Integrating the Enterprise
Vertical "command and control" sabotages organizations that need bottom-up innovation to be competitive. Yet organizational integration is increasingly essential. New research shows how technology is helping cutting-edge companies meet the challenge by integrating horizontally. Sumantra Ghoshal and Lynda Cratton

nc ofthe most fundamentiil Lind enduring tensions in all liiit very small companies is between siibunit aulononiy and empowermenl on ihc one hand and overall organizaliontil integnition and cohesion on Lhe other.' The tensions grow with increasing organizational complexity and assume tbe most intensity in large, diversified global companies.^ In our research with such organizations, we have seen ihal it is possible to balance those tensions successtijlly by implementing four kinds of horizontal integration for .ichieving cohesion witboul hierarchy. Over the lasL decade, many large companies around the world focused on creating relatively autonomous subunits and empowered managers by breaking up ihoir organizational behemoths into small, entrepreneurial units. Some, though nol all, achieved significant benefits from such restructnring.-' Freed from bureaucratic ccnlral 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 tbeir corporate-level overbead and make internal-governance processes more disciplined and transparent. However, Lbe empowerment of subuniUs also led to fragmentation and to deficiencies in internal integration. The autonomous managers of subnnits saw few incentives to share knowledge or other resources, particularly wben evaluation ol their performance focused primarily on how their own unit was doing, rather than on how the unit contributed to tbe company's overall performance. But today, in company after company, we are finding that management attention has moved to tbe integration and cohesion side of tbe tension. (See "About the Researcb."J Having captured benefits from

Sumantra Ghoshal is a professor of strategic leadership at London Business School, where Lynda Gratton is an associate professor of organizational behavior. Contact them at sghoshal@london.edu and lgratton@london.edu.
FALL 2002 MIT SLOAN MANAGEMENT RFVIFW 31

strengthening the competitiveness of each unit, companies arc now improving integration in order to achieve the benefits of better sharing and coordination across those units.'* Altbougb many companies are moving toward integration, our research shows tbat tbe drivers forcing that change often differ. For some enterprises, the main impetus comes from the demands of customers whose needs cut across the company's internal boundaries. At global engineering company ABB, the 1,300 small companies tbat Percy Bartievik creiited in tbe late 1980s have been consolidated by current CEO lorgen Centerman into 400, primarily for serving global customers more effectively. Customer needs created similar pressures at OgilvyOne, tbe world's largest direct-marketing agency. That company had to roil out the American Express Rlue credit card worldwide across mullipie media in six montbs — a task that would have been impossible in the formerly fragmented and internally competitive OgilvyOne. For other companies, the effects of technological change on management of innovation are tbe primary integration drivers.

by that fundamental technological change, Sony entered the personal-computer business, the establisbed gateway to the Internet, and launched VAIO cornputers. Tbe company proceeded to develop an integrated innovation process so that its VAIOs could work seamlessly with all otber Sony offerings. At Oracle, Goldman Sachs and luxury-goods business LVMH, rapid growtb and globalization are what's driving consolidation and integration. Oracle grew at a phenomenal pace internationally, witb little time to develop its organizational systems and processes. Hach of its overseas units developed its own system to meet the needs of local customers. Over tbe last two years, tbe company has worked hard to standardize and integrate those systems and to achieve efficiency and better global coordination. At BP, the integration driver is different still. BP's mergers with Amoco, Arco and Castrol created a fragmented organization witb many different tnanagement styles and pbilosophies. So integration bas been vital for turning tbe focus of tbe 100,000 employees away from tbeir differences and toward their shared future. Confronting the same needs are Indian pharmaceuticals company Nicholas Piramai, which grew rapidly through acquisitions, and OgilvyOne, whicb keeps acquiring Internet marketing companies that differ from its traditional direct-marketing businesses.

