This chapter outlines business formation and the differences between private and public limited companies. It is primarily concerned with SBUs’ functions, strategy and planning. Risks specific to the SBU level are also outlined.

French and Saward (1983) describe business as:

French and Saward (1983) also define strategy as:

Collins English Dictionary (1995) defines a business as:

The present authors believe strategy to be a set of rules which guide decision-makers about organisational behaviour and which go on to produce a common sense of direction. For the purposes of this book the authors believe strategic business management can basically be summarised as the management of SBUs.

The birth of a business is different to that of a corporation. A business often transforms into a corporation over time through acquisition and growth.

When a business is formed the owners can choose from one of many legal forms; however, most businesses start off as a sole trader and grow accordingly. For the purposes of this book, the authors consider larger companies, specifically SBUs, and their relation to corporate bodies and the projects they undertake.

The Memorandum of Association describes generally the objectives of the company, and what the business is. It will contain the name of the organisation, its registered address, its objectives and its initial capital. It is a document relating to those outside the organisation, for external stakeholder use.

Table 8.1 Legal differences between private and public limited companies (Adapted from Birchall and Morris 1992)

Thus there are far more limited companies in the UK than plcs, but the majority of invested capital is in the latter.

Johnson and Scholes (1999) define an SBU as:

Langford and Male (2001) define an SBU as follows:

For the purposes of this book the present authors use the definition developed by Langford and Male (2001).

The need for strategic linkages is essential for information transfer and can operate as a top-down or bottom-up process. Toffler (1985) states:

A major concern of both senior management and project participants is that projects seem to arise at will across the organisation. Confusion normally arises from:

This results in many people feeling that they are working not only on many unnecessary projects but also at cross-purposes with other areas of the business.

The wrappers model developed by Verway and Comninos (2002) is an overall approach which integrates the organisation’s strategic business and project management levels. At the core of the model is the Business Focused Project Management (BFPM) protocol, which contains the Objective Directed Project Management (ODPM) process. Each level ‘wraps’ its functionality around the one within. The wrappers can be peeled off or added as required. Figure 8.1 illustrates the wrappers. The following subsections explain each wrapper layer in the model.

Figure 8.1 The wrappers model

The inner wrapper is the strategic wrapper containing the organisation’s vision, mission, goals and objectives. The executive level of the organisation, which is responsible for setting organisational strategy, primarily owns this wrapper.

The middle wrapper is the business wrapper and is owned by senior management. It receives project proposals from operations and functions and considers them in a prioritisation and selection process. These proposals are prepared in support of the organisation’s imperatives and are generated by departments or at the executive level.

The outer wrapper is the project wrapper, representing the project management level. It is jointly owned by the project sponsors, project managers and participating functional managers. It is here that projects are initiated, planned, and executive and project results integrated into the business. The project manager and the core team member primarily manage this level. Subject to the functional managers’ mandate, core team members represent their functional areas.

The relationship between the strategic business and corporate levels is often detached. The client enters into a contract with the SBU to carry out projects. The corporate body is merely a trading name listed on the stock exchange, so there is no contract between a client and the corporate entity. However, if a project does not go to plan, resulting in action by the client, the corporate body will often step in, although it is not obliged to. This is the case because the SBU, which is part of the corporation, does not want bad publicity, resulting in a damaged reputation.

Often the chairmen of SBUs are members of the corporation’s board of directors and are duly responsible for ensuring that corporate policies are introduced into their respective SBUs.

In general, the roles and responsibilities of strategic business managers are as follows:

In terms of legal focuses the strategic business manager will abide by planning regulations, environmental restrictions and British Standards. At the strategic business level the manager will look at a wider perspective, for example stakeholder arrangements (balancing equity, bonds, debt and contractual legal arrangements between partners). Business managers ensure that everything conforms with current legislation throughout the strategy. The use of an environmental impact assessment at strategy level provides a platform for the public to participate in mitigation decisions. This in turn fosters integrity and co-ordination and shows the stakeholders the benefits of the strategic business manager (Johnson and Scholes 1999).

The typical risks faced by a SBUs include:

Physical asset or property exposure to risk can be classified in four ways: according to (1) the class of property affected, (2) the cause of gain or loss, (3) whether the outcome is direct, indirect or time element in nature and (4) the nature of the organisation’s interest in the property. The causes of loss or gain might be divided into three classes: (1) physical, (2) social and (3) economic. Physical peril or causes include natural forces, such as fires, windstorms, and explosions, that damage or destroy property, or in the case of speculative risks — that in some sense enhance the value of the property. Social perils or causes are (a) deviations from expected individual conduct, such as theft, vandalism, embezzlement, or negligence, or (b) aberrations in group behaviour, such as strikes or riots. Economic perils or causes may be due to external or internal forces. For example, a debtor may be unable to pay off an account receivable because of an economic recession or a contractor may not complete a project on schedule because of management error. Two or more of these perils may be involved in one loss. For instance, a negligent act by an employee may lead to an explosion; an economic recession and a windstorm may together so severely cripple a debtor’s organisation that the debtor cannot pay the amount owed to a supplier.

