For a growing business, structuring teams for maximum efficiency is imperative.
An effective business unit model can make a difference in success. A business structure ensures better financial efficiency and organization.
This guide explores what a business unit entails, the types of business units to choose from, and the pros and cons, and informs you how to create an effective strategy framework.
Let’s dive into business units and how implementing a strategic framework could benefit and streamline your organization.
What is a Business Unit?
A business or strategic business unit is a subset or independent division of a larger company. The unit’s processes, success metrics, product lines, market research teams, budget allocations, and strategic objectives align with the overall business policies.
The leaders in the unit report to the top-level executives, and the team members follow the code of conduct established by the overall HR department.
Business units aim to maximize profits by targeting different market segments. Each unit follows its direction, growth strategies, and vision.
What are the Types of Business Units?
There are numerous types of business units that you can adapt to fit your organization’s needs.
Here are three primary types of business units:
1. Geography business units
Such units focus on sales and marketing in particular geographical regions.
2. Customer business units
These units target particular customer groups. For example, you can have a business unit dedicated to selling products to large companies and another focusing on small businesses.
3. Product business units
Such units are in charge of marketing and developing products that fall under a particular category. For instance, if you have different products, you can have a business unit for each type.
Great things in business are never done by one person. They’re done by a team of people.
Advantages and Disadvantages of a Business Unit
A business unit has numerous advantages and disadvantages, so comparing and evaluating all relevant factors is essential before establishing one.
Here are the advantages of a business unit:
- Every business unit targets a different customer base and market section, which can help increase profitability.
- Each unit functions independently, so only some permissions require a go-ahead from the central authority, simplifying decision-making
- Bookkeeping is easier for large businesses.
- Business units help companies become more agile and adapt to changing market conditions.
- These units allow you to focus resources on the most productive areas, improving profitability.
- The setup process can be challenging because every unit requires different aspects, such as goals, vision, and promotional strategies.
- Sometimes high competition among the units negatively affects the parent company.
- Business units can introduce silos and deter cooperation, leading to wasted resources and inefficiency because each unit focuses on individual performance.
Here are the disadvantages of a business unit:
What Are the Characteristics of a Business Unit?
Business units have distinct characteristics that distinguish them from other business structures.
The main characteristics of a business unit are:
1. Unique values and missions
Business units have unique values and missions that assist in creating a broader customer base for the parent company. The unique objectives help every unit target a particular demographic and offer services and products that suit them.
2. Autonomous planning
Business units leverage autonomous planning to strategize business operations, including marketing, developing new products, and expansion. Strategic planning is very important to organizations to align vision and mission to execution. Each unit is a manageable entity that can operate under a different name but remains under the primary company.
3. Unique competitors
Business units focus on their respective markets, so they have different competitors. This structure encourages unique competition, creating an environment that nurtures new marketing techniques and product innovation.
4. Independent cost and revenue tracking
Business units account for revenue and costs separately. They help the parent company track revenue from different services or products like sales revenue making it easier to see which business units underperform.
How Does It Differ from a Subsidiary?
Subsidiaries refer to companies that a parent company partially or wholly owns. You can differentiate a business unit from a subsidiary through aspects such as:
1. Leadership structure
Every business unit has a manager who runs operations and reports to the parent company when necessary. Subsidiaries are under the parent company’s control, so the managers report to the executive team that oversees and coordinates subsidiary programs and initiatives.
2. Share ownership
With subsidiaries, the parent company owns most of the shares and has more say in business operations. A business unit remains independent and has individual shares.
3. Internal structure
Business units have independent internal structures and core business functions. Although subsidiaries can have internal systems, they rely more on the primary company’s structure.
Subsidiaries and business units develop missions and objectives for different reasons. Subsidiaries form objectives that focus on the primary company’s vision. If the goal is expansion, the subsidiary will focus on expanding the parent company into new markets.
For instance, business units have independent objectives, so if it’s an expansion, they will focus on independent expansion and have separate plans to explore new markets.
What Are the Steps Involved in Creating a Business Unit?
Forming business units is an excellent way to promote business expansion and growth. You can create an efficient unit through the following steps:
- Determine the business unit’s purpose and define its particular responsibilities.
- Allocate business resources, including assets, finances, and people.
- Establish accountability with strategic metrics and determine how to track performance and progress effectively.
- Define goals depending on what you aim to achieve.
- Create communication channels between the parent company and the business unit and determine how the information will flow.
- Establish the unit’s autonomy to enable independent decision-making.
- Plan for regular reviews and embrace adjustments to ensure success.
How Can You Develop a Strategic Framework for a Business Unit?
A strategic framework helps you stay focused on the overall goals by providing clarity and transparency in your strategic processes.
Here are the steps for developing a strategic framework for a business unit:
1. Choose a suitable strategic framework
Some examples of strategic frameworks are SWOT analysis, balanced scorecards, issue-based strategic planning, OKRs, and strategy mapping.
Your choice depends on your goals and current standing, but you can have different frameworks for various elements or stages in the planning process.
2. Integrate the strategic framework into your strategy
Ensure you determine your strategic objectives and how every goal fits into your strategic framework. Decide what you must measure and the respective KPIs to know how your vision, strategic framework, and goals align.
3. Review your plan based on your strategic framework
Having a strategic framework helps you understand how the goals of the business unit contribute to the bigger picture. Strategic consulting helps in the review cycle as a course correction aimed to close the strategy execution gap.
- What is a business unit?
A business or strategic business unit is a subset or independent division of a larger company.
- Why are strategic business units important?
Strategic business units help the parent company focus on potential markets or particular customers. They also bring structure to businesses with several services and products.
- What is the difference between a subsidiary and a business unit?
A business unit is independent and has separate shares from the primary company. A subsidiary has no individual shares since the parent company owns the share majority.
As a leader, you must always be keen to find new ways to enhance business performance and improve return on investment Creating an effective strategic framework is one effective way to boost performance and revenue generation.
You can use a strategic business unit plan to distinguish various product lines and increase market capitalization. Business units can help with brand recognition, market awareness, research and development, and market analysis if you plan to introduce new products or explore new markets.