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Q:3) what are different types of Strategic Missions at SBU level?

How do these missions affect


Strategic Planning process and Budgeting at SBU Level?

Different Types of Strategic Missions:


Business Unit Mission:
In a diversified firm one of the important tasks of senior management is resource deployment, that is, make
decisions regarding the use of the cash generated from some business units to finance growth in other
business units. Several planning models have been developed to help corporate level managers of
diversified firms to effectively allocate resources. These models suggest that a firm has business units in
several categories, identified by their mission; the appropriate strategies for each category differ. Together,
the several units make up a portfolio, the components of which differ as to their risk/reward characteristics
just as the components of an investment portfolio differ. Both the corporate 'office and the business unit
general manager are involved in identifying the missions of individual business units. Of the many
planning models, two of the most widely used are Boston Consulting Group's two-by-two growth-share
matrix and General Electric Company/McKinsey & Company's three-by-three industry attractiveness-
business strength matrix. While these models differ in the methodologies they use to develop the most
appropriate missions for the various business units, they have the same set of missions from which to
choose: build, hold, harvest, and divest.
 Build: This mission implies an objective of increased market share, even at the expense of short-
term earnings and cash flow (e.g., Merck's bio-technology, Black and Decker's handheld electric
tools).

 Hold: This strategic mission is geared to the protection of the business unit's market
share and competitive position (e.g.: IBM's mainframe computers).

 Harvest: This mission has the objective of maximizing short-term earnings and cash
flow, even at the expense of market share (e.g., American Brands' tobacco products,
General Electric's and Sylvania's light bulbs)

 Divest: This mission indicates a decision to withdraw from the business either through a
process of slow liquidation or outright sale. While the planning models can aid in the
formulation of missions, they are not cook books. A business unit's position on a
planning grid should not be the sole basis for deciding its mission.

 Business Unit Competitive Advantage: Every business unit should develop a


competitive advantage in order to accomplish its mission. Three interrelated questions
have to be considered in developing the business unit's competitive= advantage. First,
what is the structure of the industry in which the business unit operates? Second, how
should the business unit exploit the industry's structure? Third, what will be the basis of
the business unit's competitive advantage?

 Industry Analysis: Research has highlighted the important role industry conditions play
in the performance of individual firms. Studies have shown that average industry
profitability is, by far, the most significant predictor of firm performance. According to
Porter, the structure of an industry should be analyzed in terms of the collective strength
of five competitive forces.
1. The intensity of rivalry among existing competitors. Factors affecting direct rivalry are industry growth,
product differentiability, number and diversity of competitors, level of fixed costs, intermittent
overcapacity, and exit barriers.
2. The bargaining power of customers. Factors affecting buyer power are number of buyers, buyer's
switching costs, buyer's ability to integrate backward, impact of the business unit's product on buyer's total
costs, impact of the business unit's product on buyer's product quality/ performance, and significance of the
business unit's volume to buyers.
3. The bargaining power of suppliers. Factors affecting supplier power are number of suppliers, supplier's
ability to integrate forward, presence of substitute inputs, and importance of the business unit's volume to
suppliers.
4. Threat from substitutes. Factors affecting substitute threat are relative price/performance of substitutes,
buyer's switching costs, and buyer's propensity to substitute.
5. The threat of new entry. Factors affecting entry barriers are capital requirements, access to distribution
channels, economies of scale, product differentiation, technological complexity of product or process,
expected retaliation from existing firms, and government policy.

 We make three observations with regard to the industry analysis:


1. The more powerful the five forces are, the less profitable an industry is likely to be. In industries where
average profitability is high (such as soft drinks and pharmaceuticals), the five forces are weak (e.g., in the
soft drink industry, entry barriers are high). In industries where the average profitability is low (such as
steel and coal), the five forces are strong (e.g., in the steel industry, threat from substitutes is high).

2. Depending on the relative strength of the five forces, the key strategic issues facing the business unit will
differ from one industry to another.

3. Understanding the nature of each force helps the firm to formulate effective strategies. Supplier selection
(a strategic issue) is aided by the analysis of the relative power of several supplier groups; the business unit
should link with the supplier group for which it has the best competitive advantage. Similarly, analyzing
the relative bargaining power of several buyer groups will facilitate selection of target customer segments.
 Generic Competitive Advantage:
The five-force analysis is the starting point for developing a competitive advantage since it helps to identify
the opportunities and threats in the external environment. With this understanding, Porter claims that the
business unit has two generic ways of responding to the opportunities in the external environment and
developing a sustainable competitive advantage: low cost and differentiation.
 Low Cost: Cost leadership can be achieved through such approaches as economies of
scale in production; experience curve effects, tight cost control, and cost minimization (in
such areas as research and development, service, sales force, or advertising). Some firms
following this strategy include Charles Schwab in discount brokerage, Wal-Mart in
discount retailing, Texas Instruments in consumer electronics, Emerson Electric in
electric motors, Hyundai in automobiles, Dell in computers, Black and Decker in
machine tools, Nucor in steel, Lincoln Electric in arc welding equipment, and BIC in
pens.
 Differentiation:
The primary focus of this strategy is to differentiate the product offering of the business unit, creating
something that is perceived by customers as being unique. Approaches to product differentiation include
brand loyalty (Coca-Cola and Pepsi Cola in soft drinks), superior customer service (Nordstrom in retailing),
dealer network (Caterpillar Tractors in construction equipment), product design and product features
(Hewlett-Packard in electronics), and technology (Cisco in communications infrastructure). Other examples
of firms following a differentiation strategy include BMW in automobiles; Stouffer's in frozen foods,
Neiman-Marcus in retailing, Mont Blanc in pens, and Rolex in wristwatches.
 Value Chain Analysis:
Business units can develop competitive advantage based on low cost, differentiation, or both. The most
attractive competitive position is to achieve cost-cum-differentiation