MAP 120

SYNDICATE 4 - THLOLO

MAP 120 – Principles of Strategic Management

Dr Thabo Mosala

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 1

Principles of Strategic Management

TABLE OF CONTENTS

Contents

1. Introduction .................................................................................................................................................2

2. Enterprise and Supplier Development ........................................................................................................2

3. Massmart .....................................................................................................................................................4

3.1 Overview of the company ...................................................................................................................4

3.2 Preferential Procurement .....................................................................................................................4

3.3 Supplier Development .........................................................................................................................5

3.4 Enterprise Development ......................................................................................................................6

4. Strategy .......................................................................................................................................................6

4.1 PESTEL ...............................................................................................................................................6

4.2 Strategic Goals ....................................................................................................................................7

4.3 Resources & Capabilities ....................................................................................................................7

4.4 Alliances ..............................................................................................................................................7

4.5 Competitive Advantage .......................................................................................................................7

4.6 Customer Value Proposition ...............................................................................................................8

4.7 Profitability ..........................................................................................................................................8

5. Conclusion ..................................................................................................................................................9

6. References ...................................................................................................................................................9

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 2

1. Introduction

We live in a world where change is constantly taking place and organisations face tough competition in their

quest to grow market share and revenue. Corporations must adapt to these changes if they are to remain

profitable and to do this they must utilise resources available to them, identify their capabilities and build

alliances. To respond to market trends and economic forces within the external environment, organisations

need to gain a competitive advantage by identifying their customer value proposition with the ultimate goal

of increasing profitability.

For the purpose of this assignment we will dissect the company Massmart with the purpose of studying its

anatomy in the context of Enterprise Development (ED) and Supplier Development (SD).

We will shed light on the aforementioned through the use of strategic concepts such as the hardware and

software of strategy. We will analyse the benefits of ED and SD to an organisation as well as Massmart’s

effective use of both concepts as a strategic tool.

In preparing this assignment we engaged with the Builders Superstore Executive at Massmart, Mr. Mncane

Mthunzi, who provided invaluable insight on Massmart’s strategy and the use of ED and SD by the

company in its quest to gain a competitive edge.

2. Enterprise and Supplier Development

The Broad-Based Black Economic Empowerment Act 53 of 2003 (“B-BBEE Act”) provides the legislative

framework for Broad-Based Black Economic Empowerment in South Africa (Werksmans Attorneys, 2015,

p. 4). Companies had adopted these generic codes, first published in 2007, some with great success however

various stakeholders still felt that the codes were not effective as they had done very little to redress the

legacy of apartheid policies and to enhance the economic participation of black people. New codes under

section 9 (1) of the Broad-Based Black Economic Empowerment Amendment Act (Act No. 46 of 2013)

were subsequently introduced effective May, 1 2015.

The amended codes have had significant changes to the Act; they have also caused a lot of discomfort in

business and forced many organisations to rethink their strategy. The revised B-BBEE elements have been

reduced to 5 elements from the 7 that were previously measured. The new elements include Ownership,

Management Control, Skills Development, New Enterprise and Supplier Development and Socio-Economic

Development. The total weighting of the new codes is 118 (includes 13 bonus points). For the benefit of this

assignment we will focus solely on the New Enterprise and Supplier Development (ESD) elements.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 3

Enterprise and Supplier Development (ESD) is not a new element as it was previously classified under two

different elements; Preferential Procurement and Enterprise Development. The ESD element of the amended

codes is classified as a “priority element’ which means that an organisation needs to meet a sub-minimum of

40%. ESD amounts to a total of 44 points out of the 118 total points that an organisation can potentially

acquire. This is the biggest element in points and is an important element as it is directly linked to how a

company may gain its competitive advantage. ESD is now made out of three subsections namely;

Preferential Procurement, Supplier Development and Enterprise Development.

Preferential Procurement (25 points): Refers to the B-BBEE procurement spent of an organisation. An

organisation will earn points for using their procurement spent on all “empowering suppliers”. The company

may also gain 2 bonus points by procuring from Designated Group Suppliers that are 51% Black owned.

