What is the Strategic Business Unit (SBU)? Types & Examples

Last updated: November 21 2024

Written and researched by experts at Avada Learn more about our methodology

SBU seems to be a strange term, but if you are about to grow your business in terms of size and product categories, it is necessary to understand the basics of a strategic business unit.

Knowing its importance to any business owner, we would like to introduce this post, which will cover the definition and the complete guide to set up a strategic business unit.

Let’s dive in!

What is SBU?

A Strategic Business Unit (SBU) is an independently managed division or unit within a large company. These units have their own visions, missions, and objectives, operating with separate planning and goals that may differ from those of the parent company. SBUs play a crucial role in ensuring the long-term success of the overall business.

How SBUs Function

SBUs handle specific responsibilities like strategic planning for their product lines, services, or market segments. They may focus on certain customer groups or geographical regions. While they operate independently, SBUs must still report their performance and progress to the main organization’s headquarters.

What is a strategic business unit (SBU)?

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Characteristics of a Strategic Business Unit

A Strategic Business Unit (SBU) is a profit center that focuses on product offerings and market segments.

In general, a strategic business unit has the following characteristics:

Clear Mission and Target Market: An SBU operates with a distinct mission that aligns with the organization's strategic goals. It targets a specific customer segment with unique needs and preferences, allowing for focused operations.
Autonomy in Resource Management: Each SBU manages its own resources, including finances, staff, and technology. This autonomy ensures flexibility and responsiveness to market changes.
Distinct Competitors: SBUs face competition within their specific market segment, requiring tailored strategies to achieve profitability and gain a competitive edge.
Dedicated Leadership: Each unit is led by a manager who is fully accountable for its performance, strategic direction, and profitability. This leadership fosters accountability and a sense of ownership.
Independent Planning and Execution: An SBU develops and executes its own strategies, marketing plans, and budgets. This independence enables specialization and enhances overall effectiveness.

Types of Strategic Business Unit (SBU)

There are four main types of Strategic Business Units (SBUs) based on their market performance and growth potential.

Star SBUs are units with high market growth and significant market share. They often lead their sectors and require substantial investment to maintain their position and grow further. These units are vital for a company’s long-term success because they generate strong cash flow and significantly boost profitability.
Cash Cows have a high market share but operate in markets with slow growth. They produce the most revenue for the company and need little investment. Their steady cash flow supports other units that require funding, making them the backbone of the organization, especially in stable industries.
Question Marks are units in fast-growing markets but with low market share. They need large investments to improve their position. However, they pose a challenge because businesses must decide whether to invest more to grow their share or cut losses and divest.
Dogs have both low market growth and low market share. These units have limited potential for growth or profit. They usually generate just enough revenue to cover costs but don’t justify major investment or attention.

The Structure of a Strategic Business Unit

The structure of a company setting up SBUs consist of Operational units. Those units work as autonomous businesses. Within the SBU structure, the highest corporate officials tend to assign the company's responsibilities to the division owners in terms of regular operations and business unit strategy. Easily put, the parent officer is responsible for developing and executing the comprehensive strategy and managing the SBU via strategic and financial controls (also known as financial checks).

That means the senior executive has the right to make decisions for each unit since the SBU structure connects related divisions of business and the strategic business unit. What’s more, those senior executives have to follow the rules and are supervised by the head executive officer.

When it comes to levels of a strategic business unit, there are three which includes:

The corporate headquarters stay at the top.
Strategic business units are in the middle.
Divisions that are assembled based on the similarity within each strategic business unit remain at the bottom.

You should keep in mind that each SBU will be considered an independent business from a strategic viewpoint. That means the SBU groups are independent of each other, and the SBU divisions are connected.

In the SBU system, a single strategic business unit is regarded as a profit center and is led by corporate officers. The parent supervisors focus on strategic planning instead of checks or operational control. If there is little or no checking and interactions between the strategic business units and the head company, the SBU’s separate divisions can respond extremely quickly to changing business environments.

Examples of a Strategic Business Unit

Here are some examples of Strategic Business Units (SBUs) from various industries. These detailed examples showcase how SBUs enable companies to manage diverse products and markets effectively while remaining competitive and innovative.

1. Procter & Gamble (P&G)

The popular strategic business unit example doesn’t skip Procter & Gamble (P&G). P&G divides its operations into SBUs such as Beauty (e.g., Olay, Pantene), Health (e.g., Vicks, Oral-B), and Home Care (e.g., Tide, Febreze). Each SBU focuses on a distinct product line and target market while contributing to P&G’s overall growth.

Beauty SBU: This includes brands like Olay, which targets anti-aging skincare, and Pantene, which focuses on hair care. Each brand has its own marketing strategy, product development, and customer base, with independent teams managing sales and innovation.
Health Care SBU: Products like Vicks for cold relief and Oral-B for dental hygiene fall under this unit. These brands operate with tailored marketing and distribution strategies specific to health-focused consumers.
Fabric & Home Care SBU: This includes iconic brands like Tide, which dominates the laundry detergent market, and Febreze, which focuses on home freshening solutions. Each brand operates within its unique niche while aligning with the SBU’s overall goals.

