UNIVERSITY OF SOUTH AFRICA

MNG 4801

Date : July28, 2014

MUYOMBO, JRM

33703485

Contents Overview of strategic Management ................................................................................................ 3

Introduction ..................................................................................................................................... 3

SAA’s business level strategy selection ........................................................................................... 4

Strategy in perspective .................................................................................................................... 4

Risks ................................................................................................................................................. 5

Advantages ...................................................................................................................................... 5

Disadvantages.................................................................................................................................. 5

Overview of decline and failure ...................................................................................................... 6

Turnaround strategy ........................................................................................................................ 7

Classification and description of SAA’s turnaround strategy .......................................................... 7

Turnaround Matrix of SAA ............................................................................................................... 8

Theory of turnaround matrix........................................................................................................... 8

SAA”s unique precondition ............................................................................................................. 8

Turnaround strategies ..................................................................................................................... 9

Conclusion ....................................................................................................................................... 9

REFLECTION ................................................................................................................................... 10

References ..................................................................................................................................... 12

QUESTION 1

Overview of strategic Management Strategic management is one the management strategies to overcome business challenges

and run a successful and sustainable organisation. The study guide (MNG4801:12)

illustrates the path that management has gone through to arrive at strategic management

as a contemporary means of surviving in the current dynamic environment. From

management theories it is understood that strategy as a concept began with ancient

civilization especially in military parlance (Sun Tzu) and the Pericles of Athens

(Cummings. S 1995), then evolved from business policy to classical planning pioneered

by the Harvard Business School promoting the idea of managers to be train to think

strategically. We will explore later what it means to think strategically. World War II

benefited greatly from strategic thinking as it was necessary to ration resources in the

economy as explained by Ghemanwat quoting from Morgenten book on the theory of

games and economic behavior. Planning school became inefficient tool when oil price

became unpredictable, then another shift to competitive advantage which became a

blueprint for organisation to position themselves in the industry. Resource based view

took over identify organization’s unique resources and capabilities in order to compete.

System thinkers saw strategy as a product of its context. The advent of globalization ,e-

commerce and internet brought a dynamic strategy.

It can be stated that strategic management as a model of management is a natural

progression from previous tools used as it recognizes and utilizes knowledge

accumulated in previous school and create a model that is not prescriptive but as a way

of thinking. Strategic thinking as a model begins with strategic direction, strategy

formulation and ends with implementation

Introduction The focus of this question is about the second step of strategic planning, which I strategy

formulation. First of all what is strategy. Grant 2005 explains that strategy is about

winning. This can be compared to a team wanting to win a soccer game, they either use

an attacking strategy by using 3-2-5, three defenders, two midfielders and 5 attacking

players or they can adopt a defensive strategy with an option of counter attack in order to

catch the opponents on the break. Businesses operate in an open system and therefore

will always have to outperform their opponents therefore the strategy used is very

important considering the prevailing conditions in the business environment. Louw and

Venter and Thompson discuss the five views of strategy; strategy as a plan, position,

perspective, ploy and a pattern.

Needless to say, before choosing an appropriate strategy to use, an organisation needs to

set a strategic direction and conduct internal and external analysis using various tools and

then decides on the suitable strategy. They are different levels of strategies (Thompson

and Martin 2010), corporate strategies, business strategies and functional strategies.

Business level strategy describes how an organisation intends to compete in a particular

industry; hence it is referred to as a competitive strategy. Low and Venter (2013) expand

on the different strategic options, quoting Porter (1985) of three generic business or

competitive strategies inter-alia: cost leadership, differentiation strategy and Focus. This

is extended to include best-value strategy and best value focus cost.

The above discussion gives in nutshell the perspective of strategy selection within

strategic planning; the discussion that follows will look at the business strategy of

South Africa Airways (SAA) and then will describe the rational of the strategy

chosen and the implications in terms of risks, advantages and disadvantages.

SAA’s business level strategy selection The South Africa Airways (SAA) is a full-service airline and considered a one the

leading carriers in Africa and with the biggest route network in Africa…it offers

economy, business and first class cabins.(Low and Venter 2013). They pride themselves

in providing highest standards in everything they do, from hospitality and luxury airport

lounges to in-flight menus created by renowned chefs, SAA aspires to deliver a world-

class experience every time.

