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.
| Aspect | Explanation |
|---|---|
| Definition | A Strategic Business Unit (SBU) is a semi-autonomous organizational unit or division within a larger company that operates as an independent business. SBUs are typically responsible for a distinct product line, brand, market segment, or geographic area. They have their own strategic goals, budgets, and management teams, allowing them to make decisions tailored to their specific market and competitive environment. The purpose of creating SBUs is to improve focus, accountability, and performance within the organization by breaking it down into smaller, more manageable units. |
| Characteristics | – Autonomy: SBUs have a degree of autonomy in decision-making, including strategic planning, budgeting, and resource allocation. – Profit Center: They are often treated as profit centers, with their own profit and loss (P&L) statements to measure financial performance. – Unique Strategy: Each SBU may have a unique strategic approach based on its market or product focus. – Accountability: SBUs are held accountable for achieving their specific goals and objectives. – Resource Allocation: They control their resources and investments to pursue growth opportunities or address challenges. |
| Purpose | – The primary purpose of SBUs is to enhance the organization’s ability to manage and compete in diverse markets or industries. – They facilitate better strategic alignment with market needs and enable quicker responses to changes in market conditions. – SBUs can foster innovation and entrepreneurship within the organization by allowing units to experiment and take calculated risks. |
| Benefits | – Focus: SBUs can focus on their specific markets or products without being distracted by the broader concerns of the parent company. – Efficiency: They can allocate resources more efficiently, avoiding resource conflicts that can arise in centralized organizations. – Market Responsiveness: SBUs are often more responsive to changing market dynamics and customer needs. – Accountability: Clear accountability for performance encourages responsible decision-making. |
| Challenges | – Coordination: Ensuring that SBUs align with the overall corporate strategy and cooperate when necessary can be challenging. – Resource Allocation: Allocation of resources among SBUs can be contentious if not managed well. – Overhead: Maintaining multiple SBUs can increase administrative and management overhead. |
| Applications | – SBUs are commonly used in large, diversified organizations with multiple product lines or operating in various markets. – They are prevalent in industries such as consumer goods, technology, and healthcare. |
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:
Product
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.
Location
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.
Customer segment
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.
Innovation
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.
Advantages
Profitability
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.
Decision-making
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.
Longevity
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.
Disadvantages
Complexity
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.
Competition
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.
Cost
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.
Key takeaways
- 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.
Key Highlights
- Definition: A Strategic Business Unit (SBU) is an autonomous division within a larger organization, equipped with its distinct vision, mission, and objectives. SBUs can operate as separate businesses and are responsible for their strategy and bottom-line results. SBUs can also encompass teams that share operational functions while maintaining independent planning and operations.
- Understanding SBUs:
- SBUs are often large enough to have functional departments such as HR and training, yet they report to the organization’s headquarters.
- Key characteristics of SBUs include clear competition identification, unique objectives, well-defined target markets, and the ability to operate autonomously.
- The concept of SBUs was pioneered by General Electric in the 1960s, and today, many large organizations use this framework to manage diverse business areas.
- Strategic Business Unit Examples:
- Product-based SBUs: Divisions organized by product category, such as luxury sedans and off-road vehicles in an automobile manufacturer.
- Location-based SBUs: Created by global organizations to manage different markets or regions, like North American and European divisions.
- Customer segment-based SBUs: Division focused on specific customer segments, e.g., high-net-worth customers and small business loans in a bank.
- Innovation-based SBUs: Created for experimental innovations with long-term potential that may deviate from the core business model.
- Advantages and Disadvantages:
- Advantages:
- Profitability: SBUs can tailor value propositions for target audiences, leading to higher profitability due to specific budget allocation.
- Decision-making: SBUs can respond quickly to challenges without impacting the entire organization’s decision-making process.
- Longevity: Adaptability to changing markets or consumer trends allows SBUs to evolve independently over the long term.
- Disadvantages:
- Complexity: Balancing autonomy while aligning with organizational objectives can be complex, considering cultural, market, and resource factors.
- Competition: Competing SBUs within an organization may lead to product cannibalization and market confusion.
- Cost: Implementing SBUs requires substantial resources for management, branding, recruitment, and more.
- Advantages:
- Key Characteristics:
- An SBU operates as an autonomous division with distinct objectives within a larger organization.
- SBUs can be product, location, customer segment, or innovation-based, offering flexibility in various scenarios.
- SBUs enhance decision-making, profitability, and adaptability but can be complex and costly to implement and may lead to competition or cannibalization.
