Interrelationships among business units of the firm

There are three broad types of possible interrelationships among business units: tangible interrelationships, intangible interrelationships, and competitor interrelationships. All three types can have important, but different, impacts on competitive advantage and are not mutually exclusive: Tangible Interrelationships. Tangible interrelationships arise from opportunities to share activities in the value chain among related business units, due

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

Intangible interrelationships among business units

Intangible interrelationships lead to competitive advantage through the transfer of skills among separate value chains. Through operating one business unit, a firm gains know-how that allows it to improve the way another generically similar business unit competes. The transference of skills can go in either direction—e.g., from existing business units to a new business

Competitor interrelationships among business units

Competitor interrelationships are present when a firm actually or potentially competes with diversified rivals in more than one business unit. Any action taken against multipoint competitors must consider the entire range of jointly contested businesses. In addition, a firm’s competitive advantage vis-à- vis a multipoint competitor depends in part on the interrelationships that both

The need for explicit horizontal strategy of the firm

Organizational structure in most firms works against achieving interrelationships. However, organizational impediments alone do not explain why related business units, proceeding independently, will rarely optimize the competitive position of the firm as a whole. Without a horizontal strategy, business units may well act in ways that reduce rather than enhance their ability to exploit

Formulating horizontal strategy of the firm

Formulating horizontal strategy involves a number of analytical steps that flow from the framework described in Chapter 9: Identify all tangible interrelationships. The starting point in formulating horizontal strategy is to identify systematically all the tangible interrelationships that are actually or potentially present among a firm’s business units. The first step in doing so

Interrelationships and diversification strategy of the firm

Diversification based on interrelationships is the form of diversification with the greatest likelihood of increasing competitive advantage in existing industries or leading to sustainable competitive advantage in new industries. Both tangible and intangible interrelationships have an important role in diversification strategy. Tangible interrelationships should be the starting point for formulating diversification strategy. Intangible interrelationships

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 altogether. 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

Impediments to achieving interrelationships among Firms

Achieving tangible interrelationships requires a business unit to share activities in its value chain with other units while remaining a separate entity that acts independently in other value activities and maintains profit responsibility. Similarly, achieving intangible interrelationships requires the transfer of know-how among business units. The pursuit of interrelationships may well lead to joint

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

Managing horizontal organization

Achieving interrelationships is a function of instituting an array of horizontal practices. As many companies have discovered, organizational structure alone is not sufficient. Merely grouping related busi-nesses together will not guarantee the exploitation of interrelationships. Structure must be reinforced by group and sector executives who understand their roles as horizontal strategists, as well as

Control over complementary products of the firm

In nearly every industry, products are used by the buyer in conjunction with other complementary products. Computers are used with software packages and programmers, for example, and mobile homes are often used in mobile home parks—plots of land specially designed as permanent sites for mobile homes, complete with streets, electricity, and sewer hookups. Tennis

Bundling complementary products of the firm

Bundling is selling separable products or services to buyers only as a package, or “bundle.” For example, IBM bundled computer hardware, software, and service support for many years, while the manufacturers of antiknock additives for gasoline have traditionally provided various technical services along with their product all at a single price. Bundling in some

Cross subsidization over products of the firm

When a firm offers products that either are complementary in the strict sense of being used together or are purchased at the same time, pricing can potentially exploit the relatedness among them. The idea is to deliberately sell one product (which I term the base good) at a low profit or even a loss

Complements and competitive strategy of the firm

Complements are pervasive in industries. A firm must know what complementary products it depends on, and how they affect its competitive advantage and the structure of the industry as a whole. A firm must decide which complements it should produce itself, and how to package and price them. Bundling and unbundling of complements is

Industry Scenarios and Competitive Strategy under Uncertainty

How does a firm choose a competitive strategy when it faces major uncertainties about the future? Oil field suppliers currently are agonizing, for example, over how long the drop in drilling activity will last; the estimates range from less than a year to the rest of the decade. Industry structure is not static, and

Constructing industry scenarios

An industry scenario is an internally consistent view of an industry’s future structure. It is based on a set of plausible assumptions about the important uncertainties that might influence industry structure, carried through to the implications for creating and sustaining competitive advantage. An industry scenario is not a forecast but one possible future structure.

Industry scenarios and competitive strategy of the firm

Having developed and analyzed a set of industry scenarios, the next task is to use them to formulate competitive strategy. Scenarios are not an end in themselves. Many companies falter in translating scenarios into strategy. The bulk of attention is often placed on developing scenarios and not on determining their implications. There is also

Scenarios and the planning process of the firm

Every plan is based on an industry scenario in one form or another, though the process is frequently an implicit one. The use of explicit industry scenarios brings the uncertainty in planning out into the open, and bases strategy on a conscious and complete understanding of the likely significance of uncertainty for competition. The

The process of entry or repositioning of the firm

Defensive strategy rests on an acute understanding of how a challenger views the firm and on the perceived profitability of the challenger’s various options for improving position. The formulation of defensive strategy must begin by recognizing that an attack by either a new or an established competitor is a time-phased sequence of decisions and