Strat Man 344 Notes.pdf

Strategic Management 344 CHAPTER 1: THE NATURE OF STRATEGY MANAGEMENT LO 1: Explain the essence of strategy INTRODUCTION Managing an organization: - complex task in the competitive landscape of the 21st c...

Strategic Management 344 CHAPTER 1: THE NATURE OF STRATEGY MANAGEMENT LO 1: Explain the essence of strategy INTRODUCTION Managing an organization: - complex task in the competitive landscape of the 21st century - has an impact on organisational leadership, strategies and organisational architecture it is important for leaders to: - think strategically about how they achieve a competitive advantage that is sustainable for the organization - understand: o where they fit in the global competitive landscape o what it means to be a sustainable global organisation o how they can contribute towards strategic development, change and transformation in developing countries, contribution towards strategic sustainability development and transformation includes: - empowering people from the designated group and involving them in the formal economy - being a responsible citizen - thinking globally while acting locally thinking strategically about an organisation: 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 Where do we want to Refers to the strategic direction that management believes the go? organisation should adopt How will we get there? Depends on: 1. How strategy is formulated at the different organisational levels based on: customer needs stakeholder expectations integration with the environment and ethical perspectives 2. The influence of: leadership values organisational culture organisational architecture on strategy implementation How are we doing? Requires that strategic leaders manage the performance of the organisation by means of: strategic control risk measures appropriate feedback Organisation’s approach to sustainability determines successful implementation of strategy All organisations require strategy to achieve their purpose Sustaining a competitive advantage is influenced by the organisation’s engagement with: - Government - Environmental focus - Socio economic development Business models are important to ensure sustainability of an organization a plan of how an organisation creates value for its customers while simultaneously generating sufficient revenue or surpluses to have above- average returns Better understanding of markets leads to continuous rethinking of every element of business models LO 2: Demonstrate an understanding of strategy development and perspectives of strategy THE ESSENCE OF STRATEGY Strategy conceptualized Strategy is considered a key element of managerial activity Strategy can be regarded as a game plan indicating the collective effort organisations need to make in order to, for example: - 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 Strategy is important for 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 profitability There are numerous attempts to define strategy ➔ more distinct definitions: The historical origins of the concept of strategy Derived from the Greek word strategos, meaning ‘a general’ Strategos is derived from stratos (the army) and agein (to lead) First formal article on strategy: Sun Tzu’s seminal work, The art of war Only became popular in the business world in the 20th century Military and business operations share some common concepts and principles, for example: Strategy: is the overall scheme for Tactic: is a plan for a specific action leveraging resources to obtain a competitive advantage Share common characteristics: - 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 Strategy development in the 20th and 21st centuries Authors Contributions in defining management tasks F.W. Taylor Identify the best way for employees to perform a task  Henri Fayol Emphasised formal structures and processes for the adequate performance of all important tasks Henry Ford (1908–1915) innovative technology, mechanisation, quality standards, redesign, and cost cutting Alfred Sloan Emphasised rapid model changes, niche marketing The Harvard Business School Introduced a capstone course in business policy Strategy in the 20th century greater spread of wealth accelerated the development of strategy: - rate of change - greater spread of wealth Research focused on: to develop better ways of making decisions and - general management maintaining coordination in increasingly large and - business policy issues complex organisations rational planning was preferred in this period ➔ contributed towards what became known as the prescriptive and predictive approaches to strategy generation Strategy defined: Implement strategic Identify and analyse plans threats and Strategy opportunities Design control systems for Respond to threats and implementation opportunities process Strategy in the 21st century key theoretical developments that influenced the rethinking of contemporary business models included: - the application of game and complexity theories to business - the analysis of the disruptive effect of technology complexity theory ➔ is a science of complex interacting systems, and is characterised by: - non-linearity - unpredictability - aperiodicity Ibury and Sunter ➔ advocated the re-emergence of scenario planning as a valuable tool in preparing for possible different futures Contemporary business models include: - 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 LO 3: Discuss the nature and role of strategy THE NATURE OF THE ROLE OF STRATEGY The five Ps of strategy (Mitzberg’s 5Ps strategy) provide insight into how strategy is defined by the different perspectives and processes used in formulating and implementing strategy are complementary and interrelated the practice of strategy is influenced by: - the practices (how things are done) external to the organisation (extra-organisational) and Reciprocal - the activities (what is done) of people in the organisation (intra- relationship organisational) Strategy as a plan Overall direction and a course of action. Strategy formulation is a formal process of conception implemented through: organisational layers structure control systems Strategy is intended. Research suggests that formal planning systems contribute towards better strategic decision-making, and have a positive impact on organisational performance. Strategy as a position Determination of particular products in particular markets ➔ a matching of the external and internal environments. Strategy looks: downwards ➔ meeting customer needs outwards ➔ towards the external competitive market Focus is on outside-in perspective. Strategy as a perspective Organisation’s way of doing things.  Future strategies are formed by adapting past strategies based on: the collective experience of individuals the way of doing things embedded in the cultural web of an organization Resolving different views and experiences requires negotiation and bargaining. Strategy looks: inside the organisation ➔ inside the mindset of the collective strategists upwards toward the strategic purpose, intent and direction of the organisation Becoming more important in developing a competitive advantage by creating better value propositions through people and processes. Focus is on inside-out perspective. Strategy as a ploy Specific manoeuvre to outwit a competitor. The real strategy is not the expansion itself, but the threat or ploy. Strategy as a pattern Consistent behaviour over time. Strategy as a pattern encompasses a series of behaviours that result in a strategy, whether intended or not. When the pattern realised is not explicitly intended, it is referred to as an emergent strategy ➔ unplanned responses to unforeseen circumstances. Challenge for organisations is to maintain a balance between deliberate and emergent strategies. An important lesson for strategists is that they need to recognise the process of emergence and intervene where appropriate. Management is responsible for evaluating the appropriateness of emergent unplanned strategies ➔ does this by comparing the emergent strategy with the organisation’s: to assess whether there is a strategic link between - external environment them, and whether there is alignment with the - internal factors organisational purpose  areas of agreement on the essence of strategy: - 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 The levels of strategy Business level strategy How the organisation competes to strengthen its market position and attain a competitive advantage in each area of its business units. The business unit head is responsible for: Orchestrating business level strategy Ensuring that lower-level strategies are well-conceived, consistent and match the corporate level s trategy obtaining approval by corporate level executives and the board of directors Corporate level strategy Sets the direction of the organisation Determines 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: geographic coverage diversity of products or services turning cross-business into competitive advantage divestments The CEO: and senior managers are normally responsible for orchestrating corporate strategy, with input from the key senior executives who head up the business is responsible to all stakeholders The organisation’s board of directors usually reviews and approves corporate level decisions Functional level strategy Underpins business-level strategy by implementing business strategies through the functional areas: marketing human relations production information system finance Includes operational level strategy Primary approach ➔ to support the overall business strategy and competitive approach by performing strategy-critical activities. If there is no clear direction at business level, functional level strategies are unlikely to be mutually supportive and consistent. There should be synergy and cooperation between the functional areas in an organisation to achieve a competitive advantage.  