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ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
THE EFFECT OF BUSINESS INTERDEPENDENCIES ON
TECHNOLOGY-INTENSIVE BUSINESS PERFORMANCE:
AN EMPIRICAL INVESTIGATION
by
Mel Horwitch and Raymond A. Thietart
April, 1985
Revised July 2, 1985
1658-85
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
THE EFFECT OF BUSINESS INTERDEPENDENCIES ON
TECHNOLOGY-INTENSIVE BUSINESS PERFORMANCE:
AN EMPIRICAL INVESTIGATION
by
Mel Horwitch and Raymond A. Thietart
April, 1985
Revised July 2, 1985
1658-85
THE EFFECT OF BUSINESS INTERDEPEKDENCIES ON TECHNOLOGY-INTENSIVE
BUSINESS PERFORMANCE:
AN EMPIRICAL INVESTIGATION
by
Mel Horwitch and Raymond A. Thletart
Massachusetts Institute of Technology
Sloan School of Management
50 Memorial Drive
Cambridge, MA
02139
U.S.A.
The authors gratefully acknowledge the help of
Institute, which has provided the FIMS data base.
the
Strategic. Planning
THE EFFECT OF BUSINESS INTERDEPENDENCIES ON TECHNOLOGY-INTENSIVE
BUSINESS PERFORMANCE:
AN EMPIRICAL INVESTIGATION
by
Mel Horvltch and Raymond A. Thletart
Abstract
Technology Is an increasingly Important strategic Issue for the
modern corporation. One of the major decisions that firms face regarding
establishing the appropriate level of
technology Is a structural one:
Internal strategic Interdependency within and among technology-Intensive
business units. The highly visible current discussion over the efficiency
of creating small. Independent, and entrepreneurial venture units In
multi-business corporations Is really part of this larger structural
This study focuses on the overall matter of appropriate levels
concern.
technology-Intensive
In
Interdependencles
strategic
of
Internal
The businesses examined are
The PIMS data base Is used.
businesses.
technology-Intensive as defined In terms of high product R&D expenditures.
The Industrial
Seven different business configurations are Identified.
Fast
Suppliers,
product business configurations are termed Established
product
consumer
The
Giants.
Movers, High-Tech Job Shops, and Stalled
business configurations are termed Established Dlverslflers, Dominant
Specialists, and Laggers. Business performance Is measured by ROI, which
stresses short-term results, and market share, which focuses on long-term
results.
Three categories of Interdependency were established: vertical
Integration, shared facilities, and shared marketing. The effect on both
kinds of performance of all possible combinations of the three types of
Internal Interdependency was assessed for each of the seven business
The findings Indicate that there Is great diversity
configurations.
within the overly general category of technology-Intensive business.
Second, different levels of Interdependency have different Impacts on ROI
or market share performance for different kinds of technology-Intensive
Finally, the multi-business corporation that
business configurations.
possesses a portfolio of technology-Intensive businesses which represents
several business configurations probably requires a more diverse set of
Interdependencles than just mainstream Industrial R&D on the one hand and
Effective
hand.
other
the
units
on
Independent
entrepreneurial
calls
businesses
competition for a firm with diverse technology-Intensive
Internal
of
levels
for a capability to support concurrently multiple
of
set
this
modify
or
create,
reject,
Interdependencles and
to
Interdependencles as the situation warrants.
Introduction
One of
the first half of
trends
remarkable
most
the
been the steadily Increasing attention
1980s has
the
paid to the importance of
field during
the management
In
technological
Innovation as
corporate-wide
a
Indeed, there has emerged In recent years a
strategic matter of concern.
persistent and powerful chorus advocating the need to view technology as
a
high
priority
Issue
management
general
(Foster,
Hayes
1982;
and
However, the current attempt to transform
Abernathy, 1980; Lewis, 1982).
technology into a strategic variable has resulted in a number of novel
and important administrative issues.
Much of the literature before 1980 that did attempt to deal with
the high-level selection of technological choices, emphasized the issues
of
the
and
timing
and
(Ansoff
Stewart,
Prahalad,
choice
to
1976;
the
that
Marquis,
appropriate
of
a
exist
1969);
stage
of
innovative
corporation's
1982
Freeman,
1967;
innovation
technological
and
positioning
types
the
edition);
efforts
of
(Bums and Stalker, 1961; Horwitch
the
a
need
life
to
fit
cycle
or
technological
a
an
appropriate
environment (Abernathy and Utterback, 1978; Hayes and Wheelwright, 1979;
Lawrence
and
Lorsch,
1967).
But
these
studies
and
concepts
generally
involve relatively straightforward tradeoffs and decisions, whereas today
corporations are simultaneously engaged In technological activities that
exhibit
very
Horwitch,
different
1984;
characteristics along key dimensions
Petrov, 1982).
(Friar and
Such firms must concurrently make a set
,
-2-
of strategic decisions regarding technology that may appear Inconsistent
and confusing when examined In light of the lessons from the older studies
and
concepts.
One
goal
of
paper Is
this
aspects of
Identify some
to
administrative behavior that lead to positive results In the more complex
context
current
and
offer
to
useful
a
strategic management of technology In this
of
Part
the
for
cause
way
conceptualizing
the
modem setting.
Inability
the
of
much
of
of
earlier
the
management research to deal effectively with the current technologystrategy relationship Is that traditionally the study of technology and
the study of corporate strategy have traditionally been distinct (Kantrow,
Technology has been studied In considerable depth as part of R&D
1980).
management and the process of technological Innovation.
This process was
portrayed as consisting of diverse parts, varied participants, complicated
patterns
lengthy
et.al,
of
time
evolution and
examined
(Marquis,
durations
Utterback,
1974;
1971;
reexamined
and
Information
as
1969;
a
loops,
Project
Sappho,
Hlppel,
Von
determinant
1976).
of
potentially
and
feedback
n.d.;
Rothwell
Technology
been
has
structure
organizational
(Hlckson, et.al., 1969, Stanfleld, 1976; Woodward, 1965); and It has been
seen
as
being
a
critical
factor
In
Influencing
International product life cycle (Wells, 1972).
people, as champions,
Increasingly
accepted
entrepreneurs,
(Maldlque
the
evolution
of
the
Finally, the key role of
or technology-familiar managers. Is
and
Hayes,
and
most
1983;
Roberts,
1969,
1977;
Schon, 1963, 1967).
