A purely vertical corporate organizational structure is insufficient to assure that beneficial interrelationships will be recognized and achieved. The impediments to achieving interrelationships not only get in the way of interrelationships at the working level, but also provide business unit managers with a set of arguments with which to counter efforts by group or corporate management to champion important interrelationships. Business unit managers will also clearly see the compromises required to achieve interrelationships, and may be suspicious of the benefits. Senior management may be ill equipped to counter the resistance without an in-depth knowledge of the industries involved.
Companies tend to react in one of two broad ways to these organizational impediments to achieving interrelationships. Some companies conclude that, despite their strategic logic, interrelationships can never work. After encountering such problems, business unit managers give up on working with sister units and resolve instead to proceed indepen-dently. Corporate management becomes frustrated with resolving disputes and dealing with unclear accountability, and opts for extreme decentralization. In other companies, however, there is recognition that the benefits of interrelationships are so important that the traditional ways of managing diversity must change to accomodate them.
Interrelationships will not occur by accident or by fiat. Positive organizational mechanisms must be put in place to encourage business unit managers to pursue interrelationships and to ease the inherent coordination and communication difficulties in making them work. I term organizational practices that facilitate interrelationships horizontal organization. Horizontal corporate organization links business units together within a vertical structure. A balance must be struck between the vertical and horizontal elements in a diversified firm if the potential of interrelationships is to be unleashed.
Horizontal organization can be divided into four broad categories:
- Horizontal structure. Organizational devices that cut across business unit lines, such as grouping of business units, partial centralization, interdivisional task forces, and market or channel focus committees.
- Horizontal systems. Management systems with a cross business unit dimension, in areas such as planning, control, incentives and capital budgeting.
- Horizontal human resource practices. Human resource practices that facilitate business unit cooperation, such as cross-business unit job rotation, management forums and training.
- Horizontal conflict resolution processes. Management processes that resolve conflicts among business units. Such processes can be usefully distinguished from horizontal structure and systems, and relate more to the style of managing a firm.
Organizational structure and systems frequently have both a horizontal and vertical dimension. Grouping business units, for example, can be a purely vertical device to reduce the span of control of top management or can play a major role in horizontal strategy, depending on how groups are managed. Similarly, corporate incentives systems can be entirely vertical or contain provisions that encourage crossbusiness unit cooperation. I will concentrate on the horizontal aspects of organizational practices, recognizing that the horizontal and vertical aspects will interact. The issues raised by vertical aspects of organiza-tional structure and systems in diversified firms have been the subject of considerable study.84
No single device for encouraging and facilitating cooperation among business units is sufficient to ensure that all strategically beneficial interrelationships are achieved. Instead, a variety of practices that reinforce each other are required. Firms with successful horizontal strategies tend to employ an array of practices simultaneously to gain the maximum benefits from interrelationships. The array of appropriate practices can differ for each business unit, because each will have its own pattern of interrelationships with other units with a different balance of benefits and costs.
Corporate management also has a powerful role in reinforcing horizontal organization through its behavior, the way in which it articulates corporate purpose, and its choice of modes of entry into new businesses. After describing the use of horizontal organization in achieving interrelationships, I will return to the role of top management.
1. Horizontal Structure
Horizontal structure refers to temporary or permanent organizational entities that cut across business unit boundaries, supplementing the business unit structure. A variety of such entities, which are not mutually exclusive, may be employed to facilitate interrelationships.
GROUPING BUSINESS UNITS
Perhaps the most common form of horizontal structure is the group or sector, in which a number of business units report to a single executive. Most group and sector structures were originally created to reduce the CEO’s span of control, or to train and evaluate managers in managing diversity as a stepping stone to corporate management. Groups and sectors have long played an important role in the vertical organization.
