Assigning Resources to Each Strategic Business Unit
The purpose of dividing the whole business into different independent strategic business units is to allocate the total firm resources among various SBUs. These plan allocations are done on the basis of the performance of the SBU in the past, its current market position, and future potential in generating revenue for the firm. Marketing managers use various analytical tools for allocating resources among various strategic business units.
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This is the most popular growth-share matrix model. It involves Strategic Business Units (SBUs) being positioned in a matrix on the basis of market growth rate and their market share, relative to that of the largest competitor.
Competitive position can also be measured on a logarithmic scale against the share of the firm’s largest competitor.
Market growth rate provides an indicator of the relative attractiveness of the market served by each of the businesses in the company’s portfolio.
Relative market share is calculated as an SBU’s market share, divided by the market share of the largest competitors in the same market.
Strategic business units can be positioned as a circle in the matrix.
The size of the circle represents the proposition of the company’s sales generated by that particular business unit.
The market growth rate plotted on the vertical axis indicates the annual growth rate of the market in which the business operates. It ranges from 0 to 20 percent; it can be separated into ‘high’ and ‘low’ areas. Relative market share is plotted on the horizontal axis. It ranges from 0.1 to 10.
Example: A relative market share of 0.15 means that the company’s sales volume is only 15 percent of the leader’s sales volume.
Further, a relative share ‘of 5’ means that the company’s SBU is the leader and has 5 times the sales of the next strongest competitor in that market.
- Stars are market leaders in a high-growth market. A star was once a question mark, but it does not necessarily produce positive cash flow; the company must still spend to keep up with the high market growth and fight off competition.
- Question marks are businesses that operate in high-growth markets but have low relative market shares. Most businesses start off as question marks as the company tries to enter a high-growth market in which there is already a market leader.
A question mark requires a lot of cash because the company is spending money on plant, equipment, and personnel. The term question mark is appropriate because the company has to think hard about whether to keep pouring money into this business.
- Cash cows are former stars with the largest relative market share in a slow-growth market. A cash cow produces a lot of cash for the company (due to economies of scale and higher profit margins), paying the company’s bills and supporting its other businesses.
- Dogs are businesses with weak market shares in low-growth markets; typically, these generate low profits or even losses.
The table explains the characteristics of each of the strategic business units and strategic decision alternatives.
|S.B.U Classification||S.B.U Characteristics||Strategy||Strategy Characteristics|
|Dogs (Low share, low growth)||Generate low profits or losses|
Consume more management time
|Divest||Sell or liquidate the business because resources can be better used elsewhere|
|Question Marks (Low share, high growth)||Requires a lot of cash for last growth|
Continue investing in the SBU or withdraw from the market
|Build/Harvest||Increase the SBU’s market share or short-team cash flow and eliminate R&D expenditure|
|Stars (High share, high growth)||Generate large amount of cash Competitors attack on SBU||Build||Increase the SBU’s market share|
|Cash Cows (High share, low growth)||Generate considerable sums of cash Enjoy economies of scales and higher profit margins||Hold/ Harvest||Preserve the SBU’s market share or increase the short-term cash flow and involve eliminating R&D expenditure|
BCG growth-share matrix has some limitations:
- SBUs have life cycles and over a period of time, they change their positions on the matrix. Merely identifying the position of an SBU does not lead to the selection of a particular strategy. This is because firms do not aim for the same growth rate or relative market share.
- Each business unit has different potentials and needs its own strategy.
- Some of the problems with the application of the growth share matrix are that the organization runs a risk of leaving cash cows dry with its cash being transferred to other SBUs.
- This inter-SBU flow of funds to support each other runs the risk of over-investing in dogs with an assumption that dogs will take a turn and become cash cows by capturing additional market share from competitors.
- Possessing too many question marks with few investments is also a risk for the company as they may turn to become dogs when the industry growth rate slows down.
We can further understand BCG by taking the example of PepsiCo. It can be said that PepsiCo’s products and business portfolio can be divided into four major products or services; each service operates in accordance with its functions along with the products and services in different areas especially made as a distinction of each division.
The PepsiCo analysis will be based on an assessment of the services offered by the company. PepsiCo consists of five major brands: Gatorade, Quaker, Pepsi products, Frito-Lay, and Tropicana.
The products that belong to the question mark are Gatorade and also Tropicana. Because of the emergence of different healthy drinks and beverages in the global market, the market share of Tropicana and Gatorade are being threatened.
Although these brands are already established in the marketplace, the company still needs to have an effective marketing approach to increase the sale of these brands or brands. Accordingly, the question mark category means that these products have a low share of a possible high-growth market and may become a star product because of the positive response of the customers.
As can be seen in the Figure, the services that fall in the star category belong to the Pepsi brand. The star category shows the products with a high share of gradual growth of the market and these products have a tendency to produce a high amount of profits.
The next category that can be seen in the Figure is the cash cows. Herein, the products are considered to have a high share of a slow-growth market. With regards to the PepsiCo, services that can be considered the cash cows is the Quaker.
Lastly, it can be seen that Tropicana, Gatorade, and Frito-Lay are products that can be considered in the dogs category.
It can be said that PepsiCo has been able to market its products and increase its market share and market growth by using different strategies and approaches.
The company enhances the market share of its brands by considering different marketing entry modes. Through collaborative venture, PepsiCo has been able to see mergers and acquisitions along with a joint venture approach. Furthermore, franchising is another method that PepsiCo used to enhance the market share of the brands of the company.
This model has been utilized by PepsiCo in order to expand its business portfolio in other regions of the world. In this manner, the management of PepsiCo considers franchising an existing company in an international market while applying the methods of a collaborative venture.
In order to make this foreign operational mode combination a success, PepsiCo considers the most suitable and effective expansion strategy. It can be said that the spread of PepsiCo is truly global. The company has hundreds of brands, which can be found in almost 200 countries and territories around the world.