What is a Business Unit?

A business unit is a division of a larger company. It is a distinct group of employees, resources, and objectives that align with the overarching strategic goals of a corporation.

A business unit typically has its own processes and goals but still adheres to the overall company directives, ethics, and policies. 

A business unit can be small, like a single store, or much bigger, such as a company's regional division. 

What Are the Benefits of Having Business Units? 

A large corporation thrives on structure and hierarchy, but no one person or group of people can manage every day-to-day process that a large corporation undertakes.

Additionally, if a corporation offers a variety of products and services, the market specifics for one product might not translate to other offerings. 

Forming business units is an effective strategy for maintaining the overall corporate structure while also allowing for a level of independence to address the need for different approaches across different products and services.

Breaking a large corporation into a collection of business units provides a range of benefits.  

1. Increased Productivity
   When a company has multiple business units, each with its own set of processes and guidelines, it can lead to increased productivity.

   Employees can work more efficiently with processes that are tailored to the needs of their business unit, and team members can focus on the aspects specific to their business unit without having to devote attention to unrelated tasks.

2. Greater Flexibility
   A company with multiple business units can be more flexible regarding its policies and procedures. This is especially important in times of change, when adjustments need to be made quickly without disrupting operations.

   Instead of widespread changes being made to the entire corporate structure, changes can be localized to the relevant business unit, saving time, money, and other resources.

3. Increased Profitability
   A company with multiple business units can focus on different areas and particular areas of a market, leading to increased profitability overall.

   With the ability to trim costs and put a laser focus on a single product or service, business units that are dedicated to one small portion of the market can hone their USP and maximize profitability.

4. Increased Innovation: When several business units are working on different projects, they are more likely to develop innovative solutions that others have not previously considered.

   With just a little bit of communication between business units, relevant innovations can be shared and each unit can decide which changes could boost their efficiency and which they will pass over.

What Are The Drawbacks Of Having Business Units?

There are a few disadvantages to having multiple business units.

For one, it can be challenging to manage and coordinate several different projects. And it's not easy to ensure that all business units are operating efficiently and meeting the company's standards. However, if it’s done correctly, the benefits far outweigh the drawbacks. 

1. Addition of new administrative overhead.
   It can be expensive and time-consuming to establish a new business unit and, in some cases, that unit could take years to break even or recoup the expenses associated with establishing it.

2. An increased risk of “siloing.”
   On a farm, a silo is a large vertical structure that holds grain or other bulk food for animals. In a business setting, a silo mentality means that teams isolate themselves from other aspects of the business.

   For example, a siloed marketing team doesn’t feel the need to collaborate with sales; an IT department that is siloed will focus on its own internal goals and metrics instead of collaborating with other departments; and so on.

Without a strong corporate culture of collaboration and cross-role cooperation, business units can exacerbate the negative effects of siloing. 

Is a Business Unit Also a Subsidiary? 

A business unit can be considered a subsidiary if it is operated separately from the parent company but is still affiliated with it. This is common in the technology industry, where companies often create divisions such as software, hardware, and services. 

The Bottom Line

Business units are effective organizational tools to help keep large businesses productive, profitable, and flexible. Without planning and careful consideration, however, business units can increase the risk of business siloing.