International Firms
Firms pursuing an international strategy attempt to create value by transferring core competencies from home to foreign markets. If they are diverse, as most of them are, these firms operate with a worldwide product division structure. Headquarters typically maintains centralized control over the source of the firm's core competency, which is most typically found in the R&D and/or marketing functions. All other operating decisions are decentralized within the firm to national operations (which in diverse firms report to worldwide product divisions). The need for coordination is moderate in such firms, reflecting the need to transfer core competencies. Thus, although such firms operate with some integrating mechanisms, they are not that extensive. The relatively low level of interdependence that results translates into a moderate level of performance ambiguity. Thus, these firms can generally get by with output and bureaucratic controls. Overall, although the organization of international firms is more complex than that of multidomestic firms, the increase in the level of complexity is not that great.
Global Firms
Firms pursuing a global strategy focus on the realization of location and experience curve economies. If they are diverse, as most of them are, these firms operate with a worldwide product division structure. To coordinate the firm's globally dispersed web of value creation activities, headquarters typically maintains ultimate control over most operating decisions. In general, global firms are more centralized than most multinational enterprises. Reflecting the need for coordination of the various stages of the firms' globally dispersed value chains, the need for integration in these firms also is high. Thus, these firms tend to operate with an array of formal and informal integrating mechanisms. The resulting interdependencies can lead to significant performance ambiguities. As a result, in addition to output and bureaucratic controls, global firms tend to stress cultural controls. On average, the organization of global firms is more complex than that of multidomestic and transnational firms.
Transnational Firms
Firms pursuing a transnational strategy focus on the simultaneous attainment of location and experience curve economies, local responsiveness, and global learning (the multidirectional transfer of core competencies). These firms tend to operate with matrix-type structures in which both product divisions and areas have significant influence. The needs to coordinate a globally dispersed value chain and to transfer core competencies create pressures for centralizing some operating decisions (particularly production and R&D). At the same time, the need to be locally responsive creates pressures for decentralizing other operating decisions to national operations (particularly marketing). Consequently, these firms tend to mix relatively high degrees of centralization for some operating decisions with relative high degrees of decentralization for other operating decisions.
The need for coordination is particularly high in transnational firms. This is reflected in the use of a wide array of formal and informal integrating mechanisms, including formal matrix structures and informal management networks. The high level of interdependence of subunits implied by such integration can result in significant performance ambiguities, which raise the costs of control. To reduce these, in addition to output and bureaucratic controls, transnational firms need to cultivate cultural controls.
Environment, Strategy, Structure, and Performance
Underlying the scheme outlined in Table 13.2 is the notion that a "fit" between strategy and structure is necessary for a firm to achieve high performance. For a firm to succeed, two conditions must be fulfilled. First, the firm's strategy must be consistent with the environment in which the firm operates. We discussed this issue in Chapter 12 and noted that in some industries a global strategy is most viable, in others an international or transnational strategy may be most viable, and in still others a multidomestic strategy may be best (although the number of multidomestic industries is on the decline). Second, the firm's organizational structure and control systems must be consistent with its strategy.
If the strategy does not fit the environment, the firm is likely to experience significant performance problems. If the structure does not fit the strategy, the firm is also likely to experience performance problems. Therefore, a firm must strive to achieve a fit of its environment, its strategy, its organizational structure, and its control systems. We saw the importance of this concept in the opening case. Shell switched in 1995 from a matrix structure to a structure based on global product divisions because its matrix structure was no longer consistent with the global strategy that Shell had to pursue, given the extreme cost pressures in Shell's operating environment.
Philips NV, the Dutch electronics firm, provides us with another illustration of the need for this fit. Philips operated until recently with an organization typical of a multidomestic enterprise. Operating decisions were decentralized to largely autonomous foreign subsidiaries. But the industry in which Philips competed was revolutionized by technological change and the emergence of low-cost Japanese competitors who utilized a global strategy. To survive, Philips needed to become a transnational. The firm tried to adopt a transnational posture, but it did little to change its organizational structure. The firm nominally adopted a matrix structure based on worldwide product divisions and national areas. In reality, however, the national areas continued to dominate the organization, and the product divisions had little more than an advisory role. Also, Philips lacked the informal management networks and strong unifying culture that transnationals need to succeed. As a result, the company's structure did not fit the strategy that it had to pursue to survive, and by the early 1990s, Philips was losing money. Only after four years of wrenching change and large losses was Philips finally able to tilt the balance of power in its matrix toward the product divisions. By 1995, the fruits of this effort to realign the company's strategy and structure with the demands of its operating environment were beginning to show up in improved financial performance.20
Chapter Summary
This chapter identified the organizational structures and internal control mechanisms, both formal and informal, that international businesses use to manage and direct their global operations. A central theme of the chapter was that different strategies require different structures and control systems. To succeed, a firm must match its structure and controls to its strategy in discriminating ways. Firms whose structure and controls do not fit their strategic requirements will experience performance problems. This chapter made the following points:
There are four main dimensions of organizational structure: vertical differentiation, horizontal differentiation, integration, and control systems.
Vertical differentiation is the centralization versus decentralization of decision-making responsibilities.
Operating decisions are generally decentralized in multidomestic firms, somewhat centralized in international firms, and more centralized still in global firms. The situation in transnational firms is more complex.
Horizontal differentiation refers to how the firm is divided into subunits.
Undiversified domestic firms are typically divided into subunits on the basis of functions. Diversified domestic firms typically adopt a product divisional structure.
When firms expand abroad, they often begin with an international division. However, this structure rarely serves satisfactorily very long because of its inherent potential for conflict and coordination problems between domestic and foreign operations.