About the Research
This article is based on our case research over the last five years in 15 large, global companies in North America (Oracle, Goldman Sachs, Sun Microsystems), Western Europe (ABB. BT. Lufthansa. SKF, BP. LVMH), Asia (Sony, the LG Group, Standard Chartered Bank) and emerging markets such as Brazil (Natura) and India (Indian Infosys, Nicholas Piramal). We interviewed numerous managers in each company, and we made use of documents from public sources and the companies themselves. For each company, we wrote up a separate case study. In some of the companies (Lufthansa, BT, the LG Group, Indian Infosys), we repeated the full process twice over the last five years, so as to document change over time. Our research focus was not on integration, per se, but on management of change and performance-improvement processes. The issue of horizontal integration emerged from our research as one of the important means many of these companies were adopting in order to improve their business performance.

A Need for Horizontal Integration
At one level, notbing is new bere. The need for integration to counterbalance internal differentiation is an old chestnut.^^ But today's circumstances create some new possibilities and eliminate some historical ones. Tbe most important change is tbe Web and the associated infortnation-tecbnology capabihties. Information sbaring has always been at the heart of integration, but now technology allows organizations to respond to integration needs in ways tbat were unavailable even five years ago.^ Meanwhile, sotne previous integration tools bave become less significant: staff relocation and structured career paths, for example. Formerly, in companies as diverse as Unilever, Matsushita and Hewlett-Packard, managers wbo had worked in different functions, businesses and geographic locations turned their collective personal networks into tbe glue tbat held the company together.^ Althougb sucb networks are still a powerful ttiol for socializing people and building organizational cohesion, tbey are less common — in part because lifetime careers and ondemand mobility of employees can no longer be assumed. Then, the drastic pruning of middle management tbat many companies undertook in the 1990s deprived them of an important but often unrecognized source of organizational integration.**

For example, witb home enteitainment shifting Irom standalone, analug-tccbnology-based consumer electronics to Webbased, digitized content delivery, Sony saw the need to integrate its historically autonomous product divisions. Sony bad to make all its audio and video products (plus its tnusic and movie software) compatible and accessible directly through a personal computer, video-game macbine, PDA or mobile phone. Driven
32 MITSt.OAN MANAGEMENT REVIEW FALL 2002

The midievel managers who once played boundary-spanning and coordinating roles are gone. But perhaps the most important change i.s in management philosophy. In the past, integration was managed primarily through vertical processes. The way to encourage different businesse.s, functions or geographical units to share resources and coordinate their activities was lo bring them under a conimon boss and a common planning and control system.** Although there has always been a recognition of the relevance of horizontalintegraLion mechanisms, in practice they have been seen as secondary, as reinforcement to the primary vertical processes.'" The most fundamental change we have observed in the ways companies are responding to integration is a move away from the traditional vertical mechanisms of hierarchy and formal systems to a primary reliance on horizontal processes that build integration on top of subunit autonomy and empowerment. The secondary has now become primary.

organization packaged, bundled and priced them differently in each market. And to fmd out how many people Oracle employed worldwide on any given day, someone had lo scout through 60 differently formatted databases and consolidate the number. By then, the answer would have changed. Then, in 1999, CEO Larry Ellison articulated Oracle's direction for the next phase of information technology. He envisioned the computer industry becoming a utility like electricity or water. The hardware, data and applications would reside in a central location and wt)uld be accessible over the Internet to any cu.stomer with a PC and a Web browser. Oracle would provide integrated services, including ERP, customer-relationship management, supply-chain management and hmnan-resource management. As Ellison explained, "If you want to buy a car, would you get an engine from BMW, a chassis from Jaguar, windshield wipers from Ford? No, of course not. Right now with the software out there, you need a glue gun — or hire all these consultants to put It together. They call it best-of-breed. I cail it a mess." To convince customers of the value of building an operating infrastructure throtigh standardized and integrated applications over the Internet, Ellison made Oracle its own beta-test site. His metaphor was, "Eat your own dog food," and be publicly announced a target of $1 billion in cost savings — 10% of revenues. By 2001 Oracle had met that goal. All e-mail is now consolidated into one standardized, global system nsing two servers at Oracle's California beadqnarters. Prices and discounts, once a local preserve, have been standardized globally and made accessible over tbe Internet. ERP customizations that differed in every coiinlry in Europe are standardized and are operated from a single central source. The different local Web sites have been replaced by a single global site, Oracle.com, which is run out of the United States in multiple languages. Observers may quibble over how much money Oracle has saved, but most estimates are close to that $1 billion target. Over tbe two years it took to implement the global platforms, Oracle's operating margin improved from 14% to 35%. Ellison has now upped the ante from Si billion in savings to $2 billion, and tbe company Is going tbrough the next round of rationalizing its operating infrastructure to meet the new goal. Having consolidated the technological infrastructure supporting internal operations, tbe company is now using the same philosophy in its relationships with suppliers and customers — and in its sales and marketing activities. VV'bat have such drastic standardization and centralization done to front-line entrepreneurship? According to CFO Jeff Henley, they have enhanced the kinds of entrepreneurial activity tbat Oracle values most. "It would be goofy to let people do as they
FALt "2002 MIT SLOAN MANAGEMENT REVIEW 33