Case Studies
| Company | Description | Implementation of SBUs | Purpose of SBUs |
|---|---|---|---|
| General Electric | A multinational conglomerate. | GE uses SBUs to organize its diverse businesses (e.g., aviation, healthcare) into distinct units. | Improve focus, accountability, and performance in each business segment. |
| Procter & Gamble | A consumer goods company. | P&G employs SBUs to manage its various product categories (e.g., beauty, healthcare) separately. | Enhance decision-making, innovation, and market responsiveness. |
| IBM | A technology and consulting firm. | IBM utilizes SBUs to organize its services and product lines, such as cloud computing and AI. | Streamline operations, allocate resources efficiently, and address specific markets. |
| Nestlé | A global food and beverage company. | Nestlé uses SBUs to manage its diverse portfolio of brands, with separate units for different product categories. | Optimize brand management and market focus. |
| Johnson & Johnson | A healthcare conglomerate. | J&J employs SBUs for its pharmaceutical, medical device, and consumer health divisions. | Facilitate innovation and compliance in each healthcare sector. |
| Microsoft | A technology company with multiple product lines. | Microsoft uses SBUs to organize its products (e.g., Windows, Office, Azure) for better management and focus. | Improve product development, marketing, and customer support. |
| Toyota | An automotive manufacturer. | Toyota employs SBUs for its various car brands (e.g., Toyota, Lexus) to cater to different market segments. | Enhance brand differentiation and customer targeting. |
| Coca-Cola | A global beverage company. | Coca-Cola utilizes SBUs to manage its various beverage brands (e.g., Coca-Cola, Sprite, Dasani) separately. | Optimize brand strategies and market expansion. |
| Related Frameworks, Models, or Concepts | Description | When to Apply |
|---|---|---|
| Porter’s Generic Strategies | Porter’s Generic Strategies is a framework developed by Michael Porter that outlines three generic competitive strategies that businesses can pursue to gain a competitive advantage in their respective industries: cost leadership, differentiation, and focus. Cost leadership involves becoming the lowest-cost producer in the industry, differentiation focuses on creating unique products or services that are valued by customers, and focus concentrates on serving a specific market segment or niche. By adopting one of these strategies, strategic business units (SBUs) can position themselves effectively within their markets and achieve sustainable competitive advantage. | Apply Porter’s Generic Strategies to determine the strategic direction of SBUs within a larger organization. Use it to assess the competitive landscape, identify key success factors, and align the SBU’s strategy with its competitive strengths and market opportunities. Implement Porter’s Generic Strategies as a framework for strategic planning, resource allocation, and performance evaluation to guide SBUs in achieving their business objectives and gaining a competitive edge in the marketplace. |
| SWOT Analysis | SWOT Analysis is a strategic planning tool that helps organizations identify their internal strengths and weaknesses, as well as external opportunities and threats. By conducting a SWOT analysis, SBUs can assess their competitive position, understand market dynamics, and develop strategies to leverage their strengths, address weaknesses, capitalize on opportunities, and mitigate threats. SWOT analysis provides a comprehensive framework for aligning the SBU’s capabilities with its strategic goals and responding effectively to changes in the business environment. | Apply SWOT Analysis to assess the internal and external factors influencing the performance of SBUs within a larger organization. Use it to identify areas of competitive advantage, such as strong brand reputation or technological expertise, as well as areas of vulnerability, such as limited resources or market saturation. Implement SWOT Analysis as a framework for strategic decision-making, business planning, and risk management to help SBUs capitalize on their strengths, overcome challenges, and achieve sustainable growth and profitability. |
| Ansoff Matrix | Ansoff Matrix is a strategic planning tool that helps organizations identify growth opportunities by analyzing four strategic options: market penetration, market development, product development, and diversification. Market penetration involves selling more of existing products or services to current customers, market development focuses on entering new markets with existing products or services, product development entails introducing new products or services to existing markets, and diversification involves entering new markets with new products or services. By using the Ansoff Matrix, SBUs can evaluate different growth strategies and choose the most suitable approach to expand their businesses and increase market share. | Apply Ansoff Matrix to explore growth opportunities for SBUs within a larger organization. Use it to assess the potential risks and rewards associated with different growth strategies, such as expanding into new markets or diversifying product offerings. Implement Ansoff Matrix as a framework for strategic decision-making, portfolio analysis, and resource allocation to help SBUs identify growth initiatives that align with their capabilities, market dynamics, and long-term objectives and drive sustainable value creation. |
| BCG Growth-Share Matrix | BCG Growth-Share Matrix, also known as the Boston Consulting Group Matrix, is a portfolio analysis tool that helps organizations evaluate their business units based on two key dimensions: market growth rate and relative market share. The BCG Matrix categorizes SBUs into four quadrants: stars (high growth, high market share), cash cows (low growth, high market share), question marks (high growth, low market share), and dogs (low growth, low market share). By classifying SBUs into these categories, organizations can allocate resources effectively, prioritize investment opportunities, and manage their portfolio of businesses for optimal performance and growth. | Apply BCG Growth-Share Matrix to assess the strategic position and performance of SBUs within a larger organization. Use it to identify SBUs with high growth potential and market leadership that warrant investment and support, as well as those with low growth or market share that may require restructuring or divestment. Implement BCG Matrix as a framework for portfolio management, strategic planning, and resource allocation to help SBUs maximize their contribution to overall organizational success and achieve sustainable growth and profitability. |
