Q4. What is Strategic Business Unit?

What are conditions required for

creating an SBU? How is performance of SBU measured? What are the
advantages and disadvantages of creating SBUs?
Ans. Strategic business units are self contained divisions formed within an organization for
dealing with specific business concerns. These units pull together the diverse parts of the
concerned organization while cutting across the geographical and diverse lines for serving a
specific market in a more efficient manner. These strategic business units are also referred to
as independent business units or strategic planning units. The main philosophical concept
behind the formation of strategic business units is to serve a clear and defined market
segment along with a clear and defined strategy. These business units have to contain all the
needs and corporate capabilities of the respective organization. The entire portfolio of the
concerned business has to be managed by allocation of managerial and capital resources for
serving the overall interest of the entire organization. This helps in developing a balance in
the earnings, sales and the assets at a level which is controlled and acceptable for taking the
right amount of risks.

The strategic business unit (SBU) is created with the application of set criteria which consist
of the competitors, price models, customer groups and the overall experience of the company.
It is also sometimes seen that a number of different verticals present in the same organization
having similar competitors and target customers are amalgamated to form a single SBU. This
helps in strategically planning the overall business of the organization. This is also true for
the company which has different product ranges and some of them have similar capabilities
in terms of research and development, marketing and manufacturing. Such products can also
be amalgamated to form a single unit.

The main notion which rests behind the concept of strategic business units is to gain a
competitive advantage in the populated marketplace. This can be done because the SBU helps
in segmenting the activities of the company in a strategic manner and the resources are thus
allocated competitively.

Each Business Unit must meet the following criteria:

1. Have a unique business mission, independent from other SBUs.

2. Have clearly definable set of competitors.
3. Be able to carry out integrative planning relatively independently of other SBUs.
4. Should have a Manager authorized and responsible for its operation.
5. Be large enough to justify senior management attention but small enough to serve as a
useful focus for resource allocation.

Recent years have seen heightened concern and focus on measuring and managing
organisational performance. Performance management methodologies such as strategy maps,
demand forecasting, customer profitability analysis, product profitability analysis, activity-
based costing, value based management, balanced scorecards, performance prism, dynamic
pricing and driver-based resource capacity planning have proved to be great assets for
improving business performance. At the same time, as the global modern economy has
evolved, businesses have had to adapt to new organisational models.

Competition in the marketplace has intensified further increasing the need for businesses to
respond promptly to customer needs, improve quality and cut costs. As a result, most
companies have eliminated management layers and devolved authority and decision-making
down through the organisation. Through decentralisation and empowerment, there is
conventional thinking that managers and their subordinates will think and act like owners, be
willing to take calculated risks and become accountable for their performance. However, the
reality is often very different. The results are, more often than not, disappointing.

One of the problems that most companies encounter when they migrate from a centralised to
a decentralised organisational model is setting up targets and designing reward systems for
the newly formed strategic business units. As the managers of these business units get
involved in strategic decision-making, they face the challenge of achieving great results and
avoid experiencing a backlash from senior executives. In the end, they are more likely to
negotiate manageable targets that appear outwardly tough but are inwardly comfortable. In
the long-term, this approach doesn’t help at all to improve organisational performance.

To really benefit from decentralisation and empowerment, one should re-examine how they
can set targets, measure performance, and design their own reward systems.

Advantages of creating an SBU:

 Minimizes problems associated with sharing resources across functional areas,

 Quick response to environmental change,
 Increased focus on products and markets,
 Facilitates development if general managers, and
 Increases operational and strategic control, allowing corporate level executives to deal
with strategic issues.

Disadvantages of creating an SBU:

 Increased expenditure invited through doubling of operations, personnel, and

investments,
 Difficulty in maintaining a uniform corporate image,
 Dysfunctional antagonism amongst divisions might detract from in general corporate
performance,
 Over emphasis on short term performance, and
 Distortion of information.
Q8. How does a service organisation differ from a manufacturing
organisation? How is professional service organisation differ from normal
organisation? How is pricing and marketing done by professional service
organisation?

Ans: Manufacturing Organisation engaged in the production of goods (finished products)

that have value in the marketplace. These Organisations are further classified into two as
Process Organisation (Flow production or continuous process production industries) and
Discrete Manufacturing Organisation.

Service Organisation includes those Organisations that do not produce goods, but provide
certain services. The peculiarity of these organisations is that often the consumption of the
service takes place while it is in the generation. Typically, this sector includes hospitality,
advertising, banking, insurance, consultancy, logistics, etc.

The significant difference between the various types of organisations is observed when we
analyze the manufacturing or service environment in which they operate. Elements of the
manufacturing environment include external environmental forces, corporate strategy,
business unit strategy, other functional strategies (marketing, engineering, finance, etc.),
product selection, product/process design, product/process technology and management of
competencies.

Ultimately, what matters is the framework in which the overall manufacturing or service
strategy is developed and implemented.

Professional Organisation
Professional Organisation is labour intensive and the labour is of a special type. Many
professionals prefer to work independently, rather than as part of a team. Professional who
are also managers tend to work only part time on management activities; senior partners in
the accounting firm participate actively in audit engagement; senior partners in the law firm
have clients. In most professional, education does not include education in management;
quite naturally it stresses the importance of the professional, rather than that of management;
for this and other reason, professional tend to look down on manager. Professional tend to
give inadequate weight to the financial implication of their decisions; they want to do the best
job they can, regardless of its cost.

Because professional are the organisation’s most important resources, some authors have
advocated that the value of these professional should be counted as assets. The system that
does this is called Human Resource Accounting, but the problem of measuring tha value of
human assets is intractable.

Marketing in Professional Organisation

In a manufacturing company there is a clear dividing line between marketing activities and
production activities; only senior management is concerned with both. Such a clean
separation does not exist in most professional organisation, however. In some, such as law,
medicine and accounting, the professional’s ethical code limits the amount and the character
of overt marketing efforts by professional. Marketing is an essential activity in almost all
organisations, however. If it cant be conducted openly, it takes the form of personal contact,
speeches, articles, golf and similar activities. These marketing activities are conducted by
professionals, usually by professional who spend much of their time in production work that
is working for clients.

Pricing in Professional Organisation

The selling price of work is set in a traditional way in many professional firms. If the
profession is one in which members are accustomed to keeping track of their time, fee
generally are related to professional time spent on the engagement. The hourly billing rate
typically is based on the compensation of the grade of the professional plus a loading for
overhead costs and profit. In other professions such, as investment banking, the fee typically
is based on the monetary size of the security issue. In still others, there is a fixed price for the
project. Prices vary widely among professions; they are relatively low for research scientists
and relatively high for accountants and physicians.