive existing or new organisational capabilities of the organisation to execute
the strategy successfully. Distinctive capabilities refer to activities the organisation performs exceptionally well and
that may result in a competitive advantage.124 Strategic leaders play a key role in understanding what their key
resources and capabilities are, and making investments and strategic decisions that will allow them to develop new
capabilities for a sustainable future. is implies that strategic leaders should have a good understanding of what
their key resources and capabilities are, and what the business environment will require from them now and in
future.
Distinctive capabilities are:
valuable, as they allow the organisation to exploit opportunities, counteract threats and develop competitive
advantage
rare, in that they are not possessed by many other organisations
costly, or difficult for others to imitate
non-substitutable, in that there is no direct equivalent.125
In addition to the above-mentioned criteria, there are also activities that add value through the value chain.126 ese
include primary activities involved with a product’s127 physical production, its sale and distribution, and aer-sales
service, and secondary activities that assist the primary activities. Refer to Chapter 7 for a more detailed discussion
on the value chain (section 7.3.3.3).

CASE EXAMPLE: Key competencies of Sasol128

Managing the balance sheet and creating headroom through cost-containment programmes and risk-
mitigation initiatives
Driving innovation in our products and customer service
Operations excellence in delivering continuous improvement in volumes
Ability to operate in various environments and geographies, currently 33 countries.

12.7 Ensure ethical practices and good governance

Organisations have a responsibility as a juristic person. Organisational failures and scandals draw attention to
organisations not always ful lling this responsibility with oen negative consequences for stakeholders, society and
the economy. Ethical practices and good governance play a valuable role in organisations ful lling their
responsibility, performing and being sustainable. It is the responsibility of top management to ensure ethical
practices and good governance, but it does start with managers themselves being ethical leaders, as identi ed earlier.
is is clearly acknowledged by the Clicks Group, as we can see in the Case example below.

CASE EXAMPLE: Contribution of governance at Clicks129

The Clicks Group recognises the value of corporate governance in ensuring the sustainability of the business
and in enhancing long-term equity performance. The board believes that effective governance is also
contributing to value creation in at least the following respects:
Providing a clearer view of the business through a greater degree of integration between financial and non-
financial reporting
Improving the quality of reporting by management to the board
Promoting greater transparency and disclosure to stakeholders, including shareholders
Building consumer confidence in the brands
Enhancing accountability to shareholders
Providing equitable performance management and reward structures for employees
Providing effective leadership and decision-making throughout the business
Managing and mitigating risk more effectively.

Playing a key role in delivering on this responsibility is top management ensuring ethical practices and good
governance. ey need to steer and set direction with regard to the way in which speci c governance areas are to be
approached, addressed and conducted.130 To ful l this role top, managers rst need to understand, accept and ful l
their responsibility. is requires them to be familiar with the Companies Act and the King IV Report on Corporate
Governance for South Africa, as well as other relevant requirements. Relevant principles and practices to realise the
bene ts of good governance need to be responsibly applied and monitored. Ethical practices and good governance,
though, are more than simply complying, as is highlighted by the Clicks Group in the Case example below.

CASE EXAMPLE: Going beyond compliance – the Clicks Group131

While compliance with applicable regulation and voluntary codes is a good baseline from which to measure
governance, and a non-negotiable demand by the board, the group’s commitment to good governance goes
beyond compliance. The group’s governance and compliance framework is founded on the principles of
accountability, transparency, ethical management and fairness. Sound governance is entrenched across the
entire business. Governance processes are regularly reviewed to align with regulatory changes and to reflect
best practice. Strong compliance structures and processes to support the effective functioning of these structures
are essential to help avoid sanctions for non-compliance with regulation and to contribute to the sustainability of
the business. The board accordingly maintains a focus on supporting and, where necessary, enhancing these
structures and processes.

Evident also from the Clicks Group is the need for structures and processes. Strategic leaders need to set the
example personally by role modelling ethical and effective leadership through their own behaviour, ensuring the
creation of a culture of ethics and ‘ethical values applied to decision-making, conduct, and the relationship between
the organisation, its stakeholders and the broader society’.132
Ethical leadership ‘involves the anticipation and prevention, or otherwise amelioration, of the negative
consequences of the organisation’s activities and outputs on the economy, society and the environment and the
capitals that it uses and affects’.133
Strategic leaders need to put frameworks, structures, policy, processes and controls in place to comply with
applicable legislation and codes of good practice and so be able to ‘ensure accountability for organisational
performance by means of, among others, reporting and disclosure’.134
e Case example below contains some examples of what strategic leaders at Sasol do to ensure ethical practices
and good governance.

CASE EXAMPLE: Ensuring ethical practices and good governance at Sasol135

The Board and its committees continue to closely monitor the implementation of Sasol’s legal compliance policy
and processes and improve upon them, to mitigate the risk of non-compliance with the laws in the various
jurisdictions in which we do business. Competition laws, anti-bribery and anti-corruption laws, sanction laws and
safety, health and environmental laws, identified as key group legal compliance risk areas, remain our focus. We
have implemented risk mitigation controls for each of these areas, aiming to achieve a balanced approach on
compliance, by taking into consideration Sasol’s obligations as well as Sasol’s rights.
We regularly review and benchmark the Group’s governance structures and processes to ensure they support
effective and ethical leadership, good corporate citizenship and sustainable development and ensure that they
are applied in the best interests of Sasol and our stakeholders. We have the necessary policies and processes in
place to ensure that all entities in the Sasol Group adhere to essential Group requirements and minimum
governance standards. As a direct or indirect shareholder, Sasol exercises its rights and is involved in the
decision-making of its subsidiaries on material matters and is satisfied that its delegation of authority framework
contributes to role clarity and effective exercise of authority and responsibilities.

It is important to note, however, that ensuring ethical practices and good governance is not a static process and
needs to be reviewed and changed.
12.8 Initiate and lead strategic change
By now it is clear that to be sustainable, organisations need to respond to the environment in which they exist. is
requires constant change, and oen large-scale change. To position their organisations, strategic leaders need to
formulate a path, a course of action or game plan (strategy) that needs to be successfully implemented, which
requires that they understand organisations and identify, initiate and lead successful change. Upfront, though,
strategic leaders need to be aware of their own position with regard to change, and how open and accepting of
change they are, as well as knowing their own ability to plan, initiate and lead change. is relates to strategic leaders
having ‘adaptive capacity’136 and strategic thinking. Another important consideration for strategic leaders, as the
change agents, is to consider whether they have the credibility to initiate and manage the change, or whether
external change management consultants need to be brought in.
ere is no escaping the fact that upfront change needs to be carefully thought through, conceptualised and
planned before being initiated and led. Strategic leaders need be aware of and understand why change fails, and
incorporate this into their planning and leading of any change. e observation of the change efforts of more than
100 organisations137 identi ed eight fundamental errors in managing change:
Not establishing a great enough sense of urgency
Not creating a powerful enough guiding coalition
Lacking a vision
Under-communicating the vision
Not removing obstacles to the vision
Not systematically planning and creating short-term wins
Declaring victory too soon
Not anchoring changes in the organisation’s culture.

When thinking through (conceptualising) and planning the change, managers must pay careful attention to
understanding:
why change is necessary
the urgency of the change
the readiness of the organisation for change
the kind of change and what in the organisation will need to change
what the desired future state is
the obstacles to successful change
the cost of the change and resource requirements.

e strategic leadership responsibility of understanding organisations as a whole is critical to identifying the need
for change and formulating an argument as to the urgency of change. Strategic leaders must establish a sense of
urgency138 as this creates a sense of discomfort or dissatisfaction with the status quo, which encourages a need for
change. Visit this article online: e superbrand that reinvented itself.
https://www.theguardian.com/lifeandstyle/2017/jun/04/how-lego-clicked-the-super-brand-that-reinvented-itself.
Aer reading the article, consider how the CEO of Lego established a sense of urgency for change.139
e argument as to the urgency of change needs to be effectively communicated to in uence and convince the
organisation and create the conscious need for change. Critical here, and throughout the change process, is
leadership – the emotional intelligence and behaviour of strategic leaders (recall section 12.3).
Not only are understanding organisations as a whole, strategic thinking and leadership critical and important in
identifying the need for change and formulating a sense of urgency, but also in determining what to change. e
Burke-Litwin model140 of individual and organisational performance differentiates between the variables associated
with two types of change, namely transformational and transactional change:
Transformational change or second order change is revolutionary, and changes the fundamental nature or culture
of the organisation.
With transactional or rst order change, the nature of the organisation remains unaltered.

e model suggests that transformational change is achieved by changing the leadership, mission and strategy, while
changes to management practices, structure and systems produce transactional change or change in the climate of
the organisation.141 In determining what needs to change to enable the successful implementation of the relevant
strategy, models such as the McKinsey 7-S framework and the Higgins’ 8-S model (see Chapter 13 for a more
detailed discussion of these frameworks) can also assist in identifying the components, variables or elements that
potentially need to change. Successful implementation typically requires changes which may relate to the following
components:
Resources: their source, quality, quantity, con guration and allocation
Structure: organisational design, allocation of authority, physical setting, policies and procedures
Systems and processes: tasks, work methods and processes, value chain and job design
People: skills, knowledge, beliefs, attitudes, behaviour, social relationships, organisational culture and
performance
Organisational culture: the organisational values, the implicit way in which things are done in the organisation
Leadership approach and style: the way in which managers at all levels manage and lead people.
To convince the members of the organisation, together with establishing a sense of urgency, it is important to
identify appropriate people to champion the change. ese are people who are generally excited about and open to
the possibility of change, as well as those who hold sufficient power to constructively in uence others to be
committed to the change. It is consequently important to identify the type of power being used as the use of coercive
power tends to result in resistance. According to Kotter, ‘[i]n both small and large organisations, a successful
guiding coalition team may consist of only three to ve people during the rst year of a renewal effort. But in big
organisations, the coalition needs to grow to the 20–50 range before much progress can be made’.142 Establishing a
coalition team creates a critical mass for change. is can be done by identifying relevant individuals or groups
whose support is needed for the success of the change. It is therefore important to identify key stakeholders
throughout the organisation that can form part of a coalition that will guide and facilitate the change. ‘In every
successful transformation effort … the guiding coalition develops a picture of the future that is relatively easy to
communicate and appeals to customers, stockholders, and employees’.143
Not only must strategic leaders conceptualise, plan and initiate change, but they also need to lead the change for
success. is entails not only convincing the organisation of the need for change but developing and communicating
a vision of the desired future. is requires the strategic leadership responsibility of developing and communicating
a compelling vision to lead change (section 12.4).
ere will, however, be obstacles to the vision. One of these is people, and the fact that no change happens unless
people change. Strategic leaders need to anticipate and plan not only for the obstacles but also for the facilitators of
the change initiative by conducting a force eld analysis. is assists in thinking through and identifying the driving
forces supportive of the change, and the restraining factors, i.e. obstacles or forces that work to maintain the status
quo. Note, however, that adding new driving forces only increases the resistance.144 Once the strategic leaders have
identi ed the driving and restraining forces, they can plan for the implementation of the change initiative, keeping
in mind the potential obstacles and having plans in place to remove or reduce them.
See Figure 12.2 for an example of a force eld analysis. Let us assume that an organisation currently has a
rejection rate of 8% on its production line. is is far too high given that a 0% rejection rate is desired. To change the
current rejection rate, those initiating the change can conduct a force eld analysis to identify the driving and the
restraining forces. In the example in Figure 12.2, restraining forces are those factors that prevent or hinder the
change from an 8% to a 0% rejection rate. Examples of restraining forces are resistance from staff, faulty machinery,
staff lacking the necessary skills, no quality control or poor-quality materials. Driving forces refer to factors that
support the change away from the current state, for example new technology, support from top management, and
funding availability.

Figure 12.2 Force field analysis

Resistance from people is oen one of the restraining forces or obstacles identi ed during a force eld analysis.
Change is about moving from a known current situation, the status quo, to a desired unknown future situation. e
uncertainty associated with an unknown future situation engenders a response of resistance from individuals and
groups of people in an organisation unless there are compelling reasons that convince them otherwise, as argued
above. Individuals react to change in a variety of ways, which can be expressed in the form of withdrawal, anxiety,
sadness, confusion or anger. Similarly, organisations also remain comfortable with the status quo and also resist
change. It is important to understand the source of resistance and to determine strategies to manage it. e
implementation of change is crucial and involves the change of the organisation from its existing state to the desired
future state. It is important during the transition process to the desired state that resources are committed and
allocated to the programme. Here management must pay attention to planning the transition carefully as a project
to determine goals and the timing of what needs to be done.
It is also important to consider maintaining momentum along the path to the desired state. Change takes time
and can lose momentum if there are no short-term goals to meet and celebrate.145 In successful changes, ‘managers
actively look for ways to obtain clear performance improvements … achieve the objectives, and reward the people
involved with recognition, promotions and even money’.146
New behaviours expected as part of the change effort need to be reinforced by linking the formal performance
management and reward systems to the desired behaviours. Appropriate changes to these systems may well have to
take place to encourage and support the desired behaviours. It is also important to consider the role of intrinsic
rewards in reinforcing the required behaviour and maintaining the momentum necessary for the success of the
change initiative. During change programmes, however, ‘many managers fail to anticipate the decline in
performance, productivity, or satisfaction as change is implemented’ and fail to recognise that ‘organisation
members need time to practise, develop, and learn new behaviours …’.147
In the nal analysis, ‘change sticks when it becomes the “way we do things around here”, when it seeps into the
bloodstream of the corporate body’.148 It needs to be institutionalised. Strategic leaders should not be too eager to
declare the success of change. When institutionalising change, it is important that strategic leaders show the people
of the organisation the connections between the new systems, approaches, behaviours and attitudes, and the
performance of the organisation by communicating consciously within the organisation and making the effort to
ensure that ‘top management really does personify the new approach’.149

With any change initiatives, strategic leaders need to monitor and evaluate the change process and ensure the
availability of resources to support the initiatives. ey need to decide on the allocation of resources within the
organisation to enable the implementation of strategy. Particular strategies may require, for example, that resources
be directed to research and development (R&D); the purchase of specialised soware or resources to pay a premium
to attract people with specialised skills; shiing manufacturing capacity or directing resources to R&D (e.g. when an
automotive assembly plant changes from hybrid to electric cars); or investing in a drive to ensure productivity
improvements.

12.9 Summary
For organisations to succeed and be sustainable, strategy needs to be successfully implemented. It is top-level
managers who are ultimately responsible for the leadership of the organisation as a whole and play a key
determining role in the successful implementation of strategy. ey must take the lead in implementing strategy but
need the assistance of managers throughout the organisation as well as committed, performing staff.
To implement strategy successfully, top-level managers must lead strategically. To be effective, strategic leaders
ful l a number of responsibilities:
Understand the organisation as a whole: e strategic leader makes sense of the organisation as a whole and so
identi es what actions to take to enable it to implement strategy successfully.
Lead effectively and ethically for strategic results: Strategic leaders are emotionally intelligent and achieve results by
applying a range of behaviours wisely, acknowledging that the feasibility of their style depends on the cultural
conditioning of subordinates.
Develop and communicate a compelling vision to lead change: Strategic leaders lead the implementation of
strategy. ey get the ball rolling by in uencing the entire staff complement of the organisation by providing
direction through vision and the setting of performance measures.
Create an integrated organisational system supportive of the strategy: Strategic leaders align the variety of different
interacting components of an organisation as a uni ed whole to enable it to implement strategy successfully. In
creating the integrated system, top managers ful l the following tasks:
» Design and implement appropriate organisational structure: Structure and supportive mechanisms in the form
of systems, processes and policies are set in place to support and bring out the appropriate human behaviour
to facilitate the actions required to implement the strategy.
» Staff the organisation and ensure social capital: e right people with the right skills are available at the right
time to work actively towards executing the particular strategy of the organisation.
» Ensure appropriate leadership within the organisation: Strategic leaders need other managers throughout the
organisation to ensure appropriate leadership within the organisation at the various levels to understand,
interpret and translate strategy into everyday actions to be performed by the staff of the organisation.
» Create organisational culture and in uence climate: Culture and values supportive of the strategy are created
and the climate of the organisation in uenced to support the strategy.
Build and use distinctive organisational capabilities aligned to the strategy: Strategic leaders identify existing and
new organisational capabilities required by the strategy, and ensure that these are developed and delivered by the
organisation as a whole to implement strategy.
Ensure ethical practices and good governance: e example is personally set by strategic leaders through ethical
leadership by role modelling ethical behaviour. e King IV Report on Corporate Governance with its principles
and practices is key to strategic leaders’ responsibility in leading and directing the way in which speci c
governance areas are to be approached. Relevant structures, policies, processes and controls to guide and monitor
ethical behaviour and governance, together with an ethical culture and supportive organisational values, are set.
Initiate and manage change: Organisations evolve. ey need to adapt to their environment, and their strategies
change. is inevitably requires change in the organisation, which is the responsibility of strategic leaders to
initiate and lead. e effective initiation and management of change can determine whether or not the required
actions to implement the strategy succeed.

REFLECTION BOX:

Are South African organisations adopting the concept of ubuntu in their strategic leadership strategies or are
they sticking to the Western style of management? What will work best?

Opening case study questions

1. Discuss strategic leadership as a concept and how AutoTrader may have bene ted from the strategic leadership
of their CEO, George Mienie.
2. How would you classify George Mienie’s strategic leadership style on the basis of evidence provided in the
Opening case study?

Discussion questions
1. Explain why strategic leadership is a key factor in successfully implementing strategy.
2. With reference to key responsibilities, advise on what makes for effective strategic leadership.
3. Explain what strategic thinking entails. Include in your explanation the role of models in strategic thinking, and
how strategic leaders can utilise them to assist in the implementation of strategy.
4. Discuss the meaning of emotional intelligence. Use speci c examples of which you are aware to help describe
emotional intelligence in practice. Explain why emotional intelligence is important for effective strategic
leadership
5. Advise on what a manager can do to develop emotional intelligence. Identify and explain what you can do to
develop your emotional intelligence.
6. Critically evaluate the contribution of the concept of ubuntu to our understanding of effective leadership in the
successful implementation of strategy in a South African context.
7. Advise on what a strategic leader needs to do to ensure effective change management.

Using knowledge and skills

1. Access the Annual Integrated Report of three organisations such as Barloworld, Clicks Group Limited, the
Foschini Group, Lewis Group Ltd, Murray & Roberts, Old Mutual plc, Sanlam Group, Sasol Limited, Shoprite
Holdings Ltd, WBHO and Woolworths Holdings Limited, to name a few. Compare and contrast the contents of
these reports and comment on the areas organisations are typically reporting on.
• Comment on evidence of the organisations having strategic direction.
• Where relevant, using the evidence, describe and explain the strategic direction of each company.
• Compare and contrast their business models.
• Comment on how top management of these companies oversees and monitors implementation and execution
of the strategy.
• Explain and describe the evidence of accountability for organisational performance by means of reporting
and disclosure.
• Comment on how the organisations are doing in terms of performance and on the link between performance
indicators, vision, strategy and strategic goals/objectives.
• Describe what you think happens ‘behind the scenes’ from a management perspective for these organisations
to do what they do and perform as they do.
2. Prepare a PowerPoint slideshow presentation of 15 slides for the top management team of a business. e
presentation needs to highlight the responsibility of the top management team in ensuring the success of the
business.
3. Draw a diagram that represents how an organisation works. Critically evaluate the validity and practical value of
your model in guiding strategic leaders in successfully implementing strategy.
4. Identify a company. Visit https://www.mindtools.com/pages/article/newSTR_95.htm for the Nadler and
Tushman Congruence Model to develop your knowledge and understanding of this model and how to apply it.
 Using the model as a guide, describe the inputs, history and strategy of the company. Analyse and describe the
four components (task, formal organisational arrangements, informal organisation, individual) of the
organisation, and evaluate the degree of t or congruence between the various components as described by the
model. Describe the effectiveness of the organisation in terms of its output. Propose any changes required to the
organisation to improve the degree of t and/or its effectiveness.
5. You plan to improve your marks at university. Conduct a force eld analysis identifying the relevant driving and
restraining forces, and make recommendations on what you can do to improve your marks.
6. Identify what you need to do to develop your effectiveness as a strategic leader. Dra a strategy with strategic
objectives, and explain how you plan to implement it.

Further reading
Bartlett, C.A. & Ghoshal, S. 1994. Changing the role of top management: Beyond strategy to purpose. Harvard
Business Review, 72(6):79–88.
Bartlett, C.A. & Ghoshal, S. 1995. Changing the role of top management: Beyond systems to people. Harvard
Business Review, 73(3):132–142.
Bartunek, J.M., Gordon, J.R. & Weathersby, R.P. 1983. Developing a ‘complicated’ understanding in administrators.
Academy of Management Review, 8(2):273–284.
Boal, K.B. & Hooijberg, R. 2000. Strategic leadership research: Moving on. Leadership Quarterly, 11(4):515–549.
Collins, J. 2001. Good to great: Why some companies make the leap … and others don’t. New York: HarperBusiness.
Groenewald, A., 2015. Seamless leadership: universal lessons from South Africa. Johannesburg: Jonathan Ball
Publishers.
Ghoshal, S. & Bartlett, C.A. 1995. Changing the role of top management: Beyond structure to
process. Harvard Business Review, 73(1):86–96.
Higgins, J.M. 2005. e eight Ss of successful strategy execution. Journal of Change Management, 5(1):3–13.
Kets De Vries, M. 1996. Leaders who make a difference. European Management Journal, 14(5):486–493.
Kotter, J.P. 1995. Leading change: Why transformation efforts fail. Harvard Business Review, 73(2):59–67.
Kotter, J.P. & Schlesinger, L.A. 1979. Choosing strategies for change. Harvard Business Review, 57(2):106–114.
Maritz, F. 1995. Leadership and mobilizing potential: e art of the possible and the science of the probable. HRM,
8–16, October.
Rowe, W.G. 2001. Creating wealth in organizations: the role of strategic leadership. Academy of Management
Executive, 15(1).
Van den Berg, G. & Pietersma, P. 2014. Key management models: e 75+ models every manager needs to know, 3rd
ed. Indianapolis, Indiana: FT Press Financial Times.

Suggested websites
King IV Report on Corporate Governance. https://c.ymcdn.com/sites/iodsa.site-
ym.com/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-
_WebVersion.pdf
Top Employers South Africa. https://www.top-employers.com/en-ZA/certi ed-top-employers/country/south-africa/
Institute of Directors Southern Africa. www.iodsa.co.za
Entrepreneur Magazine. www.entrepreneurmag.co.za
Leadership Platform. www.leadershipplatform.com
Leadership Magazine. http://www.leadershiponline.co.za/. Access ‘articles’.
Leader.co.za. http://www.leader.co.za/
How Lego clicked: e superbrand that reinvented itself.
https://www.theguardian.com/lifeandstyle/2017/jun/04/how-lego-clicked-the-super-brand-that-reinvented-itself
e De Bono Group. www.debonogroup.com/serious-creativity.php. Read an article, ‘Serious creativity’, by Edward
de Bono. Also access hbr.org/2016/09/how-senior-executives- nd-time-to-be-creative
Ethics Institute of South Africa. www.tei.org.za
MindTools. https://www.mindtools.com/. Explore the toolkit for a range of different management and leadership
skills and go to more resources for videos. Toolkit examples include:
• Leadership skills: https://www.mindtools.com/pages/main/newMN_LDR.htm
• Strategy tools: https://www.mindtools.com/pages/main/newMN_STR.htm
• Problem solving: https://www.mindtools.com/pages/main/newMN_TMC.htm
• Decision-making: https://www.mindtools.com/pages/main/newMN_TED.htm
• Project management: https://www.mindtools.com/pages/main/newMN_PPM.htm
• Communication skills: https://www.mindtools.com/pages/main/communication_skills.htm
• Creativity tools: https://www.mindtools.com/pages/main/newMN_CT.htm
For speci c tools access:
• e Nadler and Tushman Congruence Model. https://www.mindtools.com/pages/article/newSTR_95.htm
• For leadership forms of power: https://www.mindtools.com/pages/article/newLDR_56.htm

References and endnotes

1. Todd, N. Leader.co.za. 12 September 2017. AutoTrader: Disruptive innovation is more than shiing gear.
[Online]. Available: http://www.leader.co.za/article.aspx?s=41&f=1&a=6773 [Accessed 9 January 2018].
2. Ibid.
3. Ibid.
4. Leader.co.za. 25 November 2010. How Clicks was saved. [Online]. Available: www.leader.co.za/article.aspx?
s=6&f=1&a=2461 [Accessed 23 May 2018].
5. ompson, A.A. & Strickland, A.J. III. 2003. Strategic management: Concepts and cases. Boston, MA:
McGraw-Hill Irwin. 356.
6. Drucker, P.F. 1993. e practice of management. New York: HarperBusiness. 341–342.
7. Jooste, C. & Fourie, B. 2009. e role of strategic leadership in effective strategy implementation: Perceptions
of South African strategic leaders. Southern African Business Review, 13(3):51.
8. Ireland, R.D. & Hitt, M. A. 1999. Achieving and maintaining strategic competitiveness in the 21st century:
e role of strategic leadership. e Academy of Management Executive, 13(1):43.
9. Ibid.: 43–57.
10. Ibid.
11. Rowe, W.G. 2001. Creating wealth in organizations: e role of strategic leadership. Academy of Management
Executive, 15(1):81–94.
12. Fin24. PICS: 10 greatest SA business leaders of all time. [Online]. Available:
https://www. n24.com/Economy/pics-10-greatest-sa-business-leaders-of-all-time-20170315 [Accessed 9
January 2018].
13. WM Discovery. ink big, dream bigger: 6 Lessons from Elon Musk to change the world. [Online]. Available:
http://wmdiscovery.com/the-psychology-of-elon-musk-6-lessons-that-will-change-your-life/ [Accessed 9
January 2018].
14. Katz. R.L. 1955. Skills of an effective administrator. Harvard Business Review, Jan/Feb, 33(1):33–42; 35–36.
 Goodstein. L.D. 2010. Strategic planning: A leadership imperative. In Biech, E. (Ed.). e ASTD Leadership
15. Handbook. Alexandria, Virginia: ASTD Press. 51.
16. Ibid.: 52.
17. De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context. 3rd ed. London: omson Learning. 53.
18. Boal, K.B. & Hooijberg, R. 2001. Strategic leadership research: Moving on. Leadership Quarterly, 11(4):515–
549.
19. Bartunek, J.M., Gordon, J.R. & Weathersby, R.P. 1983. Developing a ‘complicated’ understanding in
administrators. Academy of Management Review, 8(2):273–284.
20. Ibid.: 275.
21. Wytenburg, A.J. 1999. Complexity, computational ability, and the corporation of the future. In Lissack, M. &
Gunz, H.P. (Eds). 1999. Managing complexity in organizations: A view in many directions. London: Quorum
Books.
22. Ibid.
23. Havel, V. In Lissack & Gunz. 1999. Op. cit.: 1.
24. Strohm Kitchener, K.S. 1983. Cognition, metacognition and epistemic cognition: A three level model of
cognitive processing. Human Development, 26:222–232.
25. Camillus, J.C. 2008. Strategy as a wicked problem. Harvard Business Review, May. 1–9.
26. Ibid.
27. De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context. 3rd ed. London: omson Learning.
28. Boal & Hooijberg. 2001. Op. cit.: 517.
29. Ibid.
30. Ibid.
31. Ibid.
32. Nadler, D.A. & Tushman, M.L. 1983. A general diagnostic model for organisational behaviour: Applying a
congruence perspective. In Hackman, J.R., Lawler, E.E. & Porter, L.W. (Eds). Perspectives on behavior in
organizations. New York: McGraw-Hill. 112.
33. De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context, 3rd ed. London: omson Learning. 53.
34. Senge, P. 1990. e h discipline: e art and practice of the learning organization. New York: Doubleday. 9.
35. Ibid.: 74.
36. De Wit, B. & Meyer, R. 2004. Strategy: Process, content, context, 3rd ed. London: omson Learning. 59.
37. Old Mutual plc. Annual Reports and Account 2016. [Online]. Available:
http://www.oldmutualplc.com/download/31442/01d%20Mutual%20plc%20Annual%20Report%202016.pdf
[Accessed 10 January 2018]. 10.
38. Al-Debei, M.M., El-Haddadeh, R. & Avison, D. 2008. De ning the business model in the new world of digital
business. Proceedings of the Fourteenth Americas Conference on Information Systems, Toronto, ON,
Canada, 14–17 August 2009. 8–9. [Online]. Available: https://works.bepress.com/mutaz_al-debei/22/
[Accessed 16 January 2018].
39. e Foschini Group Limited. Integrated Annual Report 2017. [Online]. Available: tfg-
integratedreport2017.co.za/pdf2017/TFG_integrated_annual_report_2017.pdf [Accessed 10 January 2018].
16.
40. Lewis Group Ltd. Integrated Report 2017. [Online]. Available: www.lewisgroup.co.za/wp-
content/uploads/2017/06/lewis_ir_2017.pdf [Accessed 10 January 2018]. 8.
41. Institute of Directors in Southern Africa. King IV Report on Corporate Governance for South Africa 2106.
[Online]. Available:
http://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Report/IoDSA_King_IV_Rep
ort_-_WebVe.pdf [Accessed 10 January 2018]. 20.
42. Goleman, D. 1998. What makes a leader? Harvard Business Review, 82(1):94.
43. Goleman, D. 1999. Working with emotional intelligence. London: Bloomsbury Publishing. 36
44. Goleman. 1998. Op. cit.: 82–91.
45. Boal & Hooijberg. 2001. Op. cit.: 515–549.
46. Goleman, D. 2000. Leadership that gets results. Harvard Business Review, 78(2):80.
47. Bass, B.M. & Avolio, B.J. 1994. Improving organizational effectiveness through transformational leadership.
London: SAGE Publications.
48. Ibid.
49. Ibid.
50. Adapted from Ibid.: 5.
51. Dubinsky, A.J., Yammarino, F.J. & Jolson, M.A. 1995. An examination of the linkages between personal
characteristics and dimensions of transformational leadership. Journal of Business and Psychology, 9(3):315–
335.
52. Bass & Avolio. 1994. Op. cit.
53. Brown, M.E., Trevino, L.K. & Harrison, D.A. 2005. Ethical leadership: A social learning perspective for
construct development and testing. Organisational Behavior and Human Decision Processes. 97:117–143.
54. Op. cit.: 117.
55. Pearce, J.A. & Robinson, R.B. 2009. Formulation, implementation and control of competitive strategy, 11th
edition. Boston: McGraw-Hill Irwin.
56. Rowe, W.G. 2001. Creating wealth in organizations: e role of strategic leadership. Academy of Management
Executive, 15(1):48.
57. Ibid.: 92.
58. Hofstede, G. 1980. Motivation, leadership, and organization: Do American theories apply abroad?
Organisational Dynamics, Summer, 9(1): 57.
59. Khoza, R. 2005. Let Africa Lead: African transformational leadership for 21st Century business. Sunninghill:
Vezubuntu Publishing (Pty) Ltd.: 12.
60. Ibid.: xxii.
61. Ibid.: 5.
62. Ibid.: xxii.
63. Ibid.: 6.
64. Institute of Directors in Southern Africa. Op. cit.: 24.
65. Institute of Directors in Southern Africa. Op. cit.: 25.
66. Ibid.
67. Lucas-Bull, W. 2004. Mandela’s lessons in leadership: Inspiration for the world. Financial Mail, 22, 24
December.
68. Khoza, R. 1992. e need for an Afro-centric management approach: A South African-based management
approach. In Christie, P., Lessem, R. & Mbigi, L. African management: Philosophies, concepts and applications.
Randburg: Knowledge Resources. 122.
69. Mabuza, J. 2004. Mandela’s lessons in leadership: Leadership through ubuntu. Financial Mail, 52–53, 24
December.
70. Amos, T., Pearse, N., Ristow, L. & Ristow, A. 2016. Human resource management, 4th ed. Lansdowne: Juta &
Company (Pty) Ltd. 7.
71. Institute of Directors in Southern Africa. Op. cit.: 21.
72. Murray & Roberts. Annual Integrated Report 2017. [Online]. Available:
http://www.murrob.com/pdf/investors/annual-integrated-reports/2017/Full-Integrated-Annual-Report.pdf
[10 January 2018]. 6.
 73. Kouzes, J.M. & Posner, B.Z. e ve practices of exemplary leadership. In Biech, E. (Ed.). 2010. e ASTD
Leadership Handbook. Alexandria, Virginia: ASTD Press. 26–27.
74. Ibid.: 27.
75. Collins, J.C. & Porras, J.I., 1996. Building your company’s vision. Harvard Business Review, 74(5): 65–77
76. Ibid.
77. Ibid.
78. Ghoshal, S. & Bartlett, C.A. 1997. e individualized corporation: A fundamentally new approach to
management. Parktown: Random House (Pty) Limited.
79. Ibid.
80. Ibid.
81. Collins, J.C. & Porras, J.I. 1996. Building your company’s vision. Harvard Business Review, 74(5): 65–77.
82. Ibid.
83. Nutt, P.C. & Backoff, R.W. 1997. Craing vision. Journal of Management Inquiry, 6(4):308–328.
84. Kaplan, R.S. & Norton, D.P. 1992. e balanced scorecard — measures that drive performance. Harvard
Business Review, 70(1):71–79.
85. Ibid.
86. Lai, L. 2017. Being a strategic leader is about asking the right questions. Harvard Business Review. [Online].
Available: https://hbr.org/2017/01/being-a-strategic-leader-is-about-asking-the-right-questions [Accessed 11
January 2018].
87. Higgins, J.M. 2005. e eight S’s of successful strategy execution. Journal of Change Management, 5(1):3–13.
88. Ibid.
89. Ibid.
90. Nadler, D.A. & Tushman, M.L. 1983. A general diagnostic model for organisational behaviour: Applying a
congruence perspective. In Hackman, J.R., Lawler, E.E. & Porter, L.W. 1983. Perspectives on behavior in
organizations. New York: McGraw-Hill. 119.
91. Nadler, D.A. & Tushman, M.L. 1983. A general diagnostic model for organisational behaviour: Applying a
congruence perspective. In Hackman, J.R., Lawler, E.E. & Porter, L.W. Perspectives on behavior in
organizations. New York: McGraw-Hill.
92. Institute of Directors in Southern Africa. Op. cit.: 55–57.
93. Institute of Directors in Southern Africa. Op. cit.: 55.
94. Old Mutual plc. Annual Reports and Account 2016. [Online]. Available:
http://www.oldmutualplc.com/download/31442/01d%20Mutual%20plc%20Annual%20Report%202016.pdf
[Accessed 10 January 2018]. B. (B refers to page number.)
95. Institute of Directors in Southern Africa. Op. cit.: 21.
96. Woolworths Holdings Limited. 2017. Integrated Report. [Online]. Available:
http://www.woolworthsholdings.co.za/downloads/2017/WHL_INTEGRATED_REPORT_2017.pdf
[Accessed 10 January 2018]. 35.
97. Sanlam Group. Integrated Report 2016. [Online]. Available:
https://www.sanlam.com/investorrelations/ nancialresults/Documents/Sanlam_IR_2016_FRONT_09Mar_w
ebpdf.pdf [Accessed 10 January 2018]. 99.
98. Noe, R.A., Hollenbroek, J.R., Gerhart, B. & Wright, P.M. 2000. Human resource management: Gaining
competitive advantage, 3rd ed. Boston, MA: Irwin McGraw-Hill.
99. Jackson, S.E. & Schuler, R.S. 2003. Managing human resources through strategic partnerships, 8th ed. Mason
Ohio: South-Western. 140.
100. Ibid.
101. Ibid.
102. Sasol Limited. Integrated Report 30 June 2017. [Online]. Available:
http://www.sasol.com/extras/IR_2017/pdf/integrated-report.pdf [Accessed 10 January 2018]. 31.
103. Woolworths Holdings Limited. 2017. Op. cit.: 149.
104. Barloworld. Managing for Value Integrated Report 2017. [Online]. Available:
https://www.barloworld.com/investors/integrated-reports/ [Accessed 10 January 2018]. 118.
105. Mulholland, S. Time to let the managers step forward and manage. [Online]. Available:
http://www.btimes.co.za/96/1013/columns/columns3.htm [Accessed 24 May 2010].
106. Kaplan, R.S. & Norton, D.P. 1992. e balanced scorecard — Measures that drive performance. Harvard
Business Review, 70(1):71–79; Kaplan, R.S. & Norton, D.P. 1993. Putting the balanced scorecard to work.
Harvard Business Review, 71(5):134–147.
107. Kets De Vries, M. 1996. Leaders who make a difference. European Management Journal, 14(5):486–493.
108. Armstrong, M. 2000. A handbook of human resource management practice, 7th ed. London: Kogan Page.
109. Hellriegel, D., Jackson, S.E., Slocum, J., Staude, G., Amos, T., Klopper, H.B., Louw, L. & Oosthuizen, T. 2008.
Management, 3rd ed. Cape Town: Oxford University Press.
110. Goodstein. Op. cit.: 44.
111. Vecchio, R.P. (Ed.). 1997. Leadership: Understanding the dynamics of power and in uence in organizations.
Notre Dame, Indiana: University of Notre Dame Press. 17.
112. ompson & Strickland. 2003. Op. cit.
113. Drotter, S., Charan, R. Issues: May/June 2001. 2010. Leadership pipeline: Building Leaders at Every Level: A
Leadership Pipeline. (Online). Available: https://iveybusinessjournal.com/publication/building-leaders-at-
every-level-a-leadership-pipeline. Issues May/June 2001. [Accessed 3 May 2019].
114. Schein, E. 1992. Organizational culture and leadership, 2nd ed. San Francisco: Jossey-Bass. 12.
115. Mullins, L.J. 1996. Management and organizational behaviour, 4th ed. Johannesburg: Pitman Publishing.
116. ompson, J.L. 2002. Strategic management: Awareness and change, 4th ed. London: omson.
117. French, W. & Bell, C.H. (Jr). 1995. Organization development: Behavioral science interventions for organization
improvement, 5th ed. New Jersey: Prentice Hall International. 85.
118. Mullins. 1996. Op. cit.: 716.
119. French & Bell. 1995. Op. cit.
120. Ibid.
121. Ibid.: 16.
122. Schein. 1992. Op. cit.: 9.
123. Ibid.
124. Ibid.
125. Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2005. Strategic management: Competitiveness and globalization,
6th ed. Ohio: omson South-Western.
126. Ibid.
127. Ibid.
128. Sasol Limited. Integrated Report 30 June 2017. [Online]. Available:
http://www.sasol.com/extras/IR_2017/pdf/integrated-report.pdf [Accessed 10 January 2018]. 6.
129. Clicks Group Limited. Integrated Annual Report 2017. [Online]. Available:
http://www.clicksgroup.co.za/IntegratedAnnualReport2017/assets/pdfs/Clicks_IAR_2017.pdf [Accessed 10
January 2018]. 48.
130. Institute of Directors in Southern Africa. Op. cit.: 21.
131. Clicks Group Limited. Integrated Annual Report 2017. Op. cit.: 48.
132. Institute of Directors in Southern Africa. Op. cit.: 12.
133. Ibid.: 20.
134. Ibid.: 21.
135. Sasol Limited. Op. cit.: 43.
136. Boal & Hooijberg. 2001. Op. cit.: 515–549.
137. Kotter, J.P. 1995. Leading change: Why transformation efforts fail. Harvard Business Review, 73(2):59–67.
138. Ibid.
139. Davis, J. 2017. How Lego clicked: the super brand that reinvented itself. e Guardian. [Online]. Available:
https://www.theguardian.com/lifeandstyle/2017/jun/04/how-legoclicked-the-super-brand-that-reinvented-
itself [Accessed 11 January 2018].
140. Burke, W. W., & Litwin, G. H. (1992). A causal model of organizational performance and change. Journal of
Management, 18(3), 523–545.
141. Ibid.
142. Kotter. 1995. Op. cit.: 62.
143. Ibid.: 63.
144. Kotter, J.P. 1995. Leading change: Why transformation efforts fail. Harvard Business Review. [Online].
Available: https://hbr.org/1995/05/leading-change-why-transformation-efforts-fail-2 [Accessed 21 May 2015].
145. Kotter. 1995. Op. cit.: 59–67.
146. Kotter. 1995. Op. cit.: 65.
147. Cummings, T.G. & Worley, C.G. 2005. Organization development and change, 8th ed. Ohio: South-Western.
173.
148. Kotter. Op. cit.: 67.
149. Ibid.
 CHAPTER 13 Organisational alignment and strategy
implementation through
organisational architecture
Robert Venter

LEARNING OUTCOMES

After reading this chapter, you should be able to:

define and describe organisational architecture
understand the role of organisational architecture in strategic alignment
describe different types of organisational architecture
explain organisational architecture according to the Lee et al. framework
apply the Lee et al. organisational architecture.

KEY TERMS

alignment
functional strategy
knowledge, skills and abilities (KSAs)
organisational architecture
organisational processes
paradigm
structure/systems

OPENING CASE STUDY

Want to build an organisation that lasts? Create a superorganism1

Tamsin Woolley-Barker
For the past 25 years, I’ve studied everything from baboon cooperation in Ethiopia and orca whale innovation in the Bering Sea, to the Argentine ant invasion in
my kitchen, and my colleagues at work (not nearly as interesting!), all through an evolutionary lens.
Today, I use that lens to help companies evolve.
I’m a Biomimicry Professional, and a Biologist at the Design Table, and the teams I work with develop biologically-inspired solutions for a Global 500 clientele.
We search for the technologies that make life – and business – go.
As an evolutionary biologist, a businessperson, and a biomimic, I’m always looking for the deep patterns in life, trying to find out what lasts. And here’s one
thing I know is true:
Organisations can’t keep growing the way we structure them today.
Like dinosaurs, organisations keep getting bigger, but they need huge bones to support the weight of all that complexity. The more weight, the more bones; the
more bones, the more weight. It’s a catch-22 situation. Management is the ponderous skeleton that keeps organisations from collapse. But as they grow, the costs
of management rise, and the ability to adapt declines. When sudden change comes, there’s not much a company can do – it’s a sitting duck (or dinosaur) for the
next cosmic collision. Hierarchies can only scale so much – we can’t grow bigger bones forever.
There’s nothing inherently wrong with hierarchies. In fact, nature uses them all the time to stop change from happening. Scientists tell us that cells go rogue in
our bodies every day, but a hierarchical system usually stops those cancers from growing. Hierarchies are important and useful. But they aren’t the right structures
for adapting to change, and they inherently limit growth.
Change is coming – with shifting supply chains and customer needs, upstart competitors and technologies, resource scarcity and volatile prices, change is
sudden, unexpected, and potentially calamitous. Multinationals span many divisions and fractured market segments, their teams cross cultures, languages, time
zones, and governments. All of it is held together by management. Between technological advances and social revolutions, climate change and peak everything,
companies inhabit an unpredictable world of their own making. They are bound to topple and fall. Meanwhile, they have a mandate to maximize shareholder
return. Companies that are beholden to this short-sighted maxim require infinite growth. What happens when they hit the limit? Something has to give.
As an evolutionary biologist, I find myself asking—who inherited the Earth in the dinosaurs’ place?
Tiny, nimble mammals for one. Those ancient furtive furballs diversified into everything from elephant shrews to platypi, blue whales to rhinoceros. One of those
lucky species is us—and look at us now! Our societies are everywhere, transforming everything we touch.
But other creatures survived the crash as well. Hard-working teams of ants and termites built wealth alongside the dinosaurs, and are building it still. Termite
colonies have chewed for 250 million years, to our lasting dismay, and ants have marched from their nests for 150 million. The great biologist E.O. Wilson
estimates that all those ants tied in a sack would weigh about as much as all of us humans combined. The global mass of termites is about 27 times that – a
cow’s worth of them for every one of us.
But there are more. Beneath the soil you walk on, no matter where you live, lies a very ancient and even more successful society. A half-billion year old pulsing
nutrient superhighway of fungus toils away in the ground, constantly searching for molecules of matter to digest, minerals and water to absorb. Whatever these
individuals find flows through the system, because the fungi are fused into one. Everyone gets more than they would on their own. We like to call this the ‘wood
wide web’, a phrase coined by Professor Suzanne Simard (watch her extraordinary TED Ed).
All these creatures are ‘superorganisms’ – by which I mean ‘groups of genetically distinct individuals of the same species, with specialized division of labor,
where one individual can’t survive alone for very long.’ Their colonies comprise millions of diverse individuals, but together they accomplish the same kinds of
tasks a single organism does, with far less processing power.
They are far more than one ordinary being. Superorganisms have a special knack for creating abundance within the kinds of landscapes of scarcity that
typically exclude other creatures. You’ll find ants thriving in the deserts of Australia, and termites in parched Namibia. Naked mole rats push dirt around Somalia
as we speak, and honeybees stay warm through bitter winter freezes as low as –30 C (–22 F). How do they do it?
They leverage the power of collective intelligence and collaborative innovation. Together, they gather tiny, scattered, squandered scraps that aren’t worth the
effort for other animals—splinters of wood, bits of chopped up leaves, specks of pollen, molecules of water, and fertilizer.
‘Superorganisms have a special knack for creating abundance within the kinds of landscapes of scarcity that typically exclude other creatures.’
We can think of these colonies as living, breathing patches of network, constantly shifting into new structures as the environment changes. Where the soil is
rich in nutrients, they maximize their exposure to absorb as much as they can. Where nutrients are poor, they hurry on, pushing for new ground as fast as they
can. Their networks crisscross and connect in dense webs, shuttling resources wherever they are needed. With no commander, they organize themselves into a
‘beautifully open-ended, indeterminate dynamic structure that continually responds to changing demands’ according to British mycologist Alan Rayner.
Isn’t that exactly what we want in business? It’s such a great idea, we’ve evolved a networked communication system for ourselves! It took the fungi 500 million
years to evolve their ‘internet’, but we did it in 50 – and theirs isn’t even global! But before we pat ourselves on the back, we better learn how to use it. We need a
new way to think about leading, managing, and responding to change, and our remarkable invention is the key. But utilizing these resources correctly requires a
massive change in the way we do business. Chemists call this a ‘phase shift’ – like water moving from steam to a liquid to ice. The content is the same, but the
form is so radically different you’d never even recognize it as the same stuff. That is what we are attempting to do – a phase shift.
Superorganisms, like ants and fungi, have been networked for a very long time. They know what they’re doing. How do they capitalize on opportunity, survive
disturbance, and stay resilient? How do they spark innovation, nurture collaboration, and lead their teams? How do they seed the present for lasting – and growing
– returns on investment for the next generation? What is their secret?
For one thing, they build their compounding wealth on infinite things – sunlight and sugars, for example, and the complexity, diversity, and interconnectedness
of networks. They grow from the edges out, adding modular, self-managed units that seek and respond to opportunity and threat on the front lines. Team
performance emerges in real-time, like a constantly updated film-reel of snapshots built from thousands of pixels. Superorganisms break large, complex problems
into tiny bites of action, building until tipping points are reached and change is triggered. There are no forecasts, budgets, meetings, or plans. There is no boss.
Strategy happens organically, all the time, everywhere, and decisions are frequent, small, and imperfect. This is how superorganisms adapt to change – at the
edges, all the time, in little bits of work done by everyone.
We’ve found termite mounds in the Congo that have been occupied continuously for two millennia, and a humongous fungus in Oregon is over 2 400 years old.
These superorganisms are as close to immortal as any living thing, and their ancient way of life is a recipe for unbounded value and lasting success.
 The oldest organism in the world: fungal network in the Malheur National Forest, Oregon.

