Strategic Business Units - Meaning, Types and Characteristics - Harappa

4/28/22, 6:23 PM Strategic Business Units: Meaning, Types And Characteristics - Harappa
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 Strategic Business Units:
Lea
Meaning, Types And
Characteristics
Strategic
TYPE
SEGM
HOW
Business Units:
POS
INTE
DEFI
Meaning, Types INTE

COM
And
MAR
STRA
Characteristics
October 4, 2021 | 7 mins read
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When discussing business growth, we

often come across the topic SBU in
https://harappa.education/harappa-diaries/strategic-business-unit/ 1/15
strategic management. To grow the

size of their businesses and offer vast
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varieties of products, organizations
have
For to adopt the SBU strategy. When
Myself
Coca-Cola
For Enterpriseaspired to tap into other
market spaces, they 
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reallocated teams Schedule A Meeting
and resources to manage subsidiary
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products like Nestea, Aquabona and
Knowledge Center
Fanta. They set up these strategic
business units (SBUs) for an Lea
uninterrupted focus on each of these
products over the long term.
But is it enough to simply ask, “What is

an SBU?” The fundamentals lie in the
characteristics of a strategic business
unit and understanding the SBU
structure. Managers must also know TYPE
the different types of strategic business SEGM
units to analyze processes and allocate HOW
POS
resources effectively.
INTE
DEFI
After understanding the importance of
INTE
SBU in strategic management, we’ll COM
discuss the meaning of a strategic MAR
business unit, its advantages, STRA
disadvantages and the strategic

business unit structure.
1. WHAT IS A STRATEGIC BUSINESS

UNIT?
2. CHARACTERISTICS OF STRATEGIC
BUSINESS UNITS
3. TYPES OF STRATEGIC BUSINESS

UNITS
4. STRATEGIC BUSINESS UNIT

STRUCTURE
5. ADVANTAGES AND
DISADVANTAGES OF STRATEGIC
BUSINESS UNITS
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Knowledge Center
Lea
WHAT IS A
STRATEGIC
BUSINESS
UNIT? TYPE
SEGM
HOW
POS
INTE
DEFI
If a large organization adopts the SBU
INTE
strategy, it forms fully functional COM
departments to manage specific MAR
products, services, customers or a STRA
geographical area. These departments
are independent and set up with the
objective of increasing profits.
A strategic business unit is a term used

to represent such an independent,
specialized department or a sub-unit
that focuses on a given objective. It has
its own vision, course and mission.
Planning for a strategic business unit is
done separately, its goals are different
from that of the parent organization
and it focuses on long-term business
performance.
An SBU strategy provides working

independence to these sub-units, but
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they’re required to submit status
reports
For on performance and processes
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to
Forthe parent organization. Some SBUs
Enterprise
may have the power
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crucial Schedule A Meeting
business decisions but most have to
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report to the head office.
Knowledge Center
One such case is LG, which has a long
Lea
list of products managed by separate
divisions. Each strategic business unit
has to not only manufacture and
deliver products but also make critical
decisions and manage investments.
This way the parent organization can
focus on tracking income, costs and
profits. TYPE
SEGM
Over the years, organizations like LG HOW
and Coca-Cola have redefined the POS
INTE
meaning of strategic business units by
DEFI
showing us that SBUs don’t have to be
INTE
small projects. They can be large COM
businesses with strong support MAR
functions. They can control marketing, STRA
human resource management,

training and development. A strategic
business unit can be extremely
beneficial for an organization in the
long run, especially if it has multiple
product structures. Organizations that
consider SBU in strategic management
can quickly and effectively respond to
shifts in the market.
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CHARACTERISTICS
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OF STRATEGIC
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BUSINESS
Knowledge Center
Lea
UNITS

