Strategic business unit

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. 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. 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 include 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. Therefore, an SBU should have a set of external customers and not just an internal supplier. (Arnoldo C. Hax and Nicholas Majluff)

A Strategic Business Unit ( SBU ) is generally defined by what it has in common, as well as the traditional aspects defined by McKinsey, of separate competitors and a profitability bottom line.

The commonalities are five in number:

An SBU may be defined by its common raw materials. Such a company, Kimberly-Clark for example has a variety of paper products such as Kleenex, Kotex (sanitary napkins ), Huggies ( originally based on cellulose).

Another SBU may be defined by its common manufacturing processes: A company such as General Motors may have separate units making automobiles, trucks, diesel-electric locomotives, all based on such engineering and assembly processes.

Another SBU relies on a common distribution method; “The Sharper Image” started by utilizing advertisements only in airline magazines using direct mail . Its success eventually brought it to using regular retailing stores as well

Yet another SBU is based on common customers: Proctor & Gamble makes Pringles potato chips, Ultra-Pampers, Dawn detergent, Crest toothpaste, all based on the fact that these products are largely sold through super markets.In the past several years they also acquired Gillette Razors for much the same reason.

A last SBU may be based on its service processes, such as an accounting firm ( Deloitte Touche ) or a consulting firm ( Accenture ) where its particular set of skills of its personnel have a clear competitive advantage. A shipper/ warehouser such as UPS or Federal Express similarly fits this definition.

There are three factors that determine the success of an SBU:1. The degree of autonomy given to each SBU manager2. The degree to which an SBU shares functional programs and facilities with other SBU's3. The manner in which the corporation evaluates and rewards the performance of its SBU managers

Companies today often use the word “Segment” or “Division” when referring to SBU’s, or an aggregation of SBU’s that share such commonalities.

Walter P. BlassVisiting Professor of Management, Grenoble Graduate School of Business, Grenoble, France