Assignment No.

STRATEGIC BUSINESS UNIT (SBU) Referred to as a strategic business unit (SBU), business units have also been called strategy centers, strategic planning units, or independent business units. The philosophy behind the SBU concept has been described this way: The diversified fir should be anaged as a !portfolio"" of businesses, with each business unit serving a clearly defined product# ar$et seg ent with a clearly defined strategy. %ach business unit in the portfolio should develop a strategy tailored to its capabilities and co petitive needs, but consistent with the overall corporate capabilities and needs. The total portfolio of businesses should be anaged by allocating capital and anagerial resources to serve the interests of the fir as a whole # to achieve balanced growth in sales, earnings, and assets i& at an acceptable and controlled level of ris$. 'n essence, the portfolio should be designed and anaged to achieve an overall corporate strategy. 'dentification of Strategic Business Units Since for al strategic planning began to a$e inroads in corporations in the ()*+s, a variety of new concepts have been developed for identifying a corporation"s opportunities and for speeding up the process of strategy develop ent. These newer concepts create proble s of internal organi,ation. 'n a dyna ic econo y, all functions of a corporation (e.g., research and develop ent, finance, and ar$eting) are related. -pti i,ing certain functions instead of the co pany as a whole is far fro ade.uate for achieving superior corporate perfor ance. Such an organi,ational perspective leaves only the /%- in a position to thin$ in ter s of the corporation as a whole. 0arge corporations have tried any different structural designs to broaden the scope of the /%- in dealing with co ple&ities. -ne such design is the profit center concept. Unfortunately, the profit center concept e phasi,es short# ter conse.uences1 also, its e phasis is on opti i,ing the profit center instead of the corporation as a whole. The SBU concept was developed to overco e the difficulties posed by the profit center type of organi,ation. Thus, the first step in integrating product2 ar$et strategies is to identify the fir "s SBUs. This a ounts to identifying natural businesses in which the corporation is involved. SBUs are not necessarily synony ous with e&isting divisions or profit centers. 3n SBU is co posed of a product or product lines having identifiable independence fro other products or product lines in ter s of co petition, prices, substitutability of product, style2.uality, and i pact of product withdrawal. 't is around this configuration of products that a business strategy should be designed. 'n today"s organi,ations, this strategy ay enco pass products found in ore than one division. By the sa e to$en, so e anagers ay find the selves anaging two or ore natural businesses. This does not necessarily ean that divisional boundaries need to be redefined1 an SBU can often overlap divisions, and a division can include ore than one SBU. SBUs ay be created by applying a set of criteria consisting of price, co petitors, custo er groups, and shared e&perience. To the e&tent that changes in a product"s price entail a review of the pricing policy of other products ay i ply that these products have a natural alliance. 'f various products2 ar$ets of a co pany share the sa e group of co petitors, they ay be a alga ated into an SBU for the purpose of strategic planning. 0i$ewise, products2 ar$ets sharing parts of the co pany

