Interorganizational networks

Relationship networks are ever-expanding transnational linkages between corporations, subsidiaries, suppliers and individuals. These networks may adopt very different structures on their own account because they operate in different local contexts within their own national environments.

Royal Philips Electronics of The Netherlands, one of the world's biggest electronics companies, has operating units in 60 countries, using a network structure. These units range from large subsidiaries, which might he among the largest companies in a country, to very small single-function operations, such as research and development or marketing divisions of one of Philips’ businesses. Some have centralized control at Philips' headquarters; others are quite autonomous.

Networks are important also for managers of small and medium-sized enterprises. In a paper presented at the APEC ASC Conference 2005, 'Learning communities and global SMEs’, Dennis McNamara of Georgetown University, USA, discussed the need to build an Asia-Pacific economic community.

He pointed out that investment abroad in production facilities deprives globalizing small and medium firms of home-country’ advantages. It does so without assurance of context- specific advantages, such as networks of specialized producers adept in local knowledge- sharing of technologies of machinery and organization, as well as local labor and state resources. He cited the cases of Korean and Japanese manufacturing firms in China and Thailand respectively that reveal strong home-country links but relatively weak ties to local host-country networks.

McNamara suggested one solution would be the creation of a 'learning environment' among SMEs in the region, driving a continual process of integrating local craft with global standards. The goal would be to establish ‘learning communities’ rather than simply ‘hubs’ or ‘clusters’ of relationships. Learning communities would develop foreign direct investment by fostering effective knowledge sharing among local and foreign small and medium firms in the cluster, and APEC could play a major role in mapping regional small business networks and identifying effective strategies of knowledge sharing.

He pointed out that economic geographers have identified an ‘intermediate space’ in which local systems exist, between the dimensions of national institutions and those of individual economic actors. In this space are found institutional relationships between business organizations, local institutions, trade associations and research institutes. Thus local systems are models of integration between contextual and general knowledge, linking transferable general knowledge to manufacturing while adapting such expertise to the local context. According to Dennis McNamara, there are four dimensions of such a milieu: territory, organization, dynamics of learning, and an industrial culture.

He made a distinction between 'relational networks’ and ‘modular production networks’. The former he took to refer, for example, lo German and ethnic Chinese networks in East Asia where social ties drive cooperation. In contrast to these relational networks based on tacit knowledge (i.e. high in awareness of context), modular networks, he argued, thrive on formal linkages between firms and suppliers that allow professional relationships without excessive mutual dependence.

Global SMEs can tap local resources of tacit and formal – codified – knowledge only through intensive ties to local industry: hence the critical role of industrial clusters where local engagement permits access to important resources and information.

Global e-corporation networks

These typically involve a network of virtual e-exchanges and ‘bricks-and-mortar’ services, whether those services are in-house or outsourced. This structure of functions and alliances is made of a combination of electronic and physical stages of the supply chain network, comprising some global and some local functions.

Centralized e-exchanges for logistics, supplies and customers may be housed anywhere. Suppliers, manufacturers and distributors may be in various countries, separately or together, depending on efficiencies of scale and cost. The result is a global e-network of suppliers, subcontractors, manufacturers, distributors, and buyers and sellers communicating in real time through cyberspace. This spreads efficiency throughout the chain, providing cost- effectiveness for all parties.

The Internet ‘has stamped a seismic, indelible imprint on counties’ industrial sectors, making communications between engineers and manufacturers faster and easier worldwide. Emails permit the almost immediate exchange of messages, drawings and documents; websites provide information on firms' capabilities and catalogues, purchase parts and materials. Potential clients can find specifications, download 3D models of components and locate almost any piece of information to help engineers with their designs.

However, there is still the need to manually complete the process of locating suppliers, sending out requests for quotations, then assessing each supplier's submission. Thus it takes a great deal of time and resources to find an appropriate source for even a simple part.