Supplier Development (10 points): Refers to the development of suppliers by the organisation. The

organisation is to spend a minimum of 2% of their profits after tax annually on developing suppliers to earn

points in this section.

Enterprise Development (5 points): Refers to the development of new enterprises. The organisation needs

to spend a minimum of 1% of their net profit on enterprise development to earn points in this section.

It must be noted that although the B-BBEE Act and Codes do not impose legal obligations on firms to

comply with B-BBEE targets, a firm’s B-BBEE level is an important factor when tendering for government

and public sector services (Werksmans Attorneys, 2015). Many other private companies also want to be

viewed as “compliant” and will therefore not conduct business with companies that do not comply with the

Act. Complying with the codes, and reaching a favorable B-BBEE level is of the utmost importance for a

company conducting business in South Africa. Companies like Massmart have realized the advantage that

the company gains by being complaint and most importantly have found ways in which they can incorporate

ESD into their strategy to gain a competitive advantage.

We conducted a thorough analysis on how ESD can be used as a strategic tool; we found Massmart as a

classic example, firstly because of the huge financial budget that is injected into Supplier Development,

Enterprise Development and their emphasis on Preferential Procurement. Massmart has shown how a well-

governed Supplier Development Plan can benefit an organisation whilst building a strong a supply chain.

The next section details how Massmart has incorporated ESD to their business strategy.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 4

3. Massmart

3.1 Overview of the company

Massmart is a South African wholesale and retail trader founded in 1990. Massmart is the second-largest

distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home

improvement equipment and supplies, and the leading wholesaler of basic foods (Massmart, 2015).

The Group has over 400 stores which include the likes of Makro, Game, Builders Warehouse, Dion Wired,

Cambridge Foods, etc.

Their main objective is to achieve a competitive advantage through the continual improvement of high-

volume, low-expense business model that allows them to provide low prices on an extensive range of

products to their customers.

3.2 Preferential Procurement

Massmart views local procurement as part of their strength. Their procurement plan is determined by

economic considerations such as:

Competitive advantages in production,

The strength of local preference for domestic brands,

Transport and storage costs,

Degradation of product quality in transit,

Importance of security of supply

The extent to which local servicing and support is required.

Post-merger of Wal-Mart and Massmart, they are continuing to procure from historically disadvantaged

SMME suppliers. For them local procurement in the wholesale and retail arena is commercially justifiable

and profit maximizing. Local procurement is being, and will continue to be, pursued by Massmart and Wal-

Mart because it makes commercial sense to do so (Pattison, 2011).

Preferential procurement at Massmart was key in achieving a Level 4 B-BBEE rating in 2014 as it improved

from 8% to 12.7% in the past few years. This is evident in the way the organisation is invested and

dedicated by procuring from local empowered suppliers.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 5

3.3 Supplier Development

Massmart’s Supplier Development Fund (SDF) was established in 2012, with the sole purpose of developing

suppliers. To date the fund has distributed over R71 million, benefiting 24 manufacturing and 139

smallholder farms (SDF Annual Report, 2014). Funds are dispensed through grants, guaranteed loans from

ABSA (Massmart stands as a guarantor) and an interest free loan from Massmart which 160 Farmers

currently benefit from (Mthunzi, 2015).

Massmart has budgeted R242 million for Local Supplier Development. This encompasses multiple

industries which the Group has identified and partnered with to supply locally produced goods that can be

sold at numerous retail stores across sub-Saharan Africa. Massmart has prioritized farming, manufacturing

and other services.

Farming - where 25% of the fund has been earmarked, also known as Direct Farming, has been customized

for South Africa whereby experienced farmers are hired to mentor the up-and-coming farmers on behalf of

Massmart. A Distribution Centre was also set-up to aid and assist with logistics of moving the produce to the

relevant stores on time. Massmart provide backing for each farmer for up to 4 years until they are self-

sufficient.

