Strategic Business Units: Definition, Benefits, and Examples

At its core, a strategic business unit (SBU) is a self-contained business entity that operates independently within a larger organization. The purpose of an SBU is to focus on a specific product, market, or geographic area and to develop its own business strategy, goals, and objectives.

Benefits of Strategic Business Units

Implementing an SBU structure can provide numerous benefits for organizations, including:

• Improved Focus and Accountability - By dividing an organization into SBUs, each unit can focus on specific markets, products, or services. This allows each SBU to develop specialized expertise and to tailor its strategy and operations to its specific needs.

• Increased Flexibility and Responsiveness - Because each SBU operates independently, it can quickly respond to changes in the market, customer needs, and industry trends. This agility can be a significant advantage in highly competitive industries.

• Greater Transparency and Resource Allocation - An SBU structure can provide greater transparency into the performance of individual business units, making it easier for management to allocate resources and make strategic decisions. This can help organizations identify and invest in their most profitable products, services, or markets.

Examples of Strategic Business Units

Examples of strategic business units can be found in various industries, including:

• Automotive - Automakers such as General Motors and Ford have organized their operations into SBUs. Each SBU is responsible for a specific product line, such as trucks or SUVs, and has its own marketing, sales, and product development teams. General Motors has its Chevrolet and Cadillac SBUs, which allows them to focus on different segments of the market. In 2021, General Motors reported a net income of $6.4 billion, an increase of over 200% from the previous year. Ford's SUV SBU has been instrumental in developing new electric SUV models, such as the Mustang Mach-E. In 2021, Ford reported a net income of $3.3 billion, up from a net loss of $1.3 billion the previous year.

• Consumer Goods - Consumer goods companies such as Procter & Gamble and Unilever use SBUs to focus on specific product categories. For example, Unilever has separate SBUs for food and beverages, personal care, and home care products.

• Financial Services - Banks and other financial institutions often use SBUs to organize their operations by geography or product line. For example, JPMorgan Chase has separate SBUs for consumer and community banking, commercial banking, and asset management.

• Technology - Technology companies such as IBM and Hewlett-Packard use SBUs to organize their operations by product line or industry vertical. For example, IBM has separate SBUs for cloud computing, cognitive computing, and security solutions.

The long story - short

SBUs are designed to be independent enough to make their own decisions regarding their product line, marketing, and sales strategies. This allows them to respond more quickly to market changes and customer needs. According to a study by the Harvard Business Review, companies with an SBU structure tend to have better financial performance than those without one.

One of the advantages of the SBU structure is that it allows companies to allocate resources more effectively. By giving each SBU its own budget, companies can ensure that resources are being used efficiently. Another advantage of the SBU structure is that it encourages innovation. By giving each SBU its own product development team, companies can develop new products more quickly and efficiently.

However, the SBU structure is not without its challenges. One of the biggest challenges is coordinating the activities of the different SBUs within the company. This can be especially difficult when there is overlap between the product lines of different SBUs. For example, if the truck SBU and the SUV SBU both want to develop a new crossover model, there may be conflict over resources and market positioning. Companies must carefully manage these conflicts to ensure that the overall goals of the company are being met.

The SBU structure has become a popular organizational model in the automotive industry. By giving each SBU responsibility for a specific product line, companies can allocate resources more effectively, encourage innovation, and respond more quickly to market changes. However, companies must be careful to manage conflicts between different SBUs to ensure that the overall goals of the company are being met.

SBU vs subsidiary

The distinction between a corporate business unit and a corporate subsidiary lies in several key differences. First, a subsidiary typically focuses on different product categories and target audiences than those of its parent company. This allows the parent company and subsidiary to avoid competing for the same customers. A graphic representation of this difference could be a Venn diagram showing the overlapping and distinct areas of the product categories and target audiences of each entity.

Secondly, a subsidiary is legally a separate business entity, even if it is wholly or partially owned by a parent company. Subsidiaries have their own boards of directors and executive teams that handle strategic management and decision-making. In contrast, business units are not independent companies, but rather belong within a larger corporation. A diagram illustrating this could be a flowchart showing how a subsidiary has its own decision-making hierarchy, while business units are governed by the larger corporate structure.

Thirdly, the organizational structure of a subsidiary may not match that of its parent company, as it operates independently with its own management team. By contrast, each business unit in a corporation fits into a larger organizational structure, led by the same top-level management team. A diagram showcasing this difference could be an organizational chart of a corporation with multiple subsidiaries and business units, showing the hierarchical relationships and reporting structures between them.

Another difference between business units and subsidiaries is the relationship to the company as a whole. Since subsidiaries do not legally form part of a parent company, they may not have access to all of the same resources as a business unit would. For example, subsidiaries may not have the same marketing teams or recruiters promoting job opportunities as business units. On the other hand, business units belong to the parent company and have access to all of its resources. A visual representation of this difference could be a comparison chart showing the resources and benefits available to business units versus those of subsidiaries.

In conclusion, while both corporate business units and subsidiaries have their own unique advantages, there are clear differences between the two models. Understanding the organizational structures, relationships to the company, and independence of each model is crucial for making informed decisions about the most effective business strategy.