Introduction
The objective of this chapter is to identify the organizational structures and internal control mechanisms international businesses use to manage and direct their global operations. We will be concerned not just with formal structures and control mechanisms but also with informal structures and control mechanisms such as corporate culture and companywide networks. To succeed, an international business must have appropriate formal and informal organizational structure and control mechanisms. The strategy of the firm determines what is "appropriate." Firms pursuing a global strategy require different structures and control mechanisms than firms pursuing a multidomestic or a transnational strategy. To succeed, a firm's structure and control systems must match its strategy in discriminating ways.
Arguments for Centralization
There are four main arguments for centralization. First, centralization can facilitate coordination. This might be achieved by centralizing production scheduling decisions at the firm's head office. Second, centralization can help ensure that decisions are consistent with organizational objectives. When decisions are decentralized to lower-level managers, those managers may make decisions at variance with top management's goals. Centralization of important decisions minimizes the chance of this occurring.
Third, by concentrating power and authority in one individual or a top-management team, centralization can give top-level managers the means to bring about needed major organizational changes. Fourth, centralization can avoid the duplication of activities that occurs when similar activities are carried on by various subunits within the organization.
Arguments for Decentralization
There are five main arguments for decentralization. First, top management can become overburdened when decision-making authority is centralized, and this can result in poor decisions. Decentralization gives top management the time to focus on critical issues by delegating more routine issues to lower-level managers. Second, motivational research favors decentralization. Decentralization can be used to establish relatively autonomous, self-contained subunits within an organization. Subunit managers can then be held accountable for subunit performance. The more responsibility subunit managers have for decisions that impact subunit performance, the fewer alibis they have for poor performance.
Strategy and Centralization in an International Business
The choice between centralization and decentralization is not absolute. It frequently makes sense to centralize some decisions and to decentralize others, depending on the type of decision and the firm's strategy. Decisions regarding overall firm strategy, major financial expenditures, financial objectives, and the like are typically centralized at the firm's headquarters.
In contrast, the emphasis on local responsiveness in multidomestic firms creates strong pressures for decentralizing operating decisions to foreign subsidiaries. Thus, in the classic multidomestic firm, foreign subsidiaries have autonomy in most production and marketing decisions. International firms tend to maintain centralized control over their core competency and to decentralize other decisions to foreign subsidiaries. The situation in transnational firms is more complex. The need to realize location and experience curve economies requires some degree of centralized control over global production centers . However, the need for local responsiveness dictates the decentralization of many operating decisions, particularly for marketing, to foreign subsidiaries. The concept of global learning is predicated on the notion that foreign subsidiaries within a multinational firm have significant freedom to develop their own skills and competencies. Only then can these be leveraged to benefit other parts of the organization. A substantial degree of decentralization is required if subsidiaries are going to have the freedom to develop their own skills and competencies.
Horizontal Differentiation
The Structure of Domestic Firms
Most firms begin with no formal structure and as they grow, the demands of management become too great for one individual to handle. Further horizontal differentiation may be required if the firm significantly diversifies its product offering.
To solve the problems of coordination and control, most firms switch to a product division structure at this stage . With a product division structure, each division is responsible for a distinct product line . Thus, Philips has divisions for lighting, consumer electronics, industrial electronics, and medical systems. Each product division is set up as a self-contained, largely autonomous entity with its own functions. The responsibility for operating decisions is typically decentralized to product divisions, which are then held accountable for their performance.
The International Division
Historically, when firms have expanded abroad they have typically grouped all their international activities into an international division. This has tended to be the case for firms organized on the basis of functions and for firms organized on the basis of product divisions. Regardless of the firm's domestic structure, its international division tends to be organized on geography.
For firms with a functional structure at home, this might mean replicating the functional structure in every country in which the firm does business. For firms with a divisional structure, this might mean replicating the divisional structure in every country in which the firm does business.
Another problem is the implied lack of coordination between domestic operations and foreign operations, which are isolated from each other in separate parts of the structural hierarchy. This can inhibit the worldwide introduction of new products, the transfer of core competencies between domestic and foreign operations, and the consolidation of global production at key locations so as to realize location and experience curve economies. Because of such problems, most firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures we discuss next.
Worldwide Area Structure
A worldwide area structure tends to be favored by firms with a low degree of diversification and a domestic structure based on . Operations authority and strategic decisions relating to each of these activities are typically decentralized to each area, with headquarters retaining authority for the overall strategic direction of the firm and overall financial control.
This structure facilitates local responsiveness. Because decision-making responsibilities are decentralized to each area, each area can customize product offerings, marketing strategy, and business strategy to the local conditions. The weakness of the structure is that it encourages fragmentation of the organization into highly autonomous entities. This can make it difficult to transfer core competencies between areas and to undertake the rationalization in value creation activities required for realizing location and experience curve economies. The structure is consistent with a multidomestic strategy but with little else.
