CONFIGURATION OF STRATEGIC BUSINESS UNITS AND CORPORATE COMPETITIVE STRATEGY Leonel Cezar Rodrigues Nine of July University - UNINOVE, Brazil Edison Fernandes Polo and Valeria Riscarolli University of São Paulo - USP, Brazil Fernando César Lenzi Itajaí Valley University - UNIVALI, Brazil ABSTRACT Here we analyze the structural reforms undergone by Hering Company at the end of the 90s. The aim was to characterize the reconfiguration of Hering, followed the premises of genuine Strategic Business Units, as intended. A theoretical model was proposed in order to analyze the changes. Main results indicated a flattening of Hering’s structure, reconfigured under five SBUs following its trademarks, and two internal supporting units, and a focus on market interface specialization. This reconfiguration did support Hering’s competitive strategy, although some SBUs operated more like internal division than genuine SBUs. INTRODUCTION One of the greatest contributions that the structuralist school of administrative thinking left to practitioners was the idea that it is possible to compete advantageously by means of an improved and updated organizational design (Nadler and Tushman, 1997). Large companies, leaders in their respective segments during the 80’s and 90’s had to remodel their businesses in order to remain competitive, as in the widely discussed, classic cases of AT&T, Xerox, IBM, Corning, GE and GM, for example; to which others not less important or not even less rich, could be added, such as Cremer S/A and Hering S/A, both in the textile segment, in Brazil. The war over competitive advantages in the internal and external markets definitively altered the old rules associated with sector domination by bigger companies. It is no longer possible to have the luxury of ‘sufficient time’ for change, attributable to the large sector leaders, as pointed by Hamel (2000). New companies, agile and technologically more advanced, rapidly insert themselves into any market space left unattended. More than that, they compete directly and aggressively for new and bigger slices of the market, with the already established enterprises. The current meaning of business determinants (centrality of the consumer and technological advances) carries a double lesson for modern executives. First, in Hamel’s interpretation (2000), they need to create a business concept for their organizations that allows them to exploit their core competence, in such a way that allows for greater competitive capacity. As such, restructuring in order to improve competitiveness does not simply mean rearranging hierarchical flow charts. In order to re-configure, it is necessary to create a basic rationale, i.e., a value logic that, according to Prahalad and Doz (2003), sustains the organizational configuration in the way it is intended to. It is this value logic that will make managers to orient their efforts in the direction of the strategic objectives of the organization. Secondly, executives need to recognize that reconfiguration of the organization is a process, not a project. Since competitive environments change constantly, it is necessary to create alternative strategies for overcoming challenges. Redirection in general requires new structures associated with maintaining or increasing performance. Thus organizations must constantly be receptive to organizational designs flexible enough to adapt themselves to environmental instability. Problem and Objective Despite perceiving the speed of changes and the needs for structural flexibility, many organizations live under inflexible bureaucratic and mechanistic structures. This in turn makes it difficult for them to adapt their business model and capacity to compete in the environment in which they operate. It is necessary to reconfigure the organization. An efficient path for this mission is the redesign of the strategic business units (SBU). This is a way of restructuring businesses that considers both market objectives, as pointed out by Bourgeois III (1996), and objectives of organizational effectiveness, or positioning, according to Porter (1996). In most cases, according to Prahalad and Doz (2003), there is no clear definition between value logic and necessary configuration, especially when dealing with SBU configurations. On the one hand, the principle of unit autonomy determines the level of unit independence, consequently resulting in deterioration of the synergy function. On the other hand, sustaining synergy through restrictions on autonomy seriously limits unit performance. This article, therefore, discusses organizational re-configuration under the SBU format and the function of SBU in business. It describes the premises of re-configuration of a company, the value logic or strategic benefits of sustaining re- configuration and the practice of SBU´s management that took place at Hering S/A, in the period 1998-2001. Hering was chosen because it is representative of the sector as a whole, being the second-largest producer of knitwear in Latin America. With sales of R$ 340 million in 2004 (IEMI, 2004), Hering has been engaged in de- verticalization since 1994, transforming its market brands into Strategic Business Units. RESEARCH METHODS AND TECHNIQUES This research has been designed as a case study, because it focuses on the changes underwent by Hering S/A during a selected period of time. Yin (2005), argues that case studies are appropriate when searching for the ‘how’ and ‘why’ of a phenomenon or event. Eisenhardt (1989) asserts that is perfectly possible to identify the presence of emerging paradigms and to create new theories by means of case studies. To the author, what is essential is to sufficiently circumscribe the problem, to collect data in a systematic and trustworthy manner and