STRATEGIC BUSINESS UNITS AND ORGANIZATIONAL PERFORMANCE IN SELECTED MANUFACTURING COMPANIES IN SOUTH-EAST NIGERIA

ABSTRACT

This research  Strategic  Business  Units (SBU) and Organizational  performance  in selected  manufacturing  Companies  in  South-East  Nigeria  critically  assessed  the impact  of  Strategic  Business  Units  on  Organizational   Performance  over  time. Strategic management deals with the major and emergent initiatives taken by general managers on behalf of owners, involving the utilization of resources to enhance the performance of firms in their external environment. This study is embarked upon to know why the business environment has been turbulent which has resulted in poor performance of most of our manufacturing companies, thereby making their product to be of poor quality and expensive. It is intended to reverse this trend.  The objective of the  study is to check the extent Strategic  Business  Units affect productivity  of manufacturing companies. The study methodology adopted is the descriptive Survey design. The population of the study was three thousand  and three  (3003) workers with a sample size of five hundred (500) obtained using the Taro Yamane formular. This comprises lower, middle and top management staff of the Companies. Primary data collection was with questionnaire method using the five point Likert scale and Oral Interviews.  Data was analyzed  using tables and  percentages.  Hypothesis  one and three were tested using Pearson Product Moment Correlation while hypothesis two and five were tested using Chi Square statistics. Hypotheses four was tested using Z-test. The results indicate that there was a significant relationship (rc = 0.96 > rt =

0.8114, P < 0.05) between Strategic Business Units and productivity of the selected

manufacturing  companies. Strategic Business Units significantly (P < 0.05) can be used  to  enhance  profitability  in  the  selected  manufacturing  companies.  Strategic Business Units significantly  (rc  =0.8253  > rt  =0.8114,  P < 0.05) can  be used  to address Technological  challenges in the selected manufacturing  companies. Use of Emerging  means  of  Production  is  not  significantly  (P  >  0.05)  a  major  way  of encouraging  Strategic  Business  Units  in  the  selected   manufacturing   companies performance index. Strategic Business Units can significantly (P < 0.05) be used in enhancing the market share in selected manufacturing Companies. The conclusion of this research  is that there is a  significant  relationship  between  Strategic Business Units,  productivity  and  profitability  which  can  be  used  to  address  technological challenges in the selected manufacturing companies to enhance its market share. This research  recommends  that targets should not only be financial but also strategic. They  should  be  underpinned  by  clear  cut  action  plans  that  cascade  down  the organization and promote both ownership and commitment. Therefore in filling  the gap created by previous works, this work will ensure that performance  monitoring and tracking of individuals and Units in Strategic Business Units will help in knowing problem areas and effecting changes that could adversely affect  the fortunes of the Strategic Business Units thereby shifting the burden of making an SBU President a scape goat in the event of company failure.

CHAPTER ONE INTRODUCTION

1.1       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, vertical  integration”,  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, and  Traverso (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.

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