STRATEGIC BUSINESS UNITS AND ORGANIZATIONAL PERFORMANCE IN SELECTED MANUFACTURING COMPANIES

CHAPTER ONE

INTRODUCTION

1. Back ground of the Study

Until the 1940s, strategy was seen as primarily a matter for the military. Military history is filled with stories about strategy. Almost from the beginning of recorded time, leaders contemplating battle have devised offensive and counter-offensive moves for the purpose of defeating an enemy. The word strategy derives from the Greek for generalship, strategia, and entered the English vocabulary in 1688 as strategie. According to James’ 1810 Military Dictionary, it differs from tactics, which are immediate measures in face of an enemy. Strategy concerns something “done out of sight of an enemy.” Its origin can be traced back to Sun Tzu’s The Art of War from 500 BC. Over the years, the practice of Corporate strategy has evolved through five phases (each phase generally involved the perceived failure of the previous phase). These include: Basic Financial Planning (Budgeting), Long-range Planning (Extrapolation), Strategic (Externally Oriented) Planning, Strategic Management, Complex Systems Strategy: Complex Static Systems or Emergence and Complex Dynamic Systems (Vijaykumar, 2009: 1).    

McKinsey (1889-1937), founder of the global management consultancy that bears his name, was a professor of cost accounting at the School of Business at the University of Chicago. His most important publication, Budgetary Control (1922), is quoted as the start of the era of modern budgetary accounting. Early efforts in corporate strategy were generally limited to the development of a budget, with managers realizing that there was a need to plan the allocation of funds. Later, in the first half of the 1900s, business managers expanded the budgeting process into the future. Budgeting and strategic changes (such as entering a new market) were synthesized into the extended budgeting process, so that the budget supported the strategic objectives of the firm. With the exception of the Great Depression, the competitive environment at this time was fairly stable and predictable.     

Long-range Planning was simply an extension of one year financial planning into five-year budgets and detailed operating plans. It involved little or no consideration of social or political factors, assuming that markets would be relatively stable. Gradually, it developed to encompass issues of growth and diversification. In the 1960’s,Steiner did much to focus business manager’s attention on strategic planning, bringing the issue of long-range planning to the forefront. Managerial Long-Range Planning, edited by Steiner focused upon the issue of corporate long-range planning. He gathered information about how different companies were using long-range plans in order to allocate resources and to plan for growth and diversification. A number of other linear approaches also developed in the same time period, including “game theory”. Another development was “operations research”, an approach that focused upon the manipulation of models containing multiple variables. Both have made a contribution to the field of strategy.     

Strategic Planning (Externally Oriented) aimed to ensure that managers engaged in debate about strategic options before the budget was drawn up. Here the focus of strategy was in the business units (business strategy) rather than in the organization centre. The concept of business strategy started out as ‘business policy’, a term still in widespread use at business schools today. The word policy implies a ‘hands-off’, administrative, even intellectual approach rather than the implementation-focused approach that characterizes much of modern thinking on strategy. In the mid-1900s, business managers realized that external events were playing an increasingly important role in determining corporate performance. As a result, they began to look externally for significant drivers, such as economic forces, so that they could try to plan for discontinuities. This approach continued to find favour well into the 1970s.

Strategic Management as a discipline originated in the 1950’s and 1960’s. Although there were numerous contributors to the literature, the most influential pioneers were Alfred D. Chandler, Selznick, Ansoff and Drucker. Alfred (1962: 4)recognizes the importance of coordinating the various aspects of management under one all encompassing strategy. Prior to this time the various functions of management were separate with little overall coordination or strategy. Interactions between functions or between departments were typically handled by a boundary position, that is, there were one or two Managers that relayed information back and forth between two departments.

Chandler (1962: 4) also stressed the importance of taking a long term perspective when looking at the future in his work ‘strategy and structure’ . He show that a long term coordinated strategy was necessary to give a company structure, direction and focus. He said it concisely“structure follows strategy”. Selznick (1957: 5) introduced the idea of matching the organizations internal factors with external environmental circumstances. This core idea is developed into what we now call “SWOT Analysis”  at the Harvard Business school General Management group. Strengths and weaknesses of the firm are assessed in light of the opportunities and threats from the Business environment. Ansoff (1965: 6) builds on Chandlers work by adding a range of strategic concepts and inventing a whole new vocabulary. He developed a strategy grid that compared market penetration strategies, product development strategies, marked development strategies and horizontal and vertical integration and diversification strategies. He felt that he could use these strategies to systematically prepare for future opportunities and challenges.

