Cooperation and Autonomy: Managing Interrelationships docx

CHAPTER OUTLINE CASE 1 The Hewlett-Packard Company CASE 2 Hitachi Corporation of Japan Introduction Cooperation and Autonomy within the Organization Distinctive Competence Organizationa

CHAPTER OUTLINE

CASE 1 The Hewlett-Packard Company

CASE 2 Hitachi Corporation of Japan

Introduction

Cooperation and Autonomy within

the Organization

Distinctive Competence Organizational Structure Off-Line Coordinators Staffing

Reward and Performance Measurement Systems

Shared Values and Corporate Culture

Achieving Strategic Alignment

The Nature of Interrelationships Varying Emphasis on Cooperation Shifting the Balance between Cooperation and Autonomy

Factors Promoting Closer Cooperation

Change in Product Usage Technological Convergence The Rise of Multipoint Competition Reduced Emphasis on Acquisitions Increased Global Expansion Activity

Factors Promoting Greater Autonomy

Increased Acquisition Activity Need to Avert Creeping Bureaucratization Environmental Turbulence

Technology Fusion

The Problem of Internal Resistance

Resistance to Greater Cooperation Resistance to Greater Autonomy Dealing with Resistance to Change

Ethical Dimension

Fine-Tuning a Delicate Balance

Summary

Discussion and Exercise Questions

Cooperation and Autonomy:

Managing Interrelationships

WHAT YOU WILL LEARN

• The importance of interrelationships

in sustaining competitive advantage

• The need to balance cooperation andautonomy in supporting

• The concept of “technology fusion”

• Sources of internal resistance toorganizational change

The Hewlett-Packard Company was founded in the 1930s to

manufacture sophisticated electronic test and measurement

instruments such as oscilloscopes (used to visually display

elec-tronic wave lengths), elecelec-tronic counters (used to measure the

frequencies of emissions broadcast by radio stations), and

audio-oscillators (used to control the sound tracking in motion

pictures) Engineers and scientists in the radio, television, and

defense industries use these products daily Now,

Hewlett-Packard (or H-P) is a diversified technology company that is a

leader in designing and producing a broad array of

sophisti-cated electronics-based products and services, including

per-sonal computers, servers, electronic test equipment, laser and

ink-jet printers, specialized semiconductors, and even imaging

and word-processing software As of 1997, H-P’s revenues

were close to $43 billion (profits of $2.2 billion).

Life cycles for many of H-P’s products are short because of

rapid technological change Competitive success requires a

high rate of technological innovation and fast product

develop-ment to accelerate time-to-market Hewlett-Packard’s founders

believed the best way to encourage innovation was giving

sub-units freedom to try new approaches They devised a highly

autonomous divisional system defined by (1) small units (most

included fewer than 1,000 employees, even after the company

had grown to substantial size); (2) extensive decentralization

(each division conducted its own product development,

manu-facturing, and marketing); (3) small corporate staffs (so as not

to interfere with divisional autonomy); and (4) delegation of

major decisions to divisions.

This arrangement served Hewlett-Packard well for many

years However, the company was eventually forced to modify

it in favor of encouraging more cooperation among subunits Its

growing involvement in computers was the chief development

leading to this change By the 1990s, nearly half of

Hewlett-Packard’s forty divisions produced computers or

computer-related products Many opportunities for cooperation among

divisions existed For example, divisions could achieve product

compatibility, conduct joint marketing efforts, and share

pro-duction The company’s highly autonomous organization

offered few incentives to facilitate joint efforts.

Developments in the company’s test instruments business

also increased the need for cooperation By 1980, customers

were no longer using electronic test instruments as independent,

stand-alone items Instead, they were incorporating them into

larger computer-controlled and integrated systems As a result,

making test equipment and computers work together spurred

the need for cooperation and coordination divisional activities Additionally, during the mid-1980s, Hewlett-Packard entered the related field of engineering workstations and RISC-based microprocessors These two areas require tight linkages between functional and divisional activities.

Hewlett-Packard’s response to these developments was to modify its organizational style to encourage greater divisional cooperation It involved the following changes to the company’s formal structure:

• Consolidating several computer subunits exhibiting high potential to build interrelationships

• Grouping all computer units into a single large “subgroup”

• Forming a new unit to develop software for all Packard computers

Hewlett-Hewlett-Packard also instituted a number of other changes not directly related to formal structure:

• Program managers were assigned to direct projects needing cooperation from several divisions.

• Task forces were created to manage initiatives involving more than one division.

• Strategic plans were developed outside of specific divisions for multi-unit programs.

Not all Hewlett-Packard employees were pleased with these changes Divisional managers viewed them as intrusions on their cherished independence Many senior executives feared that changes would undermine H-P’s innovative spirit, which had been a long-standing competitive advantage Employees exhibited considerable ambivalence about the move to greater interdivisional cooperation Many aspects of the company’s tra- ditional highly autonomous organization were firmly in place The reduction in autonomy created substantial tension through- out the company Divisions now had to battle corporate man- agement for permission to introduce new products Also, more decisions were made in committees, which often resulted in no decision or selection of the weakest of all alternatives While encouraging interrelationships, these changes created

a new set of problems Several of H-P’s product introductions during the early 1990s were overpriced Products could not compete with those of more nimble rivals, including Sun Microsystems and even IBM The rise of new distribution chan- nels that sell personal computers directly to the consumer made H-P’s centralized price-setting policies obsolete overnight The use of product development committees slowed response to

changing markets The evolution of new technologies such as

RISC threatened to render obsolete many of H-P’s newest

prod-ucts In short, the move toward greater coordination made H-P

more bureaucratic at the same time that emerging technologies,

evolving distribution channels, Internet on-line ordering

sys-tems, and new competitors (Intel, Sun Microsystems) were

eroding H-P’s market position.

Now, Hewlett-Packard is in the midst of returning to its

entrepreneurial roots In the process, many of the steps taken

earlier to promote interdivisional cooperation are being

reversed These changes are enabling H-P’s various business

units to accelerate the pace of new product development to

out-maneuver and outgun Japanese rivals in such products as laser

printers, color printers, electronic instruments, calculators, and

office equipment In the past two years, H-P has introduced a

new line of hand-held computers to enter the market for

per-sonal digital assistants (PDAs) It has also regained market

share in sophisticated workstations from Digital Equipment

and is currently gunning for Sun Microsystems in specialized

UNIX-based and even Java-based applications Its

worksta-tions use the latest RISC-based microprocessor technology to

help scientists and designers conceive and test new products.

