HESHAM SAID MECKAWY (19225460 )

The organization of international business

This report is concerned with identifying the organization architecture that
international businesses use to manage and direct their global operations. By
organizational architecture we mean the totality of a firm's organization, including
formal organization structure, control systems and incentives, processes,
organizational culture, and people. The core argument outlined in this chapter is
that superior enterprise profitability requires three conditions to be fulfilled. First ,
the different elements of a firm's organizational architecture must be internally
consistent.
For example, the control and incentive systems used in the firm must be consistent
with the structure of the enterprise. Second, the organizational architecture must
match or fit the strategy of the firm-strategy and architecture must be consistent.
For example, if a firm is pursuing a global standardization strategy but it has the
wrong kind of organization
architecture in place, it is unlikely that it will be able to execute that strategy
effectively and poor performance may result. The strategy and architecture of the
firm must not only be consistent with each other, but they also must make sense
given the competitive conditions prevailing in the firm's markets-strategy,
architecture, and competitive environment must all be consistent. For example, a
firm pursuing a localization strategy might have the right kind of organizational
architecture in place for that strategy. However, if it competes in markets where
cost pressures are intense and demands for local responsiveness are low, it will still
have inferior performance because a global standardization strategy is more
appropriate in such an environment.

What is meant by organization architecture.

Today, business is acknowledged to be international and there is a general
expectation that this will continue for the foreseeable future. International
business may be defined simply as business transactions that take place across
national borders. This broad definition includes the very small firm that exports
(or imports) a small quantity to only one country, as well as the very large global
firm with integrated operations and strategic alliances around the world. Within
this broad array, distinctions are often made among different types of
international firms, and these distinctions are helpful in understanding a firm's
strategy, organization, and functional decisions (for example, its financial,
administrative, marketing, human resource, or operations decisions). One
distinction that can be helpful is the distinction between multi-domestic
operations, with independent subsidiaries which act essentially as domestic firms,
and global operations, with integrated subsidiaries which are closely related and
interconnected. These may be thought of as the two ends of a continuum, with
many possibilities in between. Firms are unlikely to be at one end of the
continuum, though, as they often combine aspects of multi-domestic operations
with aspects of global operations.

International business grew over the last half of the twentieth century partly
because of liberalization of both trade and investment, and partly because doing
business internationally had become easier. In terms of liberalization, the General
Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade
liberalization, and this was continued with the formation of the World Trade
Organization (WTO) in 1995. At the same time, worldwide capital movements
were liberalized by most governments, particularly with the advent of electronic
funds transfers. In addition, the introduction of a new European monetary unit,
the euro, into circulation in January 2002 has impacted international business
economically. The euro is the currency of the European Union, membership in
March 2005 of 25 countries, and the euro replaced each country's previous
currency. As of early 2005, the United States dollar continues to struggle against
the euro and the impacts are being felt across industries worldwide.

In terms of ease of doing business internationally, two major forces are

important:

1. technological developments which make global communication and

transportation relatively quick and convenient; and
2. the disappearance of a substantial part of the communist world, opening
many of the world's economies to private business.

Organizational Structure
1. Vertical differentiation, which refers to the location of decision-making
responsibilities within a structure (that is, centralization or decentralization)
and also to the number of layers in a hierarchy (that is, whether the
organizational structure is tall or flat).

2. Horizontal differentiation, which refers to the formal division of the

organization into subunits.

3. The establishment of integrating mechanisms, which are mechanisms for

coordinating subunits.

Vertical Differentiation in Organizational Structure

CENTRALIZATION AND DECENTRALIZATION

A firm’s vertical differentiation determines where in its hierarchy the

decision-making power is concentrated. Are production and marketing
decisions centralized in the offices of upper-level managers, or are they
decentralized to lower-level managers? Where does the responsibility for
R&D decisions lie? Are important strategic and financial decisions pushed
down to operating units, or are they concentrated in the hands of top
managers?

