A strategic business unit (SBU) in business strategic management, is a profit center which focuses on product offering and market segment. SBUs typically have a discrete marketing plan, analysis of competition, and marketing campaign, even though they may be part of a larger business entity.
An SBU may be a business unit within a larger corporation, or it may be a business into itself or a branch. Corporations may be composed of multiple SBUs, each of which is responsible for its own profitability. General Electric (GE) is an example of a company with this sort of business organization. SBUs are able to affect most factors which influence their performance. Managed as separate businesses, they are responsible to a parent corporation. GE has 49 SBUs.
Companies today often use the word segmentation or division when referring to SBUs or an aggregation of SBUs that share such commonalities.
Characteristics of Strategic Business Unit
- Own set of competitors.
- Separate business or a grouping of similar businesses, offering scope for autonomous planning.
- A manager who is accountable for strategic planning, profitability and performance of the division.
A SBU is generally defined by what it has in common, as well as the traditional aspects defined by McKinsey: separate competitors; and a profitability bottom line. Four commonalities include:
- Revenue SBU
- Like Marketing Cost SBU
- Like Operations/HR Profit SBU
- Like sales judged on net sales not gross
There are three factors that are generally seen as determining the success of an SBU:
- The degree of autonomy given to each SBU manager.
- The degree to which an SBU shares functional programs and facilities with other SBUS.
- The way in which the corporation handles new changes in the market.
Need for SBUs:
1) To ensure that each product or product line of the hundreds offered by the company receives the same attention as if it were developed, produced and marketed by an independent company.
2) To provide assurance that a product will not get lost among other products (usually those with larger sales and profits) in a large company.
3) To ensure that a certain product or product line is promoted and handled as though it were an independent business.
4) Dividing products into SBU’s helps you stay in touch with the market separately for each and every product. Thus a marketing manager/sales manager may be assigned one product at a time and will be responsible for that product itself. Thereby he/she may give valuable contribution in maintaining the STP of a product in the target market.
6) SBUs propagate the correct decision making. The decisions can be at the micro level (managing STP, strategies) or it can be at the macro level (investments from the corporate fund, whether to continue investing).
7) By micro managing each and every product and dividing it into SBU’s, the management can obtain a holistic view of the organisation. This view is also used in preparing the financial statements as well as to keep tabs on the investments and returns for the organisation from each SBU. Thus the overall profitability of the firm can be assessed.
8) The best reference for investments in SBU’s can be the BCG matrix. In the BCG matrix, the SBU’s are divided as per their market share and the market growth rate. Thus depending on the BCG matrix, the type of investments which each product needs can be decided. This is possible only if each product is treated as a completely different SBU. This SBU may be a composition of one category of product (such as currency printing) or in case of other larger organisations it may even be one single type of product (such as LED or LCD televisions).
9) Naturally once the organisation is organised, the management can manage things. For example, large companies like G & D GmbH, HUL and P&G (the best examples of multi product organisations) have at least 30 different products at all times. Each of them requiring separate manpower, strategies, expenses and returns. Thus this needs critical management at the highest level.
Strategic Business Units can be defined according to:
Product: Large companies can be split into smaller divisions based on the product category. For example, an automobile manufacturer may split its product divisions into luxury sedans(salon cars) e.g. Toyota and Lexus and off-road vehicles.
Location: Strategic business units are also useful for global organisations operating in many different markets. The same automobile company may have a North American, South America and European SBU to manage the various rules, regulations, and consumer preferences in each region.
Customer segment: Some companies, such as banks, may have separate business units for high net-worth customers and small business loans.
Innovation: Technology companies may also create new SBUs for innovations they do not expect to see a return on in the short term.
Decision-making: When faced with challenges or obstacles, management within each strategic business unit can focus on their immediate concerns and make rapid decisions that do not impact the organisation as a whole.
Profitability: When strategic business units can create their own value propositions for their respective target audiences, there is a higher likelihood of profitability. This likelihood is further enhanced since each SBU operates under a budget based on its own specific requirements.
Longevity: with markets becoming increasingly dynamic, only the most adaptable businesses will survive over the long term. The SBU structure allows each sub unit to evolve as the marketplace or consumer demographics evolve. Again, these changes in strategy can be made without negatively impacting the broader organisation.
Decentralisation of Authority: Decentralisation of authority is caused because it reduces the span of control. Decentralisation has its own effect on the organisational effectiveness and motivation system. The junior staff feel more respected and empowered.
Fast Formulation and Effective Implementation of Strategies: The strategy formulation is rendered easier as similar SBUs are under one manager who reports back to a General Manager and the CEO. The message that comes from the overall CEO leads to effective implementation. Each division has the participation in both planning and implementation.
SBUs simplify the bookkeeping process of the big companies
Complexity: Creating semi-autonomous SBUs that still work to further organisational objectives can be a complex task. Factors that need to be considered include culture, market conditions, short and long-term goals, brand messaging, and resource utilisation.
Competition: in some cases, one strategic business unit may compete with another unit from the same organisation. While it is entirely possible for a company to dominate its market with an umbrella of products, there does exist the potential for so-called product cannibalisation.
Increase in Operating Costs: Strategic business units are also costly to implement. With each new unit requiring management, branding, recruitment, accounting, and other personnel, the organisation must fill a range of positions many times over. The operational costs increase because this structure increases one more layer in the organisational structure.
Gap between Divisions and Head Office: This gap is created because of an extra layer that comes in between the head office and the SBUs. This gap reduces direct links with the divisions. This can delay the communication process which is a must for two way flow of information for decision-making and assessing the performance.
Dirty Politics and Unwanted Competition: Under this structure SBUs are at the top where there is going to be clamour for resources and foul play of office politics because all SBUs are not cash cows or stars. This categorisation can lead to unhealthy competition.