Strategic Business Unit (SBU)

Strategic Business Unit (SBU)

Definition

Strategic Business Unit (SBU) implies an independently managed division of a large company, having its own vision, mission and objectives, whose planning is done separately from other businesses of the company. The vision, mission and objectives of the division are both distinct from the parent enterprise and elemental to the long-term performance of the enterprise. The best example of SBU are companies like Proctor and Gamble, LG etc. These companies have different product categories under one roof.

Simply put, an SBU is a cluster of associated businesses which are responsible for its combined planning treatment, i.e. the company engaged in a diversified range of businesses, categorises its multitude of businesses into a few separate divisions, in a scientific way. The task may include analysis and bifurcation of a variety of businesses. It can be a business division, a product line of the division or even a specific product/brand, targeting a particular group of customers or a geographical location. In business, a strategic business unit (SBU) is a profit centre which focuses on product offering and market segment. SBUs typically have a discrete-marketing plan, analysis of competition, and marketing campaign, even though they may be part of a larger business entity.

An SBU may be a business unit within a larger corporation, or it may be a business into itself or a branch. Corporations may be composed of multiple SBUs, each of which is responsible for its own profitability. General Electric is an example of a company with this sort of business organization. SBUs are able to affect most factors which influence their performance. Managed as separate businesses, they are responsible to a parent corporation. General Electric has 49 SBUS..

Commonalities :

A SBU is generally defined by what it has in common, as well as the traditional aspects defined by McKinsey: separate competitors; and a profitability bottom line. Four commonalities include-

  • Revenue SBU
  • Like Marketing Cost SBU
  • Like Operations/HR Profit SBU
  • Like sales judged on net sales not gross

Success factors :

There are three factors that are generally seen as determining the success of an SBU

  1. the degree of autonomy given to each SBU manager.
  2. the degree to which an SBU shares functional programs and facilities with other SBUS.
  3. the way in which the corporation handles new changes in the market.

Ingredients of a Successful Business Unit Strategy

The Three Ingredients of a Successful Business Unit Strategy

  1. Context-

    A rich, nuanced, and real-time understanding of the competitive environment is an essential ingredient of good business unit strategy. How are leading-edge customers and their economics and options changing What are potential vectors of disruption? Where are today’s profit pools and how are they likely to evolve? How well are competitors, both traditional and emerging, positioned to respond? What potent new business models could change the game? And what style of strategy is most likely to win?

  2. Advantage-

    A clear and candid assessment of the business unit true sources of competitive advantage is the next critical element. What gives the business a right to win in today’s and tomorrow’s markets? the advantage based on cost, capabilities, intellectual property, unique access to data, position in an ecosystem, or other factors? Are key move required to acquire new assets or capabilities? Which combination choices of customers, markets, and investments-has the greatest potential to create value relative to rivals?

  3. Link to Execution-

    A direct and agile connection between the strategy and the business is the final component. What is the right approach to create alignment around the strategy? How to set and communicate goals? How to create tight market feedback loops that enable rapid learning and adaptation of the strategy?

Characteristics of Strategic Business Unit

  • Separate business or a grouping of similar businesses, offering scope for autonomous planning.
  • Own set of competitors.
  • A manager who is accountable for strategic planning, profitability and performance of the division.

A strategic business unit is specially formed to target a particular market segment, which requires expertise in production or management, not present in the parent company.

Strategic Business Unit Structure

The structure of SBU consists of operating units; wherein the units serve as an autonomous business. The top corporate officer assigns the responsibility of the business to the managers, for the regular operations and business unit strategy. So, the corporate officer is accountable for the formulation and implementation of the comprehensive strategy and administers the SBU by way of strategic and financial controls.

In this way, the structure combines related divisions of business into the strategic business unit and the senior executive is empowered for making decisions for each unit. The senior executive works under the supervision of a chief executive officer.

There are three levels in a strategic business unit, wherein the corporate headquarters remain at the top, SBU’s in the middle and divisions clustered by similarity, within each SBU, remain at the bottom. Hence, the divisions within the SBU are associated with each other, and the SBU groups are independent of each other. From the strategic viewpoint, each SBU is an independent business.

A single strategic business unit is considered as a profit centre and governed by the corporate officers. It stresses over strategic planning instead of operational control so that the separate divisions of the SBU can respond as fast as they can, to the changing business environment.

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