Strategic business unit

The strategic business unit (SBU) is a separate, specialized subsystem in the company, which acts as an independent entity. SBU concept has been applied first time by the U.S. company General Electric. Strategic business units are small businesses with a high functional and decision-making autonomy. Such units may or may not need to work closely with companies, from which they have been separated. They can be used to prepare the diversified company's strategy.

Types of strategic business units

There are several different types of strategic business units (SBUs) that a company can use in its organizational structure, including:

• Product SBUs: These SBUs are focused on specific products or product lines, and are responsible for managing the development, production, and marketing of those products.
• Market SBUs: These SBUs are focused on specific markets or customer segments, and are responsible for managing the sales, marketing, and customer service efforts for those markets or segments.
• Geographic SBUs: These SBUs are focused on specific geographic regions, and are responsible for managing the sales, marketing, and customer service efforts for those regions.
• Functional SBUs: These SBUs are focused on specific functions or activities, such as research and development, production, or logistics. They are responsible for managing the activities of that specific function or activity.
• Hybrid SBUs: These SBUs are a combination of two or more of the above types, such as a product-market SBU, which is focused on a specific product or product line and target market.
• Virtual SBUs: These SBUs are not physically present in the organizational structure but coordinate the activities of different units or departments to achieve the SBU's objectives.
• Diversified SBUs: These SBUs are created to manage a portfolio of businesses that are not closely related, such as a company that owns a restaurant chain, a hotel chain and a retail store chain.
• Turnaround SBUs: These SBUs are created to manage and improve the performance of underperforming or struggling business units or products.

Example of strategic business unit

One example of a company that uses strategic business units (SBUs) in its organizational structure is Procter & Gamble (P&G). P&G is a consumer goods company that produces a wide range of products, including personal care, household cleaning, and baby care products.

P&G uses SBUs to manage its different product lines and markets. For example, P&G has an SBU for its beauty and grooming products, which includes brands such as Olay, Pantene, and Herbal Essences. This SBU is responsible for developing, producing, and marketing these products to consumers.

Another example of an SBU at P&G is the home care SBU, which manages products such as Tide laundry detergent, Dawn dish soap, and Cascade dishwasher detergent. This SBU is responsible for developing, producing, and marketing these products to consumers.

P&G also has SBUs for specific geographic regions, such as the North America SBU, which is responsible for managing P&G's sales, marketing, and customer service efforts in the US and Canada.

These are just a few examples of the SBUs that P&G has in its organizational structure. The company uses SBUs to manage its different product lines and markets, which allows it to focus its efforts and resources on specific areas of its business, which leads to better performance and growth in those areas.

Strategic business unit structure

Fig. 1. Strategic Business Unit structure example

The specific organizational units that an SBU consists of can vary depending on the company and the nature of the SBU's product or service offering. However, some common organizational units that an SBU may include are:

• Sales and marketing: This unit is responsible for promoting and selling the SBU's products or services to its target market.
• Production or operations: This unit is responsible for manufacturing or delivering the SBU's products or services.
• Research and development (R&D): This unit is responsible for developing new products or services, and improving existing ones, to meet the needs of the SBU's target market.
• Finance and accounting: This unit is responsible for managing the financial aspects of the SBU, such as budgeting, forecasting, and reporting.
• Human resources: This unit is responsible for managing the SBU's human resources, including recruiting, hiring, training, and managing employee relations.
• Information technology (IT): This unit is responsible for managing the SBU's information technology systems and infrastructure.
• Supply chain management: This unit manages the procurement of raw materials, production and delivery of goods, and the management of suppliers.
• Quality control: This unit is responsible for ensuring that the SBU's products or services meet the required quality standards and customer expectations.

These are general examples and might not be present in every SBU and some SBU might have different or additional organizational units depending on their specific needs.

The division of units responsible for particular groups of products are created in accordance to:

• needs of customers,
• manufacturing technologies,
• product application,
• place in company portfolio.

Above criteria are the basis for assembling homogeneous groups of products and creating their strategic organizational units. Such SBUs allows company to improve the overall efficiency.

Features of strategic business units

The main features of strategic business units are:

• They are present in the organizational structure: SBUs are a distinct division or unit within a company's organizational structure, with their own specific goals and objectives. They are typically created to manage a specific product or service, market, or customer segment, and are given autonomy to make decisions and allocate resources in order to achieve their goals.
• They are organizational units without separate legal personality: SBUs are not separate legal entities and do not have their own legal status. They are a part of the parent company and operate under its legal and financial structure.
• They utilize "product-market" strategy: SBUs typically have a specific product or service offering and target market that they focus on. They are responsible for developing and implementing strategies to grow and compete in their specific market or segment.
• Type of activity performed by them is of crucial and decisive importance for the whole company: The activities and performance of an SBU are considered important for the overall success of the company. This is why SBUs are given autonomy to make decisions and allocate resources in order to achieve their goals.
• Functional and decision-making autonomy include: laboratory testing, production preparation, production, finance, accounting and marketing: This allows them to be more responsive to market conditions and to make decisions that are tailored to their specific product or service offering and target market.
• SBU has divisional structure, which is determined by the size of production, technology and research activities, financial and accounting processes, and marketing activities: This allows the SBU to be more efficient and effective in managing its specific product or service offering and target market.