having co on research and develop ent, anufacturing, and ar$eting co ponents ay be included in the sa e SBU. 4or purposes of illustration, consider the case of a large, diversified co pany, one division of which anufactures car radios. The following possibilities e&ist: the car radio division, as it stands, ay represent a viable SBU1 alternatively, lu&ury car radios with auto atic tuning ay constitute an SBU different fro the SBU for standard odels1 or other areas of the co pany, such as the television division, ay be co bined with all or part of the car radio division to create an SBU. -verall, an SBU should be established at a level where it can rather freely address (a) all $ey seg ents of the custo er group having si ilar ob5ectives1 (b) all $ey functions of the corporation so that it can deploy whatever functional e&pertise is needed to establish positive differentiation fro the co petition in the eyes of the custo er1 and (c) all $ey aspects of the co petition so that the corporation can sei,e the advantage when opportunity presents itself and, conversely, so that co petitors will not be able to catch the corporation off# balance by e&ploiting unsuspected sources of strength. 3 conceptual .uestion beco es relevant in identifying SBUs: 6ow uch aggregation is desirable7 6igher levels of aggregation produce a relatively s aller and ore anageable nu ber of SBUs. Besides, the e&isting anage ent infor ation syste ay not need to be odified since a higher level of aggregation yields SBUs of the si,e and scope of present divisions or product groups. 6owever, higher levels of aggregation at the SBU level per it only general notions of strategy that ay lac$ relevance for pro oting action at the operating level. 4or e&a ple, an SBU for edical care is probably too broad. 't could e brace e.uip ent, service, hospitals, education, self#discipline, and even social welfare. -n the other hand, lower levels of aggregation a$e SBUs identical to product2 ar$et seg ents that ay lac$ !strategic autono y."" 3n SBU for far tractor engines would be ineffective because it is at too low a level in the organi,ation to (a) consider product applications and custo er groups other than far ers or (b) cope with new co petitors who ight enter the far tractor ar$et at al ost any ti e with a totally different product set of !boundary conditions."" 4urther, at such a low organi,ational level, one SBU ay co pete with another, thereby shifting to higher levels of anage ent the strategic issue of which SBU should for ulate what strategy. The opti u level of aggregation, one that is neither too broad nor too narrow, can be deter ined by applying the criteria discussed above, then further refining it by using anagerial 5udg ent. Briefly stated, an SBU conditions: ust loo$ and act li$es a freestanding business, satisfying the following ission, independent of other SBUs.

(. 6ave a uni.ue business

8. 6ave a clearly definable set of co petitors. 9. Be able to carry out integrative planning relatively independently of other SBUs. :. Be able to anage resources in other areas.

;. Be large enough to 5ustify senior anage ent attention but s all enough to serve as a useful focus for resource allocation.

The definition of an SBU always contains gray areas that ay lead to dispute. 't is helpful, therefore, to review the creation of an SBU, halfway into the strategy develop ent process, by raising the following .uestions: 3re custo ers" wants well defined and understood by the industry and is the seg ented so that differences in these wants are treated differently7 ar$et

's the business unit e.uipped to respond functionally to the basic wants and needs of custo ers in the defined seg ents7 <o co petitors have different sets of operating conditions that could give the advantage over the business unit in .uestion7 an unfair

'f the answers give reason to doubt the SBU"s ability to co pete in the ar$et, it is better to redefine the SBU with a view to increasing its strategic freedo in eeting custo er needs and co petitive threats. The SBU concept ay be illustrated with an e&a ple fro =rocter > ?a ble. 4or ore than ;+ years the co pany"s various brands were pitted against each other. The /a ay soap anager co peted against the 'vory soap anager as fiercely as if each were in different co panies. The brand anage ent syste that grew out of this notion has been used by al ost every consu er#products co pany. 'n the fall of ()@*, however, =rocter > ?a ble reorgani,ed according to the SBU concept (what the co pany called !along the category lines""). The reorgani,ation did not abolish brand anagers, but it did a$e the accountable to a new corps of ini#general anagers who were responsible for an entire product line # all laundry detergents, for e&a ple. By fostering internal co petition a ong brand anagers, the classic brand anage ent syste established strong incentives to e&cel. 't also created conflicts and inefficiencies as brand anagers s.uabbled over corporate resources, fro ad spending to plant capacity. The syste often eant that not enough thought was given to how brands could wor$ together. <espite these shortco ings, brand anage ent wor$ed fine when ar$ets were growing and oney was available. But now, ost pac$aged# goods businesses are growing slowly (if at all), brands are proliferating, the retail trade is accu ulating ore clout, and the consu er ar$et is frag enting. =rocter > ?a ble reorgani,ed along SBU lines to cope with this bewildering array of pressures. Under =rocter > ?a ble"s SBU sche e, each of its 9) categories of U.S. businesses, fro diapers to ca$e i&es, is run by a category anager with direct responsibility. 3dvertising, sales, anufacturing, research, engineering, and other disciplines all report to the category anager. The idea is to devise ar$eting strategies by loo$ing at categories and by fitting brands together rather than by co ing up with co peting brand strategies and then dividing up resources a ong the . The paragraphs that follow discuss how =rocter > ?a ble"s reorgani,ation i pacted select functions. 3dvertising. =rocter > ?a ble advertises Tide as the best detergent for tough dirt. But when the brand anager for /heer started a$ing the sa e clai , /heer"s ads were pulled after the Tide group protested. Aow the category anager decides how to position Tide and /heer to avoid such conflicts.