Today financial price risk can not only affect quarterly profits, it can also determine a business’s very survival. Unpredictable movement in exchange rate, interest rates and commodity prices presents risks that cannot be ignored.

The variety of financial assets employed by individuals, business and governments is enormous and growing. Common stock, subordinated debentures, mortgage-backed securities, zero-coupon bonds, revenue bonds, futures, options, swaps and preferred stocks are but a few examples of the instruments used to finance private and public projects. Innovation continues to lead to the development of new financial assets to adapt to the ever-increasing complexity of financial markets. Embedded within this complex array of financial assets are a few attributes. Three elements are present in a typical financial asset, either singly or in combination:

Uncertainty in the global financial environment has caused many economic problems and disruptions, but it has also provided the impetus for financial innovation. Through financial innovation, the financial intermediaries were soon able to offer their customers products to manage or even exploit the new risk. Through this same innovation, financial institutions became better able to evaluate and manage their own asset and liability position. The marketplace recognised early that the uncertainty about foreign exchange rates, interest rates, and commodity prices could not be eliminated by ‘better forecasting’. This recognition induced firms to begin actively managing financial risk. The financial institutions — exchanges, commercial banks, and investment banks — have provided a range of new products to accomplish this risk management:

In addition to the existing forward contracts for metal and long-term contracts for petroleum, the onset of the increased price volatility in the late 1970s led to the appearance of futures contracts for commodities (for oil in 1978 and for metal in 1983). These were followed by commodity swaps (in 1986) and commodity options in 1986.

The productive resources of an organisation include property (physical capital) and human resources (human capital); earlier, we discussed exposures due to ownership of physical and financial assets. The discussion now turns to assessing exposures related to the organisation’s human asset. The main risks to personnel are:

Individual employees and their families bear the direct consequences of these losses. In the absence of measures to mitigate the effect of these losses, individual employees’ concerns about these exposures and their efforts to manage them can affect their productivity and contribution to the organisation’s mission. Further, loss of human assets can have direct economic effects on an organisation. Hence risk managers have valid reasons for being interested in human resource exposure.

In general use the word ‘tort’ means a wrong, legally speaking; however, a tort is a civil wrong other than a breach of contract for which the court will provide a remedy in the form of money damages. There are three basic types of tort: intentional torts, involving conduct that may be by intention or design but not necessarily with the intention that the resulting consequences should occur; (2) unintentional tort, involving the failure to act or not act as a reasonable prudent person would have acted under similar circumstances; and (3) tort in which ‘strict’ or absolute liability applies. In summary these include:

Corporate strategy is concerned with the company as a whole and for large diversified firms it is concerned with balancing a portfolio of businesses, different diversification strategies, the overall structure of the company and the number of markets or market segments within which the company competes (Langford and Male 2001).

At the corporate level of the organisation, senior managers will develop a corporate strategy that is concerned with balancing a portfolio of businesses. Corporate strategy is company wide and is concerned with creating competitive advantage within each of the SBUs. Business strategy is concerned with which markets the firm should be in and transferring the relevant information to corporate level. The division-alised structure, as part of the whole portfolio of businesses, will have different strategic time horizons for each division that has to be incorporated by the main board to produce an integrated corporate strategy (Bernes 1996).

Strategic planning is essentially concerned with strategic problems associated with defining objectives in the overall interest of the organisation and then developing corresponding courses of action required to realise these objectives. It should be clearly differentiated from tactical planning, which is short term and chiefly concerned with functional planning and not with the setting of strategic goals. Tactical planning is carried out largely by functional management, whereas strategic planning, because of its very nature, must be the prerogative of top management. For effective strategic planning it is essential to get top management support and the active participation of both corporate and SBU management. The strategic plan must cover all aspects of the organisation’s activities in an integrated manner.

The present authors believe that for effective decision making the strategic plan should include the broad objectives for the corporation as a whole, and also for the individual SBUs and projects. These objectives should look at both quantitative and qualitative angles. Targets for each major activity will also be required. For example, for the marketing sector the objective should clearly indicate for each product or service target sales/volumes and the corresponding sales/price to be achieved over the plan period; and a study of the environmental factors such as marketing trends, political developments, technology and general economic factors which are likely to affect the business. The plan should include forecasts of these variables over the planned period. All environmental assumptions should be clearly justified. These forecasts and assumptions will form the essential basic ingredient of all those planning operations of the organisation and should embrace all those elements where top management believe detailed knowledge is essential. The more obvious elements would be:

The above merely indicate the types of environmental factors which need to be taken into account in building a strategic plan. These should be followed by:

Most organisations are concerned with the risk and variability of their returns. When it is strategically important, organisations will want to incorporate explicit risk management objectives into their financial perspective. Metro Bank, for example, chose a financial objective to increase the share of income arising from fee-based services not only for its fee-based potential but also to reduce its reliance on income from core deposit and transaction-based products. Such income varied widely with variations in interest rates. As the share of fee-based income increased, the bank believed that the year-to-year variability of its income stream would decrease. Therefore the objective to broaden revenue sources serves as both a growth and risk management objective (Kaplan and Norton 1996).

