Strategic business units (SBUs) are a subunit of an organization which can act as an independent business in many ways. This includes their ability to formulate strategic ideas, develop marketing strategies, and even create their own brand identity.
The amount of freedom that is granted within a strategic business unit structure is based on what the parent organization permits each division. For a large company, especially those who are multinational, having one brand identity is impractical. Using the SBU structure allows for diversification, products with a specific focus, and fewer distractions from within the competitive market.
Forming SBUs may not be right for everyone business. Here is a look at the advantages and disadvantages that come with this type of structure.
List of the Advantages of a Strategic Business Unit Structure
1. It gives the organization a chance to create a better future for itself.
There are two ways to react to a situation: through a proactive or reactive decision. When a company decides to create SBUs, they are placing themselves on the defensive side of the equation. Although it is impossible to forecast every outcome which may occur, being proactive about corporate structure will add layers of defense to the organization. This helps a company be able to withstand changing markets and preferences while being able to target multiple demographics simultaneously because of the SBU.
2. It provides an opportunity to identify a strategic direction.
SBUs give an organization a chance to create a mission, vision, and goals which are clearly defined for each subunit. This allows each strategic business unit the opportunity to define objectives which are realistic for their segment of the parent organization. Although the goals must be in line with the overall vision of the parent company, there is also more freedom to pursue opportunities within the SBU that might not make sense to do with the entire company.
3. It offers a chance to make better business decisions.
When strategic business units are created, it allows the people involved to focus their attention on the immediate concerns which impact their subunit of the company. There is no longer a need to evaluate how a decision might impact the parent company. The decision gets to be based on the impacts which would affect the strategic business unit. You’re given an opportunity to allocate resources, find human resources, and decide which projects make the most sense to invest in to create growth within targeted marketplaces.
4. It enhances the longevity of the business.
The world is evolving quickly. Each market has unique patterns of growth which create dynamic changes that businesses must recognize. These changes can happen on a daily basis. A business must be able to react quickly to survive in this environment. With the presence of SBUs, speed becomes an asset. Each subunit is given the freedom to change or evolve as their marketplace or consumer demographics change too. As each SBU adapts, the parent company is able to adjust as well. This provides the parent organization with a better opportunity to survive in a long-term perspective.
5. It allows the parent company to avoid competitive convergence.
Because speed is an issue, parent companies without SBU structures tend to copy what their competition is doing as a way to find success. This has created a market convergence in some industries where it is nearly impossible to differentiate one company from the other. With SBUs, companies are better able to embrace more creativity, develop a unique identity, and establish brand expertise.
6. It offers financial benefits.
When subunits of a company are able to create their own value propositions for targeted demographics and markets, there is a better chance of profitability. It enhances the ability of the parent company to have control over their future because each subunit operates on a budget that is based on their specific needs.
List of the Disadvantages of a Strategic Business Unit Structure
1. It is a complex process to develop.
To create subunits within a parent organization, all major critical components must be checked and verified to create a viable structure. That includes internal environments, external environments, short- and long-term goals, strategic resource control, brand messaging, and how the SBU fits into the overall structure of the organization. If one component experiences a change, then all the other factors involved might change as well. That is why the creation of SBUs will often stall company growth until everything is in place.
2. It may create competition within the company.
If a parent company gives their SBUs enough freedom, there is the potential that the company could begin competing with itself in certain markets with their products or services. Mars does this often with products like Snickers and Twix. If a person is in the market for one candy bar, they’re going to choose a specific brand that they enjoy. Although it is possible to dominate a market by offering an umbrella of brands, it also creates internal competition that could limit profit structures if protective measures are not put into place.
3. It can be challenging to implement.
For SBUs to be successful, all workers must remain fully attentive to the work that is being done. Each worker must be held accountable for their productivity. This must happen from the top and then filter its way down to each worker. Everyone must buy into the mission and vision of the SBU for it to be successful. Then the parent organization must support the work being done. Any gaps that occur with this support create the potential for failure to begin developing within the organization.
4. It is a costly process which repeats itself for the organization.
A parent company with several SBUs that work independently together will experience duplicating costs in the brand development structure. Each SBU is operating under its own identity, which means all the significant tasks of brand development must be created and implemented each time. For core brand presentations, logo creation, and name development, the cost is an average of $475,000 per year. That doesn’t include any signage, social media, SEO work, or advertising. That is why most SBUs operate under the umbrella of a large company or a multinational firm. For smaller businesses, a better solution might be to run a DBA instead.
The advantages and disadvantages of strategic business units involve outreach and cost. Large companies can meet the needs of local markets faster and better when they create subunits with authority to make independent decisions. This benefit comes with a monetary cost and the persistent risk that the subunit might make a choice that benefits them while hurting the overall parent company.
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