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University Press Southern Africa
 Chapter 1
Introduction – The nature of strategic management
 Learning outcomes
After reading this chapter, you should be able to:
• explain the essence of strategy
• demonstrate an understanding of strategy development and
perspectives of strategy
• discuss the nature and role of strategy
• explain the concept of strategic management
• formulate an argument on the different perspectives of managing
strategically
• identify and explain the elements of the
• strategic management process
• identify and explain the tests for a winning strategy
• demonstrate an understanding of strategic paradoxes.
 Overview
• The purpose of this chapter is to:

1.Introduce the nature of strategic management

2.Provide a guide to the structure and content of this
textbook by means of the strategic management framework
 1.1 Introduction
• Managing an organisation in the competitive landscape of the twenty-first
century is a highly complex task, and has an impact on organisational
leadership, strategies, and organisational architecture.
• Among the reasons for the heightened complexity are increasingly
competitive business practices, the inclination towards strategic flexibility
to accommodate change, the emergence of networked organisations, and
the concern for sustainability and business ethics in the global arena.
• It is vital that leaders think strategically about how they achieve a
competitive advantage for the organisation.
• Leaders need to understand where they fit into the global competitive
landscape, what it means to be a sustainable global organisation, and how
they can contribute towards strategic development, change, and
transformation.
 1.1 Introduction continued

• When thinking strategically about their organisation’s current

situation and future prospects in a competitive landscape,
management is faced with four critical questions:
• Where are we now?
• Where do we want to go?
• How will we get there?
• How are we doing?
 1.1 Introduction continued

• To answer the first question, ‘Where are we now?’,

management should consider an organisation’s:
• competitive positioning
• its 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
• its environmental integrity
• its current performance
 1.1 Introduction (cont.)
• The second question, ‘Where do we want to go?’, refers to the
strategic direction that management believes the organisation
should adopt. The answer to the third question, ‘How will we get
there?’, depends on:
• how strategy is formulated at the different organisational levels based on
customer needs, stakeholder expectations, integration with the
environment, and ethical perspectives
• the influence of leadership, values, organisational culture, and
organisational architecture on strategy implementation
• Finally to answer the last question, ’How are we doing?’, requires
that strategic leaders:
• manage the performance of the organisation by means of strategic
control measures and appropriate feedback.
 1.1 Introduction continued
• It is important to note that:
• All organisations require strategies to achieve their purpose, whether they are
in developed or developing countries, large or small, profit-seeking or not for-
profit, private or from the public sector.
• Sustaining a competitive advantage is influenced by the organisation’s
engagement with government, environmental focus (process improvement and
products/services), and socio-economic development.
• Many organisations are realising that the opportunities represented by the
large emerging markets demand an entirely new way of thinking in terms of
sustainability.
• The overarching imperative to support developing nations in their quest for
better livelihoods, human rights, and environmental integrity is a challenge,
and the business community, ranging from small organisations to multinational
corporations, has an important role to play.
1.2 The essence of strategy
1.2.1 Strategy conceptualised
• The concept of strategy dates back to ancient Athens of 500
BC, and the documentation of Sun Tzu’s The art of war, written
about 500 BC.
• Strategy has always been considered to be a key element of
managerial activity, and is still offered as a capstone course at
business schools.
• But what does strategy really mean? Table 1.1 below offers
selected definitions to illustrate the complexity of the concept
of strategy.
Selected definitions of strategy
Strategy conceptualised (cont.)