Moreover, H-P has become a growing force in the personal

computer market; the company has become one of the top five

PC sellers H-P has further strengthened its position in laser

printers, with faster introduction of its extremely popular and versatile Laserjet series Equally important, H-P remains a world leader in the field of ink-jet printer technology, a prod- uct popular in Europe and for industrial applications Now, Hewlett-Packard is rapidly gaining strength and stature as a leading designer of customized computer chips used in various commercial applications For example, Hewlett-Packard’s microcontroller chips are used in many laser printers and instruments produced by its Japanese rivals and alliance part- ners, including fast-moving Canon Canon and Hewlett- Packard have long collaborated in producing the “engines” that are the mechanical workhorses of laser printers Hewlett- Packard is even teaming up with rivals IBM and Sun Microsys- tems to develop fiber-optic networks that lay the foundation for taking advantage of the convergence between telecommunica- tions and computer networks H-P has also begun working with software giant Microsoft to combine new technologies that are required to build set-top boxes and control devices that will operate tomorrow’s interactive television systems These H-P-led ventures promise to accelerate video, data, and voice communications along the Internet between users of telecom- munications and consumer electronic applications Many of these network and Internet-related businesses are beginning to replace H-P’s traditional measuring instruments as the “flag- ship” products of the company for the next millennium.

Hitachi is one of Japan’s largest industrial companies It

manu-factures everything from electrical-generating equipment to

high-speed trains, robotics, semiconductors, and consumer

electronics Hitachi has been called Japan’s “General Electric”

because of its breadth of products, size, innovation, and long

history Since its founding in 1910, Hitachi has become a $63

billion company with over 750 subsidiaries and 300,000

employees Hitachi is an excellent model of Japanese corporate

management Its tightly interwoven diversification strategy,

interactive management processes, interunit cooperation, and

technology are considered first rate by many management

ana-lysts Hitachi’s diversification is based on core technologies

from which all of its key business units draw These core

tech-nologies form the basis for new products that often require

cut-ting-edge research and development in both basic and applied

sciences Despite recent economic difficulties in Japan and

Southeast Asia, Hitachi remains viewed as a formidable petitor and technological leader by all of its global competitors.

com-By encouraging strong technological interrelationships and sharing among its business units, Hitachi has built a strong sense of corporatewide mission and purpose Hitachi’s empha- sis on promoting a high level of interdivisional cooperation has enabled it to invest in leading-edge technologies faster than its competitors, since the business units share the costs of projects and new manufacturing technologies that no one unit could afford on its own Despite the company’s strong corporatewide policy of fostering interdivisional cooperation and sharing among business units, Hitachi is nimble enough to enter new markets quickly.

As one of Japan’s leading companies in its commitment to innovation, Hitachi spends more than 6 percent of sales on R&D annually Hitachi pours money into basic science and exotic new

technologies, such as biotechnology, artificial intelligence, and

advanced materials It is one of Japan’s leading earners of U.S.

patents for a range of technologies Hitachi’s corporate vision

for the future can be summed up in two words: synergy and

inte-gration Both words are found in all of Hitachi’s laboratories.

They show that the company intends to build on the shared

capa-bilities of its many subunits.

In its pursuit of synergy and integration, Hitachi executives

contend that size and flexibility are not incompatible Many of

Hitachi’s business units are very large; some are comparable in

size to major U.S corporations Its computer and

semiconduc-tor division alone is equal in size to Mosemiconduc-torola, a leading U.S.

semiconductor company Its high-speed trains, robotics, power

generation systems, and heavy industrial equipment businesses

equal the size of European giant ABB In its Japanese home

market, Hitachi is the number two computer maker It is right

below rival Fujitsu and just a notch ahead of IBM Japan The

$7 billion consumer electronics operation is a global giant in

its own right.

How does Hitachi balance its huge, broad-based

diversifi-cation with fast innovation of new products and ideas? While

stressing integration, Hitachi practices careful

decentraliza-tion Hitachi is a paradox when examining the management

practices of diversified companies It combines strong

decen-tralization with a corporate push for synergy and cross-unit

sharing among its many businesses Some of the key

manage-ment practices that support this careful balance include the

following:

• A long-standing corporate culture that fosters

decentralization and individual initiative, especially in

basic scientific research: This format is rare in a Japanese

society accustomed to hierarchy and conformity.

• Encouragement of individual Hitachi companies to operate

on their own: Business units are free to pursue their own agendas and markets as they see fit; their only constraint is

to exploit new opportunities for interrelationships and synergy with other Hitachi business units when they arise.

• Strong cooperation between labs and factories on applied research or giant projects: Cooperation between

laboratories and factories helps accelerate time-to-market for new products or technologies that no one lab or business unit can develop on its own.

• Frequent sharing of ideas among managers in highly fraternal meetings: Despite the high level of autonomy fostered among scientists, Hitachi managers and scientists frequently meet in informal discussion sessions to talk about their research and potential commercial applications that may ensue In this way, both scientists and managers are better able to view their counterparts’ ideas and agendas for channeling corporate resources and effort into new technologies.

Hitachi encourages its scientists to invite their foreign terparts to work in the company’s labs It also prides itself on keeping every division, even when it sustains losses Hitachi’s senior management believes that all businesses, no matter how mature they are, have intrinsic technological value Even when they lose money, these businesses are retained because of their unique experiences and insights into a given set of products Over time, if new technologies are available to resuscitate an older, declining product, those same Hitachi managers and resources are available to exploit the opportunity Hitachi believes, as many Japanese companies do, that all technologies, no matter how old they are, have a future life to them Old and new technologies can

coun-be blended to create new products, which may prove useful at a future time to some part of the organization.