2. Samsung Electronics

Samsung operates multiple SBUs, including Mobile Communications (smartphones like Galaxy), Consumer Electronics (TVs, refrigerators), and Semiconductors.

Mobile Communications SBU: This SBU manages Samsung’s Galaxy smartphone line and associated accessories. It focuses on competitive innovations like foldable phones, 5G technology, and camera features, targeting tech-savvy customers worldwide.
Consumer Electronics SBU: Products like Samsung Smart TVs, refrigerators, and washing machines are managed here. The SBU emphasizes high-quality home appliances and smart home solutions, targeting both mid-range and premium markets.
Semiconductors SBU: This unit produces memory chips, processors, and other electronic components. It primarily targets business clients such as tech manufacturers (e.g., Apple and Dell), requiring specialized B2B marketing and technical expertise.

3. LG Electronics

LG also structures its business into SBUs:

Home Appliances SBU: This unit handles products like washing machines, air conditioners, and refrigerators. The focus is on integrating smart technology, such as IoT connectivity, to appeal to modern households.
Home Entertainment SBU: LG’s TVs, soundbars, and home theater systems fall under this unit. Their marketing emphasizes OLED technology and premium picture quality, targeting consumers seeking high-end entertainment systems.
Mobile Devices SBU: Though now discontinued, LG previously managed smartphones under this SBU, focusing on innovative designs like dual screens and premium cameras to compete in the global market.

4. Unilever

Unilever's product categories are organized into SBUs, such as Personal Care (e.g., Dove, Axe), Foods (e.g., Knorr, Hellmann’s), and Home Care (e.g., Surf, Comfort). Each unit is responsible for marketing, innovation, and performance in its category.

Personal Care SBU: Brands like Dove and Axe focus on skincare and personal grooming. Dove targets self-care and inclusivity, while Axe appeals to younger men with bold and edgy branding.
Foods & Beverages SBU: This unit includes brands like Knorr and Lipton. Knorr specializes in ready-to-cook meals and seasoning products, while Lipton focuses on teas and wellness beverages.
Home Care SBU: Products like Surf and Comfort fall into this unit. They target household cleaning and fabric care markets with innovative solutions like eco-friendly detergents.

The advantages and disadvantages of strategic business units

Although strategic business units are important to any business, it still holds some drawbacks. Before deciding whether to set up a strategic business unit or not, let’s review its pros and cons:

The advantages of strategic business units

Improved Profitability: By focusing on specific target markets and product offerings, SBUs can tailor their strategies and operations to maximize profitability within their niche. This dedicated focus often leads to better financial performance than managing a diverse portfolio under a single unit.
Enhanced Focus and Specialization: SBUs allow companies to break down their operations into smaller, more manageable units, each with a clear mandate and defined goals. This specialization fosters expertise and a deeper understanding of specific market segments, leading to more effective decision-making and strategy execution.
Increased Accountability: Each SBU operates independently with its own leadership and performance metrics. This structure promotes accountability, as SBU managers are directly responsible for the success or failure of their unit.
Efficient Resource Allocation: Companies can allocate resources more effectively by assigning them to SBUs based on their specific needs and priorities. This targeted approach optimizes resource usage and ensures each unit has the necessary tools and support to achieve its objectives.
Reduced Risk: By compartmentalizing operations into SBUs, companies can mitigate risk. If one SBU faces challenges or fails, the impact on the overall organization is minimized. This isolation protects the company from systemic risks and allows for more controlled experimentation and innovation.
Improved Customer Satisfaction: SBUs can tailor their products, services, and marketing efforts to their target customers' specific needs and preferences. This focused approach leads to greater customer satisfaction and loyalty.

The Disadvantages of Strategic Business Units

While Strategic Business Units (SBUs) offer numerous advantages, they also come with potential drawbacks.

Increased Complexity and Administrative Costs: Creating and managing SBUs adds management and administrative overhead layers. This can lead to increased bureaucracy, slower decision-making, and higher operational costs.
Potential for Internal Conflicts: SBUs may compete for resources, customers, and internal recognition, potentially leading to conflicts and a lack of cooperation between units.
Difficulty in Achieving Synergy: While SBUs promote specialization, they can also make it challenging to achieve synergy and leverage the strengths of different parts of the organization.
Duplication of Resources: SBUs may duplicate functions and resources that could be shared across the organization, leading to inefficiencies and higher costs. This redundancy can strain resources and reduce overall productivity.

Despite its disadvantages, many businesses still use this structure

How to Set Up a Strategic Business Unit

Setting up a strategic business unit (SBU) is beneficial because organizations creating SBUs can develop and gain success to new products, markets, or technologies, whereas they can avoid the drawbacks of working in huge businesses. The strategic business units will have their own managing team, brand name, reputation, objectives, and physical locations. In this way, those companies can work more effectively in a smaller organization and are not bound by the limited availability of resources. Also, they can grow and gain more sales thanks to the advantages of a larger company.