Four Critical Components of Horizontal Integration
How are companies putting it all together again without destroying the vitality of the parts? We have found four areas of action: operational integration through standardization of the technological infrastructure, intellectual integration through the development of a shared knowledge base, social integration through collective bonds tor performance and emotional integration through the creation of a common identity and purpose. (See "A Framework for Organizational Integration.") The four areas are simultaneously distinct and interrelated. The challenge is to manage the interrelatiojiships synergistically."
Operational Integration Through Standardized Technological Infra-

structure Intiuenced in part by reengineering, many companies in the 1990s made progress rationalizing their production and distribution infrastructures. Now the focus of operational integration has shifted to support functions such as finance, human resources, planning and service. The bottleneck in rationalizing and integrating those activities lies in IT systems. Although many companies have recognized that constraint and are making progress in updating their fragmented IT infrastructure, standardization of support functions is .still a distant ideal. Oracle — who.se rapid international expansion resulted in autonomous national subsidiaries using different systems to manage operations— is illustrative. Even as late as 1997, Oracle had 97 e-mail servers running seven incompatible programs. Each country had its own enterprise-resource-planning (HRP) system and its own Web site in the local language. Some even changed the color of the Oracle logo because of the local manager's taste. Despite having the same products worldwide, the Oracle

A Framework for Organizational Integration
For effective horizontal integration, managers have to connect the company's knowledge bases, build social relationships among people and shape a shared sense of identity, all supported by a standardized technological infrastructure.

business Oracle is in allows it to do niorf standardizing than, say, a Unilever, but most companies could still wring more advantage from technological infrastructure than they have so hu".
Intellectual Integration Through Shared Knowledge Base

INTELLECTUAL INTEGRATION Shared Knowledge Base

With the goal ot "knowledge management," many companies have developed (I'-based systems that are essentially databases for sharing information on an organizationwide basis. Such systems, however, are only the first step in establishing a shared knowledge base that truly integrates a company's intellectual capital. Because user pull must supplement the technological push.., effective integration of knowledge requires a clear strategic link and extensive communication.'^

OPERATIONAL INTEGRATION standardized Technological Infrastructure SOCIAL INTEGRATION Collective Bonds of Performance EMOTIONAL INTEGRATION Common Purpose and Identity

please in building and managing a local IT operation to support internal processes," says Henley. "By standardizing those, we have channelled thai entrepreneurship where it add.s value — in serving customers. We think it is a good idea if a salesperson spends time selling product benefits rather than negotiating prices and discounts." Oracle has been successful in standardizing its technological infrastructure while most companies have made only incremental progress. What makes Oracle different? The mo.st important factor has been the commitment of a powerful CEO who made the iniiiative his top priority. To overcome objections from country managers and to accommodate their needs and contributions, he had them participate in designing the standardi:^ed systems. Then he gave them a choice: They could either adopt the standardized and centrally operated systems completely lree of cost or continue with their local systems {accepting full costs and no adjustment in the returns they were expected to generate). Without exception, the local managers chose the first option. Standardizing operating processes has always heen a powerful integrating device, but it wasn't possible to create centrally managed, standard IT systems until now. The biggest benefits flow at the extreme, not with half-measures. It may be that the
34 MiT SLOAN MANAGEMENT REVIEW FALL 2002

