Interrelationships among business units of the firm

There are three broad types of possible interrelationships among business units: tangible interrelationships, intangible interrelationships, and competitor interrelationships. All three types can have important, but different, impacts on competitive advantage and are not mutually exclusive:

Tangible Interrelationships. Tangible interrelationships arise from opportunities to share activities in the value chain among related business units, due to the presence of common buyers, channels, technologies, and other factors. Tangible interrelationships lead to competitive advantage if sharing lowers cost or enhances differentiation enough to exceed the costs of sharing. Business units that can share a sales force, for example, may be able to lower selling cost or provide the salesperson with a unique package to offer the buyer. Achieving tangible interrelationships often involves jointly performing one value activity while in other cases it involves multiple activities. When sister business units cross-sell each other’s product, for example, they are sharing both of their sales forces.

Intangible Interrelationships. Intangible interrelationships involve the transference of management know-how among separate value chains. Businesses that cannot share activities may nevertheless be similar in generic terms, such as in the type of buyer, type of purchase by the buyer, type of manufacturing process employed and type of relationship with government. For example, beer and cigarettes are both frequently purchased recreational products sold qn the basis of image as well as taste, while trucking and waste treatment both involve the management of multiple sites.

Intangible interrelationships lead to competitive advantage through transference of generic skills or know-how about how to manage a particular type of activity from one business unit to another. This may lower the cost of the activity or make it more unique and outweigh any cost of transferring the know- how. For example, Philip Morris applied product management, brand positioning, and advertising concepts learned in cigarettes to the beer business, substantially changing the nature of competition and dramatically enhancing the competitive position of the Miller brand. It performed marketing activities for cigarettes and beer separately, but used expertise gained in managing activities in one industry to manage them more effectively in another.

Often intangible interrelationships are manifested in a firm’s use of the same generic strategy in a number of business units, reflecting management’s skills in executing a particular strategy. For example, Emerson Electric and H. J. Heinz compete by using cost leadership strategies in many of their business units. Emerson and Heinz have learned how to manage many activities to achieve low cost, and transfer this know-how to similar but separate value activities in many business units.

Competitor Interrelationships. The third form of interrelationship, competitor interrelationships, stems from the existence of rivals that actually or potentially compete with a firm in more than one industry. These multipoint competitors necessarily link industries together because actions toward them in one industry may have implications in another. While competitor interrelationships occur without tangible or intangible interrelationships being present and vice versa, the two often coexist because tangible and intangible interrelationships can provide the basis for diversification. Competitors in one industry, therefore, often expand in the same directions.

Competitor interrelationships make tangible and intangible inter- relationships all the more important to recognize and exploit. A multipoint competitor may compel a firm to match an interrelationship or face a competitive disadvantage. Multipoint competitors can also have an overlapping but different set of business units linked by different interrelationships than the firm’s, making the matching of such interrelationships difficult.

The three types of interrelationships can occur together, as has already been suggested. Tangible interrelationships involving some value activities can be supplemented by intangible interrelationships in others. Activities shared between two business units can be improved by know-how gained from similar activities in other business units. Both tangible and intangible interrelationships are often present when multipoint competitors are present. Each type of interrelationship, however, leads to competitive advantage in a different way.

Synergy is not one idea, then, but three fundamentally different ideas. Thus it is no surprise that what is meant by synergy has been vague. Synergy has most often been described in terms that suggest that what was meant was intangible interrelationships—transference of skills or expertise in management from one business unit to another. This form of interrelationship is perhaps the most ephemeral, however, and its role in creating competitive advantage often is uncertain though potentially significant. Hence it is not surprising that many firms have had great difficulty realizing the fruits of synergy in practice.

I will discuss all three forms of interrelationships in this chapter. Tangible and competitive interrelationships have the most compelling link to competitive advantage, and are easier to implement. Intangible interrelationships are fraught with pitfalls and are often difficult to ‘mplement, but can still be a powerful source of competitive advantage in some industries. All three types play a role in horizontal strategy, as will be discussed in Chapter 10.

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 *