Even better – the value they create spills out into the larger ecosystem, feeding the life that feeds them. That is how their wealth compounds. Trees convert
sunlight, water, and carbon dioxide into sugars – the fungus can’t do that. Instead, vast numbers of fused individuals absorb bits of nitrogen, phosphorus, and
water, and bring them to the tree, trading it for sugar. Hundreds of millions of years ago, the earliest land plants had only the feeblest roots. But they intertwined
with the fungi and grew strong. Today, green plants carpet the land, feeding us all, and the fungi most of all.
Similarly, the mound-dwelling African termites collect scraps of wood and bits of grass. By concentrating energy and nutrients and unlocking their value, these
mounds become hotspots, nurturing all kinds of life. The grass is better, and draws grazing herbivores who feed hungry carnivores and fertilize the soil with their
dung. More vegetation grows, attracting more prey, more predators, and feeding more termites. It’s regenerative capitalism at its best.
These ancient beings offer us a new way of doing business, as we do the hard work of adapting to the reality of a finite Earth. Ants are not choking on smog or
stuck in traffic, fungi aren’t counting carbon credits or worrying about the Great Pacific Garbage Patch. Termites don’t have slums. But all of them grow and
prosper, building infinite wealth from infinite stuff.
We can do it too. We just need to study what lasts and why.
If you want your company to change and grow, nimbly and continuously, without that slow and costly layer of management, what you need is a living thing.
What you need to build is a superorganism.

Overview
Organisational architecture as a strategic tool has grown in popularity over the past decade, particularly because of its value in aligning the organisation to ensure
strategic attainability. Organisational architecture is an integrated strategic response that draws together key dimensions of the organisation, such as organisational
structure, leadership, organisational culture, policies and strategies, to guide strategy formulation, alignment and implementation. Organisational architecture thus
provides a blueprint of the internal and largely invisible workings of the organisation.2 It is precisely this blueprint that serves as an indispensable tool, and allows
leaders to align core aspects of their organisations with their strategy, thus attaining more effective implementation. This chapter will explore the notions of alignment
and implementation with particular reference to the architecture developed by Lee et al.

13.1 Introduction
Formulating an effective strategy is only half the battle won because without effective implementation of the strategy, all good strategic intentions effectively come to
nought. e ability of an organisation to facilitate the effective and efficient implementation of strategy is almost entirely dependent on its internal functioning. It is
the internal organisation that comprises those elements pivotal in translating the strategy into tangible outcomes and actions. In essence, it is the internal
organisation, a largely abstract concept, that describes and delineates how things are done, and who does what. Strategies are put into action and results delivered by
means of alignment between organisational culture, policies and procedures, an effective knowledge and skills base, a suitable organisational structure, and different
processes and systems.
e emphasis here is on strategic alignment. Strategic alignment is quite simply taken to mean that key internal strategic drivers of an organisation work in
tandem to ensure effective strategic implementation. Indeed, effective and efficient strategic implementation is not so much dependent on the various components of
the internal organisation being in place as it is on these components acting together. In other words, while organisations might well have the necessary internal
capabilities to deliver a strong strategy, unless these are aligned it is doubtful whether implementation of the strategy will produce the desired results. e Opening
case study alludes to this by using the natural world and the notion of the ‘superorganism’ as a metaphor for how organisations need to structure or potentially
restructure around the principles of symbiosis that are ever-present in the natural world.
In much the same way, organisational architecture provides a useful tool to mesh the internal organisation together by drawing together key dimensions in a
cohesive and concerted effort to ensure productive strategic implementation.
Using the architecture developed by Lee et al.,3 this chapter will examine the importance of organisational architecture in aligning the internal organisation. We
will explore and analyse each of the key dimensions of the architecture, and highlight the interdependencies.

13.2 What is organisational architecture?

Various authors have helped contribute to an understanding of what organisational architecture is. Table 13.1 sets out some of the key de nitions.

Table 13.1 Definitions of organisational architecture

The underlying model of the organisation’s way of doing business4

… a model of the enterprise that can be shared by everyone involved in management change5

… all of the various systems, structures, management processes, technologies, strategies etc that make up the modus operandi of the organisation6

… a holistic, future facing, logical blueprint [that] needs to interpret business strategy and provide a focus on customer value, while concurrently identifying the work
activities, roles, and competencies, business rules and processes necessary to build and operate the business7

A collectively agreed and communicated document that, in light of the strategic competencies needed to fulfil stakeholder needs, defines and details the major
building blocks of the organisation8

Several key characteristics of a sound organisational architecture are discernible. An organisational architecture should:
be contained in a formal document that clari es what the business is about. is, in turn, facilitates strategic formulation and implementation, and the monitoring
of strategic progress, since everyone is essentially working towards the same goal.
contain speci c reference to the key strategic drivers of the organisation
relate each pillar of the organisational architecture to the organisation itself, thus creating a blueprint that is unique and speci c to that particular organisation (for
instance, while policies and processes are key features of almost all architectures, no two organisations will de ne these pillars in the same way)
 be collectively agreed on by all constituencies in the organisation to attain maximum strategic impact. It stands to reason that because the document sets out what
the business is ultimately about, there should be widespread consultation to generate support and consensus. Ultimately, therefore, the organisation should
communicate the document as widely as possible and should solicit as many viewpoints as possible. If there is no agreement, then the organisation will not achieve
the desired buy-in.

13.3 The ‘shape’ of organisational architectures

Most of the more popular organisational architectures focus on similar key pillars. Table 13.2 describes the rst-level or fundamental components of these
organisational architectures. As mentioned above, while these pillars serve as a basic framework, each pillar is tailored to each speci c organisation by means of
deeper application. e Case example HIV/Aids and organisational architecture: An application below provides an example of an application of an organisational
architecture.
Of the various architectures described above, the McKinsey 7-S framework is arguably the best known because of its widespread popularisation through the
consulting organisation that developed it. One of the more recent architectures to emerge is V2MOM. Developed by Saleforce.com’s CEO, Mark Benioff, this
framework is used to focus the organisation on that which ‘really matters.’9 At the same time, Nihilent’s MC3 framework has been used extensively in South Africa to
support alignment in companies such as SARS, Sasol, MTN, South African Airways, MultiChoice and Nedbank.
However, in our view, it is the architecture of Lee et al. that provides the most nuanced and recent attempt to integrate the various architectures into a cohesive
framework. Figure 13.1 illustrates the architecture as a ow diagram that highlights the various interrelationships between the key pillars.

Figure 13.1 Lee et al.’s organisational architecture10

In terms of the architecture, which is best read in reverse from right to le, organisational capabilities (or important outcomes provided by the organisation – see
Chapter 7 for a more detailed discussion of organisational capabilities) are distributed to the various stakeholders through the different organisational processes. e
structure/systems, knowledge, skills and abilities (KSA), and technology speci c to each organisation shape these processes, which are all in turn underscored by
organisational culture. Before we discuss these pillars in more detail, the Case example HIV/Aids and organisational architecture: An application describes how this
architecture might work in practice.

Table 13.2 Basic components of different organisational architectures

Ulrich11 McKinsey Higgins’ 8-S Nihilent’s Jay Veasey16 Wolfenden Lee et al.18 V2MOM19
7-S12 model13 MC3 Galbraith’s and
framework14 star Welch17
framework15

Shared mindset Strategy Strategy and purposes Calibration Strategy Processes Customer Culture Vision
Competence Style Structure Motivation Structure Organisation segmentation Structure/systems Values
Consequence Skills Systems and processes Capability Rewards technology Customer life Knowledge, skills, Methods
(rewards and Shared Style Capacity Processes Competencies cycle and abilities Obstacles
incentives) values (leadership/management People Culture interaction Technology Measures
Governance Structure style) Stakeholders (total cycle of Processes
(structure, Systems Processes and value-adding Internal and
communications Staff (re)Sources capabilities outcomes external
systems, and Shared values (inputs) experience) stakeholder
policies) Strategic performance Activities (all capabilities
Capacity for activities
change including the
Leadership life cycle
interaction is
defined)
Roles
Coordination
activity
Business
rules
(underling
organisational
culture)
Business
processes

Table 13.3 An application of the Lee et al. model to HIV/Aids and organisational architecture
Stakeholder Capabilities Processes (Needed Knowledge, Structure and Technology Culture (Informs
analysis (Who (Various to deliver skills, and systems (Initiate (Initiates and all other aspects
are the various outcomes capabilities) attitudes (Initiate and drive drives processes) of the
stakeholders?) delivered to and drive processes) architecture)
stakeholders by processes)
the organisation)
Employees Employees Support processes Base level KSAs Formal bodies and Programme-specific Singularly
» Infected Non-discriminatory (including specific » Must have for all positions to deal technologies important – can
» Non-infected policy processes relating to members of an with the (treatment facilities, energise action,
employees who Education VCT, treatment, etc.) organisation management of the nursing staff, destigmatise and
are affected (prevention and Impact on core » Basic knowledge HIV/Aids strategy antiretroviral demystify HIV/Aids
» Unaffected awareness) processes – possible and awareness » Task teams therapies, etc.) Encourage a
employees Voluntary interventions of HIV/Aids » Committees Technology as a culture that is open,
Shareholders counselling and » Flexitime and Specific programme » Allocation of substitute for labour transparent,
Customers or testing (VCT) redeployment to KSAs responsibility to where and if feasible tolerant, based on
clients Care, support, and accommodate » Required for a senior trust and indeed,
Suppliers or treatment absenteeism among support manager embracing of
producers » Extension of infected employees programmes Reporting ‘otherness’
Community benefits to » Multiskilling of such as VCT relationships Positively impact
Government dependents uninfected and peer counselling, between formal and develop
Safe working unaffected employees etc. bodies and employee attitudes
environment as well as job rotation » Properly trained positions in terms of towards HIV/Aids
Peer education to counter and educated the organogram » Sensitivity and
Shareholders absenteeism due to counsellors, Establishment of awareness
Disclosure of all sickness and family nursing staff, HIV/Aids specific training
information responsibility psychologists, units in the » Diversity
(including etc. organisation (and management
prevalence rates, » Support concomitant programmes
interventions, programmes and integration in the » Use of HIV-
» and cost specific KSAs formal positive
implications) can be organisational employees as
outsourced structure) peer educators
» VCT unit and role models

Customers or Integration of HIV/Aids Operational KSAs Health and wellness Engender

clients interventions into » Job-specific unit managerial
Better product production schedules training to Treatment facilities commitment to and
offerings (for and deadlines (to ensure accommodate Substitute for proactive
instance, better minimal stoppages) leadership around
multiskilling and leadership (where
medical aid and
Redesigning workflow job rotation leadership and HIV/Aids policies
health care
provisions) and procedures (to » Effective senior management and procedures in
Suppliers or ensure safety of knowledge are particularly the organisation
producers employees and management vulnerable) Use language
customers/clients as well systems to Flatter positively and
» Joint value-chain
as to ensure minimal minimise loss of organisational appropriately to
approach, and
breakdowns and intellectual structures with communicate the
long-term
stoppages) capital through greater devolution ‘right’ message, as
relational
» Redeployment of turnover or responsibility well as a positive
contracting with
infected employees » Basic knowledge Impact on job approach to dealing
a specific
» Development of new and awareness design with HIV/Aids
supplier/producer
techniques in of HIV/Aids » Multiskilling, job Integrate culture
in which
manufacturing/service » Encouragement enlargement, into formal
resources are
delivery of innovation and job contracts of
shared to devise
among and enrichment for employment
better awareness
feedback from uninfected through clauses
campaigns, etc.
employees to employees pertaining to
come up with » Reasonable contractual security
better and accommodations for HIV/Aids
improved for infected sufferers, non-
processes employees discriminatory
(redeployment, policy statements,
flexitime, use of etc.
devices to assist)
 Stakeholder Capabilities Processes (Needed Knowledge, Structure and Technology Culture (Informs
analysis (Who (Various to deliver skills, and systems (Initiate (Initiates and all other aspects
are the various outcomes capabilities) attitudes (Initiate and drive drives processes) of the
stakeholders?) delivered to and drive processes) architecture)
stakeholders by processes)
the organisation)
Community New approaches to Management- Ensure that
» Targeted management (emphasis specific training in resentment from
corporate social on monitoring and soft skills uninfected
investment evaluation as well as (increased individuals is kept
expenditure reporting) sensitivity and to a minimum
focusing on Accommodation of empathy) as well as through, e.g., peer
awareness, suppliers/producers in monitoring and education which
treatment, and » Need for alternative, evaluation of might create a
support more flexible supply- policies and more tolerant and
Government chain strategies, and programmes destigmatised
» Specific reporting dedicated environment
relationships Promote culture
» Stockpiling through rewards
and benefits (such
as free or
subsidised
antiretroviral
therapy)

CASE EXAMPLE: HIV/Aids and organisational architecture: An application

HIV/Aids continues to remain one of the most critical issues affecting South African organisations. It was estimated that in 2017 some 36.9 million individuals were
infected worldwide, with 19.6 million adults and children living with HIV in eastern and southern Africa (some 53% of the total number of those infected).20
According to UNAIDS, South Africa experiences the largest HIV epidemic in the world, and accounts for some 19% of the global number of people living with HIV,
15% of new infections and 11% of AIDS-related deaths.21
Arguably, the hardest hit group is the economically active segment of the population. This has multiple ramifications for organisations that face rising health-care
costs, lost productivity due to increased absenteeism and premature death, psychological and behavioural considerations, as well as legal and ethical
considerations.22 Because of this, organisations need to consider targeted and integrated responses that are strategic in nature.
To this end, Lee et al. proposed and applied an organisational architecture to ‘instil strategic and integrative integrity into HIV/Aids policies and programmes’.23
Accordingly, their model is applied in a systemic and cohesive manner to the management and integration of HIV/Aids policy and practise in the organisation. Table
13.3 summarises their approach.

13.3.1 Stakeholders
Figure 13.2 Lee et al.’s organisational architecture

e stakeholders of an organisation are broadly de ned as ‘any group or individual who can affect or is affected by the achievement of an organization’s objectives’.24
Chapter 2, section 2.5 discussed stakeholders in more detail. However, it is nonetheless important to describe them in relation to Lee et al.’s model of organisational
architecture.
e various stakeholders of an organisation are both internal and external to the organisation. Moreover, stakeholders may be classi ed as primary or secondary
depending on the overall strategic thrust, and are thus allocated resources accordingly. For instance, should an organisation choose to follow a total quality
improvement strategy that seeks to increase customer satisfaction through the commitment of all players in the organisation, then:
shareholders (primary) should hopefully enjoy higher returns on their investment through increased wealth
employees (primary) would enjoy greater job autonomy as well as skills and knowledge empowerment
customers (primary) would enjoy better products or services
suppliers (secondary) would enjoy better contracts based on symbiotic relationships with the organisation
the community at large (secondary) would enjoy the bene ts of a more responsive organisation that provides better, more socially responsive products or services,
as well as increased job opportunities.

13.3.2 Capabilities
Figure 13.3 Lee et al.’s organisational architecture

For the purposes of Lee et al.’s model, capabilities are those deliverables that the organisation provides to stakeholders. Again, these deliverables are variable. ey are
also entirely dependent on the nature of the strategy adopted and the organisation. Larger organisations with more resources are in a better position to deliver various
capabilities (see Chapters 1 and 7 for a more detailed discussion on organisational capabilities). Table 13.4 compares the capabilities underlying cost leadership and
differentiation strategies to illustrate the role of capabilities. We have described here the capabilities for each category in broad strokes in terms of outcomes, but they
can be translated into more concrete outcomes as done in the Case example HIV/Aids and organisational architecture: An application.

Table 13.4 Capabilities delivered to stakeholders according to competitive strategy25

Capabilities delivered

Stakeholders Cost leadership Differentiation

Shareholders Higher returns through streamlined, more cost-effective operations Higher returns through diversified product or service offerings

Employees More rigid, Fordist approach to production with high degrees of Stronger focus on autonomy and team work, with high-end skilling
specialisation and atypical work structures, as well as a focus on lower involved
wages

Customers Low priced goods or services that are economical, yet represent value Wider range of differentiated products or services with a focus on
for money innovation

Suppliers Continuously renegotiated contracts, with an emphasis on price and Joint ventures with high-end suppliers committed to innovation and
value quality

Community A commitment to maintaining a good public image through, at the very Proactive initiatives to respond to the needs of the broader community
least, complying with relevant legislation at large through active social investment in targeted programmes

Niche and combination strategies will naturally draw on elements from both sets of capabilities, depending on the strategic focus.

13.3.3 Processes
Figure 13.4 Lee et al.’s organisational architecture

Processes are central to the organisational architecture and are instrumental in delivering the capabilities. We can categorise processes according to management,
operational and support processes.26

13.3.3.1 Management processes

Management processes encapsulate the basic management tasks of planning, organising, leading, and controlling strategic efforts. We can add the following to the
basic tasks:27
Work methods: Approaches adopted by management to get the job done
Roles: e various responsibilities associated with a job
Work agenda: What goals and tasks the manager intends to achieve
Knowledge, skills and levels of performance required by a job.

In terms of this approach, the manager’s work agenda informs the work methods and roles deployed. ese in turn feed into and inform the traditional management
tasks, resulting in delivery of capabilities (performance). Of course, delivery is further moderated by the manager’s skills and knowledge.
13.3.3.2 Operational processes
Operational processes are responsible for the production of an organisation’s goods and services through the conversion of inputs into outputs. As such, organisations
produce most goods or services by using one of three strategies, namely process focus, repetitive and product focus.28 We can view these three strategies as falling
along a continuum, with process focus and product focus falling on either output extreme, as depicted in Figure 13.5.

Figure 13.5 Description of the three operations process strategies29

13.3.3.3 Support processes

Support processes are those functions that provide backing for the core business of an organisation. ey include human resource management, marketing and
information systems (unless, of course, these functions are the core business). Such functions, while ostensibly being on the periphery of the organisation, are key to
ensuring its ongoing functionality by ensuring the effective and efficient running of the organisation. Section 13.3.4.2 below elaborates on support processes in the
discussion on functional strategies.

13.3.4 Organisational structure

Figure 13.6 Lee et al.’s organisational architecture

e combination of an organisation’s structure, the various operational systems it deploys, the key knowledge, skills and attitudes of its staff and the technology used,
drives the various processes discussed above. We will rst consider organisational structure. In so doing, we will explore what structure is and how different
paradigms inform different approaches to organisational structure. We will moreover consider how strategic choice in uences structure before re ecting on different
elements of organisational design and structure as well as strategic outcomes.
Organisational structure plays a critical role in the effective implementation of strategy, and accordingly in the achievement of the various strategic imperatives.
e reason for this is self-evident in the following de nitions of organisational structure.
Organisational structure is de ned as the formal pattern of interactions and coordination designed by management to link the tasks and patterns of individuals
and groups in achieving organisational goals.30
Structure is also the pattern of relationships among positions in the organisation and among members of the organisation. Structure makes possible the
application of the process of management and creates a framework of order and command through which activities of the organisation can be planned, organised,
directed and controlled.31
When designing an organisational structure and thus elaborating on Lee et al.’s model presented in Figure 13.1, the organisation needs to pay attention to a
number of critical organisational areas. Figure 13.3 depicts the categorisation that helps inform organisational design. At the same time, Figure 13.3 also illustrates
how organisational design and structure is not only informed by the strategic direction of the organisation, but also affects strategic implementation.
e approach to organisational structure is also determined by the relevant paradigm. Figure 13.3 illustrates this with reference to two particular paradigms,
namely the Newtonian paradigm and the chaordic paradigm.
Paradigms are simply worldviews. Conventional wisdom leads us to believe that the world around us is ordered and predictable. e Newtonian paradigm is
predicated on Newtonian science. is paradigm entrenches the belief that the world around us works much like a well-oiled machine, and that relationships between
events are relatively linear, i.e. if X happens, then Y will be the outcome.32 is paradigm has ourished particularly under conditions where stability and a
predictable future have been the status quo. Characteristics of this paradigm are centralised management, hierarchical organisational structures, and rule-bound
bureaucratic environments in which individuals are seen as ‘cogs in the machinery’, and managers as ‘conductors of orchestras’.

Figure 13.7 Integrated strategic framework of organisational design and structure

 e chaordic paradigm, however, presumes less predictability and stability in an age of greater change and ambiguity mediated by global forces and competition.
is paradigm is based on chaos theory, which in turn is born out of complexity theory, and is accordingly predicated on ‘complex, unpredictable and orderly
disorder’.33 It was Dee Hock, the founder of Visa, who coined the term ‘chaordic’ – a combination of chaos and order. ‘In chaordic systems,’ as Hock suggested, ‘order
emerges. Structure evolves. Life is a recognisable pattern within in nite diversity.’34 We nd tangible evidence of these recognisable and identi able patterns, which
emerge from chaos, in nature and, more particularly, in fractals. Fractals are geometric, self-replicating shapes that can be divided into many parts, each of which is
similar to the original object. Examples of fractals are snow akes and the fronds of a fern. All snow akes are hexagonal, yet each one is unique and self-replicates so
that a part of a snow ake is a scaled-down version of the original one.
Understanding this chaordic paradigm in the context of business and organisations is important given the current state of the business environment. What creates
order from chaos is ultimately commonality of purpose with all players following the same rules or principles. By adhering to such tenets, recognisable patterns of
behaviour may emerge. is is particularly profound in virtual organisations where there is a complex pattern of interrelationships among partners, and the only
commonality between the different players is the vision that bonds them.
In terms of organisational structure, chaordic organisations are more exible, atter entities that tend to devolve authority as much as possible, and allow a high
degree of autonomy in decisionmaking and self-directed behaviour. Accordingly, there is a wide span of control so that managers are less involved in the daily
coordination of employees’ activity. Such a decentralised approach to authority is predicated on a strong value system to which all players adhere, and which ensures
commonality of purpose in the absence of control. 3M is oen quoted as an example of a chaordic organisation. is organisation has espoused innovation as its
central tenet, and has accordingly allowed employees the latitude to be creative. e result is that it has reaped the bene ts of new product development through self-
directed behaviour.

13.3.4.1 e in uence of strategic choice on organisational structure

As Figure 13.7 illustrates, the choice of strategy plays a critical role in informing the nature of the organisational structure. Current demands for efficiency, global
effectiveness and exibility, for instance, largely call for organisational structures that are appropriately responsive. is is relatively easy to determine in terms of
division of labour, span of control and authority:
A fairly low degree of labour specialisation is required with individuals having more autonomy over their jobs and more to do.
Managers have a far wider span of control, with jobs being complex and individual employees having greater decision-making powers.
ere is a far greater devolution of authority throughout the organisation.

Approaches to departmentalisation, which correspond to these structural determinants, are arguably less prescriptive. Ideally, organisations should be atter and less
hierarchical to ensure maximal exibility with less bureaucracy. As such they would be seen to be chaordic in nature from a paradigmatic perspective. However,
organisations may choose structures to conform to overarching concerns of customer responsiveness (divisional approach), brand or project completion (matrix
approach), or global penetration (divisional approach by region). Moreover, because of the cost-effectiveness offered by outsourcing, a virtual approach might be
advantageous. (We discuss the virtual organisation in more detail below.) Each of these structural approaches to departmentalisation has its relative advantages and
disadvantages. e organisation should therefore select the approach with the best t in terms of strategic direction.

13.3.4.2 Elements of organisational design and structure

us far we have re ected on the relevance of strategic direction in informing the choice of organisational design and structure. As illustrated in Figure 13.7 above, a
number of key components, namely the division of labour, departmentalisation, span of control and the delegation of authority, determine organisational structure
and design. We will discuss each of these below. We will then re ect on the context in which they occur as governed by two different paradigms, namely the
Newtonian paradigm and the chaordic paradigm.

Division of labour
Division of labour refers to the degree of specialisation of jobs in an organisation. We can divide jobs according to the following:
Skill or expertise: Organisations, for instance, may comprise accountants, marketers, HR practitioners and various types of artisans.
Sequencing and task dependency: e best example here is that of a production line in, for example, a vehicle-manufacturing plant. Before the vehicle can be
painted, it must be assembled. Artisans might be assigned to either function.
Degree of authority: is refers to the amount of decision-making power that an organisation devolves to the individual.
In highly specialised environments, jobs have a narrow focus, are highly repetitive and have limited scope. For instance, in garment factories, it is not uncommon to
nd one worker measuring material, another cutting, and another sewing, while a nal worker nishes the out t. Such specialisation is oen seen as the backbone of
mass production, and indeed is oen proposed as the raison d’être of the post-industrialisation organisation.
Organisations with low specialisation usually delegate more authority to the individual through job enrichment, and increase the scope of the job to include more
tasks through job enlargement. is situation is typical of service-based organisations seeking to globalise rapidly. In such organisations where efficiency of service
delivery is key, streamlined processes, as well as a high degree of multitasking, are characteristic elements.

Departmentalisation
Departmentalisation refers to the process of grouping jobs together in an organisation. An organisation may group jobs according to type, product or even location.
An organisation typically uses organograms (organisational charts) to depict departmentalisation. Organograms are line diagrams that indicate how jobs are grouped,
as well as lines of authority. ere are many ways to group jobs in an organisation. However, the most common forms of departmentalisation include:
the functional approach
the divisional approach
the matrix approach; and
the virtual approach.

In brief, the functional structure is perhaps the simplest one, as re ected through traditional organograms, with organisations being structured according to various
common functions. Problematically, however, functions generally operate in silos under this structure without any real integration. e divisional structure tends to
group jobs by area, product or customer rather than by function. ere is a strong customer orientation, and functional strategies are better aligned. However,
resourcing becomes problematic through duplication as well as competition. e matrix structure is a hybrid structure in essence. Here, divisional or project
structures are combined with functional structures, with individuals drawn from different functions in the organisation to work on a different projects in the form of
new product development, for instance. Here, there is stronger work on, for instance, project completion and/or new product development but the structure lends
itself to role ambiguity, con ict and turnover among employees. Finally, virtual structures involve the outsourcing of work to a greater or lesser extent to external
service providers who are, by all accounts, cheaper and more efficient than doing the work internally. However, coordination costs associated with having external
services providers are high. Each of these different structures is explored in more detail in Table 13.5. Each structure is described before various advantages and
disadvantages are discussed.

Figure 13.8 The matrix approach

Table 13.5 Different approaches to departmentalisation

Type of Description Advantages Disadvantages

structure
Functional Involves the grouping of jobs in the organisation Relative simplicity: Functional structures are the most Lack of integration: Different
according to a particular function such as marketing, basic and easy to understand of structures functions are often not well
human resources, finance, information systems, Specialised expertise in different areas: Clustering jobs integrated, resulting in employees
operations (including production or manufacturing), and according to functions allows for specialised expertise operating in relative silos without
research and development (for instance, the HR function might have specialised any real sense of how their job
Importantly, each function has its own functional recruiters, training and development specialists, etc.) relates to the organisation as a
strategy to help it realise the overall vision of the whole
organisation. While these strategies are often unique
and idiosyncratic to an organisation, Table 13.6 outlines
typical strategic directions a function might follow
 Type of Description Advantages Disadvantages
structure
Divisional Divisional structures reflect jobs grouped according to Strong customer orientation: Regardless of divisional Duplication in resources: Each
product type, region or customer:35 approach, organisations are more strongly customer division has its own functions,
Product type: Reflects all activities related to the oriented since they can focus on specific needs resulting in a replication of activities
production, marketing, research and development, and according to product or region Competition for resources:
selling of a specific product, particularly when there are Stronger alignment between unit and functional Unhealthy levels of competition
relatively large differences between product type, thus strategy: By incorporating functions, divisional may result in divisions focusing
requiring fairly specialised knowledge and focus managers are better able to develop a generalist only on their own goals and
Region: Reflects a focus on providing specialised approach to the development of integrated and objectives rather than those of the
services and products for specific geographic areas, interrelated responses. By implication, functional organisation as a whole36
particularly where operations are geographically managers at the divisional level are generalists (for
dispersed and where there is a need to respond to instance, the HR manager would be responsible for
differing cultural, ethnic, socioeconomic and political recruitment, and training and development, rather than
conditions only one of these focal areas)
Customer: reflects a focus on servicing the needs of
various customers, particularly when there are
significant differences between customer groupings in
an organisation

Matrix This approach involves an overlay of a divisional or Stronger focus on the project/product completion: Ambiguity in reporting
project-driven structures on a functional structure (see Project/product developmental work becomes the focal relationships: Staff are now
Figure 13.4). Typically, this sort of approach is used in point for staff who are seconded to projects. As such, beholden to two managers, which
project and brand-dominated organisations. It serves as staff can bring their knowledge and skills to bear when leads to stress
an alternative to the divisional approach by product and and as needed. Dysfunctional conflict: There is a
is also commonplace in project-based organisations heightened propensity for conflict
Each of the nodal points where the functional and between the different managers,
divisional structures intersect in Figure 13.4 represents who may have conflicting agendas
one or more employees drawn from the relevant and who vie for status, legitimacy
function to work on the project/product development. and power
Authority over the employees may vest with the Competition for scarce resources:
functional manager or the project manager, or both in a Unhealthy levels might arise as
joint capacity. Determining where authority lies is research is now shared across
dependent on the form of matrix adopted.37 In a weak multiple functions and projects
matrix, the functional manager has more authority over Further complications are drawn
the project, while the project manager acts as an out in the Case example The matrix
administrator. With a strong matrix, however, the project organisation in the
manager has authority over the project, even though the telecommunication’s industry below
functional manager retains title of his or her employees.
In a balanced matrix, authority vests in both project and
functional managers equally, and different roles are
shared.

Virtual Typically, the virtual approach entails the outsourcing of Reduction in transaction and production costs through Higher coordination costs: Markets
non-core functions that do not provide a competitive the reduction in information costs: Historically, tend to incur higher coordination
edge, which in turn allows them to focus on their core organisations existed because they reduce information costs through the setting up and
competencies (see Figure 13.5) costs related to establishing the prices of various administration of contracts, and the
Outsourcing refers to the use of external agents to service providers.39 Through the internet it is now monitoring of behaviour.41
perform one or more organisational activities.38 In so possible to source dedicated alternatives in the market
doing, organisations effectively opt to return to the to produce goods and services (as opposed to
market for the provision of services from external centralising functions). All things being equal, costs
vendors as they believe this to be more cost effective associated with these means of production should be
and efficient than retaining these functions in the cheaper due to economies of scale.40 Here, the sharing
traditional organisational structure. At the same time, of costs among multiple clients in an outsourcing
they are now able to focus on their core business. environment leads to a cost reduction.
Potentially, since practically all organisations outsource
to some extent, there is a tendency towards becoming
virtual over time.

Table 13.6 Broad strategic thrusts of major functional areas42

Function Strategic thrust

Human Staffing the organisation with the right calibre of people who have the requisite skills and knowledge at the right time
resource Instituting appropriate performance management systems to monitor, reward and remedy performance when necessary
management Providing appropriate compensation that is performance-linked to increase productivity and output
Providing training and development that is linked to the strategic imperatives of the organisation
Compliance and full engagement with the labour legislative framework
Cooperative and equitable labour relationships that underscore workplace democracy and worker participation
Implementing appropriate measures to respond fully to the needs of and accommodate an increasingly diverse workforce

Marketing Identification of target market through market aggregation and/or market segmentation
Satisfying the needs of the target market through focusing on the traditional 4 Ps (product, place, price, and promotion)

Finance Analysing and assessing financial performance through the application of ratio analysis to financial data
Use of financial planning to ascertain whether future cash flows are sufficient to cover capital investments and dividend payouts
Ascertaining the best mix of debt and equity financing to make up shortfalls from internal financing generated from income
 Function Strategic thrust
Information Implementing cross-cutting, functional-specific information systems to support HR, marketing, finance, and operations
systems Adopting decision-support systems, executive and management information systems, and knowledge work systems to assist in the development and
implementation of organisational strategy

Operations Designing process strategies, including process, product and repetitive-focused strategies, that underscore the production of goods and services
strategies Implementing capacity strategies that focus on the optimisation of facility usage to account for future demand for goods and services
Adopting layout strategies that improve usage of space, equipment and staff, as well as information flow and customer interactions
Strategically locating the operation with consideration given to proximity of suppliers, access to transport, proximity to markets, availability of suitable labour, as
well as government policy and regulation
Ensuring appropriate job design through job enlargement and enrichment interventions, as well as through teamwork, ergonomics, and work scheduling
Adopting suitable global management strategies such as just-in-time management, quality management, supply-chain management, and inventory management

Research and Carrying out basic and industrial research to advance new knowledge and test the profitability of new ideas
development Undertaking new product (and process) design and development (with specific attention being paid to the infusion of unique and distinguishing features and
strategies characteristics)
Creating an environment conducive to innovation and R&D activity, with an emphasis on a culture of risk taking and reward, as well as the creation of and
allocation of resources to dedicated research teams

STRATEGY IN ACTION: The matrix organisation in the telecommunication’s industry43

In their case study of an organisation in South Africa’s telecommunications industry, Tobin and Franze found that the matrix organisational structure adopted by the
organisation tended to dilute its ability to integrate and share knowledge. The reasons posited for this included:
an excess of departments that were too specialised, and that resulted in a dispersion of knowledge, with personal contact also being limited accordingly
the separation of performance from reward, which tended to disincentivise the sharing and integration of knowledge
a lack of any clear mechanism for employees to share and integrate tacit knowledge
ambiguity in the reporting relationship with a disconnection in terms of flow of performance-related information pertaining to employees between the project
and functional managers.

Implications of this research suggested that the structure of the matrix organisation is vitally important. The organisation should keep departments to a minimum,
thus allowing for more sharing of knowledge. At the same time, it should incentivise employees to share knowledge in the organisation, and avoid a culture that
engenders knowledge as a form of competitive advantage among them. Finally, the organisation should establish clear reporting relationships, with functions and
roles of project and functional managers clearly demarcated. In particular, it should establish strong lines of communication between the two levels of
management.

Questions
1. Matrix organisations, despite their relative complexities, are often favoured over functional and divisional structures. Would you recommend this structure
based on what you have learned about it? Substantiate your answer.
2. How might the matrix structure lead to better integration in terms of Lee et al.’s architecture?

Figure 13.9 The virtual approach

Span of control
e third component of organisational design and structure in terms of Figure 13.7 is the span of control. Span of control refers to the number of employees reporting
either directly or via working groups or committees to a manager. e span of control is affected by a number of issues:44
e amount of contact required between the employee and the manager: Where jobs are subject to time constraints or have a high degree of uncertainty, a greater
degree of coordination is required to ensure efficient and effective delivery. ere is thus a lower ratio of staff to managers (i.e. fewer employees per manager or a
smaller span of control is preferable).
e extent to which work is specialised: Lower-order jobs that are highly specialised and less complicated require less supervision because of their highly repetitive
nature. At the same time, employees working in more complicated higher-order jobs in atter organisations are allowed greater autonomy because their work is
more specialised and potentially beyond the technical expertise of managers. In both instances, there is a large span of control.
 Nature of the organisation: Flattening or downsizing organisations by reducing the number of employees as well as the tiers of management is commonplace given
the increasing trend towards globalisation. ere is a natural tendency to have wider spans of control when organisations become atter.

Delegation of authority
e fourth and nal component of organisational design and structure in terms of Figure 13.3 is the delegation of authority. is essentially refers to the
dissemination of decision-making powers throughout the organisation. In particular, the organisation will endow non-managerial employees with such powers. e
arguments for delegation are the following:
Employees are better motivated by being given greater responsibility, control over their work and decision-making powers (in essence, job enrichment).
Managers, particularly in atter organisations, are freed to focus on strategic decision-making as they do not have to micromanage the activities of their
employees.
A democratic work environment is created through the involvement of employees in decision-making structures in the organisation (see the Case example
Disclosure of information below).
e delegation of authority enhances the careers of lower- and middle-order managers who are involved in more complex, higher-order decisions.
More autonomy results in more innovative and effective solutions as well as better decisions. leading to a more efficient allocation of resources. Here, decision-
making must be linked to performance management while also contributing to a healthy level of internal competition between individuals and departments.

However, delegation of authority can lead to:

Undue stress, particularly when employees are not equipped with the knowledge and skills to follow through with decisions, or quite simply do not want the added
responsibility
A perception that the managerial prerogative is being eroded since managers are no longer the sole decision-makers in the organisation
Ineffective and inefficient decision-making since lower-level employees do not have the expertise and knowhow of management.

CASE EXAMPLE: Disclosure of information45

Disclosure of business and financial information by the employer is a critical part of effective worker participation and a true test of management’s commitment to
the process. Employees are better able to make more informed decisions and have a greater impact on the decision-making process if they have the right
information at their disposal. Moreover, a greater degree of transparency on the part of the employer will ensure that employees have a greater understanding of
the workings of the organisation, and they will thus identify more closely with the organisation’s aims and objectives.
Under the 1956 Labour Relations Act, disclosure of information was enforced through the doctrine of good faith bargaining, as well as industrial and labour
appeal court decisions pertaining to retrenchments.46 Since 1994, the South African government has made great strides in rectifying this rather nebulous position
by creating an environment that is more conducive to information sharing. Section 32(a) of the Constitution of South Africa Act 108 of 1996 grants everyone the
right of access to information held by the state, while Section 32(b) grants everyone the right of access to any information held by another person if this information
is required to exercise or protect any other right. The Promotion of Access to Information Act 2 of 2000 gives effect to this constitutional right.
The Labour Relations Act 66 of 1995 also enforces the disclosure of information conducive to harmonious labour relations. In terms of Section 16, employers
are required to disclose all relevant information to majority unions (or minority unions acting in consort to form a majority) to ensure effective consultation and
collective bargaining. Section 89 provides for the disclosure of information relevant to effecting consultation and joint decision-making within the context of a
workplace forum. The relevance of information is determined by those matters listed in Sections 84 and 86 in the Labour Relations Act 66 of 1995 for consultation
and joint decision-making respectively.47 Typically, however, the types of information likely to be disclosed will include productivity information, information on the
morale of workers, information pertaining to wages and benefits, safety information, information on company performance, information on wealth sharing, and
information on the organisation’s future.48
In a 1997 study that sought to gauge the perceptions of South African management to information disclosure, Grossett49 found that while levels of disclosure of
information were quite low, several perceived benefits emerged. These included:
improved employee commitment
increased employee satisfaction and cooperation
improved engagement of employees in decision-making
increased understanding on the part of employees of decisions taken by management
improved public perceptions of the company.

Management perceived, however, that the disclosure of certain classes of information, such as those deemed sensitive and commercially confidential such as
information pertaining to directors’ remuneration, would have a negative impact on employees’ commitment, cooperation and levels of trust.50
In a later in-depth study of seven organisations with workplace forums, Van der Walt51 sought to elicit the views of both management and employees. He also
found that while there was support for information disclosure, management was loath to disclose information that they felt would threaten their prerogative, or that
was sensitive and confidential.52 Employees, however, felt that information disclosure was insufficient.
Evidence therefore shows that South African organisations still succumb to issues of mistrust and suspicion when it comes to the disclosure of relevant and
necessary information. However, information sharing is a vital and dynamic component of effective participation. It is thus incumbent on management to foster the
necessary environment for the exchange of information, and to realise the benefits of information disclosure by engaging more fully with the process.

13.3.4.3 Strategic outcomes

e nal component of the integrated framework re ected in Figure 13.3 is that of strategic outcomes. As illustrated, a sound organisational structure and design will
result in key strategic bene ts for any organisation. Some of these generic outcomes include:
Improved effectiveness and efficiency as a result of better, more streamlined organisational design
Better quality of goods and services resulting from, for instance, the organisation giving more discretion to employees with regard to the production process
Increased productivity as a result of the organisation giving more autonomy to employees, as well as through a better structured organisation that facilitates a
greater exchange between functions and departments.
e particular paradigm that governs the organisational structure also determines the outcomes. It may be argued that a chaordic paradigm that vests more autonomy
in the employee and calls for a atter organisational structure will most likely result in the strategic outcomes listed in Figure 13.3.
Finally, Figure 13.3 includes a feedback loop, the purpose of which is to highlight the dynamic nature of organisational design and structure. e loop, which links
strategic outcomes to strategic choice, emphasises the fact that outcomes ultimately moderate not only the formulation of strategy, but also the design of organisations
to achieve the desired outcome.

13.3.5 Systems, policies, and procedures

Figure 13.10 Lee et al.’s organisational architecture

A well-established framework of systems, policies and procedures that are strategically supportive is key to driving the core processes of the organisation, and
therefore in achieving strategic alignment and implementation.

13.3.5.1 Reward systems

How organisations reward employees is singularly important in the implementation of processes and, ultimately, the achievement of strategic outcomes. It is common
practice for managers to provide nancial and non- nancial incentives to retain the commitment and loyalty of employees, and to direct their behaviour towards the
achievement of the organisation’s goals.
Financial or tangible rewards include combinations of bonuses, performance-related pay, shares and share options, as well as bene ts. Non- nancial or intangible
rewards are directly related to the job itself. ey include ways to improve overall job satisfaction by making work more challenging through the techniques of job
enrichment and enlargement, as well as making the work environment more stimulating, friendly, pleasant and accommodating. While organisations tend to focus on
nancial rewards, they should not discount the power of non- nancial incentives.
Ideally, a strategically aligned reward system should incorporate the following principles:
Financial reward and pay should be internally equitable and acceptable to employees with the principle of ‘equal work for equal pay’ applying at all times.
Moreover, the gap between the highest- and lowest-paid workers should be closely monitored and legitimised, such that all workers understand its rationale (see
the Strategy in action Accountability, ethical remuneration needed to boost corporate governance – PwC below).
Reward should be market related in order to ensure that employees are retained. Where an organisation cannot match the levels of pay of competitors, then non-
nancial rewards should be considered.
Reward should comprise a healthy mix of nancial rewards (bonuses, shares, bene ts and performance incentives over and above a competitive basic salary) as
well as non- nancial rewards ( exitime arrangements, job enrichment as well as job enlargement).
e organisation should always link nancial incentives to output and performance, and not merely attendance behaviour or even just doing the job.
e organisation should link performance-related rewards directly to the attainment of goals and objectives that are strategically aligned. At the same time, these
goals and objectives must be attainable but challenging. Such a system should apply to and be fully understood by all employees.
e organisation should ideally link executive-level reward to overall organisational performance in the form of share options and share ownership schemes.
Similarly, reward for other levels of employees should be linked to areas of responsibility. For instance, the head of marketing would have reward linked to
customer satisfaction, sales volume and market share.
e organisation must keep the time gap between performance and reward to an absolute minimum.
e organisation should ensure that reward practices are appropriate when managing a diverse and/or global workforce such that cultural sensitivities to different
reward practices are taken into account.
Finally, an organisation should never reward mediocrity, only good performance.

STRATEGY IN ACTION: Accountability, ethical remuneration needed to boost corporate governance – PwC53
Rules on executive bonuses and incentives need to be tightened to boost corporate governance, professional services firm PricewaterhouseCoopers’ (PwC’s)
‘Executive Directors: Practices and Remuneration Trends’ report has found.
PwC Africa people head Gerald Seegers on Thursday stated during a briefing that remuneration reporting trends and the dynamics around ‘say on pay’ have
changed since the introduction of the amended JSE listing requirements in May last year, which calls for fair and responsible remuneration reporting that must be
implemented across an organisation – with a special focus on junior employees.
The PwC report looked at the impact of corporate failures on executive remuneration and considered whether the time has come for companies to put risk-
adjustment mechanisms such as malus and clawback to the test. This is against the macroeconomic backdrop of increasing corporate failures in South Africa and
persistent inequality.
Malus provisions are used as an ex-ante risk adjustment over executive pay. These provisions are usually imposed over executives’ short-term and long-term
incentives. The trigger events for malus are often the same as or very similar to those prescribed for clawback. Clawback creates the obligation for executives to
repay amounts to the company that should rightfully not have been paid to them.
The question PwC raised was what effect a breach of fiduciary duties or misconduct will have on the remuneration of executives and whether companies should
claw back incentives paid to or vested in culpable executives in the event of a corporate failure. ‘In light of the current climate and recent corporate failures,
companies need to look at whether they have the appropriate measures in place to hold executives to account if the need arises and, if necessary, recover their
variable pay,’ said Seegers.
 Moreover, the report considers the future of executive benchmarking, which has been a traditional tool used to attract and retain employees who are critical to
the performance of the organisation. PwC stated that a new approach to benchmarking is suggested that first involves the determination of a pay range for
executives, followed by determining a particular executive’s movement through the range, which would be linked to performance through the executive’s tenure.

Ethics of pay
Fair and ethical remuneration, and the most appropriate measures government, business and labour and other stakeholders must take in order to better the lives of
more junior workers to establish a ‘living wage’ remains under debate.
The Gini coefficient of the employed has declined slightly to 0.429 in 2018 from 0.431 in 2017 and decreased significantly from 0.44 in 2014 when PwC first
measured this indicator.
The pay ratio for a company, which is the ratio between the total remuneration of the CEO of a company and the average of the total remuneration of all other
employees of the company has increased from 61.8 in 2017 to 64.7 in 2018.
On May 1, the first national minimum wage was introduced in South Africa at R3 500 a month. The conflation of the concepts of a ‘minimum wage’ and a ‘living
wage’ has led to disputes over the course of this year with organised labour.
There is no definitive study available to establish a South African living wage level, but the general view among reward professionals and large corporates is that
a living wage is around R10 000 to R12 000 a month.
The PwC report also discussed the progress made nationally and internationally regarding the gender gap in remuneration. The World Economic Forum’s 2017
‘Global Gender Gap’ report indicates that 68% of the global gender gap has been closed, a decrease from the 2015 and 2016 results. However, it also estimates
that the global workplace gender gap will not be closed for the next 217 years.
In South Africa, the proportion of women to men in executive roles is still low. ‘We examined the gender total guaranteed packages (TGP) median pay gap in
2017 among JSE-listed companies. We also explore how local and global institutional investors have taken steps to hold companies to account on whether they
have promoted gender diversity and representation on their boards,’ said Seegers.

Remuneration trends
The report reviewed the TGP for all executives paid; the median for CEO remuneration went up by 7.6% to R5.2 million in 2017, and the report also included an
overview of short-term incentives paid to executives.
Further, the average pay for the CEOs of the ten largest JSE-listed companies was R24.9 million in 2017. For CFOs the average is R15.1 million and for
executive directors R8.7 million.
The executive pay for each sector was also analysed. There are 46 companies included in the JSE’s basic resources sector, with only seven listed among the
large-cap companies on the JSE. Oil & gas producers have now been included in this sector.
The median TGP for CEOs of large-cap basic resource companies is R24 million and the median TGP for executive directors is R18.7 million.
The financial services sector is under sharper scrutiny than ever and the responsibility on directors’ shoulders have increased. The median TGP for the CEOs of
large-cap companies in the financial services sector showed an above-inflationary increase of 14.9% (to R8.6 million). The median TGP for the executive directors
showed an increase of 15.5% (to R5 million).
Many companies in the industrial sector are showing little growth because of slow economic growth. The median TGP for large-cap CEOs at industrial
organisations showed a moderate increase of 5.8% (R16.1 million). The median TGP for executive directors showed an increase of 2.8% (R5.8 million).
The median TGP for the CEOs of large-cap service companies showed a significant increase of 15.6% (R9.3 million). Similarly, the median TGP for executive
directors increased by 12.5% (R4 million).
‘In conclusion, benchmarking methodologies on executive remuneration need to be developed further. The challenges that remuneration specialists and
remuneration committee members face is the design of strategies and policies that are aligned with sound corporate governance principles, while motivating
executives and safeguarding shareholder interests.
‘Only by challenging the status quo regarding how remuneration policies have historically been approached will we be able to do our part to guard against
corporate failures and play our role in creating future-proof organisations that are focused on sustainable value creation,’ Seegers said.

Questions
1. Why should businesses be concerned about the pay levels of executives? When answering this question, reflect on issues relating to both the pay gap and the
performance of businesses.
2. Do you think that malus and clawback provisions are beneficial? Why or why not? Explain the strategic rationale underlying your answer.