Group and sector executives have tended to play a relatively passive role in strategy formulation, however. They review and approve business unit strategies and coach business unit managers, rather than initiate strategy. Yet the group or sector executive should have a vital role in identifying, pursuing, and managing interrelationships, provided the boundaries of the group or sector are properly drawn and the role of the group or sector executive is properly constituted.
The grouping of business units into groups and sectors should reflect strategically important interrelationships. The boundaries of groups and sectors are often difficult to draw, however, because there are multiple patterns of interrelationships among business units. In General Foods, for example, some business units have common buyers and channels while different but overlapping groups of business units are related by product form and production technology (e.g., frozen food). Where there are several possible bases for grouping business units reflecting different types of interrelationships, a firm must choose one. Interrelationships are frequently not equally significant for all the business units involved, making the selection of a basis for grouping all the more difficult.
While grouping business units is never an exact science, the principle is clear. Groups (and sectors) should be constructed around the interrelationships that are most significant for competitive advantage, growing out of a systematic look at all the interrelationships within the firm. For example, if a large percentage of cost or the most significant sources of differentiation reside in product positioning, advertising, and distribution, groups should be formed around market interrelationships. In a consumer package goods company, for example, it may be more appropriate to group businesses by buyer or channel than to organize around manufacturing technology. In a high-technology company with a differentiation strategy, conversely, it may make more sense to group business units around technologies, since exploiting technological interrelationships will be a key to competitive advantage. Tangible interrelationships should generally be the primary basis for grouping, with intangible interrelationships serving as the basis if tangible interrelationships are minor or are exhausted. For example, groups may link business units with strong tangible interrelationships, while sectors may be based on weaker tangible interrelationships and/ or intangible interrelationships.
Business units should be grouped around the most strategically important interrelationships because grouping is perhaps the single most powerful device for focusing attention on and reinforcing interrelationships, if groups are managed accordingly. Where all business units report to a single group (or sector) executive, coordination, the management of shared activities, conflict resolution, transfer or knowhow, and setting of the appropriate objectives and incentives are all facilitated.
The principle that business units should be grouped around the most important interrelationship does not imply that all groups in a diversified firm should be based on the same type of interrelationship. All groups need not and should not be market-based, production- based, or technology-based, though firms sometimes have a tendency to use the same basis for grouping all their business units. Unless one form of interrelationship is dominant throughout an entire firm, different groups should be based on different types of interrelationships.
The strength of interrelationships among the business units in a group may well vary from group to group, depending on a firm’s particular mix of businesses. Some groups may have strongly interrelated business units, while others may be characterized by few if any interrelationships and exist largely to reduce span-of-control. The way groups are managed should reflect these differences. Within a group, moreover, the interrelationship present will vary in strategic importance for the different business units. Business units that perceive few benefits of being in the group will have to be managed differently from others since they will have the greatest tendency to choose strategies that are inconsistent with strengthening interrelationships in the group. The way their performance is measured and their incentives may well have to be modified. It is important, however, that such business units are not forced to compromise their strategies so greatly as to undermine their relative competitive position. Managing any interrelationship is always a process of balancing the overall competitive advantage gained against the cost, using the tools described in Chapter 9.
ROLE OF THE GROUP EXECUTIVE
Historically, the role of many group executives has sometimes been ambiguous and uncomfortable.86 Business unit managers frequently are the strategists in diversified firms, while group executives act as reviewers. Many group executives feel, as a result, that they receive much blame but little credit for the group’s performance.
Identifying and achieving interrelationships both within and out-side the group may well be the single most important task of a group executive. In a group with significant interrelationships, the group executive must become the chief strategic officer of the group. What a “group strategy” is is ambiguous in many diversified firms. Group executives have had the tendency to behave as if they were miniportfolio managers, balancing the capital needs of different business units in the group. Where there are interrelationships, this conception of the group executive’s role is fundamentally flawed. Group strategy must be more than the summation of independently proposed business unit strategies. It must include a horizontal strategy that encompasses all the business units. A group strategy does not replace the need for business unit strategies, but integrates them.