Internet marketplaces such as ManufactureLink represent the new breed of Internet-based е-business applications that are making huge strides in improving business communication efficiency and reducing the costs of B2B (business-to-business) transactions. These systems are designed to replicate traditional business methods, but within an online environment.

ADG Global Supply, based in Western Australia, is an example of a company that uses the Internet to streamline its global supply systems. The company provides all types of equipment for the mining, earthmoving and drilling industries and offers single parts or total procurement services anywhere in the world. It has regional offices throughout Australia and a global network of stocking and shipping locations.

Transnational networks

Over time, many firms have evolved through various multinational forms to take advantage of a horizontal organization to manage across national boundaries, thus retaining local flexibility' while achieving global integration. Decentralized horizontal structures involve linking foreign operations lo each other and to headquarters in a flexible way to take advantage of both local and central capabilities.

Online citizen engagement with policy processes can be responsible for ‘raising the quality of democratic engagement, enhancing government transparency and accountability’, and ‘strengthening civic capacities’ through dense and cross-cutting networks of interaction and mutual engagement. The use of social capital is characterized by the transformation of vertical forms of interaction to more horizontal forms of linkage and policy co-development.

However, the actual experiments in e-government and participatory online decision making have often proved disappointing. Traditional forms of government policy making and political organization are based on centralized and hierarchical structures.

Moreover, it is too easy for websites, ‘particularly those of the avowedly left, to start with a promising democratic, open access charter’, but to degenerate over time into ‘slanging matches between political factions’.

Many commercial organizations whose managers tend to treat the Internet as an ‘optional tool for more efficient communications rather than as a distinctive communicative space’. Yet it has the potential to reconstitute and reconfigure relationships between multiple users in ‘complex, horizontal and multidirectional’ interactions. There are many instances where networked and decentralized forms of economic, social and political organizations have flourished. Successful firms recognize that the Internet provides a collaborative space in which individuals emerge as producers, rather than just consumers, of policies, whether commercial or political.

Therefore the democratic potential of the Internet may lie, not simply in its geographical reach, networked connectivity or interactivity, but more generally in the ways that digital media technologies break down the traditional barrier between producer and consumer, or broadcaster and audience.

For example, blogs (commentaries), wikis (web applications that allow multiple authors to edit content), open news sites and community-based open – source journalism are forms of social software that are challenging established news media. With new protocols for content selection, authorship and diversity of sources, these sites are promoting a more open, participatory culture, blurring the lines between news providers and their audiences.

This is ‘open-ended, open-ended, networked and collaborative online engagement': a form of open-source democrat. \

These are all forms of the rising open-source software movement with potential for horizontal and decentralized forms of networked intelligence. They provide also a non-proprietorial information base for promotion of creativity, innovation and new forms of wealth creation’. Thus, the concept of e-government is not simply about electronic service delivery or information provision, but about active participation and using ICT (information and communication technologies) to transform the structures, operations – and most importantly – the culture fo governments. By implication, this applies to all organizational cultures.

Various names are given to organizational forms emerging to deal with global competition and logistics. However, the traditional hierarchical pyramids, subsidiaries and world headquarters, arc gradually evolving into more fluid forms to adapt to strategic and competitive imperatives. Information and communication technology is fuelling this change. In this new global network the location of a firm's headquarters is unimportant because it becomes a communications center where many of the Web’s threads intersect.

Choice of structure

In summary, two major variables in choosing the structure and design of an organization are the opportunities and need for globalization and localization. As firms progress from domestic to international – and perhaps later to multinational and then global – companies, their managers adapt the organizational structure to accommodate their relative strategic focus on globalization versus localization, choosing a global product structure, a geographic area structure, or perhaps a matrix form.

As the company becomes larger, more complex and more sophisticated in its approach to world markets (no matter which structural route it has taken), it may evolve into a transnational corporation whose strategy' is to create alliances, networks and horizontal designs.

