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The singular aim of this paper is to explain why organisations engage in intrafirm competition. The rationale behind choosing this topic was developed when the author began researching merger and acquisition activity in multinational corporations. The author became aware of increased internal competition within an Australian multinational after a major merger. This meant that business units were competing for resources as well as market share and there was a risk to jobs due to the increased competition globally with units in economies with cheaper labour. The author became interested in why this occurred, the impact it had on the organisation and the positive and negatives aspects of this type of competition.
What is Intrafirm Competition?
Intrafirm competition is the term which refers to competitive forces between two or more units within the same organisation. This competition can be for resources; 'headquarters' resources, encompassing capital, technology, equipment, specialised human resources, training, knowledge, information' or 'position within the value-chain' (Becker-Ritterspach and Dorrenbacher, 2009). It is defined 'as the extent of overlap between the charters of two or more business units in a single organization (i.e., it is a continuous variable)' (Birkinshaw and Lingblad, 2005). The concept is widely seen in large multinational and global enterprises; 'The multinational corporation (MNC) has been identified as an entity that operates as an internal market system where intrafirm competition between subsidiaries occurs regularly' (Gammelgaard, 2009). These companies may have two or more business units manufacturing competing products, developing competing technologies, providing competing services or serving the same distribution channels to the same customer base in the marketplace. Incidents of intrafirm competition are most commonly detected in multi-business firms. According to Birkenshaw and Lingblad in their 2005 paper titled Intrafirm Competition and Charter Evolution in the Multibusiness Firm:
'the phenomenon of intrafirm competition has been noted in the automotive industry (Peters and Waterman 1982), consumer packaged goods (Solomon and Hymonitz 1987), information technology (Galunic and Eisenhardt 1996), fast food (Kalnins 2004) and advertising (Bower 1996) as well as in specific functional activities such as R&D (Quinn 1988), new business development (Kidder 1981), and marketing (Mason and Milne 1994)'
(Birkinshaw and Lingblad, 2005)
This research will focus on competition between business units within an organisation. A unit within an organisation is positioned below the corporate headquarters and represents a particular function and responsibility. It has a definite place within the organisational structure and is usually under the control of a specific business unit manager. A business unit can be comprised of functions such as finance, marketing, production and manufacturing. It is responsible for formulating and implementing the competitive strategy for a set of products or services (Porter, 1985). When two or more of these units in the same organisation have products in the marketplace that can be substituted for one another, competition takes place. This type of competition can be seen within General Motors who have multiple competing car brands and Proctor and Gamble who supply products such as soap, cleaning products and toothpaste.
Reasons for Intrafirm Competition
Birkinshaw and Lingblad suggest that there is no completed body of literature on the theory behind intrafirm competition but that it is possible to gather information from various academic sources and piece it together to provide an insight into the phenomenon. Despite the widespread presence of intrafirm competition in the marketplace and the possible positive economic benefits it might have for firms, there is limited academic literature on the subject. However, it seems that managers and executives are willing to let competition between units within the same business exist; 'coevolving companies let collaboration and competition coexist, while senior managers don't actively seek out competition, they don't discourage it either' (Galunic and Eisenhardt, 1996). One argument is that 'the firm as a whole benefits from more, rather than less, competition among its divisions' (Kalnins, 2004). Supporting this view, there are a number of distinct advantages for firms if they participate in intrafirm competition such as; the speed at which the firm can introduce new products to the market, increased potential for capturing first mover advantage, increased market power, competitive advantage over external competitors, a wider range of strategy options and eased market entry (Kalnins, 2004, Sorenson, 2000). Despite the benefits of intrafirm competition, it should also be noted that it could also have negative consequences for the organisation. These include possible waste and duplication of resources and the encouragement of a culture of non-cooperation between units (Bourgeois 1981, Cyert and March 1963) (as cited by Birkinshaw and Lingblad, 2005). Ritterspach and Dorrenbacher identify three reasons why intrafirm competition exists and why it is of growing importance. The first reason is a rise in merger and acquisition (M&A) activity and the growing number of global multinational companies 'leading to excess capacity and considerable overlap in products, markets and technologies'. The second reason suggested, is the method by which many multinational companies are structurally designed using global product divisions. Thirdly is that multinational companies are increasingly governed as internal market systems by using competition (Becker-Ritterspach and Dorrenbacher, 2009). It may be worthwhile for firms to consider how intrafirm competition could be managed and supported. It is common to observe two or more units contesting their right to pursue a particular opportunity (Galunic and Eisenhardt, 1996). But why do companies allow intrafirm competition to occur when it appears that economic logic (which resists the duplication of resources) counteracts the activity? Birkinshaw and Lingblad suggest that 'it owes its existence to economies of scope and the differentiation of unit charters to cover multiple market segments' (Birkinshaw and Lingblad, 2005). Wenpin Tsai further suggests that:
'organizational units compete with each other to gain resources and competences that are embedded in intraorganizational networks. These units may serve similar markets, and their rewards and status may depend on how they perform relative to other units in the same organization'