For example, strategic business units can save time and effort spent on building an established brand and broad base of customers that already exist in the parent organization of the SBUs. At the same time, they can prevent themselves from common challenges of the larger company such as excessive bureaucracy.

After knowing the importance of setting up an SBU, you should consider some requirements below. They look at organizational structure, recruitment & selection, corporate culture, and the remuneration system, which you should be concerned about before building a strategic business unit for your company.

Organizational Structure

The first requirement is adapting the organizational structure. That means the organizational structure will soon change when you decide to switch to a different strategic business structure. If your company adapt the organizational structure, you are free and independent in experiencing, making the experiment, and significant changes. Separating business units from each other allows you to prevent creativity that is suppressed by process and branding problems. However, large bureaucratic companies are often not flexible and agile.

Recruitment and Selection Process

The managing team working in the strategic business unit is not those working in the parent company. Therefore, when setting up an SBU, you should change the recruitment and selection process. It is about building up a new company within a different market rather than leading a developed one. The staff that excel in the head company will have many challenges if they have to apply what they know into running a new unit. Similarly, a strategic business unit can’t develop well if its managing team knows little or nothing about the SBUs.

So, if you are about to open an interview to recruit people working for your SBU, focus on asking about the organizational objectives instead of general knowledge about the parent brand. This recruitment process can help build an internal relationship and keep the team motivated. Remember to hire people who want to build a new business from the ground up, as well as learn experiences from an uncertain but experimental environment like SBUs.

The Remuneration System

When a business grows up, and the company gains more and more in reputation and fortune, business owners tend to provide shares, money, gifts, or other important financial incentives to encourage and motivate their employees. However, it does not mean that high-volume companies always have to offer incentives for them.

On the other hand, according to Frederick Herzberg’s two-factor theory, “financial incentives only partially influence employee motivation.” In fact, they are more motivated by their own careers, which means recognizing them for their hard-working within the business and letting them grow along with it.

The Corporate Culture

The last requirement when it comes to setting up a strategic business unit is adjusting the corporate culture. Besides financial incentives, business owners need to be concerned about giving them other benefits to keep them motivated. What you need to do is make your employees feel like they are listened to and appreciated for their contributions to the success of the company. Otherwise, they will easily get fed up with and unsatisfied with the toxic working environment and working conditions.

Give your employees other benefits to keep them motivated

Listen to them, ask them about their wishes and demands, and try to fulfill them as much as possible. For example, an employee wants to work at night because he finds he works better at night, change the corporate culture and allow him this night-shift option.

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Summary

A strategic business unit (SBU) is an ideal tool to help a business target its group of customers more effectively. Some experts say that larger organizations should not split up into strategic business units since they have some existing disadvantages. Nonetheless, setting up a strategic business division is challenging but rewarding as long as you make it correctly.

Hopefully, this post can give you something essential for your success in eCommerce business work. Give the strategic business unit a try if you haven’t applied for it before or you want to grow your business to a higher level. If you find this post interesting, remember to share it with your friends.

Do we miss anything? Do you want to add any tips or knowledge? Please be free to leave a comment in the section below and we will reply to you soon.

Strategic Business Unit: FAQs

A well-known example of an SBU is LG Electronics, which has multiple SBUs focusing on different product categories, such as home appliances, mobile phones, and televisions. Each unit is responsible for its own operations, marketing, and profitability. Similarly, Procter & Gamble (P&G) has SBUs for its various brands, like Tide, Gillette, and Pampers, each targeting specific markets and customer needs.

The 4 types of SBUs, based on the Boston Consulting Group (BCG) Matrix, are:

Stars: These SBUs have high market growth and high market share. They are market leaders and require significant investment to sustain growth, such as Apple's iPhone division.
Cash Cows: These SBUs have a high market share but operate in slow-growing markets. They generate steady cash flow with minimal investment, like Coca-Cola’s flagship soft drink product.
Question Marks: These operate in high-growth markets but have low market share. They require substantial investment to grow or need strategic decisions about whether to divest. An example might be a new product line with potential but uncertain success.
Dogs: These SBUs have low market share and low market growth. They typically generate little profit and may be candidates for divestment, such as outdated or declining product lines.

No, Coca-Cola as a whole is not an SBU; it is a parent company that operates through multiple SBUs. For instance, Coca-Cola's different beverage brands, such as Sprite, Fanta, and Minute Maid, can be considered SBUs. Each brand operates independently, targeting specific markets and customer segments, while still being part of Coca-Cola's overarching corporate structure.

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Sam

Sam Nguyen is the CEO and founder of Avada Commerce, an e-commerce solution provider headquartered in Singapore. He is an expert on the Shopify e-commerce platform for online stores and retail point-of-sale systems. Sam loves talking about e-commerce and he aims to help over a million online businesses grow and thrive.