INTRODUCTION

In this chapter, we focus on the issue of how senior managers can balance the need forinterdivisional cooperation and strong divisional autonomy within the organization Find-ing the right balance between cooperation and autonomy is crucial Firms compete as col-lective entities of people, businesses, and bundles of resources Autonomy and coordina-tion are required to build, and more importantly, to sustain competitive advantage Findingand striking the right balance between cooperation and autonomy determines how well

firms manage the interrelationships of activities among their subunits Interrelationships

refer to value-adding activities, skills, technologies, or resources which are shared amongthe firm’s subunits.3Interrelationships result when the firm’s divisions or other subunitswork with one another to sustain competitive advantage for the entire firm Building andmanaging interrelationships that span a number of business units are especially pertinenttopics for large firms with many subunits

Even when a firm has selected an organizational structure that seems to best fit itsoverall strategy, managers need to carefully balance divisional cooperation and autonomy

interrelationships: the

sharing of activities,

technologies, skills, and

resources among a firm’s

subunits, particularly

divisions or strategic

business units.

to foster interrelationships Interrelationships are horizontal in nature, in that they involve

value-adding activities that cut across divisions and businesses Successful management

of interrelationships that span divisions depends largely on how well senior management

can “tilt” or orient the firm toward the right balance of cooperation and autonomy

Man-aging this balance effectively requires blending the right structure with specific

organi-zation design practices that facilitate the right blend of autonomy and coordination.4

Strong interrelationships are key to sustaining corporatewide competitive advantage

Careful management of value-adding activities across divisions is needed to enable the

firm to strengthen and reinforce its distinctive competences systemwide The complex

and ongoing task for senior managers is to know when to shift the balance toward

increased cooperation or increased autonomy when the organization faces new

develop-ments Successful management of interrelationships is key to building a coherent

corpo-rate advantage

We begin by showing how a firm can use its organizational structure and supporting

design practices to promote cooperation or autonomy We then consider how a firm’s

strat-egy should influence the balance it strikes between these opposing organizational

orienta-tions Finally, we consider developments that can oblige a firm to shift its organizational

emphasis toward either greater cooperation or greater autonomy, and we examine likely

sources of resistance to shifts of this kind

COOPERATION AND AUTONOMY WITHIN THE ORGANIZATION

A variety of organizational structures and design practices can affect the degree to which

cooperation or autonomy is promoted within the firm Exhibit 11-1 portrays how a firm

can position itself along a continuum ranging from high levels of cooperation to high

lev-els of autonomy Let us examine how each of these organizational practices influences the

tilt toward cooperation or autonomy

Distinctive Competence

The nature of a firm’s distinctive competence plays an important role in influencing the

degree of cooperation or autonomy required to sustain competitive advantage Clearly, a

distinctive competence that extends across multiple lines of businesses or subunits

height-ens the need for cooperation to sustain corporatewide competitive advantage Distinctive

competences, skills, or technologies that are shared systemwide call for greater interunit

cooperation, particularly within firms that emphasize internal development of new

tech-nologies and skills A high level of cooperation is necessary to manage interactions among

activities performed in different parts of the firm This is especially important as the firm

seeks to gain scale economies of operations and learning

Conversely, a distinctive competence that is internal to any one particular division and

not easily shared with other units heightens the need for autonomy Fast response tends to

be more important than scale economies Firms whose competitive advantage is derived

from fast response, creativity, and product customization are likely to give their divisional

managers greater decision-making power Competences, skills, and technologies that are

not easily shared systemwide require increased divisional autonomy to sustain competitive

advantage at the divisional level

Organizational Structure

As mentioned in Chapter 9, modifications of the basic product division structure can do

much to promote greater cooperation For example, placement of strategic business units

(SBUs) into groups and sectors will generally enhance cooperation Product divisionsfacing similar markets or using similar technologies or joint production facilities arelikely to cooperate more when they are placed within the same SBU Matrix structures,despite their numerous disadvantages, also engender high levels of cooperation amongdivisions or subunits.

On the other hand, the conglomerate or holding company structure enhances divisionalautonomy Conglomerate structures emphasize a lean staff with few management layersbetween divisions and corporate headquarters They make no attempt to group or link busi-ness units together under larger SBUs The conglomerate structure facilitates a high level

of autonomy, enabling division managers to run their own operations As noted in Chapter

6, firms such as Tyco International, Textron, and Tenneco give their divisions great leeway

in planning and implementing individual division strategies

Geographic structures by their very nature promote a high degree of subunit autonomy.Recall that geographic structures work best when one market is unlike the next and when localconditions (requiring product customization and modifications) weigh heavily in strategy.Within this context, the use of a geographic structure facilitates the high degree of autonomyneeded to build competitive advantage at local levels Geographic structures thus promote thefast response capabilities needed to adapt to local market requirements and changes

e x h i b i t (11-1) Spectrum of Cooperation versus Autonomy

Cooperation Autonomy

1 Distinctive Competence

2 Structure

3 Staffing

4 Reward and Performance Measurement Systems

5 Shared Values and Corporate Culture

Shared and developed among SBUs

Sizable corporate staff;

large divisions, SBUs, sectors

Personnel rotated periodically across division lines

Performance measured somewhat subjectively;

rewards based in part on subjective measures and

on overall performance of the enterprise

(hierarchy-based)

Subunits are members of

a team; strong values emphasize belonging and cooperation among subunits

Competence specific to each division or SBU

"Lean" corporate staffs; small divisions, holding company format, or geographic structures

Personnel remain in same division throughout career

Performance measured objectively; rewards based entirely on performance of own division (performance- based)

Subunits are rivals competing for top performance; strong divisional identity and emphasis on individual performers

Off-Line Coordinators

A firm can increase cooperation among divisions by assigning individuals or committees

outside of the formal hierarchy to coordinate activities among subunits These individuals

and groups, often experienced managers and staff personnel, are referred to as off-line

coordinators The job of an off-line coordinator is to ensure that the firm’s

interrelation-ships are coordinated across divisional boundaries Off-line coordinators help oversee the

tasks of sharing resources, technologies, and skills between businesses They are “off-line”

in the sense that they are responsible only to corporate headquarters and thus do not owe

an allegiance to any one business unit or division These coordinators must work

exten-sively with personnel within subunits to achieve informal cooperation Off-line

coordinat-ing committees typically include all managers of a firm whose products have some

bear-ing on the skill or resource that is bebear-ing shared

Another device for increasing cooperation is use of informal integrators Informal

integrators serve a role similar to that of off-line coordinators Informal integrators act as

internal “referees” to resolve disputes and conflicts between divisional managers Conflict

may result from divisions pursuing different strategies and goals For example, at Procter

and Gamble, corporate facilitators encourage autonomous brand management teams to

share their knowledge of competitors and retailers with other teams P&G managers are

initially reluctant to share their ideas and insights, since many of them compete for the

same shelf space in grocery stores and other outlets P&G facilitators persuade managers

to share their insights by providing strong internal incentives for working together, such as

opportunities to lead the development and marketing of new products Facilitators also

emphasize that sharing does not necessarily result in cannibalization, loss of prestige, or

loss of market share for any concerned manager

Yet another device for fostering cooperation among subunits is use of internal task

forces Internal task forces serve as bridges that forge stronger interrelationships among

divisions Companies such as Allied-Signal, Chaparral Steel, Citizen Watch, Kodak,

