MAC4863/505

College of
Accounting Sciences
Department of
Management
Accounting
University of South
Africa, Pretoria

Open Rubric
Rubric
MAC4863/505

PART D:

Making strategic choices

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CONTENTS

PART D: Making strategic choices (18%) .............................................................. 2

LEARNING UNIT 1: Resources and value creation within the organisational

ecosystem ............................................................................................... 4
SUB-UNIT 1.1: Resource audit .......................................................................................... 4
SUB-UNIT 1.2: Competences ............................................................................................ 5
SUB-UNIT 1.3: Critical Success Factors (CSFs) ................................................................ 5
SUB-UNIT 1.4: Value drivers ............................................................................................ 5
SUB-UNIT 1.5: Porter’s value chain .................................................................................. 6
Summary ..................................................................................................................................... 9

LEARNING UNIT 2: Strategic options and choice................................................................. 10

SUB-UNIT 2.1: Key decisions to make.............................................................................. 10

SUB-UNIT 2.2: Strategic options – the strategic models .................................................... 11
.

SUB-UNIT 2.3: Porter’s generic strategies ......................................................................... 11

SUB-UNIT 2.4: ANSOFF.................................................................................................... 12
SUB-UNIT 2.5: Diversification ............................................................................................ 12
SUB-UNIT 2.6: Product portfolio theory – Boston Consulting Group (BCG) ....................... 13
SUB-UNIT 2.7: Acquisition ................................................................................................. 13
SUB-UNIT 2.8: Joint methods of expansion ....................................................................... 13
SUB-UNIT 2.9: Divestment ................................................................................................ 14
SUB-UNIT 2.10: International growth ................................................................................... 14
SUB-UNIT 2.11: Evaluating strategies – making a strategic choice ..................................... 14
Summary .................................................................................................................................... 19
References ................................................................................................................................ 19

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LEARNING UNIT 1: Resources and value creation within the
organisational ecosystem

In this learning unit we will look at the internal issues that an organisation needs to consider as
part of its strategic analysis. In the previous learning unit (in Part B) we learnt about the external
environmental analysis.

Learning outcomes:

At the end of this learning unit you should be able to:

• Conduct a position audit using Ms model.
• Identify (recommend) and review the critical success factors (CFS) of the organisation.
• Identify and recommend activities that add value to the organisation using the value
chain analysis model.

This topic consists of the following sub-units:

SUB-UNIT 1.1: Resource audit
SUB-UNIT 1.2: Competences
SUB-UNIT 1.3: Critical success factors (CSFs)
SUB-UNIT 1.4: Value drivers
SUB-UNIT 1.5: Porter’s value chain

SUB-UNIT 1.1: Resource audit

Grant’s resource audit

Source: (Accessed on 3 March 2015)

The Ms model can be used to help managers determine an organisation’s internal strengths
and weaknesses. Resources can be both tangible and intangible in nature.

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

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SUB-UNIT 1.2: Competences

These are groups of abilities, skills or resources that enable the organisation to act effectively.

1.2.1 Core competences

A unique strength that competitors cannot easily copy or match; they are things the business does
well that give a competitive edge over rivals.

1.2.2 Threshold competences

This is something that is simply expected by the customer; it does not give the organisation a
competitive advantage, but without it, the customer will not even deal with the organisation.

An organisation’s core competences tend to become threshold over time as rivals copy them and
customer needs and expectations change. This means that they need to be monitored regularly.

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 1.3: Critical Success Factors (CSFs)

Critical success factors are the limited number of areas in which results, if they are
satisfactory, will ensure competitive performance for the organisation. They are elements of
the organisational activity which are central to its future success. Critical success factors may
change over time, and may include items such as product quality, employee attitudes,
manufacturing flexibility, and brand awareness (CIMA Official Terminology).

What is the difference between a CSF, a key performance indicator (KPI), and a competence?
A CSF is something that is needed for the organisation to succeed at what must be done, a KPI
is the measures put in place to see if the CSF has been achieved, and a competence is what the
organisation is good at.

Rockart suggests that there are four sources for CSFs:

➢ the industry that the business is in

➢ the company itself and its situation within the industry
➢ the wider environment
➢ temporal organisational factors

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 1.4: Value drivers

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A value driver is anything that improves the perceived value to a customer. Examples of value
drivers are:

Good location, well-trained friendly staff, well-known brands, cutting edge technology, etc. Porter’s
value chain discussed below is a model that can be used to identify the value drivers in an
organisation.