Al Ogilvy and Mather's OgilvyOne, an increased need for integration became apparent in the early 1990s because of two large clients — American Express and IBiVl. Both demanded integrated services and business solutions that combined interactive media with traditional direct marketing. In the 1980s, advertising agencies used costly mass-media campaigns to attract customers, but in the 1990s, they targeted the "anarchic" customer, who had a choice o\' inilnile channels. OgilvyOne's historically fragmented organization, with highly autonomous divisions such as Data Consult, Direct Mail and Ogih')'' Interactive, simply could not respond effectively. OgilvyOne decided to focus on CListomer ownership and 360-degree brand stewardship, building both strategies on proprietary tools designed to support trust and long-term relationships with clients and clients' end customers. Customer-ownership tools such as QuickScan fa sophisticated, proprietary data-mining tool) enabled Ogilvy's creative professionals to question clients" assumptions ahout end customers. QuickScan revealed, for example, that only 16% of Nestle Pet Foods' customers accounted for 90% of the customer value for Friskies, a major cat-food brand. So OgilvyOne helped Nestle target the more valuable segment. In addition, the firm employed a complex mathematical model for understanding, developing and enhancing the relationship between a customer and a brand in order to preserve and reinforce every aspect of brand strength. But to get the most from its tools, OgilvyOne first needed mechanisms for creating, sharing and exchanging knowledge across the company. It had to harness the brainpower of its marketing gtirtis, mathemalicians, statisticians, strategy consultants and individual creative talent. So OgilvyOne developed an integrated system called Truffles. Truffles provided not only a

database and a system for testing ideas and hypotheses, but also opportunities for people to generate new ideas together through a variety of chat rooms, bulletin boards and dedicated forums. Tbe Truffles name came from a statement of founder David Ogilvy: "I prefer the discipline of knowledge to tbe anarchy of ignorance, and we pursue knowledge tbe way a pig pursues truffles." Supported by 60 knowledge officers across the company, the Iruifles initiative was the product of years of documenting the accumulated intellectual capital ofthe company. It was also a living forum for creating and sharing new ideas. Wliat made Truffles work was not only the world-class IT infrastructure nor the tremendous effort and investment that kept its information current, but also the link betweeii the system and the company's strategy. Witb all tools, tecbjiiques and relevant data on Truffles, research and ideas were directly connected to action. Tbat link overcame initial resistance and motivated both senior managers and tbe creative staff to use Truffles. Also contributing to tbe system's success were company efforts to build interpersonal relationsbips, or "soft bonds," to promote knowledge sbaring. OgilvyOne created many conversation lorums — Friday morning breakfast meetings, top-level "Board Away" days and other functions. With the motto that "the most important role of managers is to create iViendsbips," tbe senior leaders invested considerable personal time to develop tbe internal trust that sustains intellectual integration. Nigel Hovvlett, tbe cbairman of OgilvyOne's London offlce, for example, spent montbs building a relationship with Tim Carrigan, the CEO of NoHo Digital, an interactive marketing company Howlett wanted to buy. The discussions were as mucb personal as they were strategic. Tbe results of the friendship they built were manifest immediately after the acquisition was fmalized. Within two weeks, NoHo's employees were not oniy using Truffles, but also were contributing new information and techniques to tbe database for use by all Ogilvy employees. Social Integration Through Collective Bonds of Performance Althougb learning and sbaring are usually acbieved horizontally in peerto-peer forums, performance management and resource allocation are still tbe preserve of boss-to-subordinate relationsbips. Our researcb revealed, however, that enormous advantages can result when peer-to-peer interactions are extended to traditionally vertical areas. As BP's CEO John Browne recounts, "One theme we observed was tbe very different interaction between people of equal standing, if you will, wben tbey reviewed each other's work than there was wben a superior reviewed tbe work of a subordinate. We concluded that tbe way to get the best answers would be to get peers to challenge and support eacb other ratber than to have a hierarcbical challenge process."