Motorola, Nissan, and Procter and Gamble use internal task forces to achieve smoother

coordination of design and manufacturing of products among divisions For example,

Motorola encourages its division managers in R&D, manufacturing, and marketing to

serve on temporary task forces These task forces then plan new strategies for sharing

tech-nologies and production resources for individual products This joint effort helps

acceler-ate time-to-market for new products and facilitacceler-ates sharing of insights that may be

valu-able in designing new products that no one manager may have thought of individually

NEC of Japan uses many corporate-sponsored product planning committees and forums

to identify core technologies that could serve as the basis for building systemwide

interre-lationships It also uses both off-line integrators and product forums to encourage

cooper-ation between businesses Off-line integrators play an essential role in reconciling the

dis-parate needs of many businesses on a daily basis From a corporate perspective, the

purpose of numerous NEC product and technology development committees is to identify

new sources of potential interrelationships These NEC committees investigate, for

exam-ple, how new semiconductor-based technologies can be applied across computers,

com-munications, and consumer electronics NEC’s committees show how the innovations of

one business unit can be used to fertilize new products and markets in other divisions They

also try to convince divisional managers of the merits of sharing resources and ideas, and

of the benefit they can derive from innovations from other parts of the company

While off-line coordinators and internal task forces are used in many types of

compa-nies, they can be particularly helpful whenever a high level of coordination among

func-tions, divisions, or business units is desired They are particularly suitable when outright

off-line coordinator:

senior corporate staff member whose job is to manage and coordinate interrelationships among division or business units.

informal integrator:

people who work to resolve potential sources of conflict

or to promote better understanding of key issues between managers, usually

at a divisional or SBU level.

internal task force:

committees whose purpose

is to share knowledge and

to encourage joint development of technologies and products across divisions or business units.

consolidation of existing divisions and/or business units is unwarranted because nities for cooperation are too few to warrant full-scale consolidation or when combinedentities would be too large for effective supervision Off-line coordinators and internal taskforces offer ways to foster cooperation without drastically altering the firm’s divisionalstructure Extensive use of off-line coordinators will tilt a company’s organization towardthe left of the continuum shown in Exhibit 11-1; conversely, general avoidance of usingsuch coordinators will tilt it toward the right.

opportu-Staffing

The methods a firm uses to select and develop its managers and employees can do much

to influence the tilt between cooperation and autonomy over time Firms can use ment development programs to make the idea of systemwide thinking and cooperation formanagers easier to accept For example, development programs can emphasize the need toshare resources across business units Development programs can be used to show howparts of the company need to work together to build interrelationships to achieve goals that

manage-no single business unit can manage alone

The degree to which firms actively rotate their managers across divisions may alsoinfluence the cooperation/autonomy balance.5Transfer of managers throughout the com-pany can instill an appreciation for systemwide cooperation and thinking Managers whoserve in different divisions throughout their careers are better able to understand and buildinterrelationships On the other hand, firms that keep their managers and personnel in thesame division for long periods foster personal commitment and loyalty to the division, asopposed to the company Managers then feel less obligation to share resources or ideaswith their counterparts in the company, especially if managers are competing against eachother for promotions and rewards

Reward and Performance Measurement Systems

Hierarchy-based reward systems, with their emphasis on close superior–subordinate tionships, work well to promote cooperation and interrelationships among subunits.6Recall that hierarchy-based systems use informed subjective criteria and judgment to eval-uate performance Qualitative and quantitative performance metrics are used Oftentimes,division managers are evaluated according to both corporate, systemwide measures of per-formance and the performance of their own subunits

rela-On the other hand, performance-based reward systems facilitate high divisional omy Recall that performance-based systems focus predominantly on objective, narrowlydefined measures of output and results Bonuses and promotions are based on achievement

auton-of individual divisions, with little attention paid to subjective factors, such as cooperationacross subunits

Shared Values and Corporate Culture

Shared values and corporate cultures that cherish a sense of corporatewide feeling andbelonging encourage systemwide cooperation and building of interrelationships Compa-nies such as Motorola, IBM, and Unilever teach and promote values that orient managers

to think of the company’s larger interests before those of their divisions This emphasis onthe overall company makes identifying and building useful interrelationships an easier task

On the other hand, values that cherish individual initiative and strong independence fosterdivisional autonomy At companies such as Johnson & Johnson (J&J) and PepsiCo, values

based on risk taking and initiative spur competition between divisions, regions, and product

brands Systemwide cooperation is not considered nearly as critical as local initiative to build

and sustain competitive advantage J&J allows its 50-plus business units to cultivate distinctly

separate cultures This autonomy fosters strong initiative and risk taking at the divisional level

Thus, firms can use many different organization design practices to promote

coopera-tion or autonomy The way a firm uses such practices will posicoopera-tion it somewhere along the

continuum shown in Exhibit 11-1

ACHIEVING STRATEGIC ALIGNMENT

The position a firm chooses along this continuum must be carefully aligned with the

strategies a firm pursues in two key areas: diversification and international expansion

To explore the nature of this alignment, we consider here two broad approaches in each

of these areas With respect to diversification, we consider strategies of related and

unre-lated diversification; with respect to international expansion, we focus on global and

multidomestic strategies In general, related diversification and a global approach to

conducting worldwide business require a position toward the left of the continuum

shown in Exhibit 11-1, while unrelated diversification and a multidomestic approach to

conducting worldwide business require a position toward the right of the continuum If

we now combine these four different strategies, the matrix shown in Exhibit 11-2 results

As discussed in more detail below, each of the four quadrants, or cells, of this matrix

necessitates a somewhat different balance between cooperation and autonomy to

man-age interrelationships most effectively (See Exhibit 11-3 for summary.)

