Journal of Market-Focused Management, 5, 59 – 73 (2002)

# 2002 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.

Achieving Managerial Synergism: Balancing

Strategic Business Units and Profit Centers
A. COSKUN SAMLI*
Research Professor of Marketing, University of North Florida

ERIC H. SHAW
Professor of Marketing, Florida Atlantic University

Received February 15, 2001

Abstract

Much of the marketing and management literature emphasizes the importance of Strategic
Business Units (SBUs) as an organizational unit in developing market power or
competitive advantage. On the other hand, the accounting literature puts special emphasis
on Profit Centers (PCs) as an organizational unit. Are these two organizational units
related? If so, how? This article makes a critical distinction between the two concepts. In
this analysis, SBUs are based on a long-term, outward-looking market orientation for
achieving profitability, whereas PCs focus on a short-term, inward-looking cost reduction
approach to achieve profits. It is posited that distinguishing between the two and managing
SBUs and PC strategically is likely to generate a synergistic impact for the firm. This
impact will both enhance its competitive position in the market and its profit picture.
Keywords: synergism, strategic business units, profit centers, strategic management, optimal performance

Introduction

All firms have limited resources. Therefore, one of the most important aspects of
management is to utilize these limited resources optimally. From a marketing perspective
these limited resources must be allocated in such a way that they will provide the most
favorable market position. In essence this means establishing a very good relationship with
the market segments the firm targets and sell the most profitable goods and services while
consumers in these target markets are satisfying their needs and enhancing their quality of
life. Managing the firms’ limited resources is a very complex issue because of the
abundance of alternatives available to the management.
Most firms are composed of organizational units that are accountable for specific sets
of activities. Some of these units compete in well-defined markets. They serve distinct

* For Correspondence: Professor A.C. Samli, Dept. Management, University of North Florida, Jacksonville,
Florida 32224.
60 SAMLI AND SHAW

customers with carefully grouped products or services and have clearly identifiable
competitors over whom they are trying to establish a competitive advantage (Day,
1990). But all of these units do not have equal appeal in the firm’s markets, nor do
they yield the same level of return on investments. The marketing discipline refers to
them as Strategic Business Units (SBUs), and the accounting discipline calls them
Profit Centers (PCs). These units carry out the implementation of strategic plans.
However, since they do not have equal market power or similar level of profitability,
their relative roles must be identified carefully and they must be assigned right
responsibilities. The firm must allocate its resources among these units and must be
able to generate the best possible overall performance. The allocation process is made
easier and more effective as the firm decides which of these units are PCs and which
ones are SBUs. This overall orientation can be construed as the essence of the firm’s
strategic posture (Melumad, Mookherjee, Reichelstein, 1992; Brock, 1990; Day, 1990;
De Coster, 1976; Gray, 1986).
The notion of SBU is generally credited to General Electric’s attempt in early 1970’s to
more effectively organize its hundreds of products ranging from light bulbs to toasters to
computers to jet engines to nuclear reactors, into more meaningful entities for planning
purposes. Thus was born the concept of strategic business units as GE’s hundreds of
products were organized into a small number of SBUs such as consumer products and
services, industrial products and components, technical systems and materials, and
international power systems (Hall, 1978). This term is now a common place in the
marketing literature (Day, 1990; Jain, 2000).
The origin of profit centers may be traced back to late 1970s and early 1980s when a
bottom line orientation and the profit contribution of different products or departments
started attracting much attention, this allowed less profitable activities, entities or
organizational units to be eliminated at a faster pace than before.
Although typically a distinction is not made between PCs and SBUs and some of the
literature treats them synonymously (Perrault and McCarthy, 1996), there are important
differences between PCs and SBUs. Unless these differences come into focus and are
treated as such, the firm’s overall performance and its implementation of the strategic plans
cannot be optimized. Perrault and McCarthy (1996) defined a SBU as ‘‘an organizational
unit (within a larger company) that focuses on some product-markets and is treated as a
separate profit center.’’ Although both SBUs and PCs are organizational units and their
linkage is very critical for the firm’s overall performance, the distinction between the two
must be understood if optimization is to take place. For our purposes in this article a PC is
more tactical and a shorter run oriented internal business unit. A SBU, on the other hand, is
a strategic and long-term oriented unit of the organization that makes a special impact on
the firm’s external market. We argue SBUs are used for the firm to reach out in the market
and establish long-term competitive advantage, while PCs are used to deal with internal
cost and generate short-term profit. Thus, SBUs are outward oriented. They focus on
markets with greater future potentials. PCs, on the other hand, are more inward oriented.
They yield larger returns on investments in the short run and they emphasize on cost
savings. Granted, firms need both competitive advantage and cash flow, but not
necessarily in equal proportions.
ACHIEVING MANAGERIAL SYNERGISM 61

