Wednesday, November 16, 2011

Internal Organizational Analysis: Interrelationships among business units and Horizontal Strategy

This post again draws from one of the chapters from Michael Porter’s seminal work “competitive advantage” (Hey its strategy and I think it’s ok if I can’t seem to get enough of Porter).

The widely accepted belief in the 1960s and early 1970s was that combining different but related businesses could create value through synergy . However, by the late 1970s the enthusiasm for synergy decreased.Synergy was replaced by the idea of decentralization where business unit managers were given full authority and responsibility.Portfolio management (having different decentralized businesses) was the corporate strategy of the day.

However, the lack of enthusiasm for synergy was perhaps because firms couldn’t understand and implement synergy rather than a flaw in the concept of synergy. Today, owing to technological and competitive factors, firms can gain a huge competitive advantage if they identify and exploit the interrelationships among distinct businesses. Porter defines horizontal strategy as a “coordinated set of goals and policies across distinct but interrelated business units”. One might ask, what has changed for firms to embrace horizontal strategy (which seems to be a modified version of the erstwhile notion of synergy). Three major changes stand out:

a) Technology has made it interrelationships more achievable: Sophisticated information systems make it possible to have a unified (cut across businesses) and automated order processing and billing systems. Technology is also reducing costs to exploit interrelationships.

b) Multi-point competition is increasing: Multi-point competing firms are firms that compete with each other across several businesses. So Microsoft and google compete on browsers to search engines to mobile phones. Where a firm has multi-point competitors, the competitive advantage will be determined at a much broader level than at business unit level.

c) Diversification philosophy is changing: Nowadays it is possible for firms historically in the business of product development (Microsoft for example) to venture into services and consulting.

Three forms of interrelationships are:
a) Tangible interrelationships: Sharing of activities due to presence of common buyers, channels and technologies. Lead to competitive advantage because of lowering of costs.

b) Intangible interrelationships: This leads to competitive advantage through transfereof management know-how (transfer of generic skills)

c) Competitor interrelationships: These arise out of multi-point competition. Google, Microsoft and facebook not only compete for customers but also employees (vie for programmers)

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