Strategic Business Units (SBUs) – A Detailed Explanation

Introduction

In large diversified organizations, managing several different businesses efficiently becomes

complex. To ensure better strategic focus, coordination, and accountability, firms adopt a
structural concept called Strategic Business Units (SBUs). An SBU is a semi-autonomous
unit within a larger enterprise, responsible for its own strategy, performance, and
profitability, while being aligned with the overall corporate vision.

Concept and Need for SBUs

As companies expand, the span of control for the CEO becomes unwieldy—sometimes with
30–50 divisions reporting directly to the top. This broad span can impair decision-making
and dilute strategic coherence. To overcome this, SBUs are introduced as an intermediate
layer between the CEO and the heads of divisions.

Each SBU typically includes a group of related businesses or product lines. These are led by
a Vice President (SBU Head) who is responsible for strategic planning and performance
management of the group.

Key Characteristics of SBUs

1. Strategic Focus: Each SBU has a distinct strategic mission and business definition.
2. Autonomy: General managers of the units under an SBU retain operational
autonomy.
3. Responsibility: SBUs are accountable for profits, investments, and strategy
execution.
4. Coordination Layer: Acts as a bridge between corporate headquarters and
operational divisions.

Criteria for Grouping Units into an SBU

SBUs are not grouped randomly. They are clustered based on strategic relatedness, which
may involve:

 Similar product lines or market segments.

 Common competitors or customer base.
 Shared key success factors like R&D, branding, or distribution channels.
 A need for global integration and coordination.

For example, a company with several food brands may group them into a “Food &
Beverages” SBU, while separating healthcare or electronics into different SBUs.
Example: General Electric (GE)

General Electric (GE) is a classical example of SBU-based structure. Its diverse operations
—aviation, healthcare, power systems, and financial services—are divided into SBUs. Each
unit operates under its own leadership and strategies while being coordinated under the
overall GE brand.

Other examples include Union Carbide and General Foods, which structured their divisions
into SBUs to ensure better market orientation and strategic clarity.

Advantages of SBUs

1. Improved Strategic Planning

SBUs allow top management to focus on strategy for each business separately,
considering its unique market dynamics.
2. Focused Resource Allocation
Helps in allocating budgets, R&D, and talent based on business priorities rather than
uniform distribution.
3. Enhanced Accountability
Each SBU is evaluated for its own performance, which motivates managers to deliver
better results.
4. Better Coordination
Related businesses under one SBU can share best practices and synchronize efforts.
5. Training Ground for Leadership
SBU heads act like mini-CEOs, building leadership bench strength for future top
roles.

Disadvantages / Challenges of SBUs

1. Risk of Silos
SBUs may become isolated and resist collaboration with other parts of the company.
2. Duplication of Efforts
Overlapping functions across SBUs may lead to inefficiencies in functions like HR,
IT, or procurement.
3. Conflict in Role Definition
The balance of power between the SBU head and unit-level general managers can
lead to friction if not clearly defined.
4. Complexity in Coordination
The added layer (SBU VP) can sometimes slow down decision-making or dilute
accountability.
5. Cost Overheads
Maintaining separate management teams, systems, and support functions increases
overhead costs.
Strategic Relevance

SBUs are especially effective when:

 The company operates in diverse markets or geographies.

 The organization wants to manage product/market complexity.
 There is a need for strategic decentralization without losing overall control.

Today, multinational corporations such as Procter & Gamble, Unilever, and Tata Group
often use variations of the SBU concept to manage their wide-ranging businesses across
regions and product categories.

Conclusion

The Strategic Business Unit structure is a powerful tool in the hands of large corporations to
decentralize operations while maintaining strategic coherence. It helps balance local
responsiveness and global coordination, making it ideal for companies with a complex
portfolio of products and markets. However, its success depends on clear role definition,
efficient communication, and alignment between SBU strategy and corporate goals.

In a dynamic and competitive global environment, SBUs serve as building blocks of

strategy execution, enabling businesses to remain agile, focused, and customer-oriented.

The text describes the concept of Strategic Business Units (SBUs) as an organizational
structuring approach, particularly useful for large, diversified companies.

Here's a breakdown of the key points:

 Purpose of SBUs:
o Rationalizing Varied Businesses: SBUs are introduced to bring a more
rational and cohesive direction to a firm's diverse business interests.
o Managing Span of Control: They are especially useful when the Chief
Executive Officer (CEO) has too many direct reports (e.g., 40-50 general
managers), leading to an unmanageably wide span of control.
o Improving Strategic Management: By grouping related businesses, SBUs
aim to improve strategic thinking, planning, and coordination across these
diverse interests.
 How SBUs are Formed:
o Adding a Layer: A new organizational layer is created between the CEO and
the general managers of existing divisions.
o Grouping Related Businesses: Strategically related businesses or divisions
are grouped together to form an SBU.
o SBU Head: Each SBU is typically placed under the leadership of a Vice-
President (or similar senior executive), who then reports to the CEO.
  Criteria for Strategic Relatedness: Businesses are grouped into an SBU based on
strategic connections, which may include:
o A closely related strategic mission.
o A common need to compete globally.
o Common key success factors (i.e., the critical elements that determine
competitive advantage in that industry).
 Popularity: The SBU concept is quite popular, particularly in the United States.
o Examples: General Electric, Union Carbide, and General Foods are cited as
well-known examples of companies that have successfully implemented the
SBU concept.
 Challenges and Delicate Balance:
o Task Allocation: A critical challenge lies in precisely defining the roles and
responsibilities between the SBU head (Vice-President) and the general
managers of the individual units (divisions) that comprise the SBU.
o Balancing Latitude and Coordination: This requires a careful balance:
 General Managers' Need for Latitude: The general managers of the
individual units need sufficient autonomy and flexibility to manage
their specific businesses effectively.
 SBU Heads' Need for Strategic Coordination: The SBU heads need
enough authority to ensure strategic alignment and coordination across
all the businesses within their SBU. Achieving this balance is crucial
for the SBU structure to be effective.

In essence, SBUs help large, diversified corporations manage complexity by creating

intermediate strategic groupings that focus on particular market segments or business areas,
thereby enabling more effective strategic planning and execution without overburdening the
top executive.