Strategic Business Unit (SBU): Boston Consulting Group Approach of SBUs

A Strategic Business Unit (SBU) is a unit of the company that has a separate mission and objectives and that can be planned independently from other company businesses.

For instance, company division, a product line within a division, or sometimes a single product or brand.

A strategic business unit (SBU) is a relatively autonomous unit of a firm. In a diversified company, each business unit is an SBU. A division of a company may also be treated as ar, SBU.

According to Pearce and Robinson, an SBU must have certain characteristics:

  • A unique business mission
  • An identifiable set of competitors
  • The SBU strategic manager can make or implement a strategic decision relatively independent of other SBUs
  • Crucial operating decisions can be made within the SBU.

An SBU is responsible for its own products, services ‘and markets and, therefore, it is also responsible for developing its own strategy. Generally, an SBU rs independent in it’s business, operations, has its own managerial resources and has all its assets under its control.

For example, PNG has 21 business units for the production of textile products, ceramics, pharmaceutical products, etc. Each of these units is treated as an SBU. They, however, work under the Tesla corporate management.

In a diversified company, all the business-units constitute its business portfolio Each business-unit or SBU is treated as a stand­alone profit center.

A business portfolio approach is commonly followed in a diversified company for corporate strategic analysis. A corporate strategy for each SBU is set in such a way that becomes consistent with the resource capabilities of the overall company.

When a portfolio approach is followed, each unit is assessed as a separate entity. As remarked by Hili and Jones, the portfolio approach is a visual way of identifying and evaluating alternative strategies for the generation and allocation of corporate resources. One of the most widely used portfolio approaches is the Boston Consulting Group (BCG) Matrix.

The Boston Consulting Group Approach (BCG):

BCG stands for Boston Consulting Group. Also known as ‘Growth/Share Matrix/ BCG Matrix was developed by Boston Consulting Group a world-renowned management consulting firm located in the USA. It is a useful tool for analyzing a diversified company’s business portfolio.

BCG Matrix is mainly used by diversified companies having several SBUs.13 These SBUs form the ‘business portfolio’ of the company. BCG matrix is mostly used by companies as a portfolio planning tool. This matrix has four steps:

  • Dividing the business-organization. into several (at least two) SBUs
  • Determining the prospects of each SBU of the organization
  • Comparing each SBU against other SBUs with the help of a matrix (two-dimensional)
  • Setting strategic objectives for each SBU.

How to Use BCG Matrix in Practice?

To use this matrix, the SBUs of the company are plotted on a two- dimensional chart. One dimension of the chart (vertical dimension or Y-axis) represents future market growth (growth rate of SBU’s industry) and the other dimension (horizontal dimension or X-axis) represents an SBU’s relative market share.

The growth rate is measured in relation to the economy of the country. The growth rate of an SBUs industry may be faster or slow the growth rate of the economy.

As postulated by BCG Matrix, a favorable competitive environment exists in an industry when the growth rate is faster in the industry. On the other hand, relative market share is ‘the ratio of an SBU’s market share to the market, the share held by the largest rival company in its industry.

If SBU X has a market share of 10 percent and its largest rival has a market, the share of 30 percent, SBU X’s relative market share is 10/30 or 0.3.

Only if an SBU is a market leader in its industry will it have a relative market share greater than 1.0.

For example; if SBU Y has a market share of 40 percent and its largest rival has a market share of 10 percent, then SBU Y’s relative market shareis40/l0 or 4 0. When an SBU’s relative market share is greater than you can assume that it has a significant cost advantage over its competitors.

You will find in the figure that the market growth rate is placed on the left-hand side (Y-axis) and relative market share is placed at the bottom (X-axis), below the horizontal line.

The chart is divided into 4 Quadrants.

  1. quadrant 1 shows the star SBUs,
  2. quadrant 2 shows the ‘question mark’ SBUs,
  3. quadrant 3 shows ‘cash cow’ SBUs, and
  4. quadrant 4 shows ‘dogs’ SBUs.

Two pieces of information are required to plot and SBU in the matrix

  • an estimate of the future rate of growth in the market and
  • An estimate of the relative market share of the business unit.

Any business that is to the left of the dark violet is dominant in the market.

Any business to the right of the start point is nondominant.

Separate high growth from low growth markets common cut point is GDP + 3%. Markets growing faster than these are considered to be high growth, markets going slower than these are considered to be slow growth.

Both cut points are somewhat arbitrary.

For example, a business with its share of 1.01 may be the leader but it is scarcely in a commanding position compared to the next largest competitor.

Using the classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix, as shown in Figure. On the vertical axis, the market growth rate provides a measure of market attractiveness.

On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share matrix defines four types of SBUs.

Boston Consulting Group Approach of SBUs

Stars

Stars are high-growth, high-share businesses or products. They often need heavy investments to finance their rapid growth. Eventually, their growth will slow down, and they will turn into cash cows.

An SBU with high market growth and high relative market share is considered as a star business-unit. It is a profitable business. It has attractive long-term profit opportunities.

Cash Cows

Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share.

Thus, they produce a lot of the cash that the company uses to pay its bills and support other SBUs that need investment.

An SBU is considered a question mark when it has high market growth and low market share. It is relatively weak in competitive terms. A question mark business-unit is risky due to the inherent uncertainty in a high-growth market and weak market share position.

However, such a unit is considered as having a future. It may offer-opportunities for long-term profit. If more cash is poured down into this SBU and properly nurtured, it may become a star SBU,

Question Marks

Question marks are low-share business units in high-growth markets. They require a lot of cash to hold their share, let alone increase it.

Management has to think hard about which question marks it should try to build into stars and which should be phased out.

An SBU is considered as a cash cow when it has low market growth and high market share. It is a highly profitable firm and generates a substantial amount of cash. Since this SBU has a – lack of opportunity for future expansion, more cash should not be injected.

Dogs

Dogs are low-growth, lo,w-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash.

An SBU with low market growth and low market share is treated as a dog. It has a weak competitive position in a low-growth industry, it cannot generate cash and also it has a dim prospect. The corporate head office has to decide about its future. It may bp divested or liquidated, or turned around if there are sufficient reasons for its revival.

BCG recommends several things;

  1. The stars should be nurtured with the surplus cash flows from the cash cows. The long-term objective should be to consolidate the star SBU’s position.
  2. The question marks should be provided supports from the surplus of the cash cows. However, if a question mark SBU’s long-term prospect is uncertain, it should be divested.
  3. In order to make a diversified company’s business- portfolio more attractive, the corporate head office should have an objective of turning the favored question mark SBUs into stars.
  4. The company should seriously think, about getting rid of dog SBUs.
  5. The corporate management should consider making the company an organization of a balanced portfolio with enough number of stars, question marks, and cash cows.

Limitations of BCG Matrix

BCG matrix has certain flaws. Because of these flaws, it should be used cautiously.

  • BCG matrix is criticized as a very simplistic model. An ABU is affected not only by market share and growth rate. Many other relevant factors such as product differentiation^niche market possibility, etc. affect the business operations of the SBU BCG matrix does not take into account all these factors.
  • BCG matrix suggests a straight-forward Hnkage relative market Share’ and cost savings. In reality, cost advantage may not accrue to an SBU simply due to high maShaS Depending on the industry, an SBU with low simple, low-cost technology.
  • Cash cow SBUs are supposed to generate substantial cash Sows because of their high market share. It may not always be in some businesses, the capital investments needed to remain competitive are so high that an SBU classified as cash cow may find it very difficult to yield substantial cash flows.
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