Firms then switch to one of two structures: a worldwide area structure (undiversified firms) or a worldwide product division structure (diversified firms).
Since neither of these structures achieves a balance between local responsiveness and location and experience curve economies, many multinationals adopt matrix-type structures. However, global matrix structures have typically failed to work well, primarily due to bureaucratic problems.
Firms use integrating mechanisms to help achieve coordination between subunits.
The need for coordination (and hence integrating mechanisms) varies with firm strategy. This need is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnational firms.
Integration is inhibited by a number of impediments to coordination, particularly by differing subunit orientations.
Integration can be achieved through formal integrating mechanisms. These vary in complexity from direct contact and simple liaison roles, to teams, to a matrix structure. A drawback of formal integrating mechanisms is that they can become bureaucratic.
To overcome the bureaucracy associated with formal integrating mechanisms, firms often use informal mechanisms, which include management networks and organization culture.
For a network to function effectively, it must embrace as many managers within the organization as possible. Information systems and management development policies (including job rotation and management education programs) can be used to establish firmwide networks.
For a network to function properly, subunit managers must be committed to the same goals. One
way of achieving this is to foster the development of a common organization culture. Leadership by example, management development programs, and human relations policies are all important in building a common culture.
A major task of a firm's headquarters is to control the various subunits of the firm to ensure consistency with strategic goals. Headquarters can achieve this through control systems.
There are four main types of controls: personal, bureaucratic, output, and cultural (which foster self-control).
The key to understanding the relationship between international strategy and control systems is the concept of performance ambiguity. Performance ambiguity is a function of the degree of interdependence of subunits, and it raises the costs of control.
The degree of subunit interdependence--and, hence, performance ambiguity and the costs of control--is a function of the firm's strategy. It is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnationals.
To reduce the high costs of control, firms with a high degree of interdependence between subunits (e.g., transnationals) must develop cultural controls.
Critical Discussion Questions
"The choice of strategy for a multinational firm to pursue must depend on a comparison of the benefits of that strategy (in terms of value creation) with the costs of implementing it (as defined by organizational requirements necessary for implementation). On this basis, it may be logical for some firms to pursue a multidomestic strategy, others a global or international strategy, and still others a transnational strategy." Is this statement correct?
Discuss this statement: "An understanding of the causes and consequences of performance ambiguity is central to the issue of organizational design in multinational firms."
Describe the organizational solutions a transnational firm might adopt to reduce the costs of control.
What actions must a firm take to establish a viable organizationwide management network?
Closing Case Organizational Change at Unilever
Unilever is a very old multinational with worldwide operations in the detergent and food industries. For decades, Unilever managed its worldwide detergents activities in an arm's-length manner. A subsidiary was set up in each major national market and allowed to operate largely autonomously, with each subsidiary carrying out the full range of value creation activities, including manufacturing, marketing, and R&D. The company had 17 autonomous national operations in Europe alone by the mid-1980s.
In the 1990s, Unilever began to transform its worldwide detergents activities from a loose confederation into a tightly managed business with a global strategy. The shift was prompted by Unilever's realization that its traditional way of doing business was no longer effective in an arena where it had become essential to realize substantial cost economies, to innovate, and to respond quickly to changing market trends.
The point was driven home in the 1980s when the company's archrival, Procter & Gamble, repeatedly stole
the lead in bringing new products to market. Within Unilever, "persuading" the 17 European operations to adopt new products could take four to five years. In addition, Unilever was handicapped by a high-cost structure from the duplication of manufacturing facilities from country to country and by the company's inability to enjoy the same kind of scale economies as P&G. Unilever's high costs ruled out its use of competitive pricing.
To change this situation, Unilever established product divisions to coordinate regional operations. The 17 European companies now report directly to Lever Europe. Implicit in this new approach is a bargain: The 17 companies are relinquishing autonomy in their traditional markets in exchange for opportunities to help develop and execute a unified pan-European strategy.
As a consequence of these changes, manufacturing is now being rationalized, with detergent production for the European market concentrated in a few key locations. The number of European plants manufacturing soap has been cut from 10 to 2, and some new products will be manufactured at only one site. Product sizing and packaging are being harmonized to cut purchasing costs and to pave the way for unified pan-European advertising. By taking these steps, Unilever estimates it may save as much as $400 million a year in its European operations.
Lever Europe is attempting to speed its development of new products and to synchronize the launch of new products throughout Europe. Its efforts seem to be paying off: A dishwasher detergent introduced in Germany in the early 1990s was available across Europe a year later-a distinct improvement.
But history still imposes constraints. Procter & Gamble's leading laundry detergent carries the same brand name across Europe, but Unilever sells its product under a variety of names. The company has no plans to change this. Having spent 100 years building these brand names, it believes it would be foolish to scrap them in the interest of pan-European standardization.
http://www.unilever.com
Source: Guy de Jonguieres, "Unilever Adopts a Clean Sheet Approach," Financial Times, October 21, 1991, p. 13, and C. A. Bartlett and S. Ghoshal, Managing across Borders (Boston: Harvard Business School Press, 1989).
Case Discussion Questions
What strategy was Unilever pursuing before its early 1990s reorganization? What kind of structure did the company have? Were Unilever's strategy and structure consistent with each other? What were the benefits of this strategy and structure? What were the drawbacks?
By the 1990s, was there still a fit between Unilever's strategy and structure and the operating environment in which it competed? If not, why not?
What kind of strategy and structure did Unilever adopt in the 1990s? Is this appropriate given the environment in which Unilever now competes? What are the benefits of this organizational and strategic shift? What are the costs?