But
throughout
the
1960s
strategic
literature
has
minimized
the
of
the
strategic
1970s
role
the
of
corporate
technology.
Instead, corporate strategy focused on such Issues as leadership, various
forms of strategic portfolios of product-market groups or business units.
-3-
the applicability of Industrial organization theory, and the Influence of
Technology, if mentioned at
structure, process, and systems on strategy.
was usually portrayed as a subsidiary force or component
all,
critical
elements
Buzzell,
et.al.,
of
corporate
strategy
(Andrews,
Galbralth and Nathanson,
1975;
Barnard,
1938;
Henderson,
1972;
1980;
1978;
of other
Porter, 1980; Selznlck, 1957).
The recent linkage of technology and corporate strategy has resulted
in
new
significant
importance
Is
the
administrative
explicit
high
Perhaps
concerns.
for
priority
greatest
of
corporations
many
in
a
technology-intensive environment to remain innovative in diverse business
Competing
settings.
businesses
diverse
in
implies
dealing
with
technologies that differ along key dimensions, such as life cycles, types
of technologies, and the key competitive factors for success (Hambrick et
A modern corporation having a portfolio of technologies
al., 1983).
roust
find ways to administer this technological diversity successfully (Petrov,
1982).
The
tradeoffs
methods
along
available
at
cooperation;
internal
development;
and
least
to
key
three
technology
traditional
modern
dimensions,
development
corporate
R&D
vs.
Involves
strategy
technology
competition
external
activities
vs.
vs.
technology
small-scale
entrepreneurial units (Friar and Horwltch, 198A).
It is
Ihls paper focuses on the last dimension, a structural one.
clear today that corporations are struggling with the simultaneous need
to exploit their various economies of scale and scope while also capturing
some of the spirit, commitment, and talent associated with high-technology
small
firms
viewing
this
(Burgelman,
issue
is
1983,
to
1984,
examine
1980).
Roberts,
under
different
Another
way
conditions
of
the
-4-
approprlate degree of linkages and Integration among the various business
units within a corporation that can be termed technology-Intensive.
This
complex matter, as we will see, for technological diversity Is at
is a
least
complex
as
as
business
and
diversity
calls
for
an
array
of
structural relationships depending on a number of important variables.
In this study, we analyze the performance of different Intra- and
Inter-buslness linkages or business Interdependencles for various
of technology-Intensive businesses.
market share.
of
product
industrial
types
The performance criteria are ROI and
Technology-intensive businesses are defined by the level
R&D
expenditures.
(capital goods,
The
businesses
are
raw and semi -finished
of
several
kinds:
components,
materials,
suppliers, and other consumables) and consumer (durable and non-durable).
The
results
show that depending on the nature of the business
and
the
goals that the business pursues, certain kinds of interdependency levels
are
more
appropriate
than
others.
some
In
complete
Instances,
Independence and flexibility lead to Improved results.
In other cases, a
high degree of inter-business linkages and vertical Integration are more
efficient.
And in still other situations, various Intermediate levels of
Interdependency are associated with positive performance.
also
highlight
diverse
types
the
of
frequent
necessity
technology-intensive
for
a
multi-business
businesses
to
findings
The
firm
possess
overall flexibility to manage multiple levels of interdependency.
with
enough
-5-
Methodology
1) the
Several phases of analysis are discussed In this section:
choice
the
of
business
discussion of
and
sample
configuration;
the
2)
choice of the dependent or performance variables; 3) the selection of the
Independent variables; and 4) the testing procedure.
The Sample Definition
1.
A sample
consumer
with high
units
of
641
business
products,
420
Industrial
goods)
R£eD
expenditures
drawn from
is
(221
data
PIMS
the
The unit of analysis Is the business as defined In the data base
base.
(Schoeffler,
observation for
The
1977).
given
a
business
consists
of
four year moving averages.
Criterion for Selecting Businesses With High R&D Expenditures
o
The
decision
as
which
to
businesses
belong
the
In
high
R&D
expenditure sample Is based on product R&D expenditures as a percentage
of
sales.
emphasizes
It
excludes
efforts
made
R&D
by
aimed
new
at
businesses
to
process
develop
new
development
products
or
and
to
modify existing ones.
This decision to use product R&D expenditures to define technology-
Intensive businesses is dictated by our desire to study a comprehensive
range,
though
representative
sample,
of
such
businesses.
We
did
not
Include process R&D expenditures because such an action might have biased
our sample toward those businesses that competed in the latter stages of
^Anderson and Paine (1978) provide a critical analysis of the PIMS data
base. Although they voice some concern about the quality of the data,
they think that the base is generally of high quality and reliability.
-6-
a product's life cycle and thereby possibly permitting too much attention
on an unnecessarily narrow group of rather mature businesses, which might
significantly
distort
our
(Abemathy
findings.
and
Utterback,
1978;
Hayes and Wheelwright, 1979).
The
follows.
selection
of
the
641
businesses
For each type of business
Industrial:
In
(consumer:
the
sample
Is
made
as
durable and nondurable;
capital goods, raw and semi -finished materials, components,
supplies and other consumable), the mean of the product R&D expenditures
as a
percentage of sales Is
computed.
Businesses
Included
are
In
the
sample when their five-year average for R&D expenditures as a percentage
of
sales
Is
at
least
business (see Figure 1).
twice
as
large
as
the
mean
for
their
type
of
2
Figure
1
Sample Selection Distribution of R&D/Sales
3
Business
Sample of High
R&D Spenders
Mean
2xMean'
R&D/Sales
^100 businesses out of 777 consumer durable products, 121 businesses out
of 1014 consumer non-durable products, 81 businesses out of 1131 capital
goods, 52 businesses out of 571 raw and seml-flnlshed materials, 188
businesses out of 1591 components and 99 businesses out of 941 supplies
and other consumables are selected.
distribution Is computed for each type of business: industrial
(capital goods, raw and seml-flnlshed materials, components, supplies
and other consumables) and consumer (durable, non-durable).