The SBU structure adopted by an

organization should play to its
strengths and make good use of the
TYPE
opportunities in the industry. Let’s look SEGM
at the characteristics of strategic HOW
business unit: POS
INTE
As the meaning of a strategic DEFI
INTE
business unit suggests, it’s a
COM
strategy to set up a separate MAR
unit of business or a group of STRA
businesses that are allowed to
plan autonomously
The strategy deals with a
homogenous set of markets to
minimize diversity. It allows a
manager to formulate and
implement internally consistent
and coherent business
strategies
Responsibilities of profitability,
strategic planning and
performance lie with the heads
of the respective business units
Each SBU offers unique products
and services. No two SBUs within
a firm should compete with the
same products for the same

customers. Organizations avoid
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duplication of products and
effort to maximize economies of
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scale within the SBUs
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When considering an SBU structure,
Thrive Skills may not be able to meet
organizations
Knowledge Center
all these ideals. We often see trade-offs
between many small SBUs that are
Lea
homogeneous and fewer, easily
manageable SBUs.
TYPE
SEGM
HOW
TYPES OF POS
INTE
DEFI
STRATEGIC INTE
COM
BUSINESS
MAR
STRA
UNITS

The portfolio model developed by

Boston Consulting Group offers a useful
approach to measure SBU
performance based on the rate of
market growth and market share. This
divides strategic business units into
categories that can help a manager
better allocate resources going
forward. Here we have the different
types of strategic business units:
1. STARS
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For Enterprise
 growth
Stars are SBUs with high Login
and Schedule A Meeting
For Institutions
market share and represent a
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profitable business. In a fast-growing
Knowledge Center
market, such businesses are dominant
players. They require significant
Lea
monetary investment to sustain their
rapid growth.
2. CASH COWS
TYPE
A cash cow is a strategic business unit SEGM
that dominates in markets with slow HOW
POS
growth. They help in allocating
INTE
resources to other SBUs by generating
DEFI
more cash than they require. A star INTE
generally becomes a cash cow when a COM
high-growth market slows down.
MAR
STRA

3. QUESTION MARKS
Organizations face investment

dilemmas with SBUs that function in
high-growth markets with low shares. It
requires significant investment, usually
from cash cows, to develop such SBUs.
Organizations find it difficult to decide
whether to invest in these businesses or
eliminate them.
4. DOGS
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Dogs are underachievers with little
For Enterprise
hope of becoming cash cows, let alone
a star. slow-growth
They operate in
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For Institutions
markets with low market shares. Their
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performances may generate enough
Knowledge Center
cash to sustain themselves but
organizations usually choose to invest Lea
resources in SBUs that show more
promise.
Once an organization has decided

which businesses to add to the
portfolio, it can appoint a manager
who knows what an SBU is to focus on
performance, competition and TYPE
resource allocation in a particular SEGM
HOW
business category.
POS
INTE
Now that we know what a strategic
DEFI
business unit is, let’s find out about the INTE
SBU structure. COM
MAR
STRA
STRATEGIC
BUSINESS
UNIT
STRUCTURE

A strategic business unit structure has

independent operating units that
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function as autonomous businesses.
Within
For the structure, top corporate
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officials assign responsibilities to
For Enterprise
division 
owners for business Login
unit Schedule A Meeting
For Institutions
strategy and regular operations. The
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parent officers are tasked with
Knowledge Center
developing and executing
comprehensive strategies and Lea
managing SBUs with financial and
strategic controls. Senior executives
make decisions for each unit as the
SBU structure connects the units with
the related divisions of the business.
There are three levels in a strategic

business unit structure: TYPE
SEGM
At the top sits the corporate HOW
headquarters that monitors POS
INTE
performance and process
DEFI
The next level has SBU groups
INTE
that carry their status COM
At the bottom are divisions MAR
assembled according to the STRA
similarities with SBUs
From a strategic viewpoint, each

