A strategic business unit is a unit of an organization(SBUs)

Introduction

 A strategic business unit is a unit of an organization that can be considered as a separate entity for planning/investment purposes.

 In business, it is a profit center which focuses on product offering and market segment. Autonomous divisions (profit centers) of an organization make up what are called “business portfolios”, also referred to as “strategic business units (SBUs).” 

An SBU is therefore a significant organizational segment that can be analyzed to develop organizational strategy aimed at generating future business or revenue.

 Why strategic business units

 A strategic business unit is a major concept used to analyses the performance of organizations. As the number, size and diversity of divisions in an organization increase, controlling and evaluating divisional operations become increasingly difficult for strategists. Increase in sales, for example, is often not accompanied by similar increases in profitability.

The span of control may become too large at top levels of the firm. Thus, in multidivisional organizations, an SBU structure greatly facilitates strategy implementation efforts. Strategic company planning often consists of five main steps or processes namely:

 (I)   defining the organization’s mission statement.

(ii)   Setting organizational objectives. (iii) Evaluating the organization’s strategic business units (situation analysis).

(iv)   Selecting appropriate strategies to achieve the organization’s objectives before implementing them.

(v)    Implementing the strategies and monitoring the performance/results to take corrective actions where necessary if the objectives are not being achieved as desired.

Evaluating the worth of SBUs Evaluating the worth of a business is critical to strategy implementation because integrative, intensive and diversification strategies are often implemented by acquiring other firms.

Many transactions occur each year in which businesses are bought and sold in the country and in all these cases, it is necessary to establish the financial worth or cash value of a business to successfully implement strategies.

Business evaluations are becoming routine in many situations and it is just a good business practice to have a reasonable understanding of what your firm or SBU is worth. 

Other reasons for periodic valuations include; employee plans, taxes, preparations for mergers and acquisitions, retirement packages, expansion plans, death of a principal or changes in partnership agreements.

 Evaluating the worth of a business truly requires both qualitative and quantitative skills since it is difficult to assign a monetary value to some factors such as a loyal customer base, history of growth, dedicated employees, a favorable lease, a bad credit rating or good patents that may not be reflected in a firm’s financial statements.

 Categorized as SBUs. Each SBU may be a major division in an organization, a group of related products, or even a single major product or brand. However, the trick is how to set up an optimum number of SBUs in an organization because if there are too many SBUs, top management can get bogged down in details associated with planning, operating and planning.

 On the other hand if they are too few, each unit will cover too broad an area to be useful for managerial planning and control. After SBUs have been satisfactorily delineated, the whole organization may be viewed as a “portfolio” of businesses or product lines.

 An essential step in strategic planning is an organizational portfolio analysis, which identifies the present status of each SBU and determines its future role in the company. This evaluation provides guidance to management in designing strategies and tactics for an SBU. 

Management typically have limited resources to support their SBUs and thus they need to know how best to allocate these resources in the most efficient way.

 An organizational portfolio analysis is therefore designed to aid management in decision making as to which SBU(s) should be stimulated for growth, which one(s) to be maintained in their present market position and which one(s) to be eliminated.

 Qualifications for an SBU set up ideally, what constitutes an SBU varies from organization to organization. 

In larger organizations, an SBU could be a company division, a single product, or a complete product line while in smaller organizations, it might be the entire company. Gurus in the field of strategic management and marketing argue that to qualify to be identified as an SBU, the unit should:

• Be a separately identifiable business.

• Have its own resources and a distinct mission.

• Have its own competitors.

• Have its own customers.

• Have its own group of executives (management) with profit responsibility.

 A small single product organization can conduct a companywide performance analysis but in diversified firms, companywide planning cannot serve as an effective guide for executives who oversee the organization’s various divisions. 

For more effective planning and operation, a multiproduct or multi business organization should be divided into major product or market divisions

 Experts in the marketing field suggest that management may adopt any of the following strategic alternatives in the evaluation of an SBU:

(I) Intensify the marketing effort to strengthen and build the SBU (an invest strategy).

(ii) Help the SBU to maintain its present market position (protect strategy).

(iii) Use the SBU as a cash flow source to help other SBUs grow or maintain position (harvest strategy).

(iv)  Get rid of the SBU (divest strategy). Product - market growth strategies for SBUs these are opportunities for an SBU’s market growth which can be analyzed using Ansoff’s product market growth matrix. Ansoff argues that most mission statements and objectives reflect an organization’s desire to grow. That is to increase revenues and profits.

An organization therefore may take any of the two routes in its strategy design. One such route is to do what it is currently doing regarding its products and markets but do it better. The other route is for the organization to venture into new products or markets.

These two routes when applied to markets and products result in four product market growth strategies which form what is described as the Ansoff matrix as shown below; Present Products New Products Present Markets Market Penetration Product Development New Markets Market Development

 Diversification From the matrix, the product market growth strategies can be explained as follows:

 (I) Market penetration: This is a strategy where a firm tries to sell more of its present products to its present markets through greater spending on advertising or personal selling.

(ii) Market development: Is a strategy where a firm continues to sell its present products but venturing into a new market.

(iii) Product development: This is a strategy which calls for a firm to develop new products to sell to its existing markets.

(iv) Diversification: This is a strategy where a firm develops new products to sell to new markets. Strategic Business Units Market penetration Market development Product development

In the marketing arena, strategic and annual plans need to be developed which involve four steps in the strategic marketing planning process namely:

• Conducting a situation analysis.

• Determining the marketing objectives.

• Selecting the target markets and measuring market demands.

• Designing a strategic marketing mix. The annual marketing plan becomes the master blue print for a year’s marketing activities for the given business unit or product which results into the “how to do it” document that guides executives in each phase of marketing operations.

 Analyzing SBUs using the Boston Consulting Group (BCG) Model the BCG model allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization.

 The strategic decision for these SBUs is to divest and move out of the industry or harvest. Disadvantages of having SBU structures in an organization

• Requires an additional layer of management, which increases expenses in salaries.

• The role of the group CEO becomes often ambiguous. Conclusion Many organizations are expanding and spreading their wings to cover the East African region and beyond by opening up branches in countries that have greater attraction in investments.

In organizational expansions, it is critical that managers evaluate the performance of their business units to identify those that are doing well for classification as strategic business units and proper strategic planning decisions.

 Since decisions must be made on whether to invest more funds on SBUs that are doing well or to eliminate those that cannot sustain themselves in their business operations, this article will serve as a guide on how to analyses the business units for strategic planning purposes.