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Strategic Business Unit and Functional Level Strategies

The true success of an organization depends upon effective formulation and implementation

of strategies. According to Thomas Peters and Robert Waterman innovative companies are

good at strategy implementation. Effective managers often work back and forth

between strategy formulation and strategy implementation. In this process, there is a

need to understand the concept of Strategic Business Units (SBUs) and functional level

strategies. There is a need to understand the hen and egg dilemma-strategy follows structure or

structure follows strategy.

Strategy Management outcomes

Strategy formulation and strategy implementation when depicted on a matrix form suggests

four probable outcomes of the four combinations of variables: Success, roulette, trouble and

failure.

STRATEGY FORMULATION

Good Poor

STRATEGY (^) Good

IMPLEMENTATION (^) Poor

Success is the most likely outcome when an organization has a good strategy

and implements it well. In this case, all that can be done to ensure success has been

done. Environmental factors outside the company’s control such as competitive reactions or

customer

Success Roulette

Trouble Failure

changes may still make a strategy unsuccessful. However, organizational objectives

have the best chance of being achieved in this cell.

Roulette involves situations wherein a poorly formulated strategy is implemented

well. Two basic outcomes may ensue. The good execution may overcome the poor strategy or

at least give management an early warning of impending failure. Perhaps the field

sales force recognizes a problem in the strategy and changes its selling approach to a more

successful one. Alternatively, the same good execution can hasten the failure of the poor

strategy. Thus, it is impossible to predict exactly what will happen to strategies in the roulette

cell, and that’s where it gets its name.

The trouble cell is characterized by situations wherein a well-formulated strategy is

poorly implemented. Because managers are more accustomed to focusing on strategy

formulation, the real problem with the strategy – faulty implementation-is often not

diagnosed. When things go wrong, managers are likely to reformulate the strategy rather

than question whether the implementation was effective. The new (and often less appropriate)

strategy is then reimplemented and continues to fail.

Failure is the most likely to occur when a poorly formulated strategy is poorly

implemented. In these situations, management has great difficulty getting back on the right

track. If the same strategy is retained and implemented in a different way, it is still likely to

fail. If the strategy is reformulated and implemented the same way, failure remains the

probable

result. Strategic problems in this cell of the matrix are very difficult to diagnose and

remedy.

The analysis of the matrix makes two things clear.

First, strategy implementation is atleast as important as strategy formulation

Second, the quality of a formulated strategy is difficult to assess in the absence

of effective implementation.

Evolution of structures

A firm’s organizational structure is a formal configuration that largely determines

what the firm will do and how it will complete its work. Different structures are

required to implement different strategies. A firm’s performance increases when strategy and

structure are properly matched. Business-level strategies are usually

implemented through the functional structure. The cost leadership strategy requires a

centralized functional structure-one in which manufacturing efficiency and process

engineering are emphasized. The evolution from the functional

structure to the three types of multidivisional structure (M-form) occurred from the

1920s to the early 1970 s. The cooperative M-form, used to implant the related-constrained

corporate-level strategy, has a centralized corporate office and extensive integrating

mechanisms. Divisional incentives are linked to overall corporate performance. The related-

linked SBU M- form structure establishes separate profit centers within the diversified firm.

Types of organization structures

Two basic kinds of organizational structures exist-Formal and informal. There is the

formal organizational structure which represents the relationships between resources as

designed by management. The formal

organizational structure is conveyed in the organization chart. Then there is the informal

organizational structure, which represents the social relationships

based on friendships or interests shared among various members of an

organization. The

informal organizational structure is evidenced in the patterns of communication

commonly called the “grapevine.” The informal network can be used to encourage rapid

execution of strategies.

In formal organization structure there is the question of what management levels and

personnel with the organization will be responsible for various implementation tasks. The

five types of organizational structures that are commonly seen are the simple, functional,

divisional, strategic business unit (SBU), and matrix structures. A schematic diagram

of each of these

structures is shown in Figure 4- 1

Simple (^) Functional

Owner-Manager CEO

Employees Operations Marketing Finance

Divisional

CEO

SBU

CEO

Division 1

Manager

Division 2

Manager

VP

SBU 1

VP

SBU 2

Division

Managers

Division

Managers

1 2 3 1 2 3

Matrix type

CEO

VP

Production

VP

Marketing

VP

R & D

VP

Finance

Project

Manager 1

Project S

Manager 2

Figure 4- 1 Different organization structures

Simple Organizational Structure

A simple organizational structure has only two levels, the owner-manager and the employees.

Small firms with one product or only a few related ones usually exhibit this structure.

Functional Organizational

Structure

As organizations grow and develop a number of related products and markets, their

structures frequently change to reflect greater specialization in functional business areas.

Such line

functions as production and operations, marketing and research and development (R&D) may

be organized in departments.

