Strategic Business Unit: Is It Right For You and Me?
As a small family-owned and operated business, we are continually looking for ways to increase profitability while developing smart growth for our business. A popular approach is a strategic business unit. What’s a strategic business unit? The definition I find most useful is from BusinessDictionary.com:
Autonomous division or organizational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance. Because SBUs are more agile (and usually have independent missions and objectives), they allow the owning conglomerate to respond quickly to changing economic or market situations.
Given that definition, it could also be set up as a DBA (doing business as). This allows an autonomous division to be fictitiously named. Why would we do that? So that we can avoid creating a new legal entity for each business we decide to spin off our primary legal entity (i.e. corporation, LLC, etc). Forming a new legal entity involves costs of incorporating. A Strategic Business Unit, set up as a DBA, is a legitimate option for diversification without the time and costs associated with creating a new legal entity.
So when is a strategic business unit the right move? Let’s say that you run a service industry company that is normally sustained by several large projects a year, as is the case with our business. While that provides an adequate amount of revenue and profits for us as owners, it does not provide steady income for our hourly workers. We are fortune to have some very skilled workers. Some have backgrounds in general construction (electrical, plumbing, carpentry, masonry work, flooring, etc.), others in welding, others in design, and others in landscaping. This provides us with an opportunity to build strategic business units around people. Keeping the “right” people is key to growing any business. If creating a strategic business unit around an individual allows us to keep them available to our core business then it might be a good option. But let’s analyze the might.
While it might be a good option it might be a distraction from what has allowed us to remain in business for almost 30 years. This is where we turn to a time-tested, decision making process:
- SWOT Analysis
- Cost Analysis
- Projected Billable Hour Assessment
Let’s look at each of these and consider why they are relavent to the decision making process.
1. SWOT Analysis – SWOT simply stands for Strengths, Weaknesses, Opportunities, Threats. Analyzing strengths and weaknesses allows us to focus internally, drawing on past experience and the present state of the business. When considering opportunities and threats we focus on external elements, such as the economic environment, existing competition, etc., and analyze what the strategic business unit might do in the future. This is a powerful tool and can often be the determining factor.
2. Cost Analysis – When performing a cost analysis we general look at specific startup costs such as direct labor/materials costs, any professional fees, technology/equipment costs, administrative costs, marketing/advertising costs, indirect labor/benefits costs, as well as potential taxation effects. All of these categories have to be thoroughly broken down. Never, NEVER underestimate these costs.
3. Projected Billable Hour Assessment – This is where we take all the data we’ve gathered in our cost analysis, estimate our potential billable hours, and then work the math. First we find beak-even, then apply our desired profit margin. Once we have our billable hour rate we see how it matches up to the industry standard. Please keep in mind, the industry standard is just that, the industry standard. We have no idea if the business owners in this particular niche have the first clue about pricing. We will always trust our billable hour rate before we go with an industry standard, however it’s good to know where you stand. We just make it a point to deliver on the service side – high quality and exceeding expectations. I’ve written in greater detail on determining billable hour rate here, How Much Should I Charge. This assessment also shows us how many hours our workers will be tied up doing work for the strategic business unit. It will reveal the potential time conflicts.
Using this three-fold criteria, we usually have a clear understanding of what course of action is best for us. We also do a gut check. Sometimes everything looks good on paper but there’s just something in our gut telling us not to proceed. That’s when we think, think, think….and, of course, ask our wives what they think 😉 Don’t ever underestimate the intuition of those lovely ladies! Please note the gut check is normally not true in reverse. If the SWOT analysis, cost analysis, and projected billable hour assessment all tell us not to proceed, then it’s generally smart to look elsewhere. I say generally because there is an exception to every rule in startups.
One final thought…Make sure the strategic business unit is not entirely out of your scope of expertise. If you lose a key person in the SBU what happens? How easily are they replaced? While linchpins are absolutely necessary, sound business models create environments in which they can thrive.