• Strategy can be regarded as a game plan indicating the

choices a manager needs to make, for example about how to:
• attract and meet customer needs
• compete successfully
• develop the necessary dynamic capabilities
• grow the organisation
• manage the organisational architecture
• achieve performance targets by implementing strategy successfully.
1.2.1 Strategy conceptualised (cont.)
 1.2.2 The historical origins of the
concept of strategy
• The concept of strategy derives from the Greek word strategos,
meaning ‘a general’.
• Strategos, in turn, derives from stratos (the army) and agein (to
lead).
• So, originally, strategy was associated with the military – the ‘art
of leading the army’.
• Sun Tzu’s primal work, The art of war, written about 500 BC, is
regarded as the first formal article on strategy
1.2.2 The historical origins of the concept
of strategy (cont.)
• It was only in the twentieth century that the concept of strategy
gained importance in the business world.
• Military and business operations share some common concepts and
principles, particularly strategy and tactics.
• A tactic is a plan for a specific action, while strategy is the overall
scheme for leveraging resources to obtain a competitive advantage.
• Strategic decisions, whether in the military or business sphere,
share common characteristics:
• 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.
1.2.3 Strategy development in the twentieth
and twenty-first centuries
• During the early 20th century:
– FW Taylor in the USA
– Henri Fayol in France
– Henry Ford (1908–1915)
– 1912 Harvard Business School: business policy capstone courses
– Alfred Sloan from General Motors (1920–35)
– Peter Drucker (1954): proactive planning to shape the
organisation's environment
– Philip Selznick (1957): distinctive competence: core concept of
the resource-based organisational perspective
1.2.3.1 Strategy in the twentieth century
• Second World War: game theory originated- the formal study of conflict
and cooperation.
• Game theoretic concepts apply whenever the actions of several
agents are interdependent.
• These agents may be individuals, groups, firms, or any combination o
these.
• Von Neumann and Morgenster’s The Theory of Games and Economic
Behaviour (1944)
• 1950s to 1970s:
– Two environmental factors accelerated the development of strategy:
rate of change and spread of wealth
– Research focused on general management and business policy issues
– Making decisions and maintaining co-ordination in increasingly large
and complex organisations
1.2.3.1 Strategy in the twentieth century (cont.)

•Strategy was essentially defined as a process

•Sub-processes:
– Identification and analysis of threats and opportunities
– Respond to aforementioned by formulating strategic plans
– Implementation of strategic plans
– Design control systems for implementation processes
1.2.3.1 Strategy in the twentieth century (cont.)
• 1970s: circumstances: major increase in oil prices
– Increased international competition
– Focus on the analysis of the external environment
– Strategy viewed as a quest for positioning and market
leadership
• Late 1980s and early 1990s
– Internal organisational environment
– Long-term strategy resulted from developments in resource-
based and dynamic capabilities viewpoints
 1.2.3.2 Strategy into the twenty-first century
• At the beginning of the twenty-first century, key theoretical
developments that influenced the rethinking of contemporary business
models included the application of game and complexity theories to
business, and the analysis of the disruptive effect of technology.
• In 2001, Ilbury and Sunter advocated the re-emergence of scenario
planning as a valuable tool in preparing for possible different futures.
• Other developments included the:
• diagnosis of the twenty-first century competitive landscape and the impact of
globalisation
• strategic use of knowledge in organisations
• application of real options thinking, risk management, and scenario planning.
 1.2.3.2 Strategy into the twenty-first century
(cont.)
• Managers and academics had to rethink previous business models
during the early twenty-first century.
• This rethinking was influenced, among others, by the 2008-2009
recession.
• Becoming disillusioned with ‘shareholder value capitalism’, there is a
renewed interest in corporate social responsibility, business ethics,
and sustainability.
• Sustainability implies that organisations can achieve a competitive
advantage with above-average returns by creating value, managing
ethically, and being sustainable, corporate global citizens with social,
environmental, and economic integrity.
1.3 The nature and role of strategy
1.3.1 The five Ps of strategy
•Strategy as:
– Plan
– Pattern
– Position
– Perspective
– Ploy
Figure 1.1 The five Ps of strategy
 The five Ps of strategy (cont.)
• Strategy as plan
– Provides overall direction and a course of action
– Views strategic decision-making as a formal, logical, top-down
structured process
– Strategy is formulated through a rational analysis of the organisation, its
performance and external environment
– Process of conception; formal in nature
– Implemented through organisational layers, structure and control
systems
– Attain a match or strategic link between the internal organisational
capabilities and external possibilities
– Basis of the resource-based and dynamic capabilities perspectives
 The five Ps of strategy (cont.)
• Strategy as a position
– Particular products in particular markets
– Strategy looks downwards (meeting customer needs) and outwards
towards the external competitive market
• Strategy as a perspective
– Refers to the organisation's way of doing things
– Interpretative view
– Future strategies based on the adaptation of past and on the collective
experience of individuals and the way of doing things embedded in the
cultural web of an organisation
– Strategy looks inside the organisation – inside the mindset of the
collective strategists, and ‘upwards’ toward the strategic purpose,
intent and direction of the organisation
The five Ps of strategy (cont.)
• Strategy as a ploy
– A specific maneuver to outwit a competitor
– For example, impression of expanding capacity is created
by purchasing land to discourage a competitor from
building a new plant – strategy is therefore a threat
• Strategy as a pattern
– Consistent behaviour over time
– Example: Cheap products pursue a low-cost strategy
– As a pattern (looking at past behaviour), strategies also
evolve out of their past – realised strategy
– Intended strategy – envisioned strategy of top
management achieved by manager
 The five Ps of strategy (cont.)