•^The
-7-
A Strategic Configuration Perspective
o
Several
recent
studies
(Dess
and
Davis,
1984;
Hambrlck,
1983;
Harrlgan, 1980; Hofer, 1975; McMillan, Hambrlck and Day, 1982; Miles and
Snow,
1978; Miller and Frlesen,
1984; Miller and Mlntzberg,
1977,
1983;
Porter, 1980; Thletart and Vivas, 1984) show the Influence of strategic,
organizational and environmental characteristics In shaping the business
competitive
Consequently,
behavior.
behavior and of
competitive
to
due
conditions
the
of
diversity
represented
in
our
business
sample,
the
businesses should exhibit a great deal of heterogeneity.
For that reason, cluster analysis of the sample is necessary.
Theil
(1965), Bass, Cattln and Wlttlnk (1977), Schendel and Patton (1978) stress
that aggregation of observations,
without accounting for the underlying
models governing them, produces misleading results.
level,
the results may be completely different
At a highly aggregate
from the true phenomenon
observed at a more disaggregated level.
such as the age of the
Each business has its own characteristics,
product,
the nature
of
technological change,
production process, and so on.
the
type of customer,
These characteristics permit grouping the
businesses and allow us to infer, for each configuration,
of similar strategic behaviors.
the
With this in mind,
then,
the existence
a
search for
configurations or groups of homogeneous businesses in terms of external
and internal characteristics is undertaken.
To do so, the businesses are
divided into two main sets on the basis of the nature of the business
(consumer and industrial).
A cluster analysis (Schlaifer, 1978) is then
made to Identify the natural groups in each set.
To assess the stability of the groupings,
are used.
three clustering methods
The first one is the "nearest-neighbor" method, which aims to
-8-
maximlze the minimum between - cluster distance.
The second one is the
"progressive-threshold" method (Wlshart, 1969).
"unlmodal" method
(Gltman and Levlne
number of clusters,
the
package
1978)
(Schlalfer,
program
1970).
,
clusters as
empirically
three
a
the
different
the appropriate
select
provides
a
"dendogram",
which
existing at
a
Is
each stage
diagram
of
the
The businesses In each cluster are listed In order of
decreasing density.
of
To
"Cluster" of the PIMS* AQD statistical
describing the contents of the clusters
merging process.
The third method Is the
The Inspection of
function
level
at
methods.
business clustering.
of
In
density
a
which
the
index,
clustering
the
some
plot,
allows us
should
lead
cases,
which gives the number
to
take
place.
slightly
to
determine
The
different
However, the natural groups that are identified
are quite stable under the three procedures.
Variables of Configuration
o
Thirty
variables
of
configuration
are
used
for
the
clustering.
These variables deal with strategic, environmental, and business-related
factors.
They fall Into three main groups:
1.
Business strategic posture;
2.
Product and corporate level specifics;
3.
Industry competitive characteristics.
These different variables are discussed in the industrial
strategic
Porter,
Ackerman
management
1976;
and
literature
Harrigan,
Rosenblum,
1980;
(Andrews,
Porter,
1973).
1971;
1980;
They
are
Bain,
Scherer,
shown
economics and
1956;
1980;
to
Caves
and
Uyterhoeven,
Influence
competitive situation of the firm.
Table 1 gives a siunmary of the variables of configuration.
the
-9-
Table 1
Configuration Variables
Buslness Strategic
Product and Corporate Level
Posture
Specifics
o
o
Innovation
Characteristics
o Industry Specifics
- % New Product
- Patent
- Concentration
- Relative % New Product
- Age
- Life Cycle Stage
Differentiation
- Development Time
- Real Market
- Differentiation of
- Market Share
Products and Services
o Marketing Mix
- Relative Market Share
o Corporate
Growth
o
Barriers to Entry
and Exit
- Relative Price
- Size
- Capital Intensity
- Marketing Expenditures
- Diversity
- Competitors' Entry
- Distribution Channels
- Debt/Equity
- Competitors' Exit
- Relative Product
Quality
- Relative Service
Quality
o
o Product
Industry Competitive
Manufacturing
- Plant and Equipment
Newness
- Production Process
- Relative Direct Cost
o Suppliers' and
Customers
'
Power
- Number of
Immediate
Customers
- Relative Immediate
Customer
Fragmentation
- immediate Customer
Fragmentation
- Importance of
Auxiliary Services
to End Users
- Supplier's Forward
Integration
-10-
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Four
clusters
clusters
homogeneous
of
representing
groups
consumer
businesses
of
environmental,
strategic,
Industrial
homogeneous
of
businesses
business-related
and
three
are
obtained,
each
homogeneous
are
that
and
businesses
of
term
In
characteristics.
4
The
composition and the characteristics of the groups are shown In Tables
2
and 3.
A
statistical
analysis
configurations Is performed.
after
their
(Industrial)
"Fast
general
-
Configuration
(Consumer)
-
The
distinctive
"Established
Movers";
-
(Industrial)
Configuration
"Stalled
the
been named
Tech
"HI
Giants";
1
(Industrial)
2
Job
2
-
Shops";
Configuration
Configuration
Dl versifiers";
"Established
-
of
Configuration
characteristics:
(Industrial)
3
characteristics
the
seven configurations have
Suppliers";
Configuration
4
comparing
(Consumer)
1
-
"Dominant Specialists"; Configuration 3 (Consumer) - "Laggers".
2.
The Variables
o Dependent Variables
Two dependent variables measuring performance have
These
two
literature
1981;
variables
as
are
chosen
performance
Montgomery and
Silk,
because
they
appear
selected.
been
frequently
measures
(Bass,
1969;
Buzzell
1972;
Hambrlck
and
Schecter,
and
In
the
Wlersema,
1984;
Hofer,
1980).
One
market.
dependent
variable
measures
the
firm's
performance
in
its
The other measures profitability.
^16 Small clusters with less than 20 observations have been eliminated.
-'A
pairwise
each
configurations
for
comparison
between
the
characteristic is performed. A two tailed test on the differences between
the means at a significance level of .05 has been made.
:
-19-
The dependent variables are:
- Market Share
- ROI (corrected for Inflation)
The appropriateness of either a market or a profitability criterion
as the business objective may depend on the orientation of the firm.
On
the one hand, building market share Is usually motivated by a long-term
strategic orientation.