LO 4: Explain the concept of strategic management STRATEGIC MANAGEMENT efficiency: concerned with doing things right ➔ related to operational management effectiveness: concerned with doing the right things ➔ related to strategic management strategic decisions: have long-term implications and concern the entire organisation strategic management: refers to the management processes that define 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 strategic management is concerned with the overall effectiveness and choice of direction in a dynamic, complex and ambiguous environment strategic management has to make sure that strategy is implemented and working in practice What strategic management is concerned with according to the author: - Strategic planning or the thinking aspect of strategy - Supported by: o strategic decision making o risk management o strategic leadership - 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 ➔ possible change in business model - Strategy implementation or the doing aspect of strategy - Integrating sustainability into all the strategies Good strategic management = good strategic planning + good strategy implementation Position an organisation strategically ➔ strategic link between internal and external environment LO 5: Formulate an argument on the different perspectives of managing strategically THE PERSPECTIVES ON MANAGING STRATEGICALLY To achieve a competitive advantage, strategy has to be consistent with the organisation’s internal and external environments: - Internal environment ➔ inside-out perspective - External environment ➔ 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 The inside-out perspective Leaders believe that strategies should: - Be designed and developed around the organisation’s: o Resources and dynamic capabilities o strategic architecture o goals o values - and be able to convert business intelligence into useable knowledge to take advantage of the opportunities in the external environment Resource-based and dynamic capabilities viewpoints Answers the question: What can this organisation do for me? integrates the key dimensions of the organisation The 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 - Externally: integrating value-adding networks contribute to adding value in the value chain Resources and capabilities can become a threat to an organisation if they: - are lost or diminished - too entrenched to change quickly enough 1) Resource based viewpoint (RBV): Is a theoretical perspective for understanding how competitive advantage is achieved in organisations and sustained over time 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 A competitive advantage and above-average returns are easier to attain when an organisation has resources that are: - Valuable - Rare - costly to imitate - non-substitutable An organisation creates value through flexibility and innovation The key challenge is to sustain the competitive advantage ➔ can only be sustained for a certain period, given the speed with which competitors are able to copy value-creating capabilities Owing to the current competitive environment of rapid and unpredictable change, the emphasis has shifted towards an organisation’s capabilities rather than its resources 2) Core/Distinctive capabilities: distinctive skills that yield a competitive advantage, and are difficult for competitors to imitate or obtain are inherent in the technologies, processes, strategic architecture, combination of strategies, values and relationships 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 - higher-order competencies: the ability to think critically 3) Dynamic capabilities activities and processes that strategic leaders employ to integrate, build and reconfigure internal and external competencies to address rapidly changing environments, and which become the source of sustained competitive advantage The importance of goals and values values: the standards by which all employees set priorities and define the rules that they should follow to achieve a sustainable competitive advantage A key method for determining ‘good’ strategic management is to assess whether clear and consistent values have filled the organisation 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 The outside-in perspective also referred to as the market-driven strategy and the industrial organisation model leaders 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 organisation: - Identifies opportunities in the external environment - Creatively defines its competitive industry, facilitated by environmental scanning activities known as competitive intelligence - Adapts its resources and dynamic capabilities to take advantage of these opportunities ➔ known as strategic fit key to this perspective is competing successfully in an attractive industry, with the external environment as the initiator of strategy ➔ requires the organisation to develop new resources and dynamic capabilities to establish a competitive advantage the organisation can create new opportunities by forming strategic alliances with organisations that have superior resources above-average returns are earned when the organisation develops/ acquires, the internal resources and dynamic capabilities needed to implement strategies as dictated by the external environment LO 6: Identify and explain the elements of the strategic management process THE STRATEGIC MANAGEMENT PROCESS strategy formulation and implementation are concerned with two approaches to strategy: - the prescriptive (rational and logical) - emergent (intuitive, creative, experiential and emotional) strategic planning and strategy implementation takes place within an organisation’s strategic context strategic planning and implementation are supported by strategic decision- making, strategic leadership and strategic risk management Strategic direction strategic management sets the strategic direction for the organisation the strategic tools organisations employ to set their strategic direction: - strategic intent - vision statements  - mission statements - balanced scorecards - value statements Strategic analysis 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) The 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 Strategy development and formulation answer the key question: ‘Where are we going?’ first formulate/develop business level strategies ➔ often 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 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 - In creating new and significant net value for buyers, organisations have to consider gaining a competitive advantage by operating in several businesses simultaneously beyond their business level strategies Operating in several businesses simultaneously means that organisations need to develop and formulate corporate level strategies and strategies for attaining a global competitive advantage Strategic choices are guided by: - Purpose - Context - Strategic direction for an organisation Strategy implementation Successful strategy implementation is dependent on: - strategic leadership ➔ key driver for implementation - sound organisational architecture and sound organisational alignment with its architecture - strategic risk management consider how its leadership and organizational architecture enable a response to the question: How will we get there? Strategic performance and control address the question of: How are we doing?  