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, on the other hand, 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.
How SBUs Came About
Starting in 1920, companies became too large and diversified to manage under a traditional, pyramid organization. The solution was decentralization via the creation of organizational divisions that performed some functions independently of the company headquarters. This strategy was successful until 1960, when growth of profits stagnated. Given strategic direction from headquarters, some divisions could not adjust to their markets while others were stuck in low growth areas.
In 1970, General Electric pioneered the introduction of a new, different approach based on strategic business units. GE brought MacKinsey and Company on board and together they created the Nine Box Matrix design. With this approach, each SBU developed its own strategic approaches to its markets. This difference let each SBU adjust to its market requirements and generate maximum growth for its segment.
Differences in Implementation
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..
Strategic Business Unit Differences
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.
Differences in Results
Each business unit needs to develop a strategy of its own if it is to prevail over the competition, reports the Boston Consulting Group. It is difficult for companies organized along divisional lines to have such a strategy, since divisional structures find it hard 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.
Business growth in size and product categories is the desire of every business owner. You cannot discuss business growth without fully understanding the basics of the strategic business unit [SBU].
Top companies like Coca-Cola adopted the SBU strategy to spark business growth into new market growth spaces and better manage their subsidiary products. Business owners use SBUs to analyze processes and allocate resources properly.
Understanding strategic business units go beyond knowing the definition; you need to learn its characteristics, types, and overall SBU structure.
This article will discuss SBU in strategic management and the strategic business unit structure.
Let’s dive in!
What is a Strategic Business Unit [SBU]?
A strategic business unit [SBU] describes an autonomous business entity or a division of a large company that functions as an independent business.
Strategic business units have visions, missions, and objectives. Although they may be distinct from their parent enterprise, they must still conform to the company's long-term goals.
A strategic business unit can be in the form of separate divisions of a parent company, a product line from the divisions, a specific product or service being offered, or a group whose target is a geographical location or another set of people.
Despite being autonomous and independent, SBU still has organizational oversight as it reports directly to its parent company.
There is a need for an organization to set up a strategic business unit; SBU arises when there is a need to expand. The parent company then sets up strategic business units to focus on specific parts of the business so it can direct its focus on other essential areas.
SBU is suitable for organizations with multiple product structures. Companies that want to diversify into smaller units use a business portfolio approach for corporate strategic analysis.
Boston Consulting Group [BCG] Matrix, designed in 1968 for Boston Consulting Group by Bruce Henderson, is the most popular business portfolio approach for analyzing corporations' production lines or business units.
Examples of a Strategic Business Unit
A strategic business unit, SBU can function as operation units in direct control over its strategy and product lines or as independent businesses.
Irrespective of the form or type of a strategic business unit, they still operate as an independent entity.
Here are some examples of strategic business units.
1. Products
A separate unit can be brought out of a large company solely based on the product categories such a company provides.
An example is a manufacturing company that sets up two product divisions named fashion and equipment with the same brand name and operational functions.
2. Services
Organizations set up strategic business units based on the service they render. For example, a prominent telecom giant can choose to set up a data center division with the sole task of helping the telecom giant provide colocation services to its customers.
3. Location
The location or region category is a way businesses target customers across various geographical locations. It is handy for big multinational corporations looking to expand their reach across new areas.
You can set up a strategic business unit based on the location requirements of an organization far away from the company's corporate headquarters to help pull in more customers.
For example, a European-based fashion brand launching an African-themed clothing line needs to set up a strategic business unit in Africa to help it sell more of its new product line.
4. Customer Segment
The customer segment of a business involves businesses that are in the constant company of servicing high-net-worth individuals.
This practice is pretty standard in the banking sector. Banks and other financial institutions set up a strategic business unit to help these high-net-worth individuals and small businesses with their bookkeeping process and better manage their money and account.
5. Innovation
Innovation is an often tricky aspect for businesses as it pertains to innovative products and services. Beyond ground-breaking technological innovations, there are other innovation types.
Innovative companies tend to experience a considerable inflow of investments that, if not appropriately managed, can lead to mismanagement for your organization.
IT companies divide their technology businesses into strategic business units to help deal with innovation processes and new product launches and to maintain financial controls.
Structure of a Strategic Business Unit
A strategic business unit set up by an organization is composed of operating units functioning as independent businesses.
The corporate headquarters remain at the top of the strategic business unit run, SBUs are next, and the divisions within the SBUs are at the bottom.
Top Corporate Officer
Within the structure of a strategic business unit, the top corporate officer assigns responsibilities of the organization to the division owners for the onward implementation of their business unit strategy.
Division Owners
The division owners under the corporate officer are responsible for creating and executing a strategic viewpoint for the SBU and creating strategic and financial controls.
Senior Executives
The senior executive works under and reports to the chief executive officer [CEO].
In this structure, senior executives have the explicit right to get involved in the decision-making for each unit since both the divisions of business and strategic business units are interconnected.
Business Unit Leaders
Business unit leaders ensure their employees are open to adapting and evolving in a dynamic business environment. Each business unit should have its own strategic direction and own vision.
Independent SBU
When a strategic business unit is independent, and its divisions are connected and come to a strategic viewpoint, each team is considered an independent business.
SBUs can have their own support functions, such as human resource management and training departments. They function as autonomous businesses.