From this statement and from the generic competitive approaches, it is safe to say that

SAA chose Differentiation. They focus on business travellers, tourists and first class

clients; they also try to differentiate with other carriers by offering a world-class

experience through comfortable seats and food prepared to suit client tastes. SAA

therefore charges premium price for the extra services they are offering. Just by way of

comparison, a flight living Durban to Johannesburg will respectively cost you R810 and

R723 more if you took SAA instead of Mango or Kulula.com ( http://domesticflights-

southafrica.co.za/book-cheap-domestic-flight/) this suggest that SAA does not intend to

compete in the low-cost market. And the fact that it cater for all classes of travelers also

excludes the focus strategy

Strategy in perspective As stated earlier, Porter suggests three generic business level strategies: Low cost,

differentiation and Focus and within the three, one will find a variation of Focus

differentiation and best value strategy. From the discussion above it is clear that SAA

had adopted a differentiation strategy which has its risks, advantages and

disadvantages.

From the theory of Louw and Venter 2013- 272, is also referred to as premium strategy

aims to produce product or services considered unique across the industry. Thompson

and Strickland 2001-163 describes differentiation strategies as attractive competitive

approach whenever buyers needs and preferences are too diverse to be fully satisfied with

a standardized product or services. Essentially both definitions concur on offering

product or services that is not generic but seen as different in the eyes of the customers

and generally the client is willing to pay a premium price for the differentiation. For

instance SAA, did not go for one size fits all approach but segmented its airbus to

accommodate first class client, business and economy.

Differentiation can have different themes, unique taste, multiple features, superior

service, superior design. Thomspon and Stickland postulate that the most appealing

differentiations are those that are hard or expensive for rivals to duplicate. The strategy

has its own risks, advantages and disadvantages associated with it.

Risks John et.al 2011 (strategic management; formulation, implementation and control) spell

the following risks associated with differentiation strategy: imitation narrow perceived

differentiation, rendering differentiation meaningless. This can be seen in the rivalry

SAA is facing both locally and abroad. In the local market, there is no much difference in

the full service air traveller as Comair, Airlink, South African Express Airways offer

similar services with comparable luxury in first class, business class and to some extent

the economy class. This reduces the switching costs and prompts the fight for market

share.

Technological changes that nullify past investment or learning, Part of the reason

SAA is struggling to curb operational costs is because of the heavy investment in their

airbus which have become a liability for them at the moment because the heavy fuel

consumptions. They need fuel efficient fleet. New technology of fuel efficient airbus has

nullified SAA competitive performance because it has been running a loss in spite of the

world- class services they strive to offer

Cost of difference between low- cost competitors and differentiated business

becomes too great for differentiation to hold brand loyalty.

This site ( http://domesticflights-southafrica.co.za/book-cheap-domestic-flight/) gives

comparison of flight from Durban to Johannesburg. The differential price between SAA

and a low-cost is so wide to wonder if it warrants taking SAA. For the same flight, SAA

charges R 1490, whereas Mango and Kulula.com charge respectively R606 and R 702.

This may have the propensity of swaying clients to low-cost flight.

Advantages John et.al 2011 proposes the following advantages of differentiation; rivalry is reduced

when a business successfully differentiates itself, buyers are less sensitive to prices for

effectively differentiated products, brand loyalty is hard for new entrants to overcome.

Louw and Venter 2013 add to the above by stating brand loyalty creates a barrier to entry

for other organisation. To emulate SAA services, a new organisation will require massive

investment both in capital outlay for airbuses and aggressive marketing and probably

price war to compete with SAA which may prove to be futile exercise.

Disadvantages Louw and Venter write about the following disadvantages, imitability. Differentiated

organisations have to make sure the uniqueness stay for a long time otherwise

competitors are quick to follow suit. They gave an example of Outsurance could not hold

for long their “no claim bonus” before Budget and other insurance companies came up

with the same strategy. Organisations have the pressure to maintain the uniqueness of

products or services in the mind of their clients in order to continue charging premium

price. The moment that uniqueness is lost, customers may also follow.

