Strategic business units are absolutely essential for multi product organizations. These business units are basically known as profit centres. They are focused towards a set of products and are responsible for each and every decision / strategy to be taken for that particular set of products. Strategic business units can be best explained with an example.
Example of Strategic business units – The best example of strategic business unit would be to take organizations like HUL, P&G or LG in focus. These organizations are characterized by multiple categories and multiple product lines. For example, HUL may have a line of products in the shampoo category, Similarly LG might have a line of products in the television category. Thus to track the investments against return, they may classify the category as a different SBU itself.
There are several reasons SBU’s are used in an organization and they are mentioned in my post on the importance for using SBU’s in a multi product organization. However, along with the reasons for using SBU’s there are also some powers which needs to be inferred on an SBU. Planning independence, Empowerment and others are such powers which influence a SBU. 3 of such features are discussed below.
1) Empowerment of the SBU manager – Several times the empowerment of SBU managers is crucial for the success of the SBU / products. This is mainly because this manager is the one who is actually in touch with the market and knows the best strategies which can be used for optimum returns. Thus several times, the SBU manager might need a higher investment for his products. At such times the manager should be supported from the organization. Only this confidence will help the manager in the progress of the SBU.
2) Degree of sharing of one SBU with another – This point is directly connected to the first one. What if one SBU needs some budget but the same is not offered because the budget is being shared by 2 other SBU’s and as it is the budget is short. Thus the first SBU does not get the independence to implement some important strategies. Similarly there might be other restrictions applied to one SBU as it is using some resources which are shared by another SBU. This might not always be negative. Of one SBU gains more profit then usual, this revenue might also become useful for the other SBU thereby promoting growth of both of them. This is where sharing actually plays a positive role.
3) Changes in the market – An SBU absolutely needs to be flexible because it needs to adapt to any major changes in the market. For example – if an LCD manager knows that LED’s are more in demand now, he needs to communicate to the top management that he would also like a range of LED products to make the SBU even more profitable. Thus by adding LED to its portfolio, the SBU can immediately become double profitable. Thus by adjusting to change on SBU levels, the organization as a whole can become profitable.
The key to Strategic business management is to have a strict watch on the investment and returns from each SBU. The SBU manager too plays a crucial role in this and hence he is recruited from the industry with extensive experience of that particular industry. Portfolio / Multi SBU management and is done at the absolute top level of the management. Each and every change in the market, and its affect on SBU’s is anticipated which is then taken into consideration. Hence, for a multi product organization, business management may actually mean product portfolio management or SBU management.
Other references – BCG Matrix, 6 reasons SBU’s are important for multi product organizations.