There are arguments for both centralization and decentralization.

Centralization is the concentration of decision-making authority at a high
level in a management hierarchy.

Decentralization vests decision-making authority in lower-level managers

or other employees.
Arguments for Centralization There are four main arguments for
centralization.

First, centralization can facilitate coordination. Consider a firm that

manufactures components in California and performs final assembly in
Seattle. These activities may need to be coordinated to ensure a smooth
flow of components to the assembly operation. This might be achieved by
centralizing production scheduling at the firm’s head office.

In another example, Microsoft recently reduced the number of divisions in

its organization from six to three, thereby centralizing decision making in
fewer senior managers, in an attempt at greater coordination. Microsoft
felt that having six divisions in the company led to confused sales,
marketing, and product development efforts and that greater centralization
was required to harmonize efforts.

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
managers’ goals. Centralization of important decisions minimizes the
chance of this occurring. Major strategic decisions, for example, are often
centralized to make sure the entire organization is pulling in the same
direction. In this sense centralization is a way of controlling the
organization.

Third, centralization can avoid duplication of activities by various subunits

within the organization. For example, many firms centralize their R&D
functions at one or two locations. Similarly, production activities may be
centralized at key locations to eliminate duplication, attain economies of
scale, and lower costs. The same may also be true of purchasing decisions.
Wal-Mart, for example, has centralized all purchasing decisions at its
headquarters in Arkansas.
By wielding its enormous bargaining power, purchasing managers at the
head office can drive down the costs Wal-Mart pays for the goods it sells in
its stores. It then passes on those savings to consumers in the form of lower
prices, which lets the company grow its market share and profits.

Fourth, by concentrating power and authority in one individual or a

management team, centralization can give top-level managers the means
to bring about needed major organizational changes. Often firms seeking to
transform their organizations centralize power and authority in a key
individual (or group) who then sets the new strategic direction for the firm
and redraws organization architecture.

Once the new strategy and architecture have been decided on, however,
greater decentralization of decision making normally follows. Put
differently, temporary centralization of decision-making power is often an
important step in organizational change.

Arguments for Decentralization There are five main arguments for

decentralization

. First, top management can become overburdened when decision-making

authority is centralized. Centralization increases the amount of information
senior managers have to process. As a result of information overload,
managers might suffer the constraints imposed by bounded rationality.

Decentralization gives top management time to focus on critical issues by

delegating more routine issues to lower-level managers and reducing the
amount of information top managers have to process, making them less
vulnerable to cognitive biases.
Second, motivational research favors decentralization. Behavioral scientists
have long argued that people are willing to give more to their jobs when
they have a greater degree of individual freedom and control over their
work. The idea behind employee empowerment is that if you give
employees more responsibility for their jobs they will work harder, which
increases productivity and reduces costs.

Third, decentralization permits greater flexibility—more rapid response to

environmental changes. In a centralized firm the need to refer decisions up
the hierarchy for approval can significantly slow decision making and inhibit
the ability of the firm to adapt to rapid environmental changes. 6 This can
put the firm at a competitive disadvantage. Managers deal with this by
decentralizing decisions to lower levels within the organization.

Thus at Wal-Mart, although purchasing decisions are centralized so the firm

can realize economies of scale in purchasing, routine pricing and stocking
decisions are decentralized to individual store managers, who set prices
and choose the products to stock depending on local conditions. This
enables store managers to respond quickly to changes in their local
environment, such as a drop in local demand or actions by a local
competitor.