the rational interpretation of the collected information. To this research, the collection, analysis and interpretation of the information, we used the methodological design for case studies proposed by Gordon (2001), as shown in Figure 1. Figure 1: Model for a Case Study CONTEXT ANALYSIS PROCESS ANALYSIS DIAGNOSIS DESCRIPTION IDENTIFICATION OF CAUSES DATA COLLECTION [Observation, Documentation, Interview, [Identification of factors that led to the Questionnaire] current situation] PRESCRIPTION INTERPRETATION SOLUTIONS CAUSES X EFFECTS [Identification and proposal for changing [Use of theories and concepts from the the situation] Literature in understanding cause and effect relationships] Source: Adapted from Gordon, Judith R. A Diagnostic Approach to Organizational Behavior Boston: Allyn & Bacon, 2001, p. 7. SBUs – STRUCTURES, STRATEGIES AND MARKET Structuring an organization is an intuitive act in administration, since operating in an unorganized environment can become highly inefficient or unproductive. Colenghi (2003) alerts to the fact that restructuring an organization is a means of defining functional rules and determining objectives that need to be achieved. However simple, this conception of arranging tasks and responsibilities within an organization touches on two essential elements of structuring: procedures and objectives. The structuring an organization runs a greater gamut of elements and factors that must be considered for the organization to function efficiently. The vision of organizational structure perceived by Vasconcelos and Hemsley (1997), gives a more precise idea of the task involved. For these authors, the structure of an organization would be the result of a process by means of which authority is distributed and activities from the most basic levels to the highest levels of administration are specified. The structure gives rise to a system of communication, allowing people to perform their activities efficiently and to exercise the authority they need in order to achieve their organizational objectives. Re-organizing the divisions or departments of an organization, as a process of organization of its functions, tasks and resources under criteria of similarity (Oliveira, 2000) it possibly is the most common fundament of organizational re-structuring. The process of departmentalization, that leads to obtaining more rigid (mechanistic) or more flexible (organic) organizational structures, is grounded in three basic elements: a) complexity; b) formalization, and c) centralization. The search for optimization of results pressures for firms to find new forms of organizational structuring. Results are mainly obtained through mastery in strategic areas that allow companies to control internal and external elements they consider to be important to their objectives. The principles of restructuring and departmentalization of organizations are ways of achieving this control. There are, however, other equally or more efficient forms of structuring organizations capable giving out results. One of these forms is structuring into Strategic Business Units (SBU). Strategic Business Units – concepts and markets As defined by Fischmann and Santos (1982), SBUs refer to the division of ‘business reality’, following specific criteria of common connection. Such criteria can be of an internal order (the chain of values within a company) or an external order (the market environment of its operation). For the authors, the criteria of common connection can be congruent or diversified. In any case, however, they must be catalyzers of the common characteristics of the businesses that in turn represent the profile of each Strategic Unit. According to Fischmann and Santos (1982), catalyzing criteria are, in fact, the criteria for constitution of an SBU. A catalyzing criterion can be, for example, a production line of a company. In this case, the production line specific for each product or for each set of products can group common activities under the same autonomous administration, creating the rationale to configure an SBU. For companies in which technological factors are a differentiating element in their production processes, sub-division or grouping under specific technologies can be, according to Fischmann and Santos (1982), the criterion for constituting an SBU. Mastery of technology in producing tankers, for example, can be the determining factor for setting up an SBU, whether those tankers are used for the transportation of water, oil, gasoline or any other product. Bourgeois III (1996) defines an SBU in terms of market vision. In truth, the author uses the definition of Arthur D. Little (ADL) for an SBU. ADL is based on the principles of a) segmentation of the market; b) product life-cycles, and c) the competitive position of the company, in order to single out a strategic business unit, i.e. to justify the configuration of an organization into SBUs. According to ADL, an SBU is a business involving a group of products that serve common markets, compete with the same rivals and are connected in such a way that strategies cannot be formulated for any one of its products without having an impact on its other products. Among recent work done on the concept of constitution of SBUs, that of Prahalad and Doz (2003) is perhaps the most comprehensive and integrated. According to them, an SBU is a business obedient to the logic of portfolio configuration, whose contributive economic value to the corporation results from the value logic and the logic of internal governance. According to these authors, the creation of value logic for a certain configuration within a corporation depends on the vision and the ability of top management create the rationale of value logic in a company above and beyond what it