Tangible interrelationships among business units

The value chain provides the starting  point  for the analysis of tangible interrelationships.  A business unit can potentially share any value activity with another business unit in the firm, including both primary and supporting activities. For  example, Procter  & Gamble enjoys interrelationships between its disposable diaper and paper towel businesses. Certain raw materials can be procured and handled jointly, the   development  of  technology on   products  and  processes   is shared, a joint  sales force sells both  products  to supermarket  buyers, and both products are shipped to buyers via the same physical distribution system. The interrelationships are shown schematically in Figure 9-1. As this example illustrates, tangible interrelationships between two business units can involve one or many value activities. If most value activities are shared between two   business   units,   however,   they   are not strategically distinct business units but in fact one business unit.

Sharing an activity can lead to a sustainable competitive advantage if the advantage  of sharing  outweighs  the cost, provided  the sharing is difficult for competitors to match. Sharing leads to a competitive advantage if it reduces cost or enhances differentiation. Sharing always involves some cost, however, that ranges from the cost of coordinating among  the business units involved   to   the   need   to   modify   business unit strategies to facilitate sharing.

1. Sharing and Competitive Advantage

Sharing a value activity   will   lead   to   a   significant cost advantage if it involves an activity that represents a significant fraction of operat­ ing costs or assets (I term this a large value activity), and   sharing lowers the cost of performing the activity. Sharing will significantly enhance differentiation if it involves an activity im portant to differentia­ tion in   which   sharing  either increases   the   uniqueness   of the   activity or reduces the cost of being unique. Thus sharing leads to a competitive advantage if it affects the drivers of cost position or differentiation described in Chapters 3 and 4.


Sharing will have a material  impact  on   overall cost position only if the value activities involved are a significant proportion  of operating costs or assets, or will be in the future.  In the Procter  & Gamble example, the shared  value activities add   up   to   more  than  50 percent of revenues. Sharing   does   not   necessarily   lower cost,   however,   unless it favorably affects the other  cost drivers  of  an   activity.   Sharing has the potential to reduce cost if the cost of a value activity is driven by economies o f scale, learning, or the pattern o f capacity utilization.  Sharing increases the scale of an activity and increases the rate of learning if learning is a function of cumulative  volume.8 Sharing may also improve the pattern of capacity utilization  of an activity if the involved business units utilize the activity at different times. For exam­ ple, a sales force or   logistical system   that  is utilized   heavily during only part of the year serving one business unit may be utilized during other periods by another.  All three benefits of sharing for cost position can potentially occur simultaneously.

Sharing activities among business units is, then, a potential substi­ tute for market share in any one business unit. A firm that can share scale- or learning-sensitive activities among  a number of business units may neutralize the cost advantage of a high market share firm compet­ ing with one business unit. Sharing is not exactly equivalent to increas­ ing market  share in one business unit, however, because a   shared activity often involves greater  complexity  than  an equivalent scale activity serving one business unit. The complexity of a shared logistical system involving ten product varieties may increase geometrically com­ pared to one that must handle only five. The added complexity becomes a cost of sharing.

If scale, learning, or the pattern  of utilization are not  important cost drivers, sharing is likely to raise costs. Firms  often mistakenly pursue sharing solely because of excess capacity in an activity. If shar­ing does not lead to scale or learning advantages or improve the long­ term pattern of utilization, however, the costs of sharing  will usually mean that sharing creates a disadvantage.  The correct solution would have been to reduce capacity in the activity rather than share it.

Figure 9 -2 illustrates how these principles can be used to highlight activities where sharing is potentially im portant to cost position. Inter­ relationships involving value activities in the upper  right-hand  quad­ rant of the diagram are of potentially greatest significance due to their large costs and sensitivity to scale, learning, or utilization. Interrela­ tionships involving   value   activities   in   the   upper  left-hand   quadrant are not currently im portant  because sharing  will not  reduce  cost, though the value activities represent a large fraction of costs or assets. However, changes  in the technology  for   performing  such   activities can quickly make interrelationships crucial if their cost becomes more sensitive to scale, learning, or utilization. The change  in order process­ ing technology from manual systems to on-line computers in many distribution industries, for example, has begun to create important advantages from sharing order processing across related product lines. Interrelationships involving value activities in the lower right-hand quadrant can become  im portant  for cost position   if changes  in the cost structure raise the percentage of operating costs or assets they represent. The increasing capital cost of a plant and supporting infra-structure, for example, will raise the potential advantage of sharing facilities.

