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Strategic Business Unit

A Strategic Business Unit (SBU) is a separate, specialised subsystem in the company which acts as an independent company. Having SBU assists organisations to plan their strategies and make manufacturing decisions. A Strategic Business Unit (SBU) is a basic organisational unit for which it is meaningful to formulate a separate competitive strategy (Grant, 2002). 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. "SBUs operate as autonomous units, and have the primary responsibility and authority for managing their basic functions (Johnson et al., 2008)."[1]

A strategic business unit or SBU operates as an independent entity, but it has to report directly to the headquarters of the organisation about the status of its operation. It operates independently and is focused on a target market. It is big enough to have its own support functions such as HR, training departments etc. There are several benefits of having an SBU. This principle works best for organisations which have multiple product structure. The best example of SBU are companies like Proctor and Gamble, LG etc. These companies have different product categories under one roof. For example, LG as a company makes consumer durables. It makes refrigerators, washing machines, air-conditioners as well as televisions. These small units are formed as separate SBUs so that revenues, costs as well as profits can be tracked independently. Once a unit is given an SBU status, it can make its own decisions, investments, budgets etc. It will be quick to react when the product market takes a shift or changes start happening before the shift happens[2]


Strategic Business Unit Structure

How is an SBU structured[3]
The structure of SBU consist of operating units; wherein the units serve as an autonomous business. The top corporate officer assigns the responsibility of the business to the managers, for the regular operations and business unit strategy. So, the corporate officer is accountable for the formulation and implementation of the comprehensive strategy and administers the SBU by way of strategic and financial controls.

In this way, the structure combines related divisions of business into the strategic business unit and the senior executive is empowered for taking decisions for each unit. The senior executive works under the supervision of a chief executive officer.

There are three levels in a strategic business unit, wherein the corporate headquarters remain at the top, SBU’s in the middle and divisions clustered by similarity, within each SBU, remain at the bottom. Hence, the divisions within the SBU are associated with each other, and the SBU groups are independent of each other. From the strategic viewpoint, each SBU is an independent business.

A single strategic business unit is considered as a profit centre and governed by the corporate officers. It stresses over strategic planning instead of operational control so that the separate divisions of the SBU can respond as fast as they can, to the changing business environment.


Strategic Business Unit Structure
source: Business Jargons


Creating A Strategic Business Unit

How to Create a Strategic Business Unit[4]
Creating a strategic business unit enables companies to pursue new businesses, products, markets, and technologies, without the constraints of working within a large organization. The business unit has a dedicated management team, a unique brand, different goals than the parent organization, and often a different physical space. It benefits from the advantages of a startup, such as an autonomous team, but isn’t strapped for resources like most startups are. And it benefits from the advantages of a large company, such as an established brand and customer base, but can sidestep the challenges faced by large companies, such as excessive bureaucracy.

In order to, create a business unit that builds successful products, you need to get a few things right: the organizational structure, hiring, culture, and compensation.

  • Organizational structure: “Move fast and break things” has long been the mantra of Silicon Valley startups. These startups are always testing new ideas and iterating quickly based on customer feedback. “Breaking things” is an inevitable part of this process. In other words, many of your ideas are likely to fail. In “Incubation is Product Management,” Jeremiah Zinn, Chief Product Officer at Bark & Co., said that his team doesn’t ultimately pursue about 80% of their ideas. Separating the business unit from the rest of the organization gives the team room to experiment – and break things – without being stifled by process and brand concerns.
  • Hiring: Building a new business is different than operating an existing business. People who excel at operating existing businesses may struggle at starting a new business, and vice verse. In “Building Human Machines is Product Management,” Tommi Forsström, VP of Product at Shutterstock, shared his approach to hiring, and how hiring helps him instill strong culture. During job interviews, Tommi asks questions that help him understand a candidate’s long-term goals, and works to help the candidates he hires to achieve those goals. This has been a helpful strategy for Tommi to keep his team motivated. Hire people who want to build a business from the ground up and work effectively in an environment of uncertainty and experimentation.
  • Culture: If you walk into a startup’s office, you’re likely to find a ping pong table and a keg of beer. While it’s easy to understand why employees would appreciate such perks, Lina Stern, Head of Employee Experience and Organizational Design at LearnVest, said that in order to truly create a culture that keeps employees motivated to innovate, you need to do more. “People want to feel valued for the contributions they make to the organization,” she said. Lina recommends personalizing your approach to employee experience according to the values of the company and what will help each individual employee work most effectively. So, if your developers do their best work at night, Lina believes it’s ok for them to stroll into the office at 11 am. These practices, along with encouraging employees to test ideas and learn from them, help create the right environment for new product development.
  • Incentives: The reward for starting a successful company as an entrepreneur is obvious: wealth and fame. Unfortunately, large corporations can’t always offer stock or other significant financial incentives. Fortunately, they don’t need to. According to Bob Dorf, Author of The Startup Owner’s Manual, employees are often motivated by career upside. They want to be recognized for their work and grow within the company. Both Bob and Aaron Eden, a former innovation leader at Intuit, recommended giving the team exposure to senior leadership to keep them motivated. Give your business unit opportunity to present progress to senior leadership at the parent company, and invite senior leadership to join brainstorming sessions.


Strategic Business Unit - Commonalities and Success Factors

Commonalities and Success Factors of SBU [5]
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 manner in which the corporation handles new changes in the market.


Strategic Business Unit
source: Article 1000


Strategic Business Unit Analysis - The GE Matrix

The GE Model of SBU Analysis[6]
Companies adopting the GE model must be able to define each strategic business unit’s strengths in terms of them being strong or weak. Next, companies must be able to define their business unit’s uniqueness in terms of it being high or low. In some examples, the aforementioned uniqueness range is defined as being between high attractiveness and low attractiveness.