13.3.5.2 Performance management systems

Performance management systems help align individual performance with the organisation’s strategy. e organisation needs to appraise, assess and remedy
performance regularly to ensure that employees are meeting performance objectives. To be effective in aligning performance with strategy, a performance
management system should incorporate the following:
Performance management systems should play three major strategic roles. ey are rst and foremost developmental in nature – they allow organisations to
identify de ciencies in employee performance, and to rectify them through training. At the same time, performance appraisals also play an evaluative function by
allowing organisations to reward good performance and ‘punish’ poor performance when necessary. Finally, performance management systems allow
organisations to validate the efficacy of other practices in the organisation such as selection.54
Organisations need to pay attention to the type of appraisal tool they adopt as part of the performance management system. Such tools can either be outcomes or
process based. An outcomes-based appraisal focuses speci cally on the deliverables, and is based on objective, veri able results. It uses measures such as
management by objectives. A process-based appraisal relies on assessing how the employee performs the work, and is based on judgements about an individual’s
performance. is type of appraisal uses rating scales and the like. Generally, a combination of both approaches produces the desired outcome.
Organisations must ensure that they assess performance accurately and fairly. Raters should be careful not to succumb to various judgement-based errors such as
the halo effect, strictness, leniency, central tendency, bias and recency.
Understanding who carries out the appraisal is also of strategic signi cance. Multirater or 360-degree feedback has grown in popularity of late. is system
incorporates input from various sources such as supervisors, colleagues, self-evaluations and, importantly, customers. e advantage of this system is that it
addresses the various rater errors mentioned above.
Feedback from any form of appraisal should be timeous and instructive. It should include those areas where improvement is deemed necessary, as well as the
strengths in the individual’s performance.
Organisations should train managers to rate and provide feedback effectively.
 Organisations should pay attention to appraisal and feedback in multicultural environments where different emphasis may be placed on different aspects of
performance.

13.3.5.3 Policies and procedures

An organisation designs policies and procedures to guide and align its members in their activities and behaviours. As such, policies and procedures facilitate strategic
alignment and implementation in three ways:55
Policies and procedures are prescriptive in nature, and are intended to guide and create uniformity in behaviour.
Policies and procedures create consistency in operations across geographically dispersed subsidiaries, plants and outlets.
Policies and procedures facilitate the formation of an organisational culture conducive to strategic implementation.

Note, however, that too many policies and procedures are likely to create a bureaucratic quagmire simply because they are likely to block activity and sti e ingenuity.
While policies and procedures should create a sense of boundaries, they should primarily guide and facilitate effective and efficient behaviour, decision-making and
practices.

13.3.6 Knowledge, skills and abilities (KSAs)

Figure 13.11 Lee et al.’s organisational architecture

KSAs are fundamental drivers of strategic process. Also oen called competencies, KSAs include the requisite expertise and knowhow necessary to run the
organisation efficiently and effectively to retain a competitive edge. ere are three types of KSAs:
Basic KSAs: ese include the various knowledge, skills and abilities required by all members of the organisation. ese building blocks are considered necessary
to maintain the organisation’s functionality on a day-to-day basis.
Speci c KSAs: ese relate to performing core competencies and key operations in the organisation. ese KSAs are crucial elements of strategy, and relate, for
instance, to knowhow pertaining to more efficient operating systems, and expertise in innovation and new product development.
Distinctive KSAs: ese are speci c in that they provide competitive advantage because they are unique and superior to what competitors have. In other words, a
speci c KSA relating to a core competency does not automatically translate into a competitive advantage unless it provides the basis for competitive superiority.56
Market leaders in particular industries, therefore, usually enjoy the strategic advantage of distinctive KSAs. While their rivals might have speci c KSAs that are
quite similar, market leaders possess something unique that provides them with the competitive edge. e distinctive and unique KSAs provided by Mark
Shuttleworth and his team turned his IT company, awte Consulting, into a billion rand undertaking. KFC’s ‘secret blend of herbs and spices’ undoubtedly
contributes to making it a global leader in the fast-food industry.

13.3.7 Technology
Figure 13.12 Lee et al.’s organisational architecture

Technology is core to the effective implementation of processes in almost all organisations. Technology is quite simply de ned as ‘the application of scienti c
knowledge for practical purposes, especially in industry’.57 is is seen to include the knowledge required to transform inputs into outputs through the production
process.58 Technology is thus also taken to mean the actual tools, machines and the like developed from this knowhow, which make the transformation of inputs to
outputs possible. Finally, technology is oen speci c to a particular industry. Here we refer to ‘a technology’ that has particular application (for instance
manufacturing technologies, medical technologies, mining technologies, and the like).
Technologies are generally short-lived, given the rapid pace of technological advancement that has characterised the last two decades. However, they are still
capable of offering signi cant strategic advantage. is is ultimately derived from technological leadership. Being an innovator or pioneer of a new technology does
not necessarily translate into competitive gain because of the costs involved in development and the likelihood of rapid uptake (and improvement) by followers.
Rather, for many organisations being an early adopter means that technological innovations can be adopted with fewer problems and without the initial development
costs. Advantages of being a technological leader through early adoption include:59
 increased market share and higher pro ts by adopting new technologies ahead of competitors
acquisition and adoption of tested and more reliable technologies, and greater choice as suppliers increase
attraction of customers who gravitate towards organisations who adopt state-of-the-art products and services with cutting-edge technology
opportunities to modify and improve technologies before late adopters catch up. is also means that early adopters can create barriers to entry, precluding late
adopters from entering the market.

Adopting new technologies has additional implications for the organisation. e nature of the technology is of particular importance and is determined by the
speci c organisational needs. Ideally, all organisations require a base level of technology, common to all players in the industry. Key and pace technologies provide the
necessary competitive advantage and are generally unique to only a few players.60 However, regardless of the level adopted, training staff to develop and use
technology pro ciently is an absolute requirement, as are interventions to overcome any resistance to the introduction of new technology.

13.3.8 Organisational culture

Figure 13.13 Lee et al.’s organisational architecture

e nal component of Lee et al.’s organisational architecture is culture. Culture is seen as a system of norms, values, and beliefs that bind the organisation’s members
together, unifying them in purpose. An organisation’s culture therefore serves to underscore the drivers of process, laying the foundation for the type of structure and
system adopted, as well as the nature of KSAs and the absorption of technology.
Cultures are unique to organisations. Schein de nes organisational culture as ‘a) a pattern of basic assumptions, b) invented, discovered or developed by a given
group, c) as it learns to cope with its problems of external adaption and internal integration, d) that has worked well enough to be considered valid and, therefore e) is
to be taught to new members as f) the correct way to perceive, think and feel in relation to those problems’.61 Colloquially this is simply seen to be the ‘way things are
done around here’.62 When a culture unites members effectively and is sufficiently widespread, accepted and entrenched, it then becomes a key in uencer in both
strategic alignment and strategic implementation.
An organisation’s culture nds expression through a variety of manifestations. ese include the following:
Language: Many organisations use their own idiosyncratic lexicons to describe their processes, operations and general environment.
Folklore: Organisations oen use stories of spectacular successes (or failures) based on actual events to in uence desired courses of action and outcomes.
Heroes: Organisations draw on individuals who epitomise everything the organisation stands for and who are exemplary performers to induct and mentor
newcomers to the organisation.
Symbols and rituals: Logos, signs, badges and icons as well as customs and ceremonies such as team-building events, workshops and awards events are important
and powerful indicators and disseminators of culture.
Dress code: How organisations allow employees to dress also provides a sense of the nature of the culture. Jeans, T-shirts and trainers are typical forms of apparel of
soware development houses, indicating a more relaxed and laid-back atmosphere, while bankers and accountants stereotypically wear suits and ties that are more
common in a formal, corporate environment.
Office layout: e way in which the office environment is designed will give a further indication of an organisation’s culture. An open-plan environment, for
instance, allows for more open interaction among employees while segregated individual offices establish a sense of privacy, individualism as well as authority.

13.3.8.1 Dimensions of organisational cultures and alignment with strategy

While all organisations have unique cultures, management might use the following guidelines to provide an indication of how the organisation might position itself
for effective strategic alignment and implementation:63
Individuals should identify and align with the goals and aspirations of the organisation they work for. is helps to regulate behaviour through a sharing of
common belief and values.
Emphasis should be on cross-cutting, process-driven, multidisciplinary teams that focus on strategic outcomes by drawing on the collective expertise of the
organisation.
e leadership style should favour transformational leadership such that more focus is placed on people in the organisation. (Chapter 12 discussed leadership in
more detail.) Moreover, the culture should further serve to legitimise management.
Different departments in the organisation should act interdependently rather than independently to achieve desired results.
A fair degree of self-directed and autonomous work should be allowed.
Risk tolerance should be quite high to facilitate innovation, an important driver of competitive advantage.
Reward criteria should be aligned with performance and strategic outcomes.
Constructive con ict, as a function of bottom-up communication, should be tolerated such that employees feel free to challenge and criticise openly in a bid to
improve existing practices and processes.
A strategic culture should not only emphasise the outcomes and outputs, but also ‘how things are done’ by shaping work processes, working environments,
employee behaviour and customer orientation.
Strategically positioned organisations are responsive to the opportunities and threats in the external environment.
Ethical business practices and strong values should infuse the organisation’s culture. ‘Doing the right thing’ should be an important part of the way an organisation
does business. However, an organisation must take care not to pay lip service to values and ethics. ese should be incorporated in policies, procedures, systems and
processes, and be re ected in employee and managerial behaviour.

13.3.8.2 Types of organisational culture, leadership and culture and cultural change
Arguably the most important typology to have been developed in relation to types of organisational cultures is the ‘Competing Values Framework’ (CVF).64 Based on
Quinn and Rohrbaugh’s65 seminal work, the CVF seeks to describe the criteria underscoring organisational effectiveness. ey identi ed three different value
dimensions, which are plotted in Figure 13.6. Focus, on the horizontal axis, re ects internal harmony and integration on the one end, and external competitiveness
and differentiation on the other. Structure of the organisation re ected on the vertical axis ranges from exibility on the top to control on the bottom. Finally, means–
end, which is re ected distally, suggests ‘the behaviours that emanate from values and beliefs. ese behaviours are the mechanisms (means) through which culture
types are related with desired effectiveness criteria (ends)’.66 Each quadrant in the model below depicts different culture orientations as well as associated means and
ends, together with corresponding leadership styles. Here, clan cultures and adhocracy cultures both favour decentralised structures with an emphasis on exibility.
Clan cultures, which are internally focused, are premised on cohesion and participation as well as exibility, are useful in building morale and commitment among
employees. Adhocracy cultures are externally focused, and promote entrepreneurial and innovative behaviours in organisations. Hierarchical and market cultures,
however, favour centralised structures with an emphasis on control. Hierarchical cultures are internally focused and tend towards creating more structure,
consistency and efficiency. Market cultures are externally focused and are thus predominantly driven by competition, market share and growth. Each of these different
cultural orientations is described in more detail in Figure 13.6.
Importantly, two observations might be made when re ecting on the CFV. e rst is that the different categories are not discrete, but rather re ect dominant
forms for culture.67 In reality, organisations might encompass aspects of each form accordingly. e second is that cultures are non-static. Importantly, therefore,
while an organisation might identify a dominant form, cultures change over time. Incremental changes might be made in the implementation of strategy, while more
radical changes are oen necessitated when adopting a strategic direction that is markedly different to what currently exists.68 Effective cultural change requires the
commitment and involvement of leadership of the organisation.69 Here particularly, leaders should ensure that culture changes and is rede ned in accordance with
changes to the strategic direction of the organisation, mission, values, as well as competencies.70 is is a dynamic, ongoing process, such that as the organisation
transitions from an old to a new culture, organisational leadership should already be aware of and sensitised to the necessity for potential future change.72

Figure 13.14 Conflicting Values Framework (CVF) depicting culture types and corresponding leadership approaches71
13.3.8.3 e importance of organisational values
In Chapter 3 (section 3.5), you were introduced to the notion of the ‘value statement’. Values, as was stated in that chapter, are a central consideration of culture since
they ‘form the glue that binds an organisation’s culture’.73 An organisation’s values may contribute signi cantly to its success.74 is is because values will ‘eventually
affect the way customers are perceived and treated, the way employees and their contributions are viewed and rewarded, and the way in which the future is
anticipated and managed’.75 Having the ‘right’ values will therefore have a signi cant in uence on the way in which an organisation reacts to the environment, and
therefore shapes and implements strategy.
But what are the ‘right values’? Peters and Waterman identi ed eight attributes as being germane to highly successful and excellent organisations and from which
organisational values are derived.76 ese include:
A bias for action: Being driven and getting things done
Being close to the customer: Demonstrating a commitment to customer satisfaction and superior service
Autonomy and entrepreneurship: Fostering a climate of risk taking and innovation
Productivity through people: Understanding human resources as a true asset and therefore as a source of quality
Being hands-on and values driven: Overarching management philosophy that see leaders acting as role models through commitment
Sticking to the knitting: As an organisation, focus on what you do best
Simple form and lean staff: Encouraging dispersion of authority through joint decision-making and participation
Simultaneous loose–tight properties: Simultaneous control and planning while allowing for worker autonomy.

Importantly, several of the different architectures discussed in Table 13.2 point to the relevance of values in strategy alignment and implementation. By centrally
locating values, for instance, Peters, Waterman, Pascale and Athos,77 in developing the McKinsey 7S Architecture, pointed to the critical role that values play in
shaping all other elements of their model, and arguably, therefore, in shaping organisations in general (see Figure 13.15) It is these values or core beliefs that provide
guidance and shape thinking, particularly during times of crisis.

Figure 13.15 The McKinsey 7S framework78

13.4 Summary
In this chapter, we discussed the role of organisational architecture in aligning the internal organisation for more effective strategic implementation and execution. As
a strategic tool, the concept of organisational architecture has gained much currency, particularly over the past decade. Essentially, organisational architecture is an
integrated strategic response that draws together key dimensions of the organisation (such as culture, KSAs, structure and systems, policies and procedures, and
processes) used to guide strategic implementation. e value of an organisational architecture lies in its ability to integrate and align the organisation in such a way
that strategic attainability is achieved.
We used Lee et al.’s architecture to guide discussion on organisational architecture. e value of this particular model is that interrelationships between key pillars
of the architecture are illustrated using a process approach. We discussed each of the pillars that re ect the core dimensions of the internal organisation in turn
throughout the chapter.

REFLECTION BOX:

Thus far, strategic alignment has been examined within the corporate context. However, it might well have a more immediate impact on our day-to-day lives.
Consider, for instance, the fact that government is at times accused of under-delivery, and in some departments under-expenditure, which in South Africa has
repercussions for poverty alleviation in particular. How applicable and effective do you think strategic alignment through the adoption of an organisational
architecture might be in addressing this challenge?
Opening case study questions
1. Based on the Opening case study, how do you think the natural world could be usefully applied to how organisations should be structured?
2. What are the similarities between the principles underscoring organisational architecture, and those that relate to the notion of the ‘superorganism’?

Discussion questions
1. Discuss the concept of organisational architecture. In so doing, list and brie y compare the various architectures before describing how they might assist in
strategic alignment and implementation.
2. Brie y differentiate between the Newtonian and chaordic paradigms as ways of viewing organisations. Can you think of different metaphors for these paradigms
that you could apply to an organisation? For example, the organisation is like a ship. Explain how you would relate the metaphor of an orchestra and then of a jazz
band to the organisation.
3. How is organisational structure key to strategic implementation?
4. Organisational processes are sometime seen as being synonymous with excessive bureaucratisation, yet processes are also key to strategic implementation when
properly implemented. To your mind, what are the salient differences between bureaucracy and good process, and how can process facilitate strategic
implementation?
5. De Toqueville stated: ‘In proportion as the principle of division of labour is more extensively applied, the workman becomes weak, more narrow minded and more
dependent.’ Do you agree with this sentiment? In re ecting, refer to the relative advantages and disadvantages of a high degree of division of labour.
6. Fully discuss the usefulness of Lee et al.’s architecture in addressing strategic alignment. Here you might want to use an example. Try to go beyond the HIV/Aids
scenario used in the chapter.
7. Values are a central tenet of most organisational architectures. Why do you think this is? Fully motivate your answer.
8. What are the key elements of a culture that supports strategic alignment? Fully describe each element.

Using knowledge and skills

1. Identify and visit a small business of your choice. Investigate by means of an interview with the CEO what key success drivers are to strategic implementation, as
well as what deters effective implementation. How could this information be used to compile an organisational architecture?
2. How important is delegation of authority to effective decision-making? Discuss this with someone who is in a managerial position in an organisation.
3. Together with a colleague of your choice from your class, develop a presentation of 10–15 PowerPoint slides outlining the importance of organisational
architecture in strategic implementation.
4. Transformation is the current imperative of most higher-education institutions in South Africa. Try to acquire the strategy of the institution at which you are
studying (in many instances, this may be readily available on the institution’s website) and propose how organisational architecture might be used to achieve the
institution’s vision.
5. e effective management of HIV/Aids in the organisation is just one issue which might bene t from the application of Lee et al.’s architecture. By speaking to
someone you might know in a managerial position, identify any other issue which might bene t from ‘greater strategic and integrative integrity’. rough
additional research, fully describe the issue before using Lee et al.’s architecture to describe how greater alignment might occur.
6. You and your team have recently been short-listed as a group of management consultants to pitch for a major contract with South Africa’s public broadcaster to
realign the organisation strategically, following signi cant challenges it has faced of late. Develop a 15-minute pitch using PowerPoint slides in which you illustrate
how you will achieve greater alignment using any architecture of your choice. To complete this activity, you will need to research some of the challenges faced by
the SABC, and how these might be overcome through greater alignment.

Further reading
Brickley, J., Smith, C. & Zimmerman, J. 2002. Business ethics and organizational architecture. Journal of Banking & Finance, (26)9:1821–1835.
Brickley, J., Smith, C. & Zimmerman, J. 2007. Managerial economics and organizational architecture, 4th ed. Boston, MA: McGraw-Hill.
Ethiraj, S. & Levinthal, D. 2004. Bounded rationality and the search for organizational architecture: an evolutionary perspective on the design of organizations and
their evolvability. Administrative Science Quarterly, 49(3): 404–437.
Lee, G., Venter, R. & Bates, B. 2004. Enterprise-based HIV/Aids strategies: Integration through organisational architecture. South African Journal of Business
Management, 35(3):13–22.
Tetenbaum, T. 1998. Shiing paradigms: From Newton to chaos. Organisational Dynamics, Spring, 26(4):21–33.
Ulrich, D. 1998. A new mandate for human resources. Harvard Business Review, Jan–Feb:124–134.
Veasey, P. 2001. Use of enterprise architectures in managing strategic change. Business Process Management Journal, 75(5):420–436.
Wolfenden, P. & Welsch, D. 2000. Business architecture: A holistic approach to de ning the organisation necessary to deliver a strategy. Knowledge and Process
Management, 7(97):106.

Suggested websites
Galbraith Management Consultants (http://www.jaygalbraith.com) – Considered the world’s leading expert on global organisation design
McKinsey & Company (http://www.mckinsey.com) – A global management consulting rm that advises the world’s leading businesses, governments and institutions
Palladium (http://www.bscol.com) – Helps organisations execute their strategies by making better decisions
MC3 Consulting (http://www.mc3consulting.com) – Nihilent’s Enterprise Transformation Practice partners with clients in successfully translating business strategies
into de nitive business results by enabling a culture of learning, innovation, collaboration and performance
Interview with Marc Beinoff (http://www.endeavor.org/blog/marc-benioff-keynote/) – Marc Beinoff evolved V2MOM, which is a cornerstone of Salesforce.com,
ranked as one of the most innovative companies in America

References and endnotes

1. Woolley-Barker, T. 2016. Want to build an organization that lasts? Create a superorganism. Biomimicry in Business. [Online]. Available:
https://biomimicry.org/create-a-superorganism [Accessed 18 February 2019].
2. Lee, G., Venter, R. & Bates, B. 2004. Enterprise-based HIV/Aids strategies: Integration through organisational architecture. South African Journal of Business
Management, 35(3):14.
3. Ibid.
4. Ulrich, D. 1998. A new mandate for human resources. Harvard Business Review, Jan–Feb:124–134.
5. Veasey, P. 2001. Use of enterprise architectures in managing strategic change. Business Process Management Journal, 75(5):420–436.
6. Nadler, D. 1992. Organisational architecture: A metaphor for change. In Nadler, D., Gerstein, M. & Shaw, R. (Eds). Organisational architecture: Designs for
changing organisations. New York: Jossey-Bass, 1–38.
7. Wolfenden, P. & Welsch, D. 2000. Business architecture: A holistic approach to de ning the organisation necessary to deliver a strategy. Knowledge and Process
Management, 7:97–106.
8. Lee et al. 2004. Op. cit.: 14.
9. Spain, K. V2MOM: A great way to focus your team on what really matters. [Online] Available: http://www.emcap.com/thoughts/leadership/v2mom-a-great-
way-to-focus-your-team-on-what-matters/ [Accessed 8April 2013].
10. Lee et al. 2004. Op. cit.: 16.
11. Ulrich. 1998. Op. cit.
12. Peters, T. & Waterman, R. 1982. In search of excellence. New York: Harper & Row.
13. Higgins, J. 2005. e eight ‘s’s’ of successful strategy execution. Journal of Change Management, 5(1):3–13.
14. Nihilent Technologies Pvt. Ltd. 2007a. e framework. [Online]. Available: http://www.mc3consulting.com/html/ourmodel/Framework/Overview.asp. [25
May 2010].
15. Galbraith, J.R. n.d. e star model. [Online]. Available: http://www.jaygalbraith.com/pdfs/StarModel.pdf [Accessed 25 May 2010].
16. Veasey. 2001. Op. cit.
17. Wolfenden & Welch. 2000. Op. cit.
18. Lee et al. 2004. Op. cit.
19. Benioff, M. 2009. Behind the cloud: e untold story of how Salesforce.com went from idea to billion-dollar company — and revolutionized an industry. San
Francisco: Jossey-Bass.
20. UNAIDS. 2018. Joint United Nations Programme on HIV/Aids. [Online] Available: http://www.UNAIDS.org. [Accessed 3 May 2019].
21. e Joint United Nations Program on HIV/Aids (UNAIDS). 2019. [Online]. Available: http://www.unaids.org/en/regionscountries/countries/southafrica
22. Venter, R. 2002. Aids workplace policy and practice. In Andrew Levy & Associates. 20th Annual Report on Labour Relations and Employee Bene ts in South
Africa 2001–2002. Johannesburg: Andrew Levy & Associates. 84.
23. Ibid.: 13.
24. Freeman in Elias, A., Cavana, R. & Jackson, L. 2002. Stakeholder analysis for R&D project management. R&D Management, 32(4):300–310, 303.
25. Ibid.: 16–18.
26. Veasey. 2001. Op. cit.: 423.
27. Bartol, K. & Martin, D. 1998. Management. 3rd ed. Boston, MA: Irwin McGraw-Hill. 8–9; Carroll, S. & Gillen, D. 1987. Are the classical management functions
useful in describing managerial work? Academy of Management Review, 13(1):38–51.
28. Heizer, J. & Render, B. 2006. Principles of operations management, 6th ed. New Jersey: Prentice Hall. 256.
29. Ibid.
30. Bartol & Martin. 1998. Op. cit.: 255.
31. Mullins, L. 2002. Management and organisational behaviour, 6th ed. England: Prentice Hall Financial Times: 530.
32. Tetenbaum, T. 1998. Shiing paradigms: From Newton to chaos. Organisational Dynamics, Spring, 26(4):21.
33. Ibid.: 23.
34. Ibid.
35. Bartol & Martin. 1998. Op. cit.: 290–291; Gibson et al. 1997. Op. cit.: 334–336.
36. Bartol & Martin. 1998. Op. cit.: 292.
37. Larson, E. & Gray, C. 2018. Project management: e managerial process, 7th ed. New York: McGraw-Hill. 75–78.
38. Lacity, M. & Hirschheim, R. 1995. Information systems outsourcing: Myths, metaphor and realities. New York: John Wiley & Sons. 20.
39. Lacity, M. & Hirschheim, R. 1995. Information systems outsourcing: Myths, metaphor and realities. New York: John Wiley & Sons. 20.
40. Coase, R. 1937. e nature of the rm. Economica, 4(16):386–405.
41. Wiliamson, O. 1975. Markets and hierarchies. New York: e Free Press; Williamson, O. 1979. Transaction cost economics: e governance of contractual
relations. Journal of Law and Economics, October, 22(2):233–261.
42. Adapted from Coulter, M. 2002. Strategic Management in Action, 2nd ed. New Jersey: Prentice Hall. 158–207.
43. Tobin, P. & Franze, M. 2005. Organisational structure and knowledge management: A case study. Mousaion, 23(2):149–164.
44. Gibson et al. 1997. Op. cit.: 342.
45. Venter, R. & Levy, A. 2008. Labour relations in South Africa, 3rd ed. Cape Town: Oxford University Press. 488–489.
46. Van der Walt, R. 2003. Sharing business information with employees. South African Journal of Economic and Management Sciences, 6(3):546.
47. Van der Walt, R. 2007. Access to information: Information disclosure in some South African organisations. South African Journal of Business Management,
38(1):28.
48. Grossett, M. 1997. Management perceptions of the effects of disclosure of company information to employees: Results of an empirical study. South African
Journal of Labour Relations, 21(3&4): 39–40.
49. Ibid.
50. Ibid.: 51–53.
51. Van der Walt. 2003. Op. cit.: 559; 2007. Op. cit.: 34.
52. Ibid.
53. Arnoldi, M. 2018. Accountability, ethical remuneration needed to boost corporate governance — PwC. [Online]. Available:
http://www.engineeringnews.co.za/article/accountability-ethical-remuneration-needed-to-boost-corporate-governance-pwc-2018-07-12/rep_id:4136
[Accessed 24 July 2018].
54. Dreher, G. & Dougherty, T. 2001. Human resource strategy: A behavioural perspective for the general manager. Boston: McGraw-Hill Irwin, pp 142–144.
55. ompson, A., Gamble, J. & Strickland, A. 2006. Strategy: Winning in the marketplace, 2nd ed. Boston, MA: McGraw-Hill Irwin. 318–319.
56. Ibid.: 87.
57. Oxford English Dictionary. 2019. (Online) Available: http://www.oxforddictionaries.com/de nition/english/technology [Accessed 24 July 2018]. Oxford
University Press.; Venter, R. 2015. Technopreneurship and ecommerce. In Venter, R. & Urban, B. Entrepreneurship: eory in practice, 3rd ed. Cape Town:
Oxford University Press. 432.
58. Gomez-Mejia, L. & Balkin, D. 2002. Management. New York: McGraw-Hill. 388; Venter. 2015. Op. cit.: 432.
59. Bateman, T. & Snell, S. 2002. Management: Competing in the new era, 5th ed. Boston, MA: McGraw-Hill Irwin. 543; Venter, R., Urban, B. & Rwigema, H. 2008.
Entrepreneurship: eory in practice, 2nd ed. Cape Town: Oxford University Press. 444.
60. Bateman & Snell. 2002. Op. cit.: 545; Venter 2015. Op. cit.: 433.
61. Schein, E.H. 1990. Organizational culture, 45(2):109. American Psychological Association. 111.
62. Bartol & Martin. 1998. Op. cit.: 91.
63. Larson & Gray. 2018. Op. cit.: 81–88.
64. OCAI Online. 2019. (Online) Available: https://www.ocai-online.com/about-the-Organizational-Culture-Assessment-Instrument-OCAI/Competing-Values-
Framework/ [Accessed 29 July 2018]; Hartneil, C.A., Ou, A.Y. & Kinicki, A. 2011. Organizational culture and organizational effectiveness: A meta-analytic
investigation of the competing values frameworks theoretical suppositions. Journal of Applied Psychology, 96(4):677–694; Tuan, L.T. 2010. Organisational
culture, leadership and performance measurement integratedness. International Journal of Management and Enterprise Development, 9(3):251–275.
65. Quinn, R.E. & Rohrbaugh, J. 1983. A spatial model of effectiveness criteria: Towards a competing values approach to organizational analysis. Management
Science, 29(3):363–377.
66. Hartneil et al. 2011. Op Cit.: 679.
67. Tuan. Op. cit.: 255.
68. Hitt, M., Ireland, R. & Hoskisson, R. 2016. Strategic management: Competitiveness & globalization: Concepts and cases. 12th ed. Boston, MA: Cengage Learning.
402.
69. Ibid.
70. Tuan. Op. cit.: 255.
71. Adapted from: OCAI Online. 2019. (Online) Available: https://www.ocai-online.com/about-the-Organizational-Culture-Assessment-Instrument-
OCAI/Organizational-Culture-Types/ [Accessed 29 July 2018]; Hartneil et al. Op cit: 679; Quinn & Rohrbaugh. Op. cit: 372; Tuan. Op. cit: 254.
72. Ibid.
73. Mullins. Op. cit.: 133.
74. Boxx, W., Odom, R. & Dunn, M. 1991. Organisational values and value congruency and their impact on satisfaction, commitment and cohesion: An empirical
examination within the public sector. Public Personnel Management, 20(1):195.
75. Ibid.
76. Peters & Waterman. 1982. Op. cit.: 41
77. Peters, T.J., Waterman, R.H., Pascale, R.T. & Athos, A.G. 1980. Seven S model. [Online]. Available: http://www.provenmodels.com/24 [Accessed 25 May 2010].
78. Peters et al. Op cit. [Accessed 29 July 2018].
 CHAPTER 14 Strategic risk
management
Sandra Perks

LEARNING OUTCOMES

After reading this chapter, you should be able to:

describe what strategic risk management is and why it is important
explain the role and application of strategic risk management
explain the steps in the strategic risk management process
demonstrate an understanding of how to go about risk identification, evaluation and prioritisation
expound on the four types of risk treatment strategies
understand the requirements necessary for developing risk management systems
explain how risk management strategies, policies and action plans are developed
explain the problems associated with implementing risk management policies and action plans in organisations,
and how to overcome them
explain why it is necessary to continually review and improve risk processes
assess strategic risk management practices in a practical setting.

KEY TERMS

risk appetite
strategic surveillance

In the last decade, South African Airways (SAA) has frequently made news headlines. e airline has attempted
several turnaround strategies, seemingly with little success. Read the Opening case study below to uncover the
causes for this.

OPENING CASE STUDY

The SAA turnaround story1

SAA celebrated its 84th anniversary in 2018 as one of the oldest airlines in the world. The Group operates a
dual-brand airline model, with SAA as its premium brand and Mango targeting the price-sensitive market. It also
operates a cargo division (SAA Cargo) and has three other subsidiaries, namely aircraft maintenance, repair and
overhaul (SAA Technical); in-flight catering (Air Chefs); and retail travel franchises in southern Africa (SA Travel
Centre). As a Star Alliance member since 2006, the vision of SAA is to be an African airline with global reach
underpinned by integrity, high standards of safety, valuing its people, and being customer focused and
accountable. The airline operates one of the most technologically advanced aircraft fleets in the world with the
introduction of the Airbus A330-200 in 2011, two Airbus A320s in 2012 and an Airbus 330-300 in 2016. It offers
an exclusive and highly rated product with an international network to all continents from South Africa through 11
direct routes and 22 code-shares. Many leading airlines are customers of SAA Technical, the largest and most
advanced maintenance provider on the African continent.
However, the airline has been struggling financially, and in the last decade attempted nine turnarounds for
sustainable operational and financial success. These attempts seemed to focus more on obtaining operational
efficiency, such as a tap-and-go mobile check-in and self-boarding in London with biometric (facial) and
passport recognition, and the introduction of tablet-driven in-flight entertainment on its longer African routes.
SAA has also managed to keep its four-star airline ranking for the 16th consecutive year by the independent
global airline rating organisation, Skytrax. However, in spite of implementing all these operational efficiency
measures, SAA has still not been successful in its latest turnaround strategy, possibly due to the way in which
strategic risk management is implemented.
According to the King IV Report on Corporate Governance, a risk management plan should be included in
the strategic plans of South African companies. SAA’s board is responsible for risk management governance,
and an external service provider conducts internal audit spot checks on the effectiveness of its risk management
framework and compliance risk areas. Enterprise risks were identified in terms of the extent of impact,
probability and the severity of the event occurring using a five-by-five Risk Assessment Matrix for both financial
and non-financial elements. Strategic risks were identified, analysed and evaluated with regard to legacy issues
in terms of risk profile, procurement and human resources.
In 2017, the new CEO, Vuyani Jarana, announced the following eight-step turnaround plan for SAA to address
the weak financial status:
Possible staff retrenchments through an analysis of the aircraft:staff ratio
Becoming more competitive by increasing the fleet and providing more passenger comfort on long flights
Regaining market share lost to Europe by opening more direct flights as new routes
Re-establishing the international services from Cape Town International Airport and adding other new routes
Together with SA tourism, offering package tours, multicity stops and integration of regional destinations, and
conducting joint marketing by offering two-centre packages with other African countries
Reconsidering the international flight luggage limitations of only one piece weighing 23 kg
Addressing staff morale and offering efficient service
De-politicising the airline to prevent shady tenders or contracts.

Performance management is critical for the long-term retention of SAA’s employees, and crucial for the
continued existence of this airline. Performance management systems comprising of setting targets and
standards, employee development and periodic competency-based appraisals were implemented for both
management and non-management employees. In striving towards sustainability, key performance indicators
(KPIs) are set at the beginning of each year by management and shareholders to monitor SAA’s performance
against the predetermined objectives. These KPIs are reported on a monthly and quarterly basis, and regular
feedback sessions are held with shareholders. However, meeting the KPIs often results in SAA having to adjust
them due to unforeseen market and economic conditions, which points to either not having good risk
management strategies, or not ensuring that they are implemented timeously, although the airline has
established several committees to oversee risk management. It is acknowledged that politics in South Africa
also play a role in derailing good risk management strategies. Of concern is that there is no evidence of the
airline managing its risks, and it seems to regard its problems as only financial in nature, judging from the
several large bailouts from government over the past decade. Obtaining funding is a short-term solution to SAA’s
problems, but identifying strategic risks and addressing them purposefully can turn the airline around. Doing so
will improve its competitive position and assist it in addressing changing passenger demands. Jarana
acknowledged this at the 74th annual general meeting of the International Air Transport Association (IATA) in
Sydney in 2018, by indicating that SAA is now in the phase where it has to refine its strategy to tackle cleaning
 up the supply chains and cutting down on cost procurement spending, with inevitable job losses to curb
expenses. Jarana stated that ‘[t]he current operating base is not sustainable for the airline. We have to take hard
decisions regarding people and the supply chain. Job losses will be inevitable, even though my priority is about
job preservation by finding ways to find opportunities for our excess pilots and cabin crew to soften the impact’.
However, a three-year period is needed to turn the company around. Jarana further indicated that ‘[t]here is
R9.2 billion of existing debt owed to banks – debt I inherited when I took over as CEO. Then we also need R12.5
billion of working capital to take SAA to the breakeven point. So, in total we need R21.7 billion to fund the
existing debt and to fund the working capital needed to get to the breakeven point’.

Overview
There is a strong correlation between strategic business performance and risk management. Performance measures
should capture business performance at both current and future levels. An organisation may do well at an
operational level, but struggle to grow as competitors can easily imitate it. Strategic business performance requires
articulating the business vision and formulating strategies. Although many organisations engage in regular strategic
planning, they often do not foresee all the risks that can derail the effective execution of their intended strategies.
Successful strategic management is thus dependent on how well an organisation can determine and manage their
exposure to risks. Robust risk management is necessary to ensure operations are as effective and efficient as can
be. What complicates risk management is that decisions that affect one risk can have a direct impact on risks
elsewhere.
This chapter commences with putting strategic risk management in context by indicating the important role it plays
in effective strategic management, then discusses the risk management process by explaining each step in detail.
The chapter also describes the impact risks can have and how they should be considered when formulating risk
management systems, strategies, policies and action plans. The chapter concludes by taking a look at the
importance of monitoring and improving risk management performance.

14.1 Introduction
From the Opening case study e SAA turnaround story, we can see that SAA has been following several
turnaround strategies in the last decade, and acknowledges the role that management can play in securing
sustainable operational and nancial success. In its pursuit to turn SAA around, the company has identi ed its
business risks and set key performance sustainability targets. However, as SAA has repeatedly requested nancial
bailouts from government, it seems as though it has failed to effectively manage its strategic risks.
We can de ne strategic risks as those risks that can hinder or assist the organisation in achieving its long-term
goals. ey must be managed, which brings us to the notion of strategic risk management. Strategic risks
contribute most to the destruction of value in businesses (86%) but take up only 6% of the time of corporate audit
departments.2 is can emanate from many different sources, such as competitive activity, new technologies, new
regulations, political events or social changes.
Operational risks, on the other hand, are losses caused by employees, or as a result of inadequate operational
procedures, systems or controls in place.3 Strategic risks require strategic responses, such as innovation, the
development of new organisational capabilities, or the development of new markets, whereas operational risks
require operational responses, such as better procedures, systems or rules.
Strategic risk management is the continuous process of identifying and determining the extent of strategic risks,
and putting in place strategies that reduce or eliminate risks that may in uence the business strategy, objectives and
implementation of strategies. Implementing risk management policies and plans in conjunction with the intended
strategies planned for the organisation is essential for business continuity.
 Strategic risk management requires that organisations determine their risk pro le and risk appetite, and then
implement risk control systems based on the impact, frequency of occurrence and vulnerability of the organisation
to the risks. Risk pro le refers to the threats an organisation is facing and determining their possible impact on the
organisation.4 Risk appetite is the amount of risk an organisation is prepared to take to meet its strategic objectives.
e discussion that follows explores these preceding concepts in greater depth.

14.2 Strategic risks in context

In the workplace, all decisions involve risks, whether they are daily or strategic long-term ones. Although there are
many de nitions of risk, the most well-known is the de nition of ISO 31000 that de nes risks as the effects
(positive, negative or deviation from the expected) of the uncertainty of achieving objectives brought about by a
change in circumstances or consequence.5 Strategic risks are addressed at corporate level by the board of directors
and managers as it affects the long-term performance of the organisation and its continuity.6 On the other hand,
strategic risk management encompasses the processes, methods and tools to identify and manage potential events
that may prevent the organisation from achieving its intended objectives.
As can be seen in the Opening case study about SAA, the company has met its non- nancial performance targets
of ensuring that its ights take off on time and providing the best all-round service to customers. is was evident
from retaining their four-star airline rating. AirHelp, a technology company that provides legal services to airline
passengers who experience booking problems, has ranked SAA the h-best airline in the world (based on delayed
ights and booking problems).7 eir rating criteria include quality of amenities, on-time arrivals and speed of
claim processing. SAA would not have been rated this high if the airline had not deliberately set key performance
targets and actively monitored its operations to identify gaps between targets set and performance. It could be
argued that it managed operational risks quite well, but the same cannot be said for its strategic risk management, as
external market factors, in conjunction with political interference in internal issues, impacted the success of its
turnaround strategies. In 2017, the newly appointed CEO of SAA, Vuyani Jarana, changed the focus of the
turnaround strategies from being merely performance driven to focusing on risk management. However, it remains
to be seen if any signi cant changes will take place in 2018 in the company’s quest for sustainability and whether the
different risk management committees will assist in affecting a successful turnaround.
Globally, organisations are faced with increasing volatility, uncertainty, complexity and ambiguity (oen referred
to as VUCA). As an organisation grows, so does its exposure to risk increases. e strategic risk identi cation
process entails the identi cation of strengths and weaknesses, and the opportunities and threats in the external
business environment. Studies of large public companies indicate that declines in market capitalisation can be
accounted for by strategic risks (about 60%), operational risks (30%) and nancial risks (only about 10%).8
Operational risks must not be confused with strategic risks. Operational risk management means that the
organisation is avoiding risks by doing things right, while strategic risk management refers to doing the right things.
An example of operational risk is an organisation not appointing the most skilled sales staff because it wants to
lower its salary cost. e consequence of this is that it may limit its sales potential but will not lead to the business
closing. e organisation must thus weigh up sales potential with salary cost. e unbundling of Eskom, an
electricity provider in South Africa, into two separate entities (one for generation and one for distribution) can be
regarded as a strategic risk if Eskom’s leaders do not think carefully about following the right procedure and putting
in place the right systems and processes to operate as two separate entities. Although the electricity provider will
operate as two entities, the future existence of the distribution entity will rely on the generation entity taking the
correct actions. Incorrect actions by the generation entity could threaten the distribution entity’s existence.
e continuous emergence of new risks complicates risk identi cation, and requires organisations to continually
review their risk management strategies and action plans. is means that they must determine their risks and nd a
way to manage them to achieve their business objectives. When setting business objectives, organisations must think
and plan strategically in order to manage risk, which means that strategy formulation and setting risk strategies
must take place simultaneously. e following operational risk example will show an organisation revisiting its
strategy due to the arrival of a new risk, and the planning involved in dealing with this.

CASE EXAMPLE: Strategic risk strategies

Up until 2016, the possibility of academic activities at higher education institutions stopping because of student
protests for free education was inconceivable. However, during 2016 all institutions faced difficulties in completing
their academic year due to student unrest. In 2017, there were again academic service delivery disruptions at
some institutions. It is very likely that this problem will occur again every year until free tertiary education is
offered. As this is not yet available for everyone, contact institutions have to revisit their strategy to offer only face-
to-face lectures. If a contact institution’s revised strategy entails offering a mixed tuition system (contact and
online), it will be able to mitigate the risk of disruption and ensure continuous service delivery. When protests
disrupt classes, the institution will manage the risk by offering online tuition during such periods. However, this
operational risk can only be managed if there is an e-learning platform before the risk occurs, so the necessary
infrastructure and organisational structure must be in place. Implementing the use of an e-learning platform will
also require planning on how to avoid the risks associated with access to the platform and its functionality.

As can be seen from the example, dealing with the problem of academic disruptions requires institutions to revise
their strategic risk strategies. e institutions also need to consider the problems that might occur with executing a
new risk strategy. In other words, changing from purely contact tuition to mixed tuition will require attention to be
given to managing the operational risks associated with the e-learning platform, for example not being fully
operational, accessible or cost effective. As institutions cannot foresee all the risks and problems that may occur, risk
management must be a continuous process.
Risk management helps organisations to understand, manage, communicate and prevent unfavourable
conditions that may threaten the survival of the organisation. It is therefore clear that investors and managers alike
would view risk management as an important function of an organisation.

CASE EXAMPLE: Risk management

In a report by Ernst & Young,9 it was indicated that:

This shows that many organisations are serious about risk management, and that some are even overspending
on it rather than not having control systems in place. It is obvious that they realise the potential consequences of
ineffective risk management.

How organisations should go about the managing strategic risk will be discussed in more detail in the sections to
follow.
14.3 Managing strategic risks
Managing strategic risks is about considering how changes in the internal business environment could in uence the
strengths or weaknesses of an organisation, could pose opportunities or threats to the organisation, and what the
organisation could do to mitigate these risks. Organisations do not just monitor the business environment, but also
anticipate or react to changes taking place in the internal and external business environment. e environment
presents many risks, but organisations have limited resources and cannot give the same level of attention to all of
them. For that reason, it is important for organisations to apply the risk management process so that they can focus
their attention on the most important risks. In the rst phase of risk management, the organisation identi es
potential strategic risks in the external and internal environment by examining the macroenvironment (see Chapter
5), the industry environment (see Chapter 6) and the internal environment (see Chapter 7). e second phase
requires the organisation to analyse risks and to develop an understanding of the likelihood of them occurring, and
the potential impact on the organisation if they do. is analysis enables the organisation to evaluate, compare and
prioritise risks, so that it can focus its efforts on the most important ones by making strategic decisions about how to
respond to them. For example, if a nancial risk is posed by investing in new robotic technology at a motor
manufacturer, the bene ts of obtaining the new technology should be carefully weighed against the nancial
investment required by considering how quickly the technology could be outdated. Organisations can respond to
risk by deciding how they want to deal with it.
e implementation of a risk management plan is of the utmost importance in ensuring that the intended
strategic outcomes occur. e intended outcome of risk management is to reduce or eliminate the risk of some
events from occurring, or reducing the impact on the organisation if they do. e idea behind risk management is to
protect the organisation from being vulnerable by acting responsibly. e bene ts of engaging in risk management
are many and various, as threats can be minimised and opportunities seized. e strategic risk management process
is in uenced by the organisational architecture, which includes the leadership and culture of the organisation, the
systems it uses and the structure of the organisation. For example, organisational cultures that are risk averse (i.e.
that have a lower risk appetite) will deal differently with risk than those with higher risk appetites. e type of
business in uences how it views potential changes in the business environment and the extent of its risk appetite.
For example, a labour-intensive organisation will not regard legal changes to digital marketing as a high business
risk but will regard any labour law changes as such. e process of strategic risk management is depicted in Figure
14.1.

Figure 14.1 Strategic risk management process

To help an organisation monitor which risks occurred and whether the measures it adopted led to the intended
outcomes, it is necessary to keep a risk register. is should record details about the reason(s) for deviation from
the intended strategy, the action implemented to counteract risks, and how effectively and efficiently the procedures
took place. Keeping a good risk register could enable an organisation to make better future risk assessments and
implement better risk management controls.
Risk management should involve staff at all levels, which requires good communication between and among the
different hierarchical levels. A discussion of the information contained in the risk register can create a culture of
learning from mistakes, and develop the ability of staff to identify risks better. It also encourages accountability
without putting the blame on staff. Monitoring risk performance also requires good performance reporting. In
South Africa, it is mandatory for listed companies to follow the King IV Report on Corporate Governance, and
publish their triple bottom line performance results.10 External performance reporting provides all stakeholders
with information on many aspects of an organisation’s sustainability, and on how it is dealing with risks threatening
its sustainability.
e bene ts of risk management lie in building stronger organisations through selecting sound strategies for
resilience, which in turn lead to achieving objectives, increasing competitive advantage, improving the image of the
business, enhancing business performance, fast-tracking the organisation towards sustainability, and better
sustainability reporting.
Risk management is not a once-off process but requires continuous scrutiny of the environment for changes by
obtaining and sharing information internally and externally between and within management levels. However, as
with all business actions, the cost of managing risks should be considered. e proliferation of data, due to internet
access, has lowered the cost of access to data considerably. e organisation should consider the level of risk
associated with the type of products or services that it offers, the size of the business, and the complexity of the
organisational structure, as these things in uence the range of risk management strategies that will be necessary. In
the next section, we consider some aspects of implementing strategic risk management. e strategic risk
management process should also provide the organisation with a deeper understanding of the risks associated with
the implementation of strategies. A detailed discussion of the risk management process follows.

14.3.1 Step 1: Risk identification

e rst step in the strategic risk management process is to identify and assess risks with an open mind by focusing
on current and future events. Risks can be identi ed from various sources. ey can come from data collection
processes such as market research or competitive intelligence. Competitive intelligence refers to the processes and
practices that produce and disseminate actionable intelligence on the internal and external environment to advance
strategic decision-making by ethically and legally collecting, processing and analysing information.11 Risk
brainstorming by experienced employees with the right expertise is of cardinal importance in identifying and
assessing risks. Organisations can also contract external consultants to assist in identifying and assessing all possible
risks. Risk identi cation is about determining which changes in the internal and external business environment
could in uence the strengths or weaknesses of an organisation, and could pose opportunities or threats to it. It thus
requires constant environmental scanning or strategic surveillance. Environmental scanning or strategic
surveillance requires the organisation to monitor the business environment and organisational resources to identify
threats or opportunities for the continual existence of the organisation.12 e level of environmental scanning will
differ depending on the business size and how diversi ed its operations are. For example, airfare pricing at SAA and
other airlines depends on taxes and changes to regulations, so airlines continuously scan the business environment
for such changes.
ere is much uncertainty about changes in the general and industry environments, and the future actions of
competitors and customer preferences. is uncertainty shapes the internal and external business environment as
they are interrelated. In other words, an external business environment change can in uence the internal business
environment of an organisation. Managers are oen in con ict about how they will deal with business
environmental changes. To avoid management con ict, a systematic approach to identifying all threats, risks and
events that may in uence the intended strategies and objectives of the organisation must be followed. ese risks
could originate internally or externally. It is, however, easier for an organisation to plan for internal risks as they are
within their control. External risk assessment is always more difficult as the risk originates from outside the control
of the organisation.
One of the ways to identify risks is through brainstorming and creating ‘what if ’ scenarios during strategic
planning meetings. Technology facilitates the availability of information through access to ow charts, system
design reviews and operational modelling. As organisations cannot always fully comprehend the extent of the
impact of an environmental change, many use specialist risk management soware to assist them in assessing the
extent of the impact of an environmental change. Organisations also rely on being made aware of environmental
changes announced in public sources, such as newspapers, television or the internet, with information on how it
might affect their organisations.
In South Africa, the following 10 business risks, shown in Figure 14.2, were identi ed by Allianz Global
Corporate and Specialty in their Alliance Risk Barometer report for 2017 and 2018.