Figure 9 -2 .    Shared Value Activities and Cost Position


Sharing affects differentiation in two ways. It can enhance differen­ tiation   by increasing   the   uniqueness   of  an   activity,   or  it can   lower the cost of differentiation. Chapter  4 described  how   many  activities can affect buyer value and, thus, differentiation. Sharing will be most important to differentiation if it affects value activities that  are impor­ tant  to   actual  value or to   signaling value.   In   consumer  electronics, for example, sharing product development is im portant to differentia­ tion because differentiation is heavily affected by product design. Shar­ ing will also be im portant  to differentiation where  it reduces the cost of expensive forms of differentiation, such  as an extensive sales and service network (e.g., IBM in office products).

Sharing can make an activity more  unique  both  directly and through its impact on other drivers of uniqueness. Sharing enhances uniqueness directly if the shared activity is more  valuable to buyers because it involves more than one business unit. Selling several products through  the same sales force may   increase convenience for the buyer, for example, or allow for the   differentiation   advantages  of  bundling (see Chapter 12). In telecommunications,  for example, buyers want system solutions and one-vendor accountability.  Similarly, joint prod­ uct development may lead to greater compatibility among related prod­ ucts. Sharing may also increase   uniqueness   indirectly,   through increasing scale or   the   rate   of learning  in   an   activity.   As   described in Chapter 4, both scale and learning may allow an activity to be performed in a unique way.

Sharing can   reduce  the cost of differentiation through  its impact on the cost drivers of differentiating activities. Sharing product develop­ ment among business units can reduce the cost of rapid model changes if product development is subject to economies of scale, for example, while shared procurement can lower the cost of purchasing  premium quality ingredients or components. The added complexity of a shared activity is a cost of sharing,  however,   that  must  be weighed against the benefits to differentiation.


Sharing an activity will usually not  lead to an   equal improvement in cost or differentiation for each of the business units involved. Differ­ences in the scales of the business units are one im portant  reason. A business unit that uses a large volume of a component may not gain much of a cost advantage from sharing fabrication of the component with a business/ unit  that  uses a small volume  of it. However,  the unit that  is the   smaller user may   enjoy  a tremendous  improvement in cost position through  gaining the benefits of the larger unit’s scale. The advantages to the unit that is the smaller user may allow it to substantially   improve   its   market   position.   Given   such   asymmetries, it should come as no surprise that larger  business units are rarely enthusiastic about interrelationships with smaller units.10

Differences in the structure  of the industries  in which  business units compete  may  also lead to differential benefits from sharing. A small improvement in cost position may be very im portant in a com­ modity industry, for example, but less significant in an industry where product differentiation is high and firms compete on quality and service. The significance of an interrelationship  also depends  on the strategies of the business units involved. An interrelationship may lead to unique­ ness that is valuable for one business unit but much  less valuable to another. It is rare, then, that all the business units involved in an interrelationship   will perceive it   as equally   advantageous.  This point has important implications  for horizontal strategy  and for the ability of senior managers to persuade business units to pursue interrelation­ ships.

2. The Costs of Sharing

Interrelationships always involve a cost, because they require busi­ ness units to modify their  behavior  in some way. The  costs of sharing a value activity can be divided into three types:

  • cost of coordination
  • cost of compromise
  • cost of inflexibility

The cost of coordination is relatively easy to understand. Business units must  coordinate  in such   areas as scheduling, setting   priorities, and resolving problems in order to share an activity. Coordination involves costs in terms of time, personnel, and perhaps money. The cost of coordination  will differ   widely   for different   types   of sharing. A shared sales force requires   continual  coordination,  for example, while joint procurement may require nothing more than periodic com­ munication  to determine  the quantity  of a purchased  input required per period by   each   business   unit.   Different business   units   may   also see the cost of coordination differently. The costs of coordination  are often viewed as higher by smaller business units, who see a continual battle over priorities and the risk of being dictated to by larger units. Business units that  do   not   manage  a   shared  activity   or   are   located at a distance from   it also   tend   to   fear that  their  best interests   will not be protected.

