Creating Organizational Advantage

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Consider the Newell Company, whose resources are neither exceedingly general nor specific but an attractive mixture of both. In , Daniel Ferguson, a Stanford M. In July , Ferguson wrote out his strategy for Newell, identifying its focus as the market for hardware and do-it-yourself products.

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A combination or package of lines going to the large retailers carries more marketing impact than each line separately, and Newell intends to build its growth through performance and marketing leverage of this package. Although that strategy has been reviewed annually, its basic tenets have remained largely unchanged. Today the products Newell makes range from propane torches to hair barrettes to office products.

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That may appear to be a bizarre collection of unrelated items, yet Newell is far from being a conglomerate. How do we know that Newell has the right balance of resources and businesses? Many of the companies Newell has acquired were subpar performers. Nor will it enter businesses whose dominant channel of distribution is outside discount retailing.

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Indeed, Newell sold off Wm. Wright, a profitable line of home sewing products, when its distribution shifted to specialty stores. This need for fit between resources and businesses constrains the set of businesses in which a company should operate but increases the likelihood that a multibusiness strategy will actually create value.

But it must also articulate how to achieve that vision. In particular, what kinds of coordination and control must the company provide in order to effectively deploy its resources? Most corporate-level executives understand the need to add value to their businesses, yet few put in place the organizational mechanisms to make that possible. Many executives are reluctant to violate the autonomy and accountability of independent business units. Others fear they will end up with large, bureaucratic overhead structures. Companies like Newell, however, achieve the benefits of coordination with modest organizational costs.

Newell understands that the outright sharing of resources such as a common sales force is not always the best way to capture synergies. So Newell transfers critical resources throughout the firm without undermining the independence of its business units. Deploying key resources where they are important to the competitive advantage of individual businesses is at the heart of corporate strategy.

Sometimes it makes sense for businesses to share a common resource, like a sales force or an MIS system. In other cases, resources can be transferred across businesses with a minimum of coordination. Knowing whether to transfer or share resources—and which mechanisms to use—is largely a question of what kind of resource you are trying to leverage. A useful distinction can be made between resources that we call public goods and those we call private goods. By public goods, we mean, for example, brand names or best demonstrated practices—things that can be used in several businesses simultaneously without conflict.

By private goods, we mean such things as a common sales force or component-manufacturing facility—resources that are much more difficult to manage and can lead to competition and conflicts between businesses. Indeed, it may involve few, if any, explicit organizational mechanisms.

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For example, simply placing the Nike brand on a new line of sporting goods may convey a substantial competitive advantage to the business with relatively little effort on the part of the corporation. Other transfers can occur through occasional cross-business meetings and limited exchanges of information. Experienced managers can move to the new division or a project team can act as consultants.

Because there is no conflict in their use, and because even autonomous business units will actively seek to capitalize on such truly valuable corporate resources, transferring public goods can be done with relative ease, once the means for doing so are in place. With public goods, the challenge is often in their development and preservation.

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Who should be responsible for the resource? How can you ensure that the necessary investments are being made? Should new practices be developed by the corporate office or allowed to flourish in many divisions before the best one is applied everywhere? It is also important to safeguard the use of some public goods, particularly intangible ones such as brand names or sets of relationships, so that one unit does not spoil or devalue the asset. Private goods require more explicit coordination because the same resource is shared by multiple businesses and therefore its use by one unit can affect its use by another.

Consider a corporate unit that buys materials for all divisions in order to exploit economies of scale in purchasing. If they did, they would save several hundred thousand dollars per year. Believe it or not, this simple decision took more than a year to resolve. One chain wanted one-ply tissue, another wanted two-ply, and the third did not care. This example is powerful precisely because it is so trivial. If it takes a year to reach a compromise agreement on a question like this, imagine how difficult and time consuming it can be to reach consensus on sharing something important, like a sales force.

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To leverage that resource, Newell deliberately moves managers across business units and from the business to the corporate level. That practice enables Newell to transfer experience and to build a skilled in-house labor pool. Job openings are publicized widely within the company and usually are filled by in-house candidates. For Newell, the benefits of such transfers can be fully realized because of the commonalities across its businesses—and that is not an accident but a result of forethought.

Annual management meetings bring together functional vice presidents for sales and marketing, operations, personnel, control, and customer service from all divisions. Each functional group has its own two-day meeting, featuring presentations and programs aimed at transferring best practices across the divisions. In contrast to its many resource transfers, the only activity Newell shares among its businesses is its advanced data-management system.

The company explicitly chose not to form one central sales force, fearing the consequences of lost autonomy and accountability at the business level. Without the appropriate control systems, the corporate center can quickly lose its ability to determine strategic direction and influence performance in the individual businesses. That is why choices about what to measure and reward are so important.

Broadly speaking, corporations have the choice between two types of control systems: operating or financial. There are two fundamentally different methods for monitoring and controlling the performance of subordinates and business units. The first, financial control, holds managers accountable for a limited number of objective output measures, such as return on assets or aggregate sales growth.

Thus after an unexpected recession, financial control would punish managers because profit was below budget, while operating control might reward them for anticipating the downturn and cutting inventories, even though they missed their budget targets. While most companies use some mix of the two, successful corporate strategies tend to emphasize one or the other. That choice depends primarily on the nature of the businesses in the portfolio and the relative expertise of corporate executives. Financial control is most appropriate in mature, stable industries and for discrete business units.