LO 7: Identify and explain the tests for a winning strategy TESTS FOR WINNING STRATEGY tests for assessing the effectiveness of an organisation’s strategy: 1. goodness of fit test: To be a sustainable organisation, there has to be a conceptual fit or strategic link between the internal and external environments ➔ create inside-out or outside in perspective 2. competitive advantage: Is strategy helping the organisation achieve a competitive advantage? The larger the competitive edge over rivals is, the more sustainable the competitive advantage will be 3. performance test: Is strategy resulting in above-average organisational performance by adding value? Indicators include financial strength and above-average profit gains, and an increase in competitive strength and market standing two additional tests are relevant to developing countries due to the criticality of the triple bottom line: 1. social impact test: o Is strategy contributing towards the expectations of stakeholders? o In developing countries, an organisation’s strategy contributes towards overall poverty alleviation and the well-being of citizens. o One of the dilemmas of strategic management is balancing social entrepreneurship with the demands of global competitiveness 2. environmental system test: o Is strategy contributing towards the protection and sustainability of natural resources and the ecological system? o 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: - There 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 LO 8: Demonstrate an understanding of strategic paradoxes STRATEGIC PARADOXES Paradox situation: is having two opposite facts, or qualities, which you would think could not both exist at the same time Paradox 1: Past and future The challenge for strategic leaders is to balance the past with the future Organisations learn from their past successes and failures Strategy development and formulation is often based on the past with continuous improvements around the same competitive paradigm Organisations make incremental changes to their current strategies  A more dramatic and discontinuous change means that an organization should abandon the past and current paradigms in pursuit of a strategy to meet future demands Strategic leaders need the wisdom to know when, and how much, change is required to manage the paradox between past and future Paradox 2: Intended and emergent strategy The challenge for leaders is to maintain a sense of balance and flexibility in striving to attain intended strategies while allowing for emergent strategies Leaders should use their strategic decision enablers to be finely attuned to the developments and unpredicted changes in the external or internal organisational environments they will be more open to accepting valuable emerging strategies that they could overlook because of their focus on intended strategies Paradox 3: Reactive or proactive approach to strategy Whether strategies are deliberate, emergent or a combination of both, strategic leaders’ approaches could either be proactive or reactive in nature Paradox 4: Inside-out or outside-in driven strategies there needs to be a balance between the inside-out and outside-in perspectives when managing strategically which one of these perspectives should be prioritised? Paradox 5: profitability versus sustainability all organisations require strategies to achieve their purpose The main strategy for profit-seeking organisations: to maximise the return on their investment Profitability: the ability of an organisation to generate net income on a consistent basis, often measured by the price-to-earnings ratio A competitive advantage with profit maximisation is enhanced by: - Creating value - Managing ethically - Being sustainable organisation Sustainability and strategy are inseparable A profit-seeking organisation that is sustainable: - maintains and enhances its environmental, social and economic obligations - to meet the needs of current and future generations focusing on profitability alone is short-term orientation focusing on profitability + sustainability is a longer-term/beneficial orientation  CHAPTER 2: PURPOSE AND CONTEXT OF BUSINESS INTRODUCTION a purpose and context driven approach strategy: - Does not emphasise profits and shareholders return, but a love for nature and for nature based and adventurous activities - Raises the importance of organisation's purpose and ecological context - Is becoming a broader trend as it is now adopted by companies in diverse sectors - More visible in consumer-facing businesses, such as Woolworths South Africa LO 1: recognise the crucial role of defining an organisation’s purpose in making and implementing strategy PURPOSE An organisation is a group of people that commit to working together to achieve certain objectives ➔ strategy is about prioritising and aligning these diverse and different objectives The purpose is the fundamental reason for the organisation’s existence Don’t often speak about the organisation’s purpose because you assume people know ➔ Key assumption for businesses is that the purpose is to make money Milton Friedmann’s work contributes to the dominance of the money-making purpose for businesses Friedmann argues that asking managers to address social causes is misguided given that: - Managers do not have a mandate from shareholders to do so ➔ shareholders expect financial returns and do not want managers to do anything that will compromise such returns - Managers are not trained to address social issues ➔ such issues should be left to governments and civil society organisations Friedmann also argued for long-run benefits by highlighting the “interest of the corporation” ➔ Emphasis is related to “Enlightened shareholder perspective” - a manager’s responsibility is to ensure profits for investors, but to do so for the long-term in a way that ensures the continued viability of the organisation Enlightened shareholder perspective ➔ prioritises the purpose of organisations as profit-making, but within the context of social and environmental consideration Opposing opinion to Friedman’s: - Consider his POV to be single-minded focus on profits with little regard for the possible social and environmental costs that are generated by this pursuit of profits ➔ social and environmental costs are known as externalities  - His argument assumes that the law is effective and sufficient in avoiding such social and environmental costs ➔ the law is often too limited or governments are too constrained in effectively implementing it As a result, managers have been incentivised to increase profits by reducing costs associated with taking care of people and the environment polluting the river will create negative consequences for the business and so the manager may be motivated to reduce pollution for other reasons Ensure long term benefits for shareholders ➔ taking good care of: - employees - neighbouring communities - customers - the environment ‘enlightened shareholder perspective’ - still prioritises the purpose of business, as organisations pursuing profits for shareholders - even though it encourages a more careful consideration of the social and ecological context Some business leaders have thus identified social and ecological benefits as an intrinsic good ➔ means that something has value in and of itself - They define their business purpose with an explicit social and ecological orientation ➔ seek to fulfil this purpose even if it is not required by law and even if it does not benefit shareholders LO 2: recognise the implications of both short- and long-term strategic thinking for the creation of a sustainable organisation FROM SHORT- TO LONG-TERM STRATEGISING The interactions between social, environmental, and business dynamics can play out quickly, but they often involve changes over years Long-term strategies are difficult to design due to: - Many investment decisions are made based on the promise of short-term returns - Pressure by global financial markets on the need for short-term strategising Researchers found that it was possible for leaders to shift the orientation of their companies from a short-term to a long-term strategy, with positive business outcomes: - There is growing evidence that a focus on short-term results might actually be bad for an organisation’s economic performance, - Negative impact on its social and environmental impacts - Is an important aspect of more circumspect and purpose-driven strategising - Shifting from short-term to long-term thinking is thus an important aspect of more circumspect - Entails a shift from focusing on shareholders to recognising a broader array of stakeholders, whose interests need to be considered  LO 3: 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 FROM SHAREHOLDERS TO STAKEHOLDERS Stakeholders are important as organisations depend on shareholder’s money to make investments a stakeholder approach recognises and seeks to respond to the interests and expectations of a broader group of stakeholders such as employees, neighbouring communities and civil society organisations Stakeholder approach to strategy = Shareholders’ expectation and interest + stakeholders’ interest and expectations Main proponents who developed this ‘stakeholder’ approach to strategy is Ed Freeman and Heather Elms - stakeholders are at the core of what enables a company to make profits: o Customers buy a company’s products or services o Employees cooperate and dedicate their time and energy to create these products and services o Suppliers provide important inputs to make all this possible will probably be constrained if the community living around the company does not see the company as a good neighbour ➔ main aim of social responsibility is not to increase profit, but to create value for stakeholders: o customers o suppliers o employees o communities Reasons for the diversity and complexity of stakeholder relationships: - The existence of large number of diverse stakeholders with different claims in the organisation Primary stakeholders Secondary stakeholders have contractual relationships with the such as community organisations company ➔ employees can still be very influential even though have more direct claims than it has less claims ➔ protests and secondary obstruct operations - Trade-off between stakeholders, with no formula for prioritising stakeholders ➔ an important challenge for managers to address - Difficulty in managing the different shareholder’s claims and expectations - The bigger the organisation, the more complex it is to manage relationship with stakeholder How do managers prioritise such claims and expectations by the various stakeholders of the organisation? - The King IV Report on Corporate