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Strategic Business Unit

Strategic Business Unit

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Published by Rajesh Warise

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Published by: Rajesh Warise on Mar 16, 2011
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03/30/2011

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STRATEGIC BUSINESS UNIT
A SBU (strategic business unit) is a unit of the firm that isrelatively autonomous, an entity responsible for developing itsown strategy. A business unit is responsible for its own products &markets, with its own competitors. Assets required to run thebusiness are under its control & has its own managerialresources, at same time it is unlikely to be independent. Theremay 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 contextof 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 dynamicscope of the firm, the portfolio of business that comprises thefirm. The firm must actively engaged in ensuring the emergenceof 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 , corporatemanagers must decide on the allocation of resources , financial ,&human among the firms various business units. The corporatecenter is responsible for deciding the objectives to be met byeach business unit. The corporate center is responsible for thecapital allocation across the business portfolio, judging whichbusiness should be supported with investment funds.
THE GROWTH/SHARE MATRIX-
This is one of the earliest & one of the simplest approaches toresource allocation. This approach was developed to assistmanagers in making decisions on each objective each businessshould have with respect to their cash position. All economicanalysis deals with cash flow. The survival of the firm dependsupon the liquidity; hence the corporate center must carefullymanage the cash balance in its portfolio of business.To assist in determining the cash position of business, thegrowth /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 itcompetes.Rapid growing markets create strong need s for cash if thebusiness wants to maintain its position in that market, asexpansion will require new facilities as well as probable increasein the marketing & R&D expenses. Relative market share isassumed to be a measure of the ability of the business togenerate cash. Relative market share is defined as –Market share of the business / market share of the largestcompetitor.
 
A relative market share is greater than 1 indicates that thebusiness is the leader in the market. In BCG framework it isassumed that a business with large relative market share isgenerating substantial level of cash & one with a small relativemarket share is generating much lower levels of cash. A businessin a rapidly growing market may need large amount of cash fordevelopment. Example –Amazon used cash before earning profits.Business in the mature market may generate more cash than itcan use. The surplus of such business may be used by corporateto support cash –negative business. Example- Microsoft windows& office business generates positive cash flow which is used tosupport other business in portfolio.
Low market growth/high market share-
Businesses in this case are typically highly profitable due toeconomies of scale & experience curve effect & because marketleaders are frequently able to command premium prices. If thebusinesses are well managed & major environmental changes areabsent, business in this case may generate significant cash forlong time, hence the name cash cow.Cash cow businesses are generally given an objective of holdingtheir market share since the cost of share growth is likely tooutweigh the benefits.The bulk of the cash generated should be invested to supportgrowth of newer markets, products & the business.
Low market growth/ low market share-
These business trail market leaders in low growth market. Lowmarket share business has inferior cost position, lower prices & isless profitable than leader.
High market growth/ low market share –

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