STRATEGIC BUSINESS UNIT

A SBU (strategic business unit) is a unit of the firm that is

relatively autonomous, an entity responsible for developing its
own strategy. A business unit is responsible for its own products &
markets, with its own competitors. Assets required to run the
business are under its control & has its own managerial
resources, at same time it is unlikely to be independent. There
may be linkage with other units either through markets served,
technology, facilities & operations or R&D.

Business level strategy is concerned with how to manage &

develop strategy of the relatively autonomous unit in the context
of the firm corporate strategy.

The distinguishing feature of a diversified firm is that it consists of

a number of interdependent business units.

Resource allocation –

The corporate level is responsible for decision on on the dynamic

scope of the firm, the portfolio of business that comprises the
firm. The firm must actively engaged in ensuring the emergence
of new business opportunities, even when it abandons old ones.
This may include –

• Buying & selling of business units,

• Developing business internally,

• Closing or exiting business,

• Forming alliance & networks with other firms,

• Redefining business in the current portfolio.

 Corporate management must manage the firm for both today &
tomorrow, it needs a relatively long planning horizon to do this.

In managing the dynamics of company’s scope , corporate

managers must decide on the allocation of resources , financial ,&
human among the firms various business units. The corporate
center is responsible for deciding the objectives to be met by
each business unit. The corporate center is responsible for the
capital allocation across the business portfolio, judging which
business should be supported with investment funds.

THE GROWTH/SHARE MATRIX-

This is one of the earliest & one of the simplest approaches to

resource allocation. This approach was developed to assist
managers in making decisions on each objective each business
should have with respect to their cash position. All economic
analysis deals with cash flow. The survival of the firm depends
upon the liquidity; hence the corporate center must carefully
manage the cash balance in its portfolio of business.

To assist in determining the cash position of business, the

growth /share framework uses two independent dimensions-

Rate of growth of markets in which business compete,

Relative market share of the business in the market in which it

competes.

Rapid growing markets create strong need s for cash if the

business wants to maintain its position in that market, as
expansion will require new facilities as well as probable increase
in the marketing & R&D expenses. Relative market share is
assumed to be a measure of the ability of the business to
generate cash. Relative market share is defined as –

Market share of the business / market share of the largest

competitor.
A relative market share is greater than 1 indicates that the
business is the leader in the market. In BCG framework it is
assumed that a business with large relative market share is
generating substantial level of cash & one with a small relative
market share is generating much lower levels of cash. A business
in a rapidly growing market may need large amount of cash for
development. Example –Amazon used cash before earning profits.

Business in the mature market may generate more cash than it

can use. The surplus of such business may be used by corporate
to support cash –negative business. Example- Microsoft windows
& office business generates positive cash flow which is used to
support other business in portfolio.

Low market growth/high market share-

Businesses in this case are typically highly profitable due to

economies of scale & experience curve effect & because market
leaders are frequently able to command premium prices. If the
businesses are well managed & major environmental changes are
absent, business in this case may generate significant cash for
long time, hence the name cash cow.

Cash cow businesses are generally given an objective of holding

their market share since the cost of share growth is likely to
outweigh the benefits.

The bulk of the cash generated should be invested to support

growth of newer markets, products & the business.

Low market growth/ low market share-

These business trail market leaders in low growth market. Low

market share business has inferior cost position, lower prices & is
less profitable than leader.

High market growth/ low market share –

The businesses in this situation are viewed to be risky because of
the inherent uncertainty in high growth markets & their weak
market share position ,.they are marginally profitable, consume
substantial cash for investment in fixed assets &working capital.

High market growth/ high market share-

These businesses are very desirable & are relatively rare. They
may be profitable but not in the starting. An investment in
capacity expansion & increased working capital often means they
may be cash negative.

Growth markets are characterized by uncertainty with regard to

ultimate market potential, evolution of customer needs,
competencies & & technology. If relative market share is
sustained, profitability & cash flows should improve as market
growth improves.

Difficulties with growth/share matrix-

The growth/share matrix is a powerful tool for analyzing business

portfolio of a firm & for indicating s possible strategic change a
business that is investment intensive will require significantly
more funds for growth than one that is less investment intensive.

The major application of the growth /share matrix should be

diagnostic –a means of raising & discussing what if questions.