In order to achieve interrelationships, the group executive must have ultimate authority to modify business units’ strategies. Furthermore, the group executive must be willing to initiate horizontal strategy as well as respond to business unit proposals. For all the reasons described earlier, business units acting independently will rarely propose the strategies necessary to reap the benefits of interrelationships, or risk compromising their objectives for the benefit of the group. To play the role of chief strategist, a group executive will typically require the capacity to identify and analyze interrelationships within and outside the group and to analyze multipoint competitors. An indepth knowledge of the businesses in the group will be necessary. The role of the group executive as a horizontal strategist must also be reinforced by other horizontal devices that orient business unit managers toward the goal of achieving interrelationships. Partial centralization of key value activities, control over part of incentives, and a role in recruiting will all reinforce the ability of the group executive to build a true horizontal strategy.87
Another type of horizontal structure is partial centralization. It may be appropriate to centralize value activities because of important interrelationships, while still maintaining the profit responsibility of business units. Centralized value activities may also sometimes serve more than one group.
Partial centralization is relatively common in activities such as procurement, sales, and logistical systems. In General Foods, for example, manufacturing, procurement, and logistics are quite centralized across a range of divisions that span groups, while product development and marketing functions all report directly to division managers. McGraw-Hill has a shared order fulfillment system that serves many book, magazine, and other business units, while Castle and Cooke has a shared marketing and distribution system for many types of fresh foods.
Shared activities can have a variety of reporting relationships. One business unit can have formal control while others have a dotted- line relationship. Alternatively, shared activities can report to several business units, or shared activities can report directly to a group or corporate executive. It is desirable that centralized activities report to a line executive in order to maintain a marketplace orientation. The responsible executive must take an active role in managing the coordination between the centralized value activity and the business units, mindful of the issues raised in this and the previous chapter. Such a management provides a contrast to the passive, arm’s-length approach sometimes employed in guiding relations between business units and shared activities.
Success in partial centralization requires creating the proper structure and incentives for business units to manage an activity themselves, or assigning the activity to a line executive with authority over the involved business units. Success also requires an awareness on the part of all concerned that the interrelationship is valuable to the firm, as well as the creation of formal and informal coordinating mechanisms between centralized activities and involved business units. Joint planning for centralized activities that involve the affected business units is beneficial, as is regular formal contact between activity managers and business units.
OTHER CROSS-BUSINESS UNIT ORGANIZATIONAL MECHANISMS
Grouping of business units and partial centralization of value activities are the strongest forms of organizational impetus to achieve interrelationships. Group structure should be designed to capture the most important interrelationship. It may not encompass all interrelationships, however, because secondary interrelationships may be present that go outside the group but that also enhance competitive advantage. Thus temporary and permanent cross- business unit mechanisms that provide a means of achieving interrelationships not captured in the primary organizational structure are an important part of horizontal structure. Such mechanisms can serve not only as ways of initiating and implementing interrelationship projects, but also as mechanisms for educating managers about the importance of interrelationships.11 They should not be misconstrued as a “matrix” organization, but rather as devices to facilitate cross business unit cooperation.
Some of the most important organizational devices to serve this purpose are as follows:
- Market focus committees. Where a firm is organized around products or technologies, there are often important though secondary interrelationships around McGraw-Hill, for example, has established its primary organization around product forms such as books, magazines, and data bases. However, there are a number of markets, such as construction and financial services, into which many of the business units sell. McGraw-Hill can harness these interrelationships if it can attack the markets in a coordinated way, while exploiting the interrelationships around products through the primary organiza- tional structure.