By competing, firms can advance by obtaining new knowledge, exploiting economies of scope, learning from and cooperating with each other. They can also achieve greater efficiencies, stimulate technological progress and expand the market (Tsai, 2002). Business units can collaborate with each other to share a pool of knowledge and create competition which will maximise their own growth. The organisations' resources may be limited and units may need to outperform other units in the organisation supplying the same products, in order to maintain the required share. Control by executives in the head office is likely to be stronger in instances of intra-unit competition and as a result individual units repel this control, preferring to have more power over their own decision making processes. They oppose the interference and speculate about whether the head office is making the correct decisions for them. They consider that head office may forfeit some units' interests for the benefit of others. However this policy of tight control could potentially backfire on the organisation as it may mean that the individual units stop sharing knowledge hence leading to counterproductive results. Units may then make a decision to prioritise retaining their own profits and growth by withholding knowledge which could be of benefit to the larger organisation. However if the unit is somehow compelled to share knowledge and innovative ideas, they may see a reduction in their profits by having to share it with their competitors. This begs the question; does this process encourage or discourage innovative activities? By allow units to retain knowledge are organisations forcing units to be more innovative or would the benefits be greater if units shared knowledge? Tsai suggests that:
'interunit knowledge sharing can enhance overall organizational capabilities through collective learning and synergistic benefits generated from the processes of exchanging information, know-how, or local expertise among competing units'
Types of Intrafirm Competition
From a review of the literature two main types of intrafirm competition can be identified; parallel development and coexistence. Parallel development occurs when the process of developing products or technologies occurs with two or more concurrent projects running at the same time. Coexistence occurs when multiple brands, products or services developed by the same organisation coexist in the market place.
Parallel development exists for a limited period of time. From management's perspective, parallel development can manifest in the form of a structured plan or it can emerge spontaneously. One form of parallel development is heavily linked to the process of innovation, where companies are testing new ideas, products or technologies, where there is a need for speed and where the costs of duplicating activities and resource allocation is at a minimum. In this instance competition between companies could be economically rewarding as it would encourage companies to deliver new products, technologies or services to the marketplace at an increased pace ensuring first mover advantage. It may also increase the pace of introduction of new technology, increase market share, increase productivity, output, performance and growth at a low cost. Another type of parallel development occurs when two business units are competing for market share in the same space using the same technology. This may happen due to individual managers having the autonomy to move into new markets and utilise new technologies as they please, despite the potential for intrafirm competition. However, a study by Galunic and Eisenhardt in 1996 showed that this happened in an organisation called Omni (disguised name) and when senior executive management believed that a competitive scenario presented, they collaborated with all the individual business unit managers to dissipate the potential perceived negative impact (Galunic and Eisenhardt, 1996).
Coexistence (multiple brands and products coexisting and competing in the marketplace) can exist for an unlimited and indefinite period of time. Coexistence can be seen in many industries competing in the marketplace. Examples include the car, domestic product, cigarette, tyre and hotel industries. 'Domination and control by one party, though, may not be the only outcome for competing business systems, as "coexistence" may be possible' (Dobson, 2006). The reason a firm chooses to have competing products in the marketplace is due to market segmentation. Customers have a wide scope of needs and in order to satisfy these needs the organisation offers a variety of products, each one targeting various different segments of the market. In marketing terminology this process is referred to as cannibalisation and it is suggested in the literature that this is normally to be avoided. However coexistence does not necessarily exist forever. Firms such as Proctor and Gamble and General Motors have had coexisting products in the marketplace since their formation. On the other hand coexisting products may be continuously phased in and out due to changes in technology or the market. An example of this can be seen in the airline industry when an airline introduces a budget, low cost carrier in addition to the regular service which directly competes on the same routes and for the same market. However it also may capture a new market which is more cost sensitive therefore the benefit of the increased competition is positive.
To conclude the author believes that levels of intrafirm competition are on the increase due a more globalised economy and a rise in the number of international and multinational businesses. As a result of this potential rise in levels of internal competitiveness in the economic environment, the author believes that management and executives need to be aware of the power competitive forces can have within the organisation. Intrafirm competition can have both negative and positive consequences. If this activity is not fully understood and managed properly the positive impacts could be destroyed. The author has shown how competitive intrafirm activity can be on either a long or short term basis depending on the type of competition. This characteristic should not influence a firm's decision whether or not to engage in intrafirm competition. The author also outlined the process of knowledge sharing in intrafirm competition. Inter-unit knowledge sharing can benefit the organisation but could also hinder growth as the retention of knowledge could perhaps increase innovative activity. Companies will need to ascertain to what levels they wish to control knowledge sharing within their organisation and what the economic impact of the strategy they chose will be.