Businesses that are strong performers are ones with strong business strengths and high industry uniqueness values. Businesses that are average performers fall in the middle range, while poor business units have weak business strengths and low industry uniqueness. The entire model is depicted below.


GE Model of SBU Analysis
source: Ian Johnson

The GE framework is based on using nine boxes within the grid, and then using nine different strategies for an individual business unit, depending upon which box that business unit falls under. When you've identified your specific business strength and industry uniqueness characteristics, you would then provide individual grades for each variable within each category. Afterwards, you would see where each business falls on the grid.

For a corporation of GE's size, it isn't uncommon to have dozens of business units all over the matrix. This is ultimately why having nine different strategies corresponding to each box is so important. Ultimately, a high number of business units implies that there should be multiple strategies to plan for any position on the grid.

This ultimately requires a substantial investment of time and resources, the likes of which most companies simply don’t have. This makes the model an extremely time consuming and involved affair. However, instead of dialing into the nine specific strategies, we’ll define individual strategies for our three strategic business unit designations. In essence, we'll simplify the analysis so that we can analyze three simple strategies for a successful business unit, an average business unit and a poor performing business unit. We'll use our aforementioned grading rule or score value of 1 to 5.

SBU Successful (scores between 4 and 5): In this case, a successful business unit is one that has "strong" business strengths and "high" industry uniqueness. Defend your position as the market leader. Focus your efforts on what is working and stay the course. Be cognizant of competition as they may try emulating your business unit and its strategies. Protect your business strengths and continually strive to improve upon them.

SBU Average (scores between 3 and 4): This is a business unit with average business strengths and average industry uniqueness. Isolate low grades and corresponding variables. Identify unique strategies to improve those lower grades. Define what is lacking and what ultimately needs to improve. Accentuate strengths and mitigate the impact of the weaknesses within the business.

SBU Poor (scores below 3): This is a strategic business unit that has "weak" business strengths and "low" industry uniqueness. Define the poor performance of this particular SBU. In some cases, it may simply be a short-term issue, one that will easily rebound once customer demand picks up. Before making any decisions on the future of this business unit, start first by defining the current conditions. However, if this has been a going concern for some time, then it’s likely time to abandon the business altogether.


Strategic Business Unit Vs. Division

The Difference Between a Strategic Business Unit & a Division[7]
Large, diversified companies organize themselves into divisions to break the management of the company into smaller, organizationally cohesive parts. The company headquarters still gives the divisions strategic direction. Strategic Business Units, or SBUs, are organizationally complete and separate units that develop their own strategic direction. They still report back to company headquarters but operate as independent businesses organized according to their target markets. They are often large enough to have their own internal organizational divisions.

For a company to implement the SBU approach means adopting a completely different management style and company orientation. Divisions in a company reflect how the company's business can best be carried out. Divisions develop from analyses of the company's operations while SBUs must be set up to respond to the realities of the external market. Instead of looking at and analyzing themselves, companies must analyze markets. The main difference is that divisions are internally focused while SBUs look outward.

The creation of SBUs highlights the differences in strategic direction from a divisional organization. Trying to develop an overall strategy for the direction of a diversified company is difficult and means that particular strategic elements are never quite right for all the divisions. A division may often receive directions that are unclear or not completely applicable. Once a company sets up SBUs, they develop their own strategies. They analyze their competitive position in their market, they develop products that respond to the needs of their customers and they evaluate their performance. Divisions generally do not carry out such tasks.

It is difficult for companies organized along divisional lines to identify which activities create the most value and which should be abandoned. This is especially true of companies where the divisions are functional, such as those with operating, sales and service divisions. While divisions may have profit centers, decisions on where to best allocate resources are often not easy. For companies organized along SBU lines, such decisions are easier and result in a more efficient use of resources. It is clear when an SBU is active in a growing or stagnant market and whether it is a market leader. SBUs that are leaders in growing markets are assigned additional resources while those that lag in stagnant markets are shut down so that the company as a whole operates more efficiently.


Strategic Business Unit - Advantages and Disadvantages

Understanding the Advantages and Disadvantages of SBU[8]

Advantages of strategic business units

The main advantages are:

  • SBU supports cooperation between the departments of the company which has a similar range of activities,
  • improvement of strategic management,
  • improvement of accounting operations,
  • easier planning of activities.

Disadvantages of strategic business units

  • difficulty with contact with higher level of management,
  • may cause of internal tension due to difficult access to internal and external sources of funding,
  • may be the cause of the unclear situation with regard to the management activities.


See Also

Organization
Organizational Structure
BCG Matrix
GE/McKinsey Matrix
Business Strategy
Business Capability


References

  1. Defining Strategic Business Unit KB Manage
  2. What is Strategic Business Unit (SBU) Economic Times
  3. The Structure of Strategic Business Unit Business Jargons
  4. How to Create a Strategic Business Unit This is Product Management
  5. Commonalities and Success Factors of SBU Wikipedia
  6. The GE Model of SBU Analysis driveyoursuccess.com
  7. The Difference Between a Strategic Business Unit & a Division Chron
  8. What are the Advantages and Disadvantages of Strategic Business Unit? CEOPedia


Further Reading

  • SBU Concept of Business Structure and Management CA. O. P. Jagati
  • Prioritizing strategic business units in the face of innovation performance: Combining fuzzy AHP and BSC Behrooz Noori
  • Adoption of strategic business unit system and associated organizational changes for April 2004 Tokyo Gas Co. Ltd.
  • Governance of Diversified Strategic Business Units: the Case of a Large Chinese Chemical Company JIAO Jinsong
  • SBU Strategies, Corporate-SBU Relations, and SBU Effectiveness in Strategy Implementation Anil K. Gupta