Strategic Business Unit: How and Why to Add One?
As new technologies reshape almost every major industry, companies are increasingly exploring ways to continuously innovate. One commonly effective approach is to launch a strategic business unit. A strategic business unit is a small organization within a larger organization tasked with building a new product or business or entering a new market.
This approach has become increasingly popular. The proliferation of digital products makes it more challenging to fend off competition and maintain market leadership. Digital products create customer experiences that are superior to incumbent providers in industries including transportation, media, and hospitality. The startups that build these digital products now have the ability to go to market faster than ever before. This puts pressure on companies across the world to move even faster.
Creating a strategic business unit enables companies to pursue new businesses, products, markets, and technologies. All without the constraints of working within a large organization. The business unit has a dedicated management team, a unique brand, different goals than the parent organization, and often a different physical space. It benefits from the advantages of a startup, such as an autonomous team, but isn’t strapped for resources like most startups are. And it benefits from the advantages of a large company, such as an established brand and customer base. But it can sidestep the challenges faced by large companies, such as excessive bureaucracy.
The leaders that run these strategic business units are product managers. They may not have the word “product” in their job title, however, the role is the same: to learn what customers want, test and launch a new product, and build a successful business.
This guide covers how to create a new strategic business unit and build successful products in this environment.
Why companies create strategic business units?
The costs of building a digital product with global, multi-billion dollar potential have drastically decreased. What once took years and millions of dollars now takes weeks and thousands of dollars, or less. Lower developments costs and a vastly expanding market for digital products and mobile applications means it’s more important to stay ahead of customer needs.
The chart below shows how the time it takes for major breakthroughs in technology to reach mass adoption is increasing:
Airbnb went to market and reached 1,000,000 nights booked within 30 months, putting the hotel industry on its toes in the process. To compete, companies need to bring their products to market just as quickly as startups. However, legacy operations and management practices stand firmly in the way.
In “Research and Development is Product Management,” Marc Rubner, who started a successful new business unit at American Express, discusses these challenges:
“Large organizations are simply not setup to innovate…Their DNA has evolved to do exactly the opposite.”
Marc elaborates, describing how as companies grow, their operations become geared towards defending their existing business, not create new ones.
In “Intrapreneurship is Product Management,” Simon Ahuja, Harvard Business Review Columnist and Founder of Blood Orange, said that the big budgets that these have can cause more problems than they solve because they often lead to excessive process. Which is the sort of thing that can kill creativity and innovation.
In addition, large organizations often struggle to foster a culture where they can apply modern product management best practices. As a result, struggle to attract the right talent for new product development in the first place.
Creating a strategic business unit enables companies to build new products faster. Successful new product development requires a culture that encourages experimentation and tolerates learning. It requires learning about users and iterating quickly. But identifying a market need and seizing it takes time. The business unit needs to be evaluated based on different metrics than the parent company. Simply focusing on profits is often short-sighted.
Creating a strategic business unit frees the management team from the culture, bureaucracy, and practices that can hinder innovation. It enables the team to focus on meeting customer needs, move faster and ultimately, achieve organic growth for shareholders.
How to create a strategic business unit?
After case studies such as Blockbuster and Kodak illustrate the importance of adapting to customer needs. Many companies are committed to innovation, and understand the benefits of creating a dedicated business unit. However, all too often, these initiatives struggle to gain real traction. They are more “innovation theater” than real product management. In order to, create a business unit that builds successful products, you need to get a few things right: the organizational structure, hiring, culture, and compensation.
1. Organizational structure
“Move fast and break things” has long been the mantra of Silicon Valley startups. These startups are always testing new ideas and iterating quickly based on customer feedback. “Breaking things” is an inevitable part of this process. In other words, many of your ideas are likely to fail. In “Incubation is Product Management,” Jeremiah Zinn, Chief Product Officer at Bark & Co., said that his team doesn’t ultimately pursue about 80% of their ideas.
This is very different than the way large companies work. “Breaking things” isn’t so easy inside of companies with brands that are synonymous with quality and reliability. Also where employees are incentivized to keep things working rather than reinvent them altogether. That’s why Jeremiah keeps his team separated from the rest of his organization:
“By keeping the process different from the rest of the company, and keeping many of the people different from the rest of the company, we’ve been able to avoid the innovator’s dilemma and have a more vibrant innovation program.”
Marc Rubner took it one step further, emphasizing the importance of a separate physical space:
“In order to innovate in a large corporation, you must wholly separate the innovators from the rest of the organization.”
Separating the business unit from the rest of the organization gives the team room to experiment – and break things – without being stifled by process and brand concerns.
Building a new business is different than operating an existing business. People who excel at operating existing businesses may struggle at starting a new business, and vice verse.
In “Building Human Machines is Product Management,” Tommi Forsström, VP of Product at Shutterstock, shares his approach to hiring, and how hiring helps him instill strong culture. During job interviews, Tommi asks questions that help him understand a candidate’s long-term goals, and works to help the candidates he hires to achieve those goals. This has been a helpful strategy for Tommi to keep his team motivated.
Hire people who want to build a business from the ground up and work effectively in an environment of uncertainty and experimentation.
If you walk into a startup’s office, you’re likely to find a ping pong table and a keg of beer. While it’s easy to understand why employees would appreciate such perks, Lina Stern, Head of Employee Experience and Organizational Design at LearnVest, said that in order to truly create a culture that keeps employees motivated to innovate, you need to do more. “People want to feel valued for the contributions they make to the organization,” she said.
Lina recommends personalizing your approach to employee experience according to the values of the company and what will help each individual employee work most effectively. So, if your developers do their best work at night, Lina believes it’s okay for them to stroll into the office at 11 am.
These practices, along with encouraging employees to test ideas and learn from them, help create the right environment for new product development.
The reward for starting a successful company as an entrepreneur is obvious: wealth and fame. Unfortunately, large corporations can’t always offer stock or other significant financial incentives. Fortunately, they don’t need to. According to Bob Dorf, Author of The Startup Owner’s Manual, employees are often motivated by career upside. They want to be recognized for their work and grow within the company.
Both Bob and Aaron Eden, a former innovation leader at Intuit, recommended giving the team exposure to senior leadership to keep them motivated. Give your business unit opportunity to present progress to senior leadership at the parent company, and invite senior leadership to join brainstorming sessions.
How to build successful products and businesses?
It’s not enough to simply create a new business unit. You can’t expect such a team to build successful products without giving them the right tools.
Start with vision, strategy, and goals for the business unit. Is the goal to expand vertically, providing new products for existing customers, or horizontally, providing the the same product to new customers? Is the goal to generate profits, or simply to become more integrated with your customers’ everyday lives? Make sure your product development efforts are aligned.
When developing product ideas, get feedback from customers throughout the product lifecycle. This will help you make better decisions about what features to build and how to position them to your customers. The guests of This is Product Management most commonly rely on surveys, interviews, prototypes, and product analytics to conduct this research.
A strategic business unit is a small organization within a larger organization tasked with building a new product or exploring a new market. Creating a new strategic business for new product development has become a common approach for companies who want to adapt to changing customer needs and grow their market share.
Building successful products requires experimentation and iteration based on customer feedback. Hire the right team for the job. Instill a culture that encourages learning. Execute modern product management best practices, and separate your business unit from the rest of the organization.