Peer assii^t, a BP process that uses peer groups of managers from similar businesses to drive learning and knowledge sharing, is already well documented.'' But over the last two years, BP's new peer challenge has extended tbat approach to address tbe traditionally vertical performance-management and resource-allocation processes. The managers of eacb autonomous business unit enter into an annual performance contract with top management and are tben free to acbieve tbe results however tbey wisb. Peer cballenge requires managers to get tbeir plans, including investment plans, approved by tbeir peers before Hnali/ing tbe performance contract with top management. "The peers must be satisfled tbat you are carrying your fair share ofthe beavy water buckets," siiys deputy chief executive Rodney Chase. "Tbe old issue of sandbagging management is gone. Tbe cballenge now comes from peers, not from management."'"* According to BP business-unii bead Polly Elinn, "'Hie peer challenge is about convincing people in similar positions to support your investment proposal knowing that tbey could invest the same capital elsewhere, and going eyeball to eyeball with tbem, and then having to reaftlrm wbetber you have made it or not over the coming montbs or quarters." Tbe process works because half of tbe unit manager's bonus depends on tbe performance of tbe unit, and the other half depends on tbe performance of tbe peer group. In an added twist, BP bas extended tbe peer process even furtber. Tbe three top-performing business units in a peer group have been made responsible for improving the performance of tbe bottom three. "We bad 'not invented bere' raised to an art form," says Chase. With peer assist and peer challenge, be says, "What we have raised to an art form is tbat if 1 bave a good idea, my Hrst responsibility i,s to share it with my peers, and if I am performing poorly, 1 will get the peer group to belp me." BP bas acbieved a powerful force in integration and knowledge sbaring. According to Browne, "People do not learn, at least in a corporate environment, witbout a target. You can implore people to learn, and they will to some extent. But if you say, 'Look, the learning is necessary in order to cut tbe cost of drilling a well by 10%,' tben they will learn with purpose." What is special about RP's peer groups is tbeir effectiveness in transferring, sharing and leveraging cumulative learning tbrougb a direct link with performance. Emotional Integration Through Shared Identity ond Meoning Ultimately, tbe acid test of organizational integration lies in collective action. A shared knowledge base must translate into coordinated and aligned action across tbe different parts of an organization, or it is only an expensive library. Unless peer relationsbips based on trust
FALL 2002 MIT SLOAN MANAGEMENT REVIEW 35

and friendship allow excellent collective execution, they create no value other than the comforts of an exclusive country club.'-'' It was the coordin;iting and aligning of actions that historically made hierarchy appear necessary. A common btiss could align the activities of different company parts hoth through direct orders and through formal planning and control."' Yet for most companies, hierarchy is no longer as effective — not only because it destroys front-line initiative and entrepreneursliip, but also because of its inability to cope with uncertainty and rapid change.^^ As they say at OgilvyOne, "While classical orchestras follow a conductor and a musical score in a rigid and formal manner, ja/,/ hands — like Weh marketeers — must be lluid, llexible, improvised and should always Irust the requests and applause of their audience." Fluid and llexible collective action requires not only standardized infrastructure, shared knowledge and mutual trust, but also emotional integration through a common purpose and identity. Emotional integration has been the primary driver of success for companies such as Goldman Sachs. Teamwork has always been a core value of the premier investment bank because, in the words of Goldman Sachs CEO Hank Paulson, "Quite simply, none of us is assmiirt as all ot u.s." The entrenched tradition of teamwork underlies the firm's reputation for excellence in execution. "Everywhere and in every country around the world, when a Goldman Sachs hanker walks into the room, all of Goldman Sachs comes with him or her," says Robin Neustein, head of the firm's Private Equity Group. "That, in turn, is the outcome of constant work on maintaining the one-firm identity and the internal challenge to be the best and help each other be the best." This emotional alignment among individuals — and between them and the firm — is the product of three distinct Goldman Sachs characteristics. Eirst, the culture of success is built on a relentless focus on client relationships. Anyone who steps inside the firm can palpably feel this obsession with building and maintaining close and trusting relationships with clients. According to Neustein, "At Goldman Sachs, honor comes in the form of client service. ... That is why if you try to make a lot of money without putting your client first, it is not a mark of success, it is ii mark of shame." Stories of how the firm's legendary leaders — Sidney Weinherg, Gus Levy, |ohn Whitehead and others — went to extreme lengths, such as having six client dinners in one night, are told and retold. There is pride in being seen as a trusted adviser by the most influential politicians, industrialists and wealthy individuals around the world. However, rather than protecting individuals' ownership of clients, client focus promotes integration because it explicitly emphasizes long-term
36 MIT SLOAN MANAGEMENT REVIEW FAIL 2002