In Ansoffs classic “Corporate Strategy” he developed the “Gap Analysis” still used today in which we must understand the gap between where we are currently and where we would like to be, then develop what he called “Gap reducing actions”.Drucker(1954: 4) is a prolific strategy theorist author of dozens of Management books, with a career spanning five decades. His contributions to strategic management were many but two are most important.Firstly, he stresses the importance of objectives. An organization without clear objectives is like a ship without a rudder. As early as 1954, he was developing a theory of management based on objectives. This evolved into his theory of management by objectives (MBO).

The study’s conclusions continue to be drawn on by academics and companies today. PIMS provides compelling quantitative evidence as to which business strategies work and don’t work Peters (1970: 9). The benefits of high market share naturally led to an interest in growth strategies. The relative advantages of horizontal “Integration,verticalintegration”, diversification, franchises, mergers and acquisitions, joint ventures and organic growth were discussed. The most appropriate “Market dominance strategies” were assessed given the competitive and regulatory environment.

There was also a research that indicated that a low market share strategy could also be very profitable. Studies by Schumacher, Woo and Cooper, Levenson, andTraverso (1982) show how smaller niche players obtained very high returns. By the early 1980’s the paradoxical conclusion was that high market share and low market share companies were often very profitable but most of the companies in between were not. This was sometimes called the “Hole in the middle”problem. (Porter 1980).

The Management of diversified organizations required new techniques and new ways of thinking. The first Chief Executive Officer (CEO) to address the problem of Multi-divisional Company was “Alfred Sloan” at General Motors. It was decentralized into Semi – Autonomous “Strategic Business Units (SBU’s)” but with centralized support functions.

According to Markowitz (1960) one of the most valuable concepts in the Strategic Management of Multi-divisional Companies was portfolio theory.  He and other financial theorists developed the theory of “Portfolio Analysis”. It was concluded that a broad portfolio of financial assets could reduce “Specific risk”. In the 1970’s Markowitz extended the theory of product portfolio decisions and managerial strategists extended it to operating division portfolios. Each operating division (also called Strategic Business Units) were treated as a semi independent profit centre with its own revenues, costs, objectives and strategies. Several techniques were developed to analyze the relationship between elements in a portfolio. Boston Consulting Groups Analysis, for example was developed by the Boston Consulting Groups in the early 1970’s. This was the theory that gave us the wonderful image of a CEO sitting on a stool milking a cash cow. Shortly after that the General Electric multi factorial Model was developed by General Electric, companies continued to diversify until the 1980’s when it was realized that in many cases, a portfolio of operating divisions (Strategic Business Units) was worth more than separate completely independent companies.

 During the 1970 and early 1980s, several leading consulting firms developed the concept of portfolio management to achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest strategic alternatives for each of the businesses, and to identify priorities for allocation of resources. Several studies have reported widespread use of these technologies among companies. The key purpose of portfolio analysis is to assist a firm in achieving a balanced portfolio of businesses. This consists of Strategic Business Units (SBU) whose profitability, growth and cash flow characteristics complement each other and adds up to a satisfactory over all corporate performance. (Dess et al, 2009: 206). According to Business Dictionary (2010:1) Strategic Business is an autonomous division or organisational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance. Strategic business units are more agile and usually they have independent missions and objectives that allow the owning conglomerate to respond quickly to changing economic or market situation. Its creation is meant to address each market in which the company is operating. In other words the organisation of the business unit is determined by the needs of the market. It remains a sole operating unit of planning focus that group a distinct set of products or services, which are solely for uniform set of customers, facing a well-defined set of competitors. The external dimension of a business is the relevant perspective for the proper identification of SBU. Therefore any strategic business unit should have a set of external customers and not just an internal supplier.