Figure 14.2 Top 10 business risks in South Africa (2017–2018)13

As can be seen in Figure 14.2, the two main risks identi ed in both 2017 and 2018 – cyber incidents and business
interruption risks – remained unchanged. On the 2018 top 10 list, climate change/increasing volatility of weather
and loss of reputation or brand value were newly identi ed risks. Participants in the study felt that the probability of
risks occurring, excluding market developments, re/explosion, as well as macroeconomic developments, have
increased in South Africa since 2017.
Some risks could lead to signi cant social and economic losses for people, organisations, the government,
regions and even countries. In the Strategy in action case Tiger Brands hurt by listeriosis outbreak, we examine the
possible consequences of the largest global outbreak of listeriosis, with 180 con rmed deaths in South Africa and
almost 1 000 laboratory-con rmed cases at the time of writing.

STRATEGY IN ACTION: Tiger Brands hurt by listeriosis outbreak14

On 2 February 2018, officials of the South African Department of Health and members of the National Institute
for Communicable Diseases visited the Polokwane-based Enterprise Foods factory and took over 400
environmental swabs and nine product samples to test for the listeriosis disease after children who had eaten
polony became sick. Enterprise Foods has a 25% share of the country’s processed meat trade and is part of
Tiger Brands. Although the company took their own samples on 3 February and these tested negative for listeria,
low levels of the listeria strain were found in one of its products on 14 February. The company quarantined all
affected products and recalled products that had been sent to shops. It is very difficult to trace the strain as one
slice of polony can test negative, while in another slice there may be traces of the bacteria. On Monday 19
February, the National Consumer Commission ordered a national recall of Enterprise frankfurters, smoked
Russians and polony as 16 samples of food products tested positive for the ST6 listeria strain. This resulted in
 the shutdown of all their operations at their facilities in both Polokwane and Germiston, and the recall of these
products at all retailers supplied. Customers were also advised to wash their fridges with diluted bleach if they
had stored any of the products. Rainbow was also instructed to recall all their chicken viennas after a different
strain of listeria was found at their Wolwehoek plant, which they immediately did. Although Enterprise undertook
cleaning protocols in all its facilities, halted supplies to retailers, and set up a consumer helpline, the company
refused to take the blame for the deaths caused by listeriosis. Since the announcement of the cause of the
outbreak, Tiger Brands shares fell to their lowest level since December 2015 and traded 6.6% lower. It is
anticipated that South Africa could also see one of the biggest class-action lawsuits by families of those who
contracted listeriosis.

Questions
1. How would you classify this type of risk?
2. In your mind, do you think Enterprise Foods had an appropriate risk management strategy in place? Motivate
your answer.
3. Do you think Enterprise Foods is managing their risk performance well? Motivate your answer by indicating
what they could have done when discovering that there was a problem at the plant.

As illustrated in the Tiger Brands Strategy in action case above, risks affecting organisations can have dire
consequences for economic performance and professional reputation, as well as environmental, safety and societal
outcomes. Again, as the Tiger Brands case shows, not all risks can be foreseen. Few organisations are entirely
successful in analysing their business environment effectively, as scanning oen reveals incomplete and
unconnected data and information. In addition, the business environment affects organisations differently,
depending on their nancial position and resources. For this reason, it is important for organisations to evaluate and
prioritise their risks so that they can focus their efforts on the most severe threats.

14.3.2 Step 2: Risk analysis

e listeriosis outbreak shows how important it is for organisations to assess their risk pro le. e risk pro le of an
organisation can be assessed according to:15
the impact on physical assets, staff and the nances of the organisation (varying from low to extreme)
the likelihood of the occurrence linked to its probability and frequency (varying from frequent to rare)
vulnerability to risk (very high to very low).

Figure 14.3 An example of risk impact classification16

e severity of the risk determines the impact classi cation. More attention is required when a risk is classi ed as
extreme rather than incidental. In addition, risks must also be assessed in terms of frequency and likelihood of
occurrence. When a risk is assessed in terms of likelihood, it could be classi ed as:
frequently occurring
likely to occur
possibly occurring
unlikely to occur
rare.

e frequency is associated with the number of occurrences within a speci c period, such as only once in three
years or once a month. In the next paragraph we examine some examples of risks that were assessed according to
frequency.
e most difficult and complex risk to assess is an information security risk as it is a forever-changing business
environment. An information security risk will thus be classi ed as frequently occurring. In contrast, it is difficult to
predict at recruitment stage how long an employee will remain employed by an organisation. is type of risk will
therefore most probably be classi ed as possibly occurring. e personal nancial situation of an employee may
change if another member of the family loses their job. is may affect an employee’s loyalty to the organisation and
could result in their selling con dential information to competitors to keep the family a oat. is type of risk may
be classi ed as rare. Note, however, that the frequency or likelihood of an event does not indicate the impact on the
organisation; for example, even though a risk may be rare, it could have an extreme impact on the organisation.
To determine the likelihood of a risk occurring, the organisation can analyse how many similar cases have taken
place over several years, but even that will not result in a precise forecast. e likelihood of occurrence is normally
linked to a percentage (e.g. if almost certain to occur), it could be said to have an 85% probability of occurrence.
Most oen, organisations draw up a risk matrix in terms of a combination of the impact and likelihood of a risk
occurring, as seen in Figure 14.4.

Figure 14.4 Matrix of risk likelihood of occurrence and impact17

e classi cation of the points on the matrix can be explained as follows:

Risks in the bottom le corner (A) are incidental (rarely occurring) and have a low impact (1, 0).
Risks in the top right corner (B) are frequently occurring and have an extreme impact (3, 5).
Risks in the middle of the matrix (C) are infrequently occurring and have moderate impact (2, 3).

Risks in the bottom le corner (A) can oen be ignored, while those in the middle of the matrix (C) should be
reduced and those in the top right corner (B) are of critical importance and should be prioritised. e likelihood of
a product line disruption when equipment is old is high, and so is the organisation’s dependence on basic utilities
such as water and electricity. On the other hand, the likelihood of severe earthquakes in southern Africa is low.

14.3.3 Step 3: Risk prioritisation

e conditions in which a risk takes place plays a role in determining how vulnerable an organisation will be to it.
e vulnerability should be considered in terms of how prepared, agile and adaptable the organisation is to manage
the risk if it occurs. If a risk is certain and may prove to be fatal to the existence of the organisation, it should
obviously be prioritised. For example, a large-scale earthquake occurring in South Africa that causes the collapse of
an organisation’s building as well as the death of many employees would be detrimental to the survival of the
organisation. One would therefore think that this risk should be prioritised. However, the likelihood (certainty) of a
large-scale earthquake occurring in South Africa is low and therefore perhaps it is not necessary to prioritise this
risk. e more vulnerable the organisation is to the risk, the greater the potential consequences. is can be assessed
as:
high vulnerability (essential to attend to)
 medium vulnerability (to be monitored)
low vulnerability (to be observed).

ink here of cricket matches that depend on favourable weather conditions. In South Africa, we are fortunate to
have long summers with many days of sunshine and clear skies (especially in the Western Cape, which is a winter
rainfall area). However, in England, weather is a major consideration when planning cricket matches as the country
experiences fewer sunny days and more rainy ones in summer than South Africa. Scenario planning for cricket
tours in each country will be unique, partly because the climates differ.
Similarly, scenario planning for risks is unique to each organisation. Included in this must be the range of
strategies to manage the risks. Control systems to limit a risk from occurring may be required, such as the amount
of funding to be set aside to overcome the consequences of the risk occurring, and the team of employees that could
assist in managing the risk recovery process. It is therefore necessary to develop effective risk management
strategies.

14.3.4 Step 4: Developing risk responses

e nal step in dealing with strategic risks is to develop strategies to minimise or eliminate their impact. is phase
is also sometimes referred to as ‘risk treatment’.
Risk treatment is the process of selecting and implementing measures to deal with risk. Management can use
four basis risk treatment strategies, namely risk acceptance, risk avoidance, risk reduction and mitigation of risk:18
Risk acceptance: is means that the organisation accepts the consequences of risk, and budgets for them. For
example, large retailers generally budget for a certain percentage of loss due to damage or the, while banks may
budget for a certain percentage of loans not being repaid (‘loan impairments’).
Risk avoidance: is means that the organisation reduces its interaction with a risk, for example by selling off a
high-risk business area, or not stocking products from certain countries.
Risk reduction: is consists of reducing the negative effects of the risk; for example, retailers may try to manage
the possible loss of income due to the effect of online retailing by offering online shopping themselves.
Mitigation of risk: is consists of developing strategies to deal with the risk, transferring it to another party, or
sharing it. For example, large retailers will oen transfer the risk of damaged inventory or the to suppliers by
levying a fee (‘wastage allowances’). Insurers typically take on risk at a fee; in other words, by paying a premium,
businesses transfer their risk to insurance companies.

An organisation may decide to accept a risk because it will cost too much to eliminate it completely, or if it assesses
the consequences of the risk to be bearable. If an organisation decides to accept a risk, no further action will be
required except to allocate funds to manage the consequences or to communicate the risk to staff.
Risk avoidance will require immediate action in order to eliminate the possible exposure to risk. To reduce the
risk, actions should be identi ed, and alternative strategies developed to reduce the likelihood of potential losses if
the risk occurs. For example, if an organisation introduces new security measures for their staff ’s emails, this can
reduce the risk of hackers accessing con dential information. e extent of the impact, the probability of its
occurrence and the level of vulnerability of the organisation to the risk should be determined to ensure that sound
alternative strategies are developed.
Which of these treatment strategies an organisation will implement depends on its level of vulnerability to the
risk, and the budget available. If an organisation chooses risk mitigation as a strategy, taking out insurance is oen
the choice to share or transfer the risk. However, insurance will not reduce the risk, but merely protect the
organisation against nancial loss in the event of the risk becoming a reality. In other words, the risk will be
transferred to the insurer. Some examples of business risks that can be mitigated through insurance include product
liability, delity (the by employees), public liability, business interruption and goods-in-transit. In the Case
example below, we consider the risks posed by cyber attacks, and how organisations can deal with them.

CASE EXAMPLE: PoPI Act19

An Information Security Breach survey undertaken by PricewaterhouseCoopers in 2015 showed that 90% of
large organisations reported a security breach due to ex-employees, or a cyber attack, and took on average 170
days to detect a malicious or criminal attack. The survey found that 59% of employees steal proprietary corporate
data when dismissed, or resigning. It was further found that 68% of funds lost because of a cyber attack were
declared unrecoverable. For this reason, organisations must structure work streams or processes and brief their
staff on the protection of personal information protocols to avoid it from happening. Management must then
develop effective control systems and technologies to ensure compliance and train their employees to raise
awareness and understanding of the PoPI Act (Protection of Personal Information Act). It would be desirable for
companies to recruit a permanent employee to act as Privacy Officer.

As mentioned earlier in this chapter, strategic risk management is complex, so organisations must think carefully
about their risk management processes and systems. We discuss the implementation of strategic risk management in
the next section.

14.4 Implementing strategic risk management in the

organisation20
Strategic risk management in the organisation is about putting risk identi cation systems in place that can help the
organisation to identify strategic risks, develop risk management strategies, set risk management standards, develop
and implement risk management policies and action plans, monitor risk management performance and take action
to ensure that the risk management performance improves over time. is process is depicted in Figure 14.5, and
illustrated in the Case example Strategic risk management at Lego Group21.

Figure 14.5 Implementing strategic risk management in the organisation

CASE EXAMPLE: Strategic risk management at Lego Group

 Lego is one of the largest and most popular toy manufacturers in the world, growing from a simple manufacturer
of wood-based play sets to a conglomerate of plastic toys, theme parks, retail stores, board games and books.
Excerpts from an interview with Hans Læssøe, senior director of strategic risk management for Lego, reveals
how the toy company deals with risks.
‘I have been given all the time and resources I wanted to develop this [risk management process within Lego].
I have 100% buy-in on processes and tools from the CEO and corporate management. I know the company – I
currently have 31 years of seniority – as well as who to talk to for further insights. I keep it simple. If I can’t
explain what I do or what I want and why in five minutes, I redo the asking.’
‘We apply strategic risk management in three key approaches for three different things. On strategy definition,
we have a scenario-based process where we focus on making management “think the unthinkable” and hence
identify strategic issues they would not have seen had they regarded 2018 as an extrapolation of 2013. These
issues are then systematically prioritised and embedded in the strategy description. On strategy implementation
we have a defined tool and process for active risk and opportunity planning and management, which is
mandatory for major business projects, and strategy implementation. On strategy execution, we have a major
Enterprise Risk Management (ERM) database where we collect and document risks and their assessments and
handling. The database enables us to define an overall risk exposure vs the defined risk tolerance.’
‘At least in the beginning, a lot of people thought it was my job to avoid risks. It isn’t. It is my job to balance
risks and opportunities… So, would I approve of a massive project that could cost us $100 million? Sure, if the
upside was sufficiently large and the likelihood of losing sufficiently small. What I will not accept is bulldozing a
project without due consideration to the risks and opportunities involved.’

In the next section, we examine the risk management system identi cation process.

14.4.1 Step 1: Develop a risk management system

Earlier chapters of this book already considered many frameworks and tools that can play a role in the process of
identifying a strategic risk management system. Chapter 4 considered the role of strategic enablers in supporting
strategic decision-making by, among other things, developing insights and understanding risks. Chapters 5 to 7
examined the frameworks for analysing the macro, industry and internal environments of the organisation. In
addition to what is discussed in these chapters, we are going to look at four speci c control mechanisms that can, in
combination, be used as a risk management system.

Strategic surveillance
Environmental scanning or strategic surveillance can be viewed as a means of unfocused control (unfocused
because it is not speci c to a certain business issue that has occurred). In this control system, the business
environment and organisational resources are monitored to identify threats that can impede, or opportunities that
can ensure, the continual existence of the organisation.22 In this control mechanism, managers visualise which
potential threats and opportunities can affect the organisation, and what impact they might have; in doing so, they
do not rely on past occurrences to determine the way forward. Information can be obtained about the internal and
external business environment by means of:23
reading trade publications, newspapers and articles on the internet
watching television
talking to customers
talking to suppliers
attending trade shows
attending conferences
following social networking sites such as Facebook and Twitter.
is information can further assist the organisation in doing SWOT and PESTEL analyses. Regular workshops or
brainstorming sessions with managers is a good way of surfacing their perceptions of the risks facing the
organisation.

Special alert risk control

Special alert risk control is another control mechanism, and requires organisations to thoroughly and rapidly
reconsider the current strategy of the organisation due to the occurrence of a sudden and unexpected event.
Examples of these events could include:24
natural disasters such as tsunamis or earthquakes
chemical spills of, for example, nuclear waste
terrorism
plane crashes
major product defects
hostile takeovers.

Special alert risks have a very low likelihood of occurring, but can have a devastating impact on an organisation, and
even threaten the existence of the entire organisation. If any of these events occur, the existing strategic direction
may become obsolete and redundant. Special alert risk control can be applied by formulating contingency risk
strategies and assigning the responsibility of handling unforeseen events to crisis management champions and
teams. ese special control risk systems can assist in detecting crisis signals, which is the rst step in managing a
crisis. e steps an organisation could follow in a crisis management situation are illustrated in Figure 14.6.

Figure 14.6 Steps followed in crisis management25

As can be seen in Figure 14.6, aer detecting signals that there is a crisis, the organisation has to set in motion
preventative measures to limit the extent of the damage, or prepare themselves on how they are going to cope with
the damage caused. Once the measures have been implemented, the organisation should start to recover.
Organisations must sometimes thus learn from one crisis in order to prevent or be prepared for future similar crises.
However, one crisis will not be exactly the same as the next as the circumstances and/or timing will differ. e
following example illustrates the steps Toyota took when faced with a crisis.

CASE EXAMPLE: Toyota’s airbag recall26

In January 2018 Toyota South Africa recalled 730 000 vehicles when they discovered the front airbag inflators
produced by their supplier of over 15 years, Takata, were potentially faulty. Moisture intrusion could make the
inflators build up an excessive internal pressure when the airbag is deployed and cause the inflator to rupture,
with a metal fragment escaping through the airbag material, possibly injuring the occupant. Toyota released a
statement warning Toyota owners how to check if their vehicle is affected and to arrange to get the front airbag
inflations replaced. They provided a call centre number and email address to which queries could be addressed.
Owners could check if they needed to get it replaced by entering their VIN number on the Toyota website. There
was also a list available of the vehicle models and release years that may be affected. This resulted in restoring
consumer confidence of Toyota vehicle owners and prospective buyers.
Special alert risk control helps organisations to identify those environmental changes that require immediate
reaction.

Assumption risk control

Assumption (or premise) risk control is designed to gather data and analyse it systematically and continuously to
determine whether the assumptions on which the strategy is based are still valid in the light of new information.27
is type of control rests on premises and assumptions that act as a basis for formulating risk management
strategies. A premise or assumption can be the basis of several strategies, or a strategy can be based on more than
one assumption. We can therefore regard a premise as a speci c constraint. For example, an organisation may base
its strategy on importing goods or raw materials from another country at a certain exchange rate. Drastic negative
changes in that exchange rate may mean that the pricing of their products will have to change. Price is then assumed
to be a constraint for the organisation as, because of the higher price, customers may assume the products are now
of a better quality, which is not the case. e consequence may be that customers stop buying the product from the
organisation. Assumptions can be made about a whole range of environmental and industry constraints, as
illustrated in Figure 14.7.
Assumption risk control requires organisations to incorporate environmental and industry constraints in their
control system to predict the business environment landscape over the next three to ve years. ese constraints
then act as baseline assumptions to monitor environmental changes or deviations from strategic plans. It must be
noted that not all assumptions/premises require the same amount of control. For this reason, organisations must
determine whether the premises are critical or non-critical. For example, a change in the taxation rate for
organisations cannot be regarded as a critical premise, as all organisations are affected by it in the same way.
Managers must therefore carefully select critical premises/assumptions that are likely to change and would have a
major impact on the organisation and its risk strategy.

Figure 14.7 Business environmental and industry constraints28

Assumption risk control is not just bene cial for predicting the business environment landscape when setting
strategies, but can be used to revise risk strategies. For example, an organisation may launch an electric car as a new
product on the market at a moderate price level, thereby choosing a cost leadership strategy.29 However, the growing
demand for electric cars might require them in time to change to a growth strategy. If government provides aid for
electric cars up to a certain period (e.g. 2016), the organisation may decide not to continue utilising a growth
strategy, but will revert to a cost leadership strategy to cash in on the government subsidy. As the organisation
changes its growth strategy, its risk strategies need revision, and different assumption risk controls are then required.
e recovery process in formulating new risk strategies when assumptions were incorrect is of utmost importance.
 e main purpose of assumption risk control is therefore to identify changes in assumptions timeously and to
allow for immediate strategic change if necessary. A major issue in assumption risk control is determining which
assumptions and premises should be monitored.

Milestone reviews
Strategic decisions oen require big changes and are supported by large and capital-intensive projects. One control
technique that could assist in managing the strategic risk associated with such large projects is to conduct milestone
reviews. A milestone is a control measure to monitor the effective execution of a strategy at various intervals, mostly
based on time or cost. Setting a milestone usually involves a full-scale reassessment of the strategy. Milestones are
especially signi cant in the development of a project and implementation of a strategy where large commitments of
resources must be made. Failure to meet a milestone signals a warning that the project may be at risk. e
organisation can then decide whether to continue with the strategy or, if the assessment of the risk indicates that the
risk is too large, change it.
Project milestones are signi cant achievements in a project, and achieving them (or not) is a good indication of
where the project is headed and its impact on the organisation. In the Case example below, we can see how Eskom’s
Medupi project has exceeded its time and cost targets, creating massive problems for the electricity utility and the
country.

CASE EXAMPLE: Eskom’s Medupi and Kusile projects30

Eskom’s Medupi power station, located near Lephalale in Limpopo province, has been under construction since
2007, while the Kusile power station in the Nkangala district of Mpumalanga province has been under
construction since 2008. Both projects have seen massive increases in the estimated cost to completion (CTC)
and the estimated time to completion. These project overruns have strained Eskom’s financial resources, and
placed greater pressure on Eskom’s electricity price trajectory in the years ahead.
When Medupi was commissioned in 2007, the estimated CTC approved by the board was around R69 billion.
By 2016, this figure reached R195 billion. Similarly, the CTC for Kusile was estimated at around R80 billion in
2007, rocketing to R225 billion by 2016.

Organisations can use one system or a combination of them. Once this has been identi ed, the organisation must
develop speci c risk management strategies.

14.4.2 Step 2: Develop risk management strategies

Strategic risk management has become a very important focus for organisations, and in 2013 already 81% of large
companies indicated that they limit their focus to traditional risk areas such as operational, nancial and
compliance risk.31
Much of the focus of corporate governance frameworks, such as the King IV Report, is on the role and duty of
governance structures to manage strategic risks. For this reason, strategic risk management is generally regarded as a
CEO and board priority.

Figure 14.8 Types of business risks32

Source: CEB 2014 Share Shocks Analysis
*A significant market decline is defined as a drop in market capitalisation of more than 40% in a single year.
From the gure, it can be seen that the corporate audit department spend the least time (6%) on strategic business
risk assessment, while much more time (42% and 39% respectively) on operational and nancial reporting risks.
However, when considering the impact on the business, 86% of business failures are due to strategic risks, with only
9% and 2% respectively attributed to operational and nancial reporting risks.
e Case example of Netcare that follows illustrates how they have gone about setting risk management
strategies.

CASE EXAMPLE: Risk management in Netcare33

Netcare Limited is the largest private hospital network in South Africa and the United Kingdom. Their risk
management framework shows how they identify, understand and mitigate risks. Their strategic objectives are
aligned with the risks identified. Although not all risks can be fully mitigated as it is not entirely within the control
of the organisation, Netcare Limited SA has developed specific risk management strategies to reduce the
potential risks identified. A summary of their top five risks identified and some examples of their proposed risk
management strategies are indicated in the table below.

Risks Risk management strategies

Consistent quality of patient care Implementation of electronic patient records to
improve patient safety and care
 Risks Risk management strategies
Funding of increased healthcare costs Participation in efficiency discount options and
designated service provider networks which offer
members lower contributions

Declining economic growth forecast Expanding into high-growth service lines

Increased competition Attracting and retaining specialists in SA through

equity arrangements

Changing industry regulations Include primary care in comprehensive prescribed

minimum benefits to increase demand

Several technology developments have an in uence on developing risk management strategies. With the
advancement of internet technology, an abundance of data, which the organisation can use to determine potential
risks and develop risk management strategies, has increasingly become available.

14.4.3 Step 3: Set risk management standards

ere are many risk management standards to guide managers in developing a risk management strategy, such as
those developed by organisations such as the Project Management Institution, the International Organization for
Standardization (ISO), the National Institute of Science and Technology, actuarial societies and the Committee of
Sponsoring Organisations of the Treadway Commission (COSO). e two more well-known risk management
standards are those developed by the ISO and COSO frameworks. e COSO framework was established in 1992
and updated in 2013, and addresses the risks of intentional or unintentional non-declarations in nancial
statements.34 It provides the following framework to address issues related to internal control:35
Control environment: is refers to a set of standards, processes and structures for carrying out internal control
throughout the organisation.
Risk assessment: is is the process for identifying and assessing risks that may prevent the achievement of
objectives. It should consider set risk tolerance levels, and will in uence how risks are managed.
Control activities: ese are the actions established by means of policies and procedures to ensure that risks are
mitigated, either preventatively or reactively.
Information and communication: Internal communication should emphasise the importance of the risk
management process, while external communication focuses on the inbound communication of relevant external
information and providing information to external parties in response to requirements and expectations (e.g.
annual reporting).
Monitoring activities: Ongoing monitoring and evaluation should take place to ascertain whether all ve
components of the framework are in place and functioning as they should.

However, the most popular risk management standards used by organisations are the ISO 31000 ones as they cater
for any organisation regardless of its size, activity or sector.36 Organisations using ISO 31000 risk management
standards can compare their risk management strategies with an internationally recognised benchmark, and so
provide sound principles for effective risk management and corporate governance. In the Case example below, we
look at the ISO standards for developing a risk management strategy.
 CASE EXAMPLE: The ISO standards for risk management37
An ISO International Standard represents a global consensus on the state-of-the-art in the subject of that
standard. ISO has a global membership of 164 national standards bodies, from large and small, industrialised,
developing and in-transition countries. ISO has a portfolio of over 19 200 standards that provide business,
government and society with practical tools for all three dimensions of sustainable development: economic,
environmental and social. ISO provides guidelines to the risk management process and can help organisations
increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and
effectively allocate and use resources for risk aversion. However, ISO cannot be used for certification purposes.
Organisations using ISO risk management standards can compare their risk management practices with an
internationally recognised benchmark, and so provide sound principles for effective management and corporate
governance. There is no need to address the entire risk management framework or the risk management
process as outlined in ISO. However, because the focus is on the assessment of risks from emergency events,
the management of emergency risks is directed towards and in line with the International Standards for risk
management. The ISO risk management framework classifies risks in terms of financial, infrastructural,
marketplace and reputational risks. Within these categories, strategic, tactical and operational risks should be
identified.

e setting of risk management standards to achieve risk management strategies is essential for organisations that
strive towards sustainability. Although management has the overall responsibility for managing risks, they should
consult their board of directors and stakeholders to evaluate the risk management standards proposed so that they
could be most bene cial to the organisation. e aim should be to increase the competitive advantage of the
organisation, and instil trust and con dence in stakeholders. Once the standards are approved, the organisation
should proceed to develop appropriate policies and action plans on how to achieve the set strategies and standards.

14.4.4 Step 4: Develop risk management policies and action plans

Risk management policies and actions plans must be developed to guide the implementation of risk management in
the organisation, and must be approved by top management in a board meeting. To enhance the risk management
policies and action plans developed, the organisation must ensure that they are aligned to its objectives. To aid the
implementation process, the risk management policies and action plans should be simple, practical and easy to
understand. Risk management actions plans necessitate that the organisation allocates the necessary resources for
their execution. Committed employees with the right analytical skills can lead to effective implementation of risk
management action plans. However, employees also need to have access to the right technology to implement them,
and the processes and procedures necessary to implement them must be clearly outlined. ey must be
communicated to employees so that they can be proactive in identifying potential risks and be aware of how to deal
with each one. Transparency and accountability are key to effective risk management.
However, it is pointless if an organisation develops policies and plans, but does not strictly implement them, as
illustrated in the case of KPMG below.

CASE EXAMPLE: Code of Conduct38

KPMG clearly stated in its code of conduct that those who manage others must act as ethical role models and
act responsibly in a fair and accountable manner guided by their core values and in compliance with laws,
regulations and professional standards. It was further indicated in the code that it is KPMG’s duty to guard
against bribery and corruption. However, KPMG’s involvement with the Gupta empire since 2008 was questioned
in 2017. The Gupta family has been implicated in several ‘state capture’ allegations involving state-owned Eskom,
 Denel and Transnet, and a dairy project in the Free State. The Independent Regulatory Board for Auditors is in
the process of investigating KPMG’s involvement in the use of R30 million of taxpayers’ money to fund a Gupta
wedding in 2013. In addition, there seemed to have been closer ties between the Guptas and some KPMG staff
than necessary, as they received invitations to Gupta family events, such as tickets to a 2010 Soccer World Cup
match, and attending the New Age and Diwali celebrations. Because of these allegations, KPMG’s reputation has
seriously suffered with many clients defecting. To their clients it appears as if they do not follow the policies set
out in their code of conduct.
As a results of the scandal, the CEO, Trevor Hoole, and country risk management partner, Steven Louw,
along with six other senior managers have since resigned. KPMG has also taken disciplinary action against
Jacques Wessels, the lead partner in the audits of the non-listed Gupta entities. As part of KPMG’s actions plans
to improve governance and risk management, they have appointed a full-time head of risk to manage client
acceptance and retention. They also plan to annually publish a transparency report about the company’s
processes and control.

For effective implementation of risk management policies and action plans, management must allocate roles and
responsibilities to staff (governance), specifying the acceptable risk level (risk appetite) and the responses to risks
(risk mitigation). Risk rules, procedures and how each risk will be dealt with should be speci ed as far as possible. In
other words, when draing risk management strategies, it should clearly:39
indicate all anticipated risks and the severity of each one
distinguish between critical and non-critical risks
describe the extent of each risk in-depth
indicate the action required to reduce the likelihood of the risks occurring
outline the actions necessary to reduce the impact of the risks on the organisation and business environment.

If the existence of an organisation is threatened, this is oen because it did not implement its risk management
policies and actions plans, as illustrated below with Ford Kuga case.

CASE EXAMPLE: Ford Motor Company’s Kuga dilemma40

Ford SA was in the news when they had to recall the Kuga 1.6 models after some of these vehicles caught on
fire. In December 2015, one person died as a result of a Ford Kuga exploding. In spite of this, Ford did not fully
investigate the matter. It came to a head in December 2016 when owners discussed their anger and frustrations
about safety concerns on social media. This led to the recall of 4 556 Kuga models with 1.6 engines built
between December 2012 and February 2014.
The company was then forced to behave ethically by requesting Kuga owners to take their cars to the nearest
dealer in order to get the affected components checked and replaced, and warned them not to open the bonnet
of the car in event of the fire, but to leave the vehicle immediately. Because of this incident, with 40 reported
cases of engine fires, and the manner in which Ford SA managed the crisis, the company suffered huge damage
to its reputation. They acted only after owners used social media to express their concerns, and did not address
the issue when an individual died.
This was not Ford’s first misstep, as the company had many problems with the design of the Ford Pinto, which
remains a controversial case. The fundamental design issues led to deaths in rear-end accidents, but despite
being aware of them, the company did not make changes, as this would not have been cost effective. Although
not their fault, Ford also had problems with the Firestone tyres on their cars. This led to the recall of 15 million
tyres in 2000 owing to a safety-related defect, and the long-time relationship between the two companies was
terminated as a result.

ere are generally three strategic risk management action plan implementation problems:
 Risk aversion
Different risk functions ending up operating in silos and duplicating work
Employees as a source of risk.

First, too much focus on the analysis of risk versus reward can result in ‘risk aversion’ (a low-risk appetite), and if
risk is avoided at all costs, growth opportunities are missed. In response, the organisation needs to do the following
to encourage faster and better strategic decisions:41
Encourage a focus on taking and managing risks, rather than on purely avoiding or preventing it. Without taking
some risks, innovation and growth are not possible.
Instead of being addressed as two separate processes, the strategic planning process should be informed by the
annual enterprise risk management assessment, and vice versa. In other words, strategic management and
strategic risk management should be integrated.
Establish a shared company-wide risk appetite by developing formal statements of risk appetite that guide day-to-
day decision-making. A successful statement will use layman’s terms and real-world examples when talking about
risk appetite.

A second problem with the implementation of strategic risk management policies and action plans is that different
risk functions end up operating in silos, which leads to the duplication of work. Each operational risk management
function in the organisation focuses on addressing very speci c risks, with enterprise risk management also
operating in its own domain instead of integrating the various risk management functions. To address this problem,
organisations can do the following to limit duplication and increase the return on investment of risk management:42
Ask operational managers only for what is necessary and ask them once. is requires prioritising, sequencing
and integrating the information collection process for all risk management functions.
Use existing datasets and business intelligence systems to better predict where risks could occur in the
organisation, rather than buying or creating new systems and surveys.
Critical thinking skills are required to extract insight from risk information, but are oen in short supply,
especially among more junior employees. By developing critical thinking skills in areas such as data analytics and
root-cause analysis, the ability to identify and respond to risks is enhanced. Encourage greater information ows
– particularly self-reporting – from the middle of the company, not just from senior leaders.
Mid-level managers are an important source of risk information. ey oen receive direct feedback from
employees and customers, and by encouraging them to share information across the organisation, potential risks
can be highlighted.

irdly, while organisations tend to focus on risk management planning, they oen overlook the fact that employees
are the biggest source of risk. To reduce the risk associated with human behaviour, organisations can do the
following:43
Risk screening can form part of its recruitment, appointment and HRM processes.
Risk culture and so controls like building morale, shared values and openness should feature prominently in the
HRM processes and be embedded in the risk management process, audit methodology and compliance
programmes. ese standards increasingly provide leading indicators of where risk may arise in the corporation.
Focus on principles that guide employee behaviour rather than just focusing on compliance with rules.
Focus on high-risk employee populations by providing training that requires application and understanding of
how risk concepts apply to their jobs, rather than just creating awareness of risks.

As risk management is an ongoing process, performance should be monitored to effect improvements when
necessary.
14.4.5 Step 5: Monitoring and improving risk management
performance
ere should be ongoing evaluation of risk performance to review risk response strategies. Continuous monitoring
is essential as the organisation learns from its experiences. is validates that the risks are correctly identi ed and
assessed, and that the controls in place to manage the risks are effective. It further ensures that the organisation
remains relevant when changes occur in the business environment. Quality information is crucial in this stage of the
risk management process, as there must be evidence:
about what has occurred compared to what has been identi ed as risks
how the intended risk treatment plans have been utilised, and to what extent they were successful
regarding assumptions, methods and data sources used and their accuracy
of what the difference between the projected and real performance results is
about the reasons why a speci c risk management action plan has been selected.

In monitoring which risks occurred and whether the measures adopted led to the intended outcomes, it is necessary
to keep a risk register. is is to document details about the reason(s) for deviation from intended strategy, the
action implemented to counteract the risks, and how effectively and efficiently the procedures took place. e risk
register enables the organisation to make better future risk assessments, and implement better risk management
controls. Risk management requires involvement of staff at all levels. Good communication must take place between
and among the different hierarchical levels. A discussion of the information contained in the risk register can create
a culture of learning from mistakes made, and grow the experience of staff for better risk identi cation. It also
encourages accountability for actions taken without just putting the blame on staff.
Internal communication is important in reviewing risk performance. It is recommended that a risk management
champion for managing risks be identi ed. is champion should attend board and committee meetings, and
provide regular feedback on the risk performance. Providing risk training to employees and including risk
management objectives in their performance appraisals could ensure improved risk performance and effective
pursuing of the objectives of the organisation. Risk management is thus an important aspect of an organisation’s
governance, management and operations, which leads to sound performance management. e next Case example
shows how Ford Motor Company’s organisational structure may pose a risk when disregarding the signi cant
conditions within a region or not taking cognisance of the needs of the national markets. is could seriously affect
a company’s competitiveness and business sustainability.

CASE EXAMPLE: Top-down Approach44

Ford Motor Company has three geographic regional divisions that cover all the company’s marketing activities
globally. Although the norm is to have a geographic division of regions per continent or sub-continent, Ford Motor
Company only has three regional divisions worldwide, namely:
The Americas
Europe, Middle East and Africa
Asia Pacific.

The company has a top-down approach where each of these regions is governed by an executive vice-president
reporting to the CEO, and middle managers reporting to the executive vice-president. Ford Motor Company also
has 11 functional groups representing a specific business function. The benefits of this structure are that there is
global direction and control that allows easy integration of business strategies and does not complicate its
approach to markets. However, the risk that it poses to this company in terms of this simplification is that it
disregards distinct conditions within national markets or addressing specific needs pertaining to these markets.
To further illustrate the risk of having this organisational structure, the question can be posed: Can this company
 use the same strategies within European and African markets? Just think here, for example, about government
stability or the level of economic development in these particular markets.

Ongoing external risk performance reporting is expected by stakeholders to gauge whether the risk performance of
the organisation is improving. As risk disclosure is a forward-looking activity, it provides organisations with insight
to improve their business sustainability in the rapidly changing business environment. For this reason, those
attending board meetings should ask themselves the following questions as part of sound governance:45
Can we trust the risk performance data presented?
Are all risks reported on?
Is the information about risk performance up to date?
Is the risk performance data presented in an easily understood manner?
Are possible actions for improving risk performance provided for discussion?

To assist the board in understanding the progress made, risk appetite metrics should be set. ese metrics should
include both nancial (expressed in percentage) and non- nancial metrics, which can be expressed in any measure.
e metric can either indicate the minimum acceptable requirements to be met or the maximum amount of loss to
be tolerated. Examples of a risk appetite measure are shown in Table 14.1.

Table 14.1 Financial and non-financial risk appetite metrics46

Financial risk appetite metrics Non-financial risk appetite metrics

Earnings Number of failed business transactions
Cost of equity capital Number of cyber attacks
Liquidity ratio Number of main suppliers for key materials
Return on investments Demand to production rate
Market share loss Number of alternative suppliers
Expenditure for damaged goods Size of unused floor space
Credit costs Number of lost customers
Cash flow ratio Days out of stock
Share growth Number of customer complaints
Number of excess materials in stock
Network downtime in days
Employee turnover rate
Number/cost of litigation actions
Negative social media reviews

e importance of measuring business risk performance should not be underestimated as it assists towards business
sustainability. When there is high business environmental stability, most risks can be addressed via a formal strategic
risk control system. When there is low business environmental stability, a exible strategic risk control system is
desirable.
Managing risks is thus a dynamic process. It is essential that an organisation identi es and assesses risks in the
light of its intended objectives. e continuity of any organisation depends on risk and performance management.
Organisations should develop a framework that uni es performance, risk and compliance management.

REFLECTION BOX:

In this chapter we have seen that corporate audit departments devote just 6% of their time to strategic risks, yet
these risks destroy 86% of market value (see Figure 14.8). Why do you think corporate audit departments do
 not spend more time on understanding and dealing with strategic risks?

14.5 Summary
e question is thus why risk management is so important for organisations today. Maybe the answer lies in
considering the consequences of failing to do so. To survive in the dynamic changing business environment, the
challenge for organisations is thus not only to formulate strategies, but also to ensure they can manage risks that
could prevent them from achieving their strategic objectives. For organisations to thrive in the competitive business
environment, awareness of the risks that can derail their strategic performance is essential. In this chapter, it was
indicated that strategic risk management requires the identi cation of risks as well as the assessment of them, and
prioritising them in terms of impact, likelihood and frequency of occurrence and vulnerability of the organisation to
the risks. How to go about developing risk management strategies and policies, and action plans to combat risks
occurring were also addressed. e bene ts of applying risk management practices are that it:
assists management to make sound decisions
aids in more effective resource planning
minimises the impact of a nancial or non- nancial loss when the risk occurs
contributes to the effective development of strategies towards business continuity.

For that reason, continuous focus on the use of risk management practices, assessing them and improving on them
is essential and can contribute signi cantly to the success of the organisation.

Opening case study questions

1. Why is strategic risk management important for any organisation, and in particular for SAA?
2. How could SAA have avoided the recurring risks? Provide examples from the Opening case study to support
your discussion.
3. Which risk management control systems are essential for SAA to monitor its risk management performance as
mentioned in the case study?

Discussion questions
1. Discuss the importance that strategic risk management plays in being a sustainable business.
2. Explain the steps in engaging in a strategic risk management process.
3. Explain how to go about identifying potential risks that may affect the organisation.
4. Explain the four risk management treatment strategies that organisations can choose from, and give a practical
example of each.
5. Discuss the requirements necessary to implement effective risk management policies and plans.
6. Discuss the two types of risk management control systems that can assist organisations in effectively managing
risks to achieve intended objectives.
7. Indicate the measures to put in place to improve risk performance in an organisation.
8. Explain the bene ts of effective strategic risk management for organisations.

Using knowledge and skills

1. Interview a senior manager at your company of choice to determine the following:
 a) eir risk management policies and plans
b) e types of strategic risk control they utilise and how they have utilised them
c) How they are managing their risk performance
2. Identify a company that has incorporated risk management into their strategy planning. Interview a senior
manager in that company to determine the role the board of directors and senior management play in reviewing
their risk management policies and plans.
3. Choose two companies in South Africa and acquire their risk management reports from the internet. Compare
the extent to which you think they are managing their risks based on their risk management performance.

Further reading
Crouhy, M., Galai, D. & Mark, R. 2014. e essentials of risk management, 2nd ed. United States: McGraw-Hill
Professional.
Fitzsimmons, A. & Atkins, D. 2017. Rethinking reputational risk: How to manage the risks that can ruin your business.
London: Kogan Page.
Green, P.E.J. 2015. Enterprise risk management: A common framework for the entire organisation. Amsterdam:
Butterworth-Heinemann.
Lam, J. 2014. Implementing enterprise risk management: From methods to applications. Hoboken, NJ: John Wiley &
Sons Inc.

Suggested websites
IRMSA Risk Report. 2017. 3rd ed. https://www.irmsa.org.za/page/2017_Risk_Report – Read more about South
Africa’s top risks and how global risks impact South African businesses.
South African Reserve Bank. https://www.resbank.co.za/AboutUs/RiskManagement/Pages/default.aspx – Read the
various articles showing the complexity of risk management, taking into consideration the unique role and
functions of the bank by considering national interest considerations when applying risk management practices
in line with statutory and constitutional responsibilities in an ever-changing business environment.
Subramaniam, A. Risk management framework: Process, tools and techniques to minimize risk exposure.
https://www.slideshare.net/anandsubramaniam/risk-management-framework – A slide show on the types of
risks, categorising them and risk response management
e risk management process. http://www.just.edu.jo/~tawalbeh/aabfs/iss6753/presentations/RMP.ppt – A
slideshow of the risk management process
Risk management and internal control system. http://annualreport2014.volkswagenag.com/group-management-
report/report-on-risks-and-opportunities/risk-management-and-control-system.html – An example of how
Volkswagen structured their risk management model
Expert Model. http://www.expertsystem.com/strong-risk-management-framework/ – Read about some bene ts of
risk management for organisations.
Allianz Risk Barometer. https://www.agcs.allianz.com/assets/PDFs/Reports/Allianz_Risk_Barometer_2018_EN.pdf
– Read the report on the current risks important for South Africa.
e Committee of Sponsoring Organisations of the Treadway Commission (COSO).
https://www.coso.org/Pages/default.aspx – Read more about COSO.