SUB-UNIT 1.5: Porter’s value chain

The value chain models all the activities of an organisation and the linkages between them. It
shows how value is created, how costs are caused and how competitive advantage can be gained.
An organisation must be sure that its value chain is appropriate for the strategy it is pursuing.
Strategies can then be designed to:

➢ improve the efficiency and reduce the costs of non-value-adding activities

➢ enhance and develop value-adding activities

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

Discussion Activity 1 (For student participation and interaction):

2B is a medium-sized retailer of sports equipment and leisure clothing. 2B was established in

1987, and currently operates from three retail shops in locations in the town centre.

The management team of 2B is very careful about how it recruits staff. In addition to the specific
skills required to do the job, applicants must also have a “passion” for sport. This has resulted in
2B gaining a reputation for excellent customer service and enthusiastic staff. A large proportion
of staff time is also devoted to training, both on the product range and customer service
techniques. According to a recent survey conducted by the store managers, the customer believes
that 2B employees are “helpful and knowledgeable”. The customers have also praised the 2B
shops for being “well designed” and said that it was “very easy” to find what they were looking for.

Another feature of 2B that is valued by the customers is the range of goods stocked. By developing
close relationships with the major manufacturers of sports goods and clothing, 2B is able to stock
a far wider range of items than its rivals. Last year, control of this inventory was made easier by
the development of a sophisticated, computerised inventory control system. Using the system,
any member of staff can locate any item of stock in any of the shops or the warehouse. If the
required item is not “in stock” at 2B, it is also possible to automatically check the availability of
stock with the manufacturer.

At a recent management meeting, one of the store managers suggested that 2B should consider
developing its very basic website into one capable of e-retailing. At present, the website only gives
the location of stores and some very basic details of the range of inventory carried. Although the
development of the website would be expensive, the managers have decided to give the
suggestion serious consideration.

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Required:

(a) Using the value chain analysis model, explain those activities that add value in the 2B
organisation BEFORE the e-retail investment.

(b) Identify those activities in the value chain of 2B that may be affected by the e-retail investment,
and explain whether the value added by each of them may increase or decrease as a result of
the e-retail investment.

Please post your answer in the discussion forum on myUnisa under the heading Discussion Activity 1.
Please apply your own understanding to the factors; do not just copy and paste the factors as they are
presented in the study material. Please also give feedback on your fellow students’ comments/answers.

Summary

The main problem facing 2B is that its competitive advantage of differentiation through enhanced
customer service and choice will count for little on the website.

Customers will compare prices between websites and buy the cheaper goods, once they know
what they want. Even if 2B offers a very helpful online diagnostic service to help customers decide
what to buy, there is nothing to stop customers buying the product from a cheaper website.

2B will thus be under pressure to drop prices on the website to be competitive. This could
seriously undermine shop sales as customers might go into the shop for advice and then expect
2B to match its web prices in store.

Other value-based concepts

➢ Value shop – an alternative representation of the value chain based on professional

services firms.

➢ Value system – this looks at the linkages between the value chains of the business and its
suppliers and customers.

Summary

In this learning unit we looked at the methods of determining the internal resources available in
the organisation that add value. We covered Porter’s Value Chain as a key strategic model used
to determine activities that add value to the organisation and the Ms model which is used to
conduct a position audit.

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Relevant articles:

CIMA website:

Porter’s Value Chain by Graham Pitcher

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Porter’s Value Chain by the examiner

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8.pdf

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LEARNING UNIT 2: Strategic options and choice

In the previous chapters we have analysed ways in which the organisation can understand its
internal and external position. Now that the current position has been determined, the next question
is what strategy should the organisation follow? This will enable the business to decide on an
appropriate strategy. However, we now need to identify which possible strategies the organisation
could adopt. Management can then use its knowledge of its strategic position to pick the best
option.

Learning outcomes

At the end of this learning unit you should be able to:

• Identify and/or recommend a suitable strategic option between Porter’s generic strategies,
Ansoff and BCG matrix.
• Evaluate the strategic choices for suitability, acceptability, or feasibility.
• Discuss and evaluate the suitable methods of growth, namely acquisitions/mergers, organic
growth, joint methods of expansion and international growth.