The cost of coordination  will be influenced by the potentially greater complexity of a shared activity noted earlier. The added com­ plexity involved in sharing will vary, depending on the specific activity. Sharing a computerized order entry system among business units will usually add little complexity, for example, in contrast  to sharing a logistical system between two business units with large product lines. The added complexity of a shared activity can sometimes  offset econo­ mies of scale or reduce the rate of learning compared  to an activity serving one business unit. Thus  sharing  can   both  increase   scale and/ or learning at the same time as it alters the relationship between  scale or learning and cost.   This   is im portant  because   changing  the   scale- or learning-sensitivity of an activity may   benefit   or   hurt   the   firm’s cost position depending on its circumstances.  Computerization  gener­ ally has reduced   the   cost of handling  the   complexity of sharing. That is one of the reasons why interrelationships  are getting more important. A second, often more important, cost of sharing  is the cost of compromise. Sharing  an activity requires  that an activity be performed in a consistent way that may not  be optimal  for either of the business units involved.   Sharing   a   sales   force,   for   example,   may   mean   that the salesperson gives less attention   to   both  business   units’  product and is less knowledgeable about either product than a dedicated sales force would be. Similarly, sharing  component  fabrication  may mean that the component’s design cannot exactly match one business unit’s needs because it must  also meet another’s.  The  cost of  compromise may include costs not  only in the shared  value activity but  also in other linked value activities. Sharing a sales force, for example, may reduce the availability of salespeople to perform  minor  service func­ tions, thereby increasing the number of service technicians required.

Policy choices required to facilitate sharing,  then, can adversely affect the cost or differentiation of one or more of the business units involved.

That  business units must  in   some way   compromise  their  needs to share an activity   is almost  a given. The  cost of compromise  may be minor, or   may   be great  enough  to   nullify   the   value of sharing. For example, attempting  to share a logistical system among  business units producing products of widely differing sizes, weights, delivery frequencies, and sensitivities to delivery time may well lead to a logisti­ cal system that is so inappropriate to any of the business unit’s needs that the cost savings of sharing  are overwhelmed.  However,  sharing a brand name or sharing  procurement  of commodities  may involve little or no compromise.

The cost of compromise to share  an activity will often differ for each of the affected business units.   A   business unit  with   a product that is difficult to sell may have to compromise  the most in employing a shared sales force, for example. The  cost of compromise  may also differ because the particular  value   activity   plays a   differing   role in one business unit compared to another because of its strategy. The compromise involved in joint  procurement  of a common  grade   of milk or butter may be more serious for a business unit of a food manufacturer pursuing a premium quality strategy than it is for one attempting to be the   low-cost producer  if the   common  grade is not top quality.

The cost of compromise  required  to achieve an interrelationship is much less if the strategies of the business units involved are consistent with respect to the role of the shared value activity. Achieving such consistency often involves little or no sacrifice to the affected business units i f their strategic directions are coordinated over time. A particular component can be highly   effective in   the   products  of two business units if both units design their products  with the component  in mind, for example. If the design groups  of the two business units are allowed to proceed independently, however, the chances are high that the com­ mon component will not meet either business unit’s needs. Consistency among business units’ strategies that facilitates sharing will rarely hap­ pen naturally.   An  example   of both  the   opportunities  to   shape   the cost of compromise  and the indirect  costs of compromise  that  must be weighed comes from General Foods’ successful new Pudding Pops. Pudding Pops   were designed   to   melt  at   a higher  temperature  than ice cream so that distribution then could be shared with General Foods’ Birds Eye frozen vegetables. While   frozen   foods   are   transported  at zero degrees Fahrenheit, ice cream must be transported at 20 degrees below zero or it will build up ice crystals. While the benefits in shared logistics were clear, however, sharing had some  unforseen consequences elsewhere in the value chain. Because Pudding  Pops had to be ordered by supermarket  frozen food managers  along   with   vegetables, instead of with other freezer case novelty items, Pudding  Pops  were often forgotten. As this example illustrates, the benefits and costs of an interrelationship must  be examined  throughout  the value chain and not just in  the activity shared.