Conclusion

SAA has the back-up of the South African government and has created an image of

elegance when travelling with the carrier. This differentiated services is sustained by its

airbus, however fuel inefficient they have at the moment but they have given SAA an

edge to be the biggest carrier in Africa and also able to compete internationally. Recent

reports however speak about negative income statement which may tarnish the image it

has at the moment.

Question 2

Overview of decline and failure Pretorius 2008: describes turnaround as a venture that has recovered from decline that

threatened its existence to resume normal operations and achieve performance acceptable

to stakeholder. Before turnaround strategies are applied there are manifestations in the

business that spells signs of the business being in trouble. A turnaround strategy can only

be applied to an organisation in decline, not the one that has failed.

The onus is on management to watch the tell-tell signs of failure before it is too late to

rescue the business. Some of the reasons organisations fail could categorized under four

school of thoughts; failure at the top, that has to do with the management and more

precisely with the CEO attitude to failure, secondly failure can be attributed to customers

and marketing, system and structural failure and financial failure In his (Pretorius)

journal: critical variables of business failure, he postulates that failure aunts both new

firms and old firms. New firms are threatened by two liabilities; liability of newness this

refers to firms seeking legitimacy with its suppliers, clients, creditors and other

organisation in the industry and secondly by liability of smallness this means the size of

the firm may present a limitation and thereby excludes it from competing in an industry

for instance it is not easy for a start-up company to have the capacity to create an

assembly line for car and build economy of scales instantly. Old firm face the liability of

obsolescence where new technology renders production capacity redundant.

Pretorius elaborates on human causes of failure to be caused by decline, entrapment, self-

deception, hierarchy orientation, cultural rigidity, desire for acceptance and conformity

and too much consensus and compromise. If these issues are not addressed with an open

mind, chances are the organization will fail and therefore not be able to be rescued. The

best time to turn an organisation around it when it observed to be in decline.

Turnaround strategy Five stages are associated with decline according to Pretorius including: blinded stage,

inaction, faulty action, faulty implementation, crisis stage and dissolution.

Louw and Venter 2013, describe turnaround strategy as a first option of defensive

strategies which are different from growth strategies. According to Low and Venter, a

turnaround strategy consist of retrenchment, recovery and revenue growth which can be

applied depending on, to quote Pretorius a matrix based on resource munificence(firm’s

available resources) and causality of distress which can be either internal or external.

Whether we quote Pretorius or Louw and Venter, turnaround is called on when the

organisation accepts that they are in trouble and need a plan to rescue the business

activities or be doomed to failure.

From the case study of South African Airways (SAA), it is evident from the ministerial

report that it is indeed in trouble. The report says the Airline has been bailed out by the

government over the past decade(from the time of report 2013) to the tune of R 11

billion, and as of the financial year ended 2012, SAA made an operating loss of R 1.3

billion. Some of the causes are attributed to irregular expenditure which signals

management problem and fuel inefficient airbuses. Clearly if it was not the government

bailout, SAA could have existed the market long time ago.

In the discussion that follows, attention is given first all to the classification and

description of SAA’s turnaround strategy with reference to its type and form, secondly

we will apply the turnaround matrix to describe SAA’s turnaround situation and their

unique preconditions and finally explain which turnaround strategies and practices SAA

should implement to address their turnaround situation and return to their business level

strategy.

Classification and description of SAA’s turnaround strategy From the case study, Mr. Gigaba explains that there have been in the past six years about

nine turnaround strategies and it all failed at implementation and the way forward was the

increased focus and emphasis on governance and accountability. The new turnaround

would also look at mitigating measures to ensure costs would be managed. From this

description of a problems facing SAA, their turnaround strategy is a combination of

retrenchment and recovery and revenue growth. Retrenchment is about cost cutting or

downsizing and reducing non-core assets. Thompson and Strickland 2001 explain cost-

reducing strategy works best when the ailing firm’s value chain and cost structure are

flexible enough to permit radical surgery. In the SAA case, fuel consumption and staff

although essential require a creative cost cutting without interfering with the airline

abilities to perform. From the case study, SAA hardly has any operational problems

meaning their services are still regarded as world-class but the company is not profitable,

like a proverbial white elephant. Part of the strategy should be to sell off non-core assets.