could created if it existed separately. Prahalad and Doz (2003) go on to say that it is the job of executives to guarantee that reconfiguration of a corporation into SBUs, within the logic of value proposed, be duly managed by the company’s middle managers. As such, it is necessary to have structural clarity, formalized administrative processes and basic premises regarding the nature and quality of interactions and values, beliefs, and behavior. Strategic Business Units and Synergy. When a company is structured into SBUs, starting from an already existing company, there is obviously a loss of synergy. Therefore, in order to structure such a company into SBUs there must be strategic advantages for the monolithic company; if not, there would be no reason to restructure it (Prahalad and Doz, 2003). Even so, despite restructuring into independent units, the new format must look for possible synergies between units. From the point of view of competitive strategy, the contributions of Ansoff (1990) to the concept of synergy are perhaps the most interesting. To Ansoff (1990), synergy refers to the combination of product-market that contributes to the general profitability of the company. The strategic value of synergy lies exactly in the fact that there are advantages of scale under which a large company, with the same total sales of various smaller companies, is able to operate at costs lower than the sum of the operational costs of smaller companies. In the process of operating an SBU in such a way as to make it contributive to the objectives of the corporation, it is necessary to not lose sight of three elements that form the conceptual foundation for configuring an SBU: (a) administrative elements; (b) operational elements and (c) market elements. The arrangement of an SBU based on these elements or on a combination of them, must contribute to the strategic objectives of the company in such a way that justifies its structuring into an SBU. What is proposed, then, is a theoretical model for sustaining the logic of structuring an organization into SBUs. Figure 2 shows this model, along with how the strategic objectives of an organization can be better fulfilled if the configuration presents a value logic (Strategic Benefits) that sustains performance, or strength (Administration) of managers, in the sense of leading the organization in the direction of its objectives. Figure 3. Theoretical Model of the Constitution of an SBU Administrative elements Configuration Operations and Strategic SBU Marketing Benefits Strategic Administrative Elements Administrative Elements Objectives of theOperations and Marketing Operations and Marketing Organization Management Source: authors Competitive Strategy To Chandler (1962), belongs the well-known statement that connects organizational structure to business: according to him, “structure follows strategy”. Thus the act of structuring an organization, or reconfiguring organizational design, comes after the definition of, or must be aligned to the strategy. Strategy constitutes an instrument of efficient administrative management in an organization, beginning with the business vision of its executives. In Mintzberg (1987), we find some conceptualizations for strategy, as a course of action consciously defined for an organization, or a search for a competitive position in the market. Other authors, such as Tregoe and Zimmerman (1988), define strategy as a mental structure that guides the choices that determine the nature and direction of an organization. Miles and Snow (1978) already produced a taxonomy of competitive strategies, as opposed to corporate strategies. While corporate strategies relate to the type of business in which the company must operate, competitive strategies refer to the way in which a company positions itself in the market. The visions of Whittington (1993) and of Slywotzky and Morrison (1998) resemble each other greatly in their approach to maximizing profit. Hamel and Prahalad (1995) propose a different vision of strategy. It is based on the necessity of constructing an architecture of core competencies for the organization. The most popular concept for formulating strategy today is perhaps that of Porter (1996), who proposes a typology of strategies called Generic. The concept is based on three distinct routes for gaining market leadership: (a) Total Cost Leadership; (b) Differentiation and (c) Focus. Porter (1996) affirms that good positioning of a company in the market enables it to attract high rates of return, independent of any unfavorable structure and average profitability in the sector. Positioning well means to be able to apply well any one the three generic strategies. THE CASE OF HERING S/A The reconfiguration of the structure and the product portfolio of Hering obeyed a value logic imagined by its top management as the most appropriate way for the company to reach its desired strategic objective: to be the largest fashion manufacturer in Latin America. The format of reconfiguration analyzed here is concentrated on the structuring of the company into SBUs, beginning with the basis of the market positioning of its products. A short history. The Companhia Hering, based in Blumenau, SC, Brazil, began in 1880, when the brothers Hermann and Bruno Hering, German immigrants, began to produce fabrics. The company went through various phases of growth and consolidation of its business up through the 1990’s. The basic concern in its first 100 years was to verticalize its business. In the first years, Hering concentrated on consolidating itself and on widening its participation within Brazil, while later expanding into the international market, finally becoming the top fabric company in Latin American and the fourth largest in the world, in sales, during