This article provides a practical explanation of the Strategic Business Unit (SBU). After reading, you’ll understand the basics of this powerful strategy tool.
What is a Strategic Business Unit (SBU)?
A Strategic Business Unit (SBU) is a fully independently operating entity or unit of a business with its own vision and course. Although it operates independently, it has to report directly to the organisation’s head office about the status of their operations and performance. Strategic Business Units (SBU) are often aimed at a specific market.
SBUs are large enough to have their own support functions in terms of Human Resource Management (HRM), training & development, and marketing. The use of SBUs offers several advantages to organisations. The structure works best for organisations with multiple product structures. Examples of this are LG and Proctor & Gamble. The former manufactures many consumer products, such as fridges, televisions, air conditions, and so on. These are made by different ‘small’ units, making it possible to track costs, income, and profits independently. When a unit is labelled as an SBU, it’s given full independence when it comes to decision making, investments, and budgets. Another advantage of this business structure is that it can respond quickly to shifts in product markets.
Strategic Business Units (SBU) structure
The structure of an organisation with SBUs consists of operational units. In some cases, these units operate as autonomous companies. The highest corporate official assigns the responsibilities for the company to the division managers. The parent company is also responsible for coming up with and executing the overall strategy and managing the SBU through strategic and financial checks.
A single Strategic Business Unit (SBU) is considered a ‘profit centre’. It is run by supervisors. The emphasis from the parent company is on strategic planning, not on checks. The less checking and interactions there are between the SBUs and the parent company, the quicker SBUs can respond to changing business environments.
Setting up a strategic business unit
By creating Strategic Business Units (SBU), companies can develop and gain access to new products, markets, or technologies, without experiencing the limitations of working in a huge organisation. The business unit has its own dedicated management team, own brand and reputation, own objectives, and often other physical locations. It benefits from the advantages related to working in a smaller organisation, but is not bound by limited availability of resources. At the same time, the smaller business also benefits from the advantages of a larger company, such as an established brand and broad base of customers. The challenges larger organisations are faced with, such as excessive bureaucracy, can be avoided.
In order to make independent and effective Strategic Business Units from a large company, there are a few requirements to be met. The most far-reaching changes that have to be implemented relate to the organisational structure, recruitment & selection, corporate culture, and the remuneration system. These are explained below.
1. Adapting the organisational structure
Naturally, the organisational structure is the first thing that will have to be changed when switching to a Strategic Business structure. Large bureaucratic organisations aren’t flexible and agile.
Another big advantage of adapting the organisational structure is the independence and freedom this grants the separate business units. By separating business units from each other, teams are given room to experiment and break things, without this creativity being suppressed by process and branding problems.
2. Changing the recruitment and selection process
Developing a new company is different than leading an established one. People who excel in an established company may have great difficulty when asked to run a new business and vice versa. In order to create a strong culture, the focus during the interview process should be on understanding the organisational objectives. This is a useful way to keep a team motivated. Only hire people who want to build a new organisation from the ground up and want to learn to work effectively in an uncertain environment with lots of experiments.
3. Adjusting the remuneration system
The rewards for starting a successful business are obvious. Fame and fortune. But bigger companies can’t always offer shares or other important financial incentives to their employees. Luckily, they don’t always have to. As Frederick Herzberg describes in his two-factor theory, financial incentives only partially influence employee motivation. Employees are also motivated by their own careers. They want to be recognised for their work within the company and grow along with it.
4. Changing the corporate culture
It’s also important that employees experience other benefits to keep them motivated, or that they are at least satisfied about the work environment and working conditions. Employees want to feel appreciated for their contributions to the organisation. It’s therefore a good idea to fulfil employee wishes or demands as much as possible, if this helps them to become even more effective in their work. If a computer programmer works better at night, then they should be offered the option of working at night.
Difference between divisions and Strategic Business Units
A larger company is likely organised in divisions to divide the management of the company in to smaller, organisationally related parts. The head office will in that case still be in full control of the divisions. Strategic Business Units are organisationally complete, independent units that develop and implement their own strategies. They do still report to headquarters about their performance, but they operate completely independently and are organised in a way that suits their market. The units are often large enough to implement their own internal management structures.