SBU as a Profit Center
A single strategic business unit in an SBU system is a profit center. It focuses on the market segment and product offering. Corporate officers head it as parent supervisors often focus on strategic planning against operational control.
Without constant checking and interactions between the head company and the strategic business unit, the separate SBU groups and divisions get to respond better to a changing business environment.
Characteristics of a Strategic Business Unit
A strategic unit is independent, autonomous and flexible, consisting of separate teams of individual workforce poised to help the department achieve its goals. This business unit has its particular brand or product line that distinguishes it from its parent company.
SBU shares functional programs, facilities, equipment, and human resources with its parent organization.
Generally, a strategic business unit comprises the following distinctive characteristics:
- A separate business or a group of related divisions or enterprises in control of autonomous planning
- Unique and distinct experiences in management that the parent business might lack
- Work for various markets and target different market segments
- Do not have competitors as their rivals or other businesses as a result of their competitive advantage
- The head of a strategic planning unit is solely responsible for the profitability and performance of its specific unit
Pros and Cons of Strategic Business Units
Even with the numerous benefits that strategic business units offer existing and new business, you still need to consider some drawbacks before setting up a strategic business unit.
Pros of Strategic Business Units
Some advantages creating a strategic business unit tends to afford your business include:
- Improves Coordination: Strategic business units bring improved coordination to an organization due to related divisions focusing on complementing each other rather than competing.
- Decentralized Authority: Creating strategic business units reduces the authoritative control and decentralizes it to created units, motivating the organization's workforce to be more effective.
- Improved Speed and Efficiency: With one person at the helm of a strategic business unit's affairs, formulating a comprehensive strategy for the team is relatively more straightforward. With the head of the SBU in regular communication with management, there is an improved rate related to the groups for effective implementation.
- Assures Accountability: Managers are assigned to each division unit and are tasked with ensuring their assigned division's optimal running and performance. Corporate officers hold managers directly responsible for the regular operations of their separate divisions.
- Easier Bookkeeping: Large volume data organizations get to create a simpler and more efficient means of simplifying their bookkeeping process by creating a strategic business unit to monitor and store their data.
Cons of Strategic Business Units
Here are some of the setbacks of setting up a strategic business unit:
- Bridge in Communication: Keeping the flow of communication between units and upper management becomes more challenging with time. It can negatively affect the unit's operations without a clear focal point.
- Internal Tension: Access to funding often brings about tension in an organization. The same is the case with strategic business units, as access to funding sources can cause internal pressure among unit members.
- Increases Operational Cost: A strategic business unit comes as an additional unit layer to an organization and would have its own operational and administrative costs, ultimately increasing its operating cost.
How to Set Up a Strategic Business Unit
Setting up a strategic business unit offers numerous benefits to an organization as they develop and provide new products, markets, and technologies without the usual bureaucracy of working in a vast business organization structure.
A strategic business unit would comprise a team that manages its operations, brand name, objectives, and geographical location where it conducts its operations.
Organizations work better under a unit structure as they are not bound by the limited available resources that confound the larger organization.
After weighing the benefits you stand to gain from setting up a strategic business unit, you need to consider some requirements that determine how to set up your strategic business unit.
Here are some requirements to consider in setting up a strategic business unit for your organization.
1. Organizational Structure
The first requirement to consider in setting up a strategic business plan is to adapt your current organizational structure and prepare it to accommodate new changes.
Your organizational structure is likely to be changed to create room for a different strategic business structure to nurture and flourish.
With your organization adapting its organizational structure, strategic business units are free and independent to experiment and test new methods that drive significant changes.
Joining your business units with each other in the long run can lead to creative ideas being suppressed due to issues around process and branding.
Large companies are not flexible and agile enough to adapt to the needed organizational changes. The best bet for your organization is to separate and make business units separate and distinct.
2. Recruitment and Selection Process
In setting up your strategic business unit, ensuring the same management team works in both the parent company and strategic business unit defeats the purpose.
When setting up a strategic business unit, the recruitment and selection process needs to be changed. The goal is to build a new company within an existing market against a developed one.
Applying the strategy gathered during your time in the head company and incorporating it into a new unit would open you up to challenges as a staff with a success rate in the head company.
A strategic business unit would not function optimally if the management team had little knowledge about the strategic business unit under its care.
The interview process for recruiting new members to your strategic business unit should be focused more on the unit's objectives and less on the parent company. It can be an avenue to build a long-lasting internal relationship between your employees and the team.
3. Remuneration System
Creating a remuneration system for your business is essential in encouraging and motivating your employees, significantly when our business has grown and gained more ground and reputation in the market.
Remunerations can be in the form of shares, money, gifts, promotions, or other financial incentives that motivate employees to perform better.
Financial incentives are only one part of motivating your employees, which is limited. Employees can be adequately inspired by their careers.
Recognizing employees' work and impact on your business and appreciating them for their hard work can motivate them.
4. Corporate Culture
Making considerable tweaks to your organization's corporate culture is crucial when setting up a strategic business unit.
As a business's chief executive officer, you must devise intelligent and innovative ways of keeping your unit and team motivated. It should span beyond financial incentives alone.
Making your employees feel listened to and appreciated for their contributions to the business's success needs to be reflected at all times by management. It minimizes disgruntled employees complaining about the working environment and conditions.
You need to listen to the demands and requirements of your employees and do your best to meet them as long as it conforms to the business goals and objectives. Make changes to the corporate culture to incorporate your employees' needs.