Business

Business Unit: 4 Characteristics of a Strategic Business Unit

Written by MasterClass

Last updated: Dec 2, 2022 • 3 min read

Many large corporations have strategic business units (SBUs), each with its own product lines, budgets, strategic planning units, and marketing campaigns. Learn more about strategic business unit strategy and the viability of launching a new business unit within an existing company.

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What Is a Business Unit?

A business unit (also called a strategic business unit) is a subset of a larger company. An individual business unit may have its own strategic objectives, budget allocations, market research teams, product lines, and success metrics. The leaders of a business unit report to the corporation’s top-level management. Their employees abide by the same codes of conduct set forth by the broader company’s human resources department. They also get paid by the larger corporation.

Particularly large companies may have many different business units that handle all aspects of the organization. These business units might operate under the same roof or have workers across multiple geographies. By contrast, startups and small business rarely have their own business units. Typically these companies are too compact to see a benefit from the decentralization that comes along with establishing different business units.

4 Characteristics of a Business Unit

A business unit traditionally stands apart from the larger organization that controls it. Typically, they have:

  1. 1. A connection to corporate management: A strategic business unit’s leadership team is the conduit between the SBU and the company at large. Regularly, these leaders report to C-level executives and apprise them of developments within their business unit. Most employees of the SBU only interact with the unit’s management team and have minimal contact with top-level executives.
  2. 2. Independent budgets: The internal budget of a strategic business unit mostly stands apart from the budget of the parent company. The parent company may grant a top-line budget allocation to the business unit, and from there, the business unit’s management doles out the funds.
  3. 3. Separate revenue streams and profitability metrics: Many business units have their own sources of revenue that do not overlap with those from other business units. Each unit establishes its own target market. It then measures its own profitability and market share, independent of other parts of the company.
  4. 4. Their own profits: Each of a corporation’s different business units functions as an individual profit center. It reaches out to a particular market segment using a particular marketing campaign. It offers its own product line and seeks to build a customer base that may not overlap with the customers coveted by the rest of the company. The business unit’s profits may trickle back to the company at large or remain within the business unit for future budgeting.

Business Unit vs. Subsidiary

A few key differences exist between a corporate business unit and a corporate subsidiary.

  • Business functions: Traditionally, a subsidiary focuses on different product categories and target audiences than those of its parent company. This can be a useful corporate strategy, as parent company and subsidiary are not fighting each other for the same narrow pool of customers.
  • Independent vs. dependent entities: A subsidiary is more than a separate unit within a large corporation. Legally it is a separate business, albeit one that is either wholly owned or partially owned by a parent company. In most cases, subsidiaries have their own boards of directors and their own executive teams that handle strategic management and decision-making. Legally speaking, a parent company must own at least fifty percent of a smaller company to call it a subsidiary. Business units are not independent companies. They belong within a larger corporation.
  • Organizational structures: The business structure of a subsidiary might not match that of its parent company. By contrast, each business unit in a corporation fits into a larger organizational structure, led by the same top-level management team.
  • Relationship to company: Since subsidiaries do not legally form part of a parent company, they might not have access to all company resources they would enjoy in a SBU business model. Their employees report to a different human resources department and may abide by a different code of conduct. They may not have the same marketing teams promoting new products or recruiters promoting job opportunities. Those may only exist for business units that belong to a parent company.

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