Budgeting. Brand anagers for =uritan and /risco oils co peted for a share of the sa e ad budget. Aow a category anager decides when =uritan can benefit fro stepped#up ad spending and when /risco can coast on its strong ar$et position. =ac$aging. Brand anagers for various detergents often de anded pac$ages at the sa e ti e. Because of these conflicting de ands, anagers co plained that pro5ects were delayed and nobody got a first#rate 5ob. Aow the category anager decides which brand gets a new pac$age first. Banufacturing. Under the old syste , a inor detergent, such as <reft, had the sa e clai on plant resources as Tide # even if Tide was in the idst of a big pro otion and needed ore supplies. Aow a anufacturing staff person who helps to coordinate production reports to the category anager. =roble s in /reating SBUs The notion behind the SBU concept is that a co pany"s activities in a ar$etplace ought to be understood and seg ented strategically so that resources can be allocated for co petitive advantage. That is, a co pany ought to be able to answer three .uestions: Chat business a ' in7 Cho is y co petition7 Chat is y position relative to that co petition7 ?etting an ade.uate answer to the first .uestion is often difficult. (3nswers to the other two .uestions can be relatively easy.) 'n addition, identifying SBUs is enor ously difficult in organi,ations that share resources (e.g., research and develop ent or sales). There is no si ple, definitive ethodology for isolating SBUs. 3lthough the criteria for designating SBUs are clear#cut, their application is 5udg ental and proble atic. 4or e&a ple, in certain situations, real advantages can accrue to businesses sharing resources at the research and develop ent, anufacturing, or distribution level. 'f autono y and accountability are pursued as ends in the selves, these advantages ay be overloo$ed or unnecessarily sacrificed. This article focused on the concepts of planning and strategy. =lanning is the ongoing anage ent process of choosing the ob5ectives to be achieved during a certain period, setting up a plan of action, and aintaining continuous surveillance of results so as to a$e regular evaluations and, if necessary, to odify the ob5ectives and plan of action. 3lso described were the re.uisites for successful planning, the ti e fra e for initiating planning activities, and various philosophies of planning (i.e., satisfying, opti i,ing, and adaptivi,ing). Strategy, the course of action selected fro possible alternatives as the opti u way to attain ob5ectives, should be consistent with current policies and viewed in light of anticipated co petitive actions. The concept of strategic planning was also e&a ined. Bost large co panies have ade significant progress in the last (+ or (; years in i proving their strategic planning capabilities. Two levels of strategic planning were discussed: corporate and business unit level. /orporate strategic planning is concerned with the anage ent of a fir "s portfolio of businesses and with issues of fir #wide i pact, such as resource allocation, cash flow anage ent, govern ent regulation, and capital ar$et access. Business strategy focuses ore narrowly on the SBU level and involves the design of plans of action and ob5ectives based on analysis of both internal and e&ternal factors that affect each business unit"s perfor ance. 3n SBU is defined as a stand#alone business within a corporation that faces (an) identifiable co petitor(s) in a given ar$et. 4or

strategic planning to be effective and relevant, the /%- ust play a central role, not si ply as the ape& of a ultilayered planning effort, but as a strategic thin$er and corporate culture leader.