Fourth, decentralization can result in better decisions. In a decentralized

structure, decisions are made closer to the spot by individuals who
(presumably) have better information than managers several levels up a
hierarchy. It might make little sense for the CEO of Procter & Gamble to
make marketing decisions for the detergent business in Germany because
he or she is unlikely to have the relevant expertise and information. Instead
those decisions are decentralized to local marketing managers, who are
more in tune with the German market.
Fifth, decentralization can increase control. Decentralization can establish
relatively autonomous, self-contained subunits within an organization. An
autonomous subunit has all the resources and decision-making power
required to run its operation daily. Managers of autonomous subunits can
be held accountable for subunit performance. The more responsibility
subunit managers have for decisions that impact subunit performance, the
fewer excuses they have for poor performance and the more accountable
they are.

Thus by giving store managers the ability to set prices and make stocking
decisions, Wal-Mart’s top managers can hold local store managers
accountable for the performance of their stores, and this increases the
ability of top managers to control the organization. Just as centralization is
one way of maintaining control in an organization, decentralization is
another. We return to this issue in Chapter 9 when we discuss control
systems.

Horizontal Differentiation in Organizational

Structure
In contrast, horizontal differentiation is concerned with how to divide the
organization into subunits. We look at four different types of structure
here: functional, multidivisional, geographic, and matrix.

FUNCTIONAL STRUCTURE

Most firms begin with no formal structure and are run by a single
entrepreneur or a small team of individuals. As they grow, the demands of
management become too great for an individual or small team to handle.
At this point the organization is split into functions that typically represent
different aspects of the firm’s value chain.

In other words, in a functional structure the structure of the organization

follows the obvious division of labor within the firm, with different
functions focusing on different tasks. Thus there might be a production
function, an R&D function, a marketing function, a sales function, and so
on. These functions are typically overseen by a top manager, such as the
CEO, or a small top management team.

Functions themselves can be and often are subdivided into subunits.

Further horizontal differentiation within functions is typically on the basis
of similar tasks and processes. Within the manufacturing facilities of
Toyota, for example, the workforce is grouped into teams, and each team is
responsible for a discrete activity or task, such as the production of a major
component that goes into an automobile.

At Nucor too the workforce is grouped into teams, with each team taking
on responsibility for a particular step in the steelmaking process. These
teams may have significant decision-making responsibility, be held
accountable for their performance, and have their pay and bonuses tied to
team wide goals.

A functional structure can work well for a firm that is active in a single line
of business and focuses on a single geographic area. But problems can
develop once the firm expands into different businesses or geographies.
Consider first what happens when a firm expands into different business
lines.
As for coordination, when the different activities that constitute a business
are embedded in different functions, such as production and marketing,
that are simultaneously managing other businesses, it can be difficult to
achieve the tight coordination between functions needed to effectively run
a business. Moreover, it is difficult to run a functional department that is
supervising the value creation activities of several business areas.

MULTIDIVISIONAL STRUCTURE

The problems we have just discussed were first recognized in the 1920s by
one of the pioneers of American management thinking, Alfred Sloan, who
at the time was CEO of General Motors, then the largest company in the
world. Under Sloan GM had diversified into several businesses. In addition
to making cars under several distinct brands, it made trucks, airplane
engines, and refrigerators.

After struggling to run these different businesses within the framework of a

functional structure, Sloan realized that a fundamentally different structure
was required. His solution, which has since become the classic way to
organize a multi business enterprise, was to adopt a multidivisional
structure. In a multidivisional structure the firm is divided into different
product divisions, each of which is responsible for a distinct business area.

Thus Philips created product divisions for lighting, consumer electronics,

industrial electronics, and medical systems. Each division is set up as a self-
contained, largely autonomous entity with its own functions. Responsibility
for operating decisions and business-level strategy is typically decentralized
to the divisions, which are then held accountable for their performance.

Headquarters is responsible for the overall strategic development of the

firm (corporate-level strategy), for the control of the various divisions, for
allocating capital between divisions, for supervising and coaching the
managers who run each division, and for transferring valuable skills
between divisions.
The product divisions are generally left alone to run their daily operations
so long as they hit performance targets, which are typically negotiated
annually between the head office and divisional management. Head office
management, however, will often help divisional managers think through
their strategies. Thus while Jack Welch at GE did not develop strategy for
the various businesses within GE’s portfolio (that was decentralized to
divisional managers), he did probe the thinking of divisional managers
about their strategies.