Governance suggests ➔ making decisions on a case-by-case basis - a tool that managers use to map stakeholders on two dimensions: Creates four o power: degree to which stakeholder has an influence on the business quadrants o interest: stakeholder’s interest in the organisation  quadrants may be used to characterise stakeholders and identify corresponding management responses The crowd Stakeholders that have little interest in / influence, the organisation clearly do not require much management attention. Monitor them because their interest or influence may increase unpredictably. Subjects Stakeholders may have high levels of interest in the organisation, but not very much power. Managers’ responses will also depend on whether these stakeholders’ views of the business are predominantly positive or negative. Context Stakeholders may not have particularly high levels of interest in the setters business, but they may have a lot of power. Managers will need to keep such stakeholders satisfied to avoid negative attention. Players Most important stakeholders are those with high levels of both interest and influence in the organisation. Managers will need to give careful, ongoing attention to such stakeholders. Mapping out stakeholders according to their interest and power: LO 4: analyse important social-ecological trends in an organisation’s context and the corresponding risks THE DYNAMIC BUSINESS CONTEXT AND EVOLVING RISKS The 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  Strategy must: - Clarify how much risk to take - Highlight the kinds of risks - Highlight underlying trends that must be taken into consideration the world is changing in rapid ways and this means that the role of context is becoming more and more important for managers scientists: - argue we have entered a new geological epoch in which humans have a decisive, possibly destabilising impact on the earth as a whole - identify nine ‘planetary boundaries’ that define a ‘safe operating space’ for humanity: o Climate change o Changes in biosphere integrity (reduced biodiversity and species population sizes) o Stratospheric ozone depletion o Atmospheric aerosol loading o Ocean acidification o Biogeochemical flows o Land-system change (especially deforestation) o Freshwater use (its over-use and pollution) o Introduction of novel entities the first two boundaries have a special status because of their Earth System- wide nature and their influence on all the other boundaries organisations rely on ecosystems for resources Ecosystems provide vital goods and services to all social and environmental activities: - Provide vital goods and services to all social and environmental activities - Provide natural resources including renewable resources - Provide important processes and cycles - Provide important sinks for our waste Organisations face direct social-ecological risks due to these environmental impacts ➔ refer to the risks faced by an organisation due to changes in its social-ecological context Organisations are also challenged by these environmental risks because they are closely bound up with social and economic risks 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 also important to consider the longer-term social, ecological, technological and political trends that often underlie the business risks LO 5: identify the organisational opportunities associated with creating shared value and developing inclusive business models CONTEXT AS OPPORTUNITY: SHARED VALUE AND INCLUSIVE BUSINESS Strategic managers analyse and respond to context to develop opportunities for competitive and collaborative advantage  Shared values - the benefits that an organisation can create simultaneously for itself and its stakeholders - Developed by Porter and Kramer as an antidote to value creation ➔ economic and social objectives must be combined in the pursuit of ‘shared value’ Porter and Kramer’s three dimensions of creating value 1) Redefining productivity in the value chain o organisations can reduce costs in the production and distribution systems ➔ increases their competitiveness and reduces negative social and environmental impacts o organisations reduce their energy and water consumption 2) Enabling local cluster development o Efficient suppliers facilitate logistical efficiency o Without q supportive cluster, the productivity would be impacted o an organisation’s success relies on more than its interactions with suppliers and customers and its efforts to stay ahead of the competition 3) Reconceiving products and markets o Conceiving products and markets o Important gains can be made in developing new business opportunities by better understanding and responding to unmet social needs 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 The poor: - a potential market for business products and services - and providers of goods and services in corporate supply chains LO 6: understand how an organisation’s context can be embedded in its strategy THE PROCESS OF EMBEDDING CONTEXT IN STRATEGY it is possible and helpful to design this process of strategy-making so that the organisation’s strategy continuously reflects the organisation’s purpose and its dynamic context First step is to recognize your organisation as being part of a “nested system” strategy needs to take into account competitive dynamics related to your: - industry - suppliers - buyers the famous ‘five forces’ highlighted - possible new entrants by Michael Porter - possible substitutes all of these dynamics depend on a thriving social system, in which the organisation’s stakeholders’ well-being is taken care of This social system depends on the natural environment  challenging to prioritise diverse stakeholders’ claims and expectations ➔ important to clearly specify an organisation’s strategy to respond to social and ecological trends, as well as to understand these trends The weakness of the nested view is addressed by Bertels and Dobson’s four steps for developing contextual strategies and goals: 1) acknowledge the need to operate within social-ecological thresholds o 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 2) prioritise specific focus areas that your organisation needs to give particular attention to o generally based on an assessment of how the organisation impacts on its social and ecological context o It may also be informed by analysing where and how the organisation might have the most impact in making a positive difference 3) set strategy and goals that transparently explain how the organisation will contribute to bridging the performance gap between current performance and the desired endpoint o the performance gap focuses on the organisation itself and what might be reasonably expected from the organisation to achieve societal progress on the specific issue 4) transparently track performance o becomes possible to identify intermediate targets along this trajectory ➔ can be used to keep track of how well the organisation is doing in achieving its higher-level targets  Context-based strategy-making is thus a continuous process of linking broader societal ambitions and requirements – at global, national, and local levels – to the specific circumstances of your organisation LO 7: consider how to approach monitoring and reporting on embedding purpose and context in strategy implementation MEASURING AND REPORTING ON PROGRESS transparently tracking progress is vital key ingredient of most management systems ➔ reporting on the implementation of strategy to both internal and external stakeholders (focus on continuous improvement) Companies are required to do integrated reporting Businesses are being held to account more and more on their financial, social and environmental performance ➔ led to the integrated reporting movement: - companies publish just one report that integrates economic, social, environmental, and governance concerns - At the global level, the move towards integrated reporting is being led by the International Integrated Reporting Council - brings together material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates - provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates and sustains value - should be an organisation’s primary reporting vehicle  Key principles of integrated reporting: 1) Strategic focus (insights on strategic objective and relation to ability to create and sustain value) 2) Connectivity of information 3) Future orientation 4) Responsiveness and stakeholder inclusiveness 5) Conciseness, reliability, and materiality Content of an integrated report: - Organisational overview and business model - Operating context, including risks and opportunities - Strategic objectives and strategies to achieve those objectives - Governance and remuneration - Performance - Future outlook six capital forms that integrated reporting focuses on: 1) financial capital 2) manufactured capital 3) intellectual capital 4) human capital 5) social and relationship capital 6) natural capital are inputs into an organisation’s value creation process, as well as outcomes  CHAPTER 3: STRATEGIC DIRECTION LO 1: justify the indispensability of a clear strategic direction for an organisation INTRODUCTION Ensuring that the behaviours of diverse people unite around a central theme is one of the major challenges for top management Management uses strategic intent, vision, mission, and