This article has three objectives: first, to distinguish between SBUs and PCs concep-
tually; second, to examine the relationship between the two; and third, to examine how and
under what circumstances SBUs and PCs function well for the firm. Only by distinguish-
ing these two types of organizational units effectively can the firm successfully allocate its
resources and enjoy synergism by creating a positive revenue stream leading to sustainable
competitive advantage in the market place and resulting in long term profitability.

The Dichotomy

Consider, for instance, the hypothetical case that the highest return in all of K-Mart’s
departments last year was their rather specialized and limited food department. Apparel
and sporting goods departments did not come close to the performance of the food
department. As a result, the company decided that there should be substantially more space
and resources allocated to foods than apparel and sporting goods.
Indeed, the food department may be very profitable, but in a K-Mart store that is known as
a discount store, will customers be shopping for food only? Better yet, will they come to a
discount store primarily for its food offering? The likelihood is they will not. Consumers
will frequent a K-Mart store because it is a discount store with heavily discounted prices for
large non-food selections. Moreover, just around the corner from K-Mart stores there are
Food-Lions, Winn-Dixies, or Krogers, etc. Thus, less profitable departments such as
apparel and sporting goods are bringing the customers to the store. These are SBUs, yet
the store makes more profit on food items and therefore, the food department in K-Mart is a
PC. This is a responsibility center in which both the revenues and costs of the products and
services are controlled in an optimal manner (Atkinson et al., 2001). The consequence of
enlarging a PC (food) at the expense of an SBU (apparel or sporting goods) is an increase
primarily in short-term profitability at the expense of K-Marts’ long-term viability. This is
why distinguishing SBUs from PCs is so critical. K-Mart is making money from the sales of
food items because apparel and sporting goods are bringing the customers to the store. If the
firm can identify its SBUs so that it can attract more customers from its target markets, it can
sell the products or services of PCs and make substantially more money.
Almost all companies operate as several businesses but they usually do not identify these
separate organizational units carefully. This is at least partially due to defining their
business too narrowly (Abell, 1980; Kotler, 2000). They may define their business as part of
an industry based on products rather than as part of a market based on needs. Companies see
themselves in the motorcycle or bicycle industry rather than in the transportation market. Or
they see themselves in the movie making industry rather than in the entertainment market.
In such cases these firms fail to identify their SBUs and PCs clearly (Levitt, 1960).
Two key points must be considered. First, although it is not typical, in some cases the
SBU and the PC could be the same. After all, it is possible for an organizational unit to be
outward and strong in the market place as well as being internally cost efficient and
profitable. When Hewlett-Packard announced its strategic realignment plans whereby
creating two separate companies, one is the new measurement company, and the second
is the computing and imaging company, although not explicit, there was a key assumption
62 SAMLI AND SHAW

that both of these planned companies have strong SBUs, which also are PCs simulta-
neously. But how wise would such an assumption be? What would be the consequences of
an error in such an assumption? (News Release, 1999) Second, in time, organizational units
may change from being SBUs to PCs or vice-versa. Because of local demographic changes,
for instance, the department store’s children’s department may gain additional market
power and become a SBU. Similarly, as illustrated earlier, the food department may develop
special point-of-purchase displays, cost cutting and efficiency enhancing procedures and
become a PC. Also following the HP example above, what if the measurement company
develops a very strong market position but it is the computing and imaging company that
performs well in terms of immediate profits. By separating the two, the company may be
making a serious error. Particularly in managing larger organizations, the distinction and
identification of SBUs and PCs are among the most important planning tools of a firm
(Arzac, 1986; Kotler, 2000; Cravens, 1997; Jain, 2000).

