Strategy; Strategies: Multi-divisional knowledge networks

TRIMILLENNIUM MANAGEMENT: STRATEGIES
Multi-divisional knowledge networks

By Sushil Khanna

For 300 years, the main engine of economic growth was that venerable institution of the modern era: the capitalist firm. The firm's structure and processes were based on non-market principals, hierarchies, command- and control-systems, and long-term contracts. The reason firms exist is linked to the fact that the co-ordination of different elements of the value chain using the market is far more costly than the co-ordination brought through hierarchies and contracts. Hence, the main objective of the firm remains to co-ordinate and motivate its members to create products and services which are cheaper and acceptable to the customer. It does so through a system of structured information-flows, which, in turn, are juxtaposed on the hierarchy or an organisational structure.

Efforts to replace the capitalist firm with a more humane, gentler, or more democratic institution like a co-operative or a self-managed firm or a socialist enterprise have not succeeded. However, the capitalist firm itself has transformed and redesigned itself to keep pace with changes in the macro-environment. Strategy or the task of allocating (or re-allocating) resources in the firm has, traditionally, been the responsibility of the entrepreneur. With the evolution of the capital markets and the divorce between ownership and control, these tasks and decisions came to be organised at the level of the top management, or what Alfred Chandler called the general office. As the firm grew in size, and diversified into new businesses, this team at the general office found it increasingly difficult to make strategic decisions that would provide competitive advantage. This was because the increasing diversity required knowledge and information that was specific to a business or industry.

The result was the first major innovation in organisational structure last century: the Multi-Divisional Firm, where the general office concerned itself with the task of resource-allocation between businesses or divisions and decentralised the task of business strategy to divisional heads. Over the years, several innovations have tried to enhance the flexibility of organisations while retaining the co-ordinating-centre. But the structure of the firm itself has not changed much beyond Chandler's description of the M-form, despite the growth of larger and larger firms, with multinational operations and increasing market and product diversity.

It is my belief that the capitalist firm is on the threshold of a major transformation in its structure and design. This will have a profound implication for the class of managerial decisions that are known as strategic decisions. This millennium will see even more profound changes in the economy and the marketplace. Several forces have come together to transform the way the economy and the flow of products and services have been organised since the Industrial Revolution.

It is the advent of information and communications technologies that is the main motor of this second great transformation. These will transform not only older and traditional industries, but the very way in which all companies organise their work and, even more significantly, the manner in which they perceive production and consumption. The New Economy will, increasingly, be based on services rather than products, on information resources rather than physical resources, and on knowledge-rather than physical-assets. It will bring into existence new industries that merely produce information and knowledge. The advent of infotech has profound implications for all segments of the economy through the increasing integration of markets, declining transaction-costs, the erosion of entry-barriers, the growth of knowledge-based industries and firms, greater flexibility in creating and distributing products and services, an increasing uncertainty even in traditional industries, and the segmentation of a market hitherto held together by the dis-economies of fragmentation.

The strategic challenges for managers in this millennium are different. Firstly, new technologies and changes in the market will make it possible to segment customer groups and differentiate products and services on an unforeseen scale. Secondly, since competitive advantage in such markets will result from bundling together several services with the product, the need to integrate these within a company, or to achieve them through alliances with other companies will become vital.

Declining transaction costs and the need to manage and leverage knowledge and information will alter the scope and boundaries of firms. Market-pressures that could earlier be contained through a divisional form will need the dispersal of strategic decision-centres within an organisation. From a unidirectional flow of information, the new firm will be built around a network. Obviously, the need for more co-ordination and managing linkages between centres will be critical to the successful implementation of strategies.

In other words, responsibilities and the flow of strategic information will need to be dispersed within an organisation. However, even this may not be enough, and companies will have to create linkages with such knowledge centres in other firms. The result will be the disaggregation of strategic tasks within large firms. The 21st Century firm will look like an aggregation of such disaggregated structures. Delivering value to the customers will become increasingly dependent on linkages between firms with permeable borders.

So far, successful firms have managed this disaggregation through internal processes. Firms like Microsoft or, closer home, Infosys have managed this through teams, task-oriented groups, and divisions. The role of the centre remains limited to handling the firm's human resources, managing its relationship with capital markets, and strengthening the role of self-managed teams.

As we move further into this millennium, the co-ordination of activities across firms to formulate successful strategies will pose a special challenge. Companies will have to learn to share the benefits from these linkages. Such relations between firms will be mediated by financial markets. There will also be the need for teams from 2 independent firms to forge linkages.

The corporate centre's task will no longer be the formulation and implementation of strategy, but the orchestration of strategy-formulation at different levels in its own organisation, and in the network structure within which most firms will be embedded. It is the strength of these linkages, networks, or alliances that will create the flexibility to cope with a rapidly-changing marketplace.

Sushil Khanna is a Professor at the Indian Institute of Management, Calcutta

Issue Contents Write to us Subscriptions Syndication