Switching a larger company to these strategic units means a completely different management structure and approach to business. A company’s division reflects how the activities of the company can best be carried out. Divisions arise from analyses of business activities, while strategic units should be set up in order to respond to the external market. Instead of looking at themselves and analysing themselves, companies should analyse and study the market. The main difference between divisions and Strategic Business Units (SBU) is that divisions have an internal focus, while the focus of strategic units is directed outwards. The market.
Strategy and structure
The fact that SBUs have been developed emphasises the differences and necessity of strategic leadership within an organisation. Developing a general strategy for a diversified business is difficult and often means that certain strategic elements do not entirely match the different divisions. A department can often receive instructions that are unclear or not fully applicable. When a company has adapted its structure and converted divisions into strategic units, they can develop their own strategies. They can then also analyse their own competitive position, develop products, and meet the needs and demands of their customers in specific markets. Divisions tend not to do those kinds of things.
Value of business processes
Companies that are organised based on different divisions often find it difficult to determine which activities and business process actually generate the most value and which ones should be ceased. This applies mainly to businesses where the divisions are purely functional in nature, such as sales, service, and logistics. Although different divisions can have different profit centres, decisions about the allocation of resources are not easy ones. For Strategic Business Units (SBU), it’s easier to make such decisions, making their use of resources more likely to be efficient. Strategic units who are the market leader in a certain segment are likelier to be allocated resources.
Pros and cons of Strategic Business Units (SBU)
- Strategic Business Units (SBU) support the collaboration between different company departments
- SBUs make strategic management simpler
- SBUs are efficient for the bookkeeping of larger organisations
- SBUs are easier to monitor and check
- Communication with upper management can be a challenge
- Can lead to internal tension as a result of access to sources of funding
SBU and GE model
One of the way in which companies assess the success or failure of a strategic unit, is by using the GE model. General Electric uses a simple diagram of nine boxes and three essential labels to define the importance of each business unit. This is done in terms of uniqueness and appeal for each industry and the strength of individual business units in this industry.
These criteria make up the foundation of an analysis GE uses to assess the viability of a strategic unit in the long term. The idea behind the model is to determine the appeal and relative strength of a unit to see if they would be successful, which ones would perform averagely, and which ones would perform poorly and therefore have to be closed.
Strengths and weaknesses
Managers who wish to apply the GE model must be able to accurately define the strengths and weaknesses of each business unit. They then have to be able to assess the uniqueness of the strategic units in terms of high or low. Companies that perform strongly are businesses with strong business strengths and high uniqueness values in a sector. Companies that perform averagely, are in the mid-range. Weak business units don’t have strengths and are not very unique in the sector.
Strategic Business Units (SBUs) core concepts
- An SBU is a business or collection of related businesses that operate independently from the rest of an organisation. These units can therefore be planned separately. An SBU has its own marketing strategy, own business objectives and other objectives that may differ from those of the parent company.
- An SBU has its own competitors, so its own competitive position as well. This structure makes it possible to create unique business units that focus on different markets in which the company is active. This stimulates competition and makes markets and revenues grow.
- SBUs have their own managers who are responsible for the strategic planning process and the performance of the unit.
Now it’s your turn
What do you think? Are you familiar with the explanation of a Strategic Business Unit (SBU)? Do you work in a strategic business unit? Do you think it would be a good idea for larger organisations to split up into strategic business units? What are some of the pros and cons of Strategic Business Units (SBU) you’ve noticed? Would you like to share any? Do you have any other tips or additional comments?
Share your experience and knowledge in the comments box below.
- Dvir, D., & Shenhar, A. (1992). Measuring the success of technology-based strategic business units. Engineering Management Journal, 4(4), 33-38.
- Dvir, D., Segev, E., & Shenhar, A. (1993). Technology’s varying impact on the success of strategic business units within the Miles and Snow typology. Strategic Management Journal, 14(2), 155-161.
- Hinterhuber, H. H., & Levin, B. M. (1994). Strategic networks—the organization of the future. Long range planning, 27(3), 43-53.
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