Identifying PCs and SBUs

How these organizational units are identified and categorized as SBUs and PCs and how
they are managed simultaneously often make a significant difference in developing and
implementing the firm’s strategic plans. Consider, for instance, automobile sales and credit
departments. Time and again it has been seen that when the credit function of the
automobile company is used to enhance sales (SBU) rather than to focus on profit (PC),
the automotive company has performed better overall. The credit function in this case may
enhance the firm’s market appeal and improves the firm’s efforts to sell more cars.
Similarly, a retail merchandiser that insists on having its credit department operate as a
major profit making unit (PC), as opposed to operating as a support service enhancing the
firm’s sales volume (SBU), is likely not to succeed in bringing more prospective
customers. If the credit department is considered as a PC, such a retailer will probably
lose more in sales than it will gain in interest charged by the credit department. If for
instance, the credit department charges 10 plus percent (PC) it will sell fewer cars than
charging say 2 percent (SBU). What the auto dealer does not make from the credit
department will be more than offset by increased sales (PC). The net effect is reduced
profitability. In such cases different roles need to be attributed to the organizational unit
depending upon whether it is considered a PC or a SBU. If done properly, jointly
functioning PCs and SBUs will provide the firm with overall synergism.
In smaller businesses or in retail stores, the picture may be even less clear-cut regarding
which department or product group is a SBU and which one is a PC. For instance, a
department or a product (or a product group) may be used as a loss leader in a retail
establishment to bring more traffic into the store. Although it may not be making much
profit or may even incur losses, this situation may be more than compensated for by
increased sales of other products or departments. The loss leading product or department is
not a PC but a SBU. Therefore, it should not be shut down because it is not yielding
adequate profits. On the contrary, the store’s market outreach will be strengthened by using
that loss leading SBU.
ACHIEVING MANAGERIAL SYNERGISM 63

Consider, for instance, a busy lunch counter of a drugstore located downtown in a small
university town in the Southeast. The lunch counter has always been there and is always
busy. One day the drugstore closed down the lunch counter because it was not yielding
adequate profits. However, the drugstore did not account for the lunch crowd who
purchased many items in the drugstore when they came to have lunch. The lunch counter
was an SBU, not a PC. Although the lunch counter incurred losses, it generated more than
proportional sales in other departments for a net increase in overall profits. But the store
management was not perceptive enough to detect this fact. By closing it down the
drugstore lost more from indirect revenues than it gained from reducing cost.
A SBU, of course, may also be profitable. A supermarket may become known for its
bakery and fresh produce. These two organizational units may give the store a competitive
advantage and increase store traffic. This does not imply that these two departments are
not profitable. It may only be that these two departments are not nearly as profitable as
some of the non-food items or as the health and beauty department. However, without the
bakery and fresh produce (SBUs), there will not be enough traffic for non-food items or for
the health and beauty departments (PC) to produce the high profit levels that they achieve.
Honda Civic has been a very popular car. Honda has been de-emphasizing its Civic.
However, it may be claimed that the Civic functioned as a SBU to bring customers in. De-
emphasizing it may jeopardize the company’s market position and indeed its future. As a
result of these observations, the following research propositions can be constructed.
Somewhat similarly, Volkswagen (VW) discontinued its most profitable and popular
model, the Beetle, for over 30 years. It may have been the SBU that VW needed to make
more profit in the 1970s and 1980s. It is quite possible that the current resurgence of the
Beetle is helping VW to sell more of its more profitable models. Thus, the research
propositions are:

RP1: All firms have PCs and SBUs, but they are not easily distinguished.
RP2: If PCs and SBUs are not carefully identified, the firm is performing less than
optimally.

The Relationship of PCs and SBUs to Strategic Management

All businesses have PCs and SBUs. The critical aspect of marketing management is to
make sure that they are carefully identified and coordinated. Here one approach to
differentiating the two and understanding their respective contribution to the firm lies in
Porter’s generic strategies (1985). His generic strategies, differentiation, focus and cost
leadership may be connected to SBUs and PCs. The first two are SBUs and the third is a
PC respectively (Govindarajan, 1988). Again, considering the K-Mart example discussed
earlier, the sporting goods or apparel departments are likely to be managed as SBUs so that
K-Mart can reach out, differentiate itself and focus its markets. On the other hand, the food
department follows a cost leadership strategy, or PC.
Exhibit 1 illustrates the quality of management based on effective and ineffective
performance of SBUs and PCs. Effectiveness here is defined as achieving long-term
64 SAMLI AND SHAW

Exhibit 1. SBU and PC performance impact on the quality of management.

