A strategic business unit may seem an ordinary term. But it plays a significant role in business growth in terms of product category and size. Therefore, it’s very important for businesses and companies to be familiar with the concept of SBU. Today, we’ll discuss what is a strategic business unit; its structure, characteristics, advantages and disadvantages, and how to create SBU in detail along with an example.
What is a Strategic Business Unit?
A strategic business unit is a small unit or entity within a large organization managed independently. Such SBUs usually have their own course of action, objectives, mission, and vision statement. Most importantly, they make separate plans different from the rest of the company, and they have different objectives from the parent company. They impact the performance of the company in the long term.
SBU is an element of the large corporation that has the objective of planning. It could be a certain product/service, division of the product line or a business division. It doesn’t matter whatever they are, their focus is on the specific geographical area or a certain group of users.
As we know that it operates independently. When it comes to performance and status of work in progress, SBU has to report directly to the head office of the parent company. Usually, the focus of the SBU is to study a certain industry or market.
As an element of a large corporation, it doesn’t mean that the size of SBU is small. In fact, some of the SBUs are of a very big size and they have got their own support group. They control marketing operations, training and development of employees, and human resource management.
SBU offers a lot of benefits to businesses and companies, and that’s why it’s important to have one. Especially, when the company is offering various products structures. Whether a company has one or more SBUs, it should make them react quickly relevant to the product changes in the market.
For instance, LG offers a wide range of consumer products like air conditioners, television, fridge, smartphones, etc. Every SBU is responsible for budgeting, making investments, producing, and launching the product into the market. The parent company of LG focuses on tracking the company’s profitability, income, and cost.
Structure of Strategic Business Unit
When a company establishes a strategic business unit, then its structure comprises of an operational department, and that business unit operates independently. Within the structure of the SBU, the top official of the unit gives orders to division employees. The responsibility of the parent officer is to manage the unit, develop, and execute the strategy.
The senior executives of the company make decisions for every SBU, and the structure of the SBU allows the unit to connect with other SBUs and relevant divisions of the company. The head executives supervise the senior executive and they have to follow the rules and regulations of the company. However, the three levels of SBU are as follows;
- Top: Headquarters of the Corporate
- Middle: SBU
- Bottom: Divisions
You should keep in mind that SBU is an independent business unit from other SBUs of the company. Every SBU is linked with its divisions. However, the corporate officer leads every unit and regards the SBU as a profit center.
The supervisors of the parent company focused on strategic planning, rather than managing operations. If the SBUs don’t receive orders from the head office, then they have to respond quickly to the changing business trends.
Characteristics of Strategic Business Unit
Some of the main characteristics of the SBU are as follows;
- SBU is a separate business entity or group of the company that is independently in charge of business planning.
- SBUs of different companies are different, they aren’t the same
- The responsibility of the head office of SBU is strategic planning of every unit, company’s performance, and managing the company’s profitability
- The target market of every SBU is different and it targets various types of customers
- Every SBU has expertise and proficiency in different areas like management or production that the parent company lacks
Advantages of SBU
Some of the main advantages of the strategic business unit are as follows;
- SBU makes the strategic management process easier
- It develops a link and association among various departments of the company
- SBU simplifies the bookkeeping process of the big companies
- Whether it’s setting up or evaluating the performance of the SBU, it’s simple and easy
- It’s highly focused and responsive
- It has minimum issues and problems
- Comprises of manageable tasks and goals
Disadvantages of SBU
Some of the main disadvantages of the strategic business unit are as follows;
- It’s difficult to communicate with the top management
- SBU creates and results in the form of internal tension
- It has a critical process and the response time is very slow
- Responsibility is high
- Functional rivalry with other units
- Expenses are high
How to Setup a Strategic Business Unit
Some of the main elements and requirements of setting up the strategic business units are as follows;
Organizational structure is the basic requirement. As soon as you follow the different SBU structures, it would change the entire structure of the company. However, if your business is following the OS, then it would allow you to make changes, free to experiment, independent, and free.
If SBU is separate, then it prevents creativity suppressed by the process, and it would create branding problems. Companies that have large bureaucratic channels aren’t agile and flexible.
Selection & Recruitment
The management of the SBU and the parent company are different. While setting up the new SBU, you should alter the selection and recruitment process. It’s because you’re establishing a new business to target different customer markets rather than directing the developed business.
The top experienced staff would face a challenging time working in the units and they have to do everything to keep things going. The SBU won’t work if the staff either know little or thing about the operations of the unit. If you’re recruiting people, then you should ask them about the company’s objectives rather than general things. Make sure to recruit those people that have the motivation to work from the start of the business.
When a company develops and earns reputation and capital, then the management offers monetary incentives, gifts, and shares to boost their motivation level. it doesn’t mean that they always have to provide incentives.
According to the two-factor theory by Fredrick Herzberg, monetary incentives are very influential factors in boosting your motivation level. In fact, working hard and motivation level has an association with their career. It means if you perform well, then you would grow along with it.
Along with offering financial incentives to boost their motivation level up, management should offer them something extra in order to keep their motivation level up. You should recognize and appreciate their work and link it with the company’s success. Otherwise, the unappreciated working environment would make them tired. You should listen to their demands and wishes and try to satisfy them as much as you can.
Conclusion: What is a Strategic Business Unit? How to set it up
After an in-depth study of what is a strategic business unit, its characteristics, advantages, disadvantages, and how to set it up, we’ve realized that SBU is very important for a company’s growth and profitability. If you want to set up SBU for your organization, then you should make sure to study its structure and pros and cons to check whether it’s suitable for your organization or not.
Ahsan Ali Shaw is an accomplished Business Writer, Analyst, and Public Speaker. Other than that, he’s a fun loving person.