The Nature of Interrelationships

Companies in Cell 1 of Exhibit 11-3 pursue a combination of related diversification and a

global strategy to sustain systemwide competitive advantage Examples of companies in

Cooperation and Autonomy: Various Routes to Diversification

and Global Expansion

e x h i b i t (11-2)

Cell 1 include Sony, Honda, Motorola, Ericsson, IBM, Lucent Technologies, Intel,Komatsu, Toshiba, NEC, and Sharp These firms have developed a series of distinctive com-petences and technologies that span their divisions and subsidiaries around the world Many

of the interrelationships found among their divisions are based on tight sharing of R&Dcapabilities and production facilities and on joint investment in cutting-edge technologiesthat can only be commercialized and developed at the corporate level Thus, these interre-lationships extend across multiple divisions and business units Moreover, they form thebasis of new core technologies and product components that are then incorporated in endproducts

Companies in Cell 2 pursue a combination of unrelated diversification and a global egy Examples of companies in Cell 2 include the former Westinghouse Electric, Thorn-EMI, ITT, and Tenneco These companies are positioned in a broad range of unrelated, non-linked businesses, many of which share little potential for building strong interrelationshipsamong them Since unrelated diversification is not based on extending an underlying dis-tinctive competence, few interrelationships can be built and used to sustain systemwidecompetitive advantage Several of the business units in these firms have attempted to pur-sue a global strategy For example, when it was owned by Tenneco, J.I Case pursued aglobal strategy to build a stronger market presence outside the United States against com-petitors such as Caterpillar, Komatsu, Allis-Chalmers, and Hitachi Likewise, during the1970s and 1980s, several Westinghouse units (power transmission and distribution, robot-ics, and motors) have pursued a global strategy to build market share abroad

strat-Companies in Cell 3 of Exhibit 11-3 pursue a combination of related diversificationand multidomestic strategies of expansion These companies include Coca-Cola, Pep-siCo, Black and Decker, Colgate-Palmolive, Hershey Foods, Procter and Gamble,Henkel, Unilever, and Kao Many of these consumer goods companies have built a widearray of personal and health care products However, building strong interrelationships

e x h i b i t (11-3) Cooperation and Autonomy: Managing Interrelationships

Synergy based on technological, production, and/or marketing interrelationships Competencies, skills, and technologies are system wide Cross-subsidization tactics to compete globally.

Marketing-based interrelationships lay the groundwork for potential cooperation Shared image, product quality, and multipoint competition in U.S Compete in individual markets locally and separately.

No underlying competence or skill

to define sharing or interrelationships Compete in individual markets locally and separately.

based on extensive production or technology sharing is difficult since many of these

companies’ products are perishable, easily differentiated, and require extensive

modifi-cation or customization to specific market needs Nevertheless, strong marketing-based

interrelationships exist in terms of distribution skills, product bundling issues,

confor-mance to product quality requirements, and use of similar channels Moreover, these

companies tend to be avid practitioners of multiproduct competition within the United

States and large developed markets abroad Outside the United States, these firms

pur-sue multidomestic strategies, largely because of the requirements of customization,

per-ishability, and local marketing mix

Companies in Cell 4 employ a combination of unrelated diversification and

multido-mestic strategies to sustain competitive advantage at the business unit level Firms that fit

Cell 4 of Exhibit 11-3 include the two British conglomerates Hanson PLC and Diageo

PLC, Canadian entertainment and beverage powerhouse Seagram, and several U.S

broadly diversified companies such as Times Mirror, Tyco International, and Allegheny

Teledyne Few interrelationships are found at any level within these companies, since

com-petitive advantage is based on competences and skills located within individual divisions

Few, if any, systemwide interrelationships can be leveraged across divisions Consider the

example of Diageo, the recently formed company that is the result of a merger between

Grand Metropolitan and Guinness PLC, two British companies that dominate various

seg-ments of the food, distillery, and beverage industries In the United States, Diageo owns

Pillsbury, Burger King, Haagan-Dazs, and a wide variety of liquors and alcohol beverages

Pillsbury has extensive operations, experience, and market presence in the packaged foods

and baking industries both in the United States and elsewhere Burger King is attempting

to retake market share lost to McDonald’s and other new entrants (Chili’s, KFC, Wendy’s,

and local eateries) in the fast-food industry Across these Diageo businesses, few

opportu-nities are present to develop interrelationships Building and sustaining competitive

advan-tage for these three businesses occurs within each division Distinctive competences are

located deep within each division and are not easily transferred across units Many of these

competences are based on marketing skills for specific types of products and targeted

audiences In the external environment, consumers recognize Pillsbury, Burger King, and

Haagan-Daz as separate brands; few consumers would care that they all belong to a larger

entity known as Diageo

Varying Emphasis on Cooperation

For each of the four cells in Exhibit 11-3, a different degree of emphasis is placed on the

level of cooperation or autonomy accorded to business units As interrelationships become

tighter or more interwoven between business units, the need for cooperation to sustain

sys-temwide competitive advantage grows Conversely, the fewer the interrelationships that

exist between business units, the greater is the need for autonomy Exhibit 11-4 shows the

different relative emphasis given to cooperation versus autonomy in these four situations

Let us now examine these differences in more detail

High Need for Cooperation. In Cell 1, a combination of related diversification and

global strategies requires tight coordination and extensive cooperation between business

units for several reasons First, business units in related diversified firms draw upon a

dis-tinctive competence that cuts across the entire firm Thus, greater cooperation is needed to

achieve and sustain corporatewide competitive advantage Second, firms in Cell 1 also

pur-sue global strategies, which involve cross-subsidization and an interdependent linkage of

subsidiaries across various national markets Thus, firms such as Lucent Technologies,