STRATEGIC BUSINESS UNITS

Effective Ineffective

Effective Effective Overall Management Marginal Management

Balanced internal and
PROFIT CENTERS External orientation
(Situation One)
Ineffective Marginal Management
Excessive external Orientation
(Situation Three)
Excessive internal orientation
(Situation Two)
Ineffective Overall Management
Imbalanced internal and
External orientation
(Situation Four)

strategic goals in the case of an SBU and short-term profit goals in the case of a PC. In
other terms, a proper identification of SBUs and PCs. The exhibit illustrates four separate
situations.

Situation One:

If both SBUs and PCs are operating effectively, as shown in the upper left quadrant, then
this situation is termed effective overall management. The firm’s short-term profits and
long-term market growth are balanced. In such cases the combination of SBUs and PCs
are balanced and synergistic. In fact, in this kind of ideal situation the PCs and SBUs may
be the same. There will be no need for immediate change.

Situation Two:

If the SBUs are not operating effectively, but the PCs are effective, as shown in the upper
right quadrant, this is a strategic weakness and tactical strength representing only
marginally effective short-term management. It implies that the firm puts more emphasis
on internal orientation and short-term results, and hence is weakening its long-term market
power. It indicates the firm is sacrificing the future for the present or, the firm is putting
more emphasis on its internal conditions and emphasizing more cost leadership at the
expense of market power created by differentiation and focus. There must be plans for
strengthening the firm’s external orientation.

Situation Three:

If the SBUs are performing effectively, but the PCs are not effective, as shown in the lower
left quadrant, this is a strategic strength and tactical weakness and also represents, again,
marginal management. This suggests that the firm is over concerned with the future and
market growth but is not preparing itself at the present time to get there. Hence it may not
survive long enough to capitalize on its market growth potentials. This situation would
necessitate more emphasis on developing better PCs.
ACHIEVING MANAGERIAL SYNERGISM 65

Situation Four:

Finally, if both SBUs and PCs are operating ineffectively, as shown in the lower right
quadrant, this is ineffective overall management. It implies that the company is not sound
both from a strategic and tactical perspective. Its external and internal points of emphasis
are all out of line. That firm does not have much of a present let alone a future. Immediate
action is essential for survival.
At the point of this writing, Microsoft appears to have its SBUs and PCs in harmony. It
may be speculated that while windows has been used as an SBU, DOS was the PC. Now
its Internet explorer software is the SBU, while Windows is being transitioned into a PC.
This careful balancing of long-term and short-term as well as internal and external factors
is why the company is performing so well. It must be considered to be an example of the
first case. Sooner or later it will be necessary for Microsoft to distinguish its PCs and its
SBUs further, in greater detail and perhaps with different new products. Microsoft, just as
any successful company, plans for a futuristic strategy of being market oriented and being
a synergistic company. As such it must concentrate on the best markets and function
effectively in these. While it is reaching out with differentiation strategy by using
additional SBUs, it is also likely to develop other cost leader PCs (Situation One).
Sears provides an example of situation two above, ineffective strategic and effective
tactical management. Earlier, Sears was successful with its Allstate Insurance SBU (an
example of case one, effective overall management), and tried to expand this concept by
developing SBUs to generate in-store traffic and additional revenues in other financial
services. It bought Coldwell Banker, a real estate company, and Dean Whitter, a
brokerage firm. It made each of these financial services a separate department by
adding a kiosk and sales representatives. These SBUs turned out to be quite unprof-
itable, because they did not fit the Sears image of clothes, tools and appliances.
Moreover it is difficult to hold people’s attention long enough to sell real estate and
securities while their children are playing with merchandise, making noise or complain-
ing they are bored in the background. These departments were not very profitable, and
therefore did not serve as strong PCs. But overall, they were also not strategic, because
they did not necessarily increase store traffic, and therefore they were not serving
effectively as SBUs. Sears, thus for a while, displayed the situation two in Exhibit 1.
The company subsequently abandoned them.
Some years ago G.E. initiated a service contract program, salespeople were encouraged
to sell service repair contracts along with the appliance. Because of the profitability of the
program and the incentives given to the salespeople, this service contract was being
pushed vigorously. Although it was thought this would generate considerable profits, the
reverse occurred. As prospective buyers were considering an appliance purchase, the
salesperson’s special efforts to sell the service repair contract gave the impression that
something would soon go wrong with the appliance. Thus the appliance sale (PC) and
service repair contract (SBU) worked against each other. Partly because service contracts,
which should have been considered SBUs, were pushed as PCs.
A similar practice by Mercedes Benz can also be cited. In the late 1970’s and early
1980’s, the company offered a Mercedes service contract. Again, because of the profit
66 SAMLI AND SHAW