Bower and Merna (2002) describe how a business which is part of an American corporation, operating in the UK, optimises the contract strategies for a number of its projects. The risks identified by the authors led them to suggest that alliance contracts should be developed by the business and used on future projects as a means of transferring the risks identified. In this case the projects carried out by the business were similar and risks associated with each project were those relating to time, cost, quality and safety.

Many SBUs need to borrow money to finance projects. Lenders often require parent company guarantees from the corporation in case of default by the SBU. SBUs will, in some cases, use the corporation’s profit and loss accounts as a means of illustrating their financial stability to clients rather than their own accounts, which are often not as financially sound.

Figure 8.2 illustrates the relationship between the SBUs and the corporate and project levels. SBUs are seen to be subordinate to the corporate entity but senior to projects in diverse business sectors whilst remaining under the corporate umbrella.

Figure 8.2 Typical SBU organisation (Adapted from Merna 2003)

Figure 8.3 SBUs and sub-SBUs

However, there are risks inherent with JVs. Wearne and Wright (1998) believe that partners may differ in their understanding or interpretation of the objectives, and this may not be apparent before the JV has entered into commitments to others. Other risks JVs face include:

JVs may be brought about by political necessity. For example, many Third World countries insist that foreign organisations have a domestic partner if they are to receive the necessary approval for the proposed activity. A domestic partner could help mitigate risks such as language and cultural barriers.

According to the Oxford English Dictionary (1989), a portfolio is a:

Collins English Dictionary (1995) suggests that an investor’s portfolio is the total investments held by that individual or organisation. For the purposes of this book both these definitions are too narrow: the first limits a portfolio to securities and the second to the complete set of investments. The authors propose that a portfolio is any subset of the investments held by an individual or organisation to avoid both limitations.

The authors suggest that an SBU will be subjected to the same risk as the bank described above. Some projects will make profits, some break even and some lose. Providing the profit is greater than the loss, the SBU will be seen to be profitable.

Long before modern portfolio theory was developed Erasmus (1467- 1536) stated:

In the analysis of financial markets, to a greater extent than in other areas of investment management, considerable study has been undertaken to quantify the reduction in risk resulting from diversification of portfolios and determine the optimal allocation of an investor’s funds among available assets. The label applied to the mathematical models and their underlying assumptions and theories is modern portfolio theory (MPT). The essential differences between MPT and ‘portfolio theory’ are the former’s emphasis on the quantification of the variables involved and its almost exclusive application to investments in financial markets.

Portfolio analysis comprises a set of techniques which are often used by strategic planners to integrate and manage strategically a number of subsidiaries, often operating in different industries, that comprise the corporate whole (Langford and Male 2001).

In the construction industry, for example, portfolio management techniques can be applied at corporate level, for service products, end products and for the management of multi-project strategies. Scenario testing permits strategists to create alternative futures through economic forecasting, visioning or identifying branching points where discontinuities may occur. Cross-impact analysis can also assist scenario testing by looking at the strength of impacting events that may either be unrelated to a situation or enhance the occurrence of an event. To be worthwhile, however, scenario testing must be credible, useful and understandable by managers.

The information gathered was then processed within a framework of appraisal and a portfolio design mechanism (PDM). Table 8.2 shows the investment risks and the overall risk based on Witt’s (1999) study.

To achieve leadership of each project and of each specialisation used by the projects, organisations and public authorities have evolved what are called matrix systems of management with separate roles for functional and project managers (Smith 1995).

Table 8.2 Investments risks and descriptions (Adapted from Witt 1999)

Figure 8.4 Matrix management of department resources (Adapted from Smith 1999)

The Central Computer and Telecommunication Agency (CCTA) (1994) defines programme management as:

Reiss (2000) believes programme management is about implementing strategic change and realising benefit. He states that a precise definition would be:

Figure 8.5 Key components of programme management (Adapted from Sandvold 1998)

Lockitt (2000) gives a more lengthy and thorough definition of programme management. He believes:

For the purposes of this book, however, the authors believe that the CCTA definition is most appropriate. Nonetheless, the execution of the definition will be carried out through the use of management ‘templates’ (guidelines) to facilitate the use of the technique.

Each business unit must submit a summary of its proposed strategies and business plans to the corporate board. This is called the five-year commitment (FYC). The combined FYCs of all the businesses must achieve the corporate objectives. The FYC is a five-year business plan which is updated each year and moved forward by the year. The SBUs will update or add more issues and commitments and will include a business risk register covering similar points to that of the corporate risk strategy.

The tools and information used at the SBU level are similar to those at the corporate level. The business unit strategy, derived from the corporate strategy, is still concerned with survival and increasing value but is focused on its particular market area, normally a portfolio of similar projects.

Today’s marketplace demands cost effectiveness, competitiveness and flexibility from a business if it is to survive and grow. Such demands necessitate effective business plans, both strategic in support of longer-term goals and tactical in support of ever-changing business needs and priorities and their associated risks.

The strategic business level is concerned with how an operating unit within the corporate body can compete in a specific market. SBUs are created at corporate level, and can be subsumed under it. The strategies of SBUs can be regarded as the parts which require and define the organisation as a whole.