When discussing business growth, we often come across the topic SBU in strategic management. To grow the size of their businesses and offer vast varieties of products, organizations have to adopt the SBU strategy. When Coca-Cola aspired to tap into other market spaces, they reallocated teams and resources to manage subsidiary products like Nestea, Aquabona and Fanta. They set up these strategic business units (SBUs) for an uninterrupted focus on each of these products over the long term.
But is it enough to simply ask, “What is an SBU?” The fundamentals lie in the characteristics of a strategic business unit and understanding the SBU structure. Managers must also know the different types of strategic business units to analyze processes and allocate resources effectively.
After understanding the importance of SBU in strategic management, we’ll discuss the meaning of a strategic business unit, its advantages, disadvantages and the strategic business unit structure.
What Is A Strategic Business Unit?
If a large organization adopts the SBU strategy, it forms fully functional departments to manage specific products, services, customers or a geographical area. These departments are independent and set up with the objective of increasing profits.
A strategic business unit is a term used to represent such an independent, specialized department or a sub-unit that focuses on a given objective. It has its own vision, course and mission. Planning for a strategic business unit is done separately, its goals are different from that of the parent organization and it focuses on long-term business performance.
An SBU strategy provides working independence to these sub-units, but they’re required to submit status reports on performance and processes to the parent organization. Some SBUs may have the power to make crucial business decisions but most have to report to the head office.
One such case is LG, which has a long list of products managed by separate divisions. Each strategic business unit has to not only manufacture and deliver products but also make critical decisions and manage investments. This way the parent organization can focus on tracking income, costs and profits.
Over the years, organizations like LG and Coca-Cola have redefined the meaning of strategic business units by showing us that SBUs don’t have to be small projects. They can be large businesses with strong support functions. They can control marketing, human resource management, training and development. A strategic business unit can be extremely beneficial for an organization in the long run, especially if it has multiple product structures. Organizations that consider SBU in strategic management can quickly and effectively respond to shifts in the market.
Characteristics Of Strategic Business Units
The SBU structure adopted by an organization should play to its strengths and make good use of the opportunities in the industry. Let’s look at the characteristics of strategic business unit:
- As the meaning of a strategic business unit suggests, it’s a strategy to set up a separate unit of business or a group of businesses that are allowed to plan autonomously
- The strategy deals with a homogenous set of markets to minimize diversity. It allows a manager to formulate and implement internally consistent and coherent business strategies
- Responsibilities of profitability, strategic planning and performance lie with the heads of the respective business units
- Each SBU offers unique products and services. No two SBUs within a firm should compete with the same products for the same customers. Organizations avoid duplication of products and effort to maximize economies of scale within the SBUs
When considering an SBU structure, organizations may not be able to meet all these ideals. We often see trade-offs between many small SBUs that are homogeneous and fewer, easily manageable SBUs.
Types Of Strategic Business Units
The portfolio model developed by Boston Consulting Group offers a useful approach to measure SBU performance based on the rate of market growth and market share. This divides strategic business units into categories that can help a manager better allocate resources going forward. Here we have the different types of strategic business units:
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
Organizations 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. Organizations find it difficult to decide whether to invest in these businesses or eliminate them.
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 organizations usually choose to invest resources in SBUs that show more promise.
Once an organization has decided which businesses to add to the portfolio, it can appoint a manager who knows what an SBU is to focus on performance, competition and resource allocation in a particular business category.
Now that we know what a strategic business unit is, let’s find out about the SBU structure.
Strategic Business Unit Structure
A strategic business unit structure has independent operating units that function as autonomous businesses. Within the structure, top corporate officials assign responsibilities to division owners for business unit strategy and regular operations. The parent officers are tasked with developing and executing comprehensive strategies and managing SBUs with financial and strategic controls. Senior executives make decisions for each unit as the SBU structure connects the units with the related divisions of the business.
There are three levels in a strategic business unit structure:
- At the top sits the corporate headquarters that monitors performance and process
- The next level has SBU groups that carry their status
- At the bottom are divisions assembled according to the similarities with SBUs
From a strategic viewpoint, each strategic business unit is an independent business. In this system, a single SBU is considered a profit center led by corporate officials. Parent supervisors don’t focus on operational control as it allows divisions to quickly respond to changing industry environments.
Advantages And Disadvantages Of Strategic Business Units
A strategic business unit is important for an organization focused on growing its product range and market share as it can simplify the process of strategic management. Have a look at how SBUs benefit organizations:
1. Improves Coordination
Since strategic units are similar, there is seamless coordination between divisions. The focus is on complementing rather than competing.
2. Decentralizes Authority
Reducing the span of control decentralizes authority. Decentralization can positively impact an organization’s motivation system and effectiveness. It particularly motivates junior employees by empowering them.
3. Speed and Efficiency
As similar SBUs are managed by one person, formulating strategy becomes easier. The higher authority communicates with the manager, who relays objectives to implement them effectively. Each division has to participate in planning and implementation.
4. Assures Accountability
Since each division has its own manager, performance becomes their responsibility whether it’s optimal, below par or exceptional. Corporate officers sitting in the head offices can easily hold managers directly responsible for operations, profits and losses.
5. Easier Bookkeeping
Organizations that process high volumes of data can simplify their bookkeeping process in monitoring and storing data.
Although a strategic business unit can offer these advantages, we must consider the associated drawbacks as well. As a manager, you must know the disadvantages of strategic business units to not only decide whether to set one up but also to plan ways around them. Here are some of the disadvantages.
- This structure introduces an additional layer of units which increases operational costs and administrative overheads
- A direct link between divisions and head office is missing. This contributes to communication delays, hinders flow of information, affects decision-making and prevents accurate assessment of performance
- Decentralization affects flexibility and compromises operations
- Competition for resources and funding within the organization leads to internal conflicts, unhealthy competition and sometimes malpractice
Managers have to focus on the positives and devise ways to tackle the disadvantages. They can focus on improving employee relations by correct resource allocation and come up with solutions to improve communication gaps. They must find ways to improve costs and stay prepared for operational delays.
Strategic business units support coordination and cooperation across multiple departments within an organization. It’s challenging to set up such a structure but rewarding for long-term success and profit. If a manager fully understands what an SBU is, they can use it as a tool to target a specific customer group or geographical location.
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