Managing horizontal organization

Achieving interrelationships is a function of instituting an array of horizontal practices. As many companies have discovered, organizational structure alone is not sufficient. Merely grouping related busi-nesses together will not guarantee the exploitation of interrelationships. Structure must be reinforced by group and sector executives who understand their roles as horizontal strategists, as well as appropriate management systems and human resource policies. The array of horizontal practices must not be uniform across the firm, but tailored to reflect the patterns of interrelationships that are present. Some business units are more connected than others, and hence the balance between vertical and horizontal organization should vary. Top management must also reinforce interrelationships by sending clear signals about their importance, and promoting a culture where the corporation has an identity that transcends and reinforces that of business units.

Achieving interrelationships usually requires the creation of some shared values within a firm. Managers must perceive that collaboration with other business units is important and will be rewarded, and that senior management will act fairly in measuring the performance of the individual units involved. While interrelationships can sometimes be imposed, interrelationships that are imposed on business units will rarely be so strong or durable as those based on common understanding and consensus. Instituting horizontal organizational mechanisms throughout the firm is usually necessary for this attitude to occur. The process takes time, and cannot be expected to occur just because the potential for interrelationships is discovered.

1. Promising Examples

American Express provides an example of a firm with a corporate strategy built on interrelationships. It has set out to be a broadly based financial services company for upwardly mobile affluent consumers, as well as providing specialized services for financial institutions and corporations. The acquisition of Shearson Loeb Rhoades was a major step in this strategy, as was the earlier acquisition of Fireman’s Fund. There are many interrelationships among the businesses of American Express, Shearson, and Fireman’s Fund, as well as many potential new businesses that could add to American Express’s overall competitive position in financial services via interrelationships. American Express and Shearson had different cultures, however, exacerbating the problems inherent in achieving interrelationships. Moreover, American Express had traditionally been run with quite autonomous units.

To achieve interrelationships, American Express has employed a wide range of horizontal devices. A coordinated financial services strategy has become the overall theme for American Express, and top management has frequently stated and reinforced this theme. A quotation from American Express’s Annual Report is illustrative:

Key to the Company’s future is our ability to work as “one enterprise,” with staff offices at each of our major business segments interacting with one another to blend products, services, distribution and expertise to meet the demands of sophisticated customers and add to their convenience and satisfaction. Last year’s Annual Report cover graphically depicts the one enterprise concept: our American Express logo at the center of four distinct but interrelated business lines. (See Figure 11-1)

Figure 11-1. The American Express Logo

A financial services committee composed of executives from American Express and Shearson was constituted, with responsibility for developing an overall scheme for approaching the financial marketplace. Shearson’s name was changed to Shearson/American Express, reinforcing a firmwide identity. Executives, including many at senior levels, have been cross-posted. A coordinating group has been established to manage the financing of the various units. Unity across the company is stressed at management meetings. American Express has also recognized that although cultures are different in acquired units and homogenization of cultures should not be the goal, some parts of each business unit’s culture can usefully be transplanted.

It remains to be seen to what extent American Express will actually be successful in exploiting all its potential interrelationships. Managers occasionally complain of endless meetings, and cultural and style differences are still strong among units. However, there are many examples of interrelationships that the company has achieved. Cross selling of buyers is now well under way, and units are providing products to each other. New acquisitions such as Investors Diversified Services (IDS) and Ayco Corporation (personal financial counseling) are extending old interrelationships and creating new ones. Moreover, interrelationships appear to be driving the search for new acquisitions, and the ability to integrate acquired companies into the overall strategy has become a key test of further acquisitions. The acquisition of IDS was postponed after a close look uncovered problems of sharing computer systems. The acquisition occurred only after the purchase price had been reduced to reflect the added coordination and compromise costs. If American Express continues to be able to identify and achieve interrelationships, it seems on its way to becoming a leading financial services firm.

NEC Corporation is another firm in interrelated businesses that has made considerable progress in achieving interrelationships. NEC competes in semiconductors, telecommunications, computers, and home electronics. These four broad business areas are linked by numerous interrelationships in buyers, channels, technology, procurement, and production processes. NEC has been remarkably effective in exploiting these interrelationships without internal conflict. Business units share many activities, including R&D labs, sales forces, plants, and channels. A great deal of internal coordination takes place across divisions in joint selling, transfers of technology, buyer/supplier relationships, and many other areas. Given NEC’s moderate size relative to its competitors in each of its four main business areas, an important reason for its success is its ability to exploit interrelationships while its larger competitors were largely focusing on only one or two business areas.