The cost of compromise is frequently reduced if an activity is designed for sharing rather than if previously separate  activities are simply combined or if an activity designed to serve one business unit simply takes on another with no change in procedures or technology. Recent events in financial services have highlighted this point. Merging computer  systems   initially   designed   for   separate  financial   products has proven difficult, though  a system designed to process many  prod­ ucts would be effective. Similarly, attempting  to sell insurance  and other financial products through a distribution  system designed for selling stocks and bonds  has   not  served   any   of the   products  very well and has created organizational problems. However, a new concep­ tion of a brokerage office is emerging that combines brokers, customer service personnel to handle simple problems and screen clients, and specialists to sell other financial products together with a new shared information system. The  cost   of compromise  in   sharing   distribution is likely to be much less as a result.

The third  cost of sharing is the cost o f inflexibility. Inflexibility takes two forms: (1) potential difficulty in responding  to competitive moves, and (2) exit barriers. Sharing  can make  it more  difficult to respond quickly to competitors because attempting  to counter a threat in one business unit may undermine or reduce the value of the interrela­ tionship for sister business units. Sharing  also can raise exit barriers. Exiting from a business unit with no competitive advantage may harm other  business units sharing  an   activity   with   it.12 Unlike other  costs of sharing, the cost of inflexibility is not an ongoing cost but a potential cost should the need for flexibility arise. The  cost of inflexibility will depend on the likelihood of the need to respond or exit.

Some costs of coordination, compromise, or inflexibility are in­ volved in achieving   any   interrelationship.   These   costs,   particularly any required compromise to achieve an interrelationship, will be very real concerns raised by business units when sharing  is discussed. They may appear far more obvious than  the advantages of the interrelation­ ship, which   may   appear  theoretical  and  speculative.   Business units will also tend to view a potential interrelationship in the light of their existing strategy, rather than weigh its cost if their strategies are modi­ fied to minimize the costs of sharing. Finally, the value of interrelation­ ships is often clouded by organizational issues involved in sharing, including those of turf and autonomy which are addressed in Chapter 11. Thus business units can sometimes oppose interrelationships that may result in a clear competitive advantage to them.

The advantages  of sharing   an   activity   must  be weighed against the costs of coordination,  compromise,  and  inflexibility to determine the net competitive advantage of sharing. The assessment of the com­ petitive advantage from an interrelationship must be performed sepa­ rately for each of the involved business units, and the value of an interrelationship to the firm as a whole is the sum of the net advantages to the involved business units. The  net competitive  advantage  from sharing an activity will almost inevitably vary for each business unit involved. In some cases, the   net value of an   interrelationship  may even be   negative   from   the viewpoint of one business   unit because of the required compromise,  but will be more  than  offset by a positive net value for other  affected business units. For  this reason and because of the natural biases in approaching  interrelationships  noted above, then, business units will often not readily agree on pursuing interrela­ tionships that  will benefit a firm as a whole. Interrelationships  will only happen under such circumstances if there is an explicit horizontal strategy.

While there are always costs of sharing,  forces are at work to reduce them in many  industries. The  new technologies described earlier in this chapter are having the effect of reducing the cost of coordination, compromise, and, to a lesser extent, the cost of inflexibility. Easier communication and better information systems make coordination eas­ ier. Low-cost computers and information systems also introduce flexi­ bility into value activities, or the technical  capability to minimize the cost of compromise.  Programmable  machines  and robots can   adapt to the   different   needs   of business   units   sharing  them.  Many  firms are only beginning to   perceive these   possibilities for lowering   the cost of sharing, but continue  to base their  assessment of interrelationships on outdated methods.

