MM Session on SBU Strategy

8/6/2019 MM Session on SBU Strategy

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6/29/2011 2004 Pearson Education Canada Inc. 1

Steps in Strategic Planning

Defining the

corporate mission

Setting corporate

objectives & goals

Designing the

business portfolio

Developing

business unit

strategy

Designing functional

plans (marketing, human resources,

operations, finance, MIS)

Corporate level

Business level


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Establishing Strategic Business Units

Most companies operate several businesses.

Companies too often define their businesses in terms

of products. They are in auto business or gasoline

business.

Professor Ted Levitt argued that market definitionsof a business are superior to product definitions.

A business must be viewed as a customer-satisfying

process, not a good-producing process.Products are transient (temporary), but basic needs

and customer groups endure forever.


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A horse-carriage company will go out of business

soon after the automobile is invented, unless it

switches to making cars. Transportation is a need;

the horse and carriage, the automobile, the railroad,

the airline, and the truck are products that meet thatneed.

Levitt encourages companies to redefine their

business in term of need, not products.


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4

Table 4.1: Product-Oriented versus Market-Oriented Definitions of a Business

Company Product Definition Market Definition

Missouri-Pacific

Railroad

Xerox

Standard Oil

Columbia Pictures

Encyclopaedia

Carrier

Ericsson ? ?


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Table 4.1: Product-Oriented versus Market-Oriented Definitions of a Business

Company Product Definition Market Definition

Missouri-Pacific

Railroad

We run a railroad We are a people-and-goods

mover

Xerox We make copyingequipment

We help improve officeproductivity

Standard Oil We sell gasoline We supply energy

Columbia Pictures We make movies We market entertainment

Encyclopaedia We sell encyclopedias We distribute Information

Carrier We make air conditioners

and furnaces

We provide climate control

in the home

Ericsson ? ?


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A business can be defined in terms of three dimensions:customer groups, customer needs, and technology.

For example, a company that defines its business as

designing incandescent lighting systems for television

studios would have television studios as its customer

group; lighting as its customer need; and incandescent

lighting as its technology.


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Large companies normally manage quite different

businesses, each requiring its own strategy; General

Electric has established 49 strategic business units (SBUs).

An SBU has three characteristics:

(1) It is a single business or collection of related

businesses that can be planned separately from the rest of

the company

(2) it has its own set of competitors and

(3) it has a manager responsible for strategic planning andprofit performance who controls most of the factors

affecting profit.


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Assigning Resources to Each SBU

The purpose of identifying the companys strategic

business units is to develop separate strategies and assign

appropriate funding to the entire business portfolio.

Senior managers generally apply analytical tools toclassify all of their SBUs according to profit potential.

Two of the best-known business portfolio evaluation

models are

(i) Boston Consulting GroupModel and

(ii) General Electric Model


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The Boston Consulting Group Approach

The Boston Consulting Group (BCG), a leading

management consulting firm, developed and popularized

the growth-share matrix.

This matrix is basically a chart that had been created byBruce Henderson for the Boston Consulting Group in

1970 to help corporations with analyzing their business

units or product lines.

This helps the company allocate resources.


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The BCG matrix method is based on the product life cycle

theory that can be used to determine what priorities shouldbe given in the product portfolio of a business unit.

To ensure long-term value creation, a company should

have a portfolio of products that contains both high-

growth products in need of cash inputs and low-growth

products that generate a lot of cash.

It has 2 dimensions: market share and market growth. The

basic idea behind it is that the bigger the market share aproduct has or the faster the product's market grows the

better it is for the company.


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Placing products in the BCG matrix results in 4 categories in a

portfolio of a company:

1. Stars (=high growth, high market share)

- use large amounts of cash and are leaders in the business so

they should also generate large amounts of cash.

- frequently roughly in balance on net cash flow. However if

needed any attempt should be made to hold share, because the

rewards will be a cash cow if market share is kept.

2. Cash Cows (=low growth, high market share)

- profits and cash generation should be high , and because of

the low growth, investments needed should be low. Keep

profits high.

- Foundation of a company


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3. Dogs (=low growth, low market share)

- avoid and minimize the number of dogs in a company.- beware of expensive turn around plans.

- deliver cash, otherwise liquidate

4.

Question Marks (= high growth, low market share)- have the worst cash characteristics of all, because high

demands and low returns due to low market share

- if nothing is done to change the market share, question

marks will simply absorb great amounts of cash and later, asthe growth stops, a dog.

- either invest heavily or sell off or invest nothing and

generate whatever cash it can. Increase market share or

deliver cash


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After plotting its various businesses in the growth-share

matrix, a company must determine whether the portfolio is

healthy. An unbalanced portfolio would have too many

dogs or question marks or too few stars and cash cows.


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The next task is to determine what objective, strategy, and

budget to assign to each SBU. Four strategies can bepursued:

1. Build: The objective here is to increase market share,

even forgoing short-term earnings to achieve this objective

if necessary. Building is appropriate for question marks

whose market shares must grow if they are to become

stars.

2. Hold: The objective in a hold strategy is to preservemarket share, an appropriate strategy for strong cash cows

if they are to continue yielding a large positive cash flow.


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3. Harvest: The objective here is to increase short-term

cash flow regardless of long-term effect. Harvestinginvolves a decision to withdraw from a business by

implementing a program of continuous cost retrenchment.

The hope is to reduce costs faster than any potential drop

in sales, thus boosting cash flow. This strategy is

appropriate for weak cash cows whose future is dim and

from which more cash flow is needed. Harvesting can also

be used with question marks and dogs.4. Divest: The objective is to sell or liquidate the business

because the resources can be better used elsewhere. This is

appropriate for dogs and question marks that are dragging

down company profits.


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Successful SBUs move through a life cycle, starting as

question marks and becoming stars, then cash cows, andfinally dogs.

Given this life-cycle movement, companies should beaware not only of their SBUs current positions in the

growth-share matrix (as in a snapshot), but also of their

moving positions (as in a motion picture).

If an SBUs expected future trajectory is not satisfactory,

the corporation will need to work out a new strategy to

improve the likely trajectory.

MM Session on SBU Strategy

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