Achieving tangible interrelationships requires a business unit to share activities in its value chain with other units while remaining a separate entity that acts independently in other value activities and maintains profit responsibility. Similarly, achieving intangible interrelationships requires the transfer of know-how among business units. The pursuit of interrelationships may well lead to joint activity with more than one sister unit in different parts of the value chain. A business unit may share a sales force with one division, for example, and a plant with another.
Implementing any interrelationship inevitably requires costs of coordination no matter how a firm is organized. However, a variety of organizational impediments can raise these costs unnecessarily for many firms. These impediments bear some relationship to the factors that make functional coordination difficult within a single business unit. However, the organizational impediments to interrelationships are usually much stronger than impediments to functional coordination. Nothing compels coordination among business units, while the functions within a business unit must coordinate in order to do busi- ness. In fact, business units often view each other as rivals competing for limited resources and senior management attention on the basis of performance.
1. Sources of Impediments
Impediments to business unit coordination grow out of the differences between the perspective of business unit and corporate managers. Some of the most important impediments are as follows:
ASYMMETRIC BENEFITS
Interrelationships are often resisted by some business units because the benefits are or appear to be asymmetric. As I discussed in previous chapters, differences in the size and strategy of business units often mean that the competitive advantage arising from an interrelationship accrues more to one business unit than another. In some cases, an interrelationship can have a net negative impact on one business unit while being clearly beneficial to the firm as a whole. Unless the motivation system reflects these differences, it will be extremely difficult to get business units to agree to pursue an interrelationship and to work together to implement it successfully. Instead, they become embroiled in fruitless negotiations over the allocation of shared costs or over procedures for sharing revenue. The result is that interrelationships that clearly benefit all the involved business units are quickly adopted when recognized, but those with asymmetric benefits frequently remain untapped.
LOSS OF AUTONOMY AND CONTROL
In addition to resistance on economic grounds, managers often vigorously resist interrelationships to avoid a perceived or actual loss of autonomy. Some of the common sources of resistance include:
Protection of. Turf. Business unit managers may jealously guard their “turf.” They exercise full control over their operations and draw personal satisfaction from it as well as perceived influence within the corporation. Autonomy has become associated in many firms with full control over all functions, which makes managers loath to give up any of them.
Perceived Dilution of Buyer Relationships. Business units often resist market interrelationships because of fears that they will lose control of their buyers, or that relations with buyers will be damaged. Business units are concerned that sister units will steal “their” buyers, damage their image, or create confusion in buyers’ minds over the appropriate point of contact with the firm. Stockbrokers, for example, have been reluctant to share client lists with sister units in their parent companies despite the existence of interrelationships in financial services.
Inability to “Fire” a Sister Division. Business units often feel in more control when dealing with an outside company, rather than being saddled with a sister unit’s service, delivery, or product problems. Working with a sister unit is perceived as locking the business unit into an adverse bargaining situation, because corporate management will be prone to intervene in disputes and not allow an interrelationship to be severed in the event of poor sister unit performance. Managers perceive fewer constraints in dealing with an outside firm, because an outside firm can be “fired” if the interrelationship fails.83
Conflicts Over Priorities in Shared Activities. Business units are often quick to recognize the risk of conflicting priorities in shared value activities such as a shared sales force, shared logistical network, or shared development center. In a shared development center, for example, engineering time may be allocated in favor of the business unit with the most pressing need; a shared sales force will inevitably concentrate more on some products than others. While setting such priorities is rational from a corporate viewpoint, business unit managers do not welcome the prospect of compromising their plans. Thus business units resist sharing in the first place, or press to create their own autonomous unit once the shared activity has been established.
Unfair Blame for Poor Performance. Business unit managers often fear that they will be unfairly blamed for the failure of an interrelationship. Managers see the possibility that they will be evaluated for results over which they lack full control. This can encourage them to forgo the benefit of an interrelationship to ensure control over their own destiny.
A firm’s history and organizational configuration have an important influence on the strength of managers’ desire for complete autonomy. In many diversified firms, business unit autonomy is a longstanding policy that has been carefully nurtured and emphasized. In companies such as Consolidated Foods, Beatrice Foods, Johnson & Johnson, Emerson Electric, and Hewlett-Packard, for example, the belief in business unit autonomy is strongly held and has been emphasized as a key to the firm’s success. While autonomy does indeed play an important positive role, there is a strong tendency to carry it too far and ignore changing competitive circumstances. Business units in firms with a long history of autonomy may resist even the most worthwhile joint projects. Emerson Electric, for example, has had to struggle to get divisions to cooperate on such relatively nonthreatening interrelationships as joint R&D centers on selected technologies.
