What Is A Strategic Business Unit? Strategic Business Unit In A Nutshell

Q: What are some disadvantages of strategic business units?

Some disadvantages of strategic business units might be: Increased Complexity . Competition or cannibalization. And increased Costs.

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.
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.

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:

Connected Business Frameworks

Management Functions

Management functions within startups are critical to scale up the team and enable the company to find a business model/market fit at wider and wider scales through planning, management, and leading the organizations toward those goals.

Market Orientation

Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.

Portfolio Management

Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.

Project Management

Critical differences between project management and program management comprise: 1. Scope: as project managers focus on specific projects, program managers coordinate a portfolio of projects. 2. Objectives: where project managers focus on delivering a project timeline, the program manager optimizes for the achievement of multiple projects at a time. 3: stakeholders: project manager work with specific stakeholders to deliver the project. While program managers might work with multiple stakeholders. 4 Timeframe: project managers might be focused on short-term goals, whereas program managers might be more aligned on long-term objectives as they have to ensure success on multiple projects.

Product Management

Product management has become a key role within most organizations and startups as it combines product development with experimentation to create a successful product in the market. Product management requires a combination of strategic thinking, problem-solving skills, and a relentless focus on customer needs and delivering the right product at the right time. Top product managers use a customer obsession approach to build and launch successful products.

Kotter’s 8-Step Change Model

Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.

Nadler-Tushman Congruence Model

The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.

McKinsey’s Seven Degrees of Freedom

McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.

Mintzberg’s 5Ps

Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.

COSO Framework

The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.

TOWS Matrix

The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.

Lewin’s Change Management

Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.

Porter’s Five Forces

Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces

Ansoff Matrix

You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Blitzscaling Canvas

The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Business Analysis Framework

Business analysis is a research discipline that helps drive change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Gap Analysis

A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Business Model Canvas

The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Digital Marketing Circle

A digital channel is a marketing channel, part of a distribution strategy, helping an organization reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, and email marketing. And some paid channels comprise SEM, SMM, and display advertising.

Blue Ocean Strategy

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Organizational Structure Case Studies

Airbnb Organizational Structure

Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.

eBay Organizational Structure

eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.

IBM Organizational Structure

IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.

Sony Organizational Structure

Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.

Facebook Organizational Structure

Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams based on the main corporate functions (like HR, product management, investor relations, and so on).

Google Organizational Structure

Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.

Tesla Organizational Structure

Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.

McDonald’s Organizational Structure

McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.

Walmart Organizational Structure

Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.

Microsoft Organizational Structure

Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.

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