attractiveness of this service, it was pushed vigorously by the salespeople and advertised
extensively through the national media. However, since prospective Mercedes buyers
expect near perfection from this car, emphasizing breakdowns and service became a turn-
off. Thus the automotive sales (PC) were in conflict with the service contracts (SBU).
At the end of the 1980’s IBM insisted that mainframes rather than personal computers
were their key competitive tool generating a competitive edge (SBU). To the contrary,
while mainframes were still PCs for the company, they had long ceased being an SBU.
IBM lost a lot of money until it got its PCs and SBUs in order once again. Its personal
computers and related products developed a series of SBUs and PCs. All three examples
above illustrate situation three.
Wang Company, a computer giant in the late 1970’s and early 1980’s, concentrated on
certain specialized mainframes and specific financial services, but by the mid-1980’s it
was not able to identify, differentiate and use both its PCs and SBUs. Wang has been
struggling ever since. By not being able to identify and utilize its PCs and SBUs
effectively, Wang could not develop an effective marketing strategy. It has not been able
to differentiate, focus or establish cost leadership. This is an example of situation four in
Exhibit 1 (Situation Four).
When the company cannot or does not identify its SBUs and PCs, then it cannot use
these strategic concepts in a manner that will generate synergism and achieve optimal
profits. Thus, the company cannot plan and implement a powerful marketing strategy. Nor
can it allocate its resources properly among its organizational units. The preceding
discussion leads to the following research proposition.

RP3: If SBUs and PCs are not the same, making sure that both groups get the
necessary attention would improve the market position of the firm as well as its
profitability.

Optimal Performance

When SBUs and PCs function interactively and generate synergism for the company, it is
clear that the firm is receiving the maximum benefits from its resources and is optimizing
its performance. In recent years, two managerial concepts have plagued American
corporations. These are cost orientation and downsizing. Cost orientation and budget
cutting have become so commonplace that companies, in order to save money, have been
selling parts of their businesses, closing down units, and eliminating departments or
services. In doing so, many companies have cut out their best SBUs in favor of PCs. Sears,
for instance, eliminated its catalog business which was, at least partially, associated with
the name of Sears and could have been considered a strong SBU.
Since cost cutting is a reflection of internal orientation and a short-term focus, as
companies follow this course, they are eliminating externally oriented SBUs, thereby
discounting their future in favor of the present (Schrage, 1992). Further, as SBUs are
eliminated, PCs become less effective since the synergy between the PCs and SBUs is
broken, thus negatively impacting both present and future.
ACHIEVING MANAGERIAL SYNERGISM 67

Over 43 million jobs have been eliminated in the U.S. since 1979 (Downsizing of
America, 1996). Although many more new jobs were generated during the same period,
these jobs are not high paying upper middle management jobs. The disappearance of the
high paying middle management jobs may appear economical in the short run, but in the
long run many companies have weakened their core competency areas. One of the key
reasons for this is that downsizing is part of an internal orientation. As such it is an
extension of extra efforts to make PCs more profitable in the short run. But downsizing is
partially (if not fully) weakening the SBUs and is also partially weakening PCs. In fact,
cost cutting efforts that limit SBUs, sooner or later will have a negative impact on PCs.
This is because if the firm does not perform well in the market place (external orientation
related to SBUs), neither will it maintain the profitability of its PCs for long (internal
orientation). Logically, it is not possible for a firm to maintain its long run profitability
while its market position is deteriorating. In either case, downsizing, along with budget
cutting disrupts the synergistic behavior (if there was one) or interferes with the possible
synergism that may be achieved between SBUs and PCs. Thus, the resultant research
question can be expressed as follows:

RP4: Because SBUs are typically less profitable in the short-run, they are subject to
elimination more readily.