Firms with a long commitment to business unit autonomy have trained and promoted those managers who have performed well in an environment stressing independence. Self selection has also attracted managers who value independence to join the firm. Moreover, acquisitions are also often consummated by a promise of autonomy. With such a legacy, managers are likely to resist any intrusion on their autonomy or any corporate move toward centralization on principle.
Firms that have pushed the principle of decentralization down to the smallest viable business units often face the most difficulty in achieving interrelationships, despite the fact that they frequently have the greatest need to achieve the scale economies that result from them. Autonomy can be most jealously guarded when business units are small. For example, American Hospital Supply has many small divisions selling various kinds of medical products to the same buyers, via many separate yet overlapping sales forces. It seems to have experienced difficulties in achieving coordination among its many units, due to the fierce independence of many of its managers.
BIASED INCENTIVE SYSTEMS
Corporate incentive plans often exacerbate the difficulties of imple- menting interrelationships by indirectly penalizing managers for pursuing them. Business units often lack any positive incentive to participate in interrelationships. They see little gain in changing the way they perform activities to facilitate sharing or transferring know-how, both essential to a successful interrelationship. Worse yet, some incentive systems actually encourage the formation of outside coalitions in preference to interrelationships with sister units.
Some of the ways in which incentive systems work against interre- lationships include:
Lack of Credit for Contributions to Other Units. Incentive systems typically measure only a business unit’s performance and fail to value its contribution to sister units. A business unit’s contribution to an interrelationship, and hence to overall corporate performance, is often difficult to measure. Uniform financial objectives across business units and mechanical transfer pricing and allocation formulas are easy to administer and convey the impression of precision. However, they can fail to measure a business unit’s total contribution to firm performance.
Managers are reluctant to spend time and resources on interrelationship projects if they are uncertain to receive credit for them. They see no point in participating in interrelationships in which they must bear compromise costs or, worse yet, get less benefit from the interrelationship than a sister unit. In Matsushita, for example, cross-divisional product development teams have encountered some problems of this type. Participants do not know if the new products will contribute to their division’s profits and therefore are reluctant to contribute to their development.
Measurement Biases. In some firms, there are biases in the way revenues, costs, or assets are measured and allocated that prompt business units to ignore or resist interrelationships. For example, investing in assets or making acquisitions is capitalized, while the cost of pursuing an interrelationship must be expensed. Business units that are measured on return on sales will tend to invest in assets rather than diminish their profitability, while business units with narrowly conceived revenue growth objectives will be loath to split revenues with other units on an interrelationship project. They will prefer instead to incur the cost of contracting with an outside firm.
DIFFERING BUSINESS UNIT CIRCUMSTANCES
Interrelationships are difficult to achieve where business units have different organizational circumstances. Such differences raise problems of communication, and cause business units to perceive sister units as “other companies.” Some of the most common organizational differences among business units that impede interrelationships include:
Strong Business Unit Identities. Pursuing interrelationships is difficult where business units have distinct histories and identities apart from the parent firm’s. For example, business units may have originally been separate companies that were acquired, or have long been freestanding units with their own names. In such cases, managers and staff often identify more with the business unit than with the parent. The problem is exacerbated by past success. If business units have been industry leaders or pioneers, for example, they often resist any move toward joint efforts with sister units.
Differing Cultures. Cooperation can prove very difficult to achieve if business units have differing cultures. Relevant cultural differences include such things as norms of interpersonal behavior, terminology and basic business philosophy. Such differences can inhibit communication and make working relationships hard to negotiate and maintain. American Express’s banking subsidiary has struggled to integrate with the Swiss based Trade Development Bank it acquired, for example, because of different styles and language barriers, among other reasons.
Corporate and business unit managers are also sometimes uneasy about interrelationships between culturally distinct units on the grounds that they will blur the differences among them. They see interrelationships as threats to the distinct cultures that made the business units successful in the first place. This issue is particularly likely to arise in business units that were acquired, or in a diversified firm with a strong tradition of autonomy. For example, the senior management of Brunswick has expressed such fears.5 Brunswick operates in a variety of leisure-oriented industries and has acquired a number of well-known companies. It is hesitant to integrate them for fear of disrupting their cultures.
