Does your company have an opportunity to penetrate a new market with a new or existing product? Are you at a loss to explain how your company can justify the investment in time, resources and personnel towards a pursuit that is for all intents and purposes, an entirely new business venture? Many companies faced with this dilemma have opted to start their own strategic business unit (SBU). An SBU is a completely separate enterprise. It has its own cost structure and overhead, its own operations, its own marketing and sales and most importantly, it's focused on succeeding in a separate market with different customer segments, different market influencers and vastly different selling conditions. Any business that feels it must break off a portion of its business in order to succeed in a new market, is one that will benefit from starting a strategic business unit.
The Success of an SBU Doesn't Depend Upon Size of Parent Company
A number of companies believe that strategic business units belong to large corporations, ones who have the resources and clout to make an SBU succeed. However, this simply isn’t true. A business unit is a portion of your enterprise that could, or should, operate alone. In essence, it must break off in order to succeed in its new untapped market. It’s not a question of the size of the parent company, but more a question of the size of the opportunity. Does an opportunity exist for a portion of your business to branch out on its own? Is there a need to define a new business unit, one capable of servicing an entirely new industry and marketplace? Finally, is success in this new marketplace contingent upon your company setting up resources devoted solely to the new business unit?
If you’ve answered “yes” to each of these aforementioned questions, then setting up a strategic business unit is a reasonable pursuit. What’s ultimately required is your willingness to define the opportunity. Any company, regardless of size, that looks to establish a business unit, must first be willing to do the necessary research. So, how should you get started?
Define Market’s Size: You have to define your new business unit’s market size. This is nowhere near as difficult as it may seem. There are a number of resources at your disposal. Industry trade magazines are one such source. They often provide important insight into a market’s current size and its long-term future. However, it’s not uncommon for such estimates to be written from a biased point of view, one in favor of the industry and one only showcasing its positives. This can make your decision making process much more difficult.
To provide a more balanced approach to assessment, you can always turn to the internet, or you can go the route of purchasing one of several market feasibility studies. These studies provide invaluable insight into a market’s makeup, its main players, its barriers to entry and its potential for growth, or lack thereof. You must have an idea of the market’s size and how you should enter that market. Use this information as a basis for where your business unit will start.
Define Opportunity: What is the ultimate purpose of the strategic business unit? Are you selling a new product into a new industry, a new product into an existing industry or an existing product into a new industry? Be clear on the opportunity you’re pursuing. Define that opportunity it in terms of the number of potential customers and revenue that can be achieved. This is why defining the market’s current size and future growth is so important. It provides essential information as to the possible customers your new business unit will pursue.
In order to give you an idea of the importance of this step, let’s assume you are pursuing a market where your company will service several original equipment manufacturers (OEMs) and their installed equipment base. You find out that there are well over one million of these equipment lines installed in North America and three million worldwide. First, are you focusing solely on North America, or all installed equipment locations worldwide? Second, how many of your products could potentially be sold on each line, each year and what is the average number of lines owned by the market’s existing customer base? Finally, what are your costs to service your new customers?
These are just some of the questions that need to be answered when defining the opportunity for the SBU. In essence, it’s about defining the opportunity at a macro and micro level, so as to base the decision on an accurate assessment of the opportunity.
Perform Customer Needs Assessment: Understanding that opportunity involves performing a customer needs assessment. You must define how your SBU will service its new customers. You need to know, and thoroughly understand, the service norms in the new industry, the standard credit terms provided to customers, and most importantly, the type of after-sales service support these customers require. In essence, you are entering a new market. In some cases it requires a new business plan, one that defines the market's current and future health and one that outlines how your business unit will succeed.
In this particular section you must clearly understand what it costs to service your future market's customer base. Focus on the following three questions: What do customers want? How do they want it? How will you give it to them?
Determine Overhead and Cost Structure: Remember, your SBU will essentially operate as a separate entity. It is likely to require its own marketing, sales and customer service team, its own operations, its own finance and accounting team and may even need its own engineering, research and design team. In addition, you may need to set up individual warehouses and distribution locations. Ultimately, determining your business unit’s makeup will come from how you’ve defined your new market’s size, the opportunity the SBU is pursuing and your future customers’ needs. You are looking to answer whether this entire pursuit will be profitable. To do that implies that you must determine your overhead and the total cost structure for the SBU.
Overhead rate is calculated by taking a company’s indirect expenses and dividing them by its direct expenses. Indirect expenses include all expenses that can’t be traced to the costs of production, or ones that aren’t linked to the production of a given unit. These would include the salaries paid to sales, marketing, operations, inventory and administration personnel. Your direct expenses relate to your direct costs to manufacture a given product. Direct labor and direct material are included in these expenses. Understanding and tracking your new business venture's overhead is essential to success. This is especially the case during your initial foray into your new market. Get used to tracking your overhead rate and be cognizant of your SBU’s costs during its initial stages.
The above provides a summary calculating of overhead rate towards the end of the video. To read more about calculating overhead rate and percentage, please refer to: Calculating Overhead Rate & Percentage for Small Businesses
Define Gross Profit on Sales and Net Profit: Simply put, your SBU will be worthwhile if you can generate enough gross profit on sales and net profit after expenses. You must define your gross profit on sales, and then retrace this information to how you’ve defined the market’s size and your SBU’s opportunity. Understanding how many units are needed by each customer, and the amount of gross profit on sales for each unit, will go a long way to defining whether the strategic business unit is worth pursuing.
By no means is this all there is to deciding whether to start your own strategic business unit. The decision isn’t to be taken lightly, and it is one that requires a substantial amount of research and preparation. You must come up with a new business plan, one that outlines how your new SBU will succeed. These five aforementioned criteria provide a roadmap on how to make a go/no-go decision on pursuing a new business venture. First, start by defining the market’s current size, its growth patterns and its long-term future. Second, define the opportunity by deciding how and why you should pursue this new market. Third, perform a customer needs assessment with the focus of defining the SBU’s costs to service customers. Fourth, define your new strategic business unit’s overhead and cost structure by assessing the number of employees needed in each internal department within the new business venture. Finally, define the gross profit on sales by the number of units sold and the business unit's net profit after expenses. In essence, you need to define your decision to move forward on the strength of these five aforementioned criteria.
The GE Strategic Business Unit
If you want to read about the GE Matrix (above), and how this model helps to measure a strategic business unit's value, then please refer to: What is the GE Strategic Business Unit (SBU) Matrix?
The following video explains the difference between SWOT and TOWS analysis in strategic planning. It is from the post: Strategic Business Planning: SWOT & TOWS Analysis
Comments