4 Chapter - Module 1 - SBUs

MODULE 1 CONCEPT OF STRATEGY

Chapter 4.1 Strategic Business Units (SBUs)

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MODULE 1 CONCEPT OF STRATEGYChapter 4.2 Strategic Business Units (SBUs)

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Definition

An autonomous division or organizational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance.

Because strategic business units are more agile (and usually have independent missions and objectives), they allow the owning conglomerate to respond quickly to changing economic or market situations.

In business, a strategic business unit (SBU) is a profit center 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 unto 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.

Companies today often use the word segmentation or division when referring to SBUs or an aggregation of SBUs that share such commonalities.

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).

These organizational entities are large enough and homogeneous enough to exercise control over most strategic factors affecting their performance. They are managed as self contained planning units for which discrete business strategies can be developed.

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A Strategic Business Unit can encompass an entire company, or can simply be a smaller part of a company set up to perform a specific task. The SBU has its own business strategy, objectives and competitors and these will often be different from those of the parent company. Research conducted in this includes the BCG Matrix.

This approach entails the creation of business units to address each market in which the company is operating. The organization of the business unit is determined by the needs of the market.

An SBU is an operating unit or planning focus that groups a distinct set of products or services, which are sold to a uniform set of customers, facing a well-defined set of competitors.

The external (market) dimension of a business is the relevant perspective for the proper identification of an SBU. (See Industry information and Porter five forces analysis.) Therefore, an SBU should have a set of external customers and not just an internal supplier.

SBUs work on the principle of micro management. What if you have 10 different tasks in a day, and all 10 of them are important? You will divide the tasks and then perform each of them separately. This is the exact reason behind converting a product/ brand into a SBU or to make them part of a separate SBU.

SBUs make you Organized

The first principle of time management is to get organized. Similarly, one of the first things you got do is to see your organization clearly. And that can happen only if you are organized. If one of your marketing managers is handling 3–4 different products, then definitely he is going to get confused with operating all of them.

The strategies might be hazy; there will be no time for creativity or innovation and all the time will be spent in just handling the existing work rather then expansion. Thus the first thing SBUs do is they help you get organized.

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MODULE 1 CONCEPT OF STRATEGYChapter 4.5 Strategic Business Units (SBUs)

Micro manage

Naturally once you are organized, you can micro manage things. Just take an example of large companies like HUL and P&G (the best examples of multi product organizations). They 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. With SBUs, another factor which is very important is FOCUS. Micro managing helps you focus on each and every product separately.

Essentials in running an SBU

STP – The success of a product depends on its segmentation targeting and positioning. Each of these processes requires being continuously in touch with the market, receiving feedback, identifying your target market, targeting them and then positioning accordingly.

Investments – The best reference for investments in SBUs can be the BCG matrix. In the BCG matrix, the SBUs 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.

Decision making – The better performing businesses are supposed to handle the load of any newly starting business or any business which is undergoing a slump. However, if one of these revenue generating SBUs gets hit, how would you manage the cash crunch? Well these are decisions which need to be made and for them you need to have the figures for each type of product / SBU.

Profitability – By micro managing each and every product and dividing it into SBUs, we 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.

Thus these 6 reasons along with several others show us the importance of both Micro managing as well as macro managing a multi product organization.

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Overall success of the organization is possible only if it knows how to run its product portfolio and this is exactly where SBUs come in play.


Chapter 4.6 Nestle, SA - Caselet

If the company has multi-sector business then it is suitable to use some SBUs. Let’s take example of Nestle, SA.

They have business in coffee (Nescafe), bottled water, other beverages (including Aero (chocolate) & Skinny Cow, chocolate, ice cream, infant foods, performance and healthcare nutrition, seasonings, frozen and refrigerated foods, confectionery and pet food.

Of course each business must be treated as a strategic business unit so each SBU can concentrate in each market by their own executives, instead of led by a centralized CEO.

Each SBU manager/CEO will be given autonomy to some extent of degree to lead their own SBU and usually each SBU shares functional programs and facilities with other SBUs, and Head Office will give strategic direction in the development of the SBU.

But if a multinational company has only one business, like Ben & Jerry with ice cream or Starbuck with the coffee, they do not need strategic business units, as their products like ice cream and coffee are already a strategic business unit.

Hence never mix a strategic business unit as a strategy that can be chosen to apply or not.

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4 Chapter - Module 1 - SBUs