Organizational factors prompting structural change and design

It has been argued that when a company makes drastic changes in its goals, strategy or scope of operations, it will usually also need a change in organizational structure. However, other, less obvious indications of organizational inefficiency also signal a need for structural changes. Warning signals include:

• Change in size of the corporation – due to growth, consolidation or reduction

• Change in key individuals – which may alter management objectives, interests and abilities

• Failure to meet goals, capitalize on opportunities or to be innovative

• Inability to get things done on time

• Consistently overworked top managers who spend excessive hours on the job

• Belief that costs are extravagant or that budgets are not being met

• Morale problems

• Tall hierarchies that inhibit strategic control

• Planning that has become increasingly staff-driven and thus divorced from line management

• Innovation that is stifled by too much administration and monitoring of details

• Uniform solutions applied to unique situations.

The following are a few specific indicators of international organizational malaise:

• Shifts in operational scope – perhaps from directing export activities to controlling overseas manufacturing and marketing units; or change in si/e of operations on a country, regional or worldwide basis: or failure of foreign operations to grow in accordance with plans and expectations

• Clashes among divisions, subsidiaries or individuals over territories or customers in the field

• Divisive conflicts between overseas units and domestic dh ision staff or corporate staff

• Centralization leading to a flood of detailed data that are neither fully understood nor properly used by headquarters

• Duplication of administrative personnel and services

• Underutilization of overseas manufacturing or distribution facilities

• Duplication of sales offices and specialized sales account executives

• Proliferation of relatively small legal entities or operating units within a country or geographic area

• Increase in overseas customer service complaints

• Breakdowns in communications within and among organizations

• Unclear lines of reporting and dotted-line relationships, and ill-defined executive responsibilities.

At persistent signs of ineffective work, managers analyze organizational design, systems and work (low for possible causes of the problems. The nature and extent of any design change reflect the magnitude of the problem. When managers choose a new design, or modify an existing structure, they establish also an appropriate system of communication and control. They localize decisions while integrating widely dispersed and disparate global operations on both macro and micro levels.

No company is either totally centralized or decentralized – the matter is one of degree. In general, centralized decisions are common for some functions (such as finance, research and development) because these are organized for the entire corporation. Other functions (such as production, marketing, sales) are more appropriately decentralized.

Two key issues are the speed with which the decisions have to be made, and whether they primarily affect only a certain subsidiary or other parts of the company as well.

Organizational cultures – and awareness of local cultures – affect decisions on how much lo decentralize, how to organize work flow and the various relationships of authority and responsibility. For example, delegating a high level of authority to employees in a country whose culture is high in power distance is not likely to work well.

In summary, no one way to organize is best. Contingency theory applies to design as much as to any other aspect of management. The best structure is the one that fits with the firm’s goals and is appropriate to its industry, size, technology and competitive environment. Structure should be fluid and dynamic – and highly adaptable to the changing needs of the company. It cannot afford to get bogged down in administrative heritages of ‘the way we do things around here' or 'what we’ve always done'. Probably the future for multinational structures lies in a global web of networked companies.

Control systems for global operations

The challenge for international managers is how to coordinate far-flung operation' in different environments with various work processes and rules, and economic, political, legal and cultural norms. Feedback from control methods and information systems should signal need for changes in strategy, structure or operations.

Monitoring systems

Multinational managers usually employ a variety of direct and indirect coordinating and control mechanisms, depending on organization structure, as summarized in Table 1. Mechanisms for direct and indirect coordination.

ГаЫе 1 Control mechanisms in MNC structures
Multinational structures	Output control	Bureaucratic control	Decision-making control	Organization control
International division structure	Most likely profit control	Must follow company policies	Some centralization possible	Treated like other divisions
Global geographic structure	Profit center most common	Some policies and procedures necessary	Local units have autonomy	Local subsidiary culture often most important
Global product structure	Unit output for supply; sales volume for sales	Tight process controls for product quality and consistency	Centralized at product division headquarters	Possible for some companies but not always necessary
Transnational network structure	Used for supplier units and some independent profit centers	Less important	Few decisions centralized at headquarters; more decisions centralized in key network nodes	Organizational culture transcends national cultures; supports sharing and learning; the most important control mechanism
Source: Adapted from John В Cullen. Multinational management: a strategic approach, 2nd edn. South-Western.Cincinnati, 1909. p.329.