On the other hand, a high ROI objective Is often
motivated by short-term financial considerations (Boston Consulting Group,
1975; Hayes and Abemathy, 1980).
The
use
organizational
of
these
dependent variables
Interdependencles
fit
provides
best
the
Into which
Insight
different
business
configurations depending on the decision horizon selected.
o Independent Variables
Three Independent variables are selected.
Intra-
and
Inter-buslness
Interdependencles:
They represent different
vertical
Integration,
marketing Inter-relatlonshlps, and production Interdependencles.
The variables are
V:
Vertical Integration
h:
Shared Marketing (or Marketing Interrelationships)
F:
Shared Facilities (or Production Interdependencles)
These three variables are chosen for the following reasons:
represent different forms of organizational Interdependence;
low correlation with one another;
and
show a
strong
they
they have a
correlation with
other variables having the same conceptual meaning (see Table 4).
"A correlation of .36 has been tolerated between variable M (shared
marketing) and variable F (shared facilities) because they
different conceptual meanings.
bear
-20-
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-21-
Marketlng Interrelationships describe the extent to which products
are handled by the same sales force and/or are promoted through the same
advertising and sales-promotion programs as those of other components of
the
indicate
interdependencies
Production
corporation.
extent
the
to
which the business shares its plant, equipment, and production personnel
with
other
production
components
of
the
interdependencies
interdependence
that
may
be
Marketing
firm.
are
found
an
indication
reciprocal
the
of
units.
business
different
between
and
interrelationships
Vertical integration is defined as the ratio of value added (sales of the
business - purchases of the business) and the net sales (Revenue).
an indication
the
of
sequential interdependence
may
that
It is
between
exist
the various components of the firm.
interdependencies
Horizontal
production have
businesses
between
in
marketing
or
received a great deal of attention from economists and
Baumol, Panzar, and Willig
organizational scientists.
(1982),
and Teece
(1980) have proposed that multiproduct firms are able to develop economies
of scope.
businesses
These economies help individual
competitive position.
For example,
to
improve
their
joint production may be less costly
than the combined costs of manufacturing of two Independent units (Willig,
1979).
Also, sale of different products as a package may increase total
revenue compared to selling
1976).
these
However,
the
products
economies
are
separately
limited.
(Adams
Sharing
and
Yellen,
equipment
or
of
coordination,
cost of compromise, and cost of flexibility (Porter, 1985).
The need for
marketing resources may involve different
coordination
requirements.
may
lead
to
longer
Inflexibility
competitive environment.
may
costs:
times
reaction
impede
Consequently,
cost
or
adaptation
these
larger
personnel
a
changing
to
"transaction" costs may be
-22-
hlgher than the economies that are derived from jointly using some of the
firm's
A
resources.
must
balance
found
be
between
economies
and
de-economles of scope, between S3mergetlc benefits and transaction costs.
Organizational
horizontal
Interdependency.
Tavistock studies
have
scientists
Instance,
For
(Trlst and
contributed
also
Bamforth,
enhanced In a single, face to face group.
show that
Issue
the
early
the
In
1951)
to
of
the
19506,
coordination
Is
Chappie and
In the same vein.
Sayles (1961) give an example of tasks that are put together according to
the natural work flow.
vision
In
functional
These studies stress the Importance of a global
coordinating
various
specialization as
tasks
basic
a
and,
therefore,
organizational
challenge
they
On one
structure.
hand, separate production and marketing functions associated with a given
business facilitate the achievement of a global vision and coordination.
On
the
other
functional
hand,
specialization
cutting
various
across
businesses may lead to cost reduction via scale effects and to learning
through Interaction of specialists.
Sharing equipment or marketing resources Is made at the expense of
a
better coordination
the work
of
flow
(Khandwalla,
Functional
1977).
specialization as an organizational design tends to be more bureaucratic
and
mechanistic
than
self-contained
units
are
that
more
flexible
adaptable (Lawrence and Lorsch, 1967; Walker and Lorsch, 1970).
the
self-contained
units,
as
an
arrangement,
organizational
and
However,
are
less
efficient than a functional structure (Galbralth, 1971).
Other
evidence
decentralization
(Shaw,
dealing
1964;
with
Vroom,
related
1969);
degree
Issues:
coupling
between
of
units
(Welck, 1976); and nature of Interdependencles (Thompson, 1967) show that
centralized
structures,
strong
coupling
between
units,
and
sequential
-23-
frequently
are
Interdependence
conscious,
cost
stable,
with
coupling,
loose
structures,
Decentralized
organizations.
and efficient
associated
and reciprocal Interdependence tend to be associated with more adaptable
and flexible organizations.
Independent
The
facilities
marketing
shared
of
for
variables
proxy
are
F
variables
Inter-buslness
various
the
shared
and
M
Depending on their value
relationships which have been discussed above.
For
they Indicate the existence of a particular type of interdependency.
example, when shared marketing and shared facilities take on low values,
they
represent
situation
a
of
little
business
between
interdependency
units.
other dimension of Interdependency explored
The
vertical
Vertical
Interdependency.
firm attempts
extend
to
production
interdependency
upstream
and/or
in
study
this
when
develops
is
the
through
downstream
vertical integration in order to extend control over supply and/or demand
(Worthy, 1959).
of
market
Vertically Integrated firms have been explained in terms
failures
(Williamson,
1975).
The
higher
cost
the
for
negotiating contracts with outside parties, the greater is the incentive
to integrate their function within the organization.
Whatever the benefits of vertical Integration, It does entail some
costs.
The cost of coordination and lack of flexibility may offset the
advantages
of
interdependence
a
closed
associated
implementation of
plans,
and
with
programs,
efficient
vertical
and
system.
integration
schedules
The
sequential
requires
the
1967)
and,
(Thompson,
consequently, reduces the firm's flexibility and adaptability.
The vertical integration variable V represents the vertical inter-
dependency that may develop between the various
components
of
a
firm.
.
-24-
Dependlng on Its value, the degree of vertical relatedness Is different.
This may. In turn, be related to differences In efficiency and flexibility
between units.
The Testing Procedure
3.
To evaluate the effects of the different types of Interdependencles
—market
on the variables representing business performance
- a
multi-way analysis of variance Is
share and ROI
performed for each of
seven
the
configurations.
