Interrelationship among business units Chapter 9

Horizontal strategy It is the coordinated set of goals and policies across distinct but interrelated business units It is a concept of group, sector and corporate strategy based on competitive advantage not on financial consideration

Interrelationships among business units There are three broad types of possible interrelationships among business units Tangible interrelationships Intangible interrelationships Competitor Interrelationships

Tangible Interrelationships They rise from opportunities to share activities in the value chain among related business units due to presence of common buyers, channels, technologies etc.

Intangible Interrelationships It involves the transference of management knowhow among separate value chains It leads to competitive advantage through transference of generic skills or know how about how to manage a particular type of activity from one business unit to the other

Competitor Interrelationships It stems from the existence of rivals that actually or potentially compete with a firm in more than one industry An action towards one players has an impact on all the players.

Tangible relationships A business unit can potentially share any value activity with another business unit including both primary and supporting activities Sharing raw material, having joint sales force, using same distribution channel Sharing an activity can lead to sustainable competitive advantage.

Sharing and Costs Sharing has the potential to reduce cost if the cost of a value activity is driven by economies of scale, learning or pattern of capacity utilisation Sharing increases the scale of an activity and increases the rate of learning.

Sharing and Differentiation Sharing affects differentiation in two ways: a. Enhances differentiation by increasing uniqueness b. Lowering the cost of differentiation

Costs of Sharing They are divided into three types: a. Cost of coordination b. Cost of compromise c. Cost of inflexibility

Identifying tangible interrelationships Market interrelationship: a. Source of interrelationship Common buyers Common channel Common geographic market b. Possible forms of sharing Shared brand name Cross selling of products Shared marketing department Shared sales force Shared physical distribution

Identifying tangible interrelationships 2. Production interrelationship: a. Source of interrelationship: Common location of raw material Identical/similar testing/quality process Identical/similar assembly process Common factory support needs b. Possible forms of sharing: Shared inbound logistics Shared assembly facilities Shared testing/quality facilities Shared site infrastructure

Identifying tangible interrelationships 3. Infrastructure interrelationship: a. Source of interrelationship: Common firm infrastructure needs Common capital b. Possible forms of sharing: Shared raising of capital Shared cash utilization Shared govt regulations Shared hiring and training Shared legal department

Identifying tangible interrelationships 4. Technological interrelationship: a. Source of interrelationship: Common product technology Common process technology One product incorporated into the other Common technology in other value activities b. Possible forms of sharing Common firm infrastructure needs Common capital

Identifying tangible interrelationships 5. Procurement Interrelationship: Source of interrelationship: Common purchased inputs Possible forms of sharing: Joint procurement

Identifying intangible interrelationships It arises due to variety of generic similarities among business unit. 1. Shared generic strategy 2. Same type of buyer 3. Similar configuration in the value chain 4. Similar important value activities

Intangible interrelationships The key tests in identifying value activities that are important are listed below: a. How similar are the value activities in the business units b, How important are the value activities involved in competition e. How significant is the know how that would be transferred in the relevance activities.

Competitor interrelationship It is present when a firm actually or potentially competes with diversified rivals in more than one business unit Multipoint competitors

Competitor interrelationship Corporate Competitor Matrix Bus Unit1 Bus Unit2 Bus Unit3 Bus Unit4 Comp A X X X Comp B X X X Comp C X X Comp D X X Comp E X X Comp F X Comp H X

Competitor interrelationship in unrelated industries Issues revolve around how actions in one business unit can lead to reactions in another and how equilibrium with the competitor can be reached in several uncontested industries. In case of multipoint competition, there are possibilities for signalling, making threat and reciprocal action

Strategies for multipoint competitors in unrelated industries Forecast possible retaliation in all jointly contested industries Beware of a small position by a multipoint in a key industry Look for opportunities to exploit overall corporate position vis a vis a multipoint Establish blocking position for defensive purposes