Worldwide Product Division Structure
A worldwide product division structure tends to be adopted by firms that are reasonably diversified and, accordingly, originally had domestic structures based on product divisions. As with the domestic product division structure, each division is a self-contained, largely autonomous entity with full responsibility for its own value creation activities. Underpinning the organization is a belief that the various value creation activities of each product division should be coordinated by that division worldwide. Thus, the worldwide product division structure is designed to help overcome the coordination problems that arise with the international division and worldwide area structures.
Global Matrix Structure
Both the worldwide area structure and the worldwide product division structure have strengths and weaknesses. The worldwide area structure facilitates local responsiveness, but it can inhibit the realization of location and experience curve economies and the transfer of core competencies between areas. The worldwide product division structure provides a better framework for pursuing location and experience curve economies and for transferring core competencies, but it is weak in local responsiveness. Many firms have attempted to cope with the conflicting demands of a transnational strategy by using a matrix structure. In the classic global matrix structure, horizontal differentiation proceeds along two dimensions: product division and geographical area. The basic philosophy is that responsibility for operating decisions pertaining to a particular product should be shared by the product division and the various areas of the firm.
Unfortunately, the global matrix structure often does not work as well as the theory predicts. In practice, the matrix often is clumsy and bureaucratic. It can require so many meetings that it is difficult to get any work done. Often, the need to get an area and a product division to reach a decision slows decision making and produces an inflexible organization unable to respond quickly to market shifts or to innovate. The dual-hierarchy structure can also lead to conflict and perpetual power struggles between the areas and the product divisions, catching many managers in the middle. To make matters worse, it can prove difficult to ascertain accountability in this structure. In light of these problems, many transnational firms are now trying to build "flexible" matrix structures based on firmwide networks and a shared culture and vision rather than on a rigid hierarchical arrangement. Dow Chemical, which is profiled in the accompanying Management Focus, is one such firm.
Integrating Mechanisms
Strategy and Coordination in the International Business
The need for coordination between subunits varies with the strategy of the firm. The need for coordination is lowest in multidomestic companies, is higher in international companies, higher still in global companies, and highest of all in the transnational firms. The need for coordination is greater in firms pursuing an international strategy and trying to profit from the transfer of core competencies between the home country and foreign operations. Coordination is necessary to support the transfer of skills and product offerings from home to foreign operations. The need for coordination is greater still in firms trying to profit from location and experience curve economies; that is, in firms pursuing global strategies. Achieving location and experience economies involves dispersing value creation activities to various locations around the globe.
Impediments to Coordination
Managers of the various subunits have different orientations, partly because they have different tasks.
Differences in subunits' orientations also arise from their differing goals. Such impediments to coordination are not unusual in any firm, but they can be particularly problematic in the multinational enterprise with its profusion of subunits at home and abroad. Also, differences in subunit orientation are often reinforced in multinationals by the separations of time zone, distance, and nationality between managers of the subunits.
Formal Integrating Mechanisms
The formal mechanisms used to integrate subunits vary in complexity from simple direct contact and liaison roles, to teams, to a matrix structure . Direct contact between subunit managers is the simplest integrating mechanism. By this "mechanism," managers of the various subunits simply contact each other whenever they have a common concern. Direct contact may not be effective if the managers have differing orientations that act to impede coordination, as pointed out in the previous subsection.
Liaison roles are a bit more complex. When the volume of contacts between subunits increases, coordination can be improved by giving a person in each subunit responsibility for coordinating with another subunit on a regular basis.
In some multinationals the matrix is more complex still, structuring the firm into geographical areas, worldwide product divisions, and functions, all of which report directly to headquarters.
Informal Integrating Mechanisms
In attempting to alleviate or avoid the problems associated with formal integrating mechanisms in general, and matrix structures in particular, firms with a high need for integration have been experimenting with two informal integrating mechanisms: management networks and organization culture.
Management Networks
A management network is a system of informal contacts between managers within an enterprise. For a network to exist, managers at different locations within the organization must be linked to each other at least indirectly.
For such a network to function effectively, however, it must embrace as many managers as possible. For example, if Manager G had a problem similar to Manager B's, he would not be able to utilize the informal network to find a solution; he would have to resort to more formal mechanisms. Establishing firmwide networks is difficult, and although network enthusiasts speak of networks as the "glue" that binds multinational companies together, it is far from clear how successful firms have been at building companywide networks. Two techniques being used to establish firmwide networks are information systems and management development policies.
Organization Culture
Management networks may not be sufficient to achieve coordination if subunit managers persist in pursuing subgoals that are at variance with firmwide goals. For a management network to function properly--and for a formal matrix structure to work--managers must share a strong commitment to the same goals. To eliminate this flaw, the organization's managers must adhere to a common set of norms and values; that is, the firm's culture should override differing subunit orientations. When this is the case, a manager is willing and able to set aside the interests of his own subunit when doing so benefits the firm as a whole.
The ability to establish a common vision for the company is critical. Top management needs to determine the mission of the firm and how this should be reflected in the organization's norms and values. These determinations then need to be disseminated throughout the organization. As with building informal networks, this can be achieved in part through management education programs that "socialize" managers into the firm's norms and value system.
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