The "vertical Integration" variable has
one of two
"high"
value
any
to
high or low.
values:
exceeds
observation for
the
to assume
This Is done by assigning the value
which
mean
overall
been transformed
the
original
vertical
of
the
varlble.
This
of
Shared
Integration
mean
differs
depending on the configuration.
The
Independent
Facilities
(F)
assume
variables
one
of
Marketing
levels:
three
and
(K)
medium,
low,
Shared
high.
or
However, to simplify the analysis and to obtain sharper contrasts between
observations only the extreme values
— low
and
high
—
are
investigated
and discussed.
A
than
low level of
10%
promoted
of
the
through
the
products
the
same
shared marketing variable Indicates
are
handled
advertising
by
the
and
sales-promotion
those of other components of the corporation.
marketing
variable
Indicates
that
more
sales
same
than
that
force
less
and/or
programs
as
A high level of the shared
80%
of
the
products
are
handled by the same sales force and/or promoted through the same means.
A medium
range
level
Indicates
that
"shared
marketing"
lies
In
the
10%-80%
-25-
A low level of the shared facilities variable indicates that less
than 10% of the products share their plant and equipment and production
personnel with other components of the corporation.
A high level of the
shared facilities variable indicates that more than 80% of the products
A
share their equipment and personnel with other components of the firm.
medium level indicates that shared facilities lies in the 10%-80% range.
The joint effects on performance of the three Independent variables
M,
F and
V when
performed at .001,
they assume different
.01,
.05 and
levels are computed.
.10 levels of significance.
and their P-levels are calculated.
Tests
are
F statistics
-26-
DlscussloD of the Results
First, we have
Our findings can be classified In at least two ways.
discovered that there are Indeed quite different types of technologyIntensive businesses.
For the
businesses producing
we have Indentlfed four distinct configurations:
Fast Movers; 3.
2.
1.
products
Industrial
Establish Suppliers;
As seen
High-Tech Job Shops, and 4. Stalled Giants.
In Tables 5 and 6, each configuration has broadly speaking very different
sets of distinguishing characteristics.
with
consumer
distinctive
products
In
configurations
The
businesses
Identification
Is
technology-Intensive
a
emerge:
Dominant Specialists; and 3.
of
significant
Similarly, for businesses dealing
1.
context,
Established
three
Dl versifiers;
2.
Laggers.
distinctive
Itself
In
terms
of
sets
of
technology-Intensive
technology
strategy.
it
Implies that within the relatively bounded grouping of a technology-
intensive businesses, a wide variety exists and that large corporations
in
all
likelihood
must
be
aware
of
this
variety
appropriate mix of strategies and structures
to
and
must
devise
an
deal with this complex
situation.
The findings,
however,
go further in providing help
for designing
structures to enhance corporate performance in diverse technology-
intensive contexts.
As seen in Tables 5 and 6, it is clear that certain
business configurations are associated with better performance,
of ROI
with
or market
poor
share,
performance
Moreover,
the
profiles
of
with
different
corporate
interdependencies.
with certain degrees
certain
business
other
of
levels
configurations
performance
in terms
interdependencies and
of
Interdependencies.
have
associated
quite
different
with
various
-27-
Table 5
Industrial Goods
Joint Effects of Interdependencles Between Business Units on Performance
Performance Criteria
ROI
Market Share
Configurations (2)
Configurations (2)
Interdependencles"
Low Vertical Integration
No Shared Facilities
Ko Shared Marketing
**
*
****
-6.49 -10.19 -18.18
(3.47)
(7.61)
(5.46)
*«**
15.03
(2.80)
**
****
***
-3.68 33.56 -10.19 -19.81
(2.97) (6.89)
(4.26) (10.87)
***
Low Vertical Integration
No Shared Facilities
Shared Marketing
-.49
-14.51
(9.49)
-17.61
(8.59)
(.94)
3.12
(3.67)
***
Low Vertical Integration
Shared Facilities
No Shared Marketing
4.26
(9.18)
-18.85
(7.15)
**
Low Vertical Integration
Shared Facilities
Shared Marketing
****
-11.98 33.71
(5.85) (7.15)
***
-.84
(9.18)
14.14
(6.46)
****
High Vertical Integration
No Shared Facilities
No Shared Marketing
***
****
14.76 -23.88
(5.39)
(5.07)
High Vertical Integration
No Shared Facilities
Shared Marketing
***
**
43.20
(15.26)
-7.07
(2.80)
High Vertical Integration
Shared Facilities
No Shared Marketing
-6.91
(5.46)
.31
(2.23)
18.28
5.47 -4.77
(4.61) (4.59) (4.26)
-10.44
7.84
(13.05)
10.04
(10.87)
(8.69.1
-8.25
(8.81)
3.53
(11.31)
***
High Vertical Integration
Shared Facilities
Shared Marketing
4.63 15.46
(5.89) (5.67)
-20.44
(5.87)
F
df
P
3.77 10.2
(8,39) (7,22)
.002
.000
4.53
(15,76)
.000
5.95 -2.35
(5.04) (5.85) (4.58)
-6.83
16.9
(8,17)
.000
3.07
5.10
6.12 1.06
(8,39) (7,22) (15,76) (8,17)
.432
.009
.001
.000
(1)
Joint
effects of the predictors on the performance criteria, with their
statistical significance, are given in each column.
Standard errors are also
given between parentheses.
The levels of significance are:
.10*, p <
p <
.05**, p < .01***, p < .001****
(2)
Configurations are the following:
Established Suppliers (C
1
),
Fast Movers (C
2
)
Hi-Tech Job Shops (cj) and Stalled Giants (cj).
(3)
Some combinations do not
available in the table.
have
any
observation.
Consequently,
no
data
are
-28Table 6
Consumer Goods
Joint Effects of Interdependencles Between Business Units on Performance
Performance Criteria-'
Interdependencles"
-29-
What does this complex set of relationships signify for scholars and
administrators?
First, we
We will deal with this question In two ways.
will discuss the results for each configuration and will Interpret the
especially
findings,
these
significance
of
discussions
regarding
terms
In
current
the
of
varying
and
co-existence
Increasing
the
corporate-wide strategic
the
we will discuss
Second,
specific results.
relationships between large-scale. Integrated corporate R&D and smallscale, entrepreneurial units within the large corporation.
