Type of concept of portfolio and Meaning of Strategic Business Unit

There are three important concepts, the knowledge of which is a prerequisite to understand different models of portfolio analysis:

1. Strategic Business Unit
2. Experience Curve
3. Product Life Cycle

1. Strategic Business Unit

Strategic business unit is the key businesses of the portfolio which is termed as strategic business unit (SBU).

Strategic business unit can be a single business or collection of many related businesses. The SBU can be a company division, or product line within a division, or even a single product or brand. SBUs are common in organizations that are located in multi countries or multi location with independent manufacturing and marketing setups.

After identifying SBUs, the management will assess their respective attractiveness and decide how much support each deserves.

An SBU has the following characteristics:                         

Sony example

1. It has single business or collection of related businesses that can be planned separately.
2. It has its own set of competitors.
3. It has a manager who is responsible for strategic planning and profit.

 

2. Experience Curve

Experience curve is an important concept of portfolio analysis. Experience curve is akin or similar to a learning curve which explains, the efficiency is gained by workers through repetitive productive work.

Experience curve is based on the commonly observed phenomenon that unit costs decline as a firm accumulates experience in terms of a cumulative volume of production.

Experience Curve

The implication is that larger firms in an industry would tend to have lower unit costs as compared to those for smaller companies, thereby gaining a competitive cost advantage. (Hero Motto)

Experience curve results from a variety of factors such as:

• Redesign products
• Economics of scale
• Scale of production
• Learning effects
• Technological improvements in production

Conclusion:

The concept of experience curve is relevant for a number of areas in strategic management. For instance, experience curve is considered a barrier for new firms, contemplating entry in an industry. It is also used to build market share and discourage competition.

In the contemporary Indian automobile industry, the experience curve phenomenon seems to be working in Maruti Suzuki. The likely strategic choice for competitors can be a market niche approach or segmentation based on demography or geography.

 

3. Product Life Cycle

Product life cycle is an important concept of portfolio analysis. Essentially, PLC is an S-shaped curve which exhibits the relationship of sales with respect to time for a product that passes through the four successive stages —

• Introduction - slow sales growth
• Growth -rapid market acceptance
• Maturity -Slowdown in growth rate and
• Decline -sharp downward drift

 

Product Life Cycle

If businesses are substituted for product, the concept of PLC could work just as well.

Euroka Forbes and Moserbare

Introduction Stage

1st stage

• Markets are limited
• Prices are relatively high
• Competition is almost negligible
• Growth rate is slow 
• Strategy adopted – growth or expansion strategy

Growth Stage

2nd stage

• Markets/demands expands rapidly
• Prices falls
• Competition increases
• Growth rate goes up.
• Strategy adopted – growth or expansion strategy

Maturity Stage

3rdstage

• Markets gets stabilized
• Prices comes down so profit comes down
• Competition gets tough, stiff competition
• Growth rate slow down.
• Strategy adopted –Stability strategy

Declining stage

4th stage

• Markets and demands falls down sharply because of substitute products
• Prices and profit comes down sharply
• Competition is almost over as no market
• Growth rate concept does not exist now
• Strategy adopted- Retrenchment strategy, diversification strategy

1. Introduction Stage - Entry/Introduction Stage - Market Penetration Strategy should be followed. In introduction stages competition is almost negligible, processor relatively high and markets are limited. The growth in sales is at a lower rate because of lack of knowledge on the part of customers.
2. Growth Stage (Second Phase of PLC) - In this, company must follow Growth/Expansion Strategy

In the growth stage, the demand expands rapidly, prices fall, competition increases and market expands. The customer has knowledge about the product and shows interest in purchasing it.

3. Maturity Stage (Third Phase of PLC) -In this, company must follow stability strategy. In this stage, the competition gets tough and market gets stabilised. Profit comes down because of stiff competition. At this stage, organisations have to work for maintaining stability.
4. Declining Stage of PLC – In this stage, company must follow Retrenchment/ Turnaround Strategy. The sales and profits fall down sharply due to some new product replaces the existing product. So a combination of strategies can be implemented to stay in the market either by diversification or retrenchment.

 

The main advantage of PLC approach is that it can be used to diagnose a portfolio of products (or businesses) in order to establish the stage at which each of them exists. Particular attention is to be paid on the businesses that are in the declining stage. Depending on the diagnosis, appropriate strategic choice can be made. For instance, expansion may be a feasible alternative for businesses in the introductory and growth stages. Mature businesses may be used as sources of cash for investment in other businesses which need resources. A combination of strategies like selective arresting, retrenchment, etc. may be adopted for declining businesses. In this way, a balanced portfolio of businesses may be built-up by exercising a strategic choice based on the PLC concept.