Pitfalls in horizontal strategy of the firm

Although substantial competitive advantages can be gained from harnessing interrelationships, pitfalls exist in implementing horizontal strategy. The most serious pitfall is to ignore interrelationships  alto­ gether. Strategic planning  solely done by business units is not enough. At the same time, however, it can be an equally big mistake to assume that every relationship should be pursued.

1. Pitfalls in Ignoring Interrelationships

This chapter and Chapter  9 have raised numerous  pitfalls that result from ignoring interrelationships. A few notable  ones are men­ tioned here:

Misreading the Strategic Contributions o f Business Units.    A firm that fails to understand interrelationships will measure business unit performance on a stand-alone basis. It may, in the process, encourage units to take actions that will undermine interrelationships and erode overall firm position.

Misreading Position Vis-a-vis Key Competitors.    A firm that plans only at the business unit   level will fail to   diagnose its position   vis-a- vis key diversified competitors. It will also fail to formulate  moves against them that enhance overall firm position.

Portfolio Management. The presence of interrelationships, par­ ticularly tangible interrelationships, limits the usefulness of portfolio planning models as they are usually applied. Portfolio planning  models are narrowly conceived   tools designed   to aid   a diversified corporation in achieving a financially balanced  portfolio. In doing so, they may obscure the most essential strategic issue in constructing a firm’s portfo­ lio of businesses— the creation and enhancement  of interrelationships. When interrelationships  exist, decisions to build or harvest  business units cannot be made independently. The use of portfolio tools is particularly dangerous at the group  or sector  level, because business units within a group or sector tend  to have tangible interrelationships and need to be managed accordingly.

Corporate, sector, and group executives must not mistake portfolio planning for horizontal  strategy. Horizontal  strategy is more  difficult to formulate than portfolio strategy, but  is the way a diversified firm creates true economic benefits for its business units.

2. Pitfalls in Pursuing Interrelationships

It can be equally risky to pursue  interrelationships  indiscrimi­ nately:

Negative Leverage from  Sharing or Transfering Know-how.   Tan­ gible interrelationships usually involve some compromise in the strate­ gies of the business units involved. Because of this, pursuing ill-chosen interrelationships   can   harm  all   the   involved   business   units   for little net strategic gain. Transferring know-how also involves costs, and transferring   know-how  that  is in   fact   inappropriate  to   competition in another business unit in the name of supposed intangible interrela­ tionships can also do great harm. There must  be clear potential  net benefits of sharing or transfer  of know-how  for the related business units in order for an interrelationship to be strategically desirable.

Pursuing Interrelationships Involving Value Activities   That  Are Small, Have Few Scale or Learning  Economies, or Have  Little  Effect on Differentiation.      In their zeal to build a related diversification strat­ egy, firms can fall into the trap of making too much of an interrelation­ ship that, while indeed present, has little competitive significance. The presence of an interrelationship does not imply that a horizontal strat­ egy should be built around it, even if it is the only one available.

Illusory Interrelatedness. Often superficial similarities in tech­ nologies, logistical   systems,   fabrication  processes,   and   buyer  groups are not, in fact, a basis for shared activities. A technology that appears similar in two business units may, upon  closer scrutiny, be sold to buyers with very different needs that  compromise the ability to employ a shared R& D organization.  Despite the apparent similarity to outsid­ ers between offshore drilling for oil and  onshore  drilling, for example, few activities in fact can be shared by drilling contractors. Intangible interrelationships can also be illusory. There are many  generic similari­ ties among business units that are not im portant for competition.  Po­ tential interrelationships should be scrutinized carefully before being translated into shared activities or altered strategies, to prevent discov­ ering the lack of compatibility through a failure.

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

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