The Difference Between a Strategic Business Unit & a Division

Large, diversified companies organize themselves into divisions to break the management of the company into smaller, organizationally cohesive parts. The company headquarters still gives the divisions strategic direction. Strategic Business Units or SBUs, on the other hand, are organizationally complete and separate units that develop their own strategic direction. They still report back to company headquarters but operate as independent businesses organized according to their target markets. They are often large enough to have their own internal organizational divisions.

How SBUs Came About

Starting in 1920, companies became too large and diversified to manage under a traditional, pyramid organization. The solution was decentralization via the creation of organizational divisions that performed some functions independently of the company headquarters. This strategy was successful until 1960, when growth of profits stagnated. Given strategic direction from headquarters, some divisions could not adjust to their markets while others were stuck in low growth areas.

In 1970, General Electric pioneered the introduction of a new, different approach based on strategic business units. GE brought MacKinsey and Company on board and together they created the Nine Box Matrix design. With this approach, each SBU developed its own strategic approaches to its markets. This difference let each SBU adjust to its market requirements and generate maximum growth for its segment.

Differences in Implementation

For a company to implement the SBU approach means adopting a completely different management style and company orientation. Divisions in a company reflect how the company's business can best be carried out. Divisions develop from analyses of the company's operations while SBUs must be set up to respond to the realities of the external market. Instead of looking at and analyzing themselves, companies must analyze markets. The main difference is that divisions are internally focused while SBUs look outward..

Strategic Business Unit Differences

The creation of SBUs highlights the differences in strategic direction from a divisional organization. Trying to develop an overall strategy for the direction of a diversified company is difficult and means that particular strategic elements are never quite right for all the divisions. A division may often receive directions that are unclear or not completely applicable.

Once a company sets up SBUs, they develop their own strategies. They analyze their competitive position in their market, they develop products that respond to the needs of their customers and they evaluate their performance. Divisions generally do not carry out such tasks.

Differences in Results

Each business unit needs to develop a strategy of its own if it is to prevail over the competition, reports the Boston Consulting Group. It is difficult for companies organized along divisional lines to have such a strategy, since divisional structures find it hard to identify which activities create the most value and which should be abandoned. This is especially true of companies where the divisions are functional, such as those with operating, sales and service divisions. While divisions may have profit centers, decisions on where to best allocate resources are often not easy.

For companies organized along SBU lines, such decisions are easier and result in a more efficient use of resources. It is clear when an SBU is active in a growing or stagnant market and whether it is a market leader. SBUs that are leaders in growing markets are assigned additional resources while those that lag in stagnant markets are shut down so that the company as a whole operates more efficiently.