What Is a Strategic Business Unit(SBU)?

A strategic business unit plays a significant role in business growth in terms of product category and size. Typically an SBU is a business providing a single product or a number of closely related products that serve a well-defined product-market combination and compete with a well-defined set of competitors. It is very important for management of businesses and companies to be familiar with the concept of Strategic Business Units. If you are about to grow your business in terms of size and product categories, it is necessary to understand the basics of a strategic business unit.

Strategic Business Unit(SBU) Definition

A strategic business unit abbreviated as SBU, is a small business unit or entity within a larger organisation managed independently. So it is an independently managed division of a large organisation with its own vision, mission and objectives responsible for planning, developing, producing and marketing its own goods or services. A strategic business unit (UBS) is a semi-autonomous corporate unit that focuses on a product offering and market segment.

A strategic business unit is also a division responsible for managing its own strategy and bottom line and in some if not cases, is operated as a completely separate business. In some cases, SBUs encompass teams within an organisation that share operational and administrative functions. No matter what SBUs are, they all target a specific group of customers or a geographical area.

Typically the SBU is a business providing a single product or a number of closely related products that serve a well-defined product-market combination and compete with a well-defined set of competitors.

Management of the strategic business unit (SBU) will be responsible for captivating customers’ satisfaction, feedback and support and defeating rivals in its particular market. Therefore, at this level that competitive strategy is generally formulated. Most importantly, they make separate plans different from the rest of the company, and they have different objectives from the parent company. They impact the performance of the company in the long term. 

SBUs operate independently but when it comes to performance and status of work in progress, SBU has to report directly to the head office of the parent company. Usually, the focus of the SBU is to study a certain industry or market. 

 The considerations at this level may include:

• various marketing issues such as Research and development, product development, pricing, promotion and distribution, market analysis
• decisions on production technology, production environment
• staffing decisions, hiring and firing issues.

A business strategy should be formulated within the broad framework of objectives laid down by the company to make sure that each strategic business unit (SBU) plays its part. The extent to which the management of the strategic business unit (SBU) is free to make competitive strategy decisions varies from company to company and reflects the degree of centralisation in the management culture of the firm.

Strategic business units are absolutely essential for multi product organisations. These business units are basically known as profit centres. They are focused towards a set of products and are responsible for each and every decision / strategy to be taken for that particular set of products. 

As Organisations/companies become very large, they tend to restructure as a means of revitalising the organisation. Growth of a business is normally accompanied by growth in bureaucracy, as positions are created to facilitate developing needs or opportunities. Continued changes in the organisation or in the external business environment may make this bureaucracy a hindrance to development, not simply because of the size or complexity of the organisation but also because of a sluggish bureaucratic way of thinking that slows down processes.

One approach to encouraging new ways of thinking and acting, is to reorganise parts of the company into largely autonomous groups, called strategic business units (SBUs). Such units are generally set up like separate companies, with full profit and loss responsibilities invested in the top management of the unit.

The SBUs can be based on product lines, geographic markets, or other differentiating factors.

For example, LG offers a wide range of consumer products like air conditioners, televisions, fridges, smartphones, etc. Every SBU is responsible for budgeting, making investments, producing, and launching the product into the market. The parent company of LG focuses on tracking the company’s overall profitability, income, and costs. 

Understanding a Strategic Business Unit

Many strategic business units are large enough to support functional departments such as human resources, sales and training. Despite enjoying some degree of autonomy, each unit must still report directly to the company headquarters.

As part of a large corporation, it doesn’t mean that the size of a Strategic Business Unit(SBU) is small. Some of the SBUs are of very large in size and they have got their own support group. They control marketing operations, training and development of employees, and human resource management. 

Strategic Business Units offer a lot of benefits to businesses and companies, and that is why it is important to have one especially, when the company is offering various products and or services. Whether a company has one or more SBUs, it should make them react quickly relevant to the product changes in the market. 

Characteristics of a Strategic Business Unit(SBU):

• Competition is clearly and concisely identified.
• SBU is a separate business entity or group of the company that is independently in charge of business planning.
• Has a unique objective that differentiates it from the rest of the organisation or other business units.
• The responsibility of the head office of the SBU is strategic planning of every unit, company’s performance, and managing the company’s profitability 
• Has a well-defined and well-researched target market
• The target market of every SBU is different and it targets various types of customers 
• The separation of businesses or grouping of similar businesses provided there is scope for autonomous planning and functioning. 
• Every SBU has specialist expertise and proficiency in different areas like management or production or engineering that the parent company lacks 
• They have responsibility for their own profit
• SBU is a separate business entity or group of the company that is independently in charge of business planning.
• Unique set of product-markets, in the sense that no other SBU within the firm competes for the same customers with similar products. So, the company avoids duplication of effort and maximises economies of scale within its SBU’s.
• Homogeneous set of markets to serve with a limited number of related technologies. Minimising diversity across an SBU’s product-market entries enables the unit’s manager to better formulate and implement a coherent and internally consistent business strategy.
• Control over those factors necessary for successful performance, such as production, R&D and engineering, marketing, and distribution.
• Every SBU has expertise and proficiency in different areas like management or production that the parent company lacks

General Electric(GE) was one of the first companies to implement Strategic Business Units(SBUs) in the 1960’s. Today, the company has approximately 49 separate strategic business units in energy, finance, software, water, and healthcare, to mention but a few. 

The 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:

1. 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.
2. 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.
3. Customer segment – some companies, such as banks, may have separate business units for high net-worth customers and small business loans.
4. Innovation – technology companies may also create new SBUs for innovations they do not expect to see a return on in the short term.

Advantages and disadvantages of strategic business units(SBUs)

Advantages:

• 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.
• 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.
• 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

Disadvantages:

• 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.

Types of Strategic Business Units

 1. Stars

Stars are SBUs with high growth and market share and represent a profitable business. In a fast-growing market, such businesses are dominant players. They require significant monetary investment to sustain their rapid growth.

2. Cash Cows

A cash cow is a strategic business unit that dominates in markets with slow growth. They help in allocating resources to other SBUs by generating more cash than they require. A star generally becomes a cash cow when a high-growth market slows down.

3. Question Marks

Organisations face investment dilemmas with SBUs that function in high-growth markets with low shares. It requires significant investment, usually from cash cows, to develop such SBUs. Organisations find it difficult to decide whether to invest in these businesses or eliminate them.

 4. Dogs

Dogs are underachievers with little hope of becoming cash cows, let alone a star. They operate in slow-growth markets with low market shares. Their performances may generate enough cash to sustain themselves but organisations usually choose to invest resources in SBUs that show more promise.

Once an organisation has decided which businesses to add to the portfolio, it can appoint a manager who knows that the SBU has to focus on performance, competition and resource allocation in a particular business category.

Conclusion

A strategic business unit is an independently managed division of a large organisation with its own vision, mission, and objectives. A strategic business unit (SBU) is an ideal tool to help a business target its group of customers more effectively.

A strategic business unit is commonly product, location, customer segment, or innovation-based. A company can create a strategic business unit in any situation provided there is a clear and unique target market and competitive presence. There must also be scope for the separation or grouping of business activities that can function autonomously. 

Strategic business units(SBUs) improve decision-making, profitability, and increase the likelihood of company longevity due to concentration on market segmentation. However, they are costly and complex to implement and may result in product cannibalisation.

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