What Is a Business Unit? (With Characteristics and FAQs)
Updated March 10, 2023
Establishing a business's structure can help it organize internal activities and work toward its goals. Business units are separate divisions within a company established to function independently. By understanding what business units are and learning how they function, you can determine whether to recommend creating them. In this article, we define a business unit, outline its characteristics, discuss how business units differ from subsidiaries, answer frequently asked questions, and show an example of business units.
What is a business unit?
A business unit is a department or team that develops and implements independent strategies in a company. While they are fully functional divisions, their processes and practices typically align with a company's primary activities. For example, suppose a company producing equipment has business units for appliances and electronics production. Its executive team may expect these business units to follow the company's policies and reflect on its work principles when creating strategies.
Once a company reaches a significant size, introducing business units might be an effective way to ensure it thrives. Here are the potential benefits of establishing independent units within a company:
Enhanced market focus: Introducing business units can help a company meet its entire target audience's needs after identifying customer demographics. Customer demographics are observable and measurable characteristics of a target audience, such as employment status, geographical location, and age.
Increased efficiency: By sectioning operations and creating business units, a company can work more efficiently because these divisions operate similarly to independent companies.
Characteristics of business units
Business units typically have properties that make them unique from other divisions, such as:
Business units typically create independent plans for operations, such as marketing and expansion. Each division may also target different prospects. For example, suppose a manufacturer produces household equipment. It may have business units for each product, targeting teenagers for game consoles and parents or guardians for washing machines. Business units typically receive and manage procurement, material, and human resources.
Because they operate in distinct markets, business units may have different competitors from those of a company. This can help inspire product innovation and advanced marketing techniques. For example, business units focused on manufacturing boots might have different primary competitors than those of their parent company producing footwear. With increased competition, these business units may produce more comfortable boots to remain competitive. Its parent company might also oversee this innovation without participating in daily operations.
Independent revenue and cost tracking
Business units typically keep independent accounts of generated revenue and incurred expenses. This can offer increased visibility to a parent company looking to track profits from all products or services. For example, suppose you work for a vehicle manufacturer that produces various automobile brands. Business executives may examine the sales by business units to decide whether to continue with a particular automobile brand.
Independent from other business units
Many companies have multiple business units that operate independently. This way, business managers can retain each unit's autonomy while connecting them to the core business. For example, a clothing manufacturer might have multiple brands or clothing lines handled by business units, each producing a unique clothing style for different markets.
Business units vs. subsidiaries
Subsidiaries are companies completely or partially owned by another business called a parent company. Here are factors you can use to distinguish them from business units:
Ownership of shares
Examining the shares of business units and subsidiaries can be an effective way to distinguish these entities. Shares refer to ownership in an entity. A subsidiary's parent company typically owns most of its shares, offering more control over business operations. In comparison, business units maintain their independence from their parent company and have their own shares.
Another way to different business units and subsidiaries is to assess their leadership structures. Business units typically have managers who oversee operations and report to a parent company whenever required. Because a subsidiary remains within a parent company's control, its managers report more frequently to a parent company's executive team. This team may coordinate and oversee programs or significant subsidiary initiatives to ensure success.
Business units and subsidiaries may establish objectives and missions for different purposes. For example, a unit might establish objectives for independent expansion or develop plans to enter into an industry. In comparison, subsidiaries typically create objectives that extend a parent company's mission. For example, a subsidiary may have a mission to expand a parent company into international markets and improve brand awareness.
Business units typically have independent structures, including human resources departments, sales teams, support functions, and payroll management services. In comparison, a subsidiary might use a parent company's internal structure or request its own. Many parent companies offer resources to their subsidiaries to keep these entities within their control. Depending on a business's size, a subsidiary may also comprise business units.
Business units typically expand into markets already controlled by a company. In comparison, subsidiaries typically enter new markets to achieve a company's mission. For example, a company might create subsidiaries to operate in different countries and continents. This way, the company can centralize its foreign operations and connect with local customers by providing products or services that meet their specific needs.
FAQs about business units
The following helpful answers to common questions can help you learn more about business units:
What is a business unit manager?
A business unit manager oversees a unit in a company. They help ensure a business unit's goals contribute to a company's overall success. From analyzing market trends to training team members, unit managers typically have a broad range of responsibilities. They perform management functions by planning, organizing, controlling, and leading a business unit's projects.
If this position interests you, consider getting a degree in business administration or human resources to qualify for job opportunities. Managerial experience in your preferred company and in-demand business credentials can also make you a more competitive candidate. The national average salary for a business unit manager is $113,608 per year.
What tips can help you create effective strategies for business units?
Here are helpful practices you can use to establish strategies for fully functional divisions within a company:
Use a suitable approach to strategy development: You can use a collaborative approach which involves building business units using team members' input and executive recommendations. Alternatively, you can use a corporate-led approach that relies on executives to plan the unit and define its growth, profit, and market share goals.
Consider a business unit's strengths: Performing strength analysis and conducting financial projections can help you identify a business unit's strengths.
Use data and software: Before implementing a strategy, you can estimate the likelihood that it can help you reach a unit's goals. Collecting data on industry trends and economic patterns and using business software can help your assessment.
What helpful practices can you follow when creating business units?
Here's a list of actions you can take to ensure successful unit creation:
You can check that all business units have independent missions to ensure they're valuable to a company.
You can consider the additional management professionals required to lead business units to ensure they work efficiently.
You can verify that business units can establish independent markets for products or services.
Example of business units
Reviewing this example can help you learn more about business units and how they function in a company:
Harrow Union Consulting Group (HUCG) is a consulting firm that works with business and societal leaders to resolve challenges, providing expert advice and solutions. As a diversified company, it decides to establish business units to meet the unique demands of its target audience. The firm's management agrees that business units can better handle its market expansion plans than subsidiaries or affiliate companies.
HUCG creates HUCG Ultra, a unit specializing in software and data solutions. It also has HUCG Alpha, which helps businesses grow by providing artificial intelligence solutions and advanced analytics. These business units have independent missions and different prospects. They also manage separate human, material, and technology resources for their specific operations. Using a collaborative approach to strategy formulation, these business units involve team members and executives in decision-making.
Salary figures reflect data listed on quoted websites at the time of writing. Salaries may vary depending on a hiring organization and a candidate's experience, academic background, and location.
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