Impediments to achieving interrelationships among Firms

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 interrela­ tionships 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   m atter  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 coordina­ tion. 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 differ­ ences between the perspective of business unit and corporate managers. Some of the most im portant impediments are as follows:


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 motiva­ tion   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.


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 o f 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 ser­ vices.

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.

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 busi­ ness 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 interre­ lationship.   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 impor­ tant influence on the strength of managers’ desire for complete auton­ omy. In many diversified firms, business unit  autonomy  is a long­ standing 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 empha­ sized as a key to the   firm’s success.   While  autonomy  does   indeed play an   im portant  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 non­ threatening interrelationships as joint R& D centers on selected tech­ nologies.

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,  acquisi­ tions 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 divi­ sions selling various kinds of medical  products  to   the   same buyers, via many separate yet overlapping sales forces. It seems to have experi­ enced difficulties in achieving coordination  among its many units, due to the fierce independence of many of its managers.


Corporate incentive plans often exacerbate the difficulties of imple­ menting interrelationships by indirectly penalizing managers for pursu­ ing 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 pref­ erence 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 sys­ tems 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 busi­ ness units   and   mechanical  transfer  pricing   and   allocation   formulas are easy to administer and convey the impression  of precision. How­ ever, they can fail to measure  a business unit’s total  contribution  to firm performance.

Managers are reluctant to spend time and resources on interrela­ tionship 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 interrela­ tionship than a sister unit. In M atsushita, 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, invest­ ing in assets or making acquisitions is capitalized, while the cost of pursuing an   interrelationship  m ust 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 in­ stead to incur the cost of contracting with an outside firm.


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 free­ standing 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 dif­ ferences include such things as norms of interpersonal behavior, termi­ nology 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 inte­ grate 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 oper­ ates in a variety of leisure-oriented industries and has acquired a num­ ber 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 man­ agers differ among business units, forging interrelationships may prove difficult. Contacts may be uncomfortable or strained,  making  agree­ ments harder to reach. Management differences that may inhibit inter­ relationships include differences in age, titles, educational background, technical skills, and tenure in office.

Differing Procedures.      Business units may have different operat­ ing procedures that make interrelationships difficult to achieve, includ­ ing different accounting and information systems, approval limits, and union agreements. Procedural differences create friction and confusion when units attem pt to work together, and add extra costs of coordina­ tion.

Geographic Separation.      Business units separated  geographically can have difficulty achieving the   ongoing   coordination  required   to make interrelationships a success. Distance reduces the ongoing inter­ change so necessary to work out problems.


The impediments to achieving interrelationships discussed so far stem largely from the orientation and motivation of business unit m an­ agers. 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 advan­ tage through entrepreneurship that identifies and exploits interrelation­ ships. 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.

Desirefor a Consistent Organization. M any diversified firms have tended to organize all business units identically. This may simplify management’s task in some ways, but it is inconsistent with interrela­ tionships. 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 o f Measuring Performance. Many firms base incentives solely on objective, quantifiable criteria  such as growth  and profitabil­ ity. Interrelationships  almost  inevitably introduce  some   subjectivity into performance measurement, however, because business unit contri­ butions to   the   firm   as a whole are   often   hard  to   quantify   precisely. In some firms, however, subjectivity is considered undesirable.

Fear o f Providing “Excuses. ”    Interrelationships  almost inevita­ bly 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 interrela­ tionships 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 interre­ lationships can conflict with equity in the minds of some managers. Interrelationships can yield differing benefits to the business units in­ volved. Interrelationships also imply that managers should have differ­ ent 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 interrelation­ ships.

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 condi­ tions:

  • 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 interrela-tionship

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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