Chapter 4: Entrepreneurial Strategy PDF

Chapter 4 Entrepreneurial strategy Learning outcomes Define and explain why strategic management is important to the entrepreneur Describe the steps in the strategic management process Define and develop the mission statement of a venture Discuss the analysis of the external enviro...

Chapter 4 Entrepreneurial strategy Learning outcomes Define and explain why strategic management is important to the entrepreneur Describe the steps in the strategic management process Define and develop the mission statement of a venture Discuss the analysis of the external environment of a venture Discuss the analysis of the internal environment of a venture Discuss business cycles Apply the TOWS matrix as a tool for developing strategies for the venture Explain how the best strategies could be identified Explain how the entrepreneur could ensure the implementation of strategies Discuss the importance of the allocation of resources to ensure the execution of strategies Discuss the evaluation of strategies and their implementation Discuss obtaining a competitive advantage. 4.1 Importance of strategic planning for the entrepreneur A strategic plan is important for: Increasing their chances of success Assessing their current situation Shaping the business’s future Realising the business’s vision 4.2 The process of strategic management Strategic management consists of four phases: 1. Strategy formulation phase 2. Strategy evaluation phase 3. Strategy implementation phase 4. Sustainable competitive advantage phase 4.2 The process of strategic management (cont.) 4.3 Strategy formulation Steps include: Developing the business mission Analysing the external and internal environments Conducting a SWOT analysis Developing objectives and generating alternative strategies Choosing those to pursue 4.3 Strategy formulation (cont.) 4.3.1 Development of the business mission Strategic decisions are made to achieve objectives Guideline for these objectives and strategies is the mission of the enterprise or new venture Mission identifies: The target market The needs of the target market The means, products and technologies by which these products and services will be achieved When developing a mission, avoid a statement that: Reflects sentiments Uses words that are not measurable Focuses on profit Mission statement: a statement of the purpose of a company, organisation or person – its reason for existing Mission statement charts the future direction of the venture, and makes entrepreneurs think about the nature and scope of present operations, and assess the potential attractiveness of future markets and activities 4.3 Strategy formulation (cont.) 4.3.1 Development of the business mission (cont.) Mission statement should reflect nine components: Customers Products or services Markets Technology Survival, growth and profitability Philosophy Self-concept (distinctive competence) Public image Employees 4.3 Strategy formulation (cont.) 4.3.2 Analysis of the external environment To respond to or anticipate changes in the environment, the entrepreneur needs sound knowledge of the business environment In the analysis of the external environment, the entrepreneur identifies threats and opportunities that could be used in the development of their products and/or services When analysing the external environment, study these factors: Social and cultural International and national economic Physical Technological Communications and infrastructure Administrative and institutional Legal and political Competitive 4.3 Strategy formulation (cont.) 4.3.3 Analysis of the internal environment Analyse each functional area in the venture, such as research and development, marketing, sales, management, production and finance Other important aspects of the internal environment include the organisation’s infrastructure, such as information systems to support decision-making and communication Use a checklist of questions to determine strengths and weaknesses 4.3 Strategy formulation (cont.) 4.3.4 SWOT analysis Purpose of gathering data and conducting internal and external analyses: To establish an information base from which strategic plans will emerge SWOT analysis: A review of the organisation’s strengths, weaknesses, opportunities and threats Opportunity: A favourable situation or good chance that exists in the market that could be exploited for a profit Threat: An indication of an undesirable situation that exists in the market that could lead to a loss or to smaller profits Strength: Any resources or abilities to which the entrepreneur has access in order to take advantage of an opportunity or to fight off threats Weakness: Deficiency in the resources and processes available to the entrepreneur or the venture that will render the entrepreneur or the venture vulnerable in the marketplace 4.3 Strategy formulation (cont.) 4.3.5 Development of objectives The objectives developed for the venture should promote and be consistent with the mission Although a venture will have a single mission, it will have multiple objectives because of the many aspects involved in contributing towards achieving that mission Long- and short-term objectives need to be developed since the time frame of a mission is usually three to ten years Some of the objectives may even be in conflict with one another 4.3 Strategy formulation (cont.) 4.3.6 Generation of alternative strategies and choosing those to pursue TOWS, or Threats–Opportunities–Weaknesses–Strengths, matrix is an important matching tool that will aid the entrepreneur in the development of four types of strategies: Strength–opportunity strategies Weakness–opportunity strategies Strength–threat strategies Weakness–threat strategies 4.4 Strategy evaluation The second phase in the strategic process Strategies that have been developed should be measured to establish whether they will have the desired effect Two-step process: Review the external and internal factors Measure the strategies against an innovation and financial risk matrix (entrepreneurial strategy matrix) 4.4.1 Review the internal and external factors Establishes whether the strategies that have been developed will address the strengths, weaknesses, opportunities and threats that have been identified 4.4 Strategy evaluation (cont.) 4.4.2 Entrepreneurial strategy matrix A situational model suggesting strategies and actions for both new and ongoing ventures based on the level of innovation and financial risk associated with the venture and its strategies 4.5 Strategy implementation Third phase in the strategic management process Involved developing the policies for each function (such as human resources, production, finance and marketing) and annual objectives in line with the chosen strategies and long-term goals Allocate