Manufacturing – makes up 50% of the fund. Massmart introduced the Fund’s manufacturing portfolio

which currently includes 24 SMME’s supplying bricks, cooler boxes, fruit juices and maize meal amongst

others. This forms part of a reliable network of suppliers that Massmart utilises to supply their many stores

while complying with government B-BBEE regulations. Of the 24 SMMEs, 19 are black owned of which 6

are women owned, with a turnover ranging between R1.5 million and R10 million. More than 1 417 jobs

have been created through this fund which really supports the government broad-based black empowerment

approach.

Paint and Bostik Manufacturing are some of the companies backed by Massmart whereby the packaging was

improved upon making it look attractive and appealing. Massmart also improved the supply chain and

logistics in getting the product to the retail stores on time, every time. Transport is covered as an input cost

as well as distribution via the DC (Distribution Centre).

Services - 25% of fund is comprised of bookkeeping courses, improving business acumen, legal services

and enrollment of business owners on a GIBS entrepreneurship programme. Massmart engages with

suppliers to assist with improving quality of products, increasing production capacity for instance put in an

extra manufacturing line, extra machinery and/or extra shift.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 6

Massmart has put in place a fund committee and advisory board to make key decisions on applicants for the

SDF.

3.4 Enterprise Development

Massmart has developed a number of new enterprises through the provision of grants, loans and mentoring

(Mthunzi, 2015). Some of the new enterprises include Biscotti, Lethabo Milling, Nkuleko Bricks, etc. The

success of this initiative is demonstrated through their 2014 B-BBEE scorecard where they scored 15/15

points for the Enterprise Development element. So far, they have spent over R83M in developing start-ups

and established companies by providing funding to farmers amongst others. They have also established a

central packaging hub for small farmers where they bring their produce that are then packaged and sent to

the various stores.

4. Strategy

Massmart’s strategy is to achieve competitive advantage through the continual improvement of a high-

volume, low-expense business model that allows them to provide low prices on an extensive range of

products to their customers.

4.1 PESTEL

Political Government, workers’ unions and other big food retail stores play a major

role in the retail and wholesale industry.

Economic The subdued economic growth and inflation is impacting customer’s

disposable income for retail consumption.

Social Rising food prices impacts the social development of the public.

Technology The introduction of E-commerce is deemed to replace the conventional

ways of shopping.

Environment Companies are moving towards eco-friendly means of transportation and

manufacturing.

Legal The retail industry is regulated by various legislative and statutory bodies

such as NCA, NPA and Competition Commission to ensure above-board

practices.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 7

4.2 Strategic Goals

Massmart wants to continue to improve on Group profitability through a continued focus on sales, operating

margin and expenses. Massmart aims to achieve this through:

driving growth and profitability of core South African businesses over the medium-term

expansion into Food Retail and Fresh Produce through existing formats and Masscash Retail

expansion into sub-Saharan Africa - this remains a priority and in the next two years we anticipate

opening 13 new stores representing African space growth of about 50%

expand and improve their e-commerce offerings

4.3 Resources & Capabilities

Massmart gains its competitive advantage through effective use of the following resource and capabilities:

Use of economies of scale to negotiate better deals with suppliers to achieve its low cost objectives

Highly integrated IT systems for stock control and efficient running of day to day business

Strong human resources systems that allows employees to play a significant role as they feel

empowered

Fast and responsive transportation systems, dedicated truck fleet that they use to transport goods

from warehouses to the stores

Inventory replenishment systems, Just in Time (JIT) systems, used to order the stock helps them to

avoid keeping stock in their warehouses (this helps them to manage cash flow better)

Standardised business processes across all centres are managed centrally.

4.4 Alliances

Through their supplier development programme, 4 year deals are signed with suppliers which allow Mass-

Mart to procure from them. By signing these deals they ensure that they remain competitive through

dedicated suppliers of specific products.

