Strategic Business Unit

22/05/2020 0 By indiafreenotes

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.

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.

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 consist 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 taking 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.

Importance of Strategic Business Unit

  1. Responsibility

One of the first role of strategic business units is to assign responsibility and more importantly outsource responsibility to others. With this, the top management has an overview of work being done in each individual unit and they do not have to get involved in day to day activities for these strategic business units.

  1. Accountability

When handling multiple brands or products, it is easier if there are separate business units which are accountable for the success or failure of the business or product. By making these business units accountable, the company can directly take a call when hard decisions are to be taken.

  1. Accountancy

Profit and loss and balance sheets will look more prettier and more manageable if the statements are prepared separately for separate strategic business units. This makes the accountancy more transparent and at the same time, when companies have to make investment decision than this accountancy will come in use for the company.

  1. Strategy

Companies like Nestle have 4 different strategic units. One SBU like Maggi deals in Food products, another deals in Dairy products like Nestle milkmaid, the third SBU deals in Chocolate products like Kitkat so on and so forth. Thus, in the above example, it is very simple to change strategy for each business unit because the strategy for each is independent of the other.

  1. Independence

The managers of the strategic business units get more independence to manage their own unit which gives them the opportunity to be more creative and innovative and empowers them for making decisions. The best thing that can happen for SBU’s are fast decision making which is possible only when these SBU’s are given independence to work by themselves.

  1. Funds allocation

The last but not the least advantage of strategic business units are that funds allocation becomes simpler for the parent company. Depending on the performance of the SBU, funds allocation can be done on priority.

Thus, there are many advantages of having strategic business units and it is highly recommended that any firm which has multiple products adopt strategic business units in its organization structure.