For such businesses, a few financial variables accurately reflect their strategic positions. In fast-moving industries with high levels of uncertainty, financial control is less suitable.

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  4. In high-tech businesses, for example, current financial results may not capture the loss of technological leadership. Such measures may also be problematic when results across units are interdependent.

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    Operating control typically involves both quantitative and qualitative assessments that capture the nuances of a particular business. Often the managers themselves will have extensive relevant operating experience. Corporate managers may monitor dozens of line items such as reject rates, delivery lead times, and conversion statistics to assess the health of a business. The trade-offs among the targets may not be fully specified and the evaluation and incentive schemes may resemble more an implicit contract than a simple objective target. Operating control systems require far more interaction between corporate and business unit managers.

    Not surprisingly, such systems place more demands on an organization and generally lead to somewhat larger corporate infrastructures. In contrast, financial control systems are the easiest to implement and place the fewest demands on corporate management. The key is to establish discrete business units, to hold management accountable for outcomes, and to provide strong incentives for managers to meet their numbers.

    The archetype of such systems is the LBO, in which financial targets not only are agreed to within the firm but also are bound by covenants with external providers of capital. No control system can be assessed in isolation. The system focuses on 30 operating variables that management believes are critical to the success of the businesses—and because the businesses have so many similarities, a single carefully tailored system can be applied to all of them.

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    Senior managers are intimately involved in the oversight and monitoring of the businesses, principally through monthly performance reviews that allow them to add value in discussions with divisional managers. Compensation systems are always central to control systems. To facilitate transfers, compensation is uniform across divisions; base salaries are determined by position and division size.

    Newell holds individual managers and operating units accountable for performance, and it rewards excellence. From the top down, Newell maintains a culture deeply permeated by the expectation that it will be a leader in serving the needs of discount retailers. Like a nucleus, such technologies should have an explosive power to multiply themselves across many products.

    For example, as an extension of its screen technology, Sharp created the personal electronic organizer with its Wizard product. Unlike its competitors Sony and Matsushita, Sharp has never considered entering the movie business because it knows it has no competitive advantage outside its technology base. To be successful in such an environment, Sharp must make good investment choices and, to recoup its investment, it must leverage new technologies quickly and broadly throughout the company. Unlike Newell, Sharp is divided into functional units, not product divisions.

    As a result, applied research and manufacturing of key components, such as LCDs, occur in a single specialized unit where scale economies can be exploited. In contrast, Honeywell, a typical U. To prevent the functional groups from becoming vertical chimneys that obstruct effective product development, Sharp employs product managers who have responsibility—but not authority—for coordinating the entire set of value chain activities.

    Sharp invests in such time-intensive coordination to minimize the inevitable conflicts that arise when units share important activities. These are selected at the corporate technical strategy meeting because they involve original technologies that cut across product groups. All project members are vested with the authority of the company president and wear his gold-colored badge so that they can call on people throughout Sharp for assistance.

    It has to employ an operating control system that focuses more on how people behave than on the short-term financial outcomes they achieve. Promotion, therefore, rather than annual compensation, is the most powerful incentive, and employees are promoted on the basis of seniority and subtle skills exhibited over time, such as teamwork and communication. In a technologically based company with a functional organization structure, this control system is one of the few that will not unduly reward a short-term, self-interested orientation.

    Sharp has to employ an operating control system that focuses more on how people behave than on short-term financial outcomes. Like Newell, Sharp is successful in leveraging resources throughout its organization but, consistent with the nature of its underlying resources, it does so in very different ways. Merchandising practices used in one unit do not alter their use in another unit, and the development or deployment of those practices does not require extensive, coordinated decision making. Their greatest benefits are realized when individual units collaborate and pool investments. In such a context, conflicts and tradeoffs are inevitable; managing them well is critical to the success of strategies at that end of the resource continuum.

    Tyco International represents the other end of the continuum from Sharp. Contrary to the widely held negative view of conglomerates, Tyco illustrates that a carefully conceived and implemented strategy at the far left of the continuum can create substantial amounts of value—even in the United States, and even in the late s. Due to the broad applicability of their resources, companies like Tyco can operate in a wide range of businesses. In , the company was organized around six operating groups: fire protection, flow control, disposable medical products, Simplex Technologies, packaging materials, and specialty products.

    If your workforce is more talented, innovative and creative than those of other companies, chances are your business will retain its competitive advantage as it grows to meet new challenges, such as changing customer needs. An effective workforce is not just a matter of smart staffing, although that also plays a part. You must develop a management structure that fosters the employee characteristics that improve your business as a whole, creating an environment that fosters qualities that will ensure your company maintains its competitive advantage.

    No simple formula exists for developing effective employees, but your general goal should be empowerment. Whether through continuing education or increasing workplace responsibilities, empowering your employees strengthens your business. Stan Mack is a business writer specializing in finance, business ethics and human resources.

    Mack studied philosophy and economics at the University of Memphis. Skip to main content. Fulfill the Need After identifying the need, make fulfilling that need what your company does best. Strengthen Your Business After honing your business model to maximize your advantage, strengthen your company from the bottom up to maintain your competitive position. Employee Empowerment No simple formula exists for developing effective employees, but your general goal should be empowerment. About the Author Stan Mack is a business writer specializing in finance, business ethics and human resources.

    Accessed 24 September

    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
    Creating Organizational Advantage Creating Organizational Advantage
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