When to use strategic business units?

Strategic business units (SBUs) are used when a company wants to focus its efforts and resources on specific areas of its business, and when it wants to give autonomy to those areas to make decisions and allocate resources in order to achieve their goals. Some situations when a company may consider using SBUs include:

• Diversified product or service offering: When a company offers a wide range of products or services, SBUs can help manage and focus efforts and resources on specific product lines or services.
• Different target markets or customer segments: When a company serves different target markets or customer segments, SBUs can help manage and focus efforts and resources on specific markets or segments.
• Different geographic regions: When a company operates in different geographic regions, SBUs can help manage and focus efforts and resources on specific regions.
• Different technologies or production processes: When a company uses different technologies or production processes, SBUs can help manage and focus efforts and resources on specific areas of the business.
• Poor performance of a specific business unit: When a business unit is underperforming, a SBU can be created to manage and improve the performance of that unit.
• High growth potential in specific areas: When a company sees high growth potential in specific areas of its business, SBUs can be created to manage and capitalize on that growth potential.
• To manage risk: When a company wants to manage the risk associated with a particular product, service, or market, SBUs can be created to manage that risk.

Advantages of strategic business units

There are several advantages to using strategic business units (SBUs) in a company's organizational structure, including:

• Focus: SBUs allow a company to focus its efforts and resources on specific areas of its business, which can lead to better performance and growth in those areas.
• Autonomy: SBUs are given autonomy to make decisions and allocate resources in order to achieve their goals, which can lead to faster and more efficient decision-making.
• Responsiveness: SBUs can be more responsive to market conditions and changes, which can help the company stay competitive.
• Flexibility: SBUs allow a company to adapt to different markets, products, and services, which can be beneficial for companies with a diverse portfolio of offerings.
• Better decision-making: SBUs can make decisions that are tailored to their specific product or service offering and target market, which can lead to better performance and growth.
• Improved accountability: SBUs provide clear lines of accountability and responsibility, which can help the company identify and address performance issues more effectively.
• Better alignment with the company's strategy: SBUs can better align with the company's overall strategy, which can lead to better performance and growth.
• Better coordination: SBUs can coordinate more effectively with other departments within the company and also with suppliers, distributors, etc.
• Better allocation of resources: SBUs can better allocate resources to the products, services, or markets that have the most potential for growth.
• Better risk management: SBUs can better manage risks associated with a particular product, service or market.

It's important to note that SBUs can also have disadvantages, such as increased complexity and coordination difficulties, and they may not be suitable for all companies or industries.

Limitations of strategic business units

There are several limitations to using strategic business units (SBUs) in a company's organizational structure, including:

• Complexity: SBUs can add complexity to a company's organizational structure, which can make it more difficult to manage and coordinate the company's overall strategy and performance.
• Coordination difficulties: SBUs can create coordination difficulties between different units and departments within the company, which can lead to inefficiencies and conflicts.
• Increased overhead costs: SBUs can increase overhead costs, as they require additional resources and management to operate effectively.
• Limited flexibility: SBUs can limit a company's flexibility to respond to changes in the marketplace, as they are focused on specific products, services, or markets.
• Decreased efficiency: SBUs can lead to decreased efficiency, as they may duplicate efforts and resources among different units and departments within the company.
• Inability to capitalize on company-wide opportunities: SBUs may not have the resources or expertise to capitalize on company-wide opportunities, resulting in missed growth opportunities.
• Reduced focus on the big picture: SBUs can lead to reduced focus on the big picture of the company's overall strategy and performance.
• Risk of silo mentality: SBUs can lead to silo mentality, where each unit is focused on its own goals and objectives, and not the company's overall goals.
• Risk of over-specialization: SBUs can lead to over-specialization, where a unit becomes too focused on its own product, service, or market, and loses sight of the bigger picture.
• Risk of lack of inter-unit cooperation: SBUs can lead to a lack of cooperation and coordination between units, which can result in missed opportunities and inefficiencies.

It's important to note that while these limitations exist, they can be mitigated by proper management and oversight. It's also important to evaluate the specific needs of the company and the industry, to see if the SBU structure is suitable for the company, before implementing it.

Strategic business unit — recommended articles

Specialization — Grouping of posts — Revenue center — Functional strategy — Core process — Tensor structure — Types of strategies — Boundaries of the enterprise — Lateral integration

References

• Govindarajan, V. (1986).Decentralization, strategy, and effectiveness of strategic business units in multibusiness organizations. Academy of Management Review, 11(4), 844-856.
• Noori B., Prioritizing Strategic Business Units In The Face Of Innovation Performance: Combining Fuzzy AHP And BSC, "International Journal of Business and Management", Vol. III, No. 1 / 2015
• Sterkenburg, Daniel R., Corporation with Eight Strategic Business Units (2014). Business Administration Faculty Publications. Paper 68.
• Tanya, S. B., & John, M. Strategic Business Unit. Wiley Encyclopedia of Management