In addition, Welch devoted a lot of effort to getting managers to share best

practices across divisions. For example, Welch was a driving force in getting
different divisions at GE to adopt the six sigma process improvement
methodology.

One of the great virtues claimed for the multidivisional structure is that it
creates an internal environment that gets divisional managers to focus on
efficiency. 17 Because each division is a self-contained entity, its
performance is highly visible. The high level of responsibility and
accountability implies that divisional managers have few alibis for poor
performance. This motivates them to focus on improving efficiency.
Base pay, bonuses, and promotional opportunities for divisional managers
can be tied to how well the divisions do. Capital is also allocated by top
management between the competing divisions depending on how
effectively top managers think the division managers can invest that capital.
The desire for capital to grow their businesses, and for pay increases and
bonuses, creates further incentives for divisional managers to focus on
improving the competitive positions of the businesses under their control.

On the other hand, if the head office puts too much pressure on divisional
managers to improve performance, this can result in some of the worst
practices of management. These can include cutting necessary investments
in plant, equipment, and R&D to boost short-term performance, even
though such actions can damage the long-term competitive position of the
enterprise.

To guard against this possibility, head office managers need to develop a

good understanding of each division, set performance goals that are
attainable, and have staff who can regularly audit the accounts and
operations of divisions to ensure that each division is not being managed
for short-term results or in a way that destroys its long-term
competitiveness .

GEOGRAPHIC STRUCTURE

Some firms first grow not by expanding into different businesses through
diversification, but by expanding into other geographic regions—either
within their home countries or (increasingly in today’s global economy) into
other national markets. For firms that are active in multiple regions with a
single business, the structural solution to managing growth is to adopt a
geographic structure.

In a geographic structure the main subunits of the organization are

geographic areas, such as regions within a country, countries, or
multicounty regions. Figure illustrates a form of geographic structure found
in some international businesses.
Under this structure the firm is divided into geographic areas. An area may
be a country (if the market is large enough) or a group of countries. Each
area division tends to be a self-contained, largely autonomous entity. Each
may have its own set of functions (such as its own production, marketing,
R&D, and human resource functions). Operations authority and strategic
decisions relating to each of these activities may be decentralized to each
area, with headquarters retaining authority for the overall strategic
direction of the firm and financial control.

Moreover, because each geographic region has its own production

facilities, duplication inhibits the realization of economies of scale that
could be gained if the firm served the entire world market from a single
favorable location. The duplication of functions across regions also implies
that the firm is not placing different functions where they can be
performed most efficiently.

To solve these problems, many international businesses operate with a

hybrid geographic– functional structure, similar to that illustrated in Figure.
In this structure functions likeR&D, purchasing, and production are
centralized at the optimal locations. The world is then divided into
geographic regions for local marketing and sales. A geographic structure, or
a hybrid geographic–functional structure, can become unwieldywhen a firm
is engaged in several different businesses.

Under such circumstances each geographicarea might itself be divided into

different product divisions—one for each business—with functions
appearing underneath the divisions. This was the structure Unilever used
tooperate with. Although this structure had the advantage of allowing
Unilever to customize itsproduct offering and marketing strategy from
country to country, the duplication ofmanufacturing facilities drove up
costs.

By the late 1990s this structure was no longer tenable,and in 2000 Unilever
established two worldwide product divisions: one to manage its
foodsbusiness (packaged foods) and one to manage its home products
business (shampoos, detergents).The division heads were responsible for
the worldwide profitability of the businessesunder their control.
Under this new structure Unilever consolidated its manufacturing in fewer
facilities, each located where costs were favorable. Those facilities served
regional or global markets, letting the company realize economies of scale
and drive down costs. R&D was also centralized at the marketing strategy,
as well as product packaging, to account for country differences in tastes,
preferences, distribution systems, and the like.