strategic business unit is an
independent business. In this system, a
single SBU is considered a profit center
led by corporate officials. Parent
supervisors don’t focus on operational
control as it allows divisions to quickly
respond to changing industry
environments.
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ADVANTAGES
For Enterprise
AND
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DISADVANTAGES
Knowledge Center
Lea
OF STRATEGIC
BUSINESS
UNITS
TYPE
SEGM
A strategic business unit is important HOW
POS
for an organization focused on growing
INTE
its product range and market share as DEFI
it can simplify the process of strategic INTE
management. Have a look at how SBUs COM
benefit organizations: MAR
STRA
1. IMPROVES
COORDINATION
Since strategic units are similar, there is

seamless coordination between
divisions. The focus is on
complementing rather than
competing.
2. DECENTRALIZES
AUTHORITY
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Reducing the span of controlLogin Schedule A Meeting
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decentralizes authority.
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Decentralization can positively impact
Knowledge
an Center
organization’s motivation system
and effectiveness. It particularly
motivates junior employees by Lea
empowering them.
3. SPEED AND
EFFICIENCY
TYPE
SEGM
As similar SBUs are managed by one HOW
POS
person, formulating strategy becomes
INTE
easier. The higher authority DEFI
communicates with the manager, who INTE
relays objectives to implement them COM
effectively. Each division has to MAR
STRA
participate in planning and
implementation.
4. ASSURES
ACCOUNTABILITY
Since each division has its own

manager, performance becomes their
responsibility whether it’s optimal,
below par or exceptional. Corporate
officers sitting in the head offices can
easily hold managers directly
responsible for operations, profits and

losses.
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For Enterprise
5. EASIER
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BOOKKEEPING
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Knowledge Center
Organizations that process high Lea
volumes of data can simplify their
bookkeeping process in monitoring
and storing data.
Although a strategic business unit can

offer these advantages, we must
consider the associated drawbacks as
well. As a manager, you must know the TYPE
disadvantages of strategic business SEGM
HOW
units to not only decide whether to set
POS
one up but also to plan ways around
INTE
them. Here are some of the DEFI
disadvantages. INTE
COM
This structure introduces an MAR
STRA
additional layer of units which
increases operational costs and
administrative overheads
A direct link between divisions
and head office is missing. This
contributes to communication
delays, hinders flow of
information, affects decision-
making and prevents accurate
assessment of performance
Decentralization affects flexibility
and compromises operations
Competition for resources and
funding within the organization
leads to internal conflicts,
unhealthy competition and

sometimes malpractice
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Managers
For Myselfhave to focus on the
positives and devise ways to tackle the
For Enterprise
disadvantages. They Login
can focus on Schedule A Meeting
For Institutions
improving employee relations by
Thrive
correct Skills
resource allocation and come
Knowledge Center
up with solutions to improve
communication gaps. They must find
Lea
ways to improve costs and stay
prepared for operational delays.
Strategic business units support

coordination and cooperation across
multiple departments within an
organization. It’s challenging to set up
such a structure but rewarding for
TYPE
long-term success and profit. If a SEGM
manager fully understands what an HOW
SBU is, they can use it as a tool to POS
INTE
target a specific customer group or
DEFI
geographical location.
INTE
COM
MAR
STRA
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4/28/22, 6:23 PM Strategic Business Units: Meaning, Types And Characteristics - Harappa

Meaning, Types INTE

When discussing business growth, we

strategic management. To grow the

But is it enough to simply ask, “What is

disadvantages and the strategic

1. WHAT IS A STRATEGIC BUSINESS

3. TYPES OF STRATEGIC BUSINESS

4. STRATEGIC BUSINESS UNIT

A strategic business unit is a term used

An SBU strategy provides working

human resource management,

The SBU structure adopted by an

same products for the same

The portfolio model developed by

Organizations face investment

Once an organization has decided

A strategic business unit structure has

There are three levels in a strategic

similarities with SBUs

From a strategic viewpoint, each

Since strategic units are similar, there is

Since each division has its own

responsible for operations, profits and

Although a strategic business unit can

unhealthy competition and

Strategic business units support

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