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Strategic Business Unit: this article provides a practical explanation of the Strategic
Business Unit (SBU). After reading, you’ll understand the basics of this powerful
strategy tool.
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SBUs are large enough to have their own support functions in terms of Human
Resource Management (HRM), training & development, and marketing. The use of
seperate divisions (SBU’s) offers several advantages to organisations. For example, each
SBU can fully focus on a separate target market.
The structure works best for organisations with multiple product structures. Examples
of this are LG and Proctor & Gamble. The former manufactures many consumer
products, such as fridges, televisions, air conditions, and so on. These are made by
different ‘small’, independent business units, making it possible to track costs, income,
and profits independently. The units are typically considered as profit centres, and are
under control of corporate officers or senior executives.
When a unit is labelled as an SBU, it’s given full independence when it comes to
decision making, investments, and budgets. Another advantage of this business
structure is that it can respond quickly to shifts in product markets.
In some cases, these units operate as autonomous companies. The highest corporate
official assigns the responsibilities for the company to the division managers.
The parent company is also responsible for coming up with and executing the overall
strategy and managing the SBU through strategic and financial checks.
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The less checking and interactions there are between the SBUs and the parent
company, the quicker SBUs can respond to changing business environments.
The business unit has its own dedicated management team, own brand and reputation,
own objectives, and often other physical locations. It benefits from the advantages
related to working in a smaller organisation, but is not bound by limited availability of
resources.
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At the same time, the smaller business also benefits from the advantages of a larger
company, such as an established brand and broad base of customers. The challenges
larger organisations are faced with, such as excessive bureaucracy, can be avoided.
In order to make independent and effective Strategic Business Units from a large
company, there are a few requirements to be met. The most far-reaching changes that
have to be implemented relate to the organisational structure, recruitment & selection,
corporate culture, and the remuneration system. These are explained below.
Only hire people who want to build a new organisation from the ground up and want to
learn to work effectively in an uncertain environment with lots of experiments.
The rewards for starting a successful business are obvious. Fame and fortune. But
bigger companies can’t always offer shares or other important financial incentives to
their employees.
Luckily, they don’t always have to. As Frederick Herzberg describes in his two-factor
theory, financial incentives only partially influence employee motivation.
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Employees are also motivated by their own careers. They want to be recognised for
their work within the company and grow along with it.
Employees want to feel appreciated for their contributions to the organisation. It’s
therefore a good idea to fulfil employee wishes or demands as much as possible, if this
helps them to become even more effective in their work.
If a computer programmer works better at night, then they should be offered the
option of working at night.
Strategic Business Units are organisationally complete, independent units that develop
and implement their own strategies. They do still report to headquarters about their
performance, but they operate completely independently and are organised in a way
that suits their market. The units are often large enough to implement their own
internal management structures.
Divisions arise from analyses of business activities, while strategic units should be set
up in order to respond to the external market. Instead of looking at themselves and
analysing themselves, companies should analyse and study the market.
The main difference between divisions and Strategic Business Units (SBU) is that
divisions have an internal focus, while the focus of strategic units is directed outwards.
The market.
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A department can often receive instructions that are unclear or not fully applicable.
When a company has adapted its structure and converted divisions into strategic units,
they can develop their own strategies.
They can then also analyse their own competitive position, develop products, and meet
the needs and demands of their customers in specific markets. Divisions tend not to do
those kinds of things.
Although different divisions can have different profit centres, decisions about the
allocation of resources are not easy ones. For Strategic Business Units (SBU), it’s easier
to make such decisions, making their use of resources more likely to be efficient.
Strategic units who are the market leader in a certain segment are likelier to be
allocated resources.
Cons
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These criteria make up the foundation of an analysis GE uses to assess the viability of a
strategic unit in the long term. The idea behind the model is to determine the appeal
and relative strength of a unit to see if they would be successful, which ones would
perform averagely, and which ones would perform poorly and therefore have to be
closed.
Companies that perform strongly are businesses with strong business strengths and
high uniqueness values in a sector. Companies that perform averagely, are in the mid-
range. Weak business units don’t have strengths and are not very unique in the sector.
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More information
1. Dvir, D., & Shenhar, A. (1992). Measuring the success of technology-based strategic
business units. Engineering Management Journal, 4(4), 33-38.
2. Dvir, D., Segev, E., & Shenhar, A. (1993). Technology’s varying impact on the success of
strategic business units within the Miles and Snow typology. Strategic Management
Journal, 14(2), 155-161.
3. Hinterhuber, H. H., & Levin, B. M. (1994). Strategic networks—the organization of the
future. Long range planning, 27(3), 43-53.
Janse, B. (2020). Strategic Business Unit (SBU). Retrieved [insert date] from
Toolshero: https://www.toolshero.com/strategy/strategic-business-unit-sbu/
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