Strategic Business Unit Overview & Examples | What Is a Strategic Business Unit? – Video & Lesson Transcript | Study.com

Characteristics of Strategic Business Units

A strategic business unit is flexible, independent, and autonomous in its operations and business strategies. These units have flexibility in that they are able to make changes to focus on their specific target market. While the organization has a certain purpose for the work it does, the unit can form its own mission statement. The SBU can then focus on the brand it wants to create, which may be quite different from the organization.

Though part of the organization or corporation, strategic business units are independent. SBUs typically consist of a separate brand or product line to differentiate them from the company. They may consist of separate teams of workers to help accomplish the goals of the unit; on the other hand, they may have help from workers in other strategic business units or in other parts of the company. Strategic business units may share some of the facilities, equipment, and functional aspects of the organization, such as accounting, sales, and human resources.

In general, strategic business units are autonomous, meaning they can operate on their own. The larger organization may have some input, such as the budget or policies of the company, but the unit is able to make strategic decisions. Strategic business units can be classified depending on how well they perform within a market and whether that market is growing.

Types of SBUs

When a business has many individual units operating separately, the units together are referred to as a portfolio, similar to an investment portfolio. To analyze the metrics from these separate units all together, the business can use different approaches. The BCG Matrix (BCG stands for Boston Consulting Group) categorizes units into four categories for portfolio planning purposes. These include question marks, stars, dogs, and cash cows.

Boston Consulting Group Matrix

Question Marks
Lower market share
but higher growth
Stars
Higher market share
& growth

Dogs
Lower market share
& growth
Cash Cows
Higher market share
but lower growth

The top of the matrix represents higher market growth while the bottom represents lower market growth. The left column of the matrix represents lower market share while the right column represents higher market share.

Question marks are the strategic business units which have a low share in a market that is growing at a high rate. The business must decide to either sell the unit or invest in it to enable it to grow with competitors. Stars are the units that are seeing high market growth and also have a high share in within that market. Stars are considered the most successful of the four types of units. Dogs are the units that are in markets characterized by low growth and only have a low share of this weaker market. Dogs aren’t expected to bring in much income to the business and are often sold to other businesses or eliminated. Cash cows are the units that have a high share of a market that is seeing low growth. The business must determine if it needs to make improvements to these products.

Strategic Business Units Examples

Strategic business units can be formed in various industries and corporations. Some SBU examples include:

• An apparel company that wants to add a new product line of swimwear and have it operated as a separate brand
• A computer company that is expanding to begin selling smartphones with different branding
• An appliance company that is adding in a home décor section, which should be promoted differently from the appliances
• A company that manufactures bread but also begins producing snacks using a different name brand

Pros and Cons of Strategic Business Units

Strategic business units have both advantages and disadvantages. SBUs are beneficial as they allow for better focus, differentiation, and competitive advantage. SBUs use their focus to concentrate on the target audience to differentiate the product and provide cost leadership for the organization. With these tactics, the SBU can differentiate its brand within the market. As it progresses and grows, the SBU can ultimately create a competitive advantage in the market. An SBU provides a way for the company to position itself for optimum potential in seeking profitability for the company as a whole.

There are also some disadvantages to strategic business units. There may be increased costs associated with having to run the unit independently as opposed to running it as a whole with the organization. Resources may also be limited and might need to be provided by the organization, which could create competition from other SBUs. It may also cause issues in communication processes or create a more decentralized communication structure.

Lesson Summary

The strategic business unit (SBU) meaning refers to a type of business that is part of a larger organization but functions as an independent division of the company. Strategic business units have more flexibility in how they conduct business because they are separate from the organization; however, they must still report back to the headquarters of the organization. SBUs have advantages, such as allowing for better focus, differentiation, and competitive advantage. They also provide a way for the company to position itself for optimum potential in profitability for the company as a whole. Focus allows the business to concentrate on the target audience to differentiate the product and to provide cost leadership for the organization

The BCG Matrix (BCG is the Boston Consulting Group) categorizes these units into four categories for portfolio purposes: question marks, stars, dogs, and cash cows. Question marks are the SBUs with a low share in a market growing at a high rate. Stars are the most successful units which are seeing high market growth and have a high share in that market. Dogs are not expected to become successful since these only have a low share of a market with low growth. Cash cows are the units that have a high share of a market with low growth.