Intangible interrelationships among business units

Intangible interrelationships lead to competitive advantage through the transfer of skills among separate value chains. Through operating one business unit, a firm gains know-how that allows it to improve the way another generically similar business unit competes. The transference of skills can go in either direction—e.g., from existing business units to a new business unit or from a new business unit back to existing business units. The transference of generic know-how can occur anywhere in the value chain. Philip Morris transferred generic know-how in the marketing of consumer packaged goods from its cigarette business to Miller Beer, while Emerson Electric transferred plant design and cost reduction skills when it acquired the chain saw firm Beaird-Poulan. In both cases, the transference of skills changed the way that the receiving business unit competed and enhanced its competitive advantage.

Intangible interrelationships lead to a competitive advantage if the improvement in cost or differentiation in the business unit receiving the know- how exceeds the costs of transferring it. Know-how residing in one business unit has already been paid for, and hence transferring it may involve little cost compared to its cost of development. The actual transference of know-how always involves some cost, however, whether it be the cost of time of skilled personnel or perhaps the greater risk that proprietary information will leak out. Using the know-how that is transferred will also typically involve some cost in adapting it to the circumstances of the receiving business unit. These costs of transferring know-how must be weighed against the potential benefits to determine whether an intangible interrelationship will create competitive advantage.

Intangible interrelationships are important to competitive advantage when the transference of know-how or skills allows the receiving business unit to lower costs or enhance differentiation. This occurs if the transference of skills leads to policy changes that lower cost or enhance differentiation, or because the transference of skills gives the receiving business unit better insight into its other drivers of cost or uniqueness. The transference of skills from Philip Morris to Miller Beer, for example, resulted in policy changes in the way beer was positioned and marketed, as well as an escalation of advertising spending that increased scale economies in the industry and worked to the advantage of large brands like Miller.

Identifying Intangible Interrelationships. Intangible interrelationships arise from a variety of generic similarities among business units:

  • same generic strategy
  • same type of buyer (though not the same buyer)
  • similar configuration of the value chain (e.g., many dispersed sites of mineral extraction and processing)
  • similar important value activities (e.g., relations with government)

Although value activities cannot be shared, these similarities among business units mean that know-how gained in one business unit is valuable and transferable to another.

Because of the myriad possible generic similarities among business units, it is not possible to be as complete in identifying the important types as it was with tangible interrelationships. However, the value chain provides a systematic way of searching for intangible interrelationships. A firm can examine the major value activities in its business units to unearth similarities in activities or the way the chain is configured that might provide the basis for transference of know-how or highlight generic skills that might be applied to new industries.

Intangible Interrelationships and Competitive Advantage. Intangible interrelationships of one type or another are very widespread. It is always possible to point to some generic similarity in some value activity between almost any two business units. An airline is widely dispersed, has multiple sites, and relies heavily on scheduling, charac-teristics shared by trucking companies, international trading companies and industrial gas producers. Widespread similarities of some kind make the analysis of intangible interrelationships quite subtle.

The key tests in identifying intangible interrelationships that are important to competitive advantage are the following:

  • How similar are the value activities in the business units?
  • How important are the value activities involved to competition?
  • How significant is the know-how that would be transferred to competitive advantage in the relevant activities?

These questions must be answered together. The similarity of two business units is a function of how much know-how can be usefully transferred. The importance of the transferred know-how is a function of its contribution to improving competitive advantage in the receiving business unit. The transference of just one insight can sometimes make an enormous difference to competitive advantage, so even business units that are not very similar can have important intangible interrelationships. However, truly important intangible interrelationships are much less common than an initial search for them might imply. It is frequently difficult, moreover, to predict whether the transference of know-how will prove to be valuable.

The most common pitfall in assessing intangible interrelationships is to identify generic similarities among business units that are not important to competition. Either the know-how that can be transferred does not affect value activities that are important to cost or differentiation in the receiving business unit, or it does not provide insights that competitors do not already have. Philip Morris’s acquisition of the Seven Up soft drink company provides a possible example of the latter. While the beer industry had historically been populated by family firms with little marketing flair, the soft drink industry has long been characterized by sophisticated marketing by the likes of Coke, Pepsi, and Dr Pepper. Philip Morris’s marketing expertise appears to have offerred much less of an advantage for Seven Up than it did for Miller.

Many firms have fallen into the trap of identifying intangible interrelationships that are illusory or do not matter for competitive advantage. Often, it seems, intangible interrelationships are forced, and represent more of an ex poste rationalization of diversification moves undertaken for other reasons. Intangible interrelationships were prominent in discussions of synergy. The difficulty of finding and implementing significant intangible interrelationships is one of the reasons synergy proved such a disappointment to many firms.

The effective exploitation of intangible interrelationships thus requires an acute understanding of the business units involved as well as the industries they compete in. The importance of an intangible interrelationship for competition can only be truly understood by identifying specific ways in which know-how can be transferred so as to make a difference. The mere hope that one business unit might learn something useful from another is frequently a hope not realized. Even intangible interrelationships where the benefits of transferring know-

how far exceed the cost of transferring it do not lead to competitive advantage unless the transference of know-how actually takes place. Know-how is transferred through interchange between managers or other personnel in the affected business units. This process does not occur without active efforts on the part of senior management. Personnel in the receiving business unit may be wary or unsure of the value of know-how from a “different” industry. They may even openly resist it. Business units with know-how may be hesitant to commit the time of important personnel and may view the knowhow as highly proprietary. Finally, transference of know-how is subjective and the benefits of doing so often are hard for managers to understand when compared to tangible interrelationships. All these factors imply that even important intangible interrelationships can be very difficult to achieve. Doing so requires a sustained commitment and the existence of formal mechanisms through which the required transference of skills will take place. A conducive organizational setting can greatly reduce the cost of transferring know-how.

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

Leave a Reply

Your email address will not be published. Required fields are marked *