To solve this dilemma, Unilever has kept elements of its geographic

structure in place, with the head of each geographic area maintaining
responsibility for profitability in the area under his or her control, and
country managers within each region being given responsibility for local
marketing and sales (and held accountable for performance in that
country).

Unilever’s structure as of 2005, which is illustrated in Figure ,is an attempt

to solve conflicting demands on the organization while maintaining the best
features of a multidivisional structure and a geographic structure. Unilever
is hardly alone is struggling with such a dilemma; many other firms do as
well. One solution to such organizational dilemmas is to adopt a matrix
structure, which is in effect how Unilever is now operating.As we will see
next, however, matrix structures also have problems.

MATRIX STRUCTURE

The matrix structure is sometimes adopted when no single structural

design seems to solve all of a firm’s problems. With a matrix structure,
managers try to combine two different organizing philosophies in a single
design. Unilever, for example, saw benefits to being organized both on the
basis of divisions (enabling the company to consolidate manufacturing
facilities and realize economies of scales) and on the basis of geographic
areas (enabling the company to respond to different national and regional
markets).

The firm’s senior managers want all of these benefits, so they have adopted
a matrix structure with two overlapping hierarchies: one on the basis of
business and one on the basis of area. This means that a lower-level
manager might have two bosses—divisional and regional.

In addition to diversified multinational firms like Unilever, high-technology

firms based in rapidly changing environments sometimes adopt a matrix
structure. In such cases the need for a matrix is driven by the desire for
tight coordination between different functions, particularly R&D,
production, and marketing. Tight coordination is required so that R&D
designs products that can be manufactured efficiently and are designed
with customer needs in mind—both of which increase the probability of
successful product commercialization.
Tight coordination between R&D, manufacturing, and marketing has also
been shown to result in faster product development, which can help a firm
gain an advantage over its rivals. As illustrated in Figure, in such an
organization an employee may belong to two subunits within the firm. For
example, a manager might be a member of both the manufacturing
function and a product development team.

A matrix structure looks nice on paper, but the reality can be different.
Unless this structure is managed carefully it may not work well. 24 In
practice a matrix can be clumsy and bureaucratic. It can require so many
meetings that it is difficult to get any work done.

The dual hierarchy structure can lead to conflict and perpetual power
struggles between the different sides of the hierarchy. In one high-
technology firm, for example, the manufacturing manager was reluctant to
staff a product development team with his best people because he felt that
would distract them from their functional work. As a result, the product
development teams did not work as well as they might.
To make matters worse, it can prove difficult to ascertain accountability in a
matrix structure. When all critical decisions are the product of negotiation
between different hierarchies, one side can always blame the other when
things go wrong. As a manager in one high-tech matrix structure said to the
author when reflecting on a failed product launch, “Had the engineering
(R&D) group provided our development team with decent resources, we
would have gotten that product out on time, and it would have been
successful.”

For his part, the head of the engineering group stated, “We did everything
we could to help them succeed, but the project was not well managed.
They kept changing their requests for engineering skills, which was very
disruptive.” Such finger-pointing can compromise accountability, enhance
conflict, and make senior management lose control over the organization.

However, there is also evidence that properly managed matrix structures

can work. Among other things, making a matrix work requires clear lines of
responsibility. Normally this means that one side of the matrix must be
given the primary role while the other is given a support role. In a high-tech
firm, for example, the product development teams might be given the
primary role because getting good products to market as quickly as possible
is keyto competitive success.