The results of configuration l-I In the Industrial products group,
termed Established Suppliers, indicate that the absence of all kinds of
However,
Interdependencles Is negatively associated with ROI performance.
the high vertical Integration alone or high vertical Integration plus high
marketing
shared
there may
Obviously,
explanations
several
be
these
for
performance.
ROI
with
associated
positively
are
For
findings.
Established Suppliers, we know that there Is a small concentrated set of
They probably buy a great many components from the same vendor.
users.
there
Therefore,
significant
be
synergies
In
marketing
sharing
therefore,
Moreover, cost Is a key competitive factor and,
activities.
vertical
may
can
integration
significant.
be
components themselves may be very different
the
On
hence,
and,
hand,
other
require
the
little
sharing of facilities.
The
however,
market-share
exhibit
performance
rather
different
results
set
of
for
share
performance,
three
Interdependency
share
performance.
It
a
categories
may
be
high level
Is
that
configuration,
While
relationships.
Interdependency In solely vertical Integration Is
with market
this
of
negatively
capturing
associated
high
positively
Interdependency In all
associated
market
with
share
market
for
this
-30-
adaptation to market conditions.
burden
administrative
on
rapid
and
flexibility
Internal
requires
configuration
buslnesses
Extreme Interdependency puts an enormous
behavior
makes
and
coordination
extremely
an
complex and, In this case, unproductive task.
For the second configuration In the Industrial products area, 2-1,
termed Fast Movers, our results show that little or no interdependency Is
negatively associated with ROI performance as Is high vertical Integration
alone.
Is
But high Interdependency In
facilities
with
associated
positively
plus
high
simultaneously all
ROI
performance,
marketing.
shared
But
In
Is
as
categories
three
terms
of
high
shared
market-share
performance, the total absence of Interdependency Is positively associated
with market share performance, w^hlle high shared marketing alone and high
shared
marketing plus
high
shared
facilities are negatively associated
with market share performance.
These
according
contrasting
ROI and market share
to
relationships
Interdependency-performance
criteria call
attention
to
the
very
difficult strategic tradeoff that young high technology businesses face:
to
capture
market
share
early
In
product's
a
Immediately to seek high profitability.
cycle
evolutionary
or
If long-term Industry dominance.
In terms of voliune. Is a major objective, then, according to our findings,
these businesses should strive to keep simultaneously all three forms of
Interdependencles low, since this profile Is associated positively with
market
share.
One
explanation
for
this
result
Is
that
any
kind
of
appreciable amount of any type of Interdependency may tend to undermine
the ability of a young high-tech business
commitments for each of Its products.
to maintain a
set
of
focused
.
-31-
But such a profile of Interdependencles Is maintained at the likely
A high
expense of a positive ROI performance, according to our findings.
level of Interdependencles along all three dimensions or high levels of
Interdependencles In terms of shared facilities plus shared marketing are
positively
Interdependency
of
high
On
performance.
ROI
with
associated
vertical
Integration
the
other
alone
Is
the
hand,
negatively
associated with ROI performance.
of
the
Important lessons of those findings that are related to Fast Movers.
On
results
beneficial
The
of
flexibility
seem
to
one
be
the one hand, the absence of any kind of Interdependency appears to allow
these types of businesses to adapt quickly to changing external conditions
and thereby achieve positive market share results.
However,
the efficiency of the businesses may suffer.
better profitability, a high level of
coordination and
To achieve
exploitation
of
Therefore, clarity of strategic goals Is
synergies appear quite useful.
crucial - a theme that seems to be Important In the technology-Intensive
environment
and
one
that
we
will
throughout
stress
this
paper.
These
young businesses must be careful In employing management control methods
too enthusiastically and In Implementing a wide array of tight linkages
Such a posture may lead to high profitability, but not market dominance.
But extreme flexibility has Its own dangers.
Namely, Inefficiency In the
midst rapid market growth.
The results of configuration 3-1, High-Tech Job Shops, exhibit still
another
set
of
Interdependency-performance
The
relationships.
findings
that are negatively associated with ROI performance highlight the hazards
of
either
extreme,
Interdependency,
for
a
complete
this
absence
configuration.
of
Interdependency
Moreover,
the
or
absence
complete
of
any
-32-
Interdependency, as well as the profile of high shared facilities alone,
are negatively associated with market share
performance.
On
other
the
hand, the profile of high shared facilities plus high shared marketing Is
positively associated with market share performance.
findings
The
related
to
configuration,
this
High-Tech Job
Shops,
Indicate that an effective strategy may very well be a middle-of-the-road
one
that
Is
businesses
flexible and adaptive.
serve
diverse
a
customers.
of
set
competitive factor, but quality Is.
probably
useful,
least
at
for
stance makes
Such a
Cost
products
of
not
the
and
related
for
Probably
segments of the market, especially for Increasing market share.
the exact
kind of beneficial Interdependencles
key
some Interdependency Is
Therefore,
families
Is
These
sense.
depending
varies
on
the
specific product and the market.
The
results
configuration
for
4-1,
Stalled
termed
Giants,
are
especially Instructive since they do not support the commonly held belief
that mature large businesses can effectively and probably should usually
compete
on
basis
the
of
economies
of
(Porter,
scope
and
scale
1980).
Indeed, the complete absence of Interdependencles Is positively associated
with ROI
performance,
Integration
shared
plus
performance.
while
On
the
a
high
marketing
other
Interdependency
Is
negatively
hand,
level
associated
complete
the
for
vertical
with
absence
ROI
of
Interdependencles Is negatively associated with market share performance.
Again,
looms
as
a
In
a
key
very
Issue.
different
It
seems
context,
that
In
a
major
these
strategic
businesses,
rather mature, which experience long development times,
tradeoff
which
are
and which serve
concentrated customer groups, extreme loosely linked structure appears to
be
beneficial
In
terms
of
profitability.
Perhaps
such
a
decoupling
-33-
prevents contamination from spreading from the poorly performing SBUs to
hand,
potential health.
least
the businesses with health or at
such firms from exploiting any
such a fragmentation will Inhibit
possible
A
performance.
situation
this
and
sjTiergles,
that
lesson
significant
the other
On
constrain
will
market
share
from
these
emerges
possibly
findings is that mature firms in technology-intensive settings need to be
able to focus their resources on the
businesses that still
possess
the
They should not become
likelihood for success in the present or future.
distracted by too much diversity.