value statements to develop and convey strategic direction: - Strategic intent: a 10- to 20-year quest diffused at multiple organisational levels - Vision statement: a top management leadership tool often ascribed to a single visionary leader - A mission statement: what an organisation should be to achieve its purpose ➔ can guide employee behaviour when supplemented by value statements - A value statement: reflects the future standing of organisation and key values or behaviours to which employees should subscribe Both strategic intent and vision contain ‘a conviction to achieve a certain state of affairs in the future Difference between a strategic intent and vision ➔ the ‘degree of collectivity’ The 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 - can motivate them to perform passionately To realise the shared conception of the future ➔ The balanced scorecard: - Framework to translate strategic direction into actionable chunks and measures - Assists in result delivery - Creates a shared understanding, consensus, and commitment LO 2: explain what strategic intent is STRATEGIC INTENT Introduced by Hamel and Prahalad to address different notions of competitive strategy by Western and Far Eastern organisations: - Western organisations: o Trimmed ambitions to match resources o Search for advantages they could sustain (maintaining strategic fit) - Far Eastern organisations: o Leveraged resources by accelerating the pace of organisational learning to attain seemingly impossible goals o fostered the desire to succeed among their employees, which they maintained by spreading the vision of global leadership These different approaches created an upset in the global competitive balance  Hamel and Prahalad’s observations ➔ studied organisations across the world that had risen to global leadership to understand which of the above- mentioned approaches were the most successful: - organisations invariably began with ambitions that were out of proportion with their resources and capabilities - organisations succeeded by creating an obsession with winning at all levels within the organisation ➔ termed this obsession ‘strategic intent: o envisions a desired leadership position as well as the criteria to be used to measure progress o also includes focusing organisation’s attention on winning, motivating people, individual and team contributions, etc. strategic intent: - Captures the essence of winning, and setting out a 10- to 20-year quest for global leadership - Informs and shapes how organisations define their business, and where they find unique strategic advantage - Provides a central point of departure for decision making Organisations or governments that lack a clear strategic intent face: - face conflicting priorities - wasted resources - indecision - frustration in the workforce - confusion in the marketplace LO 3: explain what a vision statement is, and justify its role as the basis of the organisation’s strategy VISION STATEMENTS goes beyond mere planning and strategy by challenging organisational members to go beyond the status quo in pursuit of a long-term goal similar to strategic intent in its emotional effects ➔ goes further as it has connotations of encouraging strong corporate values in the strategic process most striking difference between visions and strategic intents is the degree of collectivity: - strategic intent: a phenomenon diffused at multiple organisational levels - vision: more clearly a top management leadership tool, often ascribed to a single visionary leader The 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 shared purpose could be fostered through a vision statement ➔ can serve as a guide to an organisation by providing direction of progress and by indicating the core ideology to be preserved core ideology: - defines the enduring character or consistent identity of the organisation - comprises the core values and core purpose (reason for being) Vision involves answering questions about the organisation’s identity: - who it is - where it is going  - what its guiding values are Hitt, Ireland, and Hoskisson considered a vision: - to be a picture of what the organisation wants to be - what it ultimately wants to achieve The vision statement should therefore articulate the ideal description of the organisation and give shape to its intended future it is important for a vision statement to reflect an organisation’s values and aspirations that capture the hearts and minds of all its employees and its stakeholders a vision stretches and challenges people by motivating staff to contribute to a bigger picture The visionary process it is important to point out that setting the vision is a creative process It is the responsibility of the organisation’s most important and prominent strategic leader to develop a vision the most effective vision statement results when: - the CEO involves a host of people to develop it - the statement is clearly tied to the conditions in the organisation’s external and internal environment Foster and Akdere ➔ revealed three basic approaches applied to develop a vision: 1) Intuitive approach: based on structured introspection 2) Analytical approach: gathering information about the direction of the organisation 3) Benchmark approach: looks to the competition for standards The vision content The attainment of a vision requires a certain level of unreasonable confidence and commitment ➔ strategic stretch Foster and Akdere - Emphasised that the foretold future should produce some sense of caution and concern - attributes associated with vision: o brevity o focus o clarity o understandability to all o abstractness employees o challenge o stability o future orientation o the ability to inspire - the proposed content of visions: o what should be included in a vision o organisation’s core ideology or philosophy o organisation’s values A vision statement should be short and concise to facilitate relatability Vision implementation Successful implementation requires: - either an extremely clear and meaningful vision - someone who can decode or translate the vision into meaningful parts Without such clarity and the required leadership the implementation of the vision will result in undirected actions and 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 the vision is credible and compelling enough, others will generate ideas to advance it Leaders who excel in visioning ➔ their own behaviour and conduct should therefore embody the core values and ideas contained in the vision statement 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 LO 4: explain what a mission statement is, and explain how it is aligned with the vision statement MISSION STATEMENTS formulating a mission statement is one of the fundamental steps in the strategic management process difference: - A vision statement forms the foundation for an organisation’s mission statement - A mission statement can change in light of changing environmental conditions A clearly defined mission statement can give executives the necessary direction to develop strategies in line with changing trends in the form of ‘real-time planning’ ➔ thus more concrete than a vision statement A mission statement should: - establish the organisation’s individuality - be inspiring and relevant to all stakeholders mission + vision statement = provide the foundation the organisation needs to choose and implement its strategies All members and stakeholders are usually involved in its development LO 5: expound on the components of a mission statement Formulating a mission statement Requirement ➔ convey a clear message in order to reach the target audience  Best length ➔ 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 A good mission statement should: - describe the fundamental objectives of the business - should include what people variously refer to as guiding principles, credos or corporate philosophies A mission statement typically answers one or more of the following questions: - Why is this organisation in business? - What are out economic goals? - What is our operating philosophy in terms of quality, organisational image and self-concept? - What are our core competencies and competitive advantage - What customers do and can we serve? - How do we view our responsibilities to all stakeholders? Allison found that statements could be grouped into three categories: 1) Producer category: statements concentrating on a product or service being provided by an organisation 2) Partner category: statements that emphasise working with customers to provide mutually beneficial solutions and experiences 3) Promotor category: statements that suggest that the organisation not only works with the client or customer, but also seeks to improve the quality of life Adoption and practice of vision and mission statements in the South African business environment Van der Walt, Kroon and Fourie ➔ 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 Results: - 90% of businesses had both vision and mission statements while 5% of businesses were still formulating them - The vision and mission statements were relatively short - The vision and mission statements were generally not older than five years, indicating continuous renewal - Vision and mission statements were used as a strategic planning tool VALUE STATEMENTS statement of an organisation’s philosophy or creed ➔ usually accompanies or appears in the mission statement Reflect the basic beliefs, values, aspirations, and philosophical priorities to which strategic decision-makers are committed in managing the organisation agree on a set of values that will guide staff behaviour during working hours due to the diverse backgrounds of members of staff needs to clearly state how managers and employees should conduct themselves ➔ guidelines as to how business is done in the organisation  LO 6: critically evaluate the way that strategic direction is expressed by an organisation BENEFITS OF CLEAR STRATEGIC DIRECTION Guides human behaviour and defines working relationships Shapes employee relationships with each other and all stakeholders Leads to better performance Serves as a benchmark for resource allocation Creates confidence that the intended strategies will not compromise the interests of all stakeholders Inspires employees CHALLENGES OF CREATING A CLEAR STRATEGIC DIRECTION Vision and mission statements have little tangible value if: - They are not accompanied by corresponding manager behaviour - They are not communicated to all stakeholders and if they do not buy in - They are not 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 LO 7: explain the alignment between an organisation’s strategic direction and strategic objectives TRANSLATING STRATEGIC DIRECTION INTO OPERATIONAL TERMS All statements should be expressed and communicated as an integrated set of objectives and measures that describe the long-term drivers of success for people to embrace and act on it objectives need to set clear guidelines and identify the individuals who will be responsible to implement the strategies necessary to state by what time the work needs to be completed as well as the resources required to do it Well-stated objectives: - Quantifiable - Measurable - Contain a deadline for achievement the aspects required to be addressed in objectives will be determined by the way in which the strategies have been developed ➔ the strategy development phase and the strategy implementation phase are interconnected the managerial purpose of setting objectives is to convert the strategic direction into specific performance targets these targets: - could relate to financial or strategic objectives - time periods associated with the delivery of performance could be short- term or long-term Financial objectives communicate management’s targets for financial performance such as: - revenue growth  - profitability - return on investment Strategic outcomes are leading indicators and project a company’s future financial performance and business prospects strike an optimum balance between financial and strategic objectives to ensure both survival and profitability in the long term ➔ use balanced scorecard as a means of translating strategic direction into operational objectives that deal with: - survival - growth - profitability LO 8: explain the alignment between an organisation’s strategic direction and its operational level BALANCED SCORECARDS a strategic management tool that is useful for guiding, controlling and challenging an organisation towards realising a shared conception of the future enables organisations to achieve an integrated, aligned and balanced focus on four perspectives that collectively underpin the achievement of the organisational vision: 1) Financial perspective: based on financial performance that provides the ultimate definition of an organisation’s success 2) Customer perspective: To survive and grow, organisations must be able to deliver quality goods and/or services that will satisfy customers’ needs 3) Internal business processes: Identifying the key business processes at which an organisation must excel to meet strategic goals and customer expectations 4) Learning and growth perspectives: describe how people, technology and the organisational climate can be combined to support the strategy offer a balance between financial and non-financial measures used to develop a framework and a focus for many critical management decisions used in different phases: - planning phase: is used to align strategic direction with long-term objectives that express the organisation’s desired business strategy - implementation phase: o to set departmental and individual goals o to communicate the strategy throughout the business for business planning o to allocate capital o to identify strategic initiatives - control phase: to measure whether objectives were achieved and to provide feedback and learning To capture the organisation’s desired business strategy, the balanced scorecard uses four processes: 1) clarifying and translating the vision into strategy 2) communicating and linking strategic objectives and measures  3) planning, setting targets and aligning strategic initiatives 4) enhancing strategic feedback and learning 1) Clarifying and translating vision into strategy Translating the vision into a set of objectives and measures helps managers build consensus on the organisation’s vision and strategy The 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 The executives must state in specific terms the ‘definition of success’ in each of these areas as well as their relative importance weightings the scorecard also highlights gaps in employees’ skills and other resources required to pursue long-term objectives 2) Communicating and linking strategic objectives and measures allows managers to: - communicate their strategy throughout the organisation - to link it to departmental and individual objectives To do this, scorecard users generally engage in three activities: - communicating and educating - setting goals - linking rewards to performance measures it is essential to communicate with and educate the employees who have to execute the strategy to execute it successfully High-level strategic objectives and measures must be translated into objectives and measures for operating units and individuals ➔ three levels of information on the scorecard: 1) First level: describes corporate objectives, measures and targets. 2) Second level: allows corporate targets to be translated into targets for each business unit 3) Third level: converts business units and corporate objectives to individual and team objectives that set targets for each measure and allow up to five performance measures per objective 3) Planning, setting targets and aligning strategic initiatives Organisations have separate procedures and units for strategic planning, resource allocation, and budgeting budget produced generally bears little relation to the targets in the strategic plan ➔ resulting in conflicting priorities and reporting: - senior management is responsible for formulating the strategic plan - financial department conducts a separate resource allocation and budgeting process to set financial targets Building a scorecard thus enables an organisation to link its financial budgets with its strategic goals 4) Enhancing strategic feedback and learning Strategies may lose their validity as business conditions change Organisations use balanced scorecards to monitor short-term results and evaluate strategies Scorecards enable companies to modify strategies to reflect real-time learning Strategic learning occurs when feedback is used to test the assumptions on which the strategy was based ➔ Executives use the findings to make the necessary adjustments SUMMARY Setting the strategic direction is the first step in strategic planning and management Organisations generally apply an individual approach in setting strategic direction The strategic leader plays an important role in setting the strategic direction Leaders are expected to walk the talk, and their behaviour should embody the core values of the organisation The executive team should communicate the strategic direction to all stakeholders Scorecards add meaning to the various statements  CHAPTER 4: DECISION-MAKING LO 1: describe the nature of strategic decision-making INTRODUCTION 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 strategic decisions: - Are big decisions, affecting the whole organisation - Require massive investments of resources that once committed, cannot be easily reversed - Are a result of cooperation between many different people and are accordingly a collective effort - are about change in the long run ➔ They are future-oriented and concern the long-term direction and success of the organisation, so they can never be regarded as routine decisions - Are about long-run changes to the scope of the organisation in terms of: o Vertical focus: the phases in the industry value chain that the organisation is active in o Horizontal focus: the breadth of the product and service range offered by the organisation o Geographic focus: the geographic scope of the organisation ➔ regional or global - Seeks to create fit between the organisation and its internal and external environment ➔ therefore heavily dependent on good strategic information and analysis - Strategic decision-making is context dependent and is influenced by the characteristics of the decision team and the individuals Strategic decision-making takes place in a specific context which influences how the decision is made and what decision is made ➔ creative input and strategic information are required  LO 2: explain how strategic decisions are made HOW STRATEGIC