A firm can gain market interrelationships through what might be termed market focus committees. To form such committees, a firm identifies the critical markets where potential interrelationships exist and designates an executive to be responsible for overseeing the firm’s efforts in each such market. A standing committee is constituted consisting of senior managers of business units serving or potentially serving the market, which meets regularly to supervise market research, identify and plan for the achievement of interrelationships in existing product areas, and identify gaps that need to be filled to strengthen the firm’s overall position in the market. Staff resources are drawn in to perform the necessary analysis. Specific interrelationship projects are then assigned to line executives within the affected business units. While such committees can be time consuming, competitive advantage will be lost without them to competitors who can organize to achieve interrelationships.
Market focus committees can also serve as an interim step in shifting from a product- or technology-based organization to a market- based organization in a diversified firm, if market interrelationships become the most strategically important. If a firm shifts to a market- based primary organization, however, it should probably establish some organizational mechanisms to reinforce the production or technological interrelationships present.
- Technology, channel and other interrelationship committees. Standing committees or working groups involving a number of business units can also be created around other important interrelationships, in products (e.g. office automation), production, procurement, technologies, shared distribution channels, logistical systems, or order processing Their function is analogous to market focus committees, and the principles for organizing them are similar. A senior line executive must accept overall responsibility for the effort, and regular progress reviews are required so that the effort will be taken seriously.
- Temporary Task Forces. While important interrelationships that cut across the primary organization structure may well require standing committees to manage their ongoing implementation, some interrelationships may be best exploited through temporary cross-business unit task forces. Temporary task forces are a very common mechanism to achieve the transfer of know-how involved in intangible interrelationships and some tangible interrelationships can be implemented this way. In addition, temporary task forces can be a device for studying interrelationships and recommending permanent ways to achieve them, whether through partial centralization, a standing committee, or a one-time change in the way business units operate.
Temporary cross-business unit task forces may address numerous types of interrelationships. General Motors, for example, forms project centers to manage critical projects that cut across business unit lines. Staff members are completely detached from existing organizational units to participate for periods of up to several’years. An example of a less formal temporary organization is McGraw-Hill’s Information Resources Task Force, which studied the management of computing capacity across the corporation. This temporary organization used part-time staff drawn from divisions, supported by staff from the corporate planning department. Another example is Sears, that is now using study groups to search for interrelationships among its businesses and to pursue interrelationships in financial services.
GROUP OR CORPORATE INTERRELATIONSHIP CHAMPIONS
A final structural device to facilitate interrelationships is the appointment of executives at the group, sector, or corporate level to act as champions for interrelationship. While staff roles such as this have fallen out of favor in some firms, they can contribute significantly to managing interrelationships. Staff executives can take responsibility for identifying key interrelationships in their areas, and then work with the affected business units to assist in achieving them. For example, a marketing staff executive can coordinate the procurement of advertising space to maximize bargaining leverage, or coordinate plans vis-à-vis a shared distribution channel. Staff executives can also assist in the management of other mechanisms to harness interrelationships such as committees and task forces of business unit managers.
MANAGING CROSS-BUSINESS UNIT ORGANIZATIONS
Cross-business unit organizations are difficult to manage, particularly in U.S. firms. Because the principle of autonomy is so ingrained and because committees are often viewed as a “waste of time” rather than an integral part of the management function, careful design of cross-business unit organizations is necessary if they are to be accepted.
A cross-business unit organization must report to a senior line executive, in order to provide it with the necessary influence within the firm and to ensure that its efforts remain focused on important issues. The cross-business unit organization must also be headed by a credible executive who is not too closely identified with a particular point of view, and who is held responsible for results. The organization must result in tangible action, or it will not be taken seriously. Top management should assign line executives from each affected business unit to the cross-business unit organization to help ensure that plans for achieving interrelationships will be implemented once developed. The representatives assigned should be senior enough to be able to influence their units to action. Some staff capability must be made available to cross-business unit organizations, or members may be called on to contribute personnel to allow meaningful analysis and thoughtful recommendations. Finally, cross-business unit organizations must be supplemented by other types of horizontal organization to help overcome the other impediments to interrelationships. In a firm with significant interrelationships, simply overcoming the cynicism toward cross-business committees will yield a major competitive advantage.
