Managing horizontal organization

Achieving interrelationships  is a function  of instituting   an   array of horizontal practices. As many companies have discovered, organiza­ tional 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 un­ derstand their roles as horizontal strategists, as well as appropriate management systems and human resource policies. The array of hori­ zontal 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. M anagers m ust perceive that collaboration with other business units is im portant 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 consum­ ers, as well as providing  specialized   services for financial institutions and corporations.  The  acquisition   of Shearson   Loeb   Rhoades  was a m ajor 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 Firem an’s Fund, as well as many potential new businesses that could add to American Express’s overall competitive position in financial services via interrelationships.  Ameri­ can 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 conve­ nience 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.18 (See Figure 11- 1 )

Figure 1 1 -1 .     The American   Express Logo l8American Express Company, Annual Report, 1982.

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 market­ place. Shearson’s name was changed to Shearson/Am erican Express, reinforcing a firmwide identity. Executives, including many  at senior levels, have been cross-posted. A coordinating  group  has been estab­ lished 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 actu­ ally be successful in exploiting all its potential interrelationships. Man­ agers 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 prod­ ucts 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 com­ puter 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 numer­ ous interrelationships  in buyers,   channels,  technology,   procurement, and production processes. NEC has been remarkably effective in ex­ ploiting 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 rela­ tionships, and many  other  areas. Given N EC’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 incen­ tive 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.  W ithin 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 inter­ relationships. Perhaps the most powerful of these is the “C&C Committee,” charged with identifying and exploiting the potential in­ terrelationships created by the convergence of computers and com­ munications. Partial  centralization  of activities is also   prevalent   at NEC in sales, distribution,  manufacturing,  and technology develop­ ment. Corporate units in areas such as production  technology and software development share the development of widely used technolo­ gies. Finally, many temporary committees are employed to get manag­ ers in different business units together.

N EC’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 through­ out their careers. Frequent forums allow managers to meet with coun­ terparts 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 interrelation­ ships:

  • 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 interrela­ tionships can   be viewed as a   m ajor  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 decentraliza­ tion 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 decentrali­ zation.

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 dimen­ sions. Decentralization  in diversified firms is still a necessity, but must be overlaid with mechanisms to achieve the im portant  interrelation­ ships. The balance between the vertical (decentralization) and horizon­ tal 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 bal­ ance that combines significant elements of both vertical and horizontal will be increasingly necessary.19 The balance must also reflect differing interrelationships from business unit to business unit.

Increasingly, diversity does not imply the absence o f interrelation­ ships. 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 manufac­ ture of personal computers and related products. These divisions were proceeding independently, but lacked the scale economies and  cross- product 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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