In essence, the SBU is a profit making area that focuses on a combination of product offer and market segment, requiring its own marketing plan, competitor analysis, and marketing campaign. A Strategic Business Unit emerges at the cross-over between:
A product offering that the company could make and
A reachable market segment that has a high value profit potential.
That is to say, if there's a big enough market niche for a product we can supply, then we may want to create a SBU that focuses on that opportunity. Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to products and markets. The unique small business unit benefits that a firm aggressively promotes in a consistent manner. When companies become really large, they are best thought of as being composed of a number of businesses.
Strategic business units
When businesses are small and owner operated there tends to be a high degree of entrepreneurial drive. Even after the organisation begins to grow, and salaried managers are employed, there may be no appreciable fall in the level of flair, energy and commitment to achieving success, if indeed there is any at all. However, in very large organisations managers can feel divorced from the events and decisions that are shaping the business. This is particularly the case where the enterprise is highly diversified. For example, a large enterprise could have interests in say grain trading, fertilizer procurement, the design and installation of silos, financial advisory services to farmers, the hire of transportation of bulk commodities, etc. A manager in fertilizer procurement could well feel that he/she has relatively little effect on overall performance since decisions such as budget allocations and sales and profit targets are dictated and determined by what happens in grain related activities. This is likely to suppress that manager's search for new and better ways of doing business because he/she believes to do so would have relatively little effect and would not be recognised, or rewarded, by senior management. The concept of a strategic business unit (SBU) was developed as a means of retaining the vitality of the entrepreneurial spirit by giving management a high degree of responsibility and autonomy in decision making. The SBU becomes a separate business entity, although still belonging to a larger commercial enterprise, having its own defined business strategy and a management with direct responsibility for its profits and sales performance.
SBUs can be based around individual brands but it is more common for a large corporation to break down its business according to either product categories (e.g. fertilizers, grain trading and farm buildings) or markets served (e.g. agriculture, distribution and construction and design). Aaker3 advises that:
“When strategies and competitors have a high degree of commonalty across businesses, it makes sense to combine those businesses into a single SBU. When they differ in meaningful ways, however, it will probably be more useful to use separate SBUs.”
The size of a business is also a consideration when deciding on how to structure the organisation. Even when an organisation's businesses have similar strategies and needs managers can feel impotent if it is a very large enterprise and it may be best to create two or more SBUs to maximise motivation and the application of initiative, and therefore corporate performance. To do so can change the way a manager thinks about his/her own mission. For instance, the manager of the transport department within a large grain trading organisation is likely to focus his/her attention upon controlling distribution costs and maximising the efficiency with which the transport function is operated. As the manager of an independent SBU the manager may begin to see his/her task more in terms of maximising the return on investment in transportation. This requires him/her to redefine the business his/her division is in (as opposed to thinking in terms of what business the grain trading division is in). New opportunities may become apparent such as the hiring out of underutilised vehicles, storage capacity and equipment; offering advisory services in logistics, stock control management, fumigation procedures etc.; and so on. The manager thus becomes less myopic in his/her view of the mission of the business.
The degree of autonomy and independence of an SBU varies enormously. Much depends upon whether the SBU has its own dedicated operations such as R & D, design, production, distribution and accounting. Often, the economics of business operations dictate that SBUs share some of these facilities but this will almost undoubtedly reduce the individual manager's sense of responsibility and control.
Marketing planning
Basically planning involves setting objectives, designing and implementing a programme to achieve the organisation's objectives and having a monitoring and control mechanism to ascertain whether the planned programme is on track or has achieved its desired objectives. Greenley2 differentiates between corporate planning, strategic planning and operational planning. He says that corporate planning is the organisation's overall planning system and its two principal constituent parts are strategic and operational planning. Strategic planning begins with an assessment of an organisation's internal and external environments.