In the words of Wikipedia (2010:60) Strategic Business Unit is a business unit within the overall corporate identity which is distinguishable from other businesses because it serves a defined external market where management can conduct strategic planning, planning in relation to products and markets. When companies become really large, they are best thought of as being composed of a number of businesses. These organisational entities are large enough and homogeneous enough to excise control over most strategic factors affecting their performance. They are managed as self contained planning units for which discrete business strategies can be developed. A strategic business unit can encompass an entire company, or can be a smaller part of a company set up to perform specific tasks. It has its own business strategy, objectives and competitors and these will often be different from those of the parent company. SBU deal with minor intended and emergent initiative on behalf of the owners, involving utilization of resources to enhance the performance of other firms with the same parental relationship or ownership. It entails specifying the organisations missions, visions and objectives developing policies and plans, often in terms of projects and programmes which are designed to achieve these objectives.

Lamb (1984:9) describes strategic Business Unit as a unit that evaluates and controls the business and the industries in which the company is involved, assesses its competitors and sets goals and strategies to meet all existing and potential competitors and then re-assesses each strategy annually or quarterly to determine how it has been implemented and whether it can succeed or needs replacement by a new strategy to meet changing circumstances, new technology, new competitors, new Economic environment or a new social financial or political environment. In using portfolio strategy approaches, a corporation tries to create synergies and Shareholders value in a number of ways. Since the businesses are unrelated, synergies that develop are those that result from actions of the corporate office with the individual units instead of among business units. Corporate parenting generates corporate strategy by focusing on the core competencies of the parent corporation and on the value created from the relationship between the parent and its businesses. In the form of corporate head quarters, the parent has a great deal of power in this relationship.

According to Campbell, Goold, and Alexandra (2001:217) if there is a good strategic fit between the parent skills and resources and the needs and opportunities of the business units, the corporation is likely to create value. If, however, there is not good fit, the corporation is likely to destroy value. Research indicates that the companies that have a good fit between their strategy and their parenting roles are better performers than companies that do not have a good fit. This approach to corporate strategy is useful not only in deciding what new business to acquire but also in choosing how each existing business   unit should be best managed. The primary job of corporate headquarters is therefore to obtain synergy among the business units by providing needed resources to units, transferring skills and capabilities among the units, and coordinating the activities of shared unit functions to attain economic scope.

This is in agreement with the concept of learning organisation in which the role of a large firm is to facilitate and transfer the knowledge assets and services throughout the corporation given that modern company market value sterns from its intangible assets- the organisation’s knowledge and capability. This is a corporate strategy that cuts across business unit boundaries to build synergy across business units and to improve the competitive position of one or more business units. When used to build synergy, it acts like a parenting strategy. When used to improve the competitive position of one or more business units, it can be thought of as a corporate competitive strategy. In multi point competition large multi-business corporations compete against other large multi-business firms in a number of markets. These multipoint competitors are firms that compete with each other not only in one business unit but in a number of business units.

At one time or another, a cash-rich competitor may choose to build its own market share in a particular market, to the disadvantage of another corporation’s business unit. Although each business unit has primary responsibility for its own business strategy, it may sometime need some help from it corporate parent, especially if the competitor business unit is getting heavy financial supply from its corporate parent. In such an instance, corporate headquarters develops a horizontal strategy to coordinate the various goals and strategies of related business units. Multipoint competitions and the resulting use of horizontal strategy may actually show the development of hyper competition in an industry. The realization that an attack on a market leader’s position could result in a response in another market leads to mutual forbearance in which managers behave more conservatively towards multi market rivals and competitive rivalry is reduced.

Once it is defined an SBU’s management must decide how to allocate corporate resources. The 1970’s saw several portfolio planning models introduced to provide on analytical means for making investment decisions. The General Electric/ Mckinsey Matrix classified each SBU according to the extent of its competitive advantage and the attractiveness of its industry. Management would like to grow, harvest or draw cash from, or hold on to the business. Another model, the Boston Consulting Groups’ Growth-Share Matrix, uses relative market share and annual rate of market growth as criteria to make investment decisions. Assessing growth opportunity includes planning new business, downsizing and terminating older business. If there is a gap between future desired sales and projected sales, corporate management will need to develop or acquire new businesses to fill it (Kotler, 2009:84).

