Integrating Mechanisms

In the previous section, we explained that firms divide themselves into subunits. Now we need to examine some means of coordinating those subunits. One way of achieving coordination is through centralization. If the coordination task is complex, however, centralization may not be very effective. Higher-level managers responsible for achieving coordination can soon become overwhelmed by the volume of work required to coordinate the activities of various subunits, particularly if the subunits are large, diverse, and/or geographically dispersed. When this is the case, firms look toward integrating mechanisms, both formal and informal, to help achieve coordination. In this section, we introduce the various integrating mechanisms that international businesses can use. Before doing so, however, let us explore the need for coordination in international firms and some impediments to coordination.

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. Multidomestic firms are primarily concerned with local responsiveness. Such firms are likely to operate with a worldwide area structure in which each area has considerable autonomy and its own set of value creation functions. Since each area is established as a stand-alone entity, the need for coordination between areas is minimized.

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. The resulting global web of activities must be coordinated to ensure the smooth flow of inputs into the value chain, the smooth flow of semifinished products through the value chain, and the smooth flow of finished products to markets around the world.

The need for coordination is greatest in transnational firms. Recall that these firms simultaneously pursue location and experience curve economies, local responsiveness, and the multidirectional transfer of core competencies among all the firm's subunits (this is referred to as global learning). As in global companies, coordination is required to ensure the smooth flow of products through the global value chain. As in international companies, coordination is required for ensuring the transfer of core competencies to subunits. However, the transnational goal of achieving multidirectional transfer of competencies requires much greater coordination than in international firms. In addition, transnationals require coordination between foreign subunits and the firm's globally dispersed value creation activities (e.g., production, R&D, marketing) to ensure that any product offering and marketing strategy is sufficiently customized to local conditions.