Motorola, Caterpillar, Komatsu, Sharp, Sony, Honda, and IBM will benefit from a highlevel of cooperation among the overseas subunits of their divisions Recall that cross-subsidization means that global competitors attempt to build market positions by lowering prices or introducing new products in different parts of the world at the sametime Subsidiaries need to cooperate to realize the full potential benefits of global strate-

gies Thus, Cell 1 firms exhibit the strongest need for fostering cooperation among

subunits Consequently, these firms are most likely to use SBU and group/sector

structures, employ hierarchy-based reward systems, and emphasize management opment programs to reinforce a systemwide way of thinking These organizational char-acteristics place Cell 1 firms to the far left of the spectrum in Exhibit 11-1

devel-Difficult Combination. Cell 2 of Exhibit 11-4 depicts firms that attempt to combine

unrelated diversification with global strategies Unfortunately, over time, firms in Cell 2

are likely to cede and lose competitive advantage, because of inherent conflicts involved

in this combination On the one hand, to pursue unrelated diversification, senior agement needs to provide considerable leeway to divisional managers to run their ownoperations, especially within newly acquired units On the other hand, divisional man-agers cannot steadily build a strong global presence without investing large sums in pro-prietary technologies, R&D, world-scale plants, and other fixed costs To do so effi-ciently, these costs are best shared with other divisions to achieve substantial criticalmass and economies of scale If divisions attempt to make such investments on theirown, they become potential targets for early divestiture, since large cash outflows sub-ject them to high levels of scrutiny and performance demands from senior management.Consequently, division managers may seek to avoid the heavy investments required tosustain competitive advantage and instead become highly risk-averse Thus, conglomer-ate firms, in particular, are likely to face considerable organizational impediments inpursuing effective global strategies.7

man-Consider, for example, the case of ITT Corporation over the past 20 years ITT once ledthe world in the telecommunications equipment industry However, ITT became one of the

e x h i b i t (11-4) Cooperation and Autonomy

Strongest need for cooperation among divisions and SBUs.

Cooperation on quality, image, and multipoint competition; high autonomy for all other issues.

Cell 3

Unsustainable over the long term; needs of global strategy inconsistent with methods to assess division performance.

Strongest need for autonomy among divisions or SBUs.

most acquisitive U.S conglomerates under the leadership of CEO Harold Geneen during

the mid-1970s, acquiring more than 200 unrelated businesses Over time, ITT’s

telecom-munications business was not able to sustain the high level of technology and capital

investment required to build new digital telephone switching equipment on its own In

1986, ITT sold a majority share of its European telephone business to the combined

French–Dutch giant, Alcatel Throughout the late 1980s and early 1990s, ITT periodically

restructured its portfolio of businesses, seeking to maximize its profitability The effect of

these restructurings has been to steadily reduce ITT’s presence in many globally oriented,

high-technology businesses For example, in December 1994, the company sold off many

of its financial services subsidiaries to buyers such as Norwest Corporation and Deutsche

Bank During the mid-1990s, ITT has generally avoided businesses requiring a global

strategy For example, it acquired Caesar’s World, a leading firm in the gaming industry

and attempted to combine it with other hotel and gaming properties Many of ITT’s

businesses—hotels, gaming, broadcasting, publishing, trade schools, and defense

electronics—were situated in industries not subject to intense global competition In fact,

a number of ITT’s businesses have been recently sold to other more focused and globally

oriented firms, including ITT’s worldwide hotel businesses to Starwood Properties, which

also own the Westin Hotel chain ITT Industries, a spin-off of the original ITT

Corpora-tion, sold its automotive division to Valero of France in a broad restructuring of a business

unit that needed to attain greater scale economies in a globally consolidating automobile

and parts industry

The British conglomerate EMI has also had difficulty combining unrelated

diversifica-tion and global strategies EMI in the 1970s was a leading innovator of the CAT scanner,

a computerized X-ray machine Yet, EMI’s dominant business at the time was music,

entertainment, and defense-oriented electronics Although EMI’s CAT scanner was a

prod-uct leader for several years, eventually other companies such as General Electric, Toshiba,

and Philips were able to displace EMI from the business These companies enjoyed

tech-nological, production, and distribution-based interrelationships among their businesses

that enabled them to overtake EMI in later generations of medical equipment EMI was

unable to develop and implement the kind of global strategy needed to compete in the

medical equipment industry By 1989, EMI had sold off most of its defense electronics,

medical equipment, and other technology-intensive businesses to General Electric and

other European and Japanese firms EMI’s senior management has concluded that the

company cannot compete effectively in these global businesses Currently, EMI’s core

businesses are situated in the music entertainment, lighting, and home appliance rental

industries The transformation of EMI is continuing as the company considers strategic

options that may include divesting itself of other peripheral businesses.8 Many analysts

believe that EMI would even sell the entire company to another entertainment or media

company for the right price

J.I Case faced similar difficulties when competing with global competitors during the

time it was a division of conglomerate Tenneco in the early 1990s Case faced significant

problems competing with the more effective global strategies of construction and

earth-moving equipment makers Caterpillar, Komatsu, Kubota, and Hitachi These four firms

use cross-subsidization tactics effectively and can spend large sums on new products and

process technologies to accelerate product development and market entry Case, on the

other hand, remained largely concentrated in U.S and other North American markets It

did not have many operations outside the United States that would enable it to retaliate

against the cross-subsidization thrusts brought about by Caterpillar and Komatsu Case

also received insufficient funds from Tenneco headquarters to build the platform needed

for an effective global strategy Realizing that sustained high investment was needed to

enable Case to compete effectively with better-armed global competitors, Tenneco ally sold off Case in a series of steps in the late 1990s.

eventu-Balanced Cooperation and Autonomy. Firms in Cell 3 of Exhibit 11-4 are bothrelated diversifiers and pursuers of multidomestic strategies This combination remains apotent one, especially for firms in the consumer packaged goods industries Moreover,this combination works well for those firms beginning to feel high levels of environmen-tal change within their industries On the one hand, the high level of relatedness amongconsumer goods and personal care products enables companies like Procter and Gambleand Colgate-Palmolive to pursue multiproduct competition aggressively within any onemarket Toothpastes, mouthwashes, diapers, soaps, and detergents are similar to oneanother in terms of distribution skills, advertising, product rollouts, and marketing expert-ise within a single market, particularly a large developed market Thus, Cell 3 companiesare well situated to build marketing-oriented interrelationships that help sustain compet-itive advantage across similar products within a given market On the other hand, the verynature of these firms’ products obliges them to pursue multidomestic strategies Theirproducts require extensive customization or modification and are thus best produced andmanaged in local end markets Companies in Cell 3 thus emphasize cooperation on suchcorporatewide matters as quality, image, and multipoint competition, while at the sametime giving divisional and local managers a great deal of autonomy on other issues, par-ticularly those concerning marketing mix and pricing strategies in specific national mar-

