January 22, 2017

6 Reasons Strategic business units are important

Strategic business units work on the principle of micro management. What if you have 10 different tasks in a day, and all 10 of them are important? You will divide the tasks and then perform each of them separately. This is the exact reason behind converting a product / brand into a SBU or to make them part of a separate SBU. There are several benefits of an SBU.

SBU’s make you Organized –  The first principle of time management is to get organized. Similarly, one of the first things you gotta do is to see your organization clearly. And that can happen only if you are organized. If one of your marketing managers is handling 3–4 different products, then definitely he is gonna get confused with operating all of them. The strategies might be hazy, there will be no time for creativity or innovation and all the time will be spent in just handling the existing work rather then expansion. Thus the first thing SBU’s do is they help you get organized.

Micro manage – Naturally once you are organized, you can micro manage things. Just take an example of large companies like HUL and P&G (the best examples of multi product organizations). They have at least 30 different products at all times. Each of them requiring separate manpower, strategies, expenses and returns. Thus this needs micro managing of the highest aspect. With SBU’s another factor which is very important is FOCUS. Micro managing helps you focus on each and every product separately.

Importance of Strategic business units

STP –  The success of a product depends on its segmentation targeting and positioning. Each of these processes requires being continuously in touch with the market, receiving feedback, identifying your target market, targeting them and then positioning accordingly. Thus these are humongous tasks if you have to do them for each and every product and if you are handling more than 5 products at any time. Therefore dividing products into SBU’s helps you stay in touch of the market separately for each and every product. Thus a marketing manager / sales manager may be assigned one product at a time and will be responsible for that product itself. Thereby he may give valuable contribution in maintaining the STP of a product in the target market.

Investments –  The best reference for investments in SBU’s can be the BCG matrix. In the BCG matrix, the SBU’s are divided as per their market share and the market growth rate. Thus depending on the BCG matrix, the type of investments which each product needs can be decided. This is possible only if each product is treated as a completely different SBU. This SBU may be a composition of one category of product (such as shampoo) or in case of larger organizations it may even be one single type of product (such as LED or LCD televisions)

Decision making –  The better performing businesses are supposed to handle the load of any newly starting business or any business which is undergoing a slump. However, if one of these revenue generating SBU’s gets hit, how would you manage the cash crunch? Well these are decisions which need to be made and for them you need to have the figures for each type of product / sbu. Thus SBU”s also propogate the correct decision making. These decisions can be at the micro level (as explained above –  managing STP, strategies) or they can be at the macro level (investments from the corporate fund, whether to continue investing?).

Profitability –  By micro managing each and every product and dividing it into SBU’s, we can obtain a holistic view of the organization. This view is also used in preparing the financial statements as well as to keep tabs on the investments and returns for the organization from each SBU. Thus the overall profitability of the firm can be decided.

Thus these 6 reasons along with several others show us the importance of both Micro managing as well as macro managing a multi product organization. Overall success of the organization is possible only if it knows how to run its product portfolio and this is exactly where SBU’s come in play.

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About Hitesh Bhasin

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