One of the most fundamental and enduring tensions in all but very small companies is between subunit autonomy and empowerment on the one hand and overall organizational integration and cohesion on the other.1 The tensions grow with increasing organizational complexity and assume the most intensity in large, diversified global companies.2 In our research with such organizations, we have seen that it is possible to balance those tensions successfully by implementing four kinds of horizontal integration for achieving cohesion without hierarchy.
Over the last decade, many large companies around the world focused on creating relatively autonomous subunits and empowered managers by breaking up their organizational behemoths into small, entrepreneurial units. Some, though not all, achieved significant benefits from such restructuring.3 Freed from bureaucratic central controls, the empowered units improved both the speed and the quality of responsiveness to market demands — and fostered increased innovation. Companies were able to reduce their corporate-level overhead and make internal-governance processes more disciplined and transparent.
However, the empowerment of subunits also led to fragmentation and to deficiencies in internal integration. The autonomous managers of subunits saw few incentives to share knowledge or other resources, particularly when evaluation of their performance focused primarily on how their own unit was doing, rather than on how the unit contributed to the company’s overall performance.
But today, in company after company, we are finding that management attention has moved to the integration and cohesion side of the tension. (See “About the Research.”) Having captured benefits from strengthening the competitiveness of each unit, companies are now improving integration in order to achieve the benefits of better sharing and coordination across those units.4
1. For a theory-grounded analysis of the tension, see R.P. Rumelt, “Inertia and Transformation,” in “Resource-Based and Evolutionary Theories of the Firm,” ed. C.M. Montgomery (Boston: Kluwer Academic Publishers, 1995), 101–132.
2. For a rich description and analysis of that tension in the context of large, diversified global companies, see C.K. Prahalad and Y. Doz, “The Multinational Mission: Balancing Local Demands and Global Vision” (New York: Free Press, 1987).
3. For a description of companies that followed the strategy of creating small units to rekindle front-line entrepreneurship, see S. Ghoshal and C.A. Bartlett, “The Individualized Corporation: A Fundamentally New Approach to Management” (New York: HarperCollins, 1997).
4. That sequential process of performance improvement — first building the strength of the units and then building integration mechanisms across them — was described in S. Ghoshal and C.A. Bartlett, “Rebuilding Behavioral Context: A Blueprint for Corporate Renewal,” Sloan Management Review 37 (winter 1996): 23–36.
5. For a classic analysis of that need, see P.R. Lawrence and J.W. Lorsch, “Organization and Environment” (Cambridge, Massachusetts: Harvard University Press, 1967).
6. The impact of the Web on integration opportunities can be inferred from the analysis of R.L. Daft and R.H. Lengel, “Information Richness: A New Approach to Managerial Information Processing and Organizational Design,” in vol. 6, “Research in Organizational Behavior,” eds. L.L. Cummings and B.M. Staw (Greenwich, Connecticut: JAI Press, 1984), 191–234. For a focused discussion on the role of IT in facilitating communication, see A.D. Shulman, “Putting Group Information Technology in Its Place: Communication and Good Work Group Performance,” in “Handbook of Organization Studies,” eds. S.R. Clegg, C. Hardy and W.R. Nord (London: Sage, 1996), 357–374.
7. See A. Edstrom and J.R. Galbraith, “Transfer of Managers as a Coordination and Control Strategy in Multinational Organizations,” Administrative Science Quarterly 22 (June 1977): 248–263.
8. The important but often ignored role of middle managers in organizational integration has been described in R.M. Kanter, “The Change Masters: Innovation and Entrepreneurship in the American Corporation” (New York: Simon & Schuster, 1983).
9. Such vertical processes of organizational integration lay at the heart of the divisional organizational model. For one of the richest and best-known expositions, see A.D. Chandler, “Strategy and Structure: Chapters in the History of American Industrial Enterprise” (Cambridge, Massachusetts: MIT Press, 1962).
10. See J. Galbraith, “Designing Complex Organizations” (Reading, Massachusetts: Addison-Wesley, 1973); and for a discussion of horizontal mechanisms in large, global companies, see C.A. Bartlett and S. Ghoshal, “Managing Across Borders: The Transnational Solution” (Boston: Harvard Business School Press, 1988).
11. We focus on the challenges of internal integration across existing and established units within large, complex organizations. Clearly, there are other important integration contexts — such as integrating strategic alliances, joint ventures, upstream and downstream partners on the value chain and so on. We do not address those contexts here, but interested readers can find comprehensive discussions elsewhere: for example, in Y. Doz and G. Hamel, “Alliance Advantage: The Art of Creating Value Through Partnering” (Boston: Harvard Business School Press, 1998). Within the organization, integration of new ventures poses unique challenges. An outstanding analysis of the topic appears in C.M. Christensen, “The Innovator’s Dilemma” (New York: HarperBusiness, 1997).
12. Several authors have highlighted the need of a social structure to support IT-based systems for effective knowledge management in distributed organizations. See, for example, the discussion on social ecology in V. Govindarajan and A. Gupta, “The Quest for Global Dominance: Transforming Global Presence Into Global Competitive Advantage” (San Francisco: Jossey-Bass, 2001).
13. See, for example, M.T. Hansen and B. Von Oetinger, “Introducing T-Shaped Managers: Knowledge Management’s Next Generation,” Harvard Business Review 79 (March 2001): 106–116.
14. This is essentially a sophisticated use of social control. See W.G. Ouchi, “A Conceptual Framework for the Design of Organizational Control Mechanisms,” Management Science 25 (September 1979): 833–848.
15. See J. Pfeffer and R.I. Sutton, “The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action” (Boston: Harvard Business School Press, 2000).
16. The benefits of hierarchy provide the theoretical basis for influential economic analysis of why companies exist, one of the most well-known being O.E. Williamson, “Markets and Hierarchies: Analysis and Antitrust Implications” (New York: Free Press, 1975).
17. For a discussion on the limitations of a hierarchical system in coping with uncertainty and rapid change, see S.L. Brown and K.M. Eisenhardt, “Competing on the Edge: Strategy as Structured Chaos” (Boston: Harvard Business School Press, 1998).
18. See A. Bandura, “Self-Efficacy: The Exercise of Control” (New York: Freeman, 1997).