• Intended strategies that are fully realised are referred to as

deliberate strategies
• Those not realised are referred to as unrealised strategies or
abandoned strategies
• When the pattern realised is not explicitly intended, it is referred
to as an emergent strategy:
• Unplanned responses to unforeseen circumstances; not a product of
formal top-down planning
The five Ps of strategy (cont.)
 1.3.2 Levels of strategy
• The primary objective of strategy is to achieve a sustained
competitive advantage as this leads to above-average returns
(increased profitability).
• Once an organisation has analysed, developed and formulated its
strategy, it needs to implement the strategy successfully.
• Three levels of strategy formulation, Table 1.4:
– Corporate level strategy
– Business level strategy
– Functional level strategy
1.3.2 Levels of strategy (cont.)
1.4 Strategic management
• Concerned with the overall effectiveness and choice of direction in a
dynamic, complex, and ambiguous environment.
• Strategic decisions have long-term implications and concern the entire
organisation.
• Strategic management encompasses more than strategic decision-
making and the strategic planning process.
• It has to ensure that strategy is implemented, that is that strategies are
working in practice.
• 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.
• It is the process by which organisations determine what value is needed
and how to add that value, and enables organisations to cope effectively
with the myriad of demands place on them from within and without.
1.4 Strategic management (cont.)
• Strategic management is concerned with:
• Strategic planning or the thinking aspect of strategy (setting the strategic
direction within a stakeholder context)
• analysing the external and internal organisational environments, facilitated by
strategic decision enablers
• developing and formulating effective strategies that balance the organisation’s
internal environment with its external environment.
• In doing so, strategic managers are responsible for establishing a
clear direction for the organisation and a means of getting there,
which requires the creation of strong competitive positions
• Strategy implementation or the doing aspect of strategy.
• In effective strategy implementation, the organisational architecture (that is
processes, structure, systems, knowledge, skills, abilities, technology, and
organisational culture), leadership activities, strategic performance
management, control and reporting are synergistically integrated to achieve
effective performance.
• Integrating sustainability into the strategies
 1.5 Perspectives on managing strategically
• The factors in the organisation’s internal environment that
influence what it is able to do can be divided into three groups,
namely:
• resources and capabilities
• strategic architecture (structure, systems and processes)
• goals and values
• To achieve a competitive advantage, strategy has to be consistent
with the organisation’s internal environment and its external
environment (macro- and industry environments).
Figure 1.3 Strategy link perspective
 1.5.1 The inside-out perspective

• Strategies should be designed and developed around the

organisation's resource and dynamic capabilities
• Take advantage of the opportunities in the external environment
• Resources and dynamic capabilities are leveraged by ‘stretching’
resources and capabilities to achieve a competitive advantage
and/or yield new opportunities
• The ability to be innovative and strategically flexible is critical
• Resource-based and dynamic capabilities viewpoints form the
basis
1.5.1.1 Resource-based and dynamic
capabilities viewpoints
• Core of the resource-based viewpoint (RBV)
• Answer question: ‘What can this organisation do for me?’
• Resources that are valuable, rare, costly to imitate and non-substitutable
value-creating strategies contribute towards achieving sustainable competitive
advantage and above-average returns
• Value-creating strategies that other competitors are unable to duplicate or are
too costly to imitate lead to a competitive advantage
• Value refers to the contribution that strategic leaders make to their
organisations, products, customers and stakeholders
• Value is created through flexibility and innovation
• Strategic flexibility: sets of capabilities in different areas of operation that add
value to how an organisation responds to external opportunities and
challenges in a dynamic and uncertain environment
• Core or distinctive capabilities are distinctive skills that yield a competitive
advantage.
• Dynamic capabilities are 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
1.5.1.1 Resource-based and dynamic
capabilities viewpoints (cont.)
• The ability to stretch resources and capabilities is largely
dependent on the organisation’s strategic architecture.
• 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, that is sustainable systems thinking. For example, Woolworths’
functional capabilities and brand technology create both an image and a
capability that enable it to trade in clothes, foods, cosmetics, household
furnishings, and credit.
• Externally, integrating value-adding networks contribute to adding value
in the value chain. For example, one of SABMiller’s key success factors is it
ability to integrate distribution channels of external partners into its
outbound value chain.
1.5.1.2 The importance of goals and values