2. Horizontal Systems
A second aspect of horizontal organization is horizontal systems— management systems that reinforce coordination and linkages among business units. While most management systems have a strong vertical element, they can also be designed to support the achievement of interrelationships. A number of systems have particular significance for achieving interrelationships.
Horizontal Strategic Planning. Most diversified firms employ vertical strategic planning systems. Business units prepare strategic plans and submit them to senior management for approval. When there are important interrelationships, however, a horizontal component must be overlaid on the vertical strategic planning process to make planning truly meaningful.
There are a number of possible approaches for introducing a horizontal dimension into strategic planning. First, the corporate planning department can accept responsibility for identifying interrelationships and initiating steps to exploit them. Second, group and sector executives can be given responsibility for horizontal strategy and the content of the group plan should concentrate on interrelationships. A third approach is to add an interrelationships section to business unit plans. Each business unit is asked to identify important interrela- tionships it has with other units inside and outside its group, and to develop action plans to exploit important ones. A final approach is to require separate, joint strategic plans from business units involved in important interrelationships. NEC Corporation has opted for the final approach, and has adopted two planning systems. In addition to a normal business unit planning system, it has established the CBP (Corporate Business Plan) system in which separate strategic plans are prepared for critical investments or programs that cut across business unit lines. The system forces business unit managers involved in an interrelationship to meet and agree on a strategic plan for dealing with it over the long term. In effect, this system requires a special plan for important horizontal issues.
The various approaches to adding a horizontal component to planning are not mutually exclusive. Usually, several should be pursued simultaneously. At the very least, mechanisms for horizontal planning must exist at both the group and corporate levels, since the horizontal strategy issues at these levels differ. No business unit will have the perspective to identify all interrelationships or develop plans to achieve them.
Horizontal Procedures. Interrelationships are facilitated by the presence of procedures governing cross-business unit activities. Many firms have transfer pricing policies, and some firms have policies governing in- house versus external purchasing. Relatively few firms, however, have guidelines for issues such as revenue or cost sharing on joint projects, or capital budgeting procedures for joint projects. Without such guidelines, pursuing interrelationship will involve a great deal of administrative turmoil and protracted negotiations. General guidelines can greatly facilitate interrelationships, limiting incentives for business units to seek outside coalitions or avoid internal interrelationships.
Transfer pricing and purchasing rules often reflect a misunderstanding of interrelationships. Simple transfer pricing rules, based on market prices, treat business units as stand-alone entities in arm’s- length relationships with each other. This negates the logic underlying interrelationships, no matter how administratively appealing it may be. Interrelationships imply that transfer pricing and other decisions should be designed to improve the firm’s overall position and not the financial results of individual business units.88 For example, Perkin- Elmer has a system in which the selling division sells at market price, while the buying division buys at cost. Both have the incentive to do business, while the buying division sets prices based on the true cost to the corporation.89 Business unit goals also may need to be adjusted in order to make them consistent with transfer pricing rules. Business units that transfer at cost, for example, should not be held to firmwide profitability targets.
Purchasing rules are another area where administrative simplicity often outweighs strategic logic. Firms defeat the purpose if they adopt the hands-off view that units can buy from the “best” source, external or internal. Most firms that are successful at achieving interrelationships treat in-house purchasing as the assumption, and business units that supply sister units view them as their most important buyers. Senior management should clearly communicate this expectation throughout the firm, and ensure that business units who treat their sister units as unimportant buyers or suppliers are not rewarded.