resources to achieve the strategies and goals, to measure performance, and to evaluate and correct strategies, objectives and goals continuously 4.5 Strategy implementation (cont.) 4.5.1 The development of policies and annual objectives Annual objectives are essential for strategy implementation because they: represent the basis for allocating resources are major instruments for monitoring progress towards achieving long-term objectives establish priorities within the venture Must be: Measurable Consistent Reasonable Challenging Clear Characterised by an appropriate time dimension Linked to rewards 4.5 Strategy implementation (cont.) 4.5.2 The allocation of resources All entrepreneurs have at least four types of resources that they can use to achieve their desired objectives: financial, physical, human and technological resources 4.5.3 Performance measurement Measure strategies criteria to establish whether they have been successfully implemented Useful criteria: Suitability Internal consistency Realistic Focused on strategic problems Capable of solving key sub-problems Customer benefit Stakeholder benefit 4.5 Strategy implementation (cont.) 4.5.4 Corrective actions and strategy alignment When implementing strategies, it is vital to take corrective action where needed 4.5.5 Continuous evaluation of strategies Implement an annual review of strategies, goals and objectives to ensure that: Customers’ continuously changing needs are addressed Changes in technology are implemented Changes in legislation are adhered to New innovations are implemented Potential for growth is seized to the advantage of all stakeholders 4.6 Obtaining sustainable competitive advantage The final stage of strategic management Aim: To obtain competitive advantage by means of continuous strategic development An organisation gains competitive advantage when it acquires attributes that allow it to perform at a higher level than others in the same industry Organisations can obtain a competitive advantage by implementing value-creating strategies that current competitors are not simultaneously implementing These strategies need to be: Rare Valuable Non-substitutable Sustainable competitive advantages: Long-term competitive advantages that are not easily copied and, thus, can be maintained over a long period of time Three generic strategies that an entrepreneur can use to gain a competitive advantage: Cost leadership strategies Differentiation strategies Focus strategies 4.6 Obtaining sustainable competitive advantage (cont.) 4.6.1 Cost leadership strategy Generic strategy that calls for being the low-cost producer in an industry for a given level of quality The organisation sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share In the event of a price war, the organisation can maintain some profitability while the competition suffers losses Organisations that succeed in cost leadership often have these internal strengths: Access to the capital required for making a significant investment in production assets; this investment represents a barrier to entry that many organisations may not overcome Skill in designing products for efficient manufacturing, for example having a small component count to shorten the assembly process A high level of expertise in manufacturing process engineering Efficient distribution channels 4.6 Obtaining sustainable competitive advantage (cont.) 4.6.2 Differentiation strategy Calls for the development of a product or service that offers unique attributes that customers value and perceive to be better than or different from the products of the competition The value added by the uniqueness of the product may allow the organisation to charge a premium price for it Internal strengths of organisations that succeed in a differentiation strategy : Access to leading scientific research Highly skilled and creative product development teams Strong sales teams with the ability to communicate the perceived strengths of the product successfully Corporate reputations for quality and innovation Risks: Imitation by competitors and changes in customer tastes; various organisations pursuing focus strategies may be able to achieve even greater differentiation in their market segments 4.6 Obtaining sustainable competitive advantage (cont.) 4.6.3 Focus strategy Concentrates on a narrow segment and, within that segment, attempts to achieve either a cost advantage or differentiation Organisations that succeed in a focus strategy can tailor a broad range of product development strengths to a relatively narrow market segment that they know very well Risks: Imitation and changes in the target segments May be fairly easy for a broad-market cost leader, which has an industry-wide focus as opposed to the market segment focus of the focus strategy, to adapt its product in order to compete directly Other focusers may be able to carve out sub-segments that they can serve even better 4.6 Obtaining sustainable competitive advantage (cont.) 4.6.4 Customer services An organisation’s ability to have a positive interaction with their customers when supplying their needs and wants Focus on building strong relationships with your customers and delivering a great customer service and experience Ensure that products and services are delivered in time and at the highest quality Rather under-promise and over-deliver than over-promise and under-deliver 4.6.5 Corporate social responsibility (CSR) The continuing commitment by business to contribute to economic development and capacity building for sustainable livelihoods while improving the quality of life of the workforce and their families as well as of the local community and society at large 4.6 Obtaining sustainable competitive advantage (cont.) 4.6.6 Broad-based black economic empowerment (B-BBEE) The government’s initiative to promote economic transformation in order to ensure meaningful participation in the economy and business by black people Has become one of the key strategic business imperatives for any business aspiring to grow and expand its asset base in the contemporary South African business environment Businesses with a turnover of less than R10 million qualify as Exempted Micro Enterprises (EMEs) that are exempt from measurement in terms of the dtic’s Codes of Good Practice for BEE An entrepreneur with a turnover of less than R5 million can achieve sustainable competitive advantage over competitors that also qualify as EMEs by developing strategies to achieve B-BBEE in order to obtain contracts from businesses while contributing towards their B-BBEE rating Businesses that operate under licence from the government and businesses that source their work from the government and state-owned enterprises are expected to contribute to the achievement of the objectives of B-BBEE