3. Difficulty of M atching

The sustainability of the net competitive advantage of an interrela­ tionship will depend  on the difficulty   competitors  have   in   matching it. Competitors have two basic options in matching the competitive advantage of an interrelationship: (1) duplicating the interrelationship, or (2) offsetting it through other means such as gaining share in the affected business unit  or exploiting a different interrelationship.  The ease of duplicating an interrelationship will vary depending on whether competitors are in the same group of related industries involved. The

most valuable interrelationships  from a strategic  point  of view are those involving industries that competitors are not in and that have high barriers to entry. For  example, Procter  & Gamble’s  advantage from  the interrelationships between its disposable diaper  and paper towel business units is quite sustainable because its paper  towel com­ petitors are blocked from entering the diaper  business by enormous entry barriers. A competitor may also face higher or lower costs of coordination and compromise than the firm in achieving an interrela­ tionship depending on the strategies and circumstances of its business units. Other things being equal, then, a firm should pursue most aggres­ sively those interrelationships that its competitors will find the most difficult to match because of the costs of  coordination  or compromise. The ability of competitors to offset an interrelationship is a func­

tion of whether  they can find some  other  way of improving  position in the affected business unit through  changes  in its strategy or by pursuit of different  interrelationships.13 Since nearly any value activity can potentially be shared, a competitor may be able to forge an interre­ lationship among a different group  of business units or share different value activities among the same group of businesses. If a firm, through pursuing an interrelationship, causes a competitor to respond by pursu­ ing different interrelationships, it faces the danger that the ultimate outcome will be an erosion in its relative position.

A final consideration in assessing the difficulty of matching an interrelationship is whether the same benefits can be achieved by a competitor through  a coalition or long-term  contract.  Sometimes a firm can gain the benefits of sharing through a joint venture or other form of coalition with another firm, without actually entering another industry. While such coalitions may  be difficult to forge, they should always be   considered   in   assessing   the   value   of an   interrelationship and how to achieve it.

4. Identifying   Tangible   Interrelationships

To aid in identifying the tangible interrelationships  present in a firm, a useful starting point is to catalog all the forms of sharing that occur in practice as well as the alternative ways they can create competitive advantage. Figure 9-3 divides forms of sharing into five categories: production, market, procurement, technology, and infra­ structure. I have   included   shared  human  resource  management  as part of shared  infrastructure.  It is useful to   separate  these categories of interrelationships because they raise different issues in sharing. Inter­ relationships ultimately stem from commonalities  of   various   types among industries, such as common buyers, channels, or production processes. These commonalities  define potential  interrelationships; whether the interrelationships lead to a competitive advantage  is a function of the benefits and costs   described   earlier.   The  sources   of each category   of interrelationship  and   the   possible   forms   of sharing to capture it are shown in Table 9-1.


Market interrelationships involve the sharing of primary value activities involved in reaching and interacting  with the buyer, from outbound logistics to service. W hen business units have only the geo­ graphic location of their buyers in common, sharing  is usually restricted to physical distribution  systems, order  processing,   and   to   servicing and sales if the products have similar sales and servicing needs. Richer opportunities for sharing are present when  business units also have common buyers, common  channels,  or both. If buyers or channels are the same, sharing of physical distribution or order processing sys­ tems among business units usually involves less complexity and lower costs of sharing. In addition, common  buyers  or channels  open up a wide variety of other possible forms of sharing shown in Table 9-1.

The subtleties in   identifying   potential  market  interrelationships stem from the   tendency  to   view   the   buyer  or channel  too   broadly. A wide variety   of products  and  services   are sold   to   oil companies, for example, including drilling equipment, refinery equipment, and transportation equipment such as oil tankers  and tanker trucks.  Thus oil companies might  be identified as a common  buyer  by business units in many industries. The  various  products  are sold to different parts of the oil company,  however,   which  often   have little contact with each other. Even within a product category such as drilling equip­ ment, equipment used in exploration is frequently sold to a different organizational unit than production equipment. Even in instances when the same unit of the oil company  makes the purchase, the particular individuals making  the purchase  decision or influencing the decision maker will often   differ for different pieces   of equipment.  Engineers may be responsible for choosing some high-technology equipment such as blowout  preventers, for example, while purchasing  agents often choose more standard items such as pipe.

