A strategic business unit (SBU) is an independently managed division of a large organization with its own vision, mission, and objectives. A strategic business unit is a division responsible for managing its own strategy and bottom line and in some cases, is operated as a completely separate business. In some cases, SBUs encompass teams within an organization that share operational and administrative functions.
Understanding a strategic business unit
Many strategic business units are large enough to support functional departments such as human resources and training.
Despite enjoying some degree of autonomy, each unit must still report directly to company headquarters.
Some of the main characteristics of a strategic business unit include:
- The competition is clearly and concisely identified.
- A unique objective that differentiates it from the rest of the organization or other business units.
- A well-defined and well-researched target market, and
- The separation of businesses or grouping of similar businesses provided there is scope for autonomous planning and functioning.
General Electric was one of the first companies to implement SBUs in the 1960s.
Today, the company contains approximately 49 separate strategic business units in energy, finance, software, water, and healthcare, among many others.
Strategic business unit examples
Strategic business units can be defined according to the following:
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 and off-road vehicles.
This sort of split into business units based on products fits into a sort of functional organizational structure.
Having this kind of division might help to have a dedicated team for each product.
And the advantage of it might be that each of those products gets dedicated resources.
However, depending on the market size the product is tackling, it might lose priority in the organization.
Take the case of a large company launching an experimental product in an area of the business far from its core product.
In that case, no only that business unit will get minimal resources. But they might get utterly de-prioritized as most of the executive team sees the new product line as distracting.
So to work out, this sort of division based on the product must get priority also from top executives.
Strategic business units are also useful for global organizations operating in many different markets.
The same automobile company may have a North American and European SBU to manage each region’s various rules, regulations, and consumer preferences.
This sort of organizational structure tackles different markets with different contexts.
It’s critical, though, that while each market operates independently, there is thought coordination between the various geography, as transfer learning within the organization.
Some companies, such as banks, may have separate business units for high-net-worth customers and small business loans.
This type of organizational structure is also suitable to prevent the company lose track of its core customer base, which finances the business.
Tech companies may also create new SBUs for innovations they do not expect to see a return on in the short term.
This organizational structure is compelling to bet into areas that ultimately move beyond the core business.
They call for a potentially renewed business model.
Like Google does with its other bets.
In general, any organization should have innovation units, which are like small startups within organizations, which not only act independently but also have the freedom to build their own culture.
Indeed, since startups often operate within a counter-culture environment, enabling these innovation units to operate in the proper context is critical for them to succeed.
Advantages and disadvantages of strategic business units
Let’s now take a look at some of the general advantages and disadvantages of strategic business units.
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.
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 organization as a whole.
With markets become increasingly dynamic, only the most adaptable businesses will survive over the long term.
The SBU structure allows each subunit to evolve as marketplace or consumer demographics evolve.
Again, these changes in strategy can be made without negatively impacting the broader organization.
Creating semi-autonomous SBUs that still work to further organizational 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 utilization.
In some cases, one strategic business unit may compete with another unit from the same organization.
While it is possible for a company to dominate its market with an umbrella of products, the potential for so-called product cannibalization exists.
Strategic business units are also costly to implement.
With each new unit requiring management, branding, recruitment, accounting, and other personnel, the organization must fill a range of positions many times over.
- A strategic business unit is an independently managed division of a large organization with its own vision, mission, and objectives.
- 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 improve decision-making, profitability, and increase the likelihood of company longevity. However, they are costly and complex to implement and may result in product cannibalization.
What are some examples of strategic business units?
Strategic business units can usually be organized based on the following:
- Product: with a company organizing strategic units based on product division.
- Location: with business units organized around various geographies.
- Customer segment: with strategic units organized around high-net-worth customers vs. smaller segments.
- Innovation: this can be a compelling organizational structure where the company has dedicated innovation units focused on bets beyond the core business model.
What are the advantages of strategic business units?
Some of the advantages of strategic business units comprise:
What are some disadvantages of strategic business units?
Some disadvantages of strategic business units might be:
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