Take a look at the product line graph of Samsung Electronics
pictured here. As I am sure you know from entering any consumer electronics
store, they have all sorts of entertainment systems including large TVs, a
lineup of high-performance mobile phones, computers and peripherals, cameras,
and even washers and dryers. In addition to that, they make many of the
electronics that go into these devices, such as microprocessors, memory, and
other semiconductor devices. For businesses they supply a broad range of
communications equipment both wired and wireless. They are the archetypical
diversified corporation that is not supposed to exist anymore and that in many
economies (such as the U.S.) has been dismantled and sold at a profit. But they
still hold together.
It is not because of friendships among managers – the way to
get promoted is to do better than your peers, so it is a fiercely competitive
company internally. Compare your performance with the nearest department,
function, or division, and find a way to do better than it. But if the
diversified corporation isn’t a way to bring people working on different but
related businesses together in a somewhat friendly way, what is it for? The departments
or divisions might as well be different corporations, because they would
definitely compare and compete then too. In a recent paper in Administrative Science Quarterly, Oliver Baumann, J. P. Eggers, and Nils Stieglitz found a key
to the answer. Interestingly, it is exactly through competition that such
corporations can do well. They are unique because both the type of competition
and awards from competition are nearly the opposite of what you see between
independent companies.
The type of competition is nearly opposite because
corporations that compete want to win the support of customers, but divisions
that compete want to win the support of headquarters. The awards from
competition are nearly opposite because customers provide cash from purchases,
but headquarters provide budgets to operate and invest. The two are different
because headquarters’ money can be directed into specific activities such as
research and development, which helps the division explore new grounds. Customers’
money can do the same, but it has many other uses including the simple option
of using it to spend more to win customers’ support for exactly the same
products.
This matters because a smart headquarters knows that an
ambitious division that wants to win can make smart and aggressive investments
in technologies. Often these will be too ambitious, so the division ends up
losing money, but there is a solution to that. As long as the corporation has
divisions with complementary products, there is usually a benefit to some other
division as well. What is required is complementarity among divisions so that
both winner and loser investments for one division can become winner
investments for the corporation. Look at the Samsung product line again. It is
full of complementarity. There are devices using the same parts, exploiting
similar intellectual property, and shaping complementary customer preferences.
The diversified firm still has some life left if it remembers to compete,
compare, and invest in technology.