Another example of viewing the buyer too broadly is becoming apparent from recent experience in financial services. The  traditional buyer of stocks and   bonds  is a   different   individual  than  the   aver­ age life insurance buyer. Both are different individuals than  the typical buyer of futures. These differences are nullifying simplistic efforts to achieve market interrelationships in financial services. Meaningful op­ portunities for exploring market  interrelationships   among  business units are usually present only where the decision makers for the prod­ ucts are the same or have some contact with each other.

The same issues arise in identifying common  channels.   Though two products might both be sold through department stores, few actual channel interrelationships are likely to be present if one is sold through discount department stores and the other through exclusive department stores such as Lord  & Taylor  and  Neiman-Marcus.  There  are also often different buying executives responsible for different classes of products in the same channel. In most supermarket chains, for exam­ ple, frozen foods are typically bought by a different buyer than  meats, even though some frozen foods are meat products. Even if the decision makers are different, however, opportunities for sharing  logistical and order processing systems may exist with both  common  buyers and common channels.

W hether products sold to a common buyer are substitutes or complements can also affect the advantage of sharing market-related activities. Shared marketing can yield less of a cost advantage when products are substitutes because the buyer  will purchase  either one product or the other but not both. However, offering substitute prod­ ucts to buyers can   reduce   the   risk   of substitution  because losses in one product can be compensated in the other (see Chapter 8). Joint marketing of substitutes can also enhance  a firm’s differentiation.

When business units sell complementary products  to common buyers, the advantage  of sharing is often greater  than  if the products are unrelated or substitutes. Complementary products usually have correlated demand  that  facilitates the efficient   utilization   of shared value activities, and other practices such as common branding, joint advertising and bundling. The strategic issues raised by complementary products, a subset of market  interrelationships,  are treated  separately in Chapter 12.

The potential competitive advantages of the im portant forms of market interrelationships  and  the most likely sources of compromise cost are shown in Table 9-2. Indirect activities such as m arket research, sales force administration and advertising production (e.g., artwork, layout) can often be shared  more  easily than  direct activities because they require lower compromise costs.14 The benefits of market interrela­ tionships can often be enhanced by changes  in the strategies of the involved business units that reduce the cost of compromise. Standardiz­ ing sales force practices, repositioning  brands  to make  their  images more compatible, or standardizing delivery standards or payment terms may make sharing easier, for example.


Interrelationships in production involve the sharing  of upstream value activities such as inbound logistics, component  fabrication, as­ sembly, testing, and indirect functions such as maintenance and site infrastructure. All these forms of sharing  require that  activities be located together. Doing so can lead to a compromise cost if the suppli­ ers or buyers of the business units sharing  the activities have greatly different geographic locations since inbound  or outbound freight costs may be increased. Shared procurement is different from production interrelationships because merging facilities is not  implied. Purchased inputs can be procured  centrally but  shipped  from suppliers to dis­ persed facilities.

Production interrelationships can be illusory when apparently sim­ ilar value activities are examined closely. For example, though the machines themselves are generically the same, a job-shop  manufactur­ ing process for one product  may involve different machine  tolerances than another, or lot sizes or run  lengths can be quite different. As with market interrelationships, indirect value activities offer particu­ larly attractive opportunities for sharing  because the compromise costs are often low. For example, such activities as building operations, maintenance, site infrastructure, and testing laboratories can be shared despite the fact that the actual m anufacturing processes are different. Table 9-3 shows the potential competitive advantages of impor­tant forms of production interrelationships, and the likely sources of compromise  cost. The  balance  will depend  on the strategies of the involved business units. For example, two business units with differenti­ ation strategies are more likely to have similar needs in terms of compo­ nent  specifications, manufacturing  tolerances, and   testing   standards than  if one business unit  pursues  cost leadership  while another  offers a premium product.


Procurement  interrelationships  involve the shared  procurement of common  purchased  inputs. Common  inputs  are frequently present in diversified firms, particularly if one looks beyond m ajor raw materi­ als and pieces of capital equipment.  Suppliers   are   increasingly willing to make deals based   on supplying   the needs of plants  located around the world, and negotiate prices reflecting total  corporate  needs. Some firms go overboard  in   shared  procurements,  however, because they fail to   recognize the   potential  costs   of compromise  or they   establish a rigid procurement process that does not allow for opportunism in negotiating attractive opportunities.