Direct methods include the design of appropriate structures and the use of effective staffing practices. Such decisions set the stage for operations to meet goals rather than troubleshooting deviations or problems after they have occurred.

Indirect coordinating mechanisms typically include sales quotas, budgets and other financial tools, as well as feedback reports, which give information about the sales and financial performance of the subsidiary' for the last quarter or year. Domestic companies invariably rely on budgets and financial statement analyzes, but for foreign subsidiaries, financial statements and performance evaluations are complicated by financial variables in MNC reports, such as exchange rates, inflation levels, transfer prices and accounting standards.

Considerable differences exist in practices across nationalities, l-'or example, managers of US multinationals tend to monitor subsidiary outputs and rely more on frequently reported performance data than do their European counterparts, who assign more parent-company nationals lo key positions in foreign subsidiaries and count on a higher level of behavior control. This suggests that US practice is to measure more quantifiable aspects of each foreign subsidiary and compare relative performances. The European system, on the other hand, measures more qualitative aspects of subsidiaries and their environments, allowing focus on each unique situation but making it difficult to compare any one performance to those of others.

There is another whole dimension to the concept of performance measurement and that is its assessment on the same terms as assessment of public value. Public value is the equivalent in public management of private sector value to shareholders and customers. The criteria essentially are the same. Private, like public, value is what the public values; that is, what people are willing to sacrifice to acquire and achieve – particularly goods and services, security and trust. Unlike public value that is shaped through political process, dialogue and public engagement, private value comes through efficient management, but – like public value – is influenced increasingly by evidence, knowledge and learning in all its forms.

Mark Moore argues that performance measurement plays an essential role in creating public value through effective strategic management. He suggests that the work of developing and improving performance measurement systems involves philosophical and normative as well as scientific and cognitive issues, and that this argument applies also to the creation of value by private firms.

Moore makes this assumption: every statement that something is worth measuring is effectively a philosophical and normative claim, not merely empirical and positive. Performance measurement is about value and therefore has important political implications beyond its obvious administrative and technical dimensions. Few managers risk public discussion of the whole concept of ‘value’ for fear of exposing their organizations to criticism and to the risk of failure to produce what the public wants. There art- only two things that might motivate managers to open such a debate. One is that by doing so they might emerge with a stronger, clearer, more consistent definition of the value of the goods and services their organizations produce. The other is to clarify the conditions under which they can successfully manage and lead their firms.

Managing systems and mechanisms

Managers cannot live up to the duties of their office if they do not know in sufficiently concrete terms whether they are succeeding in those duties or not. They cannot know the answer if they do not have the measurement tools that would allow them to drive performance and seek out the technical means for continuing improvement. Only the strategic use of performance measurement makes such things possible.

However, engaging in the task of constructing performance measures always means confronting unresolved conflicts. In the end it means managers exposing themselves and their organizations to potential failure. The only motivator is the knowledge that nobody can run organizations without really understanding what constitutes value and how to contribute to its creation.

Relevant factors include management practices, local constraints and expectations regarding authority. time and communication. The degree to which headquarters' practices and goals are transferable probably depends on whether top managers are from the head office, the host country or a third country In addition information systems and evaluation variables are taken into account.

REPORTING SYSTEMS

Reporting systems, such as those described in this lecture, require sophisticated information systems to enable them to work properly – not only lor competitive purposes but also for purposes of performance evaluation.

Top management must receive accurate and timely information regarding sales, production and financial results to be able to compare actual performance with goals and to take corrective action where necessary.