DECISIONS ARE MADE Due to its complexity, organisations may differ with their approach to strategic decision-making Three ways of making strategic decisions: 1) Strategic decision-making as a rational process often described as a rational, linear and cognitive process A typical process approach to strategic decision-making: - The organisation recognises the need for a strategic decision to be made regarding a problem or opportunity - The decision team collects information about the problem or opportunity ➔ process may be quite time and resource intensive - Following information collection and analysis, the decision team identifies a set of alternatives for addressing the problem or opportunity - Based on a set of decision criteria, the team selects the best alternative ➔ refer to the measures, principles or guidelines used to help the decision team decide - The selected alternative is then implemented Termed ‘thinking first’ approach by Mintzberg and Westley 2) Strategic decision-making as a visionary process Mintzberg and Westley refer to it as the as the “seeing first” approach begins with a vision in mind ➔ The organisation or a strategic leader envisions what can be achieved or where they could be in some point in the future Strategic decisions are then made with the vision in mind 3) Strategic decision-making as an experimentation process Mintzberg and Westley describe this approach as ‘doing first’ When decision-makers cannot clearly envision a decision, and they cannot apply rational decision processes to it, the only option that remains is to act and learn from what they are doing Rather than proposing that one approach is better than the other, strategic decision-makers can use all three methods, often in combination, to improve their decision-making LO 3: identify the contextual influences and their effect on strategic decisions CONTEXTUAL INFLUENCES ON STRATEGIC DECISION-MAKING 1) The characteristics of the decision-makers Characteristics that individuals within the team that makes strategic decisions own 1.1 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  Because human beings/managers, do not have limitless cognitive powers, they have limitations in the number of alternative solutions they can consider cannot be fully rational and consider all possible solutions to a problem ➔ bounded Research shows: - Strategic decision-makers satisfice rather than optimise - Strategic decision-makers could be rational in some ways but not in others - Many strategic decisions follow conventional rather than rational decision process 1.2 Politics and power in strategic decision teams Human beings are political (tendency to seek power), and the quest for power very often plays out in organisations and in their strategic decision- making processes Research shows: - Preferences regarding strategic decisions are often in conflict - Powerful people may influence the outcomes of decision - Political tactics are used to enhance power and influence on strategic decision-making process and outcome 1.3 The diversity of the decision team The more similar people are, the less likely they are to come into conflict Individuals from different backgrounds and different demographic groupings approach things differently ➔ more conflict Therefore the diversity of the decision-making team may influence strategic decision-making 2) The characteristics of the decision decision characteristics impact on how the decision is made: - Complexity and political importance of decisions matter determines decision-making process - Level of uncertainty concerning actions to be taken or information required, increases likeliness of using political processes - The importance of the decision may result in a comprehensive approach to decision-making - Time pressure may lead to more disagreements ➔ fewer managers being involved and less communication across departments 3) The characteristics of the organisation Organisational culture, structure and systems affect decision-making Organisational characteristics that influence strategic decision-making process: - Power centralisation: Increases likelihood of using political tactics if more power is centralised in the organisation - Structure: Formal and informal organisational structures have different influences  - Size: Large organisations tend to be more comprehensive in decision- making than small ones ➔ they will gather more information etc 4) The external environment one of the key tasks of strategic management is to ensure a fit between the organisation and its external environment ➔ industry of which the organisation forms a part of will influence how strategic decisions in the organisation are made 4.1 Hostile environments ineffective strategic decisions could have a severely negative effect on the survival of the organisation it could be expected that strategic decisions should be more comprehensive and make more use of strategic information and analysis 4.2 High-velocity, dynamic and unstable environments are characterised by: - quick and unpredictable changes in trading conditions - high levels of uncertainty could be argued that such environments require fast yet effective strategic decision-making Tend to focus on the decision and the process rather than on disagreements Rational and comprehensive approaches to decision-making are less valuable due to unavailability of information 4.3 Environmental munificence 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 research thus far supports the view that rational strategic decision-making processes lead to more effective strategic decision-making a rational process in terms of strategic decision-making delivers the most effective strategic decisions under all levels of munificence 4.4 Environmental uncertainty In conditions where information can be collected to mitigate the uncertainty, a comprehensive strategic decision-making process can lead to higher performance LO 4: distinguish between the different strategic decision enablers STRATEGIC DECISION ENABLERS Strategic decision enablers are efforts to improve the speed and quality of strategic decision-making It’s the infrastructure (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 decisions  Strategic decision-making is a complex and ongoing process Complexities of strategic decision-making: - Requires forward and backward-looking information - Requires an internal and external focus to align internal resources with external opportunities and threats - Focuses on the ‘big issues’ - Requires information from different sources - Information is not objective, thus open to different interpretations competitive intelligence (CI): Organisations typically engage in environment- scanning activities ➔ focus on the external environment business intelligence systems (BIS): provide structured, often quantitative, and historical information big data: very large and complex data sets in large organisations that require advanced and unique: - data storage refers to the large amount of data that - management engulfs organisations as a result of formal - analysis and non-formal data collection information obtained from these sources is generally disparate and fundamentally different ➔ organisation therefore requires integrating mechanisms to analyse and integrate information and present it in a useful format to the strategic decision-making process Big data and strategic decision-making large amount of structured and unstructured data organisations generated gave rise to “big data” big data analytics: the process of turning big data into useful information Big data presents the organisation with four problems: 1) The volume of data is astounding 2) Includes a large variety of data 3) The velocity of data increases constantly 4) The veracity of data is sometimes hard to verify Competitive intelligence (CI) One of the key strategic processes of any organisation is to scan the external environment constantly environmental scanning: - considers when an organisation should collect intelligence to support strategic decision-making - refers to the efforts of executives to gather intelligence to sustain their competitive advantage Some of the aspects that CI should focus on: - Competitors and complementors: Who are they, what are they planning, what are their strengths and weaknesses, and how will they react to our strategies? - 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? - 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 influencing legislation or regulation? 