The potential  competitive advantage  of shared  procurement and the likely sources of compromise cost are shown in  Table 9—4:


Technological interrelationships involve the sharing of technology development activities throughout the value chain. They  are distin­ guished from   production  interrelationships  because   their  impact  is on the cost or uniqueness of technology development, while production interrelationships involve sharing activities involved in the actual  pro­ duction of the product on an ongoing basis. It is im portant to recognize, however, that interrelationships in process development often occur together with production or m arket interrelationships.  Interrelation­ ships   in   process   technology   typically   grow   out  of interrelationships in the primary activities.

As with other forms of interrelationships, apparently promising technological interrelationships  can be illusory.   Scientific   disciplines that overlap for two business units may be of m inor  importance  to success compared to scientific disciplines that do not overlap. Harris Corporation, for example, thought it could reduce  the development expense involved in entering word  processing through  adapting  soft­ ware from its text editing system sold to newspapers.  Harris discovered that the text editing   system   had  so many  features that  were   specific to the needs of newspapers that development  of a word  processing system had to start from scratch.

Truly significant technological interrelationships  are ones involv­ing technologies important  to the cost or differentiation of the products or processes involved, as microelectronics technology is to both tele­ communications and data processing. Many products have superficial technological similarities, making  the   identification of true  technologi­ cal interrelationships difficult. As with other types of interrelationships, the net competitive advantage of a technological interrelationship will differ depending on the industry and strategies of the business units involved. For example, the benefits of sharing microelectronics technol­ ogy will tend to be greater for two consumer products business units than for a defense business unit and a consumer business unit. Rockwell International learned this lesson when  it put  a team of engineers from its defense business into   its Admiral  TV   set division.   The   sensitivity to cost was so much  greater  in TV   sets than   in defense equipment that sharing did not succeed. The  same thing occurred  in business aircraft, where a design developed originally for military use (the Sabreliner) proved too expensive for the commercial market.

Table 9-5 shows the potential  competitive  advantages  that  can stem from sharing technology development as well as the most likely sources of compromise costs.


The final category of interrelationships involve firm infrastructure, including such activities as financing, legal, accounting,  and human resource management. Some infrastructure activities are almost always shared in diversified firms, as described in Chapter  2. In   most cases, the effect of sharing on competitive advantage is not great because infrastructure is not a large proportion of cost and  sharing has little impact on differentiation.   It is ironic,   therefore,   that  the vast majority of literature on sharing has been on sharing infrastructure— principally finance and the utilization of capital. Interrelationships in finance, particularly, have been seen as a significant benefit the diversified firm contributes to its business  units.

There are two basic sources of financial interrelationships: joint raising of capital and shared utilization of capital (primarily working capital). Economies of scale in raising capital may indeed exist, espe­ cially up to   a certain   quantity  of capital  needed.   Efficient utilization of working capital is made possible by countercyclical  or countersea- sonal needs for funds among  business units,   which   allows   cash freed up by one business unit to be deployed in another. Financial interrela­ tionships typically involve relatively few compromise costs that must be offset against   any   savings.   Moreover,   financial   interrelationships are among the easiest to achieve if they are present, perhaps a reason why they are  so frequently discussed.

The m ajor limitation to the competitive advantage of shared fi­ nancing is the efficiency o f capital markets. Scale economies in financ­ ing appear  to be moderate  for most  firms and lead to a relatively small difference in financing costs. Firms can also borrow  to cover short-term cash needs and lend excess cash in the highly   efficient markets for commercial paper and other  instruments,  mitigating the value of sharing  working  capital.   Hence  financial interrelationships are rarely the basis for creating a significant competitive   advantage, unless the size and  credit rating of competitors  differ greatly. Other forms of infrastructure interrelationships can be important in particular industries. Shared  infrastructure  for hiring and   training  is important in some service industries, while shared government relations can be significant in  natural resource firms.

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

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