This topic consists of the following sub-units:

SUB-UNIT 2.1: Key decisions to make
SUB-UNIT 2.2: Strategic options – the strategic models
SUB-UNIT 2.3: Porter’s generic strategies
SUB-UNIT 2.4: Ansoff
SUB-UNIT 2.5: Diversification
SUB-UNIT 2.6: Product portfolio theory – Boston Consulting Group (BCG)
SUB-UNIT 2.7: Methods of growth
SUB-UNIT 2.8: Joint methods of expansion
SUB-UNIT 2.9: Divestment
SUB-UNIT 2.10: International growth
SUB-UNIT 2.11: Evaluating strategies – making a strategic choice

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SUB-UNIT 2.1: Key decisions to make

There are three main strategic decisions that the organisation needs to make.

➢ How to compete – Porter’s generic strategies model.

➢ Where to compete – Ansoff, BCG matrix models.
➢ Choice of investment vehicle – Organic growth, acquisition or joint development.

Three key decisions to make:

Source: Author, 2015

FIGURE: Three key decisions to make

SUB-UNIT 2.2: Strategic options – the strategic models

Three key strategic models can be used by an organisation to help generate/suggest possible
strategies, namely:

Porter’s generic strategies

Ansoff
BCG

It’s important that you know these models. You will not be required in the exam to give a general
discussion of these models; however, you will have to show that you can apply them to a given
scenario.

Study the benefits and limitations of these models in your prescribed textbook.

SUB-UNIT 2.3: Porter’s generic strategies

According to Porter, there are three potentially successful generic strategic approaches available
to organisations in an industry.

Cost leadership

Cost leadership aims to supply standard, no- f r i l l s, h i g h - v o l u m e products or services at

better prices than competitors. This approach stresses that facilities are efficient for their purpose
and engage in cost reductions in the manufacturing process, and minimises expenses (e.g.,
research and development, selling and advertising). An example of a business that follows this
approach, is Shoprite.

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Differentiation

The intention here is to create products or services perceived as uniquely attractive, creative,
and well designed.

The aim is to gain a reputation for the excellent quality of their products/services, good corporate
image, and first-rate marketing channels. An example of this is Woolworths.

Focus

Also known as a niche strategy, an organisation will focus on one or more particular segments or
niches in the market. The organisation will not try to serve the whole market.

With this approach, an organisation could also apply a cost focus strategy or a differentiation
focus strategy.

Cost focus strategy refers to where an organisation aims to be a cost leader in a particular segment
of the market, and differentiation focus strategy is where the organisation pursues differentiation
for a particular market segment.

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.4: ANSOFF

Ansoff drew up a growth vector matrix, describing how a combination of an organisation’s activities
in current and new markets, with existing and new products, can lead to growth. Note that
diversification is typically seen as the riskiest of the four strategies. It is important that you know
this matrix and how to apply it to a given scenario.

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.5: Diversification

This refers to growing an organisation through the development of new areas that are clearly
distinct from the current business. Diversification can also be used to reduce risk. There are two
main types of diversification, namely related (concentric) diversification and unrelated
(conglomerate) diversification.

2.5.1 Related diversification refers to when the organisation diversifies into related, but
distinct business, which can be done through products, markets, or technology. An
example of this is where a restaurant goes beyond serving meals, and sells its sauces,
marinades and salad dressing through supermarkets.

2.5.2 Unrelated diversification is when an organisation diversifies into areas that are unrelated
to its current business. An example of this is where an IT consulting company decides to
take over a sandwich shop.

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Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.6: Product portfolio theory – Boston Consulting Group (BCG)

This is another matrix that you need to know and be able to use. This four-cell matrix was
developed by the Boston Consulting Group (BCG), a prominent management consulting firm. It
compares various businesses/products in an organisation’s portfolio against relative market share
and market growth.

Relative market share is the organisation’s market share compared with the market share of the
organisation’s largest rival.

Market growth is the growth in the market sector.