| Value Chain Analysis | Value Chain Analysis is a strategic management tool that helps organizations analyze the activities involved in delivering a product or service to customers and identify opportunities for cost reduction, differentiation, and value creation. The value chain consists of primary activities such as inbound logistics, operations, outbound logistics, marketing and sales, and service, as well as support activities such as procurement, human resource management, technology development, and infrastructure. By conducting a value chain analysis, SBUs can identify areas where they can add value, streamline processes, and gain competitive advantage in their respective markets. | Apply Value Chain Analysis to assess the competitive position and performance of SBUs within a larger organization. Use it to identify core competencies and value-adding activities that differentiate the SBU from competitors and create value for customers. Implement Value Chain Analysis as a framework for process improvement, resource optimization, and strategic alignment to help SBUs enhance their operational efficiency, customer value proposition, and overall competitiveness in the marketplace. |
| Strategic Group Analysis | Strategic Group Analysis is a strategic management tool that helps organizations identify groups of firms within an industry that pursue similar strategies and compete on similar dimensions. Strategic groups are characterized by similarities in product offerings, target markets, distribution channels, and competitive advantages. By analyzing the strategic groups within their industry, SBUs can assess their competitive position, understand the dynamics of competition, and identify opportunities for differentiation and strategic positioning. Strategic Group Analysis provides valuable insights for formulating competitive strategies, benchmarking performance, and anticipating competitive threats. | Apply Strategic Group Analysis to evaluate the competitive landscape and dynamics of SBUs within a larger industry context. Use it to identify strategic groups and map their positions based on key dimensions such as product quality, pricing strategy, and geographic coverage. Implement Strategic Group Analysis as a framework for competitive analysis, strategic planning, and market positioning to help SBUs identify opportunities for differentiation, respond to competitive threats, and enhance their competitive advantage in the marketplace. |
| Competitive Advantage | Competitive Advantage refers to the unique strengths and capabilities that enable an organization to outperform its competitors and achieve superior performance in the marketplace. Competitive advantages can take various forms, such as cost leadership, differentiation, innovation, and customer loyalty. By leveraging their competitive advantages, SBUs can position themselves effectively in their markets, attract customers, and sustain long-term success. | Apply Competitive Advantage analysis to identify and leverage the distinctive strengths and capabilities of SBUs within a larger organization. Use it to assess the sources of competitive advantage, such as proprietary technology, brand reputation, or customer relationships, and develop strategies to strengthen and exploit these advantages. Implement Competitive Advantage as a framework for strategic positioning, marketing strategy, and resource allocation to help SBUs build and sustain their competitive edge in the marketplace and achieve superior performance and profitability. |
| Strategic Alliances and Partnerships | Strategic Alliances and Partnerships involve collaborative agreements between organizations to achieve mutual goals and objectives, such as market expansion, technology sharing, or cost reduction. Strategic alliances can take various forms, such as joint ventures, licensing agreements, strategic partnerships, or supply chain collaborations. By forming strategic alliances and partnerships, SBUs can access complementary resources and capabilities, expand their market reach, and create synergies that enhance their competitive position and value proposition. | Apply Strategic Alliances and Partnerships to explore collaboration opportunities for SBUs within a larger organization. Use it to identify potential partners with complementary strengths, expertise, or market presence and negotiate mutually beneficial agreements that create value for both parties. Implement Strategic Alliances and Partnerships as a framework for business development, innovation, and growth strategy to help SBUs leverage external resources and capabilities, accelerate market entry, and achieve strategic objectives more effectively and efficiently. |
| Scenario Planning | Scenario Planning is a strategic foresight technique that involves envisioning and analyzing multiple plausible future scenarios to anticipate changes in the business environment and prepare for alternative futures. Scenario planning helps organizations identify uncertainties, drivers of change, and potential disruptions that could impact their strategies and operations. By exploring different scenarios and their implications, SBUs can develop more robust strategies, enhance their resilience, and make better-informed decisions in an uncertain and dynamic world. | Apply Scenario Planning to assess the potential impact of external factors and uncertainties on the performance of SBUs within a larger organization. Use it to develop and analyze alternative future scenarios based on different assumptions, trends, and events that could affect the business environment. Implement Scenario Planning as a framework for strategic risk management, contingency planning, and decision support to help SBUs anticipate and adapt to changes in market conditions, regulatory requirements, or competitive dynamics and ensure their long-term viability and success. |
| Blue Ocean Strategy | Blue Ocean Strategy is a strategic framework developed by W. Chan Kim and Renée Mauborgne that focuses on creating uncontested market space and making competition irrelevant by simultaneously pursuing differentiation and low cost. Blue Ocean Strategy encourages organizations to explore new market spaces, create innovative value propositions, and redefine industry boundaries to unlock new sources of value for customers and capture untapped market opportunities. By adopting Blue Ocean Strategy principles, SBUs can break away from competitive rivalry, differentiate themselves from competitors, and create new demand in uncontested market spaces. | Apply Blue Ocean Strategy to identify and pursue innovative market opportunities for SBUs within a larger organization. Use it to challenge industry conventions, rethink value delivery, and create new market segments that are not served by existing competitors. Implement Blue Ocean Strategy as a framework for strategic innovation, value creation, and market repositioning to help SBUs escape competition, attract new customers, and achieve sustainable growth and profitability in new and uncontested market spaces. |
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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