Business units

How is the whole organization divided into business units?

A "business unit" is an organizational unit. (Another term used for the same idea is "profit center.") Dividing an organization into business units will help you know exactly which parts are doing well and which are not, and the reasons for the performance level. And if a unit is in trouble, it is usually much easier to find out where the problems are. In fact, without some way of dividing an organization into business units, senior management probably won’t know.

The accounting of each unit is usually kept separate, and it bills other business units as internal customers. Consequently, senior management can monitor the financial performance of each unit separately from the rest of the organization and can easily find out how profitable each business unit is.

Business units are usually departments, but they are projects in organizations that have a relativeley small administrative core and most activities are major projects. This is most common in construction.

Business units have another use. If a unit provides a specific service or product, you can more easily to evaluate whether or not it is better to outsource it. Consider these questions:

1. Do we have the specialist expertise and experience to provide that service at a competitive rate?
2. Do we have enough work to provide that service at a competitive rate?
3. Would it take external customers as well?
4. Would it cost less to outsource to a specialist provider?
5. What risks would be involved? for example:
1. Funds invested in a new business unit
2. Loss of control of supply chain
3. Loss of focus on couure business
4. Loss of service by an external provider for whatever reason

The same principle can be used on a smaller scale. It is fairly easy to use computerized point of sale systems to track which products sell well and which don’t. The accounting system tells the gross profit for each. Consequently, managers can make informed decisions about stock buying.

 

Case study 1

A large company has branches across the nation. Small branches are single business units, and larger branches have at least several. Managers noticed that one regional subsidiary, not long purchased from a competitor, was losing money quite badly. They sent a manager to turn it around. As it was a separate business unit, they could identify the problem quite easily and then monitor its recovery.

 

Case study 2

An organization generally didn’t divide its activities into business units. It had several departments, but they shared personnel and budgets. Consequently, it did not know how much it cost to run its departments.

 

Case study 3

A small college had an administrative center, and schools of science, humanities, education, business, and law. Its main source of income was student tuition fees, but it got into financial trouble, so it separated the schools into business units. It found:

• Science was doing well.
• Humanities was losing money.
• Education was only just surviving.
• Business was doing very well.
• Law was losing money very badly.

It then decided that the administration center should be funded by taking a proportionate share its costs from the schools. They found that this didn’t work, because admin could spend as much money as it liked but didn’t earn any money of its own.

In the end, they divided up incoming fees into a fixed percentage of tuition fees and admin fees. It worked very well, because admin now had to live within its means.

 

Case study 4

In another university, the school of humanities comprised three different departments. Admin decided that the profitable departments should cross-subsidize weak departments that couldn’t attract viable numbers of students. In the end, the strong departments stagnated, lacking funds for growth, while the weak departments continued to struggle. In other words, they had divided it into business units well, but made a mistake with cross-funding.