What is a Strategic Business Unit (SBU)?

A strategic business unit (SBU) is a part of an organization for which there is a distinct external market for goods and services that is different from another SBU. The identification of an organizations SBU is essential to the development of business-level strategies since these vary from one SBU to another. There are two opposing pitfalls to be avoided: If each product and each geographical branch (and so on) is considered to be an independent SBU such immense variety of competitive strategies for a single organization would create a lack of focus and inefficiency. This would make the development of corporate-level strategy almost impossible. On the other hand, the concept of the SBU is important in properly reflecting the diversity of products and markets that actually exist. There are two broad categories which can help in avoiding these two pitfalls and, therefore in identifying SBUs that are useful when developing business-level strategies. External criteria for identifying SBUs are about the nature of the marketplace for different parts of the organization. Two parts of an organization should only be regarded as the same SBU if they are targeting the same customer types, through the same sorts of channels and facing similar competitors. For example, a unit tailoring products/services to specific local needs cannot belong to the same SBU as another that offers standardized products or services globally. Nor are units that offer the same products to a customer group through exclusively different channels (retail or mail order/internet). Internal criteria for identifying SBUs are about the nature of the organizations strategic capability its resources and competences. Two parts of an organization should only be regarded as the same SBU if they have similar products / services built on similar technologies and sharing a similar set of resources and competences. This usually means that the cost structure of the units will be same. So within a company like Kodak the units offering film based products are not in the same SBU as those offering digital photography products even though they are addressing the same customers through the same channels.