Our findings with regard to consumer product businesses also exhibit
a
diverse
array
the
For
relationships.
Interdependency-performance
of
our results offer an
configuration 1-C, termed Established Dlverslflers,
intriguing set of relationships between Interdependency levels and ROI or
High shared marketing alone and high vertical
market share performance.
Integration alone are positively associated with ROI performance, while
simultaneous
negatively
high
levels
of
with
associated
ROI
kinds
three
all
performance.
are
interdependency
of
hand,
other
the
On
simultaneous high levels of all three types of Interdependency, as well
as
vertical
share
integration
performance,
are
alone,
while
a
positively
absence
complete
of
market
with
associated
Interdependency
is
negatively associated with market share performance.
Again,
from
this
maintaining
set
of
clarity
of
is
flexibility
Some
findings.
objectives
is
an
lesson
important
needed
to
compete
effectively for this business group, where quality and service are key
competitive
factors.
concentration,
and,
efficiency,
can
as
There
is
therefore,
vertical
a
significant
shared
Integration
marketing
for
amount
of
can
often
businesses
customer
serving
enhance
those
-34-
clusters of customers for whom cost Is Important.
Moreover, In the long
run, maintaining control over costs and establishing a
of
synergies
probably
lead
should
high
market
shares.
Established
become
overly
enamored
with
to
not
comprehensive set
Dl versifiers
attraction
the
of
flexibility since their customers appear to be constantly seeking lower
cost and demanding efficiencies, as long as quality and service measure
up.
Configuration 2-C, termed Dominant Specialists, offers still another
set of findings and lessons.
Our results Indicate that a complete absence
of Interdependencles are negatively associated with both ROI and market
share
performance,
associated
with
while
both
high vertical
ROI
and
market
Integration alone
share
positively
Is
performance.
shared
High
facilities alone Is negatively associated with market share performance.
Economies
of
scale
In
manufacturing are
for this configuration of businesses.
clearly often
beneficial
There may not be a great deal of
variety of products, though there Is some variety In the customers base.
But
the
low
cost
customers generally, at least In the long run,
products
and
Dominant Specialists.
Improve market
share
efficiency
Also,
on
the
part
of
appear to value
vendors,
their
the
overall coordination and control appear to
performance.
Finally,
the
findings
Issue
a
clear
warning to Dominant Specialists not to become too flexible, adaptive, and
decentralized.
units
for
Perhaps a hyper-lsolatlon or decentralization of business
this
configuration
inhibits
the
transfer
of
key
synergies,
which are required to remain strong for serving specialized markets.
The
findings
that
relate to our
final
configuration,
3-C,
termed
Laggers, offer lessons for what are one of the least healthy of the types
of businesses
that we studied.
The complete absence of
Interdependency
-35-
is
associated with
positively
both
ROI
and
market
share
performance,
while high shared facilities plus high shared marketing are negatively
associated with ROI and market share performance.
A clear implication of
these results is the obvious attraction of high flexibility,
structural
decoupling, and decentralization for businesses in "sick", though perhaps
technology-intensive,
industries.
Such a structure may
contamination from poorly performing businesses and
at
possible
reduce
least
may allow
for a turnaround for a few growth areas through a targeted niche strategy.
In this manner, the relevant existing strengths of a firm can be exploited
selectively,
strengths
new essential
possibly
can
be
and
established,
distraction through counter-productive coordination can be avoided.
The most
important significance of our findings, however,
may not
lie in the interpretation of and in discerning the lessons of each of the
specific
sets
of
Interdependency-performance
the business configurations indentified.
relationships
Rather,
for
each
of
the crucial meaning of
our findings is that, in fact, the whole relationship between technology,
structure,
and strategy is a much more complex one than has
been documented.
business
previously
There is clearly a diverse array of technology-intensive
configurations.
The
each
behavior of
of
these
configurations
appears to follow quite different rules from the others.
Successful
business
performance
is a multifaceted matter.
in a
technology-intensive
context
Indeed, as an issue it is probably similar in
nature to the related challenge of managing multi-business firms, which
4
usually
requires
managing
a
portfolio
of
business
units
that
have
different types of objectives and characteristics (Haspeslagh, 1982).
We can begin to conceptualize the general outlines of the important
factors for managing successfully a technology-intensive business. There
-36-
performance goals, which in this study
are at least two key dimensions:
are ROl or market share, and strategic interdependencies, which can range
from a complete absence of interdependency to total interdependency with
various
forms
interdependency
intermediate
of
levels
inbetween.
technology-intensive businesses have
Conceptually, as seen in Figure 2,
to consider the time horizon of their strategic goals, short term (related
(related to market share).
to ROI) or long term
the
degree
strategic
of
decoupling
business
and
flexibility
and
linkages
unit
that
should
they
independence
entrepreneurial
They also must consider
can
venture
establish.
Extreme
with
associated
be
while
units,
extreme
interdependency can be associated with the benefits of economies of scope
and scale.
of
Perhaps, most interesting is that there is clearly a variety
structural possibilities inbetween these two extremes and that
these
mid-range positions are at times also associated with positive (as well
as negative) performance results.
A very important aspect of these findings relates to the strategic
behavior of the large corporation that competes in several technologyintensive
areas.
unambiguous
and
corporate-wide
In
our opinion,
significant.
capability
to
set
and
from
be
able
to
select
meaning
Technological
manage
possibly extremely diverse,
to
the
of
a
for
diversity
simultaneously
internal
range
this
an
strategic
of
technology-intensive businesses in a portfolio.
institution
Is
requires
a
appropriate,
and
Interdependencies
strategic
goals
for
the
-37-
Flgure 2
Strategic Goals and Linkages
Market Share
/ Competitive Conditions
Strategic Posture
V Business Characteristics
I
Interdependency
ROI
-38-
CODCluSlOD
We would first like to point out
study.
this
To begin with, the analysis has been made on pooled cross-
Consequently, an Identical business may be observed over
sectional data.
a
some of the limitations of
four-year
time
Because we
span.
each
expect
Individual
business
to
maintain a consistent behavior and similar characteristics over a fouryear time period, this may have biased some of the results.
