What is a strategic business unit? Definition, benefits and best practices

Strategic business units enable companies to improve focus and effectively allocate resources to achieve growth in important areas.

For business owners, they provide a strategic framework to efficiently manage operations, address challenges and adapt quickly to stay ahead of competitors.

In this article, you’ll learn what a strategic business unit is, how it benefits your business and the different types you can implement in your company. We also share five best practices for creating a successful business unit.

What is a strategic business unit?

All business units in an organization share the same organizational culture, policies and top-level management, but each operates as a business within a business.

For example, if you’re launching a product to a new audience, you might set up an SBU to market it.

The business unit has its own team, mission and objectives and operates separately from other units. Clear focus and dedicated expertise empower the unit to work strategically to grow its part of the business.

SBUs are common in larger organizations with many products, services or locations requiring unique strategies and specialist knowledge and skills.

Take Amazon as a strategic business unit example.

The company uses business units to operate its various products and services, including Amazon Kindle, Amazon Prime and Amazon Web Services.

Together, the business units contribute to Amazon’s overall performance.

The same approach can be beneficial in smaller companies. For instance, a digital agency might use separate business units for marketing and design.

Creating separate entities allows leaders to better manage resources and improve efficiency.

4 characteristics of a strategic business unit

Regardless of size or type, strategic business units share four common features:

1. Individual targets

Each SBU has unique goals and success metrics based on its role within the company. Depending on the objective, a business unit might also focus on a specific customer base.

Here are some of the targets business unit managers are responsible for:

• Increasing sales

• Boosting customer acquisition and retention

• Improving product and service efficiency

• Increasing brand awareness

• Maintaining customer satisfaction

Objectives align with company goals but are managed by the SBU. Business unit leaders will periodically submit growth and sales revenue results to help top-level management understand performance and plan for the future.

2. Unique competitors

Operating in a distinct market means SBUs typically have different competitors from the organization or other business units.

For example, the main competition for Amazon Prime is Netflix and Disney Plus. However, market competitors for its Amazon Web Services are Microsoft Azure and IBM Cloud.

Understanding the competition helps a business unit analyze strengths and weaknesses to create successful marketing and sales strategies. It also helps inspire product innovation, allowing a company to fill market gaps and increase market share.

3. Decentralized management

Business units have their own structure that allows them to operate autonomously while staying connected to the core company.

Business unit managers handle planning and manage teams and are accountable for the unit’s performance.

The set-up of a business unit depends on size, resources and autonomy. Larger companies might create an SBU to operate like an independent company with little input from top-level management. In smaller organizations, existing departments might handle areas such as recruitment and human resources.

Here are some of the roles an SBU might include:

• SBU manager

• Operations and finance manager

• Sales manager

• Sales representatives

• Marketing manager

• Marketing executives

• Customer success manager

• Product manager

4. Independent revenue and budget tracking

Each SBU functions as its own profit center with different revenue sources from other business units. It’s also responsible for managing its own budgets and expenses for sales and marketing campaigns.

Autonomous resource management allows SBU managers to adjust strategies and respond to market changes to improve effectiveness.

It also gives business owners better visibility over finances. The ability to analyze profit and loss separately enables data-driven decisions on where to increase investment or move budget.

The benefits of creating a strategic business unit

Strategic business units help businesses hone in on a product, market or function for long-term growth and continuous improvement.

The benefits of setting up a business unit include:

• Increased focus. Breaking operations down into specialized units with precise goals gives you clear direction. Knowing what’s required ensures purposeful action and better efficiency across important business areas.

• Better resource allocation. Assigning resources based on specific needs and priorities gives you a targeted approach to resource management. Tracking individual SBU performance helps you see where to adjust budgets and divert resources to support objectives.

• Improved risk management. Business units operating autonomously helps to mitigate risk. If a unit underperforms, results are contained, reducing the impact on company performance. The added stability frees you up to try more innovative and experimental business development strategies.

• Clear accountability. SBU managers are directly responsible for the performance of their unit. Accountability encourages strong leadership, leading to improved collaboration, better employee engagement and enhanced performance.

• Greater customer satisfaction. Unique goals and objectives help customer-focused SBUs build sales and marketing strategies around audience pain points and preferences. Continually meeting customer needs fosters loyalty and increases retention.

In short, strategic business units allow companies to concentrate on specific offers, processes and audiences to improve performance and gain a competitive edge.

The potential risks of creating business units

Dividing a business into SBUs can be beneficial, but it’s not always the best strategy for every business. For some companies, decentralizing operations can pose management, financial and even legal risks, including:

• Management risks. Managing different business units requires a more complex organizational structure. Dividing attention between units can disrupt operations, communication, coordination and overall efficiency.

• Financial risks. Supporting multiple SBUs can mean higher administration and operation costs, including accounting, finance and human resources expenses. These higher costs can reduce profitability.

• Performance risks. SBUs can become bureaucratic, slowing decision-making and making it harder for the company to respond quickly to a changing market.

• Compliance risks. Each SBU may need to comply with different regulations and legal requirements, which can make compliance more complex and costly.

While there are advantages to strategic business units, they may pose hurdles for smaller companies that need to stay agile or that rely heavily on shared resources. Each company should weigh the risks against the benefits when deciding how to proceed.

5 types of strategic business units

There are several different business unit types you can use in your company. The right approach depends on your industry and objectives.

Here are five types of SBU for common use cases.

You can also use strategic business unit types in a hybrid approach. For example, an SBU for a new product line might have a region-based business unit to boost sales in certain territories.

Combining SBUs gives teams broad expertise to operate effectively and grow company revenue.