SBU or PC: The Key Question

Not all units or components of a company can be considered either a SBU or a PC or both.
It is, therefore, important that the current status of the company’s organizational units be
carefully examined. In addition to SBUs and PCs, the firm has some Cost Centers (CC)
that do not enter into our discussion in this paper. The examination of the components and
their subsequent classification as PCs and SBUs is a very critical aspect of strategic
management. This examination is based on the premise that all units do not yield similar
levels of revenue, nor do they have equal power in fulfilling the firm’s efforts to
differentiate or focus in the market place. While some of these organizational components
may be functioning uniformly as SBUs and PCs, others in time may change their status.
The business in question must be able to distinguish between its SBUs and PCs and put its
resources and emphasis into managing them accordingly. Generally, the SBU or the PC
status of an organizational unit should be dictated by the market, outward orientation, but
must be managed internally, internal orientation. Thus, well-managed companies must
have a healthy balance of outward and inward orientations. In other words, they must have
well identified, well-managed and carefully coordinated SBUs and PCs. That also means
that these firms are using focus, differentiation, and cost leadership strategies carefully and
in a balanced manner.
Exhibit 2 illustrates some key criteria to decide if an organizational unit should be
considered a SBU or a PC. Also in this exhibit an attempt is made to distinguish SBU and
PC features as they related to Porter’s (1985) generic strategies. Once again, as seen in the
exhibit, while SBUs emphasize on differentiation or focus, PCs emphasize on cost
68 SAMLI AND SHAW

Exhibit 2. Factors determining the status of organizational

units.

Factor SBU PC

MANAGERIAL FACTORS
Short-Term Planning Horizon - +**
Long-Term Planning Horizon + -
FINANCIAL FACTORS
Higher Volume Sales +* -
Higher Profit Margins - +**
Higher Short-Term Cash Flow - +**
Higher Long-Term Cash Flow +* -
MARKETING FACTORS
Greater Image Building +* -
Greater Traffic Development +*** -
Greater Outreach +* -
Greater Customer Loyalty +*** -

* Differentiation leading to market power.

** Cost leadership to short-term profitability.
*** Focus or segmentation leading to market power.

leadership. The criteria in the exhibit are grouped into three categories: managerial,
financial and marketing. The exhibit is intended to be illustrative, not exhaustive. It must
be reiterated that, in time, the status of the organizational unit may change from a PC to a
SBU or vice-versa. From the exhibit, it is clear that the firm may do much better by
exchanging its tactical short-run internal cash generating PC activities for strategic market
oriented long-run profit generating SBUs. This is true, as long as it has enough internal
strengths to establish some strong PCs and as long as it is managerially shrewd in
identifying it’s PCs and its SBUs carefully (Samli and Shaw, 1997).
Only an examination such as the one indicated in Exhibit 2 will enable the firm to
recognize if such a change in the status of an SBU or PC is taking place. The earlier such
change is recognized and acted upon, the more effective the company’s marketing strategy
becomes. Naturally, effective marketing strategy receives its reward in the form of
profitability from the marketplace. Thus, the following research proposition is posited:

RP5: By emphasizing SBUs more, the firm can improve its performance in the long
run.

Changing Status of SBUs and PCs

The American economy is extremely dynamic (Samli, 1993). As its dynamic nature
interacts with businesses, SBUs may become PCs, PCs may become SBUs or the unit may
simply disappear, creating a void that needs to be filled by new SBUs and PCs. Exhibit 3
illustrates some factors influencing the changing status of PCs and SBUs. It also indicates
what kind of managerial impact these factors would create. Understanding these impacts is
conducive to changing the status of UPS to a PC or vice-versa. As seen in the exhibit there
ACHIEVING MANAGERIAL SYNERGISM 69

are two key groups of factors that are inherent in a business firm. Again, it must be
reiterated that our discussion here does not include pure cost centers like maintenance
insurance, rental arrangements and the like.

External Factors:

Changes in the economy could easily alter the status of SBUs or PCs. For instance, while
the economy was doing well, the high priced Nissan Infiniti’s may be a PC but if there is a
recession, the demand for lower priced Infiniti’s may increase at the expense of higher
priced Infiniti’s (SBU). Hence, the firm must know what to promote and how to optimize
its market performance in times of economic fluctuations.
New developments in competition may force Toys R Us to change its focus from one group
of toys as an SBU to another as PC. If, for instance, Tonka trucks were a SBU, and
competitors have introduced a more popular line of toy truck models, then Tonkas need to be
replaced with another group of toys immediately and this line must be promoted aggressively.
Unexpected consumer trends such as casual wear at business places, may force a clothier
to switch from formal or semi-formal wear (SBUs) to classic casual wear (the new SBU).
The changing competitive posture of a travel agency may force it to concentrate less on
traditional travel arrangements (the old SBU) and more on tours (the new SBU). If the firm
were to move from being a leader to a follower (Kotler, 1997) for instance, many of its
SBUs become PCs and it may have to develop new SBUs. Polaroid, at one point, was the
leader of instant photography, today it is more of a follower with limited market power and
new low cost cameras (new PCs and SBUs).