Divisional Organizational Structure

As firms acquire or develop new products in different industries and markets, they may evolve

a divisional organizational structure. Each division may operate autonomously under the

direction of a division manager, who reports directly to the CEO. Divisions may be formed on

the basis of product lines (automotive, aircraft), markets (customer, industrial buyers),

geographic areas (north, south, international), or channels of distribution (retail store, catalog

sales). Each division not only has its own line and staff functions to mange but also

formulates and implements strategies on its own with the approval of the CEO.

Strategic Business Unit Structure

When a divisional structure becomes unwieldy because a CEO has too many divisions to

manage effectively, organizations may reorganize in the form of strategic business units

(SBUs) or strategic groups. This structure groups a number of divisions together on the basis

of such things

as the similarity of product lines or markets. Vice presidents are appointed to oversee the

operations of the newly formed strategic business units, and these executives report directly

to the CEO.

Matrix Organizational

Structure

A matrix organizational structure is used to facilitate the development and execution of

various programs or projects. Each of the department vice presidents listed at the top has

functional responsibility for all the projects, whereas each of the project managers listed down

the side has project responsibility for completing and implementing the strategy. This

approach allows project mangers to cut across departmental lines and can promote efficient

implementation of strategies.

The advantages and disadvantages of the different structures are presented below.

Simple

Advantages Disadvantages

1. Facilitates control of all the business

activities.

2. Makes possible rapid decision-

making and ability to change with

market signals.

3. Offers simple and informal

motivation/reward/control systems.

1. Relies totally on the owner-

manger

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volume expands.

3. Does not facilitate development

of future managers

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focus on day-to-day matters and

not on future strategy.

Functional

Advantages Disadvantages

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Figure 4. 2 At

the top is the corporate level, composed principally of members of the board of directors and

the chief executive and administrative officers. They are responsible for the financial

performance of the corporation as a whole and for achieving the non-financial goals of the

firm, for example, corporate image and social responsibility.

The second rung of the decision-making hierarchy is the business level

composed principally of business and corporate mangers. These managers

must translate the general statements of directions and intent generated at the corporate level

into concrete, functional objectives and strategies for individual business divisions or

SBUs. In

essence, business-level strategic mangers must determine the basis on which a company can

compete in the selected product-market arena.

The third rung is the functional level, composed principally of managers of product,

geographic, and functional areas. It is their responsibility to develop annual objectives and

short-term strategies in such areas as production, operations, and research and development;

finance and accounting, marketing: and human relations. However, their greatest

responsibilities are in the implementation or execution of a company’s strategic plans.

While corporate and business-level managers centre their planning concerns on “doing the

right things,” managers at the functional level must stress “doing things right.” Thus, they

directly address such issues as the efficiency and effectiveness of production and marketing

systems, the quality and extent of customer service, and the success of particular products and

services in increasing their market

shares.

Figure 4. 2 Decision Making hierarchy

Corporate

strategy

Corporate Level

Business 1 Business 2 Business (^3) Business Level

Corporate

strategy

Corporate

strategy

Corporate

strategy

Corporate

strategy

Functional

Level

Table 4 - 1 depicts the characteristics of strategic management decisions at

different levels. Examples of corporate-level decisions include the choice of business,

dividend policies, sources of long-term financing, and properties for growth. Functional-level

decisions usually determine actions requiring minimal company wide cooperation. These

activities supplement the functional area’s present activities and a re adaptable to ongoing

activities so that minimal cooperation is needed for successful implementation. Business

• level descriptions of strategic decisions fall between those for the other two levels. For

example, business-level decisions are less costly, risky, and potentially profitable than

corporate level decisions, but they are more costly, risky, and potentially profitable than

functional-level decisions. Some common business- level decisions involve plant location

marketing segmentation and geographic coverage, and distribution channels.

Table 4- 1 Characteristics of strategic management decisions at different levels

Level of strategy

Characteristic Corporate Business Functional

Type Conceptual Mixed Operational

Measurability Value judgments

dominant

Semi quantifiable Usually

quantifiable

Frequency Periodic or

sporadic

Periodic or

sporadic

Periodic

Adaptability Low Medium High

Relation to

present

activities

Innovative Mixed Supplementary

Risk Wide range Moderate Low

Profit potential Large Medium Small

Cost Major Medium Modest

Time horizon Long range Medium range Short range

Flexibility High Medium Low

Cooperation

required

Considerable Moderate Little

Corporate level Strategy and structure combinations

The need for having the right structure for implementation of strategy need not be over

emphasized. Cost leadership strategy prefers functional structure (Figure 4. 3 ). The structural

characteristics of specialization, centralization, and formalization play important roles in

the successful implementation of the cost leadership strategy. Specialization refers to the type

and number of job specialties that are required to perform the firm’s work. For the cost

leadership strategy, mangers divide the firm’s work into homogeneous subgroups. The basis

for these subgroups is usually functional areas, products being produced, or clients served. By

dividing and grouping work tasks into specialties, firms reduce their costs through the

efficiencies achieved by employees specializing in a particular and often narrow set of activities.