Thompson et.al 2001 speaks of asset-reduction strategies when the cash flow is a critical

consideration. SAA should identify assets that do not add value to the organisation,

recovery strategy is also need to nurse the company back to health (Louw and Venter

2013. The next section puts SAA in turnaround matrix to identify exactly in which

quadrant does it belong to and ho to address the turnaround.

Turnaround Matrix of SAA Pretorius identified four quadrants as a result of a combination of two variables to

position where the organisation might be in terms of decline. Accordingly he states that

only organisation in declined can be rescued and failed organisations do not stand a

chance of rescue.

The first variable is resource munificence; he explains that this refers to organisation

abundance or scarcity of resources. From Resource based view, we understand that

organizational resource is not only financial but also include, capital, people, money,

processes and intangible. The second variable is the causality of distress can be internal

or operational or external or strategic. With the two variables he (Pretorius) came up with

four preconditions of decline or turnaround situation.

Theory of turnaround matrix The first one is “Performing well” this is characterized by abundance of resource

munificence and internal causality. Ventures in this cell are not experiencing a need for a

turnaround. The venture has abundant resources and minimum causes of distress, and can

operate normally, bearing potential invisible inefficiencies. The second precondition is

Underperformance which characterized by scarcity of resources and internal or

operational problem. Pretorius explains that this cell’s preconditions are characterized by

scarce resources (limited slack) and problems caused by weak internal operations.

Despite good demand for its products, contribution margin is under pressure, capacity

utilization is low, competitive advantage comes under pressure due to inability to respond

to demand, productivity is low and the venture is cash strapped. Third cell is Distress this

cell’s preconditions are characterised by abundant resources but declining sales demand

due to loss of competitive advantage. Market share is under pressure, probably due to

growing demand for competitive or substitute products. The fourth cell is Crisis this

cell’s preconditions are characterised by scarce resources and the pressure on cash

becoming more pronounced due to the reduced sales. The venture is in the ‘‘intensive

care unit’’.

SAA”s unique precondition Given the four preconditions as explained about, South African Airways can undoubtly

be placed in the Underperforming cell. As we read from the case study, the company is

cash trapped and has been bailout in excess of R10 billion and they are still struggling to

meet operating profits. And they have been incidence of irregular expenditures of R 128

million rand and the airbuses are fuel inefficient which contributes to negative operating

profits.it can then be said that SAA is characterized by operational or internal distress and

scarcity of munificence resources. The following discussion looks at which turnaround

strategies will best suit SAA

Turnaround strategies Pretorius suggests the following for the different preconditions

Performing well organisation: The organisation will basically do nothing but continue on

the growth path. It may choose organic or in organic growth. Louw Venter describe

organic growth as market penetration, market development and innovation, in organic is

similar if not same as external growth where the organisation looks for diversification

and integration.

Given the preconditions associated with underperformance, the venture must pursue an

efficiency strategy to turn around successfully and move towards the ‘‘performing well’’

quadrant. It must pursue efficiency by such practices as improving capacity utilisation,

lowering inventory levels, improving collection processes, restructuring financing, better

use of volume discount, improving supply chain activities and more. The focus is mainly

on internal operations and doing the business right and better. These firms are well

positioned but experience cash-flow problems due to their inefficiencies. Cost to income

ratios typically deteriorates (Pretorius) this is relevant to SAA turnaround activities.

SAA at the moment is behaving like a Bull frog meaning they are spending money

they cannot afford in order to maintain the image meanwhile profits are not

realized. The government needs to ask serious questions as to whether SAA is worth

saving if the biggest chunk of revenue is going to fuel. In the meantime, cost cutting

measures are important. They need to sell what is not needed, may be discontinue

unprofitable route and tighten financial accountability

The company in distress is required to change strategies given the changes in the

environment. Pretorius explains: Given the preconditions associated with distress, the

venture has little choice but to pursue a forced repositioning strategy. Because the

repositioning is forced, the venture is under pressure to change direction quickly (finding

an alternative value proposition), which means less time for extensive research about new

products/services and market testing and therefore more chance of pursuing non-starters.