References and endnotes

 1. Sawubona. March 2003. Turning SAA around; Drop your bags and go; With self-service boarding; About
SAA. [Online]. Available: http://www.staralliance.com/en/about/airlines/south-africa_airlines/; SAA on
human resource development, transformation, risk management plan and long-term procurement plans:
Brie ng. [Online]. Available: https://pmg.org/za/committee-meeting/11838; Silke, D. 2017. n24. [Online].
Available: 8-point plan for new CEO to turn SAA around. [Online]. Available:
https://www. n24.com/Opinion/8-point-plan-for-new-ceo-to-turn-around-saa-20170804; eNCA. 2018. SAA
hangs onto 4-star ranking despite losses. 17 April 2018. https://www.enca.com/south-africa/saa-hangs-onto-
4-star-ranking-despite-losses/; Enser, L. 2018. SAA seeks extra R5 billion bailout from state. [Online].
Available: https://www.businesslive.co.za/bd/companies/transport-and-tourism/2018-04-25-saa-seeks-extra-
r5bn-bailout-from-state/; South African Airways. 2012. Annual Report. 2012. South African Airways Group.
4, 6, 23, 27, 30, 41, 42, 52, 53, 54; South African Airways Group. 2017. Integrated Report. 2017. South African
Airways. [Online]. Available: http://www. ysaa.com/jo/en/Documents/Financials/SAA_AR_2012_web.pdf/;
South African Airways. 2017. Annual Report. [Online]. Available:
https://www. ysaa.com/documents/51855150/0/SAA_IAR+2017.pdf/22db54be-b1f5-404a-99fd-
d12f3fe9e56b Smith, C. 2018. It’s time to make some hard decisions. [Online]. Available:
https://www. n24.com/Companies/Industrial/saa-ceo-all-we-ask-is-three-years-and-money-20180604
2. CEB Global. 2014. Reducing risk management’s organisational drag. [Online]. Available:
https://www.cebglobal.com/content/dam/cebglobal/us/EN/top-insights/executive-guidance/pdfs/eg2014q3-
reducing-risk-managements-organisational-drag.pdf
3. De nition of operational risks. [Online]. Available:
http://www.businessdictionary.com/de nition/operational-risk.html
4. Kenton, W. 2018. Risk pro le. [Online]. Available: https://www.investopedia.com/terms/r/risk-pro le.asp/;
Institute of Risk Management. 2019. Risk appetite and tolerance. [Online]. Available:
https://www.theirm.org/knowledge-and-resources/thought-leadership/risk-appetite-and-tolerance.aspx
5. ISO 31000. [Online]. Available: https://www.iso.org/ les/live/sites/isoorg/ les/store/en/PUB100426.pdf
6. Frigo, J.L. & Anderson, R.J. 2011. What is strategic risk management? Strategic Finance, April, 21, 22.
7. Airline world-wide rankings. 2018. [Online]. Available: https://www.airhelp.com/en/airhelp-score/airline-
ranking/
8. Rost, M. 2017. 5 steps to effective strategic risk management. Workiva. [Online]. Available:
https://www.workiva.com/blog/5-steps-effective-strategic-risk-management
9. Ernst & Young. 2011. Turning risk into results. [Online]. Available:
http://www.ey.com/Publication/vwLUAssets/Turning_risk_into_results/SFILE/Turning%20risk%20into%20r
esults_AU1082_l%20Feb%202012.pdf
10. Knopjes, B. 2017. Changes in King IV: e impact on companies’ approach to risk. [Online]. Available:
https://www.isometrix.com/changes-in-king-iv-the-impact-on-companies-approach-to-risk/
11. Pellissier, R. & Nenzhelele, T.E. 2013. Towards a universal de nition of competitive intelligence. SA Journal of
Information Management, 15(2). [Online]. Available: http://dx.doi.org/10.4102/sajim.v15i2.559
12. Schreyögg, G. & Steinmann, H. 1987. Strategic control: A new perspective. Academy of Management Review,
12:91–103.
13. BusinessTech. 2018. 10 biggest risks to business in South Africa in 2018. [Online]. Available:
https://businesstech.co.za/news/business/219477/10-biggest-risks-to-business-in-south-africa-in-2018/
14. Burkhardt, P. 2018. Tiger Brands shares tumbles as deadly listeria prompts meat recall. [Online]. Available:
https://www.timeslive.co.za/sunday-times/business/2018-03-05-tiger-brands-tumbles-as-deadly-listeria-
prompts-meat-recall/; Child, K. 2018. Here are 7 things you need to know about the listeriosis outbreak.
[Online]. Available: https://www.timeslive.co.za/news/south-africa/2018-03-7-things-to-know-about-
listeria/; Child, K. 2018. Don’t panic if you have eaten Enterprise polony. [Online]. Available:
https://www.timeslive.co.za/news/south-africa/2018-03-04-dont-panic-if-you-have-eaten-enterprise-polony/;
Child, K. 2018. e foods linked to listeria: Enterprise Russians, Rainbow Chicken polony and Enterprise
polony. [Online]. Available: https://www.timeslive.co.za/news/south-africa/2018-03-04-the-foods-linked-to-
 listeria-enterprise-russion-rainbow-chicken-polony-and-enterprise-polony/; Jordaan, N. 2018. SA could see
biggest class action lawsuit following listeriosis outbreak. https://www.timeslive.co.za/news/south-
africa/2018-03-05-south-africa-could-see-biggest-class-action-following-literiosis-outbreak/; Knowler, W.
2018. Listeriosis — what to do with your Enterprise or Rainbow polony. [Online]. Available:
https://www.timeslive.co.za/news/consumer-live/2018-03-04-listeriosis-what-to-do-with-your-enterprise-or-
rainbow-polony/; Mabuza, E. & Gous, N. 2018. Enterprise shuts two factories, says no link showing its
products caused deaths. [Online]. Available: https://www.timeslive.co.za/news/south-africa/2018-03-05-
enterprise-shuts-two-factories-says-no-link-showing-its-products-causing-deaths
15. Adapted from Deloitte & Touche LLP. 2012. Risk assessment in practice. [Online]. Available:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Governance-Risk-Compliance/dttl-grc-
riskassessmentinpractice.pdf
16. Shutterstock, Inc. nasirkhan. ID: 165501695. 3d illustration of arrow and various business risks. Concept of
business risk management. (Online). Available: https://www.shutterstock.com/image-illustration/3d-
illustration-arrow-various-business-risks-165501695. [Accessed: 20 August 2019].
17. Based on Lederman, L.L. 1984. Foresight activities in the USA: Time for a reassessment. Long Range
Planning, 17(3), June.
18. Ohlsen, D.L. & Wu, D. 2008. New frontiers in enterprise risk management. Heidelberg, Germany: Springer. 33.
19. Unpacking PoPI Act to employees is essential. 2017. [Online]. Available:
http://www.bizcommunity.com/Article/196/717/161800.html
20. Adapted from UPM. 2018. Risk management and control. [Online]. Available:
http://www.upm.com/Investors/Governance/Risk%20management-and-control/Pages/default.aspx
21. Holbrook, E. 1 February 2013. Not just child’s play: Strategic risk management at Lego. Risk Management
Monitor [Online]. Available: http://www.rmmagazine.com/2013/02/01/not-just-childs-play-strategic-risk-
management-at-lego/
22. Schreyögg, G. & Steinmann, H. 1987. Strategic control: A new perspective. Academy of Management Review,
12:91–103.
23. Emello, P.J. 2010. Business strategy development: Adjust your sails to reach your destination. Management
101, September. 20–21. [Online]. Available:
http://www.cappcb.com/Management%20101%20Business%20Strategy%20part%209%20of%209.pdf
24. Barnat, R. 2005. Strategic control. [Online]. Available: http://www.strategic-control.24xls.com/en140
25. Adapted from Coombs, W.T. & Holladay, S.J. 2012. e handbook of crisis communication. West Sussex:
Wiley-Blackwell. 22.
26. Gous, N. 2018. Everything keeps going wrong — is your car in the Toyota recall? Times Live. [Online].
Available: https://www.timeslive.co.za/sunday-times/business/2018-01-26-heres-how-to-check-if-you-toyota-
is-affected-by-the-massive-recall/
27. Teichman, T. 2012. Controlling: Concepts of management control, controllership and ratios. Berlin: Springer.
216.
28. Adapted from Barnat, R. 2005. Strategic control. [Online]. Available: http://www.strategic-
control.24xls.com/en140
29. Hartmann. B. 2011. Enterprise architecture as an instrument of strategic control. Lecture notes in Informatics,
Enterprise Modelling and Information Systems Architectures Conference, Hamburg, Germany, 22–23
September. 17. [Online]. Available: http://subs.emis.de/LNI/Proceedings/Proceedings190/9.pdf
30. Yelland, C. 7 July 2018. Medupi, Kusile, and the massive cost/time overrun. Daily Maverick. [Online].
Available: https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-
overrun/#.WyEM0EiFPIU. Donnelly, L. 2009. Medupi and Kusile: Costly and faulty. Mail&Guardian.
[Online]. Available:https://mg.co.za/article/2019-02-15-00-medupi-and-kusile-costly-and-faulty. (Accessed:
4 June 2019).
31. Deloitte. 2013. Exploring strategic risk. [Online]. Available:
https://www2.deloitte.com/global/en/pages/governance-risk-and-compliance/articles/exploring-strategic-
 risk.html
32. Adapted from “ERM Risk Assessment in Practice” — © 2012 COSO. All rights reserved. Used by permission.
https://www.coso.org/Documents/COSO-
ERM%20Risk%20Assessment%20in%20Practice%20ought%20Paper%20October%202012.pdf
33. Netcare Limited Annual Integrated Report. 2017. How we manage risk. [Online]. Available:
http://www.netcare.co.za/InvestorReport/netcare_annual-
2017/downloads/Netcare_IAR_2017_How_we_manage_risk.pdf
34. COSO Internal Control — Integrated Framework. 2013. [Online]. Available:
https://home.kpmg.com/content/dam/kpmg/pdf/2016/05/2750-New-COSO-2013-Framework-
WHITEPAPER-V4.pdf
35. Uwadiae, O. 2015. COSO — an approach to internal control framework. [Online]. Available:
https://www2.deloitte.com/ng/en/pages/audit/articles/ nancial-reporting/coso-an-approach-to-internal-
control-framework.html
36. Meyer, D.A. 2011. Meeting basic health, safety and environmental risk before sustainability — watch your
step. [Online]. Available: http://valuestream2009.wordpress.com/2011/08/25/meeting-basic-health-safety-
and-environmental-risk-before-sustainability-watch-your-step
37. ISO standards. 2012. What’s the bottom line? [Online]. Available: http://www.iso.org/iso/bottom_line.pdf/;
e Public Risk Management Association. 2010. A structured approach to Enterprise Risk Management (ERM)
and the requirements of ISO 31000. https://www.theirm.org/media/886062/ISO3100_doc.pdf
38. Baron, C. 2017. SA’s auditing’s own quali ed audit begs scrutiny. [Online]. Available:
https://www.businesslive.co.za/bt/business-and-economy/2017-09-09-sa-auditings-own-quali ed-audit-begs-
scrutiny/; Fin24. 2017. Full statement: KPMG execs quit over Gupta, SARS report. [Online]. Available:
https://www. n24.com/Companies/Financial-Services/full-statement-kpmg-execs-quit-over-gupta-sars-
report-20170915; Quintal, G. & Hosken, G. 2017. KPMG’s ngerprints all over the Gupta empire. [Online].
Available: https://www.timeslive.co.za/sunday-times/business/2017-09-10-kpmgs- ngerprints-all-over-the-
gupta-empire/. KPMG’s code of conduct. 2015. [Online]. Available:
https://home.kpmg.com/content/dam/kpmg/pdf/2016/03/kpmg-code-of-conduct-latest.pdf. KPMG
announces new leadership team for South Africa. 2017. [Online]. Available:
https://businesstech.co.za/news/ nance/203860/kpmg-announces-new-leadership-team-for-south-africa/
39. Meyer, DA. 2011. Meeting basic health, safety and environmental risk before sustainability-watch your step.
[Online] Available: http://valuestream2009.wordpress.com/2011/08/25/meeting-basic-health-safety-and-
environmental-risk-before-sustainability-watch-your-step.: 6
40. Adapted from eron-Wepener, M. 2017. Kuga re issues have damaged Ford badly. Industry News, 30
January. [Online]. Available: http://www.iol.co.za/motoring/industry-news/kuga- re-issues-have-damaged-
ford-badly-7558130; Downard, M. 2017. Ford South Africa issues recall on Kuga 1.6 models aer numerous
res. Motoring, 17 January. [Online]. Available: http://www.biznews.com/motoring/2017/01/17/ford-recall-
kuga- res/; Powell, E., Neely, C. & Sawayda, J. 2014. Ford Motor Company manages ethics and social
responsibility. [Online]. Available: http://danielsethics.mgt.enm.edu
41. CEB Global. 2014. Reducing risk management’s organisational drag. [Online]. Available:
https://www.cebglobal.com/content/dam/cebglobal/us/EN/top-insights/executive-guidance/pdfs/eg2014q3-
reducing-risk-managements-organisational-drag.pdf
42. Ibid.
43. Ibid.
44. Smithson, N. 2017. Ford Motor Company’s organizational structure analysis. [Online]. Available:
http://panmore.com/ford-motor-company-organizational-structure-analysis
45. Beck, J. 2016. Do senior managers see board meetings as a chore? [Online]. Available:
http://www.effectivegovernance.com.au/senior-managers-see-board-meetings-chore/
46. Adapted from Scarlat, E., Chirita, N. & Bradea, I. Indicators and metrics used in the Enterprise Risk
Management (ERM). [Online]. Available:
http://www.ecocyb.ase.ro/20124pdf/emil%20scarlat%20%28t%29.pdf/; PricewaterhouseCoopers. 2014. Risk
appetite framework: Insight into evolving global practices. http://web.iacpm.org/dotAsset/63685.pdf
CASE STUDIES
 PART 1 CASE STUDY

Sean McCoy
Exxaro Powering new possibilities
Late in 2005 Kumba Resources engaged in an unbundling and corporate restructuring exercise separating the
coal and other assets from its iron ore business.
While iron ore became a stand-alone entity, the primary coal business was merged with several other
businesses to form a new company. A marketing task team was assembled to consider the brand for what was
initially a project defined as ‘Newco’. This would reflect the largest BEE transaction in corporate South Africa. It
would also reflect the largest black-owned and -managed mining corporation at the time, through the merge of
Kumba Resources coal assets, Ticor, Eyesizwe Coal, and ultimately Namakwa Sands.
Legal and governance processes were demanding around this transaction, and it would take a year to
successfully launch the Newco project as a business on the JSE.
In November 2006, Exxaro was born as an exciting new mining and resources entrant in an evolving industry
sector in the country.
During its first decade of business as Exxaro, the company made several interesting acquisitions, formed joint
ventures, and explored new African markets in pursuit of further growth and expansion.
There were both successes and challenges as the company continued to enhance its minerals and resources
portfolio. This included a significant investment in Tronox, an international producer of titanium dioxide and alkali
chemicals; a development venture into the Republic of Congo, additional iron ore investments and an interesting
play in the cleaner energy space, and creating a joint venture company, Cennergi, together with Tata Power.
Although not CEO at the time, Mxolisi Mgojo was a dynamic member of the executive team and the head of
coal during the formative Exxaro years. He always spoke of a future for the company that would represent a
broader spectrum of resources interests. In April 2016, a decade later, Mgojo took over the reins of the
organisation as CEO from industry veteran Sipho Nkosi.
During this transition period, the business portfolio was consolidated, and the focus repositioned as a coal-
mining business, with investments in iron ore, pigment manufacturing, renewable energy (wind) and residual
base metals. It did not, however, take long for him to begin the process of organisational renewal. Toward the
end of 2017, in conjunction with a newer and younger executive team, an evolving business strategy was
unfolded and gradually shared within the organisation and to the market during 2018.
The organisation is now further shifting its strategy, building on its strength as a coal-mining company and
moving toward a newly defined ‘business of tomorrow’, seeking to address the challenges facing the fossil fuel
industry. This shift embraces alternative energy, water and agribusiness, which is a considerable change from
the current coal business. It does, however, do so off the success and importance of its coal business. driving
the ‘business of tomorrow’ from a sound platform of the business of today. This change necessitated bold
leadership and an ability to take some 10 000 people across business units and the corporate centre on the
journey toward a new, purpose-led future.

The business of today

Coal remains a central part of the Exxaro strategy and continues to attract considerable investment in terms of
new developments, technologies and processes. It is the foundation on which the business has been built over
the years, and it will very much fuel the future strategy of the organisation.
 Furthermore, it is the country’s second largest earner after gold, providing 6.1% of total merchandise exports.
South Africa holds the sixth-largest coal reserves in the world, representing approximately 11% of the world’s
total coal reserves. Exxaro’s coal operations can be found in Mpumalanga and Limpopo where the country’s
highest concentrations are found. This allows the company to support South Africa’s growth through a steady
supply of this essential mineral while seeking to make the sector more competitive on the international stage,
guided by constant improvements in people, processes and equipment.
The importance of this strategic asset base to the company is highlighted by looking at some of what it
defines as mega projects within the business. The new Belfast mine project as an example represents a R3,3
billion project to produce thermal coal in the Mpumalanga region, with the first production expected in 2020 and
the first-phase construction representing a 17-year life of the mine. Another of its operations, Grootegeluk in the
Limpopo province is among the most efficient mining operations in the world, operating the world’s largest coal
producing complex from a single pit with mineable reserves of more than 30 years.
Coal mining is also challenged by the advent of technological change, however, and artificial intelligence and
machine learning all have an impact on the world of work. Exxaro has placed great emphasis on embracing this
bold new world and the impact of disruptive technologies on driving organisational excellence throughout the
existing business. This effects the business unit operations as well as the functional centre and its respective
disciplines. Organisational excellence now lies at the heart of the business strategy and is seen holistically
across the business. This drives new ways of working; a new corporate office that supports this concept;
increased digitalisation across all dimensions of the organisation, including automation, bots, data analytics, etc.
Very critically, this leads to an evolving organisational culture that is preparing people for change.

The business of tomorrow

While the business of today in the form of coal and the related resources investments are driving the current
performance of the organisation, Exxaro leadership has recognised the immense challenge facing fossil fuels in
the future. It further recognises the critical role that a mining organisation could and should play in uplifting
people, specifically the communities in which it operates. This new imperative is driven by a purpose-led
business strategy that is directed at improving lives across the African continent. Beyond the latest business
buzzword ‘sustainability’, the company and its leadership are intent on delivering a sustainable and better future
for the organisation, its critical stakeholders and ultimately the planet at large.
While the business of today focuses on mining and resources, it leverages the business of tomorrow into
sustainable territories around alternative energy, water and agribusiness. Although there are some parallels with
the world of mining, this is a fundamental departure from its primary business, and this necessitates talent and
skills changes, structural business changes and a significant shift in mindset and organisational culture. In a
direct extract from the Exxaro strategy:

We want to be part of Africa’s success and future. This means we need to take a forward-looking approach
to our business. Our future goal: To exist as a thriving business.
We want to make an impact on the world, Africa and the communities where we operate, which is why in all
our sectors, we exist to solve societal needs and become a ‘Champion of Africa’. We exist to create a
better life for all our stakeholders.
To position ourselves in an ever-changing world, we looked at the things that drive our basic human needs
and the businesses that exist around them.
As a result, we directed our vision to the following areas – Coal, Renewable Energy, Water and Agri.1
The business of tomorrow, as it is referred to, has been created as a different business unit with a significantly
different operating model. It is expected to be light on capital, more entrepreneurial and agile, fast-growing
functions with high returns and rapid development. Consequently, it requires a very different management team,
governance structures and modus operandi. It relies on strong partnerships with leading organisations in their
respective fields, which has a different operating model to the long-term, capital intensive requirements of
mining.
In basic terms, the business of tomorrow is described as follows:
Renewable energy: it will explore new ways to create, maintain and store energy, focusing on distributed small
energy generation, energy analytics, energy exchange and energy funding
Water: it will discover ways to save and generate this precious resource through leak management
technologies, waste management solutions, treatment plants and creating water from new sources such as
desalination
Agri: it will focus on the greater farming value chain and supportive technologies to ensure food security
through sustainable agriculture, including farm-to-market logistics, food processing and aquaculture, as well as
new food sources such as insect protein and biofuels from feedstock.

This signifies a considerable shift in the future business of Exxaro, but one which is anchored in a sustainable
future and a purpose-led strategy for the organisation. The emphasis extends beyond quarter-by-quarter
financial results, and rather represents a bold new vision in an evolving world of work. Realising this strategy is a
work in progress and is currently driven under the umbrella of an organisation-wide initiative known as
Connect2Next. This initiative aims to amplify and orientate the company toward the future, embracing aspects
such as the overall strategy, the required culture, operational excellence, business excellence, the workplace
strategy and the digital focus at Exxaro.
While these bold changes are firmly under way, and the organisation prepares to relocate to the new
corporate office in June 2019. Operational investment and project progress are on track, and the company has
just celebrated an exemplary set of results as posted for its financial year ending December 2018. This included
excellent gains in all the key financial metrics, bolstered by record production, sales and export volumes of coal.
Against the backdrop of the leading ESG (environmental, social and governance) performance in the local
industry, the CEO has reiterated that Exxaro is purpose driven for a long-term future, with the coal business
remaining core, while driving at the risks and opportunities arising from climate change.

Sources:
1. Exxaro.2017. Exxaro Board Strategy Pack.
2. Exxaro.2019. Exxaro Annual Report 2018.[Online] Available: https://www.exxaro.com/investor/integrated-reports2018/ [Accessed: 27
June 2019].
3. HKLM. 2018. X + X = Winning – Exxaro 2026 activation strategy.
Case questions
1. Exxaro has faced some challenges from the investor relations community on the new strategic direction of the business. How do
you think the company overcomes the challenge of being perceived as a mining-only organisation?
2. The new business direction requires a significant culture and behavioural shift among managers and employees. How best does
Exxaro take all staff on this new strategic path?
3. Do you think that Exxaro can stretch from mining across such a diverse business portfolio? What are the pitfalls it may face and the
key ingredients for success?
4. Discuss the requirements of a purpose-led organisation. What does it take to distinguish this from a business fad to a sustainably
successful company?
 PART 2 CASE STUDY

Peet Venter
Absa’s planned resurgence: Turbulence ahead for the South African retail
banking industry?

Background
The fight for dominance of South Africa’s retail-banking segment hots up. Absa, once the nation’s biggest
consumer lender is considering a change in tactics to boost revenue and to regain its former leadership in the
retail-banking industry. In March 2018, the Group CEO Maria Ramos, announced the bank’s intention to restore
its leadership in South African retail banking and to double its share of revenue in Africa from 6% to 12%. She
also said the Group would begin to build a culture of entrepreneurialism and consistent delivery to customers.1
However, regaining its position as market leader will not be easy, and the bank is facing a number of challenges.

Overview of the South African banking industry

Despite South Africa’s status as a developing economy, it has a sophisticated and stable banking system,
comparable to those of most developed countries. This, along with the advanced risk management practices
applied by South African banks, meant that, unlike in many other countries, no banking crisis occurred in South
Africa after the 2008 global financial crisis.2
Despite this stability, banks have faced a tough few years, and things are starting to shake up as the South
African Reserve Bank (SARB) has issued its first banking licences for new entrants in 11 years. In 2017, there
were 19 registered South African banks, and a number of other national and international players in the industry.
However, as reported by the SARB (see Exhibit 1), this number has been very stable over the last decade, and
the last time a new banking licence was issued was when Capitec entered the industry in 2001.
Although there has been some stability in the sector, the average cost to income ratio of banks has risen
steadily, while return on equity has been declining at a similar pace. This suggests a relative increase in the
average cost base of banks (see Exhibit 2) most likely due to the challenging conditions currently facing South
African banks.
The banking sector is particularly vulnerable to low economic growth, and the slump in South Africa’s GDP
has resulted in banking revenues growing at their slowest rate since the global financial crisis. Plummeting oil
and commodity prices in 2014 and 2015 have sent various commodity-dependent sectors into turmoil, from
which they have been slow to recover. As a result of poor economic conditions, lending fell across the board,
while earnings remained stagnant. Another result of these tough conditions is that advances grew at a higher
rate than deposits, prompting banks to raise interest rates in order to ensure revenues.3

Exhibit 1:4
Table 1.1 Banking entities registered in South Africa

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
 Registered banks 19 19 18 17 17 17 17 17 17 17 19
and local

branchesBanks*

...............................

Of which: banks 0 0 0 0 0 0 0 1 1 0 0
under curatorship

......................

Local branches of 14 14 13 13 12 14 14 14 15 15 15
foreign banks

.................

33 33 31 30 29 31 31 31 32 32 34

Other Controlling 16 16 16 16 16 16 16 16 16 16 18
companies .......

Banks in final 2 2 2 2 2 2 2 2 2 2 2
liquidation ...

Mutual banks 2 2 2 2 2 3 3 3 3 3 3
.....................

Cooperative banks 0 0 0 0 2 2 2 2 2 2 3
............

Representative 46 43 42 41 43 41 43 40 40 36 31
offices .......

*Includes active banks and banks exempted by the Registrar of Banks (with effect from 1 July 1006) in terms of the Supervision
of Financial Institutions Rationalisation Act 32 of 1996 and section 1(cc) of the Banks Act 94 1990

Exhibit 25
Table 1.2 Selected indicators for the South African banking sector

Dec Dec
2016 2017

Balance sheet

Total assets (R billions) 4 877 5 157

Total assets: year-on-year growth (per cent)  0.96  5.75

Gross loans and advances (R billions) 3 708 3 802

Gross loans and advances: year-on-year growth (per cent)  2.98  2.54

Total equity (R billions)  401  455

Profitability
 Cost to income (smoothed) (per cent) 55.07 56.65

Return on equity (smoothed) (per cent) 17.69 15.96

Return on assets (smoothed) (per cent)  1.32  1.31

Capital adequacy

Common equity tier 1 capital adequacy ratio (per cent) 12.43 12.88

Tier 1 capital adequacy ratio (per cent) 12.86 13.43

Total capital adequacy ratio (per cent) 15.93 16.22

Leverage ratio (per cent)  6.20  6.62

Liquidity

Liquidity coverage ratio (per cent) 107.83 119.02

Credit risk

Impaired advances (R billions)  106  108

Impaired advances as a percentage of gross loans and advances (per cent)  2.86  2.84

Specific credit impairments as a percentage of impaired advances (per cent) ... 43.88 42.57

Portfolio credit impairments as a percentage of gross loans and advances  0.70  0.74

Things are not looking up as the financial sector is facing global challenges of digital disruption and other
threatening regulatory restrictions aiming to counter the rise in cyber-attacks. Just as banks were starting to get
to grips with the Financial Intelligence Centre Act 38 of 2001 (FICA)6 and the National Consumer Protection
Act7, they had to consider the impact of General Data Protection Regulation (GDPR) and the Protection of
Personal Information (POPI) Act on their operations and systems8. In addition, banks are preparing for the
implementation of the Basel IV package, which is focused on ‘reducing the variability of risk-weighted assets
and enhancing the credibility of the risk-based regulatory capital framework for banks’ by 20229.

Note: This table presents an overview of the financial and risk information, compiled by means of the
aggregation of data submitted during 2016 and 2017 from individual South African-registered banks (including
domestic branches of international banks but excluding offshore branches and subsidiaries of South African
banks, mutual banks and cooperative banks). Information represents aggregated bank-solo information.
Smoothed refers to calculations based on a 12-month moving average. Information is subject to change without
notice. Banking sector date is available at http://www.resbank.co.za (refer to Prudential Authority link).

The South African Reserve Bank

The SARB is the overseer of the banking industry, ensuring that banks adhere to their strict licensing
requirements. Despite its central role in monetary policy, the SARB is not owned by the government but privately
owned by about 650 shareholders. The functions of the SARB include, inter alia10:
 Formulating and implementing South African monetary policy
Managing the money supply, for example by issuing banknotes and coin
Supervising the South African banking system
Ensuring the effective functioning of the national payment system (NPS)
Managing the country’s official gold and foreign-exchange reserves
Acting as banker to the government
Administering the country’s foreign exchange and
Acting as lender of last resort in exceptional circumstances.

Recently, calls from within the ruling party to nationalise the SARB have resulted in a national debate, with some
commentators claiming that the marginal loss of transparency (due to the loss of private shareholding) could
increase the long-term risk of more aggressive or more politically sensitive policy interventions11.

The ABSA turnaround

Absa is one of four large banking groups in South Africa, the others being Standard Bank, FirstRand and
Nedbank. The ‘big four’, as they are often referred to, are characterised by their full and integrated service
offerings, diversification into non-lending revenue sources (such as insurance), ubiquitous points of presence in
the form of ATMs and branches, and complex group structures. Collectively, these four banks control about 88%
of South Africa’s banking assets, and the African operations of these banks (outside of South Africa) contribute
a significant proportion of their revenue12. Exhibit 3 contains a summary of each group, while Exhibit 4
compares the banks on a few selected key performance indicators.

Exhibit 3: The ‘big four’ South African banks13

Absa Group Limited is listed on the JSE and is one of Africa’s largest diversified financial services groups
with a presence in 12 countries across the continent and around 42 000 employees. The bank was owned by
Barclays (a UK-based banking group) until recently, when Barclays reduced its shareholding in Absa to about
15%.

FirstRand was founded in the 1970s as an entrepreneurial investment bank. Differentiated by its owner-
manager culture, FirstRand executes its strategy through a portfolio of leading financial services businesses
comprising of First National Bank (retail banking services), Rand Merchant Bank (corporate banking
solutions), WesBank (asset financing), Ashburton Investments (investment management) and Aldermore
Bank plc (UK). FirstRand is known for its entrepreneurial orientation (e.g. it spawned and then spun off
several successful businesses such as Discovery and OUTsurance), its innovativeness (especially with
regard to technology), and its very successful e-Bucks rewards programme.

Nedbank Group’s primary market is South Africa, but their expansion into Africa is ongoing. Nedbank has a
presence in six countries in the Southern African Development Community (SADC) and East Africa region
where it owns subsidiaries and banks in Namibia, Eswathini, Malawi, Mozambique, Lesotho and Zimbabwe,
as well as representative offices in Angola and Kenya. In West and Central Africa, the bank acquired
approximately 20% shareholding in Ecobank Transnational Incorporated (ETI) in 2014, enabling a unique
one-bank experience to clients across the largest banking network in Africa, comprising more than 2 000
branches in 39 countries. Nedbank overcame a major setback in 2004 when it received support from its
parent company, Old Mutual plc, and launched a recovery programme to restore the performance of the
group and to retain its position as one of the ‘big four’.

Standard Bank Group offers a range of banking and related financial services across sub-Saharan Africa.
The group’s strategy is to be an African-focused, client-centred, digitally enabled integrated financial services
organisation. Standard Bank has a 156-year history in South Africa, and the group started building a
franchise in sub-Saharan Africa almost 30 years ago. Currently the group has an on-the-ground presence in
20 countries on the African continent, and solid local knowledge required to operate a successful business in
Africa.
Exhibit 4: A comparison of the ‘big four’ on selected indicators14

Absa Firstrand Standard Bank Nedbank

Assets (R billion) R1 171 R1 447 R2, 1 (trillion) R1044

Headline earnings (R billion) R8 R26.5 R27.9 R13.5

Return on ordinary 16.6% 23.9% 15.4% 15.5%

shareholders’ equity (5-year
average 2014–2018)

Number of ATMs 10 019 4 866 9 321 4022

Employees 41 250 46 284 31 662 30 877

Country presence 12 in Africa 9 in Africa 20 in Africa 39 in Africa

through Ecobank
alliance

Standard Bank is the largest of the ‘big four’ in terms of assets and headline earnings at this time, while FNB
consistently has the highest return on equity. Competition among the ‘big four’ is generally fierce, and banks are
constantly looking for ways to cut costs, for example by closing branches, reducing headcounts and encouraging
customers to use digital channels. Absa’s planned resurgence as a market leader would require a lot of change,
as Absa seems to be lagging not only in financial terms, but also in customer satisfaction, rated lower than its
peers at 73% (compared, for example, to FNB at 81%). In March 2018, the Group CEO, Maria Ramos,
announced the bank’s intention to restore its leadership in South African retail banking and to double its share of
revenue in Africa from 6% to 12%, with a strong focus on creating a culture of entrepreneurialism and consistent
delivery to customers. Absa plans on driving growth in loans, which had stagnated, and deposits, where margins
came under pressure recently. According to Cowyk Fox, managing executive of Everyday Banking at Absa’s
Retail and Business Bank, ‘[t]here’s capacity for lending in the right spaces in the market but it depends on
where the economy goes. A lot of customers are good for credit, but they are sitting tight waiting to see where
the economy goes15.’ One thing was for certain, Absa’s efforts to improve its position were not likely to go
unchallenged16. To complicate things even more, competition for Absa was not limited to its peers, as niche
banks and new digital entrants were also eyeing a slice of the considerable pie.

Niche banks
The remaining South African banks (excluding the ‘big four’) are generally niche banks that focus on one or just
a few market segments with a limited product range. Banks that compete in this segment are generally small
compared to the large banks (see Exhibit 5). Capitec is by far the best performer in this segment, boasting the
highest return on equity of all South African banks and the most customers – an estimated 9.9 million by
February 2018, more than any other South African bank. Capitec claims that, on average, 100 000 new
customers join its ranks every month17. The bank uses technology innovatively to target the lower end of the
market with simplicity, affordability, accessibility and personal service, with a limited yet innovative product
range. This essentially consists of savings plans and unsecured credit, but offers a single point of access to
transacting, saving and credit.

A brief summary of other banks in this sector are provided below:

Sasfin Bank, Mercantile Bank and Investec are focused on the higher end of the market. Both Sasfin and
Mercantile are specialist banking groups, focusing on entrepreneurial private, commercial and corporate
 clients. Investec focuses on high-net-worth individuals and businesses who are less price sensitive and more
focused on service quality, even if at a premium.
African Bank targets a similar market to Capitec, but is only now re-emerging after a period in curatorship
following its near-collapse in 2014, while Ubank also targets lower income consumers (aiming to become the
‘workers’ bank of choice’), with a strong basis in the gold and platinum mining communities.
Grindrod Bank (an investment bank) and Bidvest Bank (offering personal and business banking) are smaller-
scale banks established by corporate groups.
Albaraka Bank differentiates itself on the basis of faith, offering Islamic banking to Muslims worldwide.
There are also some local operations of international banks, namely the Bank of Athens and Habib Bank
Zurich (or Habib Overseas Bank).

Exhibit 5: Comparative assets of South African banks18

On the basis of financial performance, Capitec is a top performer in the South African banking industry with a
consistent return on equity of 27%. However, other banks in this category have struggled to perform on par with
the industry, unlike the ‘big four’ banks that consistently outperform their global counterparts on the basis of
ROE.

Exhibit 6: The ROE of listed niche banks 201819

The new entrants
In 2018, the SARB issued the first three new banking licences in 11 years to Bank Zero, Discovery Bank and
TymeBank, three new South African digital banks. These ‘digital newcomers’ were betting on using aggressive
pricing and data analytics to attract tech-savvy, price-conscious consumers. In addition, the South African Post
Office’s Postbank has applied for a banking licence, which will allow it to offer a wider range of services. This
was the first time since the entrance of Capitec in 2001 that the sector faced new competitors. They all expect to
have substantially lower cost-to-income ratios than the big banks, giving them scope to disrupt the pricing of
retail banking products in South Africa. ‘I have been dumbfounded at how low the cost can be,’ said Bank Zero’s
co-founder Michael Jordaan, best known for turning FirstRand’s retail banking operation into the most profitable
in South Africa. ‘Our technology cost is 1 per cent of 1 per cent of the annual tech budget at one of the big
banks’20. In addition, the new players are also likely to put pressure on other traditional banking tactics in the
form of interest on credit and savings.
Discovery Bank plans to build its banking business on the same principles as its Vitality loyalty programme
that helped Discovery’s health insurance business become a market leader. Vitality is a behaviour-tracking
programme that rewards health insurance clients for healthy lifestyles, such as by paying for gym memberships,
and Discovery plans to use the same principles to target the group’s two million health insurance clients,
rewarding them for achieving financial health21.
TymeBank has teamed up with retailer PicknPay to offer a money transfer service for the retailer’s Smart
Shopper programme clients, giving TymeBank a large pool of potential customers to target with its digital
services. It also means that PicknPay’s more than 700 branches become de facto points of presence for the
bank.
TymeBank is also believed to be seeking partnerships with retirement funds firm Alexander Forbes and
insurance giant Sanlam. Partners like these could offer TymeBank further access to potential customers and
data22.
Bank Zero is aiming to use technology to drive down its costs and offer banking services at much lower rates
than incumbents, especially in business banking. CEO Michael Jordaan said that their goal is to challenge
banking fees. Jodaan added that their aim is to tackle high business fees especially related to the extremely high
fees that businesses have to pay for card transactions and electronic banking fees23.’
The new entrants will initially focus on South Africa, but may consider other emerging markets in due course
and, given their strong ICT platforms and digital nature they may find it easier to expand globally. However, in
South Africa banking services have a high rate of market penetration (> 80%) and the challenge to the
newcomers is going to be breaking into a very competitive market where customers are traditionally reluctant to
switch banks.

Fintechs
While financial technology businesses (fintechs) were originally perceived to be a big threat to incumbent banks,
they are generally thriving by forming partnerships with incumbents in the banking and insurance industries
rather than by competing head-on with them. Fintechs generally focus on providing solutions to customer or
banking ‘pain points’ (such as fraud and KYC – ‘know your customer’) that banks struggle to address.
Combining the innovative thinking and technology of fintechs with the large, established customer bases,
distribution networks and capital investment of incumbents produces a powerful customer value proposition.24
Fintechs can also help to service market segments that are traditionally difficult or unappealing for banks to
service, such as the SME sector. For example, Nisa Finance, InvoiceWorx and Merchant Capital (partnering with
Standard Bank) offer innovative finance offerings for SMEs, who often struggle to get financing from the big
banks. Growing confidence in new technologies such as artificial intelligence (AI) will drive a spate of new
applications for the industry, such as chatbots, which ease the process of customer interaction with financial
services companies, and automated wealth advisors. These applications can contribute to banks and insurers
offering more innovative services and better customer service.

The future for ABSA?

While there is some anxiety in banking boardrooms about the new entrants in the banking industry, Absa seems
relatively unconcerned. Cowyk Fox said that they are able to easily compete with digital banks. He went on to
say that despite the better prices offer, the cost base of a legacy bank can be one of a few advantages that they
have over the digital competitors.25’ Absa aims to retain its retail clients by offering better prices to loyal clients,
responding faster to their needs and proactively managing their accounts. The new strategy will allow Absa to
take on more risk after London-based Barclays cut its former controlling interest down to below 15%. Absa
executives were generally upbeat about the Barclays withdrawal, suggesting that decision making could now
return to executives on the ground, and that they will face less bureaucracy in general.
Absa seems confident that, going forward, the new strategy will be shielded from new competitors, which will,
in their view, be capital light and more transactional in nature. In contrast, Absa’s drive to increase their assets
like home loans will (according to them) provide a strong basis to offer more transactional banking.

Conclusion
While incumbent banks may not relish new competition, consumers are likely to benefit through more innovative
offerings, more competitive pricing and higher interest rates on savings accounts. The question is: who will be
the winners and who will lose in the new banking landscape?

Questions
1. What are the key opportunities and threats facing South African banks?
2. Would you regard the South African banking industry as an attractive industry to invest in?
3. Would you regard fintechs as competitors or complementors in the industry?
4. Conduct a strategic group analysis of the South African banking industry. Clearly identify the mobility barriers between strategic
groups.
5. Use a resource-based perspective to explain the success of Capitec Bank.

References
1 Warren Thompson. 15 January 2019. EXCLUSIVE: Absa wants to win back its retail crown. Business Live.
Available: https://www.businesslive.co.za/bd/companies/financial-services/2019-01-14-exclusive-absa-wants-
to-win-back-its-retail-crown/ [Accessed 2 March 2019].
2 Business Report. 14 June 2018. SA Reserve Bank releases report on country’s biggest banks. IOL. Available:
https://www.iol.co.za/business-report/economy/sa-reserve-bank-releases-report-on-countrys-biggest-banks-
15454721 [Accessed 2 March 2019].
3 Kershoff, G. 2009. What do the surveys reveal about the impact of the global crisis on the South African
economy? Proceedings of the Fourth Joint EC-OECD Workshop on Business and Consumer Opinion
Surveys, 12–13 October, Brussels.
4 South African Reserve Bank. 2017. Bank Supervision Department Annual Report 2017. Available at:
https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/8507/01%20BankSupAR2017.pdf:
3
5 Consultancy.co.za. 20 December 2017. Regulation, tech and digital innovation to disrupt South African banking.
Available: https://www.consultancy.co.za/news/259/regulation-tech-and-digital-innovation-to-disrupt-south-
african-banking [Accessed 8 March 2019].
6 Warren Thompson. Op Cit.
7 Compiled from information available on www.capitec.co.za, www.africanbank.co.za, www.sasfin.co.za,
www.investec.co.za
8 Compiled from information available on www.resbank.co.za
9 Motsoeneng, T., Chalumbira, N. & Roelf, W. 5 December 2018. These are the ‘digital newcomers’ out to
disrupt SA banking. IOL. Available: https://www.iol.co.za/personal-finance/my-money/banking/these-are-the-
digital-newcomers-out-to-disrupt-sa-banking-183772
10 [Accessed 2 March 2019].
11 Admire Moyo. 9 January 2019. 2019 will see the rise of digital banks in SA. ITWeb. Available:
https://www.itweb.co.za/content/JBwEr7n51Lrv6Db2 [Accessed 9 March 2019].
12 Ibid.
13 As at end of 2017, according to BusinessTech, 16 May 2018, available at https://businesstech.co.za/news/ban
king/245061/these-are-south-africas-biggest-banks/[Accessed 23 February 2019].
14 Warren Thompson. 15 January 2019. EXCLUSIVE: Absa wants to win back its retail crown. Business Live.
Available at: https://www.businesslive.co.za/bd/companies/financial-services/2019-01-14-exclusive-absa-
wants-to-win-back-its-retail-crown/ [Accessed 2 March 2019].
15 BusinessTech. 16 September 2018. Is Capitech now the biggest bank in South Africa?
https://businesstech.co.za/news/banking/269891/is-capitec-now-the-biggest-bank-in-south-africa/ [Accessed
2 March 2018].
16 Business Report. 14 June 2018. SA Reserve Bank releases report on country’s biggest banks. IOL. Available
at: https://www.iol.co.za/business-report/economy/sa-reserve-bank-releases-report-on-countrys-biggest-
banks-15454721 [Accessed 2 March 2019].
17 Compiled from information available on www.capitec.co.za, www.africanbank.co.za, www.sasfin.co.za,
www.investec.co.za
18 Tiisetso Motsoeneng, Nomvelo Chalumbira and Wendell Roelf. 5 December 2018. These are the ‘digital
newcomers’ out to disrupt SA banking. IOL. Available at: https://www.iol.co.za/personal-finance/my-
money/banking/these-are-the-digital-newcomers-out-to-disrupt-sa-banking-18377224 [Accessed 2 March
2019].
19 Ibid.
20 Ibid.
21 Warren Thompson. 30 October 2018. Michael Jordaan’s Bank Zero prepares to shake up the banking system.
Available: https://www.businesslive.co.za/bd/companies/financial-services/2018-10-30-michael-jordaans-
bank-zero-prepares-to-shake-up-the-banking-system/ [Accessed 2 March 2019].
22 Admire Moyo. 9 January 2019. 2019 will see the rise of digital banks in SA. ITWeb. Available:
https://www.itweb.co.za/content/JBwEr7n51Lrv6Db2 [Accessed 9 March 2019].
23 Ibid.
24 Warren Thompson. 15 January 2019. EXCLUSIVE: Absa wants to win back its retail crown. Business Live.
Available at: https://www.businesslive.co.za/bd/companies/financial-services/2019-01-14-exclusive-absa-
wants-to-win-back-its-retail-crown/ [Accessed 2 March 2019].
25 Ibid.
 PART 3 CASE STUDY

Francois du Toit
Ethiopian Airlines – A national asset
‘Ethiopian Airlines is our national pride and a special icon among our companies as it carries our common name
Ethiopia and our national flag,’ said Prime Minister Dr Abiy Ahmed during the inauguration of a state-of-the-art
passenger terminal and the Skylight Hotel.1 The Skylight Hotel at the Bole International Airport in Addis Ababa
is something of which to be proud. With 373 guest rooms and spacious executive suites, the largest Chinese
restaurant in Africa and a conference hall that can accommodate 2 500 people, it is state of the art, as is the
new passenger terminal, which features the latest technology security systems, self-check-in machines, a self-
boarding system, comfortable lounges, duty-free shops and other amenities. These facilities, however, are just
another manifestation of the success story that is Ethiopian Airlines, fondly referred to as just ‘Ethiopian’, the
pride of Ethiopia.
The results from Ethiopian Airlines are impressive, with operating revenue of US$3,7 billion in 2017/18,2 and
a net profit of US$233 million. Growth has been similarly impressive with a 43% rise in operating revenue
amounting to US$3,7 billion in 2017/18, and an average growth of 25% a year since 2010. It expects to carry
10,6 million passengers during 2018, up from 3.7 million eight years before. Ethiopian Airlines is the biggest
African airline by passenger volume, by revenue and by profits.3 In fact, it has been the only profitable African
airline since 2013.4 It is no wonder, then, that industry observers suggest that ‘[i]f you want to fly on the
continent’s best airline, with the world’s most modern aircraft, then it has to be Ethiopian. During traumas from
famine to revolution, the airline has managed to deliver those two elusive qualities: customer service and profit’.5

Strategic direction
Ethiopian Airlines is an unexpected success story on a continent where state-owned entities notoriously poorly
run. It is 100% owned by the Ethiopian government. Ethiopia only changed to a democracy from a Marxist
military regime in 1991, and is as yet is not a fully market-driven economy. The new prime minister, Dr Abiy
Ahmed, who came into power on 2 April 2018, is driving economic and political reforms. In a major policy shift in
June 2018, the government also relinquished its monopoly on several key economic sectors, including aviation
and telecommunications, and said it would allow for ‘outright full privatization’ in certain sectors such as railway,
sugar and hospitality.6 The pace of economic and political change has increased significantly, and the new
cabinet that Dr Abiy put together, reduced by a third to 20 members, has no less than 50% female members.
‘Our women ministers will disprove the old adage that women can’t lead … This decision is the first in the history
of Ethiopia and probably in Africa,’ Dr Abiy said.7 Dr Abiy followed this by appointing the country’s first female
supreme court president,8, and then the boldest move of all – the appointment of Birtukan Mideksa as head of
the electoral board, who is not only a woman, but also the founder and leader of the opposition UDJ party. He
made this appointment just after her return from exile in the US after granting her amnesty from her life
sentence. She was convicted of an attempt to overthrow the government in violent demonstrations in which
dozens of people died after the 2005 elections.9 The government’s policies resonate throughout the airline. In
2019, it celebrated International Women’s Day with an all-female-operated flight to the Norwegian capital, Oslo.
The entire flight management team comprised of women: the pilots and cabin crew, the in-flight ramp operators
as well as flight dispatchers on the ground. This is not the first time the airline has operated such a flight. In
March 2018, a similar flight between Addis Ababa and the Argentine capital, Buenos Aires, was undertaken. In
December 2017, Ethiopian Airlines made history by sending one such team on an intra-Africa trip from Addis
Ababa to Lagos, and before that, in late 2015, a similar crew flew passengers from Addis Ababa to the Thai
capital, Bangkok.10 Ethiopian Airlines has also committed to running a ‘green airline’, signing a memorandum of
understanding (MoU) with the United Nations Environment, outlining several action areas to promote
sustainability, most notably the development of the ‘Plant one tree for every passenger flown’ project. The
objective of the project is to plant nine million trees in the name of Ethiopian Airlines in different regions of
Ethiopia. Other areas of collaboration include greening the airline business through providing training on
sustainable consumption and production, integrated waste management, hazardous chemical treatment and
capacity development on air-quality monitoring.
The UN in turn will support the Ethiopian Aviation Academy with the introduction of a course on the UN
Programme Environment Sustainable Consumption and Green Economy Programme.11 All these changes bode
well for a state-owned commercial carrier competing in the international market.
So how does an African state-owned airline manage to compete successfully in the global travel market, as
Calder12 and deliver customer service and profit? As is frequently the case, the success or failure of many
corporations can be ascribed to parenting style. To have government act as a parent might seem to be the
answer on the surface but it has directly led to the demise of many a carrier. On the upside, government has the
power to ensure a trading environment, which affords the airline its own incontestable competitive advantages in
the local market. Unfortunately, to government, commercial success is often secondary to other political
objectives. State-owned entities primarily exist to render service to citizens, even if such service is at the
expense of profits. Secondly, state-owned entities are renowned for inefficiencies. This is probably the result of
the submissive position of profit in the parent’s imperatives, or the enshrined local market dominance, or the lack
of skills of political appointees, or a combination of all of these. In Africa, state-owned airlines are often vehicles
for government corruption (see the widely publicised case of South African Airways). The Ethiopian government
has successfully refrained from meddling in the management of Ethiopian Airlines.
However, not to have government intervention does not automatically guarantee aviation success. Ethiopian
Airlines is additionally reaping the synergies from its parent’s ability to (combined with the political desire to)
make Ethiopia competitive in the region and world economy. Dr Abiy’s government has taken the Ethiopian
economy to number one in Africa with growth of 8.5% in 2018.13 Government has focussed on infrastructure
investment, and Ethiopian Airlines has benefited with the new Bole Airport, the biggest in Africa. Ethiopian
Airlines has benefited by making online applications possible due to modernised government systems to bring it
into the internet era .
The Ethiopian government,, the sole stakeholder in Ethiopian Airlines has minimal intervention. This should
mean apathy and disinterest. Ethiopian Airlines is a major contributor to, and critical enabler of, the Ethiopian
government’s aspirations to move to a market-driven economy. The CEO of Ethiopian Airlines, Tewolde
GebreMariam, said that Ethiopian Airlines already makes a significant economic contribution to the nation while
being efficient, competitive internationally and able to raise capital for growth. In light thereof, privatisation plans
are more likely to see foreign involvement in various operating units than an outright sale by government of its
stake.14 Ethiopian Airlines create strategic objectives for in conjunction with the Ethiopian government and these
objectives are aligned with government’s policy directions. For example, the 15-year strategy it launched in 2010
to win back market share on routes to and from Africa, as well as the latest strategic roadmap, Vision 2025, that
will see Ethiopian Airlines continuing the introduction of new systems and technologies and playing an
indispensable role in the socio-economic development of Ethiopia and Africa at large.15