Operational planning can be further divided into short and long term planning. Short term operational planning is also known as tactical planning. Tactics and strategy differ in several important respects. Tactics relate to the following of a plan to achieve short term objectives. Thus tactics equate to the marketing plan rather than marketing strategy. Strategic marketing would establish policies for each element of the marketing mix and would specify how resources are to be deployed. Tactics deal with marketing problems in the short term. Consider the position of a fish supplier who has the competitive advantage of owning refrigerated trucks. The supplier might adopt a marketing strategy in which the price is set high in order to: recover his/her investment in expensive technology; establish a price-quality relationship in the mind of the consumer; and ensure that the level of demand does not greatly exceed the amount he/she is able to supply. Since this is his/her strategy, there would be no departure from the maintenance of prices which are high relative to those of other suppliers. However, there may be tactical manoeuvering in order to overcome certain marketing problems. When the supplier, or the product, is new to the market there may be need to stimulate demand by offering discounts. This would probably be done through the use of special ‘money-off’ coupons, or vouchers, so that the discounts could be targeted at certain customer groups and also to underline the fact that discount prices will not be the normal practice with respect to the product and are for a limited time only. Similarly, when there is a glut of fish on the market or when the supplier wants to improve short term cash flow or release space in his/her storage facility to accommodate new product lines, the tactic of offering ‘20% extra free’ in a bag of white-bait or kapenta fish might be employed. Once again the supplier would be careful to communicate to the market that these extra value packs would be available in the short term only. Thus, whereas marketing strategy focuses upon achieving long term organisational goals, tactics focus upon achieving annual marketing objectives.
Before moving on, it should be said that corporate strategy, business policy and marketing planning have relevance to enterprises of all sizes. In smaller organisations these management activities are likely to be carried out in a less formal and less sophisticated way than in larger corporations but they need to be done, formally or informally, explicitly or implicitly. Even the small independent grain trader will have to give thought to such matters as his/her strategy for survival in a municipal market overcrowded with grain traders, will have to be consistent whilst remaining flexible - in his/her reactions to problems and opportunities and needs to be in a position to anticipate changes in the marketing environment so that he/she can identify and exploit emerging opportunities.
The need for marketing planning
Strategic planning began as a response to the inadequacy of assuming that the future will look very much like the past. It is dangerous for a business to extrapolate in economies and markets that are developing and changing. In his classic article “Marketing Myopia”, Levitt4 gives several memorable examples of successful businesses that subsequently went into decline because their actions were based upon the implicit assumption that the status quo would be maintained. By way of example, Levitt cites the case of the dry cleaning industry which failed to see that in the future the main threat to their business would come not from continually improved chemical cleaners but from the development of stain resistant synthetic materials. In a similar vein the American railroad companies perceived one another to be competitors but did not anticipate how transporters over road, sea and air would develop their passenger and freight handling facilities to a degree that railroads became uncompetitive. Aaker4 explains that strategic planning encourages enterprises to abandon the notion that past extrapolations can be relied upon as a basis for future actions. Rather, they should assume that there will be discontinuities between the past and the future.
Strategic planning is also known as strategic market planning when its focus is upon the market environment within which the enterprise must operate. This reflects the fact that what an enterprise plans to do now, in order to prepare for future developments in the market, should be based upon a detailed understanding of that market and not on mechanistic projections of past and present patterns. Strategic market planning enables organisations to anticipate events rather than merely react to them. Aaker3 itemises the following benefits of strategic market planning:
It focuses management's attention on external events, especially those representing threats and/or opportunities. All too often companies tend to be inward looking when, in reality, customers and competitors are external to the firm and profits are made outside not inside the organisation.
It locks management into taking a long term perspective when the pressures are to adopt a short term focus with grave dangers of making strategic errors. The natural tendency is for managers to devote their time to dealing with the problems and opportunities of today, to the exclusion of consideration of the longer term. Strategic market management usually has a well defined time-cycle when managers have to submit short, medium and long term plans. Such cycles instill a discipline that forces managers to devote a minimum amount of time giving thought to future developments.
It changes the basis on which resource allocation decisions are made. Resource allocations are frequently dictated by financial professionals who understand accounting conventions and terminology and this is often employed to the disadvantage of managers less well informed on these matters. In other cases, resource allocations are made according to the ‘political’ strength of a group, department or individual manager rather than on commercial merit. Strategic planning seeks to match resources to opportunities (and/or threats).
It provides a strategic management control system. Monitoring and control are an integral part of strategic management. This enables management to deal with problems as these emerge rather than allowing problems to become crises. These aspects of strategic management are discussed later in this chapter.
It provides a vertical and horizontal communication and coordination system. Strategic market management is a vehicle for communicating problems and proposed strategies with precision due to its vocabulary and explicit expression of expectations of the future.
It helps enterprises operating in rapidly changing and unpredictable environments to cope.
Thus, strategic market management is proactive in that it prepares managers not merely to expect change but to anticipate it. Moreover it serves as an instrument for making management more externally orientated and less insular. Strategic market management also focuses management attention on the longer term and counters the natural tendency for management time to be totally absorbed by today's problems and opportunities.
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