Organizational mechanisms for achieving interrelationships among Firms

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 indus­ tries involved.

Companies tend to react in one of two broad ways to these organi­ zational 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 dis­ putes and dealing with unclear accountability, and opts for extreme decentralization. In other  companies,  however,   there   is   recognition that the benefits of interrelationships are so im portant that  the tradi­ tional ways of managing diversity m ust 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  horizon­ tal 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 chan­ nel focus committees.
  • Horizontal systems. M anagement systems with a cross business unit dimension, in areas such as planning, control,  incentives and capital budgeting.
  • Horizontal human resource practices. Hum an 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 hori­ zontal 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 m ajor role in horizontal strategy, depending on how groups  are managed.  Similarly, corporate  incentives systems can be entirely vertical or contain provisions that  encourage  cross­ business 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.7

No single device for encouraging  and   facilitating   cooperation among business units is sufficient to ensure that all strategically benefi­ cial interrelationships are achieved. Instead, a variety of practices that reinforce each other are required. Firm s 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 artic­ ulates 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 manage­ ment.

1. Horizontal Structure

Horizontal structure refers to tem porary or permanent organiza­ tional 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.


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 m an­ agement.   Groups  and sectors have long played an   important  role in the vertical organization.

Group and sector executives have tended  to play a relatively pas­ sive 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 im portant 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 princi­ ple 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 sig­ nificant sources of differentiation reside in product  positioning, adver­ tising, and distribution, groups should be formed around market inter­ relationships.   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-technol- ogy company  with a differentiation strategy, conversely, it may make more sense to group business units around  technologies, since exploit­ ing technological interrelationships will be a key to competitive advan­ tage. Tangible interrelationships should generally be the primary basis for   grouping,   with   intangible   interrelationships  serving   as   the   basis if tangible interrelationships are m inor 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 interre­ lationships, 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 know­ how, 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 dom inant 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 interre­ lated 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. W ithin a group, moreover, the interrelationship  present  will vary in strategic impor­ tance 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 strate­ gies 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 competi­ tive advantage   gained   against   the   cost,   using   the   tools   described   in Chapter 9.


Historically, the role of many  group  executives   has   sometimes been ambiguous and uncomfortable.9 Business unit managers  fre­ quently 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 im portant 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 mini­ portfolio managers, balancing  the capital  needs of different business units in the group.   W here there are interrelationships,  this conception of the group executive’s role is fundamentally flawed. G roup  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. Further­ more, 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 pro­ pose 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 m ultipoint competitors.  An in- depth  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 cen­ tralization 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.10


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 exam­ ple, 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   m aintain  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 struc­ ture 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  plan­ ning for centralized  activities   that  involve   the   affected business units is beneficial, as is regular  formal  contact  between activity managers and business units.


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 interrela­ tionships, however, because secondary  interrelationships  may be pres­ ent that go outside the group  but  that  also enhance  competitive advantage. Thus temporary and permanent cross-business unit mecha­ nisms that provide a means of achieving interrelationships not captured in the primary organizational structure are an im portant part of hori­ zontal 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.1 They should not be misconstrued as a “matrix” organization, but rather as devices to facilitate cross business unit cooperation.

Some of the most im portant organizational devices to serve this purpose are as follows:

  1. M arket focus W here a firm is organized around products or technologies, there are often im portant though secondary interrelationships around markets. McGraw-Hill, for example, has es­ tablished 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.   M cGraw-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 con­ sisting of senior managers  of business units serving or potentially serv­ ing 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.

M arket 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.

  1. Technology, channel and other interrelationship Standing committees or working groups involving a number of business units can also   be   created   around  other  im portant  interrelationships, in products (e.g. office automation), production, procurement, technol­ ogies, shared distribution channels, logistical systems, or order process­ ing systems. Their function  is analogous to market focus committees, and the principles for organizing them are similar. A senior line execu­ tive must accept overall responsibility for the effort, and regular prog­ ress reviews are required so that the effort will be taken seriously.
  1. Temporary Task While im portant  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-busi­ ness unit task forces. Temporary task forces are a very common mecha­ nism to achieve the transfer of know-how involved in intangible interrelationships and some tangible interrelationships  can be imple­ mented this way. In addition, tem porary  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 M cGraw-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 corpo­ rate 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.