Strategies and tactics

The performance and aspirations of Ethiopian Airlines warrants further exploration of its specific competitive
strategies and tactics. The first step was to regain the share if the international passengers it once commanded.
The intercontinental strategy is two-pronged – the first being a focus on increasing the number of
transcontinental destinations, in addition to increasing the frequency of flights. An example of the increased
frequency is its services from Bole Airport to Heathrow with three extra round trips each week to its Addis Ababa
hub. It has also secured some degree of flexibility, at least on Saturdays, Sundays and Wednesdays. On those
days, the inbound morning plane will resume the return flight three hours later, and land in Addis Ababa on the
same day.16
Growing its share of travel to the US, Ethiopian Airlines introduced three-times-a-week flights to JFK
International Airport in New York, in addition to the flights to the city’s Newark International Airport. This was
done towards ‘restructuring the network, opening new destinations, adding frequencies and shifting gateways as
it seeks to offer passengers travelling between Africa and the US the best possible connectivity and the shortest
routes’. Ethiopian Airlines also substituted Los Angeles for Houston as a destination to take advantage of the
large African community in the city, its concentration of oil companies and others that conduct business on the
continent. This route will be served three times a week via West Africa. Ethiopian Airlines also increased its
Washington DC flights from daily flights to 10 flights a week, with the additional three flights departing from Addis
Ababa in the morning and arriving in Washington DC via Abidjan in the evening. Subsequently these three
flights per week were increased to five, and a new route to Chicago was established, its fifth destination in the
US. US Secretary of State, Rex Tillerson, commented during his visit to the country that ‘Ethiopia is becoming a
critical hub for intercontinental traffic for people traveling from the US, [which] is going to promote a great deal of
interest in Africa and in Ethiopia’.17 CEO of Ethiopian Airlines, Tewolde GebreMariam justified the expansion
strategy as the US being among the airline’s most important markets due to the presence of a large African
community, and growing business and tourism ties with Africa. ‘In line with our roadmap, we will keep on
expanding our US and African network to facilitate people-to-people ties and the flow of investment, trade and
tourism. Our new route structure with additional frequencies to multiple gateways and the opening of new routes
to Houston are in response to the market demand and will provide the best possible connectivity to over 60
African destinations,’ said Tewolde.18 Outside of the US and Europe, Ethiopian Airlines is launching new routes
from Addis Ababa to Jakarta and Geneva,19 as well as a new route to Shenzhen, China – the fifth city it serves
there.20
The second prong of its growth strategy is alluded to when mentioning increasing the number of African
destinations to ‘over 60’, serviced from the hub in Addis Ababa, but also as direct destinations in their own right
from intercontinental flights as stopovers to the Bole, Addis Ababa hub. From newly introduced daily flights to
New York, four will be via Lomé in Togo to Newark Airport, and three via Abidjan in Ivory Coast to JFK.21 The
increased number of African destinations additionally expands its potential intercontinental customer base –
critical for its prosperity, as in 2015 Africa accounted for only 3% of air passenger traffic. The airline looks to
make the Ethiopian capital a transport hub, connecting other African countries, without long-haul capacity, with
continents around the world. ‘It’s trying to feed traffic from other African countries through Addis to then give
them the connectivity to travel on to other continents, US, Europe and Asia in particular.’22
As for positioning for the future, air traffic within the African continent is forecast to grow 6% a year, twice as
quickly as mature markets and faster than any other region over the next two decades.23 The state-owned
carrier does not just want to dominate the continent’s skies but is also looking to boost Africa’s fragmented
airspace through increased connectivity, setting up visa hubs that would allow more tourists to travel across
Africa, as well as launching or reviving new sovereign African airlines.24 ‘The task of African integration is not
easy,’ Tewolde said in an interview. ‘The context is the need for air transport. There is huge demand. We are
responding to it.’25
In 2010, Ethiopian Airlines announced its 15-year expansion strategy. First, it assisted with the launch of
Togo’s ASKY Airlines in West Africa, followed by the acquisition of a 49% share in the Malawian flag carrier in
southern Africa in 2013.26 In addition, Ethiopian Airlines is involved in business ventures with Air Côte d’Ivoire
and Congo Airways, and has taken over management of CEIBA International in Equatorial Guinea. The
Zambian government has announced that it is working with Ethiopian Airlines to relaunch its national carrier,
with Ethiopian Airlines owning 45% of the shares. Plans have also been unveiled to establish a wholly owned
airline in Mozambique, as well as the signing of a contract to start an airline in Guinea. Ethiopian Airlines has
also taken stakes in a Chadian airline. Tewolde said the new airline in Chad would draw in passengers from
Cameroon, Central African Republic, Niger, northern Nigeria and Sudan.27 It announced that it is in discussions
to back the Nigerian government’s plans for a new national carrier, as well as plans for the company to buy a
20% stake in Eritrea Airlines as part of a new peace deal, starting with flights between the neighbouring
states.28
Ethiopian Airlines was forced to adopt a piecemeal approach to expansion because full African air transport
liberalisation has failed to materialise, despite several attempts. In 1999, 44 African countries signed the
Yamoussoukro Decision in Ivory Coast’s capital, giving airlines freedom to ferry passengers between two foreign
countries. This agreement, however, has barely started as governments moved to protect domestic carriers. To
try to revive the stalled process, 23 African governments signed another deal in 2018 to forge a single aviation
market,29 the so-called Single African Air Transport Market (SAATM), an initiative by the African Union that aims
to open up Africa’s skies. ‘Twenty per cent of the market is carried by African airlines and 80% of the market is
carried by non-African airlines,’ said Tewolde. ‘The market share [held by African airlines] has been declining for
the last 20 years.’ Ethiopian Airlines is positioned to profit from it. The expansion is part of the airline’s 2025
Vision to become the leading aviation group in Africa, and increase the share of the market occupied by African
airlines.30 Within the next 30 years, Addis Ababa is expected to double the number of travel consumers and hit
US$2.5 billion.31
In its pursuit of growth, Ethiopian Airlines has now expanded its African freight operations to the US. Already
the largest cargo operator in Africa, serving more than 92 international destinations across five continents, it has
won the SKYTRAX World Airline Award for Best Airline in Africa, ‘African Cargo Airline of the Year’ and ‘Air
Cargo Brand of the Year in Africa’ awards four years in a row.32 Global expansion of its freight business was
always the next logical step. On 29 August 2018, Ethiopian Airlines launched weekly freighter flights between
Addis Ababa and Miami, creating the first-ever cargo-only route between the African continent and Miami
International Airport. The route includes stops in Spain, Colombia and Belgium. With the new service, Ethiopian
will carry Inditex high-end textile products from Zaragoza to the Americas. ‘In line with our strategic roadmap,
Vision 2025, we will keep on expanding our cargo destinations worldwide, thereby facilitating trade and
economic growth among different regions of the world,’ Tewolde tweeted.33
Ethiopian Airlines is collaborating with the European Union to establish a graduate business programme,
hosted under the airline’s Aviation Academy, a six-decade-old training centre that currently provides instruction in
pilot and cabin-crew training, maintenance services, and leadership courses.34 The MBA programme epitomises
Ethiopian’s Pan-African strategy, while for the EU, establishing a graduate school in Ethiopia signifies the
growing interest to establish more world-class business programmes on the continent.
Growth strategies are capital intensive. They require expenditure on acquiring additional aircraft, expanding
facilities to handle increased passenger traffic, increased cargo traffic and training facilities. The new aircraft
Ethiopian Airlines purchases are what its whole business revolves around, as it provides for increased capacity;
optimises efficiencies, which supports profitability;35 and affords its customers a state-of-the art travel
experience. These aircraft represent the image and customer offering of Ethiopian Airlines: ‘They have one of
the newest fleets in the world … SE and Boeing Co aircraft. For the first time in the history, an African airline can
compete with the Middle East and European airlines in intercontinental skies.’36 It was also the first African
operator to take delivery of the Boeing 787-9 Dreamliner, to be deployed on its US passenger routes.37 The
freight routes will utilise B777-200LRF freighter aircraft. On 1 March 2019, the first B737-800 freighter was
delivered, the first of its kind in the Ethiopian cargo fleet. Regarding the new aircraft, Tewolde said: ‘The B-737-
800 freighter will give us a new capability to serve short-haul destinations in African and the Middle East more
economically, which includes the export of Ethiopian meat, fruits and vegetables to the Gulf Region.’
Developed with the industry’s most efficient and reliable technology, the new B737-800 freighter aircraft is the
newest member of the freighter family and offers greater efficiency for the standard-body freighter market. It has
a carrying capacity of more than 23 metric tonnes of payload with excellent operating economics to maximise
efficiency for cargo operations.38 Plans include a repeat order for the Boeing 787, probably the 787-9 variant,
which would double the size of the existing fleet.39 Western banks are assisting in financing plans to boost its
fleet of 108 planes, with 66 more on order. Chinese banks are involved too, partly reflecting Beijing’s drive to
build a new trade corridor to the Middle East and Africa.40 Chinese banks have been especially prominent in
financing Bole Airport upgrade investments.41
Some observers have been concerned about the risks involved in Ethiopian’s strategies, not that the carrier
has been anything but cautious. Tewolde declared: ‘The carrier is also looking at the Airbus A350-1000 and
seeking to evaluate whether the model would perform sufficiently well out of Addis Ababa, which combines a hot
climate with an altitude of close to 8 000 feet, making it a testing location for aircraft. It already operates the
smaller A350-900 plane.’42 It has also cut back on some initiatives and realigned its strategies. For example, the
airline has cancelled its Los Angeles destination,43 and shelved plans to establish a fleet of smaller jetliners as
gains in demand suggest that the routes where they would be deployed would be better served using larger
planes. Some of these decisions were made in anticipation of exceeding forecast demand: ‘We have decided to
suspend the evaluation of the 100-seater regional aircraft acquisition project, since the market size of the
selected regional routes is growing faster than we expected. Boeing 737 jets from the current fleet will instead be
used while the airline studies passenger trends,’ Tewolde said.44
The risks highlighted are in the main related to those inherent to new business ventures. In most cases so far,
Ethiopian Airlines has taken minority stakes in ‘start-up’ airlines and tried to implant its management culture into
the target organisations, often in nations haunted by costly failures of state carriers. Ethiopian Airlines has been
spending tens of millions of dollars in some of Africa’s toughest markets, but this could be a risky strategy, as
buying minority stakes as a means of expanding into other markets has proven disastrous for others, such as
Abu Dhabi’s Etihad. Servicing debts is at risk if traffic does not pick up fast enough at its new hubs in Togo,
Malawi and Chad. In addition, none of the new destinations are in major centres: Lome is far smaller than west
African cities such as Nigeria’s economic capital Lagos, or Abidjan in Ivory Coast, while Chad’s dusty desert
capital is even smaller. ‘You want to build [a hub] in a place where you are going to get local traffic and
connecting traffic,’ said Craig Jenks, president of consultancy Airline/Aircraft Projects Inc. Another threat is that
of ‘self-competition’, as Zambia’s relaunched flag carrier could steal traffic from Ethiopian’s existing southern
African hub in neighbouring Malawi, Yamlaksira Getachew, a management professor at Loyola Marymount
University, warned.45
Then, on Sunday 10 March 2019, what Ethiopian Airlines invested in dearly as a competitive advantage and
treasured as symbol of its success caused the airline immense reputational damage:

In today’s global business headlines:

A Boeing 737 MAX operated by Africa’s leading Ethiopian Airline crashed, killing all 157 on board, just six
minutes after leaving Addis Ababa on yesterday’s scheduled flight to Nairobi. Confirmed among those who
died are 32 Kenyans, 18 Canadians, 8 Americans and citizens of France, China and the UK. The aircraft,
which was only four months old, had landed just hours before from Johannesburg. This is the second fatal
crash of a 737 MAX, the updated version of Boeing’s best-selling single aisle plane. In October last year, an
identical plane operated by Lion Air crashed into the Java Sea 11 minutes after take-off, killing all 189
people on board. October’s accident focused attention on a new stall-prevention system which Boeing
designed for the plane. Ethiopian Airlines is the continent’s largest, having quadrupled passenger numbers
four-fold in the last decade to the current 10m a year. The airline last suffered a fatal crash nine years ago.46
Strategy is about assuming risk in return for profits, but how does an organisation mitigate risk when it emanates
from such an unlikely source?

Questions
1. What are the sources of Ethiopian’s competitive advantage in your view?
2. Critically evaluate Ethiopian’s corporate growth strategy.
3. How would you describe Ethiopian’s global strategy? What are the risks inherent to this strategy?
4. If you were in the top management team of Ethiopian, how would you handle the air disaster of 10 March 2019? Provide motivations
for your answer.
References
1. IOL. 2019. All you need to know about Ethiopian Airlines airport terminal expansion and hotel. IOL Travel, 31
January 2019. [Available]: https://www.iol.co.za/travel/travel-news/all-you-need-to-know-about-ethiopian-
airlines-airport-terminal-expansion-and-hotel-19058235 [Accessed 8 March 2019].
2. Segawa, A. 2018. SAA can learn a lot from Ethiopian Airlines. The Citizen, 26 July. [Available]:
https://citizen.co.za/news/south-africa/2013922/saa-can-learn-a-lot-from-ethiopian-airlines/ [Accessed 8
March 2019].
3. Maasho, A. 2018. Ethiopian Airlines signs deal to revive Zambia’s national carrier. Earnings Season, Reuters,
16 January. [Available]: https://www.reuters.com/article/ethiopia-zambia-ethiopianairlines/ethiopian-airlines-
signs-deal-to-revive-zambias-national-carrier-idUSL8N1PB36C [Accessed 8 March 2019].
4. Imiru, G.A. 2018. Operational performance measurement of world major airlines with particular emphasis on of
Ethiopian Airlines: An integrated comparative approach. Doctoral thesis, School for Business Leadership,
Unisa.
5. Calder, S. 2018. Plane talk: Why Ethiopian Airlines is now Africa’s best carrier. The Independent, 16 March.
[Available]: https://www.independent.co.uk/travel/news-and-advice/ethiopian-best-airline-south-african-
airways-profit-loss-africa-travel-a8258836.html [Accessed 8 March 2019].
6. Dahir, A.L. 2018. Ethiopian Airlines, European Union to establish business school. Application Season, Quartz
Africa, 7 December. [Available]: https://qz.com/africa/1487417/ethiopian-airlines-european-union-to-establish-
business-school/ [Accessed on 8 March 2019].
7. Akwei, I. 2018a. Ethiopia and Rwanda raise the global bar with gender-balanced governments. Women,
Face2Face Africa, 18 October. [Available]: https://face2faceafrica.com/article/ethiopia-and-rwanda-raise-the-
global-bar-with-gender-balanced-governments [Accessed 8 March 2019].
8. Taylor, M.E. 2018. Ethiopia makes another historic move as it appoints its first female Chief Justice —
Women, Face2Face Africa, 1 November. [Available]: https://face2faceafrica.com/article/ethiopia-makes-
another-historic-move-as-it-appoints-its-first-female-chief-justice [Accessed 8 March 2019].
9. Akwei, I. 2018b. Ethiopia picks female opposition leader to head electoral body. Women, Face2Face Africa, 22
November. [Available]: https://face2faceafrica.com/article/ethiopia-picks-female-opposition-leader-to-head-
electoral-body [Accessed 8 March 2019].
10. Shaban, A.R.A. 2019. IWD 2019: Ethiopian operates all women functioned flight. Business, Africa News, 8
March. [Available]: https://www.africanews.com/2019/03/08/2019-iwd-ethiopian-operates-all-women-
functioned-flight/ [Accessed 8 March 2019].
11. Atani, M. 2018. Ethiopian airlines pledges to plant 9 million trees: One for every passenger. Green Economy,
UN Environment, 21 March. [Available]: https://www.unenvironment.org/news-and-stories/press-
release/ethiopian-airlines-pledges-plant-9-million-trees-one-every-passenger [Accessed 8 March 2019].
12. Calder. 2018. Op. cit.
13. Gray, A. (2018). Ethiopia is Africa’s fastest-growing economy. World Economic Forum. [Available] at
https://www.weforum.org/agenda/2018/05/ethiopia-africa-fastest-growing-economy/, [Accessed 5 July 2019]
14. Manek, N. 2018. Flightpath for SAA? Ethiopian Air shelves plane deal, outlines privatisation. BizNews, 16 July.
[Available]: https://www.biznews.com/africa/2018/07/16/ethiopian-airlines-saa [Accessed 8 March 2019].
15. Eze, C. 2019. Ethiopian Airlines takes delivery of B737 freighter. This Day Live, 4 March. [Available]:
https://www.thisdaylive.com/index.php/2019/03/04/ethiopian-airlines-takes-delivery-of-b737-freighter/
[Accessed 8 March 2019].
16. Calder. 2018. Op. cit.
17. Wexler. 2018. Op. cit.
18. The East African. 2018. Battle for US skies: Ethiopian Airlines ups the stakes. [Available]:
https://www.theeastafrican.co.ke/business/battle-for-us-skies-Ethiopian-airlines-ups-the-stakes/2560-
4965660-12q7b4qz/index.html [Accessed 8 March 2019].
19. Giles, C. 2018. Ethiopian Airlines positions itself to take over Africa’s skies. Market Place Africa, CNN, 23 May.
[Available]: https://edition.cnn.com/2018/05/23/africa/ethiopian-airlines-africa-flight/index.html [Accessed 8
March 2019].
20. Calder. 2018. Op. cit.
21. The East African. 2018. Op. cit.
22. Giles. 2018. Op. cit.
23. Mohammed, O. & Fick, M. 2018. Ethiopian Airlines steps up hunt for African connections. Business News,
Reuters, 23 November. [Available]: https://www.reuters.com/article/us-ethiopia-airlines-africa/ethiopian-
airlines-steps-up-hunt-for-african-connections-idUSKCN1NS0X3 [Accessed 8 March 2019].
24. Dahir. 2018. Op. cit.
25. Mohammed & Fick. 2018. Op. cit.
26. Ibid.
27. Giles. 2018. Op. cit.
28. Jasper, C. 2018. Ethiopian Air in talks to help Nigeria create a flag-carrier. Bloomberg, 17 July.
[Available]:https://www.bloomberg.com/news/articles/2018-07-17/ethiopian-air-in-talks-to-back-nigerian-
startup-carrier [Accessed 8 March 2019].
29. Mohammed & Fick. 2018. Op. cit.
30. Giles. 2018. Op. cit.
31. Wexler. 2018. Op. cit.
32. Eze. 2018. Op. cit.
33. MIA. 2018. Ethiopian Airlines launches historic cargo route at MIA. Miami International Airport, 29 August.
[Available]: https://news.miami-airport.com/ethiopian-airlines-launches-historic-cargo-route-at-mia [Accessed
8 March 2019].
34. Dahir. 2018. Op. cit.
35. Imiru. 2018. Op. cit.
36. Wexler. 2018. Op. cit.
37. The East African. 2018. Op. cit.
38. Eze. 2018. Op. cit.
39. Jasper. 2018. Op. cit.
40. Mohammed & Fick. 2018. Op. cit.
41. Wexler. 2018. Op. cit.
42. Jasper. 2018. Op. cit.
43. The East African. 2018. Op. cit.
44. Manek. 2018. Op. cit.
45. Mohammed & Fick. 2018. Op. cit.
46. Hogg, A. 2019. Ethiopia Airline plane crashes. Global Investing, BizNews, 11 March. [Available]:
https://www.biznews.com/global-investing/2019/03/11/zuma-sa-intelligence-deutsche-commerzbank-ethiopia-
airline [Accessed 11 March 2019].
 PART 4 CASE STUDY

Mari Janse van Rensburg

Medine: Masterplanning community development
Since 1911, the Medine Group has a long and proud history as a pioneer in many fields. From humble
beginnings, the Group has grown and expanded from being solely a sugar producer to becoming a diversified
organisation, operating with a workforce of 1,200 on the island of Mauritius.
Medine Limited, which is listed on the secondary market, Development and Enterprise Market (DEM) of the
Stock Exchange of Mauritius (SEM), has just made the decision to move from the DEM to the official market
(SEM). It features among the Top 20 Mauritian companies in terms of Market Capitalisation.1

Being relevant
Located off the southeast coast of Africa, Mauritius is an island state of approximately 1.3 million inhabitants.
The country’s economy has made great strides since independence in 1968, from being mostly dependant on
their agricultural commodity (sugar), to being one of the most successful small developing countries. Continued
economic growth and foreign investment followed government programmes to drive privatisation, financial
market liberation, and industry development.
Although sugar continues to contribute to the island’s export earnings, the economy has expanded to include
manufacturing, tourism, technology, education, renewable energy, real estate development, smart cities, and
financial services amongst others.
Described as the ‘’pearl of the Indian Ocean”, the island’s idyllic landscapes, tropical climate and pluralistic
culture attracts not only international tourists but also skilled foreign professionals, investors and retirees. These
expats enjoy an island lifestyle while they benefit from professional opportunities, a secure investment climate,
conducive business development policies, and tax benefits.2 3
The history of the Medine Group is inherently linked to that of Mauritius, and the Group grew along with the
Mauritian economy and over time differentiated its activities into four clusters, namely agriculture, leisure,
property and education.4,5

Agriculture
The agricultural cluster of the Medine Group, historically linked to sugarcane, now includes several sectors of
activity ranging from sugarcane production, plant cultivation, fruits and vegetables, to renewable energy. This
cluster plays an essential role in the development and protection of Medine’s land. The cluster also includes the
Medine nursery and Medine landscaping. Although Medine’s landscaping services and nursery are not
exclusively for the Group, the team mainly works on internal projects as the Group is engaged in the long-term
development of a Smart City. The garden centre serves as logistical support to the internal landscaping team.
Since 2019, in a joint venture with Akuo Energy Indian Ocean, Medine offers electrical energy through a
photovoltaic farm.

Leisure
Responding to opportunities created by the fast-growing tourism industry, the Leisure Cluster of the Medine
Group consists of various businesses, including:
Casela World of Adventures: The most visited tourist attraction in Mauritius, hosting up to 500,000 visitors per
year
Concorde: the Medine Group acquired the well-established travel agency and destination management
company at the end of 2018.
Tamarina four-star Golf & Spa Boutique hotel
Tamarina Golf Club: 18-hole, par 72 golf course
SPARC (Sports Aquatics and Recreation Centre): The largest multi-sports facility on the West Coast of
Mauritius which also host a medical and health centre
Yemen Experience: The largest deer reserve and preserved nature park on the island featuring an array of
experiences accessible to the public such as family adventures, business seminars, and eco-touristic
exploration
Catering: Providing food and beverages within Medine-owned restaurants and cafeterias.

Each of the businesses listed contributes towards providing leisure experiences to residents and tourists. These
businesses have also contributed to positioning the west coast of Mauritius as an attractive tourism destination.

Property
The property cluster of the Medine Group is responsible for the sound and sustainable development of the
group’s land assets. Medine has pioneered a key number of projects including Tamarina Golf Estate, and is
mainly focusing its efforts on the execution of Uniciti, Medine’s smart city, as per the Masterplan published in
2005 for the valorisation of the Group’s 10,000 hectares land bank. Within a few years, Uniciti has quickly
expanded with the launch of a university campus, schools, student residences, office parks, shopping centre,
and other building projects.

Education
Through Uniciti Education Hub, Clusterthe Medine Group provides, through high quality education. Using
exclusive partnerships with leading international institutions, it covers an educational offering which ranges from
nursery level to executive education, with higher education as its main pillar. Higher education spearheads the
vision towards the setting up of a knowledge-hub through an integrated and international campus.

See far, look closely

The current organisational structure follows an ambitious strategy to position the Group as a pioneer in
sustainable and harmonious development. The foundation and implementation of the strategy was spelt out in
2005 in the Medine Master Plan (MMP) by M. Pierre Doger de Speville, Chairman of the Group in 2005:

Medine endeavours to: ‘See far, look closely.’

‘See far’ to remain faithful to the tradition of the visionaries who founded and developed Medine. ‘Look close’ in
order to equip our various sectors of activity with the modern methods and procedures necessary to fulfil our
Mission, which is to build a better future for all.6
The MMP details the vision and plans of Medine Limited for the Western part of Mauritius over a twenty-year
period. This document, which is in essence a blue-print for the Group’s operations, is regularly updated and
reviewed to reflect the opportunities and constraints faced by the company during implementation. One of the
biggest realisations of the MMP, is Uniciti which started its development in 2011. Uniciti is designed to combine
the key components of a quality city life, to ensure overall economic, social and environmental sustainability
through achieving a delicate balance between residential, business, commercial, educational, healthcare, sports
and recreational uses.7 Medine was one of the first companies to apply for, and meet the criteria of the Smart
City Scheme (SCS) introduced by the Mauritian Government. The SCS promotes the development of self-
sufficient cities offering integrated working, living and leisure space focusing on innovation, sustainability,
efficiency and quality of life.8 In the case of Uniciti, the development promotes the concept of “Live, Work, Enjoy
& Learn” with education and higher education at the core of its development. It is this concept that creates
synergy and strategic alignment between the four business clusters.

Uniciti Concept
Live Learn Work Enjoy

Residential Uniciti Education Hub Uniciti Office Park Student Life

Student residences Nursery and Pre-primary Sports
Retirement village School Restaurants
Healthcare Primary School Shopping
Third-party developers Secondary School Green park and art
Higher Education station
Executive Education Leisure park
Events and nightlife

Trouble in paradise
Medine has achieved a series of developments which have today become landmarks of the West. However, the
Group’s financial performance over the years had been poor with a number of businesses generating
substandard returns. This culminated in a headline loss of MUR845 million (R341 million, at time of writing) for
the 2017/18 financial year.9

Time to reflect…
Reflecting on the Group’s 2017/18 performance, Thierry Sauzier (CEO) commented that the performance was
disappointing but not unexpected. It was important to put the results into context:

“They reflect challenges which were not new and now had to be dealt with. Sugar, our oldest cluster, has
been in constant decline for a number of years, and our Milling operations had been unviable and running at
losses for quite some time. When I took over as CEO of the Group last year [2017], it was very clear that a
number of courageous decisions had to be taken. I had to acknowledge the reality of the situation: building
a healthier and stronger platform for the Group’s future was critical if we wanted to grow sustainable.”10
MUR845 million is a significant loss but this included asset write offs of MUR595 million (R240,3 million). The
remaining underlying losses of MUR 249 million (R100,5million) were below expectation but it reflected a drop in
the sugar price, timing with regards to investments and delays in real estate projects completion.11

The way forward

The groups’ overall financial performance was well below par, but the new leadership team implemented by the
CEO is confident that they have a clearer picture of the way forward. The 2017/18 financial year has indeed
been a year of transition for the Group. Following a reassessment of priorities and short-term objectives the
focus will now be on:12 13
Restructuring of business clusters – Investments will be focused on core areas with established competitive
advantage. Such investment will enhance core value propositions and ensure optimal usage of innovation.
Specifically:
The Uniciti Education Hub will remain the driving force of the Group’s real estate project as growing student
numbers will populate Uniciti. As such, the Group will continue to offer and enhance a unique lifestyle for
students, offering accommodation facilities, restaurants, a sport centre as well as shopping and leisure
facilities. Such facilities will further create an unmatched environment for new institutions to join Uniciti
The property cluster has always generated strong returns and the Group will rely on this cluster to continue
generating cash flow and drive overall performance through the development of infrastructure and real estate
 that generate recurring revenues
The acquisition of Concorde, one of the Top 5 local travel agencies and the number 1 Destination Management
Company (DMC) in Reunion Island, completes, and strategically consolidates the Group’s positioning of its
leisure cluster. Offerings within this cluster will benefit from continuous improvement through service delivery
and innovation
The agricultural cluster will be restructured to reduce the financial burden resulting from declines in global
sugar prices. The closure of a sugar mill and resulting asset write offs will be followed by further actions to
improve the efficiency of operations. The Group will also work with the Government and other stakeholders to
find sustainable solutions to the national sugar challenge. Investments will also be made to extend the current
production of electrical energy on the 30,000m2 roofing in Uniciti
Shifts in the organisational culture towards a performance-based one with clear accountability within the
organisation. Essentially, a new ‘Medine model’ will be introduced to remove a sense of complacency and take
decisive action to face business challenges. Additional key talents have been recruited to enhance the current
leadership team and to navigate the Group through a period of change and transformation
Enhancing corporate parenting advantage through a restructured corporate function that will explore avenues
for improving the overall efficiency of operations. This includes the introduction of simplified standards and
centralised processes, getting a grip on costs and embracing digitalization and technology.

The leadership team is confident that they are geared to implement the remaining objectives set in the MMP:

‘These are trying times, and a mill closure is a particularly strong symbol of how things change in life, and
why we must continually adapt in order to progress…’
(René Leclézio, Medine Chairperson)14
It may be trying times but the Group’s CEO is confident that further to the deep restructuration of Medine’s
financial assets and the operational activities during the past 18 months, the Group is now in position to further
benefit from and contribute to the growth of the Mauritian economy. Change is nothing new as this company has
a successful record of navigating change since its foundation. But, it will be the efforts, resilience, drive and
enthusiam of staff that will be the key to continuous improvement and growth.15

Case questions and solutions

1. The Medine Master Plan (MMP) spans over 20 years during which the Group was required to implement various strategies to meet
the criteria to develop a smart city. Explain how diverse business clusters contribute towards achieving the long-term vision of the
company.
2. Does the CEO display characteristics of strategic leadership? Motive your answer with relevant examples from the case?
3. There is a strong correlation between strategic business performance and risk management. Identify, asses, and classify at least
one strategic risk that Medine had to face in the past two years. Comment on their response and the impact it had on the Group’s
performance.

References
1. Medine. 2019. Medine Group — Living Better. [Online]. Available: www.medine.com [Accessed: 01 April
2019].
2. Expat.com. 2019. Living in Mauritius: 2019 Edition. [Online] Available:
https://www.expat.com/en/guide/pdf/21_mauritius/ [Accessed: 16 July 2019]
3. Economic Development Board Mauritius. 2019. A Competitive Trade & Export Platform. [Online] Available:
http://www.edbmauritius.org/ [Accessed: 01 April 2019].
4. Medine. 2019. Medine Group — Living Better. [Online]. Available: www.medine.com [Accessed: 1 April 2019].
5. Medine. 2018. Medine Annual Report 2018. [Online]. Available: https://www.medine.com/investor-
relations/medine [Accessed:1 April 2019].
6. Medine. 2019. About Us: Vision. Available: https://www.medine.com/about/vision
7. Uniciti. 2019. Uniciti — Live, Work, Learn, Enjoy. [Online]. Available: https://www.uniciti.mu [01 April 2019].
8. Board of Investment. 2011. Smart City Scheme Guidelines. [Online]. Available:
http://www.edbmauritius.org/media/1674/smart-city-scheme-guidelines.pdf
9. Medine. 2018. Investor relations. [Online]. Available: https://www.medine.com/investor-relations/medine. [16
July 2019].
10. Medine.2018. Op.Cit.: 3.
11. Ibid.
12. Ibid.
13. Medine. 2018. Op. Cit.: 2
14. Medine. 2018. Op.Cit: 1.
15. Medine. 2018. Op. Cit.: 2
 Glossary
Ambidexterity theory of leadership – a leadership theory that predicts that different types of leadership are needed
for innovative and exploratory behaviours versus implementation-based exploitation behaviours.
Applied design thinking – an approach that applies the methods and mindsets behind excellent design in elds like
engineering, industrial design and architecture to the design of business models.
Assumption risk control (also referred to as premise control) – the process of gathering data and analysing it
systematically and continuously to determine whether the assumptions on which the strategy is based are still valid
in the light of new information.
Balanced scorecard – a strategic management tool useful for guiding, controlling and challenging an organisation
towards realising a shared conception of the future.
Benchmarking – a tool for identifying an organisation’s relative strengths and weaknesses compared to its
performance in the past, its competitors or best-in-class performers.
Big data – the very large and complex data sets in large organisations that require advanced and unique data
storage, management and analysis.
Blue ocean strategy – creating uncontested market spaces where competitors are made irrelevant because new
markets are created.
Bottom of the pyramid innovation – relates to targeting the (typically very large and untapped) segment of poorer
customers in a society, particularly in developing countries (termed thus because it is the largest segment and it
comprises the lowest earners in a society).
Business intelligence systems (BIS) – internal information systems that provide structured information on the
organisation’s historical performance.
Business level strategy (also referred to as competitive strategies) – strategies that relate to how the organisation
will meet its customers’ needs, how to counter the competitive efforts of its rivals, how to cope with the existing
market conditions, and how to sustain or build its competitive advantage.
Business model – a plan of how an organisation creates value for its customers while simultaneously generating
sufficient revenue or surpluses to have above average returns.
Business model – a rationale for how an organisation can create, capture and deliver value.
Capabilities – the organisation’s capacity to combine resources into productive activities. Also refers to the various
deliverables that the organisation provides to stakeholders.
Collectivism – emphasises collective goals and group harmony as opposed to individual goals.
Competitive advantage – a condition achieved by an organisation when superior value is created for its customers
compared with its competitors or when it outperforms its competitors in key areas, such as pro tability.
Competitive intelligence (CI) – the process of collecting information about competitors or the marketplace to
develop the strategic plans of an organisation.
Complexity theory – a science of complex interacting systems characterised by non-linearity, unpredictability and
aperiodicity.
Context-based strategy making – the process of diligently embedding social-ecological context into an
organisation’s strategy, including the four steps of acknowledging, prioritising, setting strategic goals and tracking
progress.
Core competencies – the unique abilities of an organisation that cannot easily be copied by others.
Corporate governance – the exercise of effective and ethical leadership to achieve an ethical culture, good
performance, effective control and legitimacy of an organisation (a corporate).
Corporate level strategies – strategies that deal with the overall scale and scope of the organisation.
Cost leadership – a strategy that allows an organisation to achieve superior pro ts by producing its products or
services at a signi cantly lower cost than that of competitors.
Cost leadership strategy (also referred to as low cost provider strategy) – a strategy that is based on low input
costs aimed at a price-sensitive market.
Country-speci c advantages (CSS) – bene ts that could result from lower tax rates, lower nancing costs and more
inexpensive labour than in the organisation’s home country
Creative destruction – the destruction of markets and the failure of certain businesses, as resources are reallocated
to more innovative businesses that provide more societal value.
Culture – the outcome of human behaviour based on pervasive and shared norms, values, attitudes and beliefs that
people use to interpret experience and generate social behaviour that guides their lives as individuals or as members
of a group.
Data analytics – the process of turning big data into useful information.
Differentiation strategy (also referred to as the premium strategy) – a strategy that is based on unique and valued
offerings in a price-insensitive market.
Disruptive innovation – new ways of doing things (innovation) that can create a new market and value network,
which disrupts, or displaces, an existing market and value network.
Distinctive capabilities – unique, valuable capabilities that provide a basis for competitive advantage.
Dominant design theory – a theory that predicts that new technologies can result in a pattern of intense
competition between different formats of a product whereby a design will ultimately win out, and the industry will
then start to mass produce the ‘winning’ design.
Dynamic capabilities – the organisation’s ability to integrate, build, and recon gure internal and external
competences to address rapidly changing environments.
Economic rent – the ability of resources to attract income.
Economic risk – the likelihood that events, including economic mismanagement, will cause drastic changes in a
country’s business environment that adversely affect the pro t and other objectives of a particular business
organisation.
Economic systems – these include market economies, command economies and mixed economies.
Emotional intelligence (also known as EI or EQ) – the ability to identify and manage one’s own emotions and
understand and in uence those of others – essentially one’s ability to work intelligently with one’s emotions.
Environmental scanning or strategic surveillance – the monitoring process of the business environment and
organisational resources to identify threats or opportunities for the continual existence of the organisation.
External environment – an environment that comprises the macro-environment and the industry environment,
and includes all in uences outside the organisation that affect a rm’s decision-making and performance.
Firm-speci c advantage (FSA) – a superior domestic competitive advantage at the outset that a rm needs to have
when considering expanding internationally.
Focused strategy – a strategy that is followed by organisations that direct their competitive efforts to a speci c
niche.
Foreign direct investment (FDI) – involves direct investments in a foreign country for productive business
purposes.
Foreign market entry modes – these include exporting, licensing, strategic alliances (which include short- to
longer-term contractual agreements), joint ventures, franchising and wholly-owned subsidiaries in one or more
foreign countries (an equity-based mode of entry)
Foreign portfolio investment (FPI) – refers to investments in negotiable nancial instruments – shares, stocks,
bonds, options and futures – in off-shore nancial markets.
Functional strategy – strategy speci c to each function within an organisation.
Fuzzy front end of product development – relates to the unstructured, dynamic and uncertain rst stage of the
innovation process where one needs to come up with opportunities and concepts before they can form the basis of
the formal development process.
Geopolitical forces and events – continuing con ict that causes pervasive and widespread global and regional
disruptions that seriously affect political, business and sociocultural relations, and signi cantly increase the risk of
doing business with countries in affected regions.
Global business environment – a pervasive environment characterised by declining barriers to trade and
investment, cultural convergence, improved communications, global networking and improved transportation
technologies.
Global companies – MNCs characterised by extensive global networks of operations (global companies are also
referred to as transnational or globally integrated companies).
Global strategy – a strategy involving global standardisation to increase pro tability through cost reductions from
experience curve economies derived from decreasing costs over time as experience is gained and from location
economies; derived from operations in low-cost foreign locations.
Globalisation – broadly de ned as the shi away from distinctive national markets towards a more integrated and
interdependent world economy.
Globalisation of markets – the merging of traditionally separate national markets into one huge global marketplace
over time as a result of converging national value systems, consumer needs and preferences on a worldwide scale.
Globalisation of production – the declining barriers to trade and investment in recent decades, which bene ts
international organisations.
Gross domestic product (GDP) – a measure of the value of goods and services produced in an economy during a
speci ed period.
Gross national income – measures the total income received by the residents of a country.
Individualism – emphasises the importance of guaranteeing individual freedom and self-expression in pursuance
of individual goals.
Industry – a group of organisations offering products or services that are close substitutes for each other.
Integrated reporting – the process of communicating material information about an organisation’s strategy,
governance, performance, and prospects in a way that re ects the commercial, social and ecological context within
which it operates (de nition adapted from the International Integrated Reporting Council).
Internal environment – constitutes everything inside the organisation, in particular its resources, capabilities and
competencies that enhance its performance.
International business – comprises international trade and foreign direct investment (FDI).
International competitive advantage – organisations that have a distinctive domestic competitive advantage and
possess a valuable set of resources that can be leveraged into new markets can consider by either exploiting or
enhancing their existing domestic competitive advantage.
International enterprise – could be involved in any international business activity such as importing from and
exporting to other countries.
International management – the process of applying management concepts and techniques in a multinational
environment and adapting management practices to different political, legal, economic and cultural contexts.
International strategy – a strategy to increase pro tability by transferring core competencies to foreign markets
where indigenous competitors lack them.
International trade – occurs when a rm exports goods or services to consumers in another country.
Issues priority matrix – an approach that simultaneously assesses the extent of both the probability of a macro-
environmental event occurring and extent of its probable impact on an organisation.
KSAs – the requisite expertise and knowhow necessary to run an organisation efficiently and effectively.
Leaders – those individuals who use their skills and ability to in uence others to support the achievement of a
common goal.
Leadership – essentially concerns the constructive ‘in uencing’ of people to support the achievement of a common
goal.
Legal systems – the legal system of a country is in uenced by the prevailing political ideology and political system
since the government de nes a country’s legal framework within which organisations conduct business. tTe three
prominent systems in use around the world are common law, civil law or code law, and theocratic law – are de ned
as follows
Liability of foreignness – this typically results from unfamiliarity due to lack of local country knowledge and
information (including political/legal requirements, economic and cultural issues, and infrastructure); additional
and oen unanticipated costs of managing a foreign operation (including expatriate travel and locating costs as well
as subsistence costs for the duration of the expatriate’s foreign assignment), and reluctance of locals to do business
with the MNE); and discrimination, which is the typical practice of consumers favouring local rms over foreigners.
Long wave theory – a theory of innovation that predicts that there are certain patterns in innovative change and
that these can be described as waves, being of longer duration than business cycles.
Low-cost focus strategy – a strategy that focuses on low costs in a narrow buyer segment aimed at outcompeting
competitors based on lower costs.
Macro political risk analysis – reviews all major political decisions likely to affect all enterprises in the country
Macro-environment – an environment that includes political, legal, economic, sociocultural, technological,
demographic and natural environmental forces at the global level and/or within a country.
Macro-environmental analysis (also referred to as environmental scanning) – a systematic process of collecting
and analysing information for the purposes of planning, forecasting or choosing a preferred future.
Micro political risk analysis – directed towards government policies and actions that in uence selected sectors of
the economy or speci c foreign businesses within an industry or industries in the country, for example restrictive
regulations of a country’s telecommunications industry, and restrictive labour laws in selected industries such as
mining and exploration.
Milestone review – a control measure to monitor the effective execution of a strategy at various intervals, based
mostly on time or cost.
Mission statement – a statement that stipulates the nature of the business and the customers it seeks to serve and
satisfy.
Multidomestic or localisation strategy – a strategy to increase pro tability by customising products and services to
comply with the tastes and preferences of customers in distinct foreign markets.
Multinational enterprise (MNE) – involves ownership and control of productive cross-border business operations
through foreign direct investment (multinational enterprises are also referred to as multinational corporations,
multinational companies or MNCs).
Multiple connections – the interconnectedness between markets and the constant intensifying diversifying of
economic exchanges worldwide.
National competitive advantage – this originates from the internal strengths of successful domestic organisations
that innovate and continually improve their processes and re ne their strategies within their industries to the extent
that their superior product and service offerings become internationally competitive.
Operational risks – losses as a result of inadequate operational procedures, systems or controls, or those caused by
employees.
Operational strategy (also referred to as functional strategies) – strategies that deal with how the component
parts of an organisation deliver the corporate and business-level strategies over the shorter to medium term.
Organisational architecture – a collectively agreed and communicated document that, in light of the strategic
competencies needed to ful l stakeholder needs, de nes and details the major building blocks of the organisation.
Organisational climate – the prevailing atmosphere in the organisation representing how members of the
organisation feel about it at a point in time, which can be in uenced by particular events.
Organisational culture – a system of norms, values and beliefs that bind the organisation’s members together,
unifying them in purpose and distinguishing the members of one organisation from another.
Organisational purpose – the fundamental reason and motivation for the organisation’s existence. It may be
explicit or implicit, and oen it is both. It is the single most important, overarching objective of the organisation,
which determines the various other, subsidiary objectives that may be identi ed.
Organisational routines – high-level organisational processes or ways of doing things that create an organisational
memory and eliminate the need to reinvent a task every time it has to be performed.
Organisational structure – the pattern of relationships among positions in and among members of the
organisation, making possible the application of the process of management and creating a framework of order and
command through which activities of the organisation can be planned, organised, directed and controlled.
Paradigm – a world view.
Paradoxical situation – a situation that has two opposite facts, or qualities, which one would not expect to be able
exist simultaneously.
PESTEL – an environmental-scanning framework that classi es external in uences by source, including political,
legal, economic, sociocultural, technological, demographic and natural environmental sources.
Political risk – the likelihood that political forces will cause drastic changes in an organisation’s business
environment that will adversely affect the pro t and other objectives of a particular business organisation.
Political system – a system of government in a nation.
Processes – management, operational and support processes that are instrumental in delivering the capabilities.
Red ocean strategy – a strategy of competing in highly contested markets, for example on price, which can be
damaging to all involved, as businesses each compete against each other at each other’s expense.
Regional economic integration – involves agreements among countries in a geographic region to reduce, and
ultimately remove, tariff and non-tariff barriers to the free ow of goods, services and factors among each other.
Regional economic integration (REI) – the growing economic interdependence that results when two or more
countries within a geographic region form an alliance aimed at reducing or eliminating barriers to trade and
investment.
Resources – the assets, skills and capabilities over which an organisation has control.
Risk appetite – the amount of risk an organisation is prepared to take to meet its strategic objectives.
Risk aversion – a strategy whereby the organisation avoid risk at all costs.
Risk appetite metric – the minimum acceptable requirements to be met or maximum amount of loss that the
organisation will tolerate.
Risk pro le – the evaluation process of the impact of an organisational threat and willingness to accept the risk.
Risk register – a document detailing the reason(s) for deviation from intended risk strategy, the actions necessary to
counteract the risks, and an indication of how effectively and efficiently the procedures that took place were
documented.
Scenario analysis and planning – an extremely useful approach in understanding future-orientated macro-
environmental, industry and competitive dynamics and change, providing plausible alternative views of how the
business environment of an organisation might develop in future.
Shared value – the bene ts that an organisation can create simultaneously for itself and its stakeholders.
Social-ecological context – the social and ecological systems, and their inter-relationships, on which an
organisation depends.
Social-ecological risks – the risks faced by an organisation due to changes in its social-ecological context.
Special alert risk control – the process whereby the organisation, due to the occurrence of a sudden and
unexpected event, thoroughly and rapidly reconsiders the organisation’s current strategy.
Stakeholders – any group or individual who can affect or is affected by the achievement of an organisation’s
objectives.
Strategic alignment – internal driver where various components of an organisation acting together.
Strategic decision enablers – the combination of people, processes and technology that enables the organisation to
obtain intelligence about its environment and turn it into useful insights that enable it to make strategic decisions.
Strategic decision-making – deals with decisions that are future oriented and concern the long-term direction on
large investments of resources (this entails the whole organisation and is not limited to a speci c function or
department).
Strategic decisions – future-oriented, fundamental and signi cant decisions that affect the entire organisation and
concern its long-term direction as well as a large investment of resources.
Strategic direction – the overall intended objectives of the organisation.
Strategic exibility – the necessary dynamic capabilities that an organisation must have to deal with uncertainty
and risk in responding to the demands and opportunities in uncertain competitive environments.
Strategic intent – a concept that envisions a desired leadership position as well as the criteria to be used to measure
progress.
Strategic leadership – the leadership of an entire organisation through in uencing people and providing a sense of
direction for the achievement of a common goal, growth and sustainability.
Strategic orientation – involves an organisation’s cultural strategic predisposition, whether an ethnocentric,
polycentric, regiocentric, or geocentric predisposition toward its international business involvement as a frame of
reference for its international strategic planning and operations.
Strategic risk management – the continuous process of identifying and determining the extent of strategic risks
and putting in place strategies that reduce or eliminate risks that may in uence the attainment of the business
strategy, objectives and implementation of strategies.
Strategic risks – risks that prevent the organisation in achieving its long-term goals.
Strategic thinking – a mental or thinking process applied by an individual in the context of wanting to achieve
success in an activity.
Strategic timeframe – the period of time that is prioritised when making strategic decisions, such as investment
decisions. is includes in particular the period of time that is prioritised when considering nancial returns from
such investments.
Strategies – courses of deliberate action that strategic decision makers take to match the organisation’s unique
strengths and capabilities with the opportunities in the external environment.
Strategy – the direction and scope of an organisation over the long term, which achieves advantage for the
organisation through its con guration of resources within a changing environment and to ful l stakeholder
expectations.
Strategy implementation – putting strategy into effect; making strategy happen; executing strategy.
Sustainability – the maintenance and enhancement of environmental, social and economic resources to meet the
needs of current and future generations.
Sustainable competitive advantage – an enduring edge over competitors in attracting buyers and coping with
competitive forces.
SWOT analysis – the comparison of the strengths, weaknesses, opportunities and threats of an organisation for
strategic planning purposes.
Technology – the application of science to improving the organisation’s operational capability, which includes office,
service and manufacturing technologies.
Technology S-curve (also known as the technology life cycle curve) – a plot of the relative performance of a
technology against the engineering effort required to develop/sustain it.
reshold capabilities – the minimum capabilities needed by the organisation to compete in a market.
Transformational leadership – leadership based on motivational principles which seeks to engage followers in the
goals of an organisation.
Transnational strategy – a strategy pursued by globally networked companies to increase pro tability by exploiting
experience-based cost and location economies while simultaneously complying with local responsiveness in foreign
markets.
Ubuntu – a philosophy or worldview relating to our humanity, the idea that ‘I am because of other people’.
Value chain – the chain of activities in which an organisation engages to add value to a product.
Value innovation – is a type of strategic innovation that can be used to create new markets and thus create market
spaces where the competitors are not relevant.
Value statement – a statement that re ects the future standing of the organisation, and typically comprises a set of
key values or behaviours to which employees should subscribe.
Values – the standards by which all employees set priorities and de ne the rules that they should follow to achieve a
sustainable competitive advantage.
Vertical focus – refers to the phases in the industry value chain in which an organisation is active.
Vision statement – a statement that articulates the ideal description of the organisation.
 Index
Please note: Page numbers in italics refer to tables and figures; page numbers in bold refer to boxes.