Second, our
choice of R&D expenditures as a proxy variable for technology-Intensive
businesses may not be totally accurate.
with
high
R&D
Include
may
expenditures
On the one hand, consumer goods
businesses
products
have
that
which are modified frequently to respond to taste and fashion changes.
Consequently,
low.
On
the
other
the
expenditures
expenditures may
technology content of these
tends
to
Although our decision
limit
to
decision
our
hand,
notion
the
focus
not
on
include
to
R&D may clarify
product
very
process
technological
of
be
R&D
intensity.
the
set
of
businesses examined, this decision also may unnecessarily narrow the set
Third, the multi-way analysis
of "real" technology-intensive businesses.
of
variance
performed
is
on
a
limited
Interdependencles are not observed.
for
which
data
is
available
are
data
set.
cases
Several
of
Consequently, only the joint effects
computed.
In
addition,
the
lack
of
observations for some of the cases of interdependencles prevent computing
the main effects on performance of each specific Interdependency and the
interaction
effects
intra-organizatlonal
between
interdependencles.
interdependency has
not
Fourth,
been
fully
the
notion
explored.
of
For
example, interdependencles in terms of information networks, hierarchical
relationships, and power structure have not been taken into account.
An
-39-
Investlgatlon
of
interdependencles
and
spectrum
broader
a
also
should
linkages
Intra-organlzatlonal
of
be
studied.
High technology also
study only deals with internal Interdependencles.
Involves interorganlzatlonal linkages
of
research
still
performance
results
to
would
done
be
(Ohmae,
associated
An Important
1985).
combine
certainly
Internal
both
with
our
Finally,
area
review
a
of
external
and
interdependencles In technology-Intensive contexts.
fiut
In spite of the acknowledged constraints of this research, the
analysis has resulted In some significant findings and Implications
both further study and for management practice.
there are
several distinctive kinds of
We Identified seven configurations.
Established
area:
Suppliers,
Fast
First,
It
for
appears that
technology-Intensive
businesses.
Four are In the Industrial products
High-Tech
Movers,
Job
Stalled Giants, and three are In the consumer products area:
Shops,
and
Established
Clearly, technology-
Dlverslflers, Dominant Specialists, and Laggers.
Intensive business behavior Is a quite diverse matter.
Second, we also Identified a spectrum of strategic Interdependency
levels,
ranging from total
Interdependence.
our
analysis,
marketing.
each
kind
We used
vertical
Independence
of
three different
Integration,
businesses
the
types
shared
of
to
complete
Interdependencles
facilities,
and
In
shared
We originally expected, and later found to some degree, that
of
interdependency
and
each
combination
of
Interdependency
might affect business performance differently for each of the different
business configurations.
Conceptually, we believe that there are at least two Important kinds
of
performance
measures
for
technology-intensive
businesses,
short-term
-40-
We used ROI as a short-term
orlented ones and long-term oriented ones.
measure and market share as a long-term measure.
kinds
of
Interdependencles
that
We found that often the
associated
positively
are
with
ROI
performance were not similarly associated with market share performance.
Hence,
clarity of strategic goals Is critical In a technology-Intensive
business.
The
research
also
produced
interdependency-perf ormance
complex
a
associations
for
diverse
and
the
set
of
configurations.
seven
Our discussion of the findings and Implications for each of the specific
configurations
Is
presented above.
At
a
more
general
level,
however,
terms such as "technology-Intensive", "high technology", or "Innovation-
Intensive" alone are not very useful for devising effective strategies In
product-markets where R&D expenditures are high.
The strategy-structure
Technology is only
relationship in such a context is complex and varied.
a starting point in understanding structure and competitive behavior.
The
which
implications
usually
has
the
are
especially
responsibility
the
corporate
level,
allocating
resources
for
crucial
for
at
a
portfolio of technology-intensive businesses that differ themselves along
a
number
of
critical
dimensions.
Again,
we
repeat:
diversity is at least as complex as business diversity.
technological
Of course, a key
concern at the corporate level Is the selection of the proper portfolio
of
technology-intensive
businesses,
which,
given
the
fact
that
we
identified seven distinctive configurations of such businesses. Is a more
difficult task than the earlier relevant research would lead us to believe
(Ansoff and Stewart, 1967; Freeman, 1982 edition).
Another crucial issue relates to effective structure for innovation.
The current debate has focused on the costs and benefits of establishing
-41-
the
designing
between
Interdependency
the
extremes
two
require
Interdependency
contains
more
one
than
type
different
of
diverse
and
Intensive
technologically
of
more
research,
our
In
structure
effective
for
than
simplistic
a
Independence
complete
and
technology-Intensive
Different
kinds
different
for
seen
much
total
of
units.
business
of
configurations
business
Internal
Involves
competition
have
we
as
appropriate
most
the
technology-Intensive
tradeoff
However,
corporation.
large
entrepreneurial units within
and
small-scale,
varlous forms of venture,
types
of
performance.
A
and
levels
positive
corporation
likelihood
all
In
such
Consequently,
configuration.
a
corporation must be able to cope with and exploit several levels of Interdependencles
at
The
time.
same
the
organization.
fact,
In
must
also
possess the capability of continuously rejecting, creating, and modifying
Its set of strategic Interdependencles as the situation warrants.
To
for effective
conclude,
competition,
technology-Intensive
what
we are ultimately calling for Is an organizational form that maintains an
overall capability for mega-structural flexibility with regard to Internal
Institution should be able
This
Interdependencles.
diverse sets of strategic Interdependencles.
to
support
and
use
The specific design of such
a structure Is obviously contingent on the selection of technology-
businesses
Intensive
characteristics
In
the
of
the
set
of
overall
portfolio
interdependencles
of
are
a
firm.
also
But
clearly
the
more
complex than merely possessing on the one hand mainstream industrial R&D,
with such units as research laboratories, engineering design departments,
and
pilot
units
that
Clearly,
and,
plants,
tend
to
on
mimic
the
other
hand,
Independent
Silicon Valley within
the
modem enterprises are only now beginning
entrepreneurial
large
to
corporation.
confront
In
a
sophisticated fashion technology-intensive competition, which is emerging
as both a crucial and surprisingly complex management challenge.
-42-
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