Corporate management’s first course of action should be a review of opportunities for improving existing businesses. One useful framework for detecting new intensive growth opportunities is called a “product-market expansion grid” A company first considers whether it could gain more market share with current products in their current market, using market penetration strategy. Next it considers whether it can find or develop new markets for it current products, in a market development strategy. Then it considers market with a product-development strategy. Later the firm will also review opportunities to develop new products for new markets in a diversification strategy. Next it considers whether it can find or develop new markets for its current products, in a market development strategy. Then it considers whether it can develop new products of potential interest for its current market with a product-development strategy. Later the firm will also review opportunities to develop new products for new markets in a diversification strategy (Kotler, 2009:85).

In broader domain of strategic Management, the phrase “Strategic Business Unit” came into use in the 1960’s largely as a result of General Electrics many units. These organizational entities are large enough and homogeneous enough to exercise control over most strategic factors affecting their performance. They are managed as self contained Planning Units for which discrete business strategies can be developed. A Strategic Business Unit can encompass an entire company, or can simply be a smaller part of a company set up to perform specific tasks. The SBU has its own business strategy, objectives and competitors and these will often be different from those of the parent company. Research conducted on this includes the Boston Consulting Group (BCG) Matrix (Wikipedia, 2019:1).

 A Strategic Business Unit is a sole operating unit of planning focus that does group a distinct set of products or services, which are solely for uniform set of customers, facing a well-defined set of competitors. The external (Market) dimension of a business is the relevant perspective for the proper identification of a Strategic Business Unit. (Porter Five Forces Analysis 2010:5). Therefore any SBU should have a set of external customers and not just an internal supplier. Companies today often use the word segmenting or “Deviation” when referring to SBU’s or an aggregation of SBU that share such commodities. (Hax, 1979).

In discussing Strategic Business Units (SBU) it is imperative to look at its relationship with strategic Planning. According to (Onwuchekwa 1998) Strategic Planning is a systematic and comprehensive analysis for selecting an organizational long-term goals programme, projects, budgets, policies, plans etc for realizing long-term goals. Organizational visions and missions consists part of its’ corporate strategy, strategic planning are rational plans through which an organization accomplishes its goals. They are means through which Managers accomplish objectives. Strategic Planning deals with fundamental issues of problems about organizational functionality (Onwuchekwa 1998). SBU’s have come to be identified as one of the ingredients of strategic planning which is aimed at achieving organizational set goals in the long-run. It helps management to conduct strategic planning in relations to products and Markets (Wikipedia, 2010).

Strategic Business Units (SBU’s) are products of Strategic Management and Strategic Planning discussed above. Strategic Management is a field that deals with the major intended and emergent initiatives taken by general Managers on behalf of owners, involving utilization of resources to enhance the performance of firms in their external environment. It entails specifying the organizations missions, visions and objectives, developing policies and plans, often in terms of projects and programmes which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs (Nag, Hambrick, Chen, 2007). According to Arieu (2007) there is strategic consistency when the actions of an organization are consistent with the expectations of Management and these in turn are with the market and the context. Strategic Management is an ongoing process that evaluates and controls the business and the industries in which the company is involved, assesses its competitors and sets goals and strategies to meet all existing and potential competitors and then re-assesses each strategy annually or quarterly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, new economic environment or a new social financial or political environment (Lamb, 1984: 9).

Strategic Business Units are the most viable and useful tools for strategic Management processes. While we have looked at Strategic Business Units in relation to Strategic Planning and strategic Management, its importance in organizational performance needs to be highlighted in this discuss. According to Business Dictionary.Com (2011), Performance is defined as the accomplishment of a given task measured against preset known standards of accuracy, completeness, cost and speed. In a contract performance is deemed to be the fulfillment of an obligation, in a manner that releases the performance from all liabilities under the contract

 Eckenson (2007) defines Performance Management as a series of organizational processes and applications designed to optimize the execution of business strategy. Organizational performance therefore is a process by which organization’s monitor the accomplishment of given tasks measured against existing standards of accuracy, completeness, cost and speed aimed at achieving its set goals or objectives.

Aubrey (2006) describes Performance Management as a technology (ie science embedded in application methods) for managing both behaviour and results, two critical elements of what is known as performance. According to Wikipedia (2008) Organizational performance comprises the actual output or results of an organization as measured against its intended outputs or goals and objectives. According to Richard et al (2009) organizational performance encompasses three specific areas of firm outcomes: