Strategic Business Units

Contents :
  1. Concept of Strategic Business Units (SBU's).
  2. Need and Characteristics of Strategic Business Units.
  3. Identifying and Dimensions of Strategic Business Units.
  4. Strategic Business Units Linkages with Enterprise Performance Management.
  5. Advantages and Disadvantages of Strategic Business Units.

What is Strategic Business Units (SBU's) ?

A Strategic Business Unit (SBU) is an operating division of firm which serves a distinct product-market segment or a well-defined set of customers or a geographic area. The SBU is given the authority to make its own strategic decisions within corporate guidelines as long as it meets corporate objectives.

Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to products and markets. The unique small business unit benefits that a firm aggressively promotes in a consistent manner. When companies become really large, they are best thought of as being composed of a number of businesses (or SBUs).

Need of SBU 

Following are the needs of SBUs :

1) To ensure that each product or product line of the hundreds offered by the company would receive the same attention as if it were developed, produced and marketed by an independent company.

2) To provide assurance that a product will not get lost among other products (usually those with larger sales & profits) in a large company.

3) SBU's makes the organization in organized form. The first principle of time management is to get organized. Similarly, one of the first things an owner got to do is to see his organization clearly.

4) To ensure that a certain product or product line is promoted and handled as though it were an independent business.

5) Dividing products into SBU's helps you stay in touch of the market separately for each and every product. Thus a marketing manager/sales manager may be assigned one product at a time and will be responsible for that product itself. Thereby he may give valuable contribution in maintaining the STP of a product in the target market.

6) SBUs propagates the correct decision making. The decisions can be at the micro level (managing STP, strategies) or it can be at the macro level (investments from the corporate fund, whether to continue investing?).

7) By micro managing each and every product and dividing it into SBU's, an owner can obtain a holistic view of the organization. This view is also used in preparing the financial statements as well as to keep tabs on the investments and returns for the organization from each SBU. Thus the overall profitability of the firm can be decided.

8) The best reference for investments in SBU's can be the BCG matrix. In the BCG matrix, the SBU's are divided as per their market share and the market growth rate. Thus depending on the BCG matrix, the type of investments which each product needs can be decided. This is possible only if each product is treated as a completely different SBU. This SBU may be a composition of one category of product (such as shampoo) or in case of larger organizations it may even be one single type of product (such as LED or LCD televisions).

9) Naturally once the organization is organized, the management can micro manage things. For example, large companies like HUL and P&G (the best examples of multi product organizations) have at least 30 different products at all times. Each of them requiring separate manpower, strategies, expenses and returns. Thus this needs micro managing of the highest aspect. Micro managing helps the management to focus on each and every product separately.

Characteristics of SBU 

Ideally, strategic business units have the following characteristics :

1) Control over those factors necessary for successful performance, such as production, R&D and engineering, marketing, and distribution. This does not mean an SBU should not share resources, such as a manufacturing plant or a sales force, with one or more other business units. But the SBU should determine how its share of the joint resource is used to effectively carry-out its strategy.

2) Homogeneous set of markets to serve with a limited number of related technologies. Minimizing diversity across an SBU's product-market entries enables the unit's manager to better formulate and implement a coherent and internally consistent business strategy.

3) Responsibility for their own profitability.

4) Unique set of product-markets, in the sense that no other SBU within the firm competes for the same customers with similar products. Thus, the firm avoids duplication of effort and maximizes economies of scale within its SBU's.

As anyone might expect, firms do not always meet all of these ideals when designing business units. There are usually trade-offs between having many small homogeneous SBUs versus large but fewer SBUs that managers can more easily supervise.

Dimensions of SBU 

The three dimensions that define the scope and mission of the entire corporation also define individual SBUs :

1) Customer Needs : 
Similarity in the customer needs or the product benefits sought by customers in the target markets.

2) Personal Characteristics : 
Similarity in the personal characteristics or behavior patterns of customers in the target markets.

3) Technical Compatibility : 
This particularly with respect to product technologies and operational requirements, such as the use of similar production facilities and engineering skills.

Identifying Strategic Business Unit 

A strategic business unit is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU. The identification of an organization's strategic business units is essential to the development of business-level strategies since these will vary from one SBU to another. There are two opposing pitfalls that need to be avoided :

1) If each product and each geographical branch (and so on) is considered to be an independent SBU such immense variety of competitive strategies for a single organization would create a lack of focus and inefficiency. This would make the development of corporate-level strategy almost impossible.

2) On the other hand, the concept of the SBU is important in properly reflecting the diversity of products and markets that actually exist.

There are two broad criteria which can help in avoiding these two pitfalls and, therefore, in identifying SBUs that are useful when developing business level strategies :

1) External Criteria : 
It is for identifying SBUs are about the nature of the marketplace for different parts of the organization. Two parts of an organization should only be regarded as. the same SBU if they are targeting the same customer types, through the same sorts of channels and facing similar competitors. 
For example, a 'unit' tailoring products/services to specific local needs cannot belong to the same SBU as another that offers standardized products or services globally. Nor are units that offer the same products to a customer group through exclusively different channels (retail or mail-order/internet).

2) Internal Criteria :
It is for identifying SBUs are about the nature of an organization's strategic capability its resources and competences. Two parts of an organization should only be regarded as he same SBU if they have similar products/services built on similar technologies and sharing a similar set of resources and competences. This usually means that the cost structure of the 'units' will be similar. So within a company like Kodak the units offering film-based products are not in the same SBU as those offering digital photography products even though they are addressing the same customers through the same channels.

The identification of SBUs impacts on the choices of generic competitive strategic, corporate-level issues about relationships between SBUs and issues of organization design. These decisions occur in the public sector too. The frequent re-packaging of activities into and within ministries in Central Government shows how difficult these judgments can be. 
For example, in the U.K. over the last few decades 'Education' has been partnered with 'Science', then 'Employment and then with 'Skills'. It is important to review the definition of SBU's as the business environment and/or an organization's capabilities change. 
For example, the development of mobile telephony created new SBU's for telecom companies many of which were floated-off as independent companies.

SBU Linkages with Enterprise Performance Management 

A strategy is the business road map to financial success. The strategy provides direction from where is businessman and where he want to be. An effective strategy must be a top down process. The process starts with the creation of an enterprise wide strategic plan. From this plan, the Strategic Business Unit and functional strategic plans are created. The strategic planning process must be time bound, easy to understand, and expedited through the use of standard tools.

The following tasks regardless of whether a businessman is in enterprise-wide, SBU, or functional strategic planning, which will help the company's management team to develop a strategy :
  • Conduct current situation analysis.
  • Determine planning horizon.
  • Conduct environmental scan.
  • Complete gap analysis.
  • Create vision.
  • Develop business strategy.
  • Create balanced scorecard.
  • Identify tactics and initiatives.
  • Execute strategy.
  • Identify key success factors.
The efficient and effective enterprise performance management should consider organizational vision and strategy, success factors and their inter-relationships, and the different types of applicable performance measures including Key Performance Indicators (KPI's) and how they influence performance. It should also establish the right reporting framework to ensure such critical information is collected and delivered to the right people at the right time.

The efficient and effective enterprise performance management solution should also allow for seamless collection and integration of metrics from all types of enterprise data assets and in real-time when necessary, as well as easy customization to support not only current, but also future requirements without the need for programming or costly business intelligence (BI) projects. The ability to automatically launch action to prevent or correct inadequate performance is also an important complement to the solution.
The EPM helps SBUs to analyses the various strategic business units which will increase the organizational performance in various departments and others.
Such an insightful and holistic solution is critical for senior management officials to analyze and influence performance, correlate or aggregate organizational activities, and oversee the health of all business processes in one single set of executive-level dashboards and scorecards.

Advantages of Strategic Business Units 

The advantages of SBUs are as follows :

1) Decentralization of Authority : 
Decentralization of authority is caused because it reduces the span of control. Decentralization has its own effect on the organizational effectiveness and motivation system. The juniors feel more honored and empowered.

2) Better Co-ordination :
There is perfect co-ordination between different divisions because they are similar strategic units. There will be more complementary than competition.

3) Fast Formulation and Effective Implementation of Strategies :
The strategy formulation is rendered easier and cozier as similar SBUs are under one manager who reports back to General Manager and the CEO. The message that comes from CEO leads to effective implementation. Each division has the participation in both planning and implementation.

4) Assured Accountability :
Each division that comes under a SBU manager is accountable for its performance under, normal or over. Similarly each SUB is accountable to the general manager and so on.

Disadvantages of Strategic Business Units 

The disadvantages of SBUs are as follows:

1) Increase in Operating Costs :
The operation costs increase because this structure increases one more layer in the organizational structure. Administrative overheads paid-up.

2) Gap between Divisions and Head Office : 
This gap is created because extra layer that comes in between the head office and the SBUs. This gap reduces direct links with the divisions. This delays the communication process which is a must for two way flow of information for decision-making and assessing the performance.

3) Reduced Flexibility : 
In order to achieve one thing another is to be sacrificed in part it not in goal. The decentralization dilutes the degree of flexibility which encourages slow movement of information.

4) Dirty Politics and Unwanted Competition : 
Under this structure SBUs are at the top where there is going to be clamor for resources and foul play of politics because all SBUs are not cash cows or stars or dogs or even question marks. This categorization leads unhealthy competition.