retention. "Clients are simply in your custody," John Weinberg, ii second-generation leader of the firm, consistently reminded employees. "Someone before you established the relationship, and someone after you will carry it on." Although client focus provides a force for emotional integration with outsiders, pride in the quality of colleagues is an equally powerful force for emotional integration with insiders. As an internal survey conducted in 2000 revealed, 99% of Goldman Sachs employees were proud to work for the firm. Extraordinary levels of investment in recruiting only the most talented people around the glohe —- and then in continuous training and development for excellence — has, over decades, created the mystique about the firm as a magnet for talent, a mystique that reinforces the pride of belonging. Second, it is not just the salary that has allowed the firm to become a magnet for talent. Inherently linked to the identityshaping pride of belonging is a broader sense of purpose that emotionally connects each individual to the ethos of the firm. Says Coldman Sachs president and co-chief coordinating officer John Thornton, "Anyone with any depth and talent has to ask the question,'What am I doing with my life?'The purpose of my life is to use my talent for some hirger and better purpose." In Coldman Sachs, a broader purpose has historically been at the heart of that positive cycie of huilding emotional integration by linkinjj purpose, talent and the pride of belonging. The third contributor to emotional integration in Goldman Sachs is the one-firm mentality that is supported by, for example, doing the evaluation and selection of partners on a firmwide, rather than a divisional or product hasis — and by a compensation system that until recently relied on the overall profit and loss to determine each partner's fortunes. Each partner was allotted a fixed proportion of whatever the income for the year might be, with no discretionary payment based on any aspect of the partner's or the unit's performance. ''We all had a piece of the action," .says Phil Murphy, co-head of investment management. "We didn't care where the action came from. There was no disincentive to take that call from Hong Kong to help me out. ... You and I didn't care who got the credit for it; we knew we would both share the benefits." After Goldman Sachs became a public company, the link between overall firm performance and each partner's compensation was still important, although 60% rather than lOO'K. of the rewards are now based on the common pool.

Entrepreneurial Activity and Horizontal Integration Co-Evolve
Our research demonstrates that individual and subunit autonomy co-evolve with horizontal integration in a dynamic process. Tt is in this dynamic evolulion that horizontal integration differs

The Co-Evolution of Autonomy and Horizontal Integration
Managers need to trust that autonomy and horizontal integration wili iead to a symbiotic process tiirougb wiiich tbeir joint outcomes — superior business performance and the deepening of a culture of collaboration — will reinforce each other over time.

Crowing Self-Confidence al Managers

INDIVIDUAL AND SUB-UNIT AUTONOMY

fop Management's Willingness To Delegate and Empower

Entrepreneunat Spirit and Initiative

DEVELOPMENT OF A CULTURE OF COLLABORATION

Support Through Peers and Infrastructure Mutual Trustand Friendship

from vertical integration. Instead of smothering bottom-up initiatives, horizontal integration creates a reinforcing process through which both autonomy and integration can flourish. (See "The Co-Evolution of Autonomy and Horizontal Integration,") BP is typical of how the dynamic worked at all the companies we studied. When lohn Browne was CEO of BP's North American stibsidiary, Sobio, he conducted a careful experiment to test his growing belief that a spirit of entrepreneurship was possible in a big company if the organization were broken up into relatively small, empowered units. He created a separate unit out of one operation that chronically lost money. To prevent any positive outcome from appearing purely a result ol" outstanding local leadership, he appointed managers of normal ahilities. Allowed complete autonomy and freedom from the company's central controls, the unit dramatically improved performance, confirming Browne's theory. When he became CEO in 1996, Browne acted on tbat lesson by restructuring BP into 150 business units and giving unit managers considerable freedom. The only conditions were that they respect certain "botmdaries"— essentially, the core values