A
absorptive capacity 282, 295
absorptive capacity 294
accumulation 294
additional knowledge (cumulativeness) 294
Cohen & Levinthal 294–295
competency trap 294–295
electromechanical to electronic devices 295
expectation formation 294
knowledge, new and prior 294
‘lock-out’ 294
‘not-invented here’ syndrome 295
path dependency 294
R&D unit 294
Schumpeter’s process of creative destruction 295
theory 292, 295, 318
value of external information 294
Accountability, ethical remuneration needed to boost corporate governance – PwC 483–485
accountability without putting blame on staff 506
accumulating resources
benchmarking 214, 235
borrow from other organisations 214
mine experience 214
Act for change 8
active inertia condition 25
Adam Smith’s notion of ‘division of labour’ 287
added value in an industry 183
based on intangible features 259
advances in technology
airport and harbour infrastructures 371
China, pacesetter in mobile shopping 371
commercial jet aircraft 371
containerisation 371
e-commerce and digital networks 371
electric vehicles 371
exponential growth of internet financial activities and transactions 371
freight ships 371
global logistics and sourcing 371
information flows 371
SK Telecom, China Mobile, T-Mobile 371
transportation, ongoing developments 371
worldwide telecomminications 371
 World Wide Web and social media 371
Africa People Mover 261
ageing population 141, 149, 151, 157
combined with affluence 151
commercial passenger airline industry 157
financial retirement fund sectors 141
healthcare industry 141
hospitality industry, locally & internationally 157
leisure and tourism industries 141
leisure, recreation, tourism 157
retirement funds 157
retirement housing 157
social security 157
transportation in general 157
aggregate service providers, Hippo 185
agreeableness 314
interpersonal conflict 314
airlines, full-service
Airlink 253
British Airways 249, 251, 255
business level and corporate level strategies 249
CemAir 253
Comair Limited 251, 255
criteria for evaluating strategies 249
FlySafair 251, 253, 255
Kulula.com 251, 253, 255
Mango 251, 252, 253, 255
Mango against Kulula.com 249
Mango’s fleet of fuel-efficient aircraft 256
mobile boarding passes or benefits 255
onboard internet connectivity 255
SAA 249
strategic choice with theoretical principles 249
alignment
functional strategy 458
implementation 462
Allianz Global Corporate and Speciality 507
Alliance Risk Barometer report 2017, 2018 507
Alphabet (formerly Google) 220
ambidexterity theory of leadership 308
alignment processes 308
avoiding risks 308
closing leader behaviours to enable exploitations 308
corrective action 308
encouraging experimentation, independent thinking,
decision-making 308
exploitation, reducing variance in employee behaviour 308
explorations 308
following rules 308
monitoring goal achievement 308
opening behaviours to support exploration 308
predictions in working contexts 308
reduced variance 308
risk taking 308
 search for alternatives or solutions 308
setting specific guidelines 308
temporal flexibility 308
variations of employee behaviours 308
Andrews, Kenneth 13
Android 220
An extended framework of industry competition 192
Anglo American Corporation 251
enterprises in mining, retail, media, other sectors 251
Anheuser-Busch InBev 368
Annan, Kofi 14
Ansoff, Igor 13
Anthropocene, new geological epoch 58
Anton Rupert, Rembrandt group 438
Apple 26, 184, 291
developed iPod 193
iPhone 259
Apple’s complementary services 180
appropriability 213–214
embeddedness 214
protection of intellectual capital 214
relative bargaining power 214
resource exploitation 214
appropriate leadership within organisation 437–438
appropriateness of strategy
attractiveness to stakeholders 272
decision trees 268
desirability 271
environmental influences 268
feasibility 270
Johnson, Scholes, Whittington 268
matrix 268
organisation needs to assess factors 268
scenarios 268
strategic management process 268
suitability 268
SWOT (strengths, weaknesses, opporunities, threats) 268
tools to test strategy for appropriateness 268
validity 271–272
apps makes smartphones more valuable to users 189
architecture in strategic alignment 458
Lee et al. framework 458, 462, 463
architecture, reputation & innovation 225–226, 234
Bidvest, South African company 225
highlighted by John Kay 225
knowledge as key drivers of capabilities 234
Are you really coping with radical environmental change? 141–142
artificial neural networks (ANN) 129
assembly manufacturing 292
Association of South East Asian Nations (ASEAN) 147
assumption (or premise) risk control 515–516
cost leadership strategy 516
growth strategy 516
atmospheric aerosol loading 58
attractiveness to stakeholders 272, 273
automotive and information and communication technologies
(ICT) industries 176
self-driving or driverless cars 176
Automotive industry in the future: Are car manufacturers
ready for it 174–175
autonomy in decisionmaking & self-directed behaviour 473
Auto Trader South Africa 15, 24, 35
market interconnectiveness 29
strategic action and reaction 29
strategically fit with change in technology and market needs 29
Strategy in action 28–29
Avis vision statement 81–82

B
Balanced Scorecard Institute (BSI) 93
balanced scorecards 30, 76, 78, 96, 432–433, 438
balance between financial and non-financial measures 92–93
clarifying and translating vision into strategy 93
concrete operational objectives and measures 433
customer perspective 92
developed by Kaplan and Norton 92
development of 93
financial perspective 92
implementation phase 93
internal business processes 92
learning and growth perspectives 92
measuring performance 93
performance feedback 433
strategic direction into operational terms 433
tool 96
banking industry example of oligopolistic competition 184
bargaining power of buyers (customers) 174, 186, 257
backward vertical integration 187
buyer concentration 186–187
information 187
pricing structures and input costs 187
ratio of purchase price to total cost 187
switching costs 187
with other decision-makers 112
bargaining power of suppliers 257
AB inBev 187, 187
dependence on single industry 188
forward vertical integration 188
lack of substitutes 188
opportunity cost 187
supplier concentration 187
switching costs 187
Barloworld Holdings
transport, logistics, equipment, automotive business segments 251
Barloworld Social, Ethics & Transformation committee 437
barriers, industry and entry 292
Basic components of different organisational architectures 465–468
B-Corporation or B-Corp 52
behaviour
drives strategy 439
strategic leaders 444
Bell, Samuel 65
belonging, strengths of feelings, care & goodwill 440
benchmarking role, Johnson et al. 235
best-in-class 230, 232
historical 230
industry 230
benefits of clear strategic direction 91
challenges 91
Bertels, Stephanie 67
best value strategy 272
Bidvest Group 182
big data
analytics 105
business analytics 116
notion of 115
big data and strategic decision-making
structured (from sales transactions) 116
unstructured (from environmental scanning activities) 116
biogeochemical flows 58
biosphere integrity 59
Blue ocean and value innovation strategies in hotel industry 278–280, 281
blue ocean strategies 15, 33, 282, 283, 299
applied by AutoTrader 29–30
competitive advantage and value innovation 14, 299
Dual impact blue ocean process 298
innovative 297
Kim & Mauborgne 297–299
or uncontested market spaces 281
versus red ocean strategies 318
see also red ocean strategies
blueprint of internal and invisible workings of organisation 462
BOP
innovation examples 318
process for developing business specifications 306
Boston Consulting Group 13
Botswana-based retailer, Choppies 256
bottom of the pyramid (BOP) 280
innovation strategies 283
bounded rationality 105, 111
conflict between decision-makers and time pressure 111
conventional rational decision process 111
Herbert Simon’s description 111
sacrifice rather than optimise 111
brainstorming and ‘what if’ scenarios 507
brand or project completion (matrix approach) 474
broad-based communication programme 94
BSK Marketing, South Africa 15
Budget Insurance 200, 260
Burke-Litwin model 444
transformational and transactional change 444
business
 crash in housing market 302
dynamic context and evolving risks 58–61
exposure to systemic risk 301–302
external environment 137
financial crisis of 2009 302
level strategies 272
Model 8
model innovation (Chesbrough) 299, 303
printer and ink model effective 303
vision and formulating strategies 501
Xerox’s copier/printer (Chesbrough) 303
Business environmental and industry constraints 516
business intelligence systems (BIS) 115, 116
A simplified view of business intelligence systems 119
business level strategies/competitive strategies 32, 243, 248, 251
cost or value focused strategy 253
differentiation and focus 253
distinctive features 265
Distinctive features of business level strategies 266–267
focused differentiation strategy 253
integrated cost leadership/differentiation strategies 253
known as ‘generic strategies’ of cost leadership, differentiation and focus 252–253
middle of the road strategies 253
niche service to business travellers 253
overall cost leadership 253
Porter’s generic strategies 252, 253
price sensitive market 253
strategies stuck in the middle 253
type of competitive advantage 253
variations in 253
business models
definition 423
innovation (Chesbrough) 204
inputs, processes, activities, stakeholders roles and outputs 423
Johnson, Christensen, Kagermann 304–305
real-life business context 305
require lateral thinking 424
strategic triggers for change 304–305
Buying power of large southern African supermarket chains is keeping small 193–195

C
Calico (focused on longevity) 220
Canon’s aim to ‘beat Xerox’ 80, 368
and Honda to ‘become a second Ford’ 80
capabilities 470, 470
basis of strategic innovation 219
benchmarking 208
deliverables to stakeholders 470
distinctive 208
dynamic 208, 219–220
hierarchy of resources 218
organisational 218
role of 470
threshold 208, 218
Capabilities delivered to stakeholders according to
competitive strategy 470
Niche and combination strategies 471
capabilities, functional analysis 223
corporate management (corporate head office functions) 223
capabilities, identifying distinctive corporate management 223
corporate headoffice functions 223
cross-functional coordination 223
customer care 223
Discovery’s success 223
distinctive 218
dynamic 218
finance 223
functional capabilities 223
functional categories 223
functional framework 223
human resources (HR) 223
logistics or supply chain management 223
marketing 223
organisational 218
production or operations 223
research and development 223
sales 223
strategy in action case 223
threshold 218
capabilities, Porter’s value chain
chain of activities by McKinsey & Co 223
see also value chain
capabilities, types of
distinctive (Hamel & Prahalad) 219
threshold 218
capability life cycle (CLC) 228
development 228
founding 228
maturity 228
capacity theory, absorptive 285
capital forms, six
Forms of capital as inputs and outcomes of company’s value creation process 72
value creation process 72
capitals 8
human, social and relationship, natural, intellectual, manufactured and financial 8
Capitec Bank 232
and FirstRand’s superior return on equity 219
Capitec – providing cheap and simple banking solutions 264–265
carbon dioxide features 259
carbon emission intensity target 8
CDP – combating pollution and climate change 154
CDP formerly the Carbon Disclosure Project) 154
Cell C 144
cellphone
game-changing influence on telecommunication markets 284
industry 259
cellular handset market 212
Nokia 212
 Sharp Corporation in Japan 212
Chandler, Alfred 13
change components 444
facilitators of initiative 445
initiatives 447
leadership approach and style 445
organisational culture 445
people skills 445
resistance from individuals and groups 446
resources 445
structure 445
systems and processes 445
withdrawal, anxiety, sadness, confusion, anger 446
change managing 443–447
fundamental errors 443
intrinsic rewards 446
maintaining momentum along path to desired state 446
need for and formulating an argument 444
sense of urgency 444
changes in biosphere integrity 58
change values, openness to biological & social interaction needs 316
self-direction and stimulation 316
self-direction values 316
chaordic paradigm 473
commonality of purpose 473
organisation 473
organisational structure 473
3M as example of chaordic organisation 474
virtual organisations 473
chaos theory 473
characteristics of organisation
power centralisation 113
size 113
structure 113
Chery QQ33 0.8 TE is still the cheapest car in SA 255
China’s restriction on foreign exchange transactions 382–283
Chouinard, Yvon 54
Chrome 220
Cisc and Philips 15
City Lodge Hotel Group 262
Classification of countries in terms of per capita (GNI),
adjusted for purchasing power parity, 2016 385
Clicks Group Limited 7, 442
David Kneale, CEO 417
climate change 58, 59, 68
increasing volatility of weather 508
coalface of organisation 438
operational managers & supervisors 438
coalition team creates critical mass for change 445
Coco-Cola 368
core competencies and competitive advantage 86
cost or differentiation 86
mission statement 86
specialised marketing & merchandising know-how 25
 vision statement 81
codification or standardisation 193
coersive power use results in resistance 445
coherence (horizontal integration) 438
cohesive strategy-making 20
Coleman patents
protect uniqueness of products 258
reliability and durability 258
collaboration 283
collateral assets 292
collectivist 136
Collusion in the construction industry 191, 192
collusion or cartels to maintain stability 184
communicating
and educating 94
and linking 93–94
communities
choice, quality products, job creation 7
Companies Act of 2008 51
competence-destroying technical change 295
Competing in South Africa’s airline industry – only the fittest survive 243–248, 249, 251, 255, 264
low cost airline industry 253
competition and industry structure
bargaining power of buyers 182
bargaining power of suppliers 182
framework for industry analysis (Michael Porter) 182
rivalry between existing competitors 182
threat of new entrants 182
threat of substitutes 182
competition and rivalry
hypercompetition 184
monopolies 183
oligopolies 184
perfect competition 184
Competition Board 191
competitive advantage 3, 5, 6, 8, 208, 210, 252, 406
distinctive capability 212
Porter’s concept 390
relative to key success factors in market 212
Competitive advantage in an international context 391
competitive advantage and strategy 394–395
Porter’s competitive generic low-cost and differentiation strategies 394
competitive behaviour disrupting forces of competition 183
competitive challenges for full-service airlines 249
declining economy 249
increasing fuel costs 249
increasing landing and airport charges 249
leadership challenges 249
low-cost airlines 249
sustainable advantage 249
competitive global context 18
competitive intelligence (CI) 105, 115, 116, 122
competitors and complementors 116
customers and distribution channels 116
 economic environment 116
environmental scanning 116
industry regulators and legislation 117
strategic value of CI 126
suppliers 116
technological environment 117
competitive or business strategy 176, 210
sustainable advantage 176
competitive strategies for international business
global 395
international 395
multidomestic or localisation 395
transnational 395
competitive strategy expressed and practised by Western and Far Eastern organisations 79
maintaining strategic fit 79
competitor analysis
ABSA 199
First National Bank 199
Nedbank 199
South African retail banking industry 199
Standard Bank 199
competitors, framework for analysing
competitive intelligence (CI) 199
Framework for competitor analysis 200
individual and groups 203
profiling 199
complementary forces framework competition 189
customers 189
smart devise industry 189
suppliers 189
Complementary relationships in the smart device industry 190
complementary relationships – the value net
Brandenburger and Nalebuff 188–189
complementor 174, 191
complementor concentration 189
dependence on a single industry 190
five forces framework 188
integration 189
market growth 190
switching costs 189
unbundling complementary products 189
visibility 190
complementing resources 214
balancing 215
blending 215
complementors 191, 203
complexity
of international business 373
theory 3, 13, 473
computers 128
intelligent agents 129
systems 129
concentrating resources
converging elements 214
 focusing the efforts of each organisational unit 214
targeting activities with highest impact 214
Conflicting Values Framework (CVF) depicting culture types
& corresponding leadership approaches 491
conscientiousness
demanding jobs 314
initiative, drive, persistence, organisational skills 314–315
conservation values (Schwartz)
conformity, tradition, security values 316
religious or cultural customs 316
socially oriented external expectations 316
traditional values 316
conserving resources
co-opting 215
recycling 215
consistency 273
communications and technology (ICT) 271
customer- and employee-centred information 271
pay-TV industry 271
solutions service provider 271
strategic intent and objectives 271
consolidation through mergers or acquisitions 196
construction and oil sector
Murray & Roberts, WBHO, Sasol 7
consumer market segments 141
changing needs & buying behaviour 141
context-based strategy-making 47, 69
contextual influences on strategic decision-making 111–112
characteristics of decision-makers 111–112
Contribution of governance at Clicks 441
control 20
strategic measures 7
cooperative relationships 191
Brandenburger & Nalebuff’s key idea 191
complementary relationships 191
‘co-opetition’ 191
core competencies 415
corporate citizenship 6
corporate goals 94
corporate governance 415
corporate level strategies 33, 243, 251, 272
corporate social responsibility 6, 8
corporate strategy concepts 10
cost advantages sources
cost-leadership strategy 256
economies of scale 256
specialised machines 256
Cost and differentiation advantages in wine industry 230
value chain 230, 231
cost-effectiveness offered by outsourcing 474
cost leadership strategy 174, 255, 257, 272, 470
aimed at large market 254
change in competitive environment 257
competitors respond to focused 262
 disadvantages 257
foreign competitors in developing countries 257
Hill & Jones 257
labour cost savings 257
low-cost, low-priced products 257
low-cost strategy 257
low labour costs 257
referred to as low cost provider 243
threat to 257
cost reduction and local responsiveness pressures
competitive pressure 395
financial services 395
non-durable consumer goods 395
processed foods 395
countries, differences between 373
country-specific advantages (CSAs)
culture 364, 373, 374, 385
in foreign markets 393
Creating a sense of urgency – Lego won’t survive 444
crisis management champions and teams 514
cross-border trade and investment 368
cross-cultural literacy 388
CSM’s production facility 233
Appraising CSM’s resources and capabilities – a visual summary 234
cultural conditioning of leadership behaviour 429–431
‘foreign’ leadership theory 429
national cultural value systems 429
notion of ubuntu 429
‘Rainbow Nation’, South Africa 429
social and cultural values of people 429
stakeholder-inclusive approach 429
Wendy Lucas-Bull, former Retail CEO 430
cultural conditioning of subordinates 416
cultural dimensions (Hofstede)
individualism versus collectivism 388
indulgence versus restraint 388
masculinity versus femininity 388
power distance 388
short-term versus long-term orientation 388
uncertainty avoidance 388
culture 440, 492
nation, society, group 386, 388
culture manifestations
dress code 489
folklore 489
heroes 489
language 489
office layout 489
Schein’s definition of organisational culture 489
symbols and rituals 489
customer analysis 174
key success factors 202
market segmentation methodology 202
scope of segmentation 202
 segment attractiveness 202
segment uniqueness 202
customer relationship management (CRM) 120
customer responsiveness (divisional approach) 474
customer satisfaction
community at large (secondary) 470
customers (primary) 469
employees (primary) 469
shareholders (primary) 469
suppliers (secondary) 470
customers needs 7
cyber incidents and business interruption risks 508

D
Daimler-Benz, German icon 215
DaimlerChrysler 215
dashboard management 121
see also digital dashboards
data
cleansing 120
clickstream 120
extracting, transforming, loading (ETL) 120
proliferation due to internet access 506
static 146
storage, management, analysis 115
turned into intelligence 26
variety 116
velocity 116
veracity (truthfulness) 116
volume 116
data collection (including CI and BIS) 115, 116
data extraction and reporting
artificial intelligence (AI) 121
database research 121
executive information systems (EIS) 120, 121
mining concept (Bradley definition) 120, 121
OLAP 120–121
statistical techniques 121
data services
Skype, WhatsApp calling and Apple Facetime 380
WhatsApp and video 380
data warehouse
BI technology 120, 122
data marts 120
decisions
criteria 105
importance of 112
time pressure 112
decision trees
design added features to pursue differentiation 269
Example of a decision tree 270
forecasting 270
graphical presentation of options 269
growth, investment, diversity 269
 invest in research and development 269
Reuben September, CEO 271
scenarios 270
Dee Hock, founder of Visa
coined term ‘chaordic’, combination of chaos and order 473
defining the industry
advantage and profitability 176
boundaries 176–177
complementarities 177
convergence 176
horizontal, vertical, geographic scope 177
managerial judgement 176
outside-in perspective 176
substitutability 177
Definitions of organisational archictecture 463
degree of collectivity 81
difference between visions and strategic intent 81
delegation of authority 480
arguments 480
non-managerial employees 480
Dell and Apple 191
Description of the three operations process strategies 471
developing countries 7
development, change and transformation, strategic 7
Deming Cycle 70
Plan, Do, Check, Act Cycle 70
demographic factors
collectivist and individualistic societies 149
criteria 149
cultural diversity 149
ethnic diversity 149
globalisation and freedom of movement 149
growth rates of age groups worldwide 149
migration of people 149
departmentalisation 475
conflict 475
divisional approach 475
external service providers 475
functional approach 475
matrix approach 475
resourcing 475
role ambiguity 475
turnover among employees 475
virtual approach 475
virtual structures 475
departmentalism 474
designing process 312
design theory, dominant 285, 291
abductive thinking 312
assembly manufacturing industries 291
Beckman & Barry 312
cybernetics field 312
emergence changes rules of the game 291
‘first generation’ theories and methods 312
 inspiration, ideation, implementation stages 312
‘second generation’ theories 312
set of standards 291
‘state-gate’ process 312
Suarez and Utterback 291
transition point or milestone in industry life cycle 291
design thinking 312, 319
applied 283
concept visualisation 313
creating new and better models 313
developing new ideas and possibilities 313
engineering, industrial design, architecture 312
ideation 313
multidisciplinary collaborating, focus on enabling 312
prototyping 313
sourcing creativity from constraints or challenges 313
Three Gears of Business Design (Fraser) 313
user evaluation 313
desirability 273
ability to produce results 271
needs and priorities of organisation 271
Thompson & Martin 271
Differences between fuzzy front end phase & the development phase 311
Different approaches to departmentalisation 476–478
differentiation strategy 174, 243, 272, 470
advantages 259
brand loyalty 259
broad 259
disadvantages 260
focused 259
higher market share than competitors 257
intangible source, quality of service 260
linked to high switching costs 259
protection against competitors 259
referred to as premium strategy 257
reliability or prestige 260
strategy aimed at large market 259
differentiator 259–260
brand loyalty 259, 260
period of economic recession 260
digital dashboards, benefits of using 121
digital photography
dismissed by film camera manufacturers 198–199
Kodak 199
digital technologies 14
digital transformation 24
dimensions of organisational cultures & alignment
with strategy
ethical business practices and values 490
guidelines 489
strategic alignment and implementation 489–490
Dinokeng scenarios for South Africa 128
Walk Apart, Walk Behind, Walk Together 128
Disclosure of information 481–482
Discovery Health 259
brand loyalty 259
business model innovation 283
founder Adrian Gore 418
Vitality programme 418
distinctive capabilities 220
architecture, reputation, innovation framework 220
functional analysis 220
organisational aligned to strategy 440
Porter’s value chain 220
divestment of non-core business activities 13
division of labour
degree of authority 474
job enrichment through job enlargement 474–475
mass production 474
post-industrial organisation 474
sequencing and task dependency 474
skill or expertise 474
specialised environments 474
Dobson, Rylan 67
dominant design theory 282, 291, 318
bandwagon effects or network externalities in industry 292
influence of government regulation or intervention 291
presence of collateral assets 291
strategic action taken at organisational level 291–292
Suarez and Utterback 291–292
typewriter 292
Donald Gordon, Liberty Life 438
DRC’s new mining code is in force 381–382, 383
drivers of globalisation
competition, cost-reduction pressures, economics scale and scope 371
cultural homogenisation 371–372
escalating costs of research and development (R&D) 371
industrialisation. economic development, modernisation 372
integration of world financial markets 372
government and industrial policies 372
Mahindra plans assembly in South Adrica 371
multinational enterprises 371
Standard Bank to expand footprint in Francophone Africa 371
driving forces 445
Drucker, Peter 20
due diligence 107
Dunning’s Eclectic Paradigm
internalisation (I) 390
location-specific advantages (L) 390
OLI paradigm 390
ownership-specific advantages (O) 390
dynamic capabilities 3, 25, 219–220, 234–235
alliance and acquisition routines 220
coevolving 220
Eisenhardt & Martin 220
exit routines 220
knowledge creation 220
patching strategic process 220
 reconfiguration of resources 220
resource allocation routines 220
resource integration 220
strategic decision-making 220
Dynamic view of strategy 228
dynamic views of strategy (Ghemawat) 228–229
concept of dynamic strategy 228
economic commitment theory 228
lock-in 229
notion of ‘lumpy commitments’ 228
principles 228
pure resource-based view 228
value of resources and capabilities 228

E
Earth Summit in Rio de Janeiro 14
Eastman, George 24
economic environment
international management 384–385
MNE’s products and services 384
economic factors (Hill & McShane)
currency exchange rates 145
growth rate of economy 145
level of interest rates 145
price inflation 145
economic growth or recessionary cycles 378
average annual cross-border investment 378
FDI and networks of subsidiaries 378
global financial crisis 378
global recessionary cycle 378
IMS 378
value of world trade 378
world economy 378
economic performance 8
economic philosophy 386
economic progress 7
economic rent 208
Apple’s iOS software 211
Ricardian (named after economist David Ricardo) 211
Schumpterian (named after Joseph Schumpeter) 211–212
unique resources and capabilities 211
economic risk 136, 146
economics of production 287
economic systems 364
market economy 385
mixed economy 385
economies of scale 292
ecosystems 59
education 386, 387
electric-powered vehicles and self-driving cars 141
electronics and appliance manufacturers
Apple, IG and Samsung 188
electronics retail industry
Dion Wired 184
 HiFi corporation 184
Hirsch’s and Makro 184
price competition and discounting 184
Elements of culture 386
emotional intelligence 415, 416, 423, 439, 444
behavioural complexity 425
empathy 425
Goleman’s approach 425
motivation 425
relationships and competencies 425
self-awareness 425
self-regulation 425
social skills 425
employee rewards to performance 94
employment and unemployment levels 146
Whence employment and careers? 146–147
empowering previously disadvantaged people 7
end-game success strategies 174
Encyclopaedia Britannica 179
Fujifilm digital cameras 179
harvesting an asset 179
Itime, South African airline 179
key success factors 179
leadership 179
Louis Vuitton 179
niche 179
quick sale of business or liquidation 179
withdrawal 179
‘enlightened shareholder perspective’ 52
Ensuring ethical practices and good governance at Sasol 442–443
enterprise risk management 522
environment
external 168, 210, 249
internal 210, 249, 505
strengths and weaknesses 210, 249
threats and opportunities 249
environmental analysis 136
external and internal 107
environmental changes 107
environmental integrity 8
environmental legislation 154–155
environmentally conscious market 259
environmental munificence of organisation
empirical evidence 113–114
environmental scanning 137–138, 105
and analysis processes 107
decision enablers 115
environmental, social and economic resources 6
environmental, social and governance (ESG) issues 70
environmental sustainable cause 259
environmental turbulance 158, 168
environmental uncertainty
customer preferences 114
see also Telkom’s decision to sell its share
 in Vodacom 114
environment of organisation 7
external 113, 136, 138, 140
focus (process, improvement, products/services) 8
high-velocity, dynamic, unstable 113
hostile and threatening 113
integration with 7
internal 136, 138, 140
environment-scanning activities 115
Eskom in South Africa 144, 183, 190
Eskom’s Medupi and Kusile projects 516–517
ethical perspectives 7
ethical practices 417
European Union (EU) 147
elimination of customs controls 378
trade and investment 378
world’s largest economic trade bloc 378
European Union (EU) and South Africa 370
eutrophication 58
evaluating strategies
appropriateness 268
corporate level strategies 268
feasibility 270–271
innovation 268
strategic options 268
suitability of strategy 268
evolution
in industry 203
of strategic management 11–12
evolutionary dynamics in industry 193
Example of risk impact classification 509
exchange of foreign currencies and foreign exchange risk
cross-border transactions 374
foreign exchange rates 374
executive intelligence officer (EIO) responsibilities
content leadership 124
decision relevance 124
dot connector 124
education enabler 124
finance and resource availability 271
intelligence quality assurance 124
safe harbour 124
top-level executives 417
voice of realism 124
experience, openness to 314
exploitability
Hamel & Prahalad 214
resource-based view (RBV) 211, 214
exporting 399–400
external envirionment
strategic relevance and structure 138–140
strategic stretch or fit 138
structure 139
externalisation 126
external risk performance reporting, ongoing 524
extraversion (Costa & McCrae) 314

F
Facebook 292
factor conditions, Japan 392
Fastjet networks 271
founder of easyJet, Stelios Haji-Ioannou 272
Ghana, Kenya, Tanzania, Angola 271
Fay, John 65
feasibility 273
Ferrero Rocher, Italian sweet manufacturer 148
fertilisers and pesticides, increase in use of 63
Financial and non-financial risk appetite metrics 524
firm-specific advantage (FSA) 364
First Descents mission statement 87
1st for Women 260
five forces and value net frameworks 193
Five million jobs will be lost to AI by 2020 – WEF 379–380
five Ps of strategy (Mintzberg) 5, 16
activities (what is done) 16
bottom-up approach 18
deliberate and emergent strategies 18, 30
diversification strategy 18
emergent strategy 18
emergent unplanned strategies 19
extra-organisational 16
‘fuzzy and intuitive process of understanding’ 18
intra- and extra-organisational strategic activity 16
plan, pattern, position, perspective, ploy 16–18
practices (how things are done) 16
strategy as a perspective 16
strategy as a plan 16
top-down planning 18
umbrella strategy 19
flexible production configurations and networks 435
flexibility to accommodate change 6
floods in New Orleans in 2005 59
focused cost leadership 272
based on low cost 262
hotel and tourism industry 262
focused differentiation strategies 272
boutique hotel industry 262
custom cruiser 262
customised touring 262
Edcon Group’s Charter Club brand 262
Harley-Davidson competitive advantage 262
standardised motorcycles in market 262
target market niche 262
touring motorcycles 262
focused strategies advantages 243, 260, 262, 263
above average returns on investment 263
also called a niche strategy 260, 272
customers’ loyalty 262–263
 Hill & Jones 262
Porter’s five forces model 262
versions of cost leadership and differentiation 260–261
focus strategies disadvantages
boutique fashion designer competing against boutique
offerings through large retailers 263
production costs 263
Zara and Woolworths 263
Force field analysis 445, 446
Ford Motor Company 15, 523, 523–524
Ford Motor Company’s Kuga dilemma 521
Ford Mustang brand image 259
foreign countries, individual
low-cost labour 390
low costs of financing 390
natural resources 390
skilled labour 390
foreign direct investment (FDI) 136, 146, 364, 367, 370
foreign market entry modes 398
equity- or non-equity-based modes 399
exporting 398
franchising 398
joint ventures 398
licensing 398
selecting an optimal entry mode 402
strategic alliances, contractual agreements 398
turnkey projects 399
wholly-owned subsidiaries in foreign countries 398
foreign markets
entry modes 364, 366, 398–399
expanding operations 366
modes 364
strategies for entering 398
foreign portfolio investment (FPI) 364, 367
formal economy 7
Formulation and setting risk strategies 503, 503–504
Foschini Group 423
Foster
culture trap 290
knowledge 292
misreading market signals 290
technological myopia 290
Foster and Akdere’s three basic approaches to develop vision
analytical, benchmark, intuitive approach 82
attributes necessary for vision 82
technology S-curve explanations 282, 285, 318
Four international strategies 396
Four steps for developing contextual strategies and goals 68
frachising 410
McDonald’s, KFC, Starbucks 401
fractals 473
geometric, self-replicating shapes 473
snowflakes & fronds of a fern 473
free call-tracking system 24
Freeman, Ed
co-authored with Heather Elms 54
social responsibility of business 54–57
freemarket philosophy and democratic principles 386
freshwater use (over-use and pollution) 58
Friedman, Milton 50–51, 58
Full range leadership development theory 426
functional analysis & Porter’s value chain 220
architecture, reputation, innovation 220
Functional analysis of capabilities, examples of 224
functional or operational strategies 272, 438
fuzzy front end innovation 319
product development 283

G
Galloway, Gideon, founder and CEO 78
game theory 188
General Agreement on Tariffs and Trade (GATT) 370, 373
General Agreement on Trade in Services (GATS) 370, 373
General Agreement on Trade-Related Intellectual Property Rights (TRIPS) 370, 373
geographic focus of organisation 105, 107
geographic information systems (GIS) 121
geopolitical forces and events 364
global beer market
Nottingham Road Brewing Company, KwaZulu-Natal Midlands 201
Strategic group map of the global beer market 201
global business environment 140, 375, 406
domestic organisations 376
dynamic 366
importance and structure 376
international businesses 140
macroenvironmental factors 376
MNE management 376
global business imperative
country-specific advantages (CSAs) 373
firm-specific advanatge (FSA) 372–373
international business different 372–373
MNE’s involvement in different countries 373
Standard Bank 373
global business networking 368
global climate change 154
motor vehicle manufacturing 154
global companies 364
referred to as transnational or globally integrated companies 367
global competition 281
global competitive advantage 33
global context
demographic factors 157
‘domestic’ and ‘global’ factors 157
economic factors 156
legal factors 157
natural environmental factors 157
political factors 157
sociocultural factors 157
 technological factors 157
global corporate citizens 7
global economic system, interdependent and interlinked 368
global environment
expanding operations to foreign markets 156
exporting 156
foreign direct investment 156
formation of international joint ventures 156
strategic alliances 156
global environmental forces 140
globalisation 13, 36, 136, 140, 156, 364, 366, 371
context of international business 367–368
cross-border flow of goods, services, capital, information,
knowledge 368
drivers 364, 369
economic definition 368
economic perspective 368
markets 364
ongoing and increasing international competition 156
markets and production sets of opposing forces 368–369
production 364
Segal-Horn’s understanding 368
tariff and non-tariff barriers 370
tariff rates 370
virtues and adverse implications debate 368
globalisation of markets 364
benefits for MNEs 369
localisation forces 369
national value systems 369
new market opportunities 369
preferences on world-wide scale 369
opposing forces 268–369
standardised products 369
globalisation of production
location economics 369
lower costs and/or improved quality 369
global or supranational political institutions and agreements 377
cross-border movement of goods, services, resources 378
geopolitical forces and events 377
International Court of Justice in Hague, Netherland 378
international law 377–378
International Monetary Fund (IMF) 377
international practice accepted as law 378
MNF’s strategic international options 377
‘natural law’ 378
political risks 377
regional economic integration (REI) 378
trade blocks or free trade areas (FTAs) 378
treaties and conventions 378
Un through World Bank (WB) 377
World Trade Organization (WTO) 377
global penetration (divisional approach of region) 474
global positioning data 121
Global Reporting Initiative (GRI) 14
global strategy 364, 367
centralised decision-making control 397
coordination of sales 397
economies of scale 397
leveraging firm technology across markets 397
marketing of standardised products worldwide 397
mutually interdependent subsidiaries in foreign countries 397
pressurres for cost reduction 397
production, marketing, R&D 397
global warming 59
use of fossil fuels 154
goals
setting 94
and values 26
Going beyond compliance – the Clicks Group 442
good governance 417
Google 26
Maps 220
government
alleviation of taxes and provision of export incentives 393
and chance events (Porter) 393
DRC’s new nining code in force 393
engagement with 8
profit-reducing force 191
regulating barriers to entry and competition 191
government restrictions and intervention
foreign exchange controls 373
investment restrictions 373
local ownership requirements 373
quotas on imports into foreign countries 373
tariff and non-tariff barriers 273
government’s monetary policy 146
expenditure on societal needs, health care, education,
welfare and infrastructure 146
interest rates and inflation levels 146
taxation 146
greenhouse gases
carbon dioxide and methane 59
emissions targets 67–68
gross domestic product (GDP) 136, 145–146, 385
gross national income (GNI) 136, 145–146
Growing the magic kingdom 215
growth in above-average returns 281
growth phases of product or industry
decline 196
development phase 195
growth phase 195
maturity 195–196
shake-out phase 195
GSM technology 195, 198

H
Haiti earthquakes 393
Hamel and Prahalad’s concept of strategic intent 79–80
Harry oppenheimer, Anglo American 438
Hart, Stuart 64
Hierarchical model of foreign market entry modes 399
hieratchical organisational structures 473
Higgins’ 8-S model 444
high-velocity micro-computer industry 113
Hitt, Ireland, Hoskisson 81
on vision statement 81
HIV/Aids and organisational architecture – An application 464, 469, 470
HIV/Aids – an unforgiving phenomenon 148–149
HIV/Aids impact
economic, socio-economic, demographic implications 148, 157
macroenvironmental perspective 148
sociocultural factor 157
horizontal focus of organisation 105, 107
How Discovery in South African context shook up its industry through business model innovation 302–303
How Discovery keeps innovating – the perspective of CEO Adrian Gore 221–223
How Dow Corning built successful new business model from scratch 305
How multiple connections create value 15–16
HRM
differentiation through innovation 436
differentiation through quality 436
functions 435
practices 437
production managers 438
strategies, systems, processes 436
Huawei 184
human resources 217–218
individual skills and competencies 217–218
human rights 8

I
Iceland volcanic eruption, volcanic ash 393
Ilbury and Sunter
re-emergence of scenario planning 13
implementation of strategy 415, 417
Implementing strategic risk management in organisation 513
Independent Communications Authority of
South Africa (ICASA) 144, 191
broadcast licence 271
India’s prohibition of foreign wholly-owned subsidiaries in retail sector 382
individual innovativeness 33
individualistic issues priority matrix 136
individual motivational values 315
individual skills and competencies 208
individual values theory 319
Industrial Revolution 287
industry analysis 203
asumption that organisations are selfish 188
competitive advantage 176
competitive and cooperative dynamics 176
defining 176
evolution and structure 176
importance of customers 188
 human elements 188
industry environment as a threat (Porter) 188
multidimensional 203
niches and segments 261
opportunities and threats in environment 176
organisational performance 188
static framework 188
structure-conduct-performance approach 188
theoretical foundation 188
three broad steps 176
top-down or prescriptive approach to strategy 188
variations in profitability 176
industry competition, extended framework of 191
five forces framework 191
Wheelen and Hunger 191
industry dynamics and strategy, competitor analysis 174
industry environment 138, 178, 389, 505
analysis 175
boundaries 174
buyers 389
competitive forces 174
competitive rivalry 389
competitors and customers analysis 175
complementary products or services and government 389
governmen regulators 389
intervention 389
Porter’s five forces model 389
potential entrants 389
substitutes 389
suppliers 389
industry evolution; competition over time
life cycle 195
S-curve analysis 195
industry key success factors
collective goods or services (police service or museums) 181
competition 177
corporation 177
customers 177
Key success factors example 177, 178
mature and declining industries 178
not-for-profit industries 178
not-for-profit settings 181
Pankei Ghemawat’s criticisation of ‘three C’s’ 178
Robert Grant’s suggestion 177
technology-intensive industries 178
‘three C’s’ defined by Kenichi Ohmae 177
industry key success factors in industries
competitive advantage in mature industries 178
conditions of decline 179
cost advantage 178
cost leadership 178
critical success factors 227
differentiation 178
end-game strategies 178
 Grant’s identification 178
key success factors (KSFs) 227
market segments 178
mature and declining 178
profitable market segments 178
relative competitive position of organisation 178–179
strategic industry factors 227
strategic innovation 178
Using key success factors to identify capability gaps 227
Industry life cycle of the cellular industry 174,198, 196–197, 198
knowledge diffusion 197–198
industry regulation 191
as a competitive force 190
and value net frameworks 190
industry-specific regulators 144
industry-specific regulators 144
government agencies or statutory bodies 144
industry standards
Blu-Ray and compact disc 291
guidelines 181
inflation rate (economic factor) 157
information and communications technology (ICT) 371
information levels of scorecard 94
Information Security Breach survey, PricewaterhouseCoopers 512
information technology (IT)
component of organisations’ strategies 153
transfer 368
innovation
bottom of the pyramid 299
disruptive associated with uncertainty 284
disruptive dangers 282, 284, 299, 318
disruptive technologies, Christensen 284
focus of value 284
knowledge of theory 282, 284
Markides 284
organisations 280, 281
principles 281
risk quantified or calculated 284
seminal theory 285
strategic 284, 299
theories 281, 282, 285, 318
Innovation context and its constituent elements 280
innovation opportunities (Prahalad)
Apple’s approach 301
‘boundaries’ of innovation sandbox 307
Business model 301
core delivery system 307
cost model 301
ecosystem 307
guidelines to reconceptualise busness models 307
Indian Institute of Science collaborations 307
innovation in BOP markets 307, 318
operating model 300
organisation 301
 presented by innovation theories 284
systems thinking 307
three elements or choices 301
value chain 301
value proposition 300–301
innovation opporunities at bottom of pyramid 305
access 306
affordability 306
availability 306
awareness 306
BOP markets, Prahalad 305, 306
breakthrough innovations 306
innovators 306
micro-consumers, micro-producers, micro-investers,
middle class demographic 306
working ‘within innovation sandbox’, Prahalad terms 306
Innovation paradox 293–294
innovative individuals 280, 281, 283–284
biological needs 315
diversity 313
needs associated with group survival and functioning 315
needs related to coordinated social interaction 315
personality theory 313
Schwartz’s values theory 313
innovativeness and individual values
comprehensive values theory (Schwartz) 315
Schwartz’s values theory, Big Five theory 315
innovative software 297
inside-out
approach 140
internal organisational environment 36
perspective of superior returns 25
perspectives 5–6, 13, 22–26, 32, 35
strategic stretch 23, 33
insurance
companies 200
short-term 185
intangible resources 217
brand value, culture, intellectual capital 217
intangible assets (brand value, brand names) 217
patents, brands, business systems, customer databases 217
physical assets 217
integrated cost leadership
differentiation strategies 263
integrated strategies 263, 264
middle business strategies 263
middle ground business strategies 263
motor vehicle industry 263
orientation towards best value 263–264
Sorbet Beauty Salons South Africa 264
strategy 263
integrated international strategic management process 364
integrated organisational system
conceptual models 434
 cross-functional activities 433
Higgins to drive corporate strategy 433
integrated organisational system tasks 434
Integrated Reporting framework
future outlook 71
governance and remuneration 71
operating context, risks and opportunities 71
organisational overview and business model 71
performance 71
strategic objectives and strategies 71
integrated reporting principles of integrated reporting 70
conciseness, reliability 70, 71
connectivity of information 70
future orientation responsiveness 70, 71
materiality 70
reliability 70, 71
responsiveness and stakeholder inclusiveness 70, 71
strategic focus 70
Integrated strategic framework of organisational design and structure 473
integrated strategic management framework 366
integrated strategies, advantages of 272
profit margins and bottom line 264
Toyota example 264
integrated strategies, disadvantages
Competing in South Africa’s airline industry 264
included SAA and SA Express 264
integrating mechanisms 105
Intel 368
intelligence gathering, analysis, dissemination 131
intelligence specialists
BI analyst 124
CI officer 124
marketing intelligence officer 124
market researcher 125
intelligence teams
challenge conventional wisdom 123
CI, CRM, data mining, marketing research 123
core members 123
guidelines (Fahey & Herring) 123
market integration skills 123
market intelligence 123
multidisciplinary 123
strategic decision-makers 123
strategic intelligence issues 123
transient members 123
see also Use of an intelligence team
interest rates increase 157–158
international business 364
dynamics, structures, environments 366
levels of education 388
proactive reasons 374
reactive reasons 374
strategic management 366
motives for involvement 374
 trade and direct investment 366
international competitive advantage 364, 366
country specific advantages (CSAs) 390
factor markets in foreign countries 390
international competitive advantage in global context 390
country-specific advantages (CSAs) 390, 406
international competitive strategies 366
internationalisation process 374–375
benefits of value creation 375
discrimination 375
liability of foreignness 375
MNEs 375
objectives and strategies 375
reactive and proactive motives 375
relational 375
Standard Bank 375
Typical evolution of multinational enterprise 375
unfamiliarity 375
value through international expansion 375, 406
international competitive strategies, quest for 406
combinations of strategies 393
ethnocentric, polycentric, regiocentric predisposition 394
factor markets in foreign countries 390
firm-specific advantage (FSA) 390
global strategy 393
international strategy 393
MNE’s foreign subsidiary 390
multidomestic or localisation strategy 393
strategic orientation (DEF30) 393
transnational strategy 393
international enterprise 364, 367
International Integrated Reporting Council 70
internationalisation 33, 364
external environments 376
motives and strategic options 366
international management 367
international organisations and agreements role
World Trade Organisation (WTO) 373
GATT, GATS, TRIPS 373
international strategies 364, 367
IBM 396
Kelloggs 396
Microsoft 396
stationary, packing material, toys, domestic appliances 396
Toys ‘R’ Us 396
international strategic management
developing international strategic framework 402
generic strategic process 402
global context 402
long-term objectives (LTOs) 403
organisational culture and values 403
process 402
steps to follow 402–403
strategy evaluation and control 402
 process 364, 366
international strategic management framework
generic process 402
steps 1 to 5 402, 404
International strategic management process 403
international strategic planning 385
international trade 364
and foreign direct investment (FDI) 367
internet
growth in usage for Africa, Middle East, Latin America/Caribbean, Asia increase 152
Growth in users (millions), 2000–2017 150
moderate usage in Europe, North America 152–153
personal computer 287
internet of things (IoT) 14
intra-industry analysis 176, 199, 203
intrinsic good rather than instrumental value 52
iPhone XS 184
iPhone XS Max 184, 30
iPod 302
iTunes service 301
irrigation water reduced 63
Islamic banking and finance 384
Islamic law 384
Qur’an (Koran) foundation 384
ISO standards for risk management 519
Issues Priority Matrix 136, 163–164, 164, 168, 169
low priority, high priority 164
PESTEL approach 164
priority matrix 164
strategic myopia 164
IT capabilities 26

J
Japanese organisations
global competitive balance 79
vision of global leadership 79
Joule electric car 214
South African-developed 215

K
Kaplan, Robert 14–15
Key competencies of Sasol 441
key stakeholders 445
key success factors (KSFs) industry, 176, 203, 391
King IV Code of Corporate Governance 51–52
‘stakeholder-inclusive approach’ 55
King IV Report on Corporate Governance 424-425, 435
external performance reporting 506
triple bottom line performance results 506
King Price Insurance 76–78, 79
King Price: Our flawsome family and the values we live by 89–90
King Report IV
on Corporate Governance 14, 424–425
need for integrated sustainability reporting 14, 424–425
 requirements 8
stakeholder relationships 14
King III Report on Corporate Governance 70
knowledge
building blocks in organisation 226
and capabilities 220, 226
creation routines 220
economy 380
explicit 126
integrating specialist knowledge of individuals 226
knowing about, or explicit 226
knowing how, or tacit 226
revolution, Schumpeter 287
sharing 126
skills base 462
strengths and weaknesses 284
transfer 126
Knowledge as building blocks of organisational capalities 227
Knowledge, skills & abilities (KSAs) 458, 487, 492
basic 487
distinctive 487
specific 487
see also Mark Shuttleworth
Kodak 24, 28, 35
core or distinctive capabilities 24
Eastman Kodak Co 24
externally 24
internally 24
printing industry 24
strategic architecture 24
Komatsu’s intent to ‘encircle Caterpillar’ 80
Kondratiev’s long wave theory of innovation 282, 285, 286, 318
business cycles 285
cycle associated with automobiles, electronics, oil, aerospace 285
cycle associated with computers, telecommunications, internet 285
cycle associated with cotton, iron, water power 285
cycle associated with electricity, chemicals, steel 285
cycle associated with railways, steam power 285
depression stage 285, 286
different technology 285
diminishing returns 286
disruptive innovation 286
innovative cycles 285
internet boom, 1990s 285
price competition 286
prosperity stage 285, 286
recession stage 285, 286
recovery phase 285
surplus capacity 286
KPMG 520
Kramer 62, 63

L
labour
 departmentalisation or functional roles 435
division 434–435
grievance, disciplinary, dispute procedures 436
law changes 505
relations systems 436
unions 112
labour-intensive organisation 505
land-system change and deforestation 58
language 386
international negotiations and contracts 387
marketing 387
promotion and advertising 387
Signs from all over the world 387, 387
spoken (verbal) & unspoken (non-verbal) 387
leaders
become change agent 421
effective ethical 416
initiating and managing change 421
strategic 424
leadership 7, 415, 444
ambidexterity theory for innovation & transformational leadership theory 283, 318–319
approach 283
defintions 438–439
ethical 442
exploration and exploitation 283
lead ethically and effectively for strategic results 424–430
organisational culture, policies, strategies 462
organisational learning 283
pipeline model 439
role in developing innovation-supportive organisation 307
Rowe’s conceptualisation 428
skills and values 439
strategic 417, 418
transformational theory 283, 318, 439
value of strategic 415
leadership role
creating organisation supportive of innovation 308
exploration and exploitation modes 308
responsibility 431
Rosing, Frese, Bausch 308
leadership style (behaviour) 425–429
Bass & Avolio styles identified & classified 426, 428
Goleman, golf as analogy 426
transactional leadership 426, 427
transformational leadership 426, 427
see also under transactional factors
Leadership through ubuntu 430–431
Lee et al.
architecture 493
model 470
organisational architecture 464
process approach 493
legal environment
bilateral and multilateral agreements or treaties 383
 civil law or code law 384
collectivist-inclined totalitarian states 383
common law 384
Islamic banking and finance 384
reciprocal tax treaties between countries 383
systems in foreign locations 383
theocratic law 384
legal systems 364
leisure and recreation opportunities 148
Levels of strategy 250
business level 19, 250
corporate level 19, 250
functional level 20
functional or operational stategy 250
Lewis Stores’ business model spelt out 424
liability of foreignness 364
licencing
foreign licenced organisation 400
exclusive rights for nutritional products from Nestlé 400
pharmaceutical company Aspen 400
lifecycle analysis technique 67, 203
Life Sciences (glucose-sensing contact lenses) 220
Lincoln, Abraham 85
linking rewards to performance measures 94
livelihoods 8
logistics company UPS 63
long-term objectives (LTOs) 403
long-term strategies and decision-making 53
long-term value-creation benefits 53
low-cost focus 243
low-cost leadership 263
strategy 254–255
Low price insurance for the people 256, 256
off-the-shelf cash prepaid insurance policies 256
loyalty programmes
Discovery Vitality 203
FNB e-Bucks 203
Pick n Pay’s Smart Shopper card 203
SAA Voyager 203
Luthans & Doh, strategies identified
integrative, protective, defensive techniques 383
proactive political strategies 383
relative bargaining power analysis 383
luxury design brand Jo Borkett 258
sales agreement with Edgars 258