the 1990’s. In the mid 90’s, Hering began the horizontalization of its business, seeking to accommodate itself to globalization and the economic opening of Brazil. To turn it business horizontal, Hering ceased to be a mesh fabric manufacturer and devoted itself to apparel. It completely eliminated its spinning facilities and began the process of partial contracting out of various manufacturing processes, such as dyeing, fabric finishing, part of its fabric manufacturing and great deal of its clothing manufacturing. Hering stopped to be a mesh maker to adopt a new mission: to be a mesh apparel fashion business. Starting there, it concentrated itself on the core requisites of its new business mission: to manage its brand names, to manage demand and to build a network of partnerships with other small companies to support the horizontalization of its business. Diagnosis. With a basis in the concept of a horizontally organized company, i.e. as an orchestrator of partnership companies, Hering developed a new internal structure, in SBUs, that could sustain its competitive objectives. The strategy to reconfiguring. In the years that followed the restructuring of its business, Hering worked strongly on the idea of market brands. According to the interviewed people, Hering’s strategy was to re-position itself within the market, based on the potential merchandizing of its brands. Instead of marketing its products based on price competition, as the company had been doing, resulting in low aggregate value and a consequent policy of low pricing, Hering decided on a strategy of differentiation for its brands through premium prices. In order to give value to its brands, Hering created direct channels to consumers (a network of franchised stores called Hering Store) and transformed its brands into valuable trademarks. At the same time, it developed market specialization for each brand, with a distinct pricing policy and other aggregated services. The SBUs brand name as the premise of reconfiguration. After identifying the potential of the Hering brand, the company began to franchise the Hering and the other brands (Omino, Mafisa, Public Image, Folha and PUC), called the Hering family of brands. The Hering brand franchise system began in Argentina and moved into Brazil, later expanding throughout Latin America. Concomitantly, Hering sub-licensed the brand dzarm for the Brazilian market, and various Disney brands for production and commercialization in the European market. Figure 4 shows how Hering restructured itself in order to manage its business within its new business concept in the period analyzed. Figure 4. Corporate Structure of Hering Market Business Units Hering dzarm Brands Export Licenses Hering Stores: Hering brand Brazil PUC stores system Stores system .Argentina products for dzarm .Bolivia Sales franchise stores Other brands for dzarm brand multi-brand stores .Chile International Hering brand products for .Paraguay licensed .PUC .Mafisa products for multi-brand brands stores .Omino .Public Image .Uruguay Multi-brand .Folha .Venezuela Stores International sales for multi-brand stores Units of Common Support Business Units - Manufacturing Business Units - Support Dyeing Weaving Assembly (Stonewashing) (Partial) Logistics Finances Control (Partial) Source: Adapted from BISLAND, David C.M. Avaliação das Mudanças Estratégicas na Cia. Hering. Master’s Thesis, in Business Administration. Universidade Regional de Blumenau, 108p. Blumenau (SC), 2000, p. 93. Hering arranged its business structure into seven units. Five units are oriented towards brand management (Market Business Units - Hering, dzarm, Brands, Exportation and Licenses). Two others are oriented towards supporting the others (Common support units - Manufacturing and Support). According to information gathered from the interviewed Hering’s managers, the functions of each of these strategic units derives from the conception of the collections – three annual collections were created and launched – up to their manufacture, launching, commercialization and promotion (collection exhaustion). The autonomy of the brand SBUs was circumscribed to the elaboration and budget execution, the structure and strategy of operation, including market decisions, segmentation and price determinations. Physically, the units were spread out over various locations, functioning in an independent and separate ways. Regarding to common support units, these functioned more like departments of the main unit. Manufacturing and Logistics units leveraged on possible synergies from the production and from the logistics of the brand units. According to those interviewed, there were notoriously two areas of distinct competence at Hering: the area of cutting fabrics and the creation of collections. As the assembly of clothing was highly sub- contracted, the logistics unit became essential to transport production inputs and finished products, especially to maintain its network production scheduling in a synchronized way. These two units, along with top management, comprise the structural axis of the matrix. Analysis and Interpretation. The most striking factor that can be seen in the restructuring of Hering is that the company correctly associated the concept of horizontal structuring with: (a) transference (some totally, others partially) of its primary activities (thread manufacturing, dyeing, weaving, clothing assembly and stamping); (b) formation of a network of partners able to support its production needs; (c) development of core competencies like the foundation of its business: Cutting – Creating Collections – Management of market brands, and (d) redesign of its internal structure in order to support the new business concept: Strategic Business Units (market brands) – Divisions