5 best practices for creating a successful strategic business unit

Strategic business units vary depending on type, resources and objectives. However, all successful SBUs share the same key elements: clear purpose, planning, structure and communication.

These steps will ensure your business unit effectively contributes to your company’s goals.

1. Define the purpose of your business unit

The first step of creating a new business unit is clarifying the primary goal. Your SBU should have a clear purpose tied to your company objectives.

Develop a mission statement that answers the following:

• What the business unit is for (e.g., product or function)

• Why the business unit exists (e.g., revenue growth or improving efficiency)

• Who the business unit serves (e.g., customers or employees)

• How the business unit achieves its goals (methods of operation, principles and philosophies)

Summarizing your purpose in one concise sentence will guide your business unit and provide focus and direction for its team.

Here’s an example of a strategic business unit mission statement for a region-based SBU:

Make your mission statement aspirational and achievable to keep your team motivated. However, don’t set it in stone. Review and update your statement as your business grows and unit goals evolve to ensure it’s relevant to your objectives.

2. Set measurable goals and key performance indicators

Use your mission statement as a starting point for your business unit goals.

The SMART framework will help you set goals that motivate your team and drive business unit success.

Past performance can help you keep goals measurable.

For example, if your conversion rate is healthy but customer churn is high, your sales team might target customers who aren’t likely to make repeat purchases.

If you want to create a function-based business unit for sales, you could use these metrics to set a measurable goal to increase customer lifetime value (CLV). For instance, your goal might be to increase CLV by reducing customer churn to 4% or less.

You can then set sales objectives to help you achieve your goal. Here are some examples of SMART goals for a subscription business.

• Create and share a customer satisfaction survey with incentives to drive participation

• Send email reminders and renewal offers to customers whose contracts are expiring in the next quarter

• Call 25 existing customers each month to offer advice and guidance

Getting clear on your goals makes it easier to choose key performance indicators (KPIs) to track performance and keep your business unit accountable.

Using the above example, if your objectives involve contacting customers, tracking sales activity metrics like calls made and emails sent gives you a clear picture of sales rep performance. Additionally, monitoring the churn rate will inform you how your business unit is progressing toward the goal.

Leveraging customer relationship management (CRM) software with reporting features makes it easy to track goals.

A tool like Pipedrive provides a real-time view of activities so you can understand the following:

• How team members perform against individual goals

• The collective impact of your business unit

Pipedrive also lets you customize dashboards with charts and dropdown menus so you can focus on the information that matters. Combining this with in-built reporting automations speeds up the process for better decision-making.

3. Establish a clear structure

The size and scale of your strategic business unit depend on the nature of your organization.

For example, a product-based SBU might have dedicated sales, production and finance teams. A process-based SBU, on the other hand, might consist of a handful of specialists working to improve workflows.

Regardless of your objectives, setting up each SBU with a clear organizational structure keeps everyone clear on hierarchy, roles and responsibilities. It also makes identifying skill gaps and recruiting the right team members easier.

Here’s a general structure most SBUs share:

With your business structure in place, create a communication plan that outlines the rules for effective information and data sharing between the unit and business leaders.

An effective communication plan should include:

• Objectives (e.g., aligning organization and SBU managers on the business initiative)

• Details on who’ll receive communication and notifications

• Key messaging

• Channels for delivering communication (e.g., email, communication platform or in-person meetings)

• Communication schedule, including reporting milestones and deadlines

• Roles and responsibilities

• Success metrics for evaluating your plan’s effectiveness

While SBUs are set up to operate autonomously, a communication plan ensures effective and strategic communication to avoid missteps and eliminate silos that impact performance.

4. Allocate sufficient resources for sales, marketing and growth

Resource allocation needs careful planning to ensure your SBU has the time, budget and tools to work productively.

Your goals and objectives can guide your resources. For example, say you want to expand your customer base by 20%. Ask yourself how you can use people, technology and finances to get there.

Additionally, running a SWOT analysis can uncover strengths and weaknesses in your current systems to help you spot areas to invest in.

Here’s how a SWOT analysis might look for an SBU created for a new product launch:

Use your analysis to see what’s working and allocate resources to gain a competitive advantage.

Once you establish your SBU, use metrics such as profitability, growth and market share to determine where to invest.

Boston Consulting Group’s growth-share matrix divides SBUs into four categories to help businesses understand what to prioritize:

For example, if your SBU has a low market share but high growth potential, you might invest more in sales to boost leads and conversions.

Continually evaluating performance will ensure your SBU keeps pace and adapts to market changes.

5. Develop a performance management system

Performance management is crucial to ensure your SBU meets its goals and contributes to your company’s success.

At the executive team level, holding regular check-ins and feedback sessions with the SBU manager is good practice. Meetings provide an opportunity to monitor progress, tackle challenges and celebrate wins.

Choose a performance management model within the SBU that aligns goals with team and employee performance.

Here are three common models for monitoring progress:

A CRM system like Pipedrive provides real-time insights and lets you track key metrics to track performance. Business units and company managers can use this data to address issues and find areas for improvement.

Use a CRM alongside a performance appraisal system to conduct check-ins and gather feedback from team members. Apps like Lattice and Workleap include features such as employee surveys and talent reviews to create feedback loops.

Understanding your people’s challenges will help you provide the right support and allocate the right resources to enhance productivity and engagement.

Final thoughts

A strategic business unit enables companies to focus on activities crucial to long-term growth. With a purposeful approach and clear objectives, a BSU offers the structure to capitalize on opportunities, mitigate risk and thrive in new markets.

Ready to create your business unit? Discover how Pipedrive can help you track and optimize business unit performance with a free 14-day trial.