In a diversified multinational firm like Unilever, the divisions might be given

the primary role because they are responsible for manufacturing costs and
product development, while the geographic areas take on the support role.
Clear goals should be well prioritized so that when conflicts occur, which is
inevitable, the goals help to indicate what is most important. In Unilever’s
case, for example, driving down costs is an important goal, and the need to
first satisfy this goal can be used as a decision rule to help solve any
conflicts between the division and area hierarchies in the matrix.
Integrating Mechanisms Organizational Structure
When this is the case, managers look toward integrating mechanisms, both
formal and informal, to help achieve coordination. Here we introduce the various
integrating mechanisms managers use and discuss how the choice of integrating
mechanism is determined by the strategy of the firm.

FORMAL INTEGRATING MECHANISMS

The formal integrating mechanisms used to coordinate subunits vary in

complexity from simple direct contact and liaison roles, to teams, to a matrix
structure. In general, the greater the need for coordination between subunits, the
more complex formal integrating mechanisms need to be.

Direct contact between subunit managers is the simplest integrating mechanism:

Managers of the various subunits just contact each other whenever they have a
common concern. Direct contact may not be effective, however, if managers have
differing orientations that impede coordination. Managers of various subunits
may have different orientations partly because they have different tasks.
For example, production managers are typically concerned with production issues
such as capacity utilization, cost control, and quality control, whereas marketing
managers are concerned with marketing issues such as pricing, promotions,
distribution, and market share.

These differences can inhibit communication between managers, who may not
“speak the same language.” Managers can also become entrenched in “functional
silos,” which can lead to a lack of respect between subunits and inhibit the
communication required to achieve cooperation and coordination. For these
reasons, direct contact may not be sufficient to achieve coordination between
subunits when the need for integration is high.

When the need for coordination is greater still, firms use temporary or permanent
teams composed of individuals from the subunits that need to achieve
coordination. Teams often coordinate product development efforts, but they can
be useful when any aspect of operations or strategy requires the cooperation of
multiple subunits. Product development teams are typically composed of
personnel from R&D, production, and marketing.

The resulting coordination aids the development of products that are tailored to
consumer needs and that can be produced at a reasonable cost (through design
for manufacturing). When the need for integration is very high, firms may
institute a matrix structure, in which all roles are viewed as integrating roles. This
structure is designed to maximize integration among subunits. As discussed
earlier, common matrix organizations include structures based on functions and
product development teams, as in high-technology firms,or on divisions and
geographic areas, as in diversified multinational enterprises.

However, as we have already noted, matrix structures can bog down in a

bureaucratic angle that creates as many problems as it solves. If not well
managed, matrix structures can become bureaucratic, inflexible, and
characterized by conflict rather than the hoped-for cooperation. For such a
structure to work it needs to be somewhat flexible and to be supported by
informal integrating mechanisms.
INFORMAL INTEGRATING MECHANISMS: KNOWLEDGE NETWORKS

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 an informal integrating
mechanism: knowledge networks supported by an organizational culture that
values teamwork and cross-unit cooperation. A knowledge network is a network
for transmitting information within an organization that is based not on formal
organization structure, but on informal contacts between managers within an
enterprise and on distributed information systems.

The great strength of such a network is that it can be a nonbureaucratic conduit

for knowledge flows 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 example, Figure shows the simple networkrelationships between
seven managers within a complex multinational firm. Managers A, B,and C all
know each other personally, as do Managers D, E, and F.

Although Manager B doesnot know Manager F personally, they are linked through
common acquaintances (Managers C and D). Thus Managers A through F are all
part of the network. Manager G is not.

Imagine Manager B, a marketing manager in Spain, needs to know the solution to

a technical problem to better serve an important European customer. Manager F,
an R&D manager in theUnited States, has the solution to Manager B’s problem.
Manager B mentions her problem to all of her contacts, including Manager C, and
asks if they know anyone who might be able to provide a solution.
Manager C asks Manager D, who tells Manager F, who then calls Manager B with
the solution. In this way coordination is achieved informally through the network
rather than by formal integrating mechanisms such as teams or a matrix
structure.