Internal Factors:

With the change of management, Sears, in the late 1970’s and early 1980’s, became
much more concerned with the financial aspects of business. It shifted its focus from

Exhibit 3. Factors causing a status change in SBUs and PCs.

External Factors Managerial Impact

. Changes in the economy
. New developments in competition
. Unexpected consumer trends
. Changing competitive posture of the
firm in the market place
Internal Factors
. Changes in the management
. Attempts to reposition the firm
. Sudden changes in the profit picture
. Major revision in the managerial
philosophy.
. Needed change of emphasis
. Strengthening SBUs or changing them
. Reassessing the SBU and PC classification
. Reevaluating the firm’s strenghts and
reassigning SBU and PC status
. Understanding what the previous management
was doing.
. Decision to strengthen the firms strength and
eliminating its weaknesses.
. Quick assessment of which SBU is falling short
or which pc is not working properly.
. Changing the managerial philosophy. For instance,
to become more short run oriented or more visible in the market.
70 SAMLI AND SHAW

Sears’ special brands: Craftsman tools and Kenmore appliances (SBUs) to real estate,
financial services and insurance. This change brought about a dramatic variation in
the company’s already identified and effective SBUs and PCs. In the meantime, Sears
also attempted to reposition its merchandising activity from department store to a
discount store with everyday low prices and much less service. Again, the SBUs and
PCs of the company changed in the merchandising area also. With the shakeup in
SBUs and PCs, Sears’ profit picture deteriorated and its market position became much
weaker.
Sudden changes in the profit picture, say, in K-Mart has been forcing the company to
realign its SBUs and PCs. Some of its merchandise groups are being deemphasized, more
appealing product lines are being more rigorously promoted and some others are being
discontinued to cut costs.
A major revision in the managerial philosophy for Disney changed its emphasis from
cartoon movies to Disneyworld amusement parks and recently to merchandising. Clearly,
SBUs and PCs are changing regularly.

The Story of Two Mature Industries

The changing roles of SBUs and PCs can be traced by examining the recent history
of two industries that are mature. In other words, they are at the top of their product
life cycles and there will be no change unless the product is changed partially,
improved or completely abandoned. These two industries are photography and men’s
non-electric shaving systems. Exhibit 4 presents a summary of the key events in these
two industries.
Up until the 1960’s the photography industlry had some not so advanced cameras and
limited variety of film. At this point the film and cameras were both PCs and SBUs. In the
1960’s selling film was profitable (PC) and the industry was almost giving the cameras
free (SBU) to sell more film. Another decade or so, developing the film became very
profitable (PC), so much so that the industry was giving away film free (SBUs). Giving
away film free created much business in the film development activity. However, around
the early 1990’s the industry started developing much more versatile cameras with many
new features. This trend is continuing. Digital cameras at this point in time can be
categorized as being both SBUs and PCs.
Men’s shaving systems remained the same with metallic razors and blades. Razors were
primarily both PCs and SBUs. In the 1960’s blades were improved. Stainless steel blades
were introduced. They were PCs. Companies such as Gillette or Wilkinson would give
away razors almost free to sell blades. Thus razors were SBUs and blades were PCs. A
large variety of disposable razors became standard in the 1970’s. These were, again, both
SBUs and PCs simultaneously. In the 1990’s Gillette initiated the Tech series. These also
are both PCs and SBUs. The following research proposition, therefore, is constructed.

RP6: The relative status to PCs and SUBs change in time. It is critical to assess
these changes swiftly and act accordingly.
ACHIEVING MANAGERIAL SYNERGISM 71

Exhibit 4. The story of two mature industries.