They have formed alliances with SMME companies like Biscotti (biscuit manufacturing company) and

Lethabo Milling (maize milling industry).

4.5 Competitive Advantage

Massmart uses its SD and ED strategy to gain competitive advantage against its competitors as they invest in

developing a reliable supply chain through empowering SMMEs that form part of its local supply chain.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 8

So far, they have spent over R83 million in developing start-ups and established companies by providing

funding to farmers amongst others. They have also established a central packaging hub for small farmers

where they bring their produce that are then packaged and sent to the various stores. This means that they

have an advantage as those suppliers only supplies their stores as a first preference.

In farming, Massmart requires the SMME’s to dedicate 3 hectares of land for production before they can

supply to other suppliers. This guarantees Massmart lower cost which in turn results in lower prices for their

customers.

4.6 Customer Value Proposition

As Massmart SMME suppliers are funded and supported by the organisation, they are guaranteed lower

costs. Massmart therefore control the value chain, allowing them to provide lower prices every day to their

customers. Furthermore, other value-add to the customers are as follow:

Massbuild is a leading retailer in DIY, home improvement and garden centres. The clean and

friendly look of each store is not synonymous to customers shopping for this type of retail goods.

“Our new stores aim to introduce ‘retail theatre’ where lighting, colour and ambiance enhance the

shopping experience, signage is clean and bold, and product displays are enticing.”

Masswarehouse offers a taylor-made fit to all customers on a huge range of retail products.

Massdiscounters offer a wide range of branded products to its customers and at value for money at

every logical price point. (Massmart, 2015)

4.7 Profitability

Massmart comprises of four divisions with all specializing on high-volume, low-cost distribution of goods

for cash therefore margins are low (Massmart, 2015).They buy in bulk which increases buying power and

the more favorable negotiation of purchasing at lower prices. Most of the consumer goods are FMCG (fast-

moving consumer goods) therefore by growing sales, they grow profitability as well as build customer

loyalty. With lower supplies costs and lower customer prices, profitability is boosted as customers buy in

bulk.

MAP 120 – Principles of Strategic Management Dr Thabo Mosala |Syndicate 4 – Thlolo 9

5. Conclusion

Massmart has strategically positioned itself by embracing ESD to develop and utilise local suppliers and

new enterprises. Massmart’s usage of strong supplier development as part of the company strategy has

helped strengthen its customer value proposition and has allowed it to remain profitable whilst focusing on

the socio-economic aspects.

This assignment has demonstrated how a company can use ESD as a strategic tool, and not just as a points

scoring mechanism. It has proven that when ESD is used as a strategic tool, it not only benefits the

organisation, but also benefits the customers and the society at large.

What began as a legal obligation now yields incredible benefits for Massmart and in hindsight, a strategy

worthy of emulation. Massmart will continue using innovative ways to incorporate ESD into their company

strategy (Mthunzi, 2015).

6. References

Government Gazette, 2013. Amended Code Series 400: Measurement Of The Enterprise and Supplier Development

Element of Broad-Based Black Economic Empowerment.

Massmart, 2015. Overview. [Online]

Available at: http://www.massmart.co.za/about-massmart/overview/

[Accessed 19 October 2015].

Massmart, 2015. Sustainability. [Online]

Available at: http://www.massmart.co.za/sustainability/supplier-development/

[Accessed 20 October 2015].

Mthunzi, M., 2015. Supplier Development Executive [Interview] (2 October 2015).

Pattison, G., 2011. Massmart Procurment. [Online]

Available at: http://www.massmart.co.za/press/massmart-says-local-procurement-makes-commercial-sense/

[Accessed 24 October 2015].

SDF Annual Report, 2014. Supplier Development Fund Annual Report 2014, s.l.: s.n.

Werksmans Attorneys, 2015. Keep Informed: Werkmans Attorneys. [Online]

Available at: http://www.werksmans.com/wp-content/uploads/2014/11/041763-WERKSMANS-B-BBEE-booklet.pdf

[Accessed 19 October 2015].