Management Differences. If the profile, skills and style of managers differ among business units, forging interrelationships may prove difficult. Contacts may be uncomfortable or strained, making agreements harder to reach. Management differences that may inhibit interrelationships include differences in age, titles, educational background, technical skills, and tenure in office.
Differing Procedures. Business units may have different operating procedures that make interrelationships difficult to achieve, including different accounting and information systems, approval limits, and union agreements. Procedural differences create friction and confusion when units attempt to work together, and add extra costs of coordination.
Geographic Separation. Business units separated geographically can have difficulty achieving the ongoing coordination required to make interrelationships a success. Distance reduces the ongoing interchange so necessary to work out problems.
FEAR OF TAMPERING WITH DECENTRALIZATION
The impediments to achieving interrelationships discussed so far stem largely from the orientation and motivation of business unit managers. Corporate management may be equally hesitant to tamper with decentralization. A number of common reasons for this include:
Dampening Entrepreneurship. Corporate management may fear that anything that tampers with decentralization will undermine the entrepreneurial spirit in business units.6 No fundamental contradiction exists between entrepreneurship and interrelationships, however, unless one equates entrepreneurship narrowly with independence. While there is some justification for extreme decentralization in startup ventures, business unit managers can often create the greatest competitive advantage through entrepreneurship that identifies and exploits interrelationships. Nevertheless, the view that pure decentralization provides the greatest entrepreneurial incentives remains deeply ingrained in many firms. Business unit managers often raise reduced incentives as an argument for resisting interrelationships as well.
Desire for a Consistent Organization. Many diversified firms have tended to organize all business units identically. This may simplify management’s task in some ways, but it is inconsistent with interrelationships. Interrelationships imply that different business units (and groups of business units) should have varying degrees of autonomy and control over different activities, as well as different measures of performance and objectives.
Difficulty of Measuring Performance. Many firms base incentives solely on objective, quantifiable criteria such as growth and profitability. Interrelationships almost inevitably introduce some subjectivity into performance measurement, however, because business unit contributions to the firm as a whole are often hard to quantify precisely. In some firms, however, subjectivity is considered undesirable.
Fear of Providing “Excuses. ” Interrelationships almost inevitably cloud the clean lines of authority and responsibility in business units. Hence top management may fear that business unit managers will use interrelationships as excuses to justify poor performance.
2. Interrelationships and Equity
Many of these organizational impediments to achieving interrelationships are based on the perceived conflict between interrelationships and equity. Equity, or fairness, is a principle embraced by virtually all firms. It is part of the fabric of an organization that allows conflicts to be reconciled and underpins the motivation of managers. Yet interrelationships can conflict with equity in the minds of some managers. Interrelationships can yield differing benefits to the business units involved. Interrelationships also imply that managers should have different degrees of autonomy, differing objectives, and differing bases for incentives. Managers may complain that they are “carrying” other business units, and that rewards are given to other managers whose performance is not as good.
Many diversified firms have explicitly or implicitly adopted a narrow view of equity that stems from their decentralized organizational structures. Equity is defined to mean treating every business unit the same and avoiding any subjectivity in decision making—particularly in such sensitive areas as incentives or transfer prices. Equity is further defined as meaning that all business units must agree on interrelationships.
A narrow view of equity is not only logically incorrect but makes interrelationships achievable only in those rare cases where all business units benefit equally or the interrelationship can be achieved through arm’s-length dealings with little loss of autonomy. A more constructive view of equity, which emphasizes fairness rather than sameness in the ways in which top management treat business units, is a prerequisite to successfully achieving interrelationships. Creating such a view of equity, as well as building allegiance to a higher corporate purpose, is an essential task of horizontal organization.
3. Differences in Impediments among Firms
The extent of impediments to achieving interrelationships differs widely among firms, as a result of their histories, mix of businesses, organizational structures, and policies. The greatest difficulties in achieving interrelationships tend to occur under the following conditions:
- Highly decentralized firms with many small business units
- Firms with a strong tradition of autonomy
- Firms built through the acquisition of independent companies
- Firms that have made little or no effort to create a corporate identity
- Firms with little or no history of interrelationships, or who have had a bad experience in attempting to pursue an interrelationship
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.