Horizontal Incentives. The incentive system must recognize that the firm can gain from interrelationships, and should reward business unit and group managers for achieving them instead of encouraging them to concentrate on their individual results. It is also necessary to remove any biases in measurement that favor external or go-it- alone investments instead of joint efforts with other business units. In firms with important interrelationships, the incentive system should reward business units and their managers to some extent on group and corporate results as well as on business unit results. In nearly every firm I have observed that is successful at achieving interrelationships, compensation plans emphasize group or corporate performance. These firms have proven that business unit managers do not need to have all their compensation based on business unit results in order to be highly motivated. Tying compensation solely to business unit results reflects a simplistic view of motivation. Instead, business unit managements can and should be made part of the firm’s general management team through a broader basis of compensation.90 Performance measurement should differ for each unit. Performance targets should reflect the differing balance between individual business units’ results and their broader contribution to the firm through interrelationships. Senior management must accept the responsibility to convince all its business unit managers that this is fair and reflects a higher corporate purpose.
Incentives should contain a subjective component in firms with important interrelationships. A business unit’s contribution to the firm cannot usually be measured quantitatively. Any one quantitative standard will not be able to weigh all factors and may indirectly bias behavior against a firm’s interests. Instead, group and corporate management must be prepared to judge a business unit’s contribution to group or corporate strategy. While firms have traditionally avoided subjective incentives, top management must communicate to groups and business units a need for them and a sense of fairness in rewarding contributions to the firm as a whole.
3. Horizontal Human Resource Practices
A third aspect of horizontal organization is human resource policies. These are policies for hiring, training, and managing human resources that facilitate cross-business unit collaboration, as well as successful relationships between business units and centralized functions. As with horizontal systems, horizontal human resource policies should apply to an entire firm or to those parts with significant interrelationships.
Personnel Rotation among Business Units. The rotation of personnel among business units facilitates the achievement of interrelationships in a number of ways. It helps to reduce cultural and procedural differences among business units, creates personal relationships that facilitate joint projects, educates managers about areas of opportunity for interrelationships with other units, and promotes a corporate (or group) identity in addition to the business unit identity.16 Though there may be some cost in terms of training time and continuity when rotating personnel, the long-term benefits can be significant not only for interrelationships but also in retarding the onset of conventional wisdom in business units. Firms such as DuPont, General Electric, and Citicorp have active rotation programs that seem to have facilitated interrelationships.
Some Firmwide Role in Hiring and Training. A firm wide (or group) role in hiring and training can help build a corporate identity and an awareness of the overall interests of the firm. Corporate orientation and training programs can educate managers about other business units, and encourage personal relationships among incoming managers who will eventually be dispersed to different units. Ongoing management development programs can also facilitate interrelationships. Programs that bring managers from different units together not only can have an educational function, but also develop understanding and encourage personal relationships. Such a corporate role in orientation and training need not reduce the ability of business units to hire personnel that fit their needs.
Promotion from Within. Promotion from within tends to reinforce a corporate perspective, and can lead to managers adopting a longer time horizon. Both of these effects can facilitate interrelationships. Home-grown managers not only tend to identify more strongly with a firm, but are also more likely to develop a network of personal relationships within the firm that facilitates horizontal collaboration. While there are risks of reinforcing conventional wisdom, a general preference to promote from within (though not necessarily from within the same business unit) can be important to firms with strong interrelationships.
Cross-business Unit Forums and Meetings. Carefully designed meetings that bring managers from different business units together can facilitate the discovery and achievement of interrelationships. It is particularly effective in such meetings to ask managers to brief their peers about their respective businesses, and to encourage group discussions of issues that cut across unit lines.
Education on Interrelationship Concepts. It is vital that key managers understand the strategic logic of interrelationships and have a language system for discussing and an analytical framework for identifying them in their own businesses. This education can be part of management development programs, companywide meetings, and other forums. While top management often understand the concept of interrelationships, middle managers frequently do not and changes in their behavior will make or break the achievement of interrelationships in practice.
4. Horizontal Conflict Resolution Processes
The fourth aspect of horizontal organization is management processes for resolving conflict among business units. Any successful organizational structure combines formal structures and systems with ongoing processes through which managers interact. While less tangible than structure and systems, these processes can be just as important to success, particularly where responsibilities are not clear and frequent interaction among organizational units is necessary.