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.7: Methods of growth

Expansion can take many forms, including:

➢ Acquisition
➢ Merger
➢ Organic growth

Acquisition/merger Organic growth

Rapid access to resources Can be cheaper
Fewer barriers to entry Easier to control/spread out the costs
Less competitor reaction Arguably less risk
Cultural problems in the new merged Often relatively slow
business

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.8: Joint methods of expansion

Strategic Franchising Licenses Outsourcing

Joint venture
alliances

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Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.9: Divestment

Divestment is when an organisation disposes of its activities or part of them. The strategy can
sometimes be a contraction of the business. Most often the focus is on growth and expansion, but
sometimes it can be more beneficial to dispose (divest) of activities.

Examples of divestments are:

• Management buyout (MBO)

• Management buy ins (MBI)
• Cost rationalisation
• Relocation strategies

SUB-UNIT 2.10: International growth

Exporting Overseas
Multinational Transnational
strategy manufacture

Study the information on this topic in your prescribed textbook and do the “Test your
understanding” exercises.

SUB-UNIT 2.11: Evaluating strategies – making a strategic choice

Which strategy has the best fit for the organisation? After an organisation has identified its
existing strategic position, and the different strategic options available to it, it must then choose
which of these options it wants to follow.
Johnson and Scholes have identified three criteria that potential strategies can be evaluated
against, namely:

Suitability

The strategy must fit the organisation’s operational circumstances.

Feasibility

Can the chosen strategy actually be implemented?

Acceptability

Will the chosen strategy be accepted by the organisation’s stakeholders?

All three of these criteria should be met for a strategy to be accepted.

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Please remember these three criteria when you are asked to evaluate a strategy in an
assignment or an exam, it is a good framework to use.

Have a look in your prescribed book to see how Ansoff’s matrix is used together with the three
criteria.

Strategy evaluation – the role of the management accountant

The management accountant will contribute to the strategic evaluation process by providing
financial information to help management make the correct strategic choices. Examples of
these are:

• Net Present Value (NPV) calculations

• ROCE
• Ratio analysis
• Cost/Benefit analysis
• Cash flow forecasts
• Working capital and foreign exchange implications
• Economic value added
• How the project can be financed
• Compiling a budget for the new project

Study the information on this topic in your prescribed textbook and do the “Test your
understanding”

Guiding case for students:

Four companies from four different industries are as follows:

JJ Locksmiths (Pty) Ltd

Established in the last year, JJ Locksmiths manufactures state of the art door locks, which
replace the need for a key with computer image recognition of fingerprint patterns. JJ
Locksmiths is currently the only company in the market offering these door locks.

Noriscel (Pty) Ltd

A biotechnological product manufacturer established three years ago and engaged in the rapidly
expanding annual feedstuffs market, with numerous international patents.

Three Circle Bakery (Pty) Ltd

A confectionery company, which has been operating for many years and is now experiencing
low sales growth but high market share in a long-established industry.

ERG Merchants (Pty) Ltd

A retailing organisation, which has been very profitable but is now experiencing a loss of market
share with a consequent overall reduction in turnover. ERG wishes to regain market share by
either reducing prices, acquiring a rival, investing in additional promotions, etc.

Required:

(a) Discuss how Ansoff’s product market growth vector matrix may be applied by the firms in
developing their growth and divestment strategies.

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(b) In terms of the BCG portfolio matrix, classify and explain the above four companies.

Solution:

(a) Ansoff drew up a growth vector matrix, describing a combination of a firm’s activities in
current and new markets, with existing and new products. The matrix can be represented
diagrammatically as follows.

JJ Locksmiths (Pty) Ltd is involved in launching a very innovative product to revolutionise an

existing market (home security). Such product development forces competitors to innovate and
may provide initial barriers to entry, with newcomers to the industry being discouraged. This will
give JJ Locksmiths (Pty) Ltd the chance to build up rapid market penetration, but as competitors
enter the market, it must make sure that it keeps household and commercial customers interested
via constant innovation. The drawback to this is the related expense and risk. JJ Locksmiths
(Pty) Ltd must also make sure that it has enough resources to satisfy demand so that competitors
cannot poach market share.

Product improvements will be necessary to sustain the market, so JJ Locksmiths (Pty) Ltd
must make sure that enough resources are given to research and development of new
technologies (and hence new products) in its field, as well as to maintain sufficient production
capacity to satisfy current demand.

Noriscel (Pty) Ltd is engaged in a rapidly expanding market that is likely to attract many
competitors keen for their own share of the market and profits. The growth strategy is limited to
the current agricultural market, so referring to the Ansoff matrix above, the company is going to
be mainly concerned with market penetration and product development, with an emphasis
on the latter to make life more difficult for new competitors. By investing in product development,
the company will see a necessary expansion in its R&D facility. To keep the new products and
the company itself in the public eye, it may need to invest more in marketing and promotion.