Additional characteristics of the form of the functional structure used to implement the

differentiation strategy are shown in Figure 4 - 4

Office of the President

Cost leadership strategy (^) Centralized Staff

Engineering Marketing Operations Personnel Accounting

Figure 4 - 3 Functional organization for cost leadership strategy

Figure – 4 - 4 Differentiation through functional structure

President and Limited staff

R & D Marketing

New Product Operations Marketing Human Finance

R & D Resources

Notes:

 Marketing is the main function for keeping track of new product ideas

 New product R & D is emphasized

 Most functions are decentralized, but R & D and marketing may have centralized

staffs that work closely with each other.

 Formalisation is limited so that new product ideas can emerge easily and change is

more readily accomplished.

Overall structure is organic. Job roles are less structured.

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Role of SBU level executives

The role of SBU level executive is very important to strategic management since each

product- market segment has a unique strategy. These executives are profit centre heads or

divisional heads and are considered the chief executives of a defined business unit for the

purpose of strategic management. An SBU level executive wields a lot of authority within

the SBU and

also works in coordination with other

SBUs.

Many public and private sector companies have adopted the SBU

concept in some form or the other “There are several family-managed

groups today who boast of their professionally-managed organizations

structure. Each of their companies has a chief executive who has total

responsibility and authority over the profit center.

Strategic planning at MRF Ltd used senior management expertise

by dividing them into five groups dealing with products and markets,

environment, technology, resources, and manpower. Each group had a

leader who helped to prepare position papers for presentation to the

board. The executive directors in the company were actively involved in

SWOT analysis through the help of managers and assistant managers.

At Shriram Fibers, the strategic planning system covered the

different businesses ranging from nylon yarn manufacture to the

provision of financial services. Strategic plans were formulated at the

level of each SBU as well as at the corporate level. The corporate

planning department at the head office coordinated the strategic planning

exercise at the SBU-level. Each SBU had its own strategic planning cell

Functional

strategies

Functional

strategies which

are short-term

game plans for

the key functional

areas are the

means to

accomplish the

annual plans.

Functional

strategies by

clearly specifying

the various measures to be taken in different functional areas in different time

horizons help operationalize the grand strategy. In other words, functional strategies provide

the short-term operational details for accomplishing the long term objectives systematically.

Pearce II and

Robinson Jr. (1988) maintained :

“Functional strategies help in implementation of grand strategy by organizing

and activating specific subunits of the company (marketing, finance, production, etc) to

pursue the business strategy in daily activities. In a sense, functional strategies translate

thought (grand strategy in to action designed to accomplish specific annual objectives. for

every major subunit of a company, functional strategies identify and coordinate actions

that support the grand strategy and improve the likelihood of accomplishing annual

objectives.”

Operationalizing the corporate strategy requires the development of functional

strategies in key areas like marketing, production, R &D, finance and human resources.

Figure. 4. 5

Illustrates annual objectives and functional

strategies

Figure. 4. 5

Annual

objectives and

functional

strategies

Long-term objective

Double Sales within

3 years

Annual objective

Increase sales by

Rs. 86 crores

Division A

Annual

objective

Increase sales

Division B

Annual objective

Increase sales

by Rs. 30 crores

Division C

Annual objective

Increase sales

by Rs. 18 crores

R & D Annual

Objectives

Develop one

new product

Improve

features of

product Y

Production Annual

Objectives

Increase

productivity by

15 %. Increase

production by 25%

Marketing Annual

Objectives

Increase no.

Increase no. of

dealers by 50

Increase field sales

force by 10

Personnel

Annual

Objective

Reduce no. of

employees by

500 Organize

two Epps

The annual objective is to increase sales by Rs. 86 crores. Strategies for this include,

for example, increasing the sale of division A by Rs. 38 crores, division B by Rs. 30 croes,

division C by Rs. 18 crores, developing a new product, intensifying promotion by increasing

the size of the filed sales force, increasing the number of dealers etc.

The functional strategy for marketing must cover all the factors of the marketing mix.

Mutually consistent strategies for each of the factors must be developed to help achieve the

annual marketing objective.

R & D strategy may involve improving product or packing, developing new product

etc.

Similarly every key functional area must develop strategies to achieve the annual

objectives. The functional strategies are discussed in detail in unit III of this study material

for all the functional areas viz., R & D operations, finance, human resources, logistics,

information systems and marketing

Summary

The true success of an organization depends upon effective formulation and implementation

of strategies. There is a need to understand the hen and egg dilemma-strategy follows

structure or structure follows strategy. Strategy formulation and strategy implementation when

depicted on a matrix form suggests four probable outcomes of the four combinations of

variables: Success,

roulette, trouble and failure. Designing sound organization structures would enable

strategists to accomplish the implementation of strategies in a proper way. There

are four types of organization structures. The five types of organizational structures that

are commonly seen are the simple, functional, divisional, strategic business unit (SBU), and

matrix structures. Decision making in the hierarchy is found at three levels – corporate,

business and functional. Functional strategies enable the implementation of corporate level

strategies.