strategic-business-unit

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

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, however, each unit must still report directly to company headquarters.

Some of the main characteristics of a strategic business unit include:

  • Competition which 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:

  1. 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.
  2. 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 the various rules, regulations, and consumer preferences in each region.
  3. Customer segment – some companies, such as banks, may have separate business units for high net-worth customers and small business loans.
  4. Innovation – tech companies may also create new SBUs for innovations they do not expect to see a return on in the short term.

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 entirely possible for a company to dominate its market with an umbrella of products, there does exist the potential for so-called product cannibalization.
  • 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.

More Resources

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SWOT Analysis

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SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

Pareto Analysis

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The Pareto Analysis is a statistical analysis used in business decision-making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.

Failure Mode And Effects Analysis

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A failure mode and effects analysis (FMEA) is a structured approach to identifying design failures in a product or process. Developed in the 1950s, the failure mode and effects analysis is one the earliest methodologies of its kind. It enables organizations to anticipate a range of potential failures during the design stage.

Blindspot Analysis

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A Blindspot Analysis is a means of unearthing incorrect or outdated assumptions that can harm decision making in an organization. The term “blindspot analysis” was first coined by American economist Michael Porter. Porter argued that in business, outdated ideas or strategies had the potential to stifle modern ideas and prevent them from succeeding. Furthermore, decisions a business thought were made with care caused projects to fail because major factors had not been duly considered.

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