With market penetration, the company will aim to achieve the following:

• Maintain or increase its share of the current market with its current products, for example
through competitive pricing, advertising, sales promotion and quality control.
• Secure dominance of the market and drive out competitors.
• Increase usage by existing and new customers. The customer base is likely to be
expanding.

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Three Circle Bakery (Pty) Ltd is in the mature phase of its life cycle. As the current market is
mature, the company can achieve growth via the investigation of new markets. Referring to the
Ansoff matrix, this means pursuing a strategy of market development. Seeing that the current
market is mature, with satisfied customers and little innovation, there is small scope for market
development, unless it is via short-term aggressive tactics such as cuts in prices.

Selling current products to new markets is likely to be more successful, and may include one
or more of the following strategies:

• new geographical areas and export markets

• different package sizes for food and other domestic items
• new distribution channels to attract new customers
• differential pricing policies to attract different types of customers and create new
market segments
• mass marketing techniques that encourage customers to switch brand

The company may also investigate the possibility of developing new products to make up for
those that are in the decline phase of their life cycle. This may lead to the creation of more cash
cows.

ERG Merchants (Pty) Ltd is in a difficult position, with a weak position in a well-established
market. It needs to undertake some rigorous analysis of costs. A strategy of divestment may
be advised to enable it to reduce costs and concentrate on more profitable areas of activity.
Resource limitations mean that less profitable outlets or products may have to be abandoned.
This could involve analysis of individual contributions, perhaps using direct product profitability
techniques.

The market has become less attractive and ERG Merchants (Pty) Ltd needs to assess its image
and profitability. It is likely that customers have become more discerning on price, as it has
happened in the South African retailing sector in the past few years. When some product areas
have been divested, the company may find that it has the resources to pursue strategies of
market penetration for some products and new product development to improve its image with
customers.

A strategy of total withdrawal and diversification into wholly new industries is not seen as
appropriate for any of the companies described in the question. It could not be recommended
because of the attendant risks.

ERG Merchants (Pty) Ltd does need to be careful, as it is facing the most difficult situation of all
the companies that have been described. It is one thing to eliminate unprofitable products, but will
there be sufficient growth potential among the products that remain in the product range?

In addition, new products require some initial capital expenditure. Retained profits are by far
the most significant source of new funds for companies. A company investing in the medium to
long term which does not have enough current income from existing products will go into
liquidation, in spite of its future prospects.

(b) Using the BCG portfolio matrix, the four companies can be classified as follows:

(1) JJ Locksmiths (Pty) Ltd. A Star because it is in a very competitive position, being
the only company in the market offering these state-of-the-art door locks.
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(2) Noriscel (Pty) Ltd. A star as it operates in a rapidly expanding market and owns
numerous international patents.
(3) Three Circle Bakery (Pty) Ltd. A cash cow as it has high market share, having
been established many years ago, but because it is in the mature stage its prospects
are limited to falling prices and volumes, which is what is currently happening to Three
Circle Bakery.
(4) ERG Merchants (Pty) Ltd. A question mark (problem child); ERG was very profitable
but is losing market share.

Summary

This learning unit looked at how to identify strategic options, which can be done by using Porter’s
generic strategies, the Ansoff module or the BCG matrix. It is very important that you need to
know how to relate these three models to a question in an assignment or an exam.

We also learnt that suitability, acceptability and feasibility can be used to evaluate strategic options.

Methods of growth, namely acquisitions/mergers, organic growth, joint methods of expansion

and international growth were discussed. Sometimes, divestment is the best strategic option for
an organisation.

Relevant articles:

CIMA website:

BCG Matrix by Staph Edwards Mutton

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Generating strategic options

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Scenario Planning
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References

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Kaplan Publishing. 2019. CIMA Strategic Management (E3) Study Text. 1st ed.

Kaplan E3 Integrated Workbook – TUTOR.

CIMA Study Text: Strategic Paper E3 Enterprise Strategy. Suitable for exams up to September
2013. London: BPP Learning Media.

IMA Official Study Text Paper 2000. Organisational Management. EPP books Services.

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