kets Thus, Cell 3 companies need to emphasize cooperation on some issues and to

encourage autonomy on other issues This combination puts Cell 3 companies

some-where in the middle of the spectrum of Exhibit 11-1

High Need for Autonomy. Companies in Cell 4 of Exhibit 11-4 pursue unrelated sification and multidomestic strategies They therefore experience the least need for coop-eration across subunits and the greatest need for autonomy at divisional levels Considerthe illustration of Hanson PLC again With extensive acquisitions and holdings of manycompanies in the United States, Hanson needs to provide as much autonomy as possible

diver-to its business and overseas subsidiary managers First, divisional managers operatingunder the Hanson umbrella of unrelated diversification need autonomy to respond to therequirements of their own markets Many of Hanson’s business units are situated in thelow-technology building materials industry (bricks, aggregates, gravel, cement, timber).These products involve little R&D and cannot be exported readily to distant marketsbecause of their weight Coordination to share resources and technologies across thesebusinesses does not produce much benefit, since few competences can be extended on asystemwide, corporate-level basis Also, each business is subject to its own particularcycles and buying patterns Second, Hanson’s pursuit of multidomestic strategies forthese businesses also favors autonomy Since production and marketing activities are self-contained within each market, greater autonomy allows managers to deal with local con-

ditions Thus, companies in Cell 4 have the strongest need for autonomy This

character-istic places them toward the right of the spectrum in Exhibit 11-1 It is therefore notsurprising that companies such as Hanson, Diageo, Times Mirror, and Seagram tend tohave small corporate staffs, to organize along a holding company structure, and to useperformance-based reward systems to measure divisional performance Over time, oneshould expect that companies located in Cell 4 to be aggressive buyers, restructurers, andsellers of business units on an ongoing basis Hanson PLC has already made a number ofmoves in recent years to reposition its corporate disposition by selling off several lessprofitable businesses

Shifting the Balance between Cooperation and Autonomy

Many companies find themselves migrating across the cells of Exhibit 11-5 as their

strate-gies change over time Each time they move to a new cell, they must strike a new balance

between cooperation and autonomy Consider the illustration of Asea-Brown-Boveri

(ABB) first discussed in Chapter 9 It was known as Brown-Boveri before it merged with

Asea in the mid-1980s In the 1970s the firm competed in various lines of business in the

European electrical equipment, transportation, and motors industries At the time, these

businesses were quite unrelated, since they shared few components, engaged in little joint

production, and had separate marketing activities Furthermore, the standards for

electri-cal products were very fragmented in different European countries at the time

Conse-quently, Brown-Boveri pursued multidomestic strategies for most of its businesses Since

it was pursuing unrelated diversification at the corporate level, and its businesses were

pur-suing multidomestic strategies for serving the European region, it was located in Cell 4 of

Exhibit 11-5 As is appropriate for firms pursuing this combination of strategies,

Brown-Boveri allowed divisions considerable autonomy

During the 1980s, the company acquired Combustion Engineering and Westinghouse

Electric’s power transmission and distribution businesses and entered a number of closely

related other businesses These moves shifted ABB to Cell 3 of Exhibit 11-5 Its resulting

businesses (such as numerical controllers, machine tools, robotics, and transformers)

exhibited an increasing number of similarities in terms of competitive requirements for

economies of scale, R&D costs, technology investment, and marketing tasks To take

advantage of the new potential for interrelationships among businesses, ABB developed

new mechanisms to facilitate cooperation among them, including formal product

develop-ment teams spanning various businesses

Simultaneous with these developments, standards for electrical and transportation

equipment became increasingly uniform throughout Europe as the continent underwent

economic consolidation This development presents ABB with an opportunity to pursue

and exploit advantages of a global strategy for many of its businesses To leverage this

opportunity, ABB is shifting the strategy for many of its businesses to a more global

approach Since ABB is now pursuing related diversification and global strategies in

many of its businesses, it is now located in Cell 1 of Exhibit 11-5 Not surprisingly, its

Shifting Emphasis on Cooperation over Time

e x h i b i t (11-5)

organization has shifted toward the left of the continuum shown in Exhibit 11-1, ing the emphasis it places on cooperation The company is currently using a matrix struc-ture designed to facilitate yet higher levels of cooperation among its subunits In fact, tofurther strengthen its hand in the global power equipment business, ABB is now working

increas-to pool its power units with Alsincreas-tom in a newly combined company called ABB Alsincreas-tom.This new entity will be able to compete more effectively against General Electric andSiemens

A variety of other developments can oblige a firm to shift its position along the uum shown in Exhibit 11-1 In the next two sections we examine some of the most fre-quently encountered developments of this kind We begin by examining developments thatcan oblige a firm to shift organizational emphasis toward greater cooperation; then we con-sider those factors necessitating a shift toward greater autonomy

contin-FACTORS PROMOTING CLOSER COOPERATION

A high level of interdivisional cooperation is necessary to identify and to build temwide, corporate-level interrelationships This cooperation is particularly important forfirms that have a distinctive competence, technology, or skill that spans multiple businessunits Numerous developments can increase the need for such cooperation Among themore important are: (1) changes in the way customers use products, (2) technological con-vergence, (3) the rise of multipoint competition, (4) reduced emphasis on acquisitions, and(5) increased global expansion activity (see Exhibit 11-6)

sys-Change in Product Usage

Closer divisional coordination is desirable when customers begin to view a firm’s products

as parts of a larger, integrated system As described in the opening case, Hewlett-Packardexperienced this kind of shift throughout its history Customers in industrial, medical, andscientific fields initially used Hewlett-Packard’s electronic test and measurement equip-ment as free-standing units In other words, electronic measuring instruments were notlinked or hooked up to any other product Now, industrial and medical users incorporatethese devices into more complex systems linked by computers, microprocessors, and fullyintegrated testing and analysis systems

Hewlett-Packard’s engineering workstations also now serve as the “brains” or “nervecenter” for many design and testing activities that used to be performed independently Forexample, the design of new aircraft parts, semiconductor chips, and machine tools wereformerly performed by individual scientists, engineers, and development people whoexerted little effort to coordinate their activities Now, scientists using H-P’s workstationscan design, test, and modify their new product ideas all at once This all-in-one capability

e x h i b i t (11-6) Developments Prompting Need for Greater Coordination among Businesses

• Customers begin using formerly discrete products together in systems.