• Goals and values cannot be ignored

• Values as the standards by which all employees set priorities and
define the rules that should be followed to achieve a sustainable
competitive advantage
• 21st century environment, values such as flexibility, speed,
innovation, integration are pertinent
• Key assessment of ‘good strategic management’ is whether clear
and consistent values have permeated the organisation
 1.5.2 The outside-in perspective
• Also referred to as market-driven strategy
• Strategies should be designed and developed as determined by the
market needs and an understanding of and response to the external
environment
• Organisation identifies opportunities in the external environment,
facilitated by competitive intelligence, creatively defines its competitive
industry, then adapts its resources and dynamic capabilities to take
advantage of these; known as strategic fit
• The key to this perspective is competing successfully in an attractive
(that is profitable) industry, with the external environment as the
initiator of strategy.
• Competing in an attractive industry requires the organisation to develop
new resources and dynamic capabilities to establish a first-mover
advantage.
1.6 The strategic management
process
• Strategic management process includes:
– An understanding of the organisation's strategic direction and
stakeholders, strategic analysis, strategy development and formulation
and strategy implementation
– A combination of the commitments, decisions and actions required for
an organisation to achieve strategic competitiveness and earn above-
average returns
– Both the prescriptive (rational and logical) and emergent (intuition,
creativity, experience and emotion) approaches to strategy
– Figure 1.4 below: Strategic management framework
 1.6.1 Sustainable organisation and strategic
direction
• To achieve this, an organisation that is sustainable integrates
corporate social responsibility, stakeholder claims, corporate
citizenship, and the environmental context into its strategies
• The manner in which strategic leaders respond to, and manage
economic, social, and environmental relationships, and how they
engage with their stakeholders, has a direct impact on the
organisation’s long-term success and its ability to create value, that is
sustainability
 1.6.2 Strategic analysis
• Facilitated by the infrastructure of strategic decision enablers, the
organisation undertakes an analysis of 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).
• From the outside-in perspective, the organisation identifies
opportunities in the external environment (political-legal, economic,
sociocultural, demographic, technological, and natural environment)
aspects and creatively defines its competitive industry and then
adapts its resources and dynamic capabilities to take advantage of
these.
 1.6.2 Strategic analysis (cont.)
• 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 competitive advantage.
• According to the inside-out perspective, an organisation should
design and develop its strategies around its resources, and
distinctive and dynamic capabilities to take advantage of the
opportunities in the external environment.
 1.6.3 Strategy development
and formulation
• After an organisation has analysed its external and internal environments
facilitated by the network of strategic decision enablers, it needs to
develop and formulate its strategies.
• The organisation now needs to answer the key question, ‘Where are we
going?’
• Strategies at business level are 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.
 1.6.4 Strategy implementation

• ‘How will we get there and how are we doing?’

• Strategies chosen and developed have to be implemented
• Chapter 12 addresses leadership as the key driver of effective
strategy implementation
• Chapter 14 discusses business performance management,
strategic control which includes the balanced score card and
aspects of risk management, and sustainable reporting.
• The balanced score card, as part of the strategy implementation
monitoring system, is one means of addresses the question, ‘How
are we doing?’.
1.7 Tests for a winning strategy
• Five important questions
– Goodness of fit test
• How well does the strategy fit the organisation's situation?
– Competitive advantage test
• Is strategy helping the organisation achieve a sustainable competitive
advantage?
– Performance test
• Is strategy resulting in above-average organisational performance by adding
value?
– Social impact test
• Is strategy contributing towards the expectations of stakeholders?
– Environmental ecosystem test
• Is strategy contributing towards the protection of and sustainability of
natural resources and the ecosystem?
 1.7 Tests for a winning
strategy (cont.)

• 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 environmental requirements in a global context
 1.8 Strategic paradoxes

• Paradox 1: Past and future

• Paradox 2: Intended and emergent strategy
• Paradox 3: Reactive or proactive approach to strategy
• Paradox 4: Inside-out or outside-in driven strategies
• Paradox 5: Profitability versus sustainability
 Discussion questions
1. Explain the concept of strategy in your own words, and briefly
explain the five Ps of strategy.
2. Distinguish between intended, deliberate, emergent, and
realised strategy.
3. Discuss the roles of different management levels in strategic
management. In your opinion, what would be an important
consideration, given the challenges of the twenty-first century
competitive landscape?
4. Explain competitive advantage, above-average returns, and
value-creating capabilities. Why are these concepts important for
an organisation’s performance?
5. Distinguish between the inside-out and outside-in perspectives
in analysing strategy
 Discussion questions (cont.)

6. Explain what is meant by strategic management and discuss the

dynamic nature of the strategic management process.
7. Critically evaluate the merits of each of the tests of a winning
strategy.
8. Advise top management on how the strategic paradoxes would
affect their strategic effectiveness.