PC vs. SBU APPROXIMATE TIME PHOTOGRAPHY

PC & SBU Prior to 1960’s Selling Cameras

PC 1960’s Selling Film
SBU 1960’s Selling Cameras
PC 1970’s Film Developing
SBU 1970 Selling Film
PC & SBU 1990’s Digital Cameras

PC vs. SBU APPROXIMATE TIME MEN’S SHAVING SYSTEMS

PC & SBU Prior to 1960 Razors and Blades
PC 1960’s Blades
SBU 1960’s Razors
PC & SBU 1970’s Dispensable Razors
PC Gillette Tech 1, 2, 3

Managing PCs and SBUs

Regardless of what department, what product or service line, or what business affiliates
are identified as SBUs and PCs in a business, it is critical that they are managed
accordingly to there being SBUs or PCs. The SBU’s management must play a critical role
in the business’ strategic plan which is tailored to its capabilities in the market. At the
same time, management must remain loyal to the company’s charter or mission. Such a
plan may include prioritized and quantified objectives, market position changes, pro
forma income statements, cash flow projections, a schedule for implementation and
proper control mechanisms. The SBUs role in this total picture must be carefully clear. If
there are newly identified SBUs, they must be promoted, advertised or otherwise must
play a key role in the outreach spectrum of the company. Perhaps certain PCs need to be
connected to these SBUs, which may require additional coordination. The PC manage-
ment should develop a plan emphasizing proper cost savings, increasing the profits and
cash flows for a much shorter period of time (Gupta and Govindarajan, 1984; Hall, 1978;
Hax and Majluf, 1984).
Useful tools for managing SBUs and PCs are life cycle and portfolio analyses (Kotler,
2000). In the introduction stage of a firm’s life cycle it is often unclear whether a new
product, service or department will become a SBU, a PC or unsuccessful as either. Thus it
is necessary to expend funds to build while the situations are carefully analyzed. As
successful products, services or departments become stars, during the growth phase, it is
necessary to build these as budding SBUs. The product, service or department usually turn
into a PC as the firm matures (Kotler, 2000). By the end of the maturity phase, products
that are invariably PCs and cash cows may need to be harvested. When they become both
unprofitable and do not support other products, services or departments of the firm by
outreach or by profit, it is time to divest the dogs.
It is possible that there may be a number of organizational units that are neither
SBUs nor PCs. It is important to identify them early on and guide them in the
72 SAMLI AND SHAW

direction to become a SBU or a PC. A merchandise return department, wrapping or

packaging department in a retail store may play such a neutral role. They don’t
promote the store and they are not profitable all by themselves. However, they are
expected to be present for customers’ convenience. In fact, in time they may all
become SBUs or PCs.
Although throughout this paper we have tried to identify SBUs and PCs, it is only the
management of the company that is close to its operations can successfully judge as to
what components of the business should be used as PCs and SBUs and at what stage these
needs to be eliminated or reversed. This, we believe, is a very strong strategic orientation
that needs to be considered by all managements.

Conclusion and Future Research

This paper distinguishes between SBUs and PCs in the context of the firm’s strategic
posture. By identifying them carefully and managing them effectively, the firm can
successfully implement its strategic plans and can achieve synergy, long term viability
and short term profitability. To do so the firm must balance an outward competitive
position, differentiation or focus, with long term market orientation (SBUs), along with
short run cost considerations (PCs) and cost leadership. SUBs should strengthen the
firm’s market position so that it can take advantage of its PCs. Thus, as it takes care of
the present, it makes an effort to strengthen its future. But, above all, the firm must treat
PCs and SBUs appropriately for what they are. It must be aware of changing status of
its PCs and SBUs.
If the firm uses its potential SBUs as PCs and its PCs as SBUs it will not maintain a
strong market position and most likely will put its survival in jeopardy. Much research
needs to be done in the area of identifying and classifying PCs versus SBUs. In addition to
six research propositions set forth throughout this article, a future research agenda should
include:

 How many PCs and how many SBUs for a particular firm?
 What additional criteria should be used to determine the current or the changing
status of the organizational units? Are there early indicators showing critical
changes?
 How should PCs and SBUs be coordinated?
 How should the firm allocate its resources among its PCs and its SBUs to optimize its
performance?
 As indicated earlier, what is the relationship of SBUs and PCs to other cost centers?

It is critical to realize that market effectiveness (based on strategic activity) in the long run
will be more profitable than just simple, short run cost and profit consciousness. Working
in these areas, American companies not only will improve their market performance and
their profit pictures, but will also better satisfy the needs of the consumers who make up
their markets.
ACHIEVING MANAGERIAL SYNERGISM 73

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A. Coskun Samli is a research professor of Marketing and International Business at the University of North
Florida. He received his Ph.D. from Michigan State University. Dr. Samli has published extensively in the areas of
marketing management and international trade.

Eric H. Shaw is professor and chairman of marketing at Florida Atlantic University. He received his Ph.D. from
Temple University. His research and teaching interests focus on strategic marketing planning and the development
of marketing thought and theory.