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: - serves as an early warning system - focus further CI efforts on these opportunities and threats to assess them and aid decision-making - provides feedback on the strategic management process and thus enables corrective actions if required CI directly supports the strategic decision-making processes in the organisation The strategic CI cycle  Five steps: - Step 1: Identify the strategic decision to be made - Step 2: Key intelligence topics (KITs) o the organisation must determine the focus areas for CI, as it is impossible to monitor the entire business environment ➔ key intelligence topics - Step 3: CI collection plan o determines the: ▪ the data sources that will be used ▪ the people involved in the collection process ▪ how the data will be collected o CI and environmental scanning activities should never rely on secondary information only ➔ primary sources such as intelligence from human sources are NB o The most important sources of CI: ▪ Primary information may be obtained in the form of structured or unstructured interviews ▪ Observation of competitors’ facilities and operations ▪ Reverse engineering of competitive products and mystery shopping ▪ Publicly available information ▪ Institutional information in the public domain ▪ Internal sources include intelligence obtained from employees ▪ Competitive signalling - Step 4: Collection and evaluation o Data gathering then takes place as outlined by the data collection plan - Step 5: CI analysis and insights BUSINESS INTELLIGENCE (BI) The aim of BI is to convert massive amounts of raw data into useful and actionable intelligence Data on its own has limited value and must be made available to strategic decision-makers in an integrated and usable format This involves obtaining data from the various operational systems BI has not been entirely successful in integrating internal and external intelligence Source Systems One of the key challenges in BI is to obtain information from many different data sources A few general examples of source systems: - Legacy systems are historical and possibly outdated systems, but for some reason are still being used by the organisation - Enterprise resource planning (ERP) is typically supply chain activities - Customer relationship management (CRM) systems are regarded as the marketing equivalent of ERP systems - Online transaction processing (OLTP) refers to those systems that facilitate and manage transaction-oriented applications - Clickstream data is the record of an internet user’s ‘virtual trail’ that is left while surfing the internet Data warehouse It is typically a central system where information from diverse sources is combined to make it available to marketing and other decision-makers The aim of a data warehouse is to provide rich, timely, clean, and well- structured information to BI analysis tools The 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 Data extraction and reporting The last step in the process of adding value to the organisation’s data Tools used for data extraction: - OLAP: provides the ability to view data in a multidimensional format - Data mining: an analytical process consisting of statistical techniques and artificial intelligence - Executive information systems (EIS): operational data presented in the form of charts, tables, etc. - Geographic information systems (GIS): presents data in a map-based presentation INTEGRATING MECHANISMS Integrating mechanisms integrate external, unstructured data (CI) with internal, historical, highly structured data (BI) and other big data to: - Develop a richer picture of the organisation’s environment - 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 different manifestations of integrating mechanisms: 1) People as integrating mechanisms People provide the creative insights that cannot be duplicated by technology or process Intelligence teams Multidisciplinary intelligence teams add value to the strategy-making process Fahey and Herring’s guidelines for the use of intelligence teams: - The team should consist of core members and transient members - Decision-makers should engage with the team’s activities - Team should be used for complex strategic intelligence issues - The team should be multidisciplinary - Should include members who can think ‘outside the box’ and challenge conventional wisdom Executive intelligence officer (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 The EIO’s responsibilities: - Content leadership: collaborates with teams on intelligence issues - Intelligence quality assurance: evaluates intelligence sources - Decision relevance: assists to focus on the highest priorities - Voice of realism: uses facts and insights to provide a realistic perspective - Education enabler: uses the dissemination of intelligence as a learning opportunity - Safe harbour: does not judge ideas or opinions - Dot connector: provides the best view of the big picture Intelligence specialists Intelligence specialists are known by a number of different job titles, e.g. CI officer, BI analyst, etc. Main role is to combine intelligence from different sources to provide insights and to support decision-making 2) Processes as integrating mechanisms Three more important processes that contribute to the integration and dissemination of intelligence: 1. Knowledge management o The process of finding, selecting, organising, distilling, and presenting information that improves an employee’s comprehension in a specific area of interest ➔ links between CI, BI and KM become clear o CI and BI activities constantly generate new knowledge o Knowledge is generally divided into tacit and explicit knowledge: ▪ Explicit knowledge can be easily codified and transferred to others ▪ Tacit knowledge cannot be easily transferred or copied o The highest level of knowledge sharing occurs when tacit knowledge is transferred from one individual or group to other individuals or groups ➔ takes place through a process of socialisation  o The next process is to transfer tacit knowledge to explicit knowledge to make it more widely known and easier to transfer ➔ externalisation o Once knowledge is explicit, it can easily be linked and used in combination with other explicit knowledge o Ultimately the goal is to ensure that explicit knowledge becomes tacit knowledge o Role of KM summarised: 2. Amplifying weak signals o organisations that are able to cut through the clutter of data to get to the intelligence that no or few other organisations have will be in a better position to establish a competitive advantage o 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 o Schoemaker and Day’s process for amplifying weak signals53 that builds on the idea of scenario analysis and planning: ▪ First step: to have environmental scanning processes that actively search for weak signals by driving the search for intelligence down to local levels  ▪ Second step: 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 ▪ Third step: encouraging constructive conflict and debate, gaining insights and intuition from seasoned managers, and confronting the reality of what is happening in the business environment 3. Scenario planning o Used to develop different perspectives of the future to plan for contingencies o Shell’s four key applications of scenario: ▪ To help make sense of a complex situation ▪ To assist in developing robust strategies that offer best performances ▪ Anticipating changes in situations where the future is uncertain ▪ As an adaptive organisational learning tool for managers o Key elements of the processes for scenario analysis and planning: ▪ Agree on the purpose, objective, and time horizon of the scenario ▪ Requires an understanding of participants of the organisation, key uncertainties and driving forces ▪ Scenario planning team need to agree on a few key drivers or uncertainties ▪ Key uncertainties are used to create possible scenarios ▪ The scenarios should be widely communicated, depending on the desired outcome ▪ Generate strategies ▪ Look for signals that might indicate the likeliness of a scenario over another o Scenario outcomes can be in the form of narratives, matrix, or simulated environments 3) Technology as an integrating mechanism Focus on two broad categories of software: - Planning and decision-support tools: o refer to a variety of tools in several categories that may be used to support the planning and decision-making processes in an organisation ➔ includes simulation tools and planning templates o Strategy simulations, for example, can assist strategic decision-makers in asking ‘what if?’ questions - Artificial intelligence: o is a category of technology that simulates human thinking patterns o three main categories of AI applications: ▪ expert systems ▪ Artificial neutral networks (ANN) ▪ Intelligent agents LO 5: Identify ways of improving the quality of strategic decision-making 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 Guidelines: 1) Building multiple alternatives Multiple alternatives should be developed and presented This has the additional advantage of reducing management bias that may result in certain alternatives being eliminated early on in the decision-making process 2) Tracking real time information Instead of relying on trends and statistical analyses managers in fast-moving environments may be more predisposed towards real-time information, which focuses on the latest information from current operations 3) Seeking the views of trusted advisors The experience of older, more experienced managers can be very valuable Decision-makers in fast-moving environments will often have a network of such experienced managers as ‘trusted advisors’ 4) Aiming for consensus, but not at any cost important to stimulate conflict and debate, and allocate a realistic time frame to making strategic decisions If the allocated time has lapsed and consensus has not been reached, a decision is made using a decision rule ➔ In this way, decision pace and rhythm can be maintained 5) Building collective intuition Developing a common understanding of the business and its environment among decision-makers is an important way of reducing unnecessary conflict and disag