Horizontal Strategy

Chapter 10

Horizontal Strategy

• It coordinates the goals and strategies of related business units

Formulating Horizontal Strategy

1. Identify all tangible interrelationships2. Trace tangible interrelationships outside the

boundaries of the firm3. Identify possible intangible interrelationships4. Identify competitor interrelationships5. Assess the importance of interrelationships to

competitive advantage6. Develop a coordinated horizontal strategy to

achieve and enhance the most important interrelationships

Achieving and Enhancing Interrelationships

• Share appropriate value activities• Coordinate strategic postures of related business units• Distinguish the goals of business units• Coordinate offensive and defensive strategies against multipoint

competitors and competitors with different interrelationships• Exploit important intangible interrelationships through formal

programs for exchanging know how.• Diversify to strengthen important interrelationships or create new

ones• Sell business units that do not have significant interrelationships

with others or that the achievement of important interrelationships more difficult

• Create horizontal organizational mechanisms to assure implementation

Interrelationship and Diversification

• Diversification based on interrelationships is the form of diversification with the greatest likelihood of increasing competitive advantage in existing industries

Diversification based on tangible relationships

• There are three broad types of tangible interrelationships:

1. Market oriented diversification: It aims to sell new products to common buyers, channels or geographic markets in order to reap the benefits of market interrelationships

2. A production oriented diversification strategy aims to produce similar products with shared production value activities

3. A technology oriented diversification strategy aims to develop or enter new industries based on similar core technologies

Diversification through Beachheads

• It is diversification based on intangible interrelationship which is not a stand alone opportunity but a potential beach head. Once a firm enters a new industry based on intangible interrelationships, it can then use the beachhead to spawn new opportunities for diversification based on tangible interrelationships

Achieving Interrelationships

Chapter : 11

Impediments to achieve interrelationships

• Source of impediments:1. Asymmetric benefits2. Loss of autonomy and control

a. Protection of turfb. Perceived dilution of buyer relationshipsc. Inability to “fire” a sister divisiond. Conflicts over priorities in shared activitiese. Unfair blame for poor performance

3. Biased incentive systema. Lack of credit for contributions to other unitsb. Measurement biases

Impediments to achieve interrelationships

4. Differing business unit circumstancesa. Strong business unit identitiesb. Differing culturesc. Management differencesd. Differing procedurese. Geographic separation

5. Fear of tampering with decentralizationa. Dampening entrepreneurshipb. Desire for consistent organisationc. Difficulty of measuring performanced. Fear of providing excuses

Organisational mechanisms of achieving interrelationship

• Interrelationships can be generated by horizontal organisations.

• Horizontal organisations can be divided into four broad categories

1. Horizontal structure

2. Horizontal systems

3. Horizontal human resource practices

4. Horizontal conflict resolution processes

Horizontal structure

“ Organisational devices that cut across business unit lines, such as grouping of business units, partial centralisation, interdivisional task forces and market or channel committees”

Horizontal systems

“ Management systems with a cross business unit dimensions, in areas such as planning, control, incentives and capital budgeting”

Horizontal human resource practices

“ Human resource practices that facilitate business unit cooperation, such as cross business unit job rotation, management forums and training”

Horizontal conflict among processes

“ Management processes that resolve conflicts among business units. Such practices can be usefully distinguished from horizontal structure and systems, and relate more to the style of managing a firm”

Horizontal structure

• Grouping of business unit that report to a common executive.

• Groups and sectors should be generated around interrelationships especially if they contribute to major costs.

• The role of the group executive is to reinforce a horizontal strategy which involves identifying and achieving interrelationships both within and outside the group

Horizontal structure

• Partial centralisation is a type of horizontal structure where certain value activities are centralised due to important interrelationships

• There are other cross business unit organisational mechanisms like market focus committees, technology and channel committees and temporary task forces

Horizontal systems

A number of systems can be developed in order to achieve interrelationships:

1. Horizontal strategic planning:

a. Corporate planning department can accept responsibility to identify interrelationships

b. Group and sector executives can be given responsibility for horizontal strategy

c. Developing joint strategic plans from business units

Horizontal systems

2. Horizontal procedures:a. Transfer pricing policiesb. Cost sharing for joint projectsc. Capital budgeting for joint projects

( Interrelationships imply that transfer pricing and other decisions should be designed to improve the firm’s overall position and other decision should be designed to improve the firm’s overall position and not the financial results of the individual business units)

Horizontal systems

3. Horizontal incentives: An incentive system that rewards business and group managers for achieving interrelationships rather than individual results.

An incentive system that covers group and corporate results as well as business unit results

Horizontal Systems

4. Horizontal human resource practices: Policies of hiring, training and managing human resources that facilitate cross business unit collaboration, as well as successful relationships between business units and centralized functions

a. Personnel rotation among business units

b. Firm wide role in hiring and training

c. Promotion from within

d. Cross business forums and meetings

Horizontal conflict resolution process

• Achieving interrelationship will involve sharing of authority, need for frequent coordination and subjective performance evaluation and thus a requirement for a horizontal conflict resolution process

Complementary Products and Competitive Advantage

Chapter: 12

What are complementary products

• Products that are jointly used by the buyer

• The sale of one product promotes the sale of other

• The sale of bread will affect the sale of butter similarly the sale of vada will affect the sale of paav or computer software will affect the sale of computer hardware

• They are the opposites of substitutes.

Critical aspects

1. Control over complementary products:

2. Bundling

3. Cross subsidization