• Technologies of different products converge.

• Multipoint competition is on the rise.

• Acquisitions play a less important role in diversification.

• Global expansion increases.

makes it easier for users of H-P’s equipment (aircraft and electronic firms) to cut down

their own product development time This development has greatly expanded the need to

build interrelationships and increase cooperation among various Hewlett-Packard subunits

H-P divisions now need to cooperate on product design (to ensure compatibility of H-P

products from separate divisions), component design (to manufacture compatible parts

more easily for various H-P subsystems), sales (to enable the company to sell systems

rather than individual products), marketing (to ensure proper pricing and advertising), and

customer service

Other industries facing similar transformations in product usage include the machine

tool industry, which is becoming increasingly driven by computers and software During

the 1970s, factories used lathes, machine centers, and other tools as stand-alone

opera-tions Stand-alone operations meant that none of the individual work centers needed to

communicate or link up with other parts of the factory Materials and components moved

from one end of the factory to the other with little coordination, other than that provided

by human scheduling Now, the rise of bar-coding methods, machining cells,

servome-chanics and automated insertion equipment makes factories highly integrated operations

These techniques make great use of advanced software to help control and streamline

oper-ations For example, computerized tracking systems often control the movement of

inven-tory, work-in-process, and product changeover when goods move from one machining

center to another within the factory

As a consequence, companies in the machine tool industry have been obliged to

under-take steps to ensure that their machinery and other tools work in tandem to give the

cus-tomer a clean, smoothly running “package” of equipment In fact, many machine tool

pro-ducers are now taking steps to ensure that the software programs used to manage their

systems are capable of fully linking with those of other suppliers and customers through

advanced telecommunications and Internet-based networks

Technological Convergence

Convergence of once-distinct technologies can also increase the need for subunit

cooper-ation Consider the recent developments in integrated circuits and semiconductors, for

example Many formerly distinct products (cameras, microwave ovens, printers, personal

computers, Internet-related appliances, telephones, calculators, and musical instruments)

now incorporate integrated circuits in their design These products are thus becoming

technologically more similar, since they increasingly share a common core competence or

skill Circuit boards and semiconductor designs used for one product can often be easily

modified for incorporation in another product The growing reliance upon these modular

electronic components hastens the convergence of numerous products based upon a core

electronic or chip-based technology

Recognizing this trend, Casio of Japan has focused on innovating new products

based on using microelectronics to develop new controller chips that power its watches,

calculators, and musical instruments Casio watches and calculators often use the same

types of liquid-crystal displays and timing mechanisms found in other Casio products,

such as flat-screen television sets and video games As these products embody a greater

degree of technological content, Casio has now taken this electronics-based expertise to

develop a series of new Internet-driven palm-sized network computer appliances that

use a streamlined version of Microsoft’s Windows CE program to provide paging and

e-mail capabilities to people on the move This palm-sized personal digital assistant

(PDA), known as Cassiopeia, is designed to compete with similar offerings from 3Com,

IBM, Sharp, Sony, and other firms seeking to develop new forms of digital wireless

communications that are also compatible with personal computers and other networkappliances The high-technology content in all of these products are compelling thesefirms to innovate and develop new forms of advanced technologies and capabilities toharness new sources of convergence In another example, Japanese optical equipmentmakers Canon and Nikon are using innovative lens and optical-based technologies

to design office equipment, color copiers, laser printers, and even ultrasophisticatedsemiconductor-making equipment Office copiers, cameras, printers, microscopes,semiconductor capital equipment (steppers), and laboratory-based testing equipment alldraw upon these two companies’ extensive experience with precision engineering andmanufacturing of lenses, mirrors, small lasers, and other optics-based technologies.The Otis, Sikorsky, Carrier, and Pratt and Whitney divisions of United Technologies arealso experiencing technological convergence The elevators, helicopters, air-conditioningunits, and building systems produced by these units are making increasing use of newclosed-loop electrical designs, hydraulics, sensors, and microprocessor-based control sys-tems With the introduction and greater use of advanced electronics and control devices innew designs, these products have become “smarter” over time For example, in manySikorsky helicopter or Pratt and Whitney jet engines, centrally controlled microprocessorsand sensors closely monitor and manage these systems’ operations according to weather,altitude, weight load, and other critical factors In United Technologies’ Carrier division,entire buildings are now designed to be “intelligent,” meaning that a central building con-trol system handles numerous functions, such as security, heating, air conditioning, firedetection, and sprinkler systems Building control systems now possess avionics-like tech-nologies, servo-mechanical control systems, artificial intelligence, and advanced displayssimilar to those found in commercial and military aircraft The skills required for Carrier

to design and construct an intelligent building control system for its customers come notonly from Carrier, but also from other divisions, such as Otis and Pratt and Whitney Otishas mastery of the controls needed to make elevators function smoothly, while Pratt andWhitney and Sikorsky possess the electronics and systems integration/control expertise tomake the entire system “smarter” and more responsive

Industry Convergence. In a broader sense, technological convergence has begun to vade and even redefine the structure of entire industries Consider, for example, the rapidgrowth of the Internet that is cutting a wide swath across almost every industry in the UnitedStates The Internet has already begun to link up telecommunications, data networking, andcable television with computers, consumer electronics, interactive television sets, and evenPDAs to provide a whole new range of services These services include on-line retailing,financial services, travel planning, and other new capabilities As the Internet continues topervade and redefine more industries, companies such as IBM, Intel, Motorola, Yahoo!,AtHome, AT&T, Lucent Technologies, Time Warner, Viacom, Comcast, Seagram, Hewlett-Packard, Microsoft, General Electric, General Instrument, and Walt Disney envision a daywhen customers can use their hybrid personal computer/television sets as multifunctionaldevices that enable on-line shopping, communications, interactive television, and other fea-tures This future hybrid digital television and/or personal computer is expected to serve asthe heart of a series of network appliances that will combine the traditional features of tel-evision sets and personal computers with those of telephones, pagers, fax machines, andeven home security systems Thus, once separate and distinct industries, such as consumerelectronics, telecommunications, personal computers, semiconductors, and software, arerapidly coming together

per-The corporate strategies of AT&T and Lucent Technologies, discussed in Chapter 6,are based on exploiting the convergence among computers, telecommunications, and