Identification of Four (4) Classifications of SBUs

IDENTIFICATION OF FOUR (4) CLASSIFICATIONS OF SBUS 4

Identificationof Four (4) Classifications of SBUs

Identificationof Four (4) Classifications of SBUs

Themanagement’s first step is to identify the strategic business unitsthat make up the company(Pride &amp Ferrell, 2014).An SBU can be a company division, a product within a division, orsometimes a single product or brand. The company has to assess theattractiveness of different SBUs and decides how much support eachdeserves. When designing a business portfolio, it is advisable tosupport those products in the business that is concordant withbusiness philosophy of the company and its core competencies. Basedon the Boston Consulting Group (BCG) approach, a company classifiesall the SBUs according to their growth-share matrix (Stern &ampDeimler, 2006). The growth-share matrix defines four types of SBUsas follows:

Star:This is a SBU product that has fast-growing market share (p.23). Theyalso have the largest market share among the goods or services that acompany offers to the market. They have high profitability but theyalso require a lot of financing to sustain their growth. For theseproducts to be successful in the market, the company has to ensurethat it increasingly captures other markets. This means promotionalstrategies must target new customers while also retaining traditionalones (Wernerfelt, 2012). If the company fails to attract newcustomers, the star is likely to fail because of the high risk ofmaintaining them. Their growth eventually slows down and they turninto cash cows.

Question-marks: These are those products in the company that have highpotential but raise a lot of questions because of their low profits(p.24). The low profit margins make them to raise a lot of questionsthan answers for the company. The company sustains their productivitybut it is unsure of the possibility that they will continue yieldingthe same low profits. In high-growth markets, they are low-sharebusiness units that require a lot cash to maintain let aloneincrease.

Dog:These are products that have a very low growth potential with a smallmarket share. The company keeps producing them for the purpose ofmaintaining its short-term cash-flows rather than its long-term cashprospects (p.24). A company with a product in this category has twooptions: to keep producing it for the short-term cash prospects ofdivest the money invested in the product and move on with a differentline of production that is profitable.

Cash-cow:Products in this category generate a lot of cash flows than they needto maintain the share of the market. They need less cash to supporttheir continuity. They are very important because the revenue theygenerate is used to finance the stars and keep the Question marks inproduction (Hedley, 2006). They are very important for the company’slong-term and short-term prospects.

Whya company may find it difficult to dispose a Question mark

Itis difficult for any company to do away with question marks becausethey have high market prospects (Buzzell &amp Gale, 2007). Theyalso do not have a specific strategy that can increase the company’scertainty on their market viability. Thus, they have both thepositive potential to be stars, and the negative potential to bedogs. The management cannot risk losing them through disposal becausethey may just turn out to be a great idea. Most businesses wouldrather invest more on the questions marks to realize their commercialpotential than dispose them off through divesture.

References

Buzzell,R. D., &amp Gale, B. T. (2007). ThePIMS principles: Linking strategy to performance.Simon and Schuster

Hedley,B. (2006). A fundamental approach to strategy development. LongRange Planning,9(6),2-11.

Pride,W., &amp Ferrell, O. C. (2014). Foundationsof marketing.Cengage Learning.

Stern,C. W., &amp Deimler, M. S. (Eds.). (2006). TheBoston consulting group on strategy: Classic concepts and newperspectives.John Wiley &amp Sons.

Wernerfelt,B. (2012). A resource‐basedview of the firm. Strategicmanagement journal,5(2),171-180.