The peer-assist process became effective in about two years as much of BP's business-performance improvement began to flow from combining tbe business units' entrepreneurial spirit with the peer groups' knowledge sharing and mutual support. For Investment in Infrastructure and example, when Polly Flinn — then a Communication young manager from Amoco with no experience working outside the United States —• became the managing director of BP's retail business in Poland, she drew on active help from tbe marketing peer group and turned her business from a $20 million-per-year loss to a $6 million profit within 18 months. The comhination of empowerment and support improved husiness performance, producing two main results. First, toplevel managers developed growing confidence in their strategy of delegating authority to the business-unit leaders. Second, the company had more resources to invest in developing tbe integration infrastructure, including IT systems, and in building conversation and communication mechanisms. Those investments lurther strengthened the mechanisms and the processes of horizontal integration. As the symbiotic effects of autonoihy and horizontal integration evolved, a culture of collaboration gradually emerged. Rodney Chase described tbe culture cbange thus: "In our personal lives — as fatbers, motbers, brothers or sisters — we know how much we like to help someone close to us to succeed. Why didn't we believe tbat the same can happen in our husiness lives? That is the breakthrough, and you get there when people take enormous pride in helping tbeir colleagues lo succeed."
FALL 2002 MIT 5L0AN MANAGEMENT REVIEW 37

SUPERIOR BUSINESS PERFORMANCE

of the company — and deliver on their performance contracts. Simultaneously, Browne downsized or completely eliminated much of the staff-supported, vertical, comniandand-control infraslrucUire, abolishing the offices of country presidents and several functional departments in London. To support the empowered and fully accountable business-unit leaders, be created tbe BP peer groups. Thus managers wbo ran similar businesses were assigned to help one another to improve both individual and collective performance.

And as the culture evolved, managers' self-confidence grew. They set themselves increasingly tough targets and achieved them through their own initiative.s and the support of their peers.'^ Their success strengthened their sense of autonuiny and their spiril of entrepreneurship. Moreover, the culture led to the reinforcement of mutual trust and friendship - and the peer— group processes of horizontal integration. A cautionary note: The symhiotic co-cvolution of autonomy and horizontal integration takes time to mature. Vertical integration — bringing different units under a common hoss and a common plannhig and control system — can he implemented relatively quickly. But to develop people's self-confidence and to huild trust and friendship can be achieved only through persistent action and reinforcement over time. For senior executives, that is the greatest challenge in huilding horizontal integration: Although they have to he relentless in driving the process, they also have to he patient about results. For those who respond well to that challenge, the ultimate benefits are durahle enhancement of organizational capability and sustainable improvement of husiness performance.

C Hardy and W.R. Nord (London: Sage, 1996), 357-374. 7. See A. Edstrom and J.R. Gaibraith, "Transfer of Managers as a Coordination and Control Strategy in Multinational Organizations," Administrative Science Ouarterly 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 bestknown expositions, see A.D. Chandler, "Strategy and Structure: Chapters in the History of American Industrial Enterprise" (Cambridge, Massachusetts: MIT Press, 1962). 10. See J. Gaibraith, "Designing Complex Organizations" (Reading, Massachusetts: Addison-Wesley. 1973): and for a discussion of horizontal mechanisms in large, global companies, see CA. Bartiett 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 ot new ventures poses unique challenges. An outstanding analysis of the topic appears in CM. 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 tor effective knowledge management in distributed organizations. See, for example, the discussion on social ecology in V. Govindarajan and A. Gupta, "The Ouest 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. Ouohi, "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 ot hierarchy provide the theoretical basis for influential economic analysis ot 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).

REFERENCES 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. CM. Montgomery (Boston: Kluwer Academic Publishers. 1995), 10M32. 2. For a rich description and analysis of that tension in the context of large, diversified globai companies, see C.K. Prahalad and Y. Doz, "The Muitinational 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 CA. Bartiett, "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 CA. Bartiett. "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 PR. 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 Frocessing 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 ot Organization Studies," eds. S.R. Clegg,

Reprint 4413
Copyright -O Miissi}chnsclls liiflilutc of Tcclinohgy. 2002. AH rights n-fir

38

MIT SLOAN MANACEMFNT RfVlEW

FALL 2002