Steps for Defining SBUs

Question: What is the square root of 75?
Solution:
Step 1: Estimate: choose a number between 8 and 9.
Step 2: Multiply the estimate by itself.
Step 3: If the product = 75, congratulations! You have the right answer.
Otherwise, continue to Step 4.
Step 4: If the product > 75, choose a lower new estimate and Go to Step 2.
             If the product < 75, choose a higher new estimate and Go to Step 2.

Question: What are the strategically distinct business units in your organization?
Solution:
 Step 1: Estimate: use a current list of businesses or generate a quick list of SBUs.
 Step 2: Analyze the activities (value chain) and the industry structure of each.
 Step 3: If each SBU is strategically distinct, congratulations! You have the right answer.
 Otherwise, continue to Step 4.
 Step 4: If 2 SBUs are really 1, remove one SBU from the new SBU list and Go to Step 2. If 1 SBU is really 2 SBUs, then add 1 SBU to the new SBU list and Go to Step 2.

 * * * * *

The first and most important question that needs to be addressed when starting or revisiting corporate strategy is, “What businesses are you in?”   In practice, it is emotionally difficult for many executives to accept the fact that they might not instantly know the answer to a question that appears so simple. 

The truth of the matter is that because of globalization, advances in technology, and regulatory changes, the answer is not always simple, and the answer often changes with time as new industries are created and old industries restructure or fade away. 

The major barrier to defining the corporation’s SBUs is psychological.  But once the will to answer the question is at hand, and key managers agree to openly think about the issue, the process described above will be very useful. 

There is no book you can buy that will list the correct answers.  Regulatory and industry databases that categorize different industries are often years behind the ongoing global restructuring, and they often categorize industries based on geographical and legal boundaries, rather than strategically relevant business criteria.   

By-pass this first step at your peril. 

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Copyright 2008 Alan S. Michaels               Alan S. Michaels    All Rights Reserved.
Last modified:   Tuesday February 19, 2008