for synergy gains. The data in Table1 show the real behavior of Hering’s brand units, as strategic business units. The functions of marketing, sales, research and development, price setting and innovation demonstrate to be characteristic of SBUs. Financial function, however, is divided, showing the units with independent behavior when it refers to budgetary execution, and a dependent behavior, that is a behavior of a corporate division, when it refers to budgetary planning and determination of costs. Table 1: Profile of Brand Units: Function as Division or in SBU Division SBU Marketing 1 2 3 4 Sales 1 2 3 4 Human Resources 1 2 3 5 Finance 2 3 4 Manufacturing 2 3 4 5 Logistics 2 3 4 5 Research & Dev. 1 2 3 4 Purchasing 1 2 4 5 IT 2 3 4 5 Maintenance 2 3 4 5 Resources and Infrastructure 1 2 4 5 Processes : Decision Process 1 2 3 5 Costs 2 3 4 5 Price Setting 1 2 3 4 Intra-departmental synergy 1 3 4 5 Innovation 1 2 3 4 Automation and Integration 2 3 4 5 Source: Research data. Analyzing Hering’s strategic option during the period, we may notice that the company is no longer interested on being a fabric manufacturer –with less built-in value in its products. The company decided to move forward on to another concept of its business, directly connected to the consumer through which Hering could bring greater profit. In this way, reconfiguration should support the new orientation of the company. This would be achieved if Hering were able to transfer the new value logic of the company to its managers. In these first steps, its main challenges seem to have been: (a) development of core competencies; (b) development of a network of partnerships and (c) organizational re-design. Hering showed that it was able to carry out the two first easily. The third one, however, does not seem to have happened in the way Hering intended. The company bet that incorporation of the value logic would be better and more efficiently achieved if there would be adequate motivation for doing so. By giving autonomy to its brand units, the company stimulated managers in the direction of its strategic objective. However, the concern to achieve synergy between SBUs created internal detours that led SBUs to become more akin to functional divisions than being SBUs. The human resources function displayed sufficient enough independent behavior, but not totally. In the perception of the interviewed people, the SBUs were not completely autonomous, and should be adherent to hiring, remuneration and career policies, issued and approved by the matrix. Purchasing, Resources and Infrastructure function also followed the same path. Acquisition of essential materials like thread, raw materials and some equipment was centralized, while other types of specific needs were decentralized. The functions of manufacturing, logistics, information technology and maintenance were centralized in the matrix. According to the interviewed, the SBUs needed to program their needs ahead, so services and products carried out within the SBUs were always performed seeking to gain synergy. Equally, there was centralization of the automation and integration processes of information technology. The decision-making process was not totally independent. There was only autonomy in regard to questions concerning market segmentation, price setting, marketing and sales, research and development and localized innovation. This context of unequal autonomy caused a distortion in the units, in such a way that Manufacturing and Logistics (that were, in fact, divisions) ended up behaving like SBUs. They wanted administrative and operational autonomy and contrary to behaving like divisions seeking the benefits of synergy, behaved as if they were SBUs. CONCLUSIONS As we can see, the design of Hering’s business structure was well conceived theoretically. There is a clear logic of value behind the configuration, determined by the functions of its business. Its new configuration seems to be the correct approach for the intended market: de-verticalize operational functions with less aggregate value and return to functions that guarantee passing on greater value to consumers, directly connected to its trademark products. Hering competencies turned to brand management, not to production. The transference of production activities to partner companies, forming a network, happened systematically, allowing Hering to dedicate itself to create competences in the consumer market. Thus the value logic (strategic benefits) of the company, as shown in Figure 3, is aligned with its corporate strategy. Reconfigurating the company into SBUs, however, does not seem to have worked in the intended form. Despite being called strategic units, Hering’s SBUs functioned, in part, as if they were functional divisions of the company. Analysis of the data in Table 1 shows partial autonomy of the SBUs, emphasized by the decision- making process. Although mutual support units (Fig. 4) were promising gains in synergy, the non-duplication of departments within the units, such as sales, information technology and maintenance, as well as their own efforts to increase synergy, compromised the decision-making ability of the SBUs, besides inducing the mutual units to behave like SBUs themselves. However, administrative dynamics compensated for eventual detours and corporate strategy on the whole was not compromised. Judging by its annual balance sheet and financial report, Hering gradually increases its annual revenues and profits. We strongly recommend the development of specific capabilities, related to demand management and collection development, which are common to all Hering´s SBU and could increase synergy among Units, benefiting Hering´s business as a whole. 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