Establishing Strategic Business Units
Large companies normally manage quite different businesses, each requiring its own strategy.
A strategic business unit (SBU) has three characteristics:
- it is a single business, or a collection of related businesses, that can be planned separately from the rest of the company;
- it has its own set of competitors; and
- it has a manager responsible for strategic planning and profit performance who controls most of the factors affecting profit.
The purpose of identifying the company’s strategic business units is to develop separate strategies and assign appropriate funding.
Senior management knows its portfolio of businesses usually includes a number of “yesterday’s has-beens” as well as “tomorrow’s winners.”
Assigning Resources to Each SBU
Once SBUs have been defined, management must decide how to allocate corporate resources to each unit.
Newer methods of portfolio planning rely on shareholder value analysis and on whether the market value of a company is greater with an SBU or without it.
These value calcu-lations assess the potential of a business based on growth opportunities from global expansion, repositioning or retargeting, and strategic outsourcing.
Assessing Growth Opportunities
Assessing growth opportunities includes planning new businesses, downsizing, and terminating older businesses.
If there is a gap between future desired sales and projected sales, corporate management will need to develop or acquire new businesses to fill it.
One option is to identify opportunities for growth within current businesses (intensive opportunities).
A second option is to build or acquire businesses related to current businesses (integrative opportunities).
A third option is to add attractive unrelated businesses (diversification opportunities).
The Ansoff Matrix
Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets. The output from the Ansoff product/market matrix is a series of suggested growth strategies which set the direction for the business strategy.
Another approach for growth is by expanding the organization. The details are explained below the image.
Intensive growth.
Marketers can use a “product-market expansion grid like the Ansoff-matrix” to consider the firm’s strategic growth opportunities in terms of current and new products and markets.
The company first considers whether it could gain more market share with its current products in current markets, using a market-penetration strategy.
Next it considers whether it can find or develop new markets for its current products in a market-development strategy.
Then it considers whether it can develop new products for its current markets with a product-development strategy.
Later the firm will also review opportunities to develop new products for new markets in a diversification strategy.
Integrative growth.
A business can increase sales and profits through;
- backward integration (acquiring a supplier),
- forward integration (acquiring a distributor),
- or horizontal integration (acquiring a competitor).
Horizontal mergers and alliances don’t always work out, however.
Diversification growth.
This makes sense when good opportunities exist outside the present businesses—the industry is highly attractive and the company has the right mix of business strengths to succeed.
The firm might seek new products that have technological or marketing synergies with existing product lines, though appealing to a different group of customers.
Or it might use a horizontal strategy to search for unrelated new products that appeal to current customers.
Finally, the company might seek new businesses with no relationship to its current technology, products, or markets, adopting a conglomerate strategy to diversification.
Making growth choices
The Boston Consulting group’s product portfolio matrix (BCG matrix) is designed to help with long-term strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or develop products.
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