M
macroeconomic environment
developments 508
foreign direct investment (FDI) 146
income levels within country 146
levels of disposable income 146
levels of saving 146
national debt 146
 potential risks, external & internal 505
stock market indices (All-Share Index on JSE) 146
unemployment rates 146
macroenvironment 137, 138, 158, 178, 505
ecological issues: pollution, energy as scarce resource 157
external environmental change 158
influence on industries and organisations 140
international oil price 157
opportunities and threats 158
Palmer & Hartley’s opinion 140
political-legal factors 144
political risk 144
strategic importance 140–141
structure and analysis 138
vehicle manufacturing industry 157
vision and mission 140
macroenvironmental analysis
Basic stages in environmental analysis 160–161
benefits 167–168
conducting 161–167
‘emergent’ instead of ‘deliberate’ strategising 168
environmental scanning process 168
Examples of factors and forces 162
in strategy formulation 136
into knowledge (Nonaka) 140
limitations 168
techniques 159
see also SWOT analysis; PESTEL approach
macroenvironmental analysis of countries
demographics, geography, physical characteristics 380
political, legal, economic, sociocultural systems 380
macroenvironmental nine-stage process (Lynch)
stage 1: environment basics 159
stage 2: degree of turbulance 159
stage 3: background factors that influence competitive environments 159
stage 4: analysis of stages of market growth 159
stage 5: factors specific to industry 159
stgae 6: balance of power in industry 159
stage 7: factors specific to cooperation in industry 159
stage 8: factors specific to immediate Competitors 160
stage 9: customer analysis 160
macroenvironmental factors and forces 136
demographic 142
economic 142
environmental 142
Examples 162, 163
political-legal 142
socio-cultural 142
technological 142
macroenvironmental factors at global level 376–377
business-related activities 377
economic force 377
demographic 377
global trade 377
 investment 377
natural environment forces 377
political-legal institutions and forces 377
technological environmental forces 377
macroenvironmental turbulance 136
agriculture industry 159
assessing (Lynch) 158
biogenetics and AI 159
changeability in market 158
complexity and novelty components 158
globalisation 158
mobile phone handsets 158
predictability 158–159
rapid technological, social, political change 158
weather forecasts 159
macroenvironment five forces
added value in an industry 183
competitive behaviour 183
disruption of forces of competition 183
nine-stage process 183
technology changes 183
macro-, industry and internal environments 107
macro political risk analysis 364, 382
Mahindra plans assembly in South Africa 405–406
management, centralised 473
management processes
knowledge, skills, levels of performance 471
roles 471
work agenda 471
work methods 471
managers to consider
human capital 71
intellectual capital 71
manufactured capital 71
natural capital 71
social and relationship capital 71
Marcario, Rose (Patagonia founder and current CEO) 54, 55
market 176
assess and target specific segments 203
capitalisation 503
creation 283
disruptions 299
distripution entity rely on generation entry 503
new entrants 174
segments 174, 203
skilled sales staff 503
strategic, operational, financial risks 503
marketing finance managers 438
Markides 299
strategic and technological innovation 299
Mark Shuttleworth and KSAs 487
Thawte Consulting 487
Matrix approach 475
Matrix of risk likelihood of occurrence and impact 510
Matrix organisation in telecommunication’s industry 479
matrix structure 475
maximising profit potential 13
McDonalds franchise 226
McKinsey 7S framework 444, 492
measuring business risk performance 524
mechanisms, integrating 123
integration of CI and BI 123
intelligence teams 123
market integration skills 123
market intelligence 123
see also scenario planning and analysis
mechanisms, processes as integrating
amplifying weak signals (Schoemaker & Day) 125, 126, 127
CI and BI activities 125
explicit and tacit knowledge 125
knowledge management 125
Transfer of knowledge 127
see also scenario planning
mental models 424
benefits and potential limitations 423
specialised knowledge and skill 422–423
strategic reasoning process 422
think logically & laterally to be creative 423
Mental or cognitive activities of strategic reasoning process 419
Michelin’s complex technological process
in manufacturing radial tyres 25
micro political risk analysis 364, 382
Microsoft 26
mission statement 87
Office products 259
Windows operating system 181, 211
middle (functional) managers 438
milestone reviews 518
development of project 516
military and business operations 9–10
mining companies 50
Mintzberg, see five Ps of strategy
mission committee or team 85
mission statements 30, 76, 79, 85, 96
best practice 85–86
form of ‘real time planning’ 85
formulation 85–87
fundamental objectives of business 86
guiding principles, credos or corporate philosophies 86
partner category (Allison) 87
primary stakeholder groups 87
producer category (Allison) 87
promotor category (Allison) 87
questions 86–87
strategic management process 85
Mission statements: Considering the content from top global grands 88
MiWay insurance 185, 260
MNEs international advantage 393
mobile phones, smartphones, iPads access to internet 153
monitoring and reporting on progress 49
monopoly rents 211
morale levels 440
motivational goals or values 315
circumplex structure 315
conservation domain values 315
constructs in terms of innovativeness 315
openness to change values 315
security, conformity, tradition 315
self-enhancement values 315
self-transcendence values 315
structure with four oppositional domains 315
MTN 144, 226, 271
demographic & sociocultural issues 138
external challenges 139
external environmental forces 138, 139
industry environment 139
internal environment 139
internal expansion initiatives 138
internal forces or factors 138
macroenvironment 139
Nigerian authorities 138
political/governmental macroenvironmental threat 139
Quest for growth in Africa 136–137
SA telecommunications company 138
SIM cards 138
Structure of the external environment 139
venture into Iran, 2006 144
multidomestic or localisation strategy 364, 367
competitive advantage 397
customisation or adaptation of products 396
high cost structures 397
high pressures for local responsiveness 396
limited organisational learning 397
low pressures for cost reductions 396
organisational decision-making 397
system-wide opporunities to realise economies of scale 396
value-creating or value-adding activities 396
multinational enterprise (MNE) 364, 366, 367, 368
campaign financing & related interventions 383
integrated international strategic management 366
referred to as multinational corporations,
multinational companies 367
multiple connections 3, 14
Mutual and Federal 185

N
national competitive advantage, Porter’s attributes 391
chance events 391
demand conditions 391
factor conditions 391
organisational strategies, structures, rivalry in organisation’s domestic environments 391
related and supporting industries 391
 role of government 391
National Energy Regulator (NERSA) 190
natural cycle, nitrogen and phosphorus 59
natural environment, factors related to
acid rain, result from coal-burning factories 153
air pollution 153
change in atmospheric radiation 153
emissions from cars and factories 154
environmental degradation 153
extinction of flora and fauna, deforestation 153
global climate changes 153
industrial toxic waste in underground sites 154
land pollution, waste & nuclear waste 154
ozone depletion 153
solar radiation 153
threats to life-supporting ecology 153
natural events
earthquakes, landslides, avalanches, floods, tidal waves,
droughts, freezes, volcanic eruptions 155
Haiti and Chile earthquakes 155
When ‘dry white’ is not a vintage but a disaster 155
natural resources 59
natural world 363
NCs VHS and Sony’s Betamax video standards 291, 368
clash between 291
Nedbank 435
Nedbank’s Fair Share 2030 as example of context-based strategy 69–70
Nelson Mandela
icon of SA leadership 430
ubuntu 430
Neotel taken over by Liquid Telecom 144
‘nested system’ view of business strategy 66, 66
Nestlé in US 148
Netcare 517
networked organisations 6
neuroticism 314
New Ventures Organisation (NVO) 35
niche market 272
Nintendo, Japanese multinational 35–36
Nintendo Labo 36
Nokia 26, 28, 35, 291, 368
non-linearity, uncertainty, ambiguity 13
non-renewable resources (minerals and metals) 59
North American Free Trade Agreement (NAFTA) 147, 370
between US, Canada, Mexico, European Union (EU) 370
not-for-profit organisations
collective goods or services (police service or museums) 181
Discovery Vitality 182
Edward Skloot, business consultant 181
entrepreneurial attitude 182
industry key success factors 181
management talent 182
mergers 182
Red Cross/Red Crescent and Oxfam 182
 stakeholders 182
strategic advantage 181
strategic alliances 182
strategic piggybacking 181–182
support from trustees 182
venture capital 182

O
ocean acidification 58
off-shore financial markets 367
off-shoring of businesses 301
oil and petroleum prices, international 141
Old Mutual plc (insurance sector) 7, 435
CEO Lain Williamson 423
Emerging Markets (OMEM) 435
Emerging Markets interim 435
examples of processes 435
OM Asset Management (OMAM) 435
role of business model 423
Wealth (OMW) 435
online transaction processing (OLTP) 120
operational processes
focus 471
repetitive and product focus 471
operational strategy 243
also referred to as functional strategy 243
opportunities and threats 6
organisation
internal elements 462
Porter’s research 392
potential competitive position 176
resources and capabilities 208
strategic direction, competitiveness, profitability,
survival 140
strengths or weaknesses 208
volatility, uncertainty, complexity, ambiguity (VUCA) 503
organisational architecture 6, 7, 366, 458, 462, 505
fundamental components 464
HIV/Aids 464
key pillars 464
knowledge, skills, abilities (KSA) 464
Lee et al.’s model 464, 469
McKinsey 7-6 framework 464
Nihilent’s MC3 framework 464
organisational processes 464
role of 492
SARS, Sasol, MTM, SA Airways, Multichoice &
Nedbank 464
‘shape’ of 464
structure/systems 464
V2MOM Developed by Saleforce.com’s Ceo, Mark Benioff 464
organisational capabilities
distinctive, valuable, rare, costly 440
non-substitutable 441
 resources to identify, cultivate, exploit 440
value chain 440
organisational chart (organigram) 434
organisational climate 415, 439
organisational culture 7, 415, 417, 439
associated means and ends 490
clan & adhocracy cultures 490
collective assessment, Schein approach 439–440
‘Competing Values Framework’ (CVF), Quinn & Rohrbaugh 490
competition, market share & growth 490
corresponding leadership styles 490
culture orientations 490
effective cultural changes 490
flexibility 490
hierarchical and market cultures 490
incremental changes 490
key characteristics 463–464
leadership, culture, cultural change 490
radical changes 490
strategic direction, mission, values, competencies 490
value dimensions 490
organisational innovativeness 33
organisational positioning attaining competitive advantage 13
organisational processes 458
organisational purpose 49
organisational routines 208
organisational structural system coordination procedures 434
degree of differentiation or specialisation 434
departmentalisation 434
distribution of authority 434
policies and procedures 434
processes and systems 462
standardisation of procedures 434
organisational structure 462, 472, 474
application of process of management 472
chaordic paradigm 472
critical organisational areas 472
current demands for efficiency 474
definitions 472
division of labour, span of control & aithority 474
framework of order and command 472
global effectiveness and flexibility 474
influence of strategic choice 417
Lee et al’s model 471, 472
Newtonian paridigm 472
Newtonian science 472–473
organisational design 472
processes and policy 417
relevant enabling systems 417
strategic choice 472
strategic imperatives 472
strategic implementation 472
division of labour, span of control & authority 474
global effectiveness and flexibility 474
 influence of strategic choice 474
processes and policy 417
relevant enabling systems 417
talented people as staff 417
organisational system, integrated 417
organisational values
autonomy & entrepreneurship 492
being close to the customer 492
being hands-on & values driven 492
bias for action 491
Peters & Waterman’s 8 attributes 491
productivity through people 492
simple form and lean staff 492
simultaneous loose-tight properties 492
sticking to the knitting 492
value statement 491
values in strategy alignment & implementation 492
organisations
capabilities 248
internationalise 364
Japanese, European, Southeast Asian 13
operational level 76
opportunities and competitive forces in industry 248
opportunities and risks 49
overall strategic direction 248
purpose 47
social and ecological context 49
strategic context 46, 104, 242
strategic direction 76
strategic objectives 76
strengths and weaknesses 248
underlying purpose 49
organograms (organisational charts) 475
outside-in, also known as strategic fit 27, 33
approach 140
competitive advantage 27
competitive intelligence 27
external environment 32
industrial organisation model 27
market-driven strategy 27
organisational environments 36
perspectives 6, 13, 22–23, 27–30
of superior returns 27
outsourcing 13
OUTsurance, short-term industry 185, 200
no-claim bonus 260
overhead costs, low 256

P
Pam Golding Properties 418
biggest real estate property groups 418
paradigm 458
paradoxical situation
past and future 34
 intended and emergent strategy 34–35
reactive or proactive approach to strategy 35
Inside-out or outside-in driven strategies 35–36
Profitability versus sustainability 36
Patagonia 50, 72
case study 47–48
social and ecological objectives 52
PEP stores
joint venture with Abacus Insurance 256
mission statement 86
performance
agreements with staff members 438
economic and environmental 8
risk and compliance management 524
performance management systems 438
appraisal & feedback in multicultural environments 486
halo effect, strictness, leniency, central tendency,
bias and recency 486
judgement-based errors
multicultural environments, appraisal and feedback 486
Multirater or 360-degree feedback 486
outcomes or process-based appraisal 486
rating scales 486
strategic roles 486
timeous and instructive feedback 486
train managers to rate and provide feedback 486
type of appraisal tool 486
‘personality’ of organisation 86
personality theory 319
perspectives on managing strategically
competitive advantage 22
external and internal environments 22, 24–25
goals and values 22
macro- and industry environments 22
organisational resources and capabilities 22
strategic architecture 22
strategy link perspective 23
PESTEL approach 136, 161–162, 168
analysis 163, 169
commercial airline within commercial airline industry 162
identifying factors and forces relevant to organisation 162
political, economic, socio-cultural, technological, ecological
& legal variables 161
Philips 368
physical production
after-sales service 441
sales & distribution 441
secondary ectivities 441
physical resources 217
Pick n Pay 79, 186–187
beverage sector 7
‘planetary boundaries’ that define ‘safe operating space’ 58
policies and procedures 486, 492
strategic alignment and implementation 486
political environment
absence of rule of law 381
appropriation of land and assets 381
collectivism 380
communism 380
democracy 380
dimensions 380
DRC’s new mining code in force 381
exchange controls 381
externally imposed limits on imports or exports 381
externally induced financial constraints 381
extortion 381
forced divestiture and confiscation 381
global cross-cultural cultural leadership 379
government intervention and political risk 381
illegal occupation of property 381
individualism 380
investment and trade 380
military conflict 381
nationalisation of industries or industry sectors 381
poor law inforcement 381
restricting repatriation of capital and profits 381
restrictive access to financial, labour, commodity,
material markets 381
restrictive licensing policies 381
socialism 380, 381
strikes and civil disorder 381
terrorism 381
theocratic totalitarianism 380, 381
threats or disruptions, operations by hostile groups 381
unexpected changes in laws and regulations 381
value-added or export performance requirements 381
war and revolution 381
political-legal factors 142–145
funding for research and development 143
global business environment for international businesses 140
global environmental forces 140
globalisation 140
global or supranational institutions and agreements 377
grants and subsidies for workforce 143
India’s government policy and retail sector 143
intellectual property 143
laws that protect patents 143
local mine-ownership limitations 143
political contraints on organisations (Pearce & Robinson) 143
political stability and effective legal systems 143
Zimbabwe government 143
Zimbabwe may scrap rules on local mine ownership 143
political legal risks
barriers to international trade and industry investment 144
discriminatory taxation 144
expropriation of property & private sector assets 144
foreign exchange controls 145
government intervention in business operations & activities 144
 government nationalisation of industries 144
intellectual property rights, inadequate protection 144
national hostilities and military intervention 145
rule of law, absence of 144
unfair competition from public sector 144
see also terrorist attacks
political philosophy 386
political system 364
politics and power in strategic decision teams 111–112
diversity of team 112
pollution 51, 141
Polman, Paul 53, 54, 55
Focus on long-term as CEO of Unilever 53–54
Porter, Michael (1980) 13, 62, 63
delay in issuing licences & permits 393
‘five forces’ of strategy 66
leading strategy scholar, professor at Harvard Business School 249
role of government and chance events as attributes 393
telecommunications, air transport, liquor industry 393
value-destroying relationships (bargaining power) 188
value-enhancing (complementary) relationships 188
Porter’s categories of activities in value chain
primary activities 223
support activities 223
Porter’s concept of national competitive advantage 390
as frame-work for internationalisation 390
Porter’s diamond of national competitive advantage 392
Porter’s five forces framework for industry analysis 183, 188
Porter’s five forces model
new entrants 257
powerful buyers 257
powerful suppliers 257
substitute products 257
threats from competitors 257
Porter’s generic strategies and the focused strategies 254, 272
portfolio of business 251
positioning and market leadership quest 13
PPC’s problems highlight challenges facing local companies venturing into Africa 122
Prahalad, C.K. 64
Prasa (Passenger Rail Association of South Africa) 144
price-sensitive market segment 255
price-to-earnings ratio 36
primary activities in value chains
after-sales service 224
inbound logistics 224
marketing and sales 224
operations 224
outbound logistics 224
principles of value innovation and blue ocean
strategies 282
Processes 471, 471
Processes for knowledge creation and sharing in an organisation 125
product development phase in motion 319
production managers 438
productive strategic implementation 463
profitability 6, 36
attractiveness of industry 211
competitive advantage over rivals 211
source of 13
public sources information 507
newspapers, television, internet 507
purchase of specialised software or resources 447
pay premium to attract people with specialised skills 447
purpose, organisational 47, 50–52
time frame 50

Q
Qwerty typewriting format 282

R
Radiohead band 303
‘InRainbows’ on band’s website 303
rational planning 10, 13
reasoning process
gaps/discrepancies recognised 422
mental/conceptual models 422
solutions conceived and realised 422
recession 2008–2009 14
red ocean strategies 283
red versus blue ocean strategies 298
regional economic integration (REI) 147, 364, 370
regulator role as competitive force in industry
at macroenvironmental level 190
direct restrictions 191
five forces framework 188
legislation 191
maintaining barriers to entry 190
price control 190
at regulator level 190
scrutiny and control of mergers and acquisitions 191
related and supporting industries 392
relationships shaping the industry
cooperative relationships 182
Michael Porter’s understanding industry structure 182
role of regulation 182
religion 386–387
renewable energy sources and shared value 65
see VITALITE in Zambia
renewable resources (fish, fertile soils, timber) 59
Report by Ernst & Young indications 504
reporting
and feedback 20
integrated 47
integrated movement 70
research and development (R&D) 257, 288, 447
activity 295
broad-based differentiation 258
design expertise 257
 differential efforts 258
investments 288
promotional approaches 257–258
strategy of differentiation 258
wide competitor base 258
resource-based and dynamic competitive
capabilities viewpoints (RBV) 5, 13, 23–25, 210
above average returns 24
competitive advantage 23–24
customer acceptance 24
market opportunities 23
Summary of the RBV 218
value-creating strategies 23, 24
resource-based view (RBV) 211, 214
resources
and capabilities of organisation 211
assets, skills, capabilities 208, 211
identification of strengths and weaknesses 211
intangible 217
physical 208
value of 212
resources and capabilities, developing 235
acquisition 215
Chrysler, American automotive giant 215
creation of a spin-out organisation 216
internal creation 216
resources and capabilities, identification 235
human resources 217–218
intangible resources 217
physical resources 217
resources and capabilities, practical framework
Appraisal of CSM’s resources and capabilities 233
appraisal of resources and capabilities 232
demand side and supply side approaches 232
developing strategy implications 232–233
identify key resources 232
relative strength of resource or capability 232
strategic importance assessed using key success factors 232
resources and capabilities, strategic importance
industry positioning 211
primary source of profit 211
strategic direction of organisation 211
see also profitability
resources, determinants of scarcity
causal ambiguity 213
economic deterrence 213
path dependency 213
physical uniqueness 213
Resource value determinants 212
return on investment of risk management
critical thinking skills 522
existing datasets and business intelligence systems, use of 522
mid-level managers 522
prioritising, sequencing, integrating information collection process 522
 root-cause analysis 522
reward system principles 482–483
accountability, ethical remuneration to boost corporate governance (PwC) 483
bonuses, shares, benefits, performance incentives 483
customer satisfaction, sales volume, market share 483
executive-level reward 483
financial & non-financial incentives 483
financial & tangible rewards 483
financial reward and pay 483
financial rewards (flexitime, arrangements, job enrichment,
job enlargement) 483
job enrichment and enlargement 483
non-financial or intangible rewards 483
performance-related rewards 483
power of non-financial incentives 483
share options & share ownership 483
strategic outcomes 483
time gap between performance and reward 483
Ricardian rents concept 226
organisational routines 226
specialist knowledge of individuals 226
tacit knowledge 226
risk
appetite 499, 505
appetite metrics 524
assessments 523
assumption (or premise) control 515
control systems 502
cost of managing considered 506
critical premises/assumptions 515–516
disclosure 524
evaluate, compare, prioritise 505
exchange rate 515
financial and non-financial metrics 524
frequency of occurrence and vulnerability 502
identification 506, 523
internal communication 523
investing in new robotic technology 505
likelihood of occurance 509–510
loss of reputation or brand value 508
matrix 510
price 515
probability of occurrence 510
profile 502
register 523
selling confidential information to competitors 510
Tiger Brands Strategy 508, 509
see also strategic risks in context
risk analysis
impact on physical assets 509
likelihood of occurrence linked to probability 509
vulnerability 509
risk associated with human behaviour
building morale, shared values, openness 522
 high-risk employee populations 522
principles that guide employee behaviour 522
screening 522
risk control system
flexible strategic 524
formal strategic 524
risk identification, evaluation, prioritisation 499
strategic identification process 503
strengths, weaknesses, opportunities, threats 503
risk management 523, 525
assess practices in practical setting 499
contingency strategies 514
controls 523
developing systems 499
formulating risk strategies 515
monitoring and improving performance 501
problems with implementing policies & action plans in organisations 499
process 501
register 506
robust 501
systems, strategies, policies, action plans 501
Risk management in Netcare 518
risk management performance 522–523
evaluation 522
evidence 522
monitoring and improving 522
quality information 522
risk management policies and action plans
acceptable risk level (risk appetite) 520
committed employees 520
drafting strategies 521
implementation process 520
responses to risks (risk mitigation) 520–521
roles and responsibilities to staff (governance) 520
technology 520
transparency & accountability 520
risk management practices, benefits of 525
risk management standards 519
actuarial societies 518
Committee of Sponsoring Organisations of the Treadway Commission (COSO) 518
control activities 518
control environment 518
information and communication 519
International Organization for Standardization (ISO) 518
ISO 31000 519
KPMG 520
monitoring activities 519
National Institute of Science and Technology 518
Project Management Institution 518
standards 519
risk management strategies
corporate audit department 517
corporate governance frameworks 517
King IV Report 517
 operational and financial reporting risks 517
risk management system identification process 513
control mechanisms 514
environmental scanning 514
potential threats and opportunities 514
strategic surveillance 514
risk prioritation, high, low, medium 511
scenario planning 511
risk processes review and improve continually 499
risk-rating system, sophisticated intelligent 78
risk responses, developing
acceptance 511
avoidance 511, 512
basic treatment strategies 511
mitigation 511
reduction 511
risk treatment of existing competitors
differentiation and switching costs 184–185
diverse strategies 185
expansion 185
fixed costs or perishable products 185
high exit barriers 185
number and size 184
rate of industry growth 184
risk treatment strategies 499, 512
Road Lodge hotel chain 262
role of external environment in strategy 211
role of vision and mission statements
manufacturing businesses 87
practice in South African business environment 87
rule-bound bureaucratic environments 473

S
SAA turnaround story 499–501, 502
airfare pricing 507
AirHelp, technology company 502
business continuity 502
corporate audit departments 502
destruction of value in business 502
four-star airline rating 502
requested financial bailouts from government 502
sustainable operational & financial success 502
taxes and changes to regulations 507
Vuyani Jarana, CEO on risk management 503
Samsung 26, 184, 259, 291
Sanlam (insurance sector) 7
Santam 63–64
insurance organisation initiative 64
response to changing risk landscape 60–61
shared value 64
strategy in action 59
Sasol and Woolworths Holdings Limited 437
Sasol: Innovation in the DNA 208–210
patent families in energy & chemicals industries 226
satisfice 105
scenario analysis and planning 136, 165
approaches to 168
benefit of 166
clarify key external strategic issues (Thompson) 167
consider four plausable alternative scenarios 167
degree of certainty and uncertainty 167
driving forces (Thompson) 167
Hill et al. 165
identify and examine possible outcomes (Thompson) 167
key uncertainties (Thompson) 167
predetermined elements (Thompson) 167
recognising existence of continuity 167
under-prediction or over-prediction of change 167
‘what if’ plans 165
Scenario planning and analysis – Shell Oil Company 165–166, 167
Scenarios for South Africa 129
Schumpeter’s theory of creative destruction 282, 286, 287, 318
‘backdrop’ 286
creative destruction result in societal benefits 287
disruptive innovation 286
marginal cost, revenue, principle 287
process, predictions of ‘creative destruction’ 286
process of ‘industrial mutation’ 286
SCIP code of ethics for CI professionals 117
Schwartz’s values structure 316
scope of organisation 105, 107
Selected definitions as strategy 9
Scenario Analysis 136
scenario planning 125, 127
key applications 127–128
scenario analysis and planning 128
Shell seen as pioneer 127
war-gaming 131
Scenarios for South Africa 129
Schumpeter’s theory of creative destruction 282, 285
S-curves of the performance of materials used in tyre manufacture 289
self-directed behaviour 474
self-enhancement values
delayed gratification 317
motivational goals of success, competence & accomplishment 317
power, achievement, hedonism 317
Schwartz’s and McClelland’s theories 317
stimulation and achievement 317
values and need for power 317
self-transcendence values
universalism and benevolence 316–317
Semmelweiss Effect 282
innovation paradox 282
service-based organisations 475
service delivery, stream-lined processes 475
shared value and inclusive business 62–65
enabling local cluster development 63
Porter and Kramer 62
 redefining productivity in value chain 62
renewable energy production or water recycling 62
shared value 62
shareholders to stakeholders 54–57
technology companies and war on DRC 57–58
shareholder value capitalism 14
Shell service station’s strategy 199
dominated by Engen service station (Grant) 199
Shoprite Group 186–187
Shoprite Holdings Ltd strategy levels 3–5, 7, 19–20
corporate level strategy 20
functional level strategy 20
Furniture and Other Operating segments 19
global competitive advantage 20
leading retailer in Africa 8
retail sector 7
strategy 3–5, 7
Supermarkets Non-RSA 19
Supermarkets RSA 19
‘silo’ mentality 299
smartphones, tablets, apps 184
social and ecological trends 67
social capital
cost or differentiation 436
staff with right talent 436
social-ecological thresholds 67
social-ecological context 47, 49, 50, 59
social-ecological risks 47
organisations’ environmental impacts 59
social entrepreneurship 6
socialisation process 126
social structure 386
social trends
child-headed households 147
dual income families 148
health and wellness trends 148
single-parent households 147–148
women in workplace 148
sociocultural environment 385
culture as outcome of human behaviour 385–386
sociocultural factors in macroenvironment 147, 378–379
Cavusgil et al. 379
cross-cultural interface 379
cross-cultural leadership 379
cultural-related attributes of nation, society or group – culture 147
global cross-cultural leadership 379
globalisation 147
religious, ethnic, educational, demographic, lifestyle and ecological changes 147
scanning 147
socio-economic development 8
socio-ecological impact on communities and environments 14–15
socio-economic trends 47
soil fertility 72
soil-specific composting reduced 63
Sol Kerzner, Sun City resort 418
luxury hotels in South Africa 418
Sony Experia 259, 291
sources of CI
competitive signalling 119
institutional information in public domain 119
intelligence obtained from employees 119
observation of competitors’ facilities and operations 118
primary information 118
publicly available information 119
reverse engineering of competitive products and mystery shopping 119
source systems
enterprise resource planning (ERP) 120
legacy 120
South Africa
coal production technologies 392
cutting-edge technologies 392
highly skilled people in commerce and industry 392
minerals, basic workforce skills 392
world-class financial infrastructure, banking system 392
world leader Sasol 392
South Africa and its role in relation to ‘exponential
technologies’ and the ‘Fourth Industrial Revolution 292–293
South Africa Cirque du Soleil & success of blue ocean strategy 299–300
South African Airways 144, 182, 499
South African business environment 87
practice of vision and mission statements 87
South African Electronic Communications Act 191
South African parastatals (Portnet) 7
South African Vision 2030 80, 80
Southern African Development Community (SADC) 147, 370
span of control
amount of control required between employee and manager 480
extent to which work is specialised 480
nature of the organisation 480
Spar retailer 256
special alert risk control 514
chemical spills, nuclear waste 514
contingency risk strategies 514
hostile takeovers 514
major product defects 514
natural disasters, tsunamis, earthquakes 514
plane crashes 514
terrorism 514
specialisation 13
specialist risk management software 507
stakeholder engagement
focus on global strategies 14
governance and ethics 14
multiple connections 14
multiple scenarios 14
stakeholder-focused 6
stakeholders 7, 47, 54, 469, 469
Ackerman and Eden refer as ‘the crowd’, ‘subjects’ 56
 diverse 108
expectations 7
mapping of according to interest and power 56
referred to as ‘context setters’ 57
relationships 55–56
salience of different 47
value 251
Standard Bank
decision to enter Cô d’Ivoire market 366
issues and challenges of international expansion 366
Standard Bank: Example of balanced scorecard 95
Standard Bank to expand footprint in francophone Africa 365–366
Starbucks 258
strategy of focused differentiation 258
state-owned enterprises (SOEs) 144–145
commercial airline industry in US 144
government legislation deregulation and privatisation 144
privatisation initiatives 144
StayEasy hotel chain 262
Steps followed in crisis management 514
stimulation needs 316
stock exchange 70
strategic advantage 5
strategic alliances 191
Comair and British Airways in South Africa 400
equity joint venture (EJV) 400–401
international commercial airline industry 400
joint ventures 400
KLM & Northwest Airlines 400
minority joint venture 401
South African Airways (SAA) 400
Star Alliance 400
strategically aligned reward system principles
bonuses, shares, benefits, performance incentives 483
diverse and/or global workforce 483
executive-level reward 483
financial incentives to output and performance 483
financial reward and pay 483
market related 483
non-financial rewards (flexitime, job enrichment, job enlargement 483
performance-related rewards 483
share options & share ownership 483
time gap between performance & reward 483
strategic alignment 462, 463
strategic analysis 6, 32, 138
aspects 32
decision-making 32
internal environment 32
strategic and competitive intelligence professionals (SCIPs) 117
strategic attainability 462
strategic business performance and risk management 501
strategic change, initiate and lead 417, 443
formulate path, course of action, game plan (strategy) 443
strategic choice, factors influencing
 action to gain competitive advantage 251
strategic choices at business level 249, 252
referred to as competitive strategies 249
see also Porter, Michael
strategic CI cycle 118
Step 1: Identify strategic decisions to be made 118
Step 2: Key intelligence topics (KITs) 118
Step 3: CI collection plan
Step 4: CI collection and evaluation 119
Step 5: CI analysis and insights 119
strategic decision enablers 115, 129
framework for 115
strategic decision-makers’ factors considered
available resources 251
customer needs and changing demands 251
experience 251
market conditions 251
opportunities in industry 251
organisation’s competitive advantage 251
skills of staff 251
strength of competitors 251
threats in industry 251
unique capabilities in organisation 251
strategic decision-making 248
strategic decision-making as experimental process 129
‘doing first’ (Mintzberg & Westley) 110
Honda in the USA – brilliant strategy or an experiment that worked? 110
Honda’s entry into US market 110
strategic decision-making as rational process 105, 107
complexity of 108
context dependent 108
decision criteria 109
effect on key stakeholders 109
financial measures 109
impact on performance and sustainability 109
nature of 108, 108
quality 105
rational, linear, cognitive process 109
strategic decision-making as visionary process
Elon Musk’s vision of the future 109–110, 418, 423
founding SpaceX 418
‘seeing first’ approach (Mintzberg & Westley) 109
strategic decision-making, improving quality and speed
aiming for consensus 130
building collective intuition 130
building multiple alternatives 130
defusing politics 131
seeking views of trusted advisors 130
stimulating quick conflict 131
tracking real time information 130
strategic decisions 6, 105, 107, 108
characteristics 112
enablers 105
framework for 115
 military or business sphere 10
strategic direction 30, 32, 96, 243
financial objectives 92
integrated set of objectives and measures 91
long-term drivers of success 91
performance targets 92
revenue growth, profitability, return on investment 92
strategy development phase 92
strategy implementation phase 92
translating into operational terms 91–92
strategic feedback and learning, enhancing 94
strategic flexibility 3, 5
strategic frames 3
strategic group analysis 174
analyse competition in an industry 174
substitutes 174
strategic groups
competition within groups 200
consider where to compete 202
Fleisher & Bensoussan’s competitive strategy 200
identify opportunities and threats 202
identify their most direct competitors 202
impact of bargaining power of buyers & suppliers 200
mobility barriers 200
substitution 200
strategic implementation 462–463
successful 415
strategic information and analysis 108
strategic initiatives
linking financial budgets with goals 94
planning, setting targets, aligning 94
strategic innovation principles 318
strategic intent 30, 76, 252
and vision 79
‘degree of collectivity’ difference 79
strategic leaders 416
‘adaptive capacity’ 443
change agents 443
seven key responsibilities 418
strategic leadership 415
action 418
forward thinking, George Mienie, CEO 418
key responsibilities 415
managerial and visionary 428
need and value 416
role of 416
Rowe’s argument 427–428
stability, order, preservation of existing order 428
Strategic leadership in action at Auto Trader 415–416
strategic management 20, 22
business ethics 249
choice of business level strategy 248
competitiveness 22
corporate governance 249
 effectiveness and efficiency 20
environments, internal and external 22
framework 6, 30, 31
goals for value creation and distribution 20
implementing 22
integrating sustainability 22
levels of strategy and decision-making hierarchy 21
planning 22
process 6, 7, 30, 85, 243
stakeholders, role of 249
strategic management framework 31
sustainability 107, 249
sustainable competitive advantage 22
strategic myopia 136
strategic option criteria
concern appropriateness 268
consistency, validity, attractiveness to stakeholders 268
feasibility and desirability 268
Thompson & Martin’s evaluation 268
strategic orientation (DEF30) 364
ethocentric orientation 394
geocentric orientation 394
of international organisations 394
polycentric orientation 394
regiocentric orientation 394
strategic outcomes
better quality of goods and services 482
chaordic paradigm 482
feedback loop 482
generic 482
improved effectiveness and efficiency 482
increased productivity 482
strategic paradoxes 6
strategic performance management 20
strategic perspective 20
Strategic Planning Institute (Profit Impact on Market Strategies) project 13
strategic risk management 6
action plan implementation problems 521, 522
benefits of engaging in 505
changes in internal and external environment 504–505
faster and better decisions 521–522
intended outcome 505
organisational architecture 505
process 505
role and application 499
steps 499
strength and weaknesses of organisation 504
Strategic risk management at Lego Group 513
strategic risk management plan implementation 505
Strategic risk management process 505
strategic risks in context
addressed at corporate level by board of directors and managers 502
ISO 31000 defintion 502
strategic surveilance 499
 environmental scanning 506
strategic thinking 47, 415, 416, 419–422
absorptive capacity 421–422
adaptive capacity 421–422
creative 421
formulate unique solutions as generic solutions 421
managerial wisdom 421–422
problems as puzzles 421
reductionistic model 421
think laterally 421
‘wicked problems’ 421
strategic timeframe 47, 49
strategic tools 30, 96
strategic value
good information 107
innovation options 6, 32
resources and capabilities 208, 234
Strategic, visionary and managerial leadership 428–429
strategies
applicable of 7–8
at business level 6
at corporate level 6
at global level 6
broad generic 254
design 30
Strategies for declining industries 179
Strategies for overcoming resistance to change 447
strategising, short- to long-term 53–54
strategy 9
best-value 254
conceptualised 8
development and formulation 32–33
essence of 5–6
generic 254
Greek word strategos (stratos, the army); (agein, to lead) 9
guide formulation 462
historical origins of concept 9–10
implementation 33, 47, 415, 435
in the 20th century 10, 13
into the 21st century 13–15
levels 5
low-cost 256
prescriptive and predictive approaches to generation 13
process of embedding context in 66–69
purpose and context 49
regarded as gameplan 9
tactics 10
strategy-making, cohesive 20, 73
strategy, vision, long-term strategic goals 432–433
stratospheric ozone depletion 58
‘ozone hole’ 58
strengths and weaknesses, identifying 229, 235
analysis of comparative 210
structure/systems 458, 492
substances, new or modified and undesired effects 58
successful strategy implementation 6
succession planning and leadership 439
‘sugar tax’ legislated by South African government 164–165
Sun1 262
SunSquares and Garden Courts 262
superorganisation as metaphor 463
support activities
human resource management 225
infrastructure 225
procurement 225
technology development 225
supportive organisations 281–310
exploration and exploitation modes of innovative process 308
fuzzy front end of innovation (FFE) 310
Kim & Wilemon’s outcomes 310
managing the people dimension 311
managing the time dimension 311
new product development (NPD) 310
project selection and definition 310–311
role of leadership 308
Rosing, Frese, Bauch 308
strategy 310
supportive of innovation 308
technological readiness 310
tolerance for risk taking 310
transformational leadership theory 308–309
support processes 472
Susman, Simon 52, 58
sustainability 3, 36
approach to 7
business ethics in global arena 7
competitive advantage 258
long-term 36
reporting 14
strategy 6
sustainable competitive advantage 213, 243
barriers to transferability 213
geographic immobility 213
imperfect information 213
resource complementarity 213
resource dependency 213
sustainable development 8
Sustainable Development Goals 73
sustainable growth 281
or growth in above-average returns 281
sustainable organisation 6
sustainable strategic management 7
sustained competitive advantage 25
SWOT analysis 403
SWOT approach and analysis 136, 161
implications known as forces 161
inflation, volatile exchange rates 161
strength, weaknesses, opportunities and threats 161, 210–211
 see also decision trees
SWOT matrix 268–269, 269
quadrants 1 to 4 269
symbiosis principles 463
systems, policies, procedures 482, 482
strategic alignment and implementation 482

T
target markets, specific 86–87
technological advancement 152
technological advances at global levels 379
artificial intelligence (AI) 379
biotechnology, genetic engineering 379
five million jobs 379
internet, world wide web, computer technology 379
laser-optic technologies 379
technological development downsides
pollution and global warming 153
retraining, reskilling of emerging work and careers 153
technological developments
advanced multipurpose drones 153
computer-added design and manufacturing 153
genetically modified food products 153
genetic engineering 153
nanotechnology 153
robotics and advancement in AI 153
3D printing 153
technological disruption 282
technological environment 389
major drivers of globalisation 389
technological factors
creative and disruptive 151
new industries (cellphone industry) 151
technological innovation 7, 36
Technology 487
technology 13
advancement 152
artificial intelligence (AI) 128
as integrating mechanism 128
codifiable knowledge 181
internet, world wide web, social media 152
lead time over competitors 181
market creation and disruptive innovation 299
planning and decision-support tools 128
planning software 129
strategy simulations 128–129
tacit knowledge 181
three main categories 129
Technology companies and war on DRC 57–58
technology-intensive industries
Apple and Samsung 180
BlackBerry smartphone devices 181
competitive advantage 180
complementary products and services 180
 industry key success factors 180
intellectual property 180
iPhone 181
lead time over competitors 181
manufacturing, financing, marketing, retailing 180
patents, copyright, trademarks, trade secrets 180
protection of intellectual property 180
Research in Motion 180, 181
smartphone and BlackBerry 180
Technology – is there an end in sight? 151–152
technology life cycle
Clayton Christensen 198
customer migration to new technologies 198
disruptive technologies 198
sustaining and disruptive technologies 198
technology S-curve 282
changes in technology (Foster) 288
discontinuous innovation 289
discontinuous innovation 289
disruptive innovation 288
electronics industry 289
IBM 288, 368
established industry’s value curve 296–297
inflection point 288
market destruction 289
Moore’s law 288
‘natural limit’ 288
potential performance of technology 288
radical innovation 289–290
return on R&D achieving market leadership 288
silicon chip 288
‘technical’ potential 288
‘technological blindness’, Foster 289
technological discontinuities or changes in market 289
telecommunications sector (MTM, Vodacom) 7
Telkom
customer- and employee-centred information 271
Mobile 216
partnered with DStv 271
Showmax 271
South Africa 216
strategic direction and consistency 271
Telkom Media 271
broadcast licence by ICASA 271
Telkom’s decision to sell its share in Vodacom 114, 114
Telkom’s lesson in strategic decision-making: The Multi-Links disaster 105–106
Telkom’s Multi-Links failure 107, 108
terrorist attacks
Mumbai, 2008 377
Paris, 2015 377
World Trade Center, New York, 2001 377
Tesla co-founding Paypal 418
tests for a winnng strategy
competitive advantage 33
 environmental system 34
goodness of fit 33
performance 33–34
social impact 34
‘thinking first’ approach (Mintzberg & Westley) 109
threat of new entrants
capital cost of entry 185
control of distribution 185
differentiation 186
economies of scale 185
good relationships 185
legal restraints 186
retaliation 186
time 185–186
threat of substitutes
Blu-ray disc technology 186
digital video disc (DVD) technology 186
generic substitution 186
product-for-product substitution 186
products or services 186
substitution of digital cameras for film cameras 186
substitution of need 186
video cassette recorder (VCR) 186
Windows and Intel 186
three-dimensional (3D) manufacturing or printing 287
The case of 3D manufacturing 287–288
Tiger Brands hurt by listeriosis outbreak 508
tobacco industry 149
top management 415, 416, 417, 435
new technology support and funding availability 445
Top 10 business risks in South Africa (2017–2018) 507
Toyota’s airbag recall 515
Toyota’s low costs 264
trade
blocs and free trade areas 147, 370
decline in barriers 370
investment, declining barriers 369–370
tariff and non-tariff barriers on imports 369–370
volume of world trade 370
transactional factors
contingent reward (CR) 427
laissez-faire (LF) 427
management-by-exception active (MBE-A) 427
management-by-exception passive (MBE-P) 427
transactional leaders (Bass)
active management by exception 309
contingent reward behaviours 309
laissez-faire leadership 310
positive management by exception 310
strategic innovation 310
transactional-transformational leadership paradigm 309
Transfer of knowledge 127
transformational leadership 308–309
idealised influence (charisma) 309, 427
 individualised consideration 309, 427
inspirational motivation 309, 427
intellectual stimulation 309, 427
transformation and sustainable development 7
transnational strategy 364, 367, 397
Anhauser-Busch 398
Asea Brown Boveri (ABB) 398
Caterpiller and Walmart 398
decisionmaking centralised and decentralised 398
InBev 398
Nestlé 398
Sasol 398
Toyota 398
transnational strategies 398
Unilever 398
trial-and-error, experimental process 292
triple bottom line (economic, social, environmental)
achievement 8
environmental system test 34
impact of strategy 34
social impact 34
Tsogo Sun Hotel group 262
Sun’s SUN1 262
Tupperware 260
Turnkey projects 400
two-by-two matrix (gameboard) 128
Types of risk management strategies and the attention paid by corporate audit departments 517
Tzu, Sun
The art of war 8
U
ubuntu 415
uncertain competitive environments 5
uncertainty level in decisions 112
UN Conference for Environment and Development 14
underpricing competititors, no-frills strategy 255
understand organisation as a whole 418–419
identifying and diagnosing 419
leadership style 419
reasoning process 419–420
strategic thinking mental process of reasoning 419
unique solutions as generic solutions 421
underwood Model 5 typewriter 292
UN Global Compact 14
Unilever 7
United Nations’ Sustainable Development Goals (SDGs) 64
unique individual 313
acceptance of diversity and difference 314
Big Five theory 314
Revised NEQ Personality Intervention (Costa & McCrae) 314
Use of an intelligence team 123–124
Using resources and capabilities to establish competitive
advantage 216–217
V
validity 271–272, 273
business information doubtful in its nature 271
future plans and strategies of MTN 271
relevant business information 271
Value chain 208, 225
contribution 229
cost and differentiation analysis steps 229
opportunities for cost or differentiation advantage 208
R&D to marketing & after-sales service 223
value curves 297
value-destroying relationships (such as bargaining power) 188
value-enhancing (complementary) relationships 188
value innovation 280, 318
assets and capabilities 296
Compaq entered personal computer market 296–297
competitive advantage 295
‘conventional strategies’ 295
create new blue ocean markets 280
customers 296
delivery platform 297
industry assumptions 295
Kim & Mauborging 295, 296–297
link between value and innovation 297
product and service offerings 296
product platform 297
strategic focus 296
strategies 295
uncontested market space or blue ocean 295
value net, competitors opposites of complementors 189
values 3, 7
creation 30
innovation 15
‘quantum leap’ 297
shared 47
statements 30, 76, 89–90, 96
strategic leadership 415
vertical focus of organisation 107
Virtual approach 479
vision and mission 252
visionary leadership 428
future orientated 428
proactively shapes ideas 428
relates to people in empathetic ways 428
stability, order, preservation of existing order 428
visionary process 82
vision, compelling, to lead change
Big, Hairy, Audacious Goal (BHAG) 432
concept of visionary leadership 431
creating action for implementation 432
envisioned future 432
Ghoshal & Bartlett 432
inspirational motivation 431
Murray & Robert’s Dream of 2025 431–432
 shapers of institutional purpose 432
strategic leaders 432
vision components
core ideology 432
core values and purpose 432
envisioned future 432
vision content
Collins and Porras and ‘gulp factor’ 82
strategic stretch 82
vision, guide to crafting (Nutt & Backoff)
actionability 432
articulation 432
communication 432
desirability 432
possibility 432
vision implementation 84–85
Samsung – a clear strategic direction 83–85
Samsung shares 83
vision statements 30, 76, 79, 80–82, 96
action orientated 82
bottom-line orientated 82
flexible 82
focused 82
Illustrating unique approaches 81
long term 82
planned 82
product of leadership 82
purposeful 82
responsive to competition 82
setting audacious or ambitious goals or challenges 82
strategic 82
VITALITE in Zambia 65
managers 72
Vitality discounts on selected items 259
banking 259
car insurance 259
life insurance 259
Vodacom 144, 226, 271
von Neumann and Morgenster
The theory of games and economic behaviour 10
W
Walt Disney Company’s mission statement 86
Want to build an organisation that lasts? Create a superorganism 458–462
wholly-owned subsidiaries 401
brownfield ventures 401
disadvantages 402
greenfield venture 401
international Mittal Group 401
Iscor, South African steel producer 401
Ispat Iscor, renamed Mittal Steel, now Kumba Resources 401
MNE’s control over its core capabilities 401–402
Woolworths Holdings Limited 24–25, 58, 186–187, 435, 436
commitment to sustainable development 63
 ‘Farming for the Future’ programme 63, 72
food sector 7
‘Good Business Journey’ strategy 50, 52, 53, 59
milk value chain 67
Sustainability Committee 52
sustainable farming and soil fertility 59
see also Susman, Simon
workplace implications
disruptive innovation 318
individual behaviours 317–318
knowledge of personality theory 317
political preferences 317
potential strategic manager 318
power and achievement values 317
traditional values 317
World Bank classification of economics
in terms of per capita (GNI) (GNP)
World Business Council on Sustainable Development 64
World Commission on Environment and Development 14
World Trade Organization (WTO) (DEF16) 370
World Wide Web 152, 371

Y
You Tube 220
youth, lucrative market 141