A final structural device to facilitate interrelationships is the ap­ pointment 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 exam­ ple, a marketing staff executive can coordinate the procurement of advertising space to maximize bargaining leverage, or coordinate plans vis-a-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.


Cross-business unit organizations are difficult to manage, particu­ larly 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   organiza­ tions 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 cyni­ cism toward cross-business committees will yield a m ajor 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 im portant interrelationships,  however, a horizontal compo­ nent 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 plan­ ning department can accept responsibility for identifying interrelation­ ships 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 im portant  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 invest­ ments 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 im portant horizontal issues.

The various approaches to adding a horizontal component  to planning are not mutually exclusive. Usually, several should be pursued simultaneously. A t 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 gov­ erning in-house versus external purchasing. Relatively few firms, how­ ever, have guidelines for issues such   as   revenue   or   cost sharing on joint projects, or capital budgeting procedures for joint projects. With­ out  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 interrela­ tionships.

Transfer pricing and purchasing rules often reflect a misunder­ standing 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   m atter   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.12 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.13 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. Firm s 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 interrelation­ ships treat in-house purchasing  as the assumption,  and business units that supply sister units view them as their  most  im portant  buyers. Senior management should clearly communicate this expectation throughout  the firm, and ensure that  business units who treat  their sister units as unim portant 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 interrelation­ ships, 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 man­ agement team through a broader basis of compensation.14 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 stan­ dard will not be able to weigh all factors and may indirectly bias behavior against a firm’s interests. Instead, group and corporate man­ agement must be prepared to judge a business unit’s contribution  to group or corporate strategy. W hile firms have traditionally avoided subjective incentives, top management  m ust communicate  to groups and business units a need for them and a sense of fairness in rewarding contributions to the firm as a  whole.15

3. Horizontal   Hum an   Resource  Practices

A third aspect of horizontal organization  is human  resource poli­ cies. These are policies for hiring, training, and managing human  re­ sources that facilitate cross-business unit collaboration, as well as successful relationships between business units and  centralized  func­ tions. As with horizontal systems, horizontal human resource policies should apply to an entire firm or to those parts with significant interre­ lationships.

Personnel Rotation among Business Units. The  rotation  of per­ sonnel among business units facilitates the achievement of interrelation­ ships 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 orienta­ tion 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  manage­ ment development programs can also facilitate interrelationships. Pro­ grams that bring managers from different units together not only can have an educational function, but also develop understanding and en­ courage personal relationships.   Such   a   corporate  role   in   orientation and training need not reduce the ability of business units to hire person­ nel that fit their needs.

Promotion from   Within.   Promotion  from within tends to rein­ force a corporate  perspective, and can lead to managers  adopting a longer time horizon. Both of these effects can facilitate interrelation­ ships. 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 im portant to firms with strong interrela­ tionships.

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 man­ agers understand the strategic logic of interrelationships and have a language system for discussing and an analytical framework for identi­ fying 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 interrelation­ ships in practice.

4. Horizontal  Conflict Resolution  Processes

The fourth aspect of horizontal organization is management pro­ cesses for resolving conflict among business units. Any successful orga­ nizational structure combines formal  structures  and systems with ongoing processes through  which managers  interact. While less tangi­ ble 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 perfor­ mance evaluation. Hence  processes for resolving conflict among  busi­ ness units are vitally important to achieving interrelationships.  The processes themselves vary greatly from firm to firm, though senior management  always plays an im portant  role by setting the tone for how business units should  interact  and   by acting as final arbiters of any disputes. W hat  is im portant  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 suc­ ceeds. Chief executive officers can have a m ajor impact on the achieve­ ment 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 paro­ chial 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 artic­ ulating 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 Cor­ poration, 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. N EC’s manag­ ers 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 station­ ery. 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 m anagement’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 develop­ ment 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,  D u Pont  and  Procter  & Gamble, which   have   successfully   exploited   interrelationships,   have    traditions of creating many businesses internally.

The difficulties posed by acquisitions for achieving interrelation­ ships do not imply that firms should  never make  acquisitions. Rather, they suggest that firms apply a rigorous test in choosing between acqui­ sitions and internal entry, and that horizontal strategy issues be promi­ nent 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 im portant  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 Transam erica’s insurance group. Despite the fact that  the James acquisition offered great possibilities for achieving interrelation­ ships, 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.

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