SELECTION OF GRAND STRATEGIES

4.7 SELECTION OF GRAND STRATEGIES

Why did First National Bank decided to close 34 of their branches in South Africa? Why would Wyeth, a world leader in pharmaceutical and healthcare products, merge with Pfizer, another pharmaceutical company? These questions can best be answered by looking at the strategy selection process that shows the logical steps that lead to the choice of a strategy. The selection of grand strategy starts with the identification of the recent grand strategy or strategies. External factors (such as a change in legislation) and internal factor (such as the Why did First National Bank decided to close 34 of their branches in South Africa? Why would Wyeth, a world leader in pharmaceutical and healthcare products, merge with Pfizer, another pharmaceutical company? These questions can best be answered by looking at the strategy selection process that shows the logical steps that lead to the choice of a strategy. The selection of grand strategy starts with the identification of the recent grand strategy or strategies. External factors (such as a change in legislation) and internal factor (such as the

choice of strategies in an organisation (see section 4.6) as they also play a major role in selecting a strategy or combination of strategies for an organisation? The choice of a strategy may seem like a very scientific process but it is far from that. The choice of a

strategy reflects the current strategists’ preferences in terms of risk that they are comfortable with, time horizon of the strategy and the strategists’ personalities. Change the

composition. Change the composition of the team of strategist who have to choose a strategy and you will most probably find that the new team chooses a different strategy or set of strategies.

Identify the present grand strategy

Conduct a portfolio analysis

Select a grand strategy

Evaluate the selected strategy

Figure 4.10: The grand strategy selection process

Source: Smit, et al. (2013:120)

Organisations offering one product or service need to choose a strategy for this one business only. However, the choice of a strategy for a multi-business organisation is more complex. Consider again the City Lodge hotel group. The group comprises four distinct brands of hotels, namely: Courtyard (four stars), City Lodge (three stars), Town Lodge (two stars) and Road Lodge (one star). Knowing how to manage multiple businesses or units calls for knowledge of portfolio management. The portfolio approach is a useful aid to multiple- business organisations in which each business is managed as a separate business or profit Organisations offering one product or service need to choose a strategy for this one business only. However, the choice of a strategy for a multi-business organisation is more complex. Consider again the City Lodge hotel group. The group comprises four distinct brands of hotels, namely: Courtyard (four stars), City Lodge (three stars), Town Lodge (two stars) and Road Lodge (one star). Knowing how to manage multiple businesses or units calls for knowledge of portfolio management. The portfolio approach is a useful aid to multiple- business organisations in which each business is managed as a separate business or profit

Although many different approaches to portfolio management can be identified, we shall focus only on the Boston Consulting Group growth/share matrix, each of an organisation’s strategic business units (SBUs) is plotted according to its (1) market growth rate (percentage

growth in sales) and (2) relative competitive position (market share). City Lodge hotel group will plot their four brands (Courtyard, City Lodge, Town Lodge, Road Lodge) according to

each business unit’s market growth rate and relative competitive position in the industry. The horizontal axis represents the market share of each SBU of a fictitious organisation

relative to the industry leader. The vertical axis represents the annual market growth rate for each SBU; s particular industry. SBU s are plotted on the matrix once their market growth rates and relative market shares have been computed. Figure 4.14 represents the BCG matrix for a company with multiple SBUs, such as South African Breweries or Edcon or the City Lodge hotel group. Each circle represents a business unit. The size of the circle represents the proportion of corporate reserves generated by that SBU.

On the BCG matrix, businesses are classified as stars, cash cows, question marks, and dogs. Stars are businesses in rapidly growing market shares. These businesses should be quite profitable. They require substantial investment to maintain their dominant position in a growing market. This requirement is often generates a large amount of cash that can be used to support other SBUs, especially question marks. These cash-generating businesses are called `cash cows’ because they can be `milked’ for resources to supports other businesses. Cash cows are the foundation of the corporate portfolio.

Question marks are high-growth, low-share SBUs that normally require a lot of cash to maintain. Management must decide whether they want to invest additional cash to convert these SBUs into stars or to faze them out.

The BCG matrix calls SBUs with a low market share and market growth the `d ogs’ in an organisation’s portfolio. A dog is usually a candidate for divestiture or liquidation. Such an

SBU is in a saturated, mature market with intense competition and low profit margins.

If a portfolio analysis is conducted, management should be in a position to select a grand strategy for the corporation. A strategy for dog businesses, for instance, would be to cut on maintenance or research and development – a strategy called `harvesting’.

Management needs to ask and answer several searching questions about its strategies in order to evaluate the strategies selected. The most important question is: will the strategies achieve the mission and long-term goals of the organisation?