Achieving interrelationships nearly always involves the sharing of authority, the need for frequent coordination, and subjective performance evaluation. Hence processes for resolving conflict among business units are vitally important to achieving interrelationships. The processes themselves vary greatly from firm to firm, though senior management always plays an important role by setting the tone for how business units should interact and by acting as final arbiters of any disputes. What is important is not the exact form of the process in a firm, but the existence of some process that is managed by group, sector, and corporate management which is perceived as fair.
5. The Corporate Role in Facilitating Interrelationships
A purely bottom-up approach to interrelationships rarely succeeds. Chief executive officers can have a major impact on the achievement of interrelationships through their behavior, as can other line executives above the business unit level. There are many opportunities available to senior management to define a larger corporate purpose, to stress the importance of interrelationships, and to discourage parochial behavior by business unit, group, and sector managers. A strong set of firmwide values and a strong corporate identity are vital links in reducing cynicism toward committees, resolving conflicts, and so on.
One important way to reinforce interrelationships is through articulating a unifying theme. A unifying theme at the corporate, sector, and group levels that stresses interrelationships can be a powerful tool for motivating managers to find and implement them. It should be prominently and repeatedly stressed by senior management both externally and internally, and at all levels of the company. NEC Corporation, for example, has the theme of “C&C” (computers and communications), which symbolizes the converging of electronics and communications technology into integrated C&C systems. Going hand in hand with the theme is a diagram that vividly displays the merging of the technologies. This theme is a constant one in top management speeches, annual report copy, and internal discussions. NEC’s managers at all levels understand the theme, and it has reinforced the search for interrelationships by business units.
Interrelationships are also facilitated if the corporate identity is displayed prominently in each business unit on logos, signs, and stationery. This does not imply the abandonment of valuable business unit trade names. Instead, it suggests that a firm should develop both its corporate identity as well as those of business units, within the firm and outside. This not only affects management’s view of themselves, but can directly facilitate the achievement of market interrelationships by making buyers more aware of the connection among business units.
6. Interrelationships and the Mode of Diversification
The achievement of interrelationships is facilitated by developing new businesses internally rather than acquiring them. Internal development is typically based on interrelationships, and organically grown units are likely to have strategies consistent with other parts of the firm. Shared value activities are more likely to be designed for sharing. Acquisitions, on the other hand, require that interrelationships be forged with a heretofore separate organization, with all the associated impediments. Acquisitions also raise the odds that compromises in strategy will be necessary to pursue interrelationship opportunities.17 Firms such as IBM, Kodak, GE, DuPont and Procter & Gamble, which have successfully exploited interrelationships, have traditions of creating many businesses internally.
The difficulties posed by acquisitions for achieving interrelationships do not imply that firms should never make acquisitions. Rather, they suggest that firms apply a rigorous test in choosing between acquisitions and internal entry, and that horizontal strategy issues be prominent in the search for acquisitions. The choice of acquisition should reflect the added difficulty of achieving interrelationships with acquired firms. Many firms have chosen to acquire to minimize start-up losses and to have a quicker impact on revenues, sacrificing interrelationships in the process that were important to the firm’s long term strategy.
If acquisition emerges as the best way to enter a new business, horizontal strategy issues should not be ignored. Unless an acquisition is in an unrelated field, the ability to integrate the acquired firm in a way that achieves interrelationships must be weighed. Many acquirers almost guarantee that interrelationships will not occur by promising complete autonomy to the management of prospective acquisitions. For example, in Transamerica’s purchase of Fred S. James Company, an insurance broker, Transamerica pledged that the James Company would be independent and report directly to the CEO instead of through Transamerica’s insurance group. Despite the fact that the James acquisition offered great possibilities for achieving interrelationships, achieving them has been made substantially more difficult, at least for a time.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.