The organisation in crisis has to adopt a defensive strategy called managing end

game(Low Venter), here the organisation is resource staved and external environment is

not really favourable, therefore divestiture could be a good idea

Conclusion Turnaround strategy intends to restore an organisation to its earning capabilities that is

consistent with industry and investors expectation. Any organisation can face decline at

any point in the life cycle, whether new or mature organisation. Management have to

have pulse on signs associated decline and failure in order to apply corrective measure

when necessary. Human causes of failure have been associated among other things with

self-deception, too much consensus and comprise and the pervasive negative attitude

towards failure as Pretorius writes, social norms can render losing as shameful, therefore

anti-failure bias exist in human being which inhibit the ability to recognize when things

aren’t going well in the organisation. A miss diagnosis of turnaround preconditions may

have devastating impact for instance if SAA assume they are in distress while they are

underperforming, they may be applying wrong strategies altogether. These raises

suspicion about the nine turnaround strategies the tried and failed to implement. Could it

be a strategic blunder rather than operational issue?

REFLECTION

1 To what extent do you feel that you have achieved the learning outcomes for the

study units in this assignment?

I do not know which

learning outcomes

were relevant to this

assignment

Did not

achieve the

learning

outcomes

Limited Moderate Fully

achieved the

learning

outcomes

2 Please indicate the extent to which the doing of this assignment contributed to your

understanding of the course concepts.

Did not contribute

at all

Limited

contribution

to

understanding

Unsure Some

contribution

to

understanding

I now

understand

the course

concepts

3 If you could redo this assignment again, what would you want to do differently?

Mark your top 3 choices; you can add your own opinion in the space provided

below:

3.1 Start with the assignment earlier. x

3.2 Contact the lecturer(s) for assistance.

3.3 Form a study group.

3.4 Have more contact with fellow students to discuss the assignment.

3.5 Be more active on the myUnisa discussion forum to share ideas.

3.6 Start earlier with recommended readings. x

3.7 Consult evaluation sheets more extensively before starting with the

assignment.

3.8 Other:

I should have read the assignment first to identify the content needed to

study instead of spending time on studying material that had no bearing

on the assignment. For instance I studied chapter 11 on globalisation.

x

4 Indicate the three most difficult aspects of doing this assignment.

4.1 Knowing what is expected of me in this assignment.

4.2 Finding relevant sources to use.

4.3 Distinguishing between relevant and non-relevant information to include

in the assignment.

4.4 Using the electronic databases to access articles/journals.

4.5 Integrating the various sources into one document. x

4.6 Applying the course concepts to practical examples.

4.7 Understanding the course concepts.

4.8 Adhering to page number limitation.

4.9 Adhering to referencing requirements.

4.10 Writing the assignment in a style that is acceptable for a postgraduate

student.

4.11 Meeting the deadlines.

4.12 Coping with work, study and family. x

5 While doing the assignment, did you realise that there is a gap between

the theories and the practical application (i.e. how it is done in practice?).

If yes, what do you think this means?

No

References 1. Pretorius, M. 2008. ‗When Porter‘s generic strategies are not

enough: Complementary strategies for turnaround situations‘. Journal of

Business Strategy, 29 (6): 19 - 28.

http://0-www.emeraldinsight.com.oasis.unisa.ac.za/journals.htm?issn=0275-

6668&volume=29&issue=6&articleid=1751791&show=abstract

2. Pretorius, M. 2008. ‗Critical variables of Business failure – A

review and classification framework‘. South African Journal of Economic

and Management Sciences, 11 (4): 408 - 430.

http://0-reference.sabinet.co.za.oasis.unisa.ac.za/document/EJC31265

3. Pretorius, M. 2009. ‗Defining business decline, failure and

turnaround: A content analysis‘. South African Journal of

Entrepreneurship and Small Business Management, 2 (10): 1-16.

http://repository.up.ac.za/bitstream/handle/2263/9750/Pretorius_Defining(2009).pdf?sequ

ence=

4. Louw, L & Venter, P 2013 Strategic management third Edition , developing

sustainability in Southern Africa, Oxford University Press, South Africa

5. Thompson and Strickland 2001, crafting and executing strategy, text and readings,

12th edition, MC Grawhill, Singapore

6. Pearce II, JA and Robinson Jr, RB strategic management, formulation,

implementation and control 12th edition, Mc Graw-Hill international edition

7. ( http://domesticflights-southafrica.co.za/book-cheap-domestic-flight/) (accessed on

27/7/2014)