Strategic Business Unit | Full Form of SBU, Types and Structure

What is Strategic Business Unit (SBU)?

Strategic Business Unit (SBU) can be defined as a separate business unit with its vision, mission, and objectives. In a large business, where there are several departments, it is preferred to build SBUs and give all of them the power to achieve their individual goals and to contribute to organisational goals as a whole. Strategic Business Unit (SBU) is a separate, independent, and fully functional unit. For example, TATA Group has several SBUs. Individual SBUs for Automotive, Airlines, Chemicals, Defense, FMCG, Electric Utility, Finance, Home Appliances, Hospitality, IT Services, Locomotives, Retail, Real Estate, Steel, and Telecommunications, have been set up under the TATA group.

Full Form of SBU

SBU stands for Strategic Business Unit. Units formed under Strategic Business Unit (SBU) aim to maximise profits and minimise costs of their own unit, thus maximising profits and minimising costs of the organisation as a whole. SBUs can be identified as small units of different functions, coming under an organisation.

An SBU is a grouping of related businesses amenable to composite planning treatment. As per this concept, a multi-business enterprise groups its multitude of businesses into a few distinct business units in a scientific way. The purpose is to provide effective strategic planning treatment for each one of its products/businesses.

Characteristics of Strategic Business Unit (SBU)

1. Separate Mission and Objectives: Every SBU has its vision and missions for which it works. Their objective is to achieve those missions and contribute towards the entity’s business.

2. Group of Related Businesses: SBU can have either a single business or a collection of related businesses so that independent planning can be done. However, SBU may/may not share the same utilities of business like raw material, power, human resources, etc.

3. Own Set of Competitors: Every Individual SBU has its own set of competitors for which different strategies and goals are formulated.

4. Decentralised Management: In every created SBU, a manager will be deployed, who will have the responsibility for planning, performance, profit, etc. The manager shall be accountable for the performance of each SBU.

Types of Strategic Business Unit (SBU)

Companies after creating the Strategic Business Unit (SBU) have to ascertain how much resources shall be employed by individual SBUs. For this, they have to take into account several factors to decide, like, Profitability, Market Share, Opportunity Market, etc. To divide SBU categories to ascertain resources to be deployed, Boston Consulting Group’s Matrix is given which divides SBUs into four different categories which are:

1. Star: These are the SBUs that perform well and have recorded rapid growth. They possess a decent market share and possess a high market growth rate. As they have growth potential, they are the most favorable for expansion. For example, Apple’s iPhone.

2. Cash-Cow: These SBUs have a high market share but a low growth rate. These are generally those markets that are already established and generate regular economies for business and as their growth rate is low they need low costs to survive. For example, Apple’s IWatch (Smartwatch) or Apple’s MacBook.

3. Question Marks: They have low market share but high growth opportunities. As opportunities are high they require more cash to hold their market share and require heavy investment. If Question Marks are attended well they can become Star, but if not handled carefully they may turn into Cash Trap for business. For example, Apple’s iPad.

4. Dogs: These SBU’s growth rate and market share are relatively low. They do not have much future and must be disinvested by the company. For example, Apple’s iPod.

Structure of Strategic Business Unit (SBU)

The SBU structure is composed of operating units where each unit represents a separate business to which the corporation delegates responsibility for day-to-day operations. By such delegation, the corporate office is responsible for formulating and implementing overall corporate strategy and managing SBUs through strategic and financial controls. The SBU structure groups similar products into strategic business units and delegates authority and responsibility for each unit to a senior executive who reports directly to the chief executive officer. This change in structure can facilitate strategy implementation by improving coordination between similar divisions and channeling accountability to distinct business units. A Strategic Business Unit (SBU) structure consists of at least three levels, with a corporate headquarters at the top, SBU groups at the second level, and divisions grouped by relatedness within each SBU at the third level. This enables the company to more accurately monitor the performance of individual businesses, and control problems.

For example,

• Aditya Birla Group’s corporate headquarters are at the top of the whole structure of SBUs. The corporate office provides overall strategic direction, governance, and oversight for the entire structure.
• Further, at the second level, Aditya Birla Group has several major SBUs, each operating in a distinct industry. Some of the SBUs are Aditya Birla Capital Limited, Aditya Birla Fashion & Retail Limited, Aditya Birla Chemicals Limited, and Aditya Birla Group’s Metals Business.
• Within each SBU, there are further divisions that are grouped based on relatedness to the industry. For instance, within Aditya Birla Chemicals SBU, there are SBUs set up for India, Thailand, etc.

Difference Between Strategic Business Unit & Division

Basis	Strategic Business Units	Division
Strategy	Each and every SBU prepares its own set of targets, objectives, and vision which they have to follow.	Divisions do not have a particular strategy of their own. They accept the strategy formulated by top-tier management.
Decentralisation	SBU has a manager who is charged with proper authority and responsibility, which makes it flexible to manage an SBU.	Divisions follow a traditional hierarchy, where there is no flexibility of control, as they follow commands from upper management.
Result Oriented	SBU are formulated with a result to achieve.	No such goal-oriented style is adopted under divisions.
Feedback	SBU’s are formulated to achieve goals, and the top management here looks for feedback from the SBUs.	Divisions Feedback is not the priority of management.
Use of Technology	SBU involves the use of the latest technology and modern means of input as new-age tech can help better in achieving the desired outcome effectively and efficiently.	Divisions rely only on traditional approaches under their department.

Advantages of Strategic Business Unit (SBU)

1. Focused Strategy: SBUs allow for a more focused approach to different markets or product lines. Each SBU can develop its own strategies in accordance with its target audience.

2. Resource Allocation: SBUs enable efficient allocation of resources based on the individual unit’s needs and priorities, optimising the utilisation of assets and capital.

3. Risk Management: Since SBUs operate somewhat independently, risks in one unit are somewhat contained and may not affect the entire organisation. This risk mitigation can enhance overall corporate stability.

4. Innovation: SBUs can experiment and innovate more freely, as they have greater autonomy. This can lead to quicker product development and adaptation to market changes.

5. Accountability: Each SBU has a manager, who is accountable for his/her SBU’s performance. Similarly, each SBU is accountable to the top-level management.

Disadvantages of Strategic Business Unit (SBU)

1. Duplication of Efforts: There may be duplication of functions and resources across SBUs, leading to inefficiencies in areas such as administration, marketing, and research and development.

2. Conflict of Interests: SBUs may prioritise their individual goals over the organisation’s overall objectives, potentially leading to conflicts of interest and competition among units.

3. Overhead Costs: Maintaining separate SBUs can increase administrative and overhead costs, particularly if each SBU requires its own support staff and infrastructure.

4. Resources Allocation Bias: There is a risk that resources are allocated in a biased manner to SBUs that appear more profitable or promising, neglecting long-term strategic priorities or emerging markets.