How has NEC been able to achieve these interrelationships? The answer lies in the extensive horizontal organization NEC has put in place to facilitate interrelationships. This overlays an equally well- developed vertical organization, in which decentralized business units are managed through planning, control, resource allocation, and incentive systems. Structurally, NEC has organized itself into four broad groups—electron devices, telecommunications, computers, and home electronics—that each reflect strong interrelationships in products, markets, and technology. Note that the computer, telecommunications, and electron devices groups are organized around technology while home electronics is a market-oriented grouping. Within these broad groups, related products such as switching equipment and transmission equipment have been grouped together, reflecting even stronger interre- lationships.

To promote interrelationships across groups there are forty-four ongoing corporatewide committees, many involving important interrelationships. Perhaps the most powerful of these is the “C&C Committee,” charged with identifying and exploiting the potential interrelationships created by the convergence of computers and communications. Partial centralization of activities is also prevalent at NEC in sales, distribution, manufacturing, and technology development. Corporate units in areas such as production technology and software development share the development of widely used technologies. Finally, many temporary committees are employed to get managers in different business units together.

NEC’s C&C theme has constantly reinforced the need to exploit interrelationships. Every division also identifies itself with the NEC brand. The vast majority of businesses have been developed internally. Managers rotate among divisions and undergo extensive training upon joining the corporation (all personnel are hired centrally) and throughout their careers. Frequent forums allow managers to meet with counterparts in related business units.

The strategic planning process at NEC includes the CBP system described earlier, which allows unified planning for businesses with interrelationships. Incentives are not solely linked to financial results, but reflect the business unit’s overall contribution to the company. Internal customers are viewed as the most important, and external sourcing is practiced only if superior quality and price are available from outside. The net result is a clear culture at NEC which reinforces finding and exploiting interrelationships.

2. Japanese Firms and Interrelationships

While there are many non-Japanese firms that have achieved inter- relationships, a number of characteristics of many, though not all, Japanese firms make them well positioned for exploiting interrelationships:

  • strong belief in overarching corporate themes
  • internal development of new businesses
  • a less rigid tradition of autonomy
  • more flexible incentives, less based on business unit results
  • willingness to centralize activities
  • greater tradition of committees and frequent personal contact among executives
  • intensive and continuing in-house training
  • corporatewide hiring and training

Given their history, Japanese firms may be in a position to strike a better balance between horizontal and vertical organization in the diversified firm than U.S. and European firms, which tend to have either a strong tradition of autonomy or a high degree of centralized control. In many ways, the ability of Japanese firms to achieve interrelationships can be viewed as a major future challenge in competing with Western firms as interrelationships grow in importance. The first Japanese challenge, low labor costs, has been replaced by the second Japanese challenge of quality and productivity. Perhaps interrelation- ships will emerge as the next Japanese source of competitive advantage, coupled with an increasing ability to innovate.

It is also intriguing to note that the U.S. companies that have achieved interrelationships, such as GE, DuPont, IBM, and Procter & Gamble, have many of the same characteristics. As interrelationships become increasingly critical to competitive advantage, these firms may serve as role models for firms steeped in the tradition of extreme autonomy and diversification through acquisition so characteristic of U.S. industry.

3. A New Organizational Form

The principles underlying horizontal organization imply a new organizational form for diversified firms. The concept of decentralization has revolutionized the way diversified firms are managed, bringing with it a wide range of practices and management expectations. Many leading companies have successfully made the transition to decentralization. .

Diversified firms must undergo further organizational evolution if they are to respond to today’s competition. Because of the importance of interrelationships, there is a growing need for a new corporate organizational form that recognizes both vertical and horizontal dimensions. Decentralization in diversified firms is still a necessity, but must be overlaid with mechanisms to achieve the important interrelationships. The balance between the vertical (decentralization) and horizontal dimensions in the organization of the diversified firm is an ever changing one, and the ideal is perhaps a constant shifting of the balance as the need to emphasize different activities changes. However, a balance that combines significant elements of both vertical and horizontal will be increasingly necessary.93 The balance must also reflect differing interrelationships from business unit to business unit.

Increasingly, diversity does not imply the absence of interrelationships. Business units can be distinct and benefit from decentralization, while being linked by interrelationships. Hewlett-Packard, a firm noted for its strong tradition of decentralization, is just one example of the growing need to balance vertical with horizontal. Recently, HP has recombined a number of divisions involved in the design and manufacture of personal computers and related products. These divisions were proceeding independently, but lacked the scale economies and crossproduct coordination to mount a concerted attack on IBM and Apple.

This new organizational form requires a modification of rigid or narrow views of autonomy, as well as changing attitudes toward incentives systems and toward the role of group and sector executives. Instead of seeking autonomy and viewing committees and other joint efforts as a waste of time, business unit managers will have to modify their conception of what “managing their own business” means. The new requirements of the diversified firm will involve a price in terms of less simplicity, greater ambiguity, more subjectivity, and potentially more conflict. However, diversified firms that can successfully negotiate this transition will reap rewards in terms of competitive advantage. If they can make this new transition, there will be little debate over whether diversified firms add value.

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

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