Popularly known as an SBU, a strategic business unit is a fully functioning unit that operates separately from the company's headquarters and sets its own strategic direction. It still reports to the company's board but otherwise will operate as independent businesses. A division, by contrast, doesn't have its own profit and loss liability. It receives directions and strategy from the corporate headquarters.
At its most boiled down, a strategic business unit is a separate, independently operated unit within an organization. The SBU division will still report to headquarters about the status of the operation, but otherwise, it's totally responsible for revenue generation, budgets and strategy development. The unit is usually big enough to have its own organizational functions, such as finance, human resources, IT and so on. It follows its own goals and direction based on the needs of its target market.
Once it receives SBU status, the unit can formulate budgets and make investments and strategic decisions based around its own markets and brand identity. This gives the SBU a chance to make a profitable future for itself that's free from the shackles of corporate policy. The structure works best for organizations that have multiple locations and products. An SBU making business-to-business SAAS products, for example, can pursue strategies specific to that market instead of sharing marketing strategies and resources with a division that's focused on consumer goods.
The downside is that it's a complex system to develop. The company will have to invest considerable time and resources in making sure the SBU can operate as a stand-alone business and develop its own brand. There's also a risk that the SBU will compete with the company's other products – Mars does this with its chocolate bars.
Unlike an SBU, a division isn't normally responsible for its own bottom line and doesn't set its own strategy. It's just a part of the larger business entity taking its instructions from corporate-level vice presidents and the CEO. Divisions are often referred to as departments or business functions – for example, the research and development function or the finance function. Divisional structures can also be organized around geography (the Chicago division), a product (the lighting division) or a market (the consumer division).
Organized well, divisional structures are incredibly flexible and can react quickly to changes in operating conditions. That's because day-to-day decision-making is decentralized to the division manager. The division can handle orders, customer complaints and so on internally, although the overall strategy of the division remains with HQ.
On the downside, there's always the risk of turf wars. Conflict is inevitable if divisions overlap or if they're forced to compete for human and financial resources. Control is also an issue. Give the division too much autonomy and you reduce the level of standardization across the organization.
Putting it all together, you can identify three key areas of difference between a strategic business unit and a division:
Strategy: SBUs set their own strategy, which gives them a chance to make better business decisions. Divisions accept strategy from corporate HQ. These objectives may not be realistic for the division and are unlikely to give the division any control over its future.
Management: The SBU structure requires a different style of management. Because the SBU is decentralized, managers have considerable flexibility in control and decision-making, Divisions, by contrast, often operate within a traditional hierarchical structure, with the CEO and senior leadership team perched at the top of the tree and the division managers sitting below.
Resources and results: Divisions aren't responsible for their own results, so they're not looking at which activities create the most value. This means that resources may be allocated in the wrong place and activities that really should be abandoned aren't. SBUs are their own profit centers, so they're incentivized to use resources more efficiently. This allows them to focus their investment where it's needed the most.