For such a network to function effectively 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 use the informal network to find a solution; he would have
to resort to more formal mechanisms.

Establishing firm wide knowledge networks is difficult. Although network

enthusiasts speak of networks as the “glue” that binds complex organizations
together, it is unclear how successful firms have been at building companywide
networks. Techniques that establish knowledge networks include information
systems, management development policies, and conferences.

Firms are using distributed computer and telecommunications information

systems to provide the foundation for informal knowledge networks. Electronic
mail, videoconferencing, high-bandwidth data systems, and Web-based search
engines make it much easier for managers scattered over the globe to get to
know each other, to identify contacts that might help solve a particular problem,
and to publicize and share best practices within the organization.

Wal- Mart, for example, uses its intranet to communicate ideas about
merchandizing strategy between stores located in different countries. Firms are
also using management development programs to build informal networks.
Tactics include rotating managers through various subunits regularly so they build
their own informal network and using management education programs to bring
managers of subunits together so they can become acquainted.

In addition, some science-based firms use internal conferences to establish

contact between people in different units of the organization. At 3M regular
multidisciplinary conferences gather scientists from different business units and
get them talking to each other. Apart from the benefits of direct interaction in the
conference setting, after the conference the scientists may continue to share
ideas, increasing knowledge flow within the organization.

3M has many stories of product ideas that were the result of such knowledge flow
—including the ubiquitous Post-it note, whose inventor, Art Fry, first learned
about its adhesive from a colleague working in another division of 3M, Spencer
Silver, who had spent several years shopping his adhesive around 3M.

Knowledge networks by themselves may not be sufficient to achieve coordination

if subunit managers pursue subgoals that are at variance with firmwide goals. For
a knowledge network to function properly (and also for a formal matrix structure
to work) managers must share a strong commitment to the same goals. To
appreciate the nature of the problem, consider again the case of Managers B and
F.

As before, Manager F hears about Manager B’s problem through the network.
However, solving Manager B’s problem would require Manager F to devote
considerable time to the task. If this would divert Manager F away from regular
tasks—and the pursuit of sub goals that differ from those of Manager B—he may
be unwilling to do it. Thus Manager F may not call Manager B, and the informal
network would fail to solve Manager B’s problem.

To eliminate this flaw, organization managers must adhere to a common set of

norms and values that override differing subunit orientations. In other words, the
firm must have a strong organizational culture that promotes teamwork and
cooperation. 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. If
Managers B and F are committed to the same organizational norms and value
systems, and if these organizational norms and values place the interests of the
firm as a whole above the interests of any individual subunit, Manager F should
be willing to cooperate with Manager B on solving her subunit’s problems.

STRATEGY, COORDINATION, AND INTEGRATING MECHANISMS

All enterprises need coordination between subunits, whether those subunits are
functions, businesses, or geographic areas. However, the degree of coordination
required and the integrating mechanisms used vary depending on the strategy of
the firm. Consider first enterprises that are active in just one business. In the
single-business enterprise, the need for coordination between functions is greater
in firms that are competing through product innovation.

As we discussed earlier, such organizations need to coordinate the R&D,

manufacturing, and marketing functions of the firm to ensure that new products
are developed in a timely manner, are designed to be efficiently manufactured,
and match consumer demands. We saw that a matrix structure is one way of
achieving such coordination. Another more common solution is to form
temporary teams to oversee the development and introduction of a new product.
Once the new product has been introduced, the team is disbanded and
employees return to their usual functions or move to another team.

There is also a high need for coordination in firms that face an uncertain and
highly turbulent competitive environment, where rapid adaptation to changing
market conditions is required for survival. In such cases there is a need to make
sure the different functions of the firm are all pulling in the same direction so that
the firm’s response to a changing environment is coherent and embraces the
entire organization.

Temporary teams are often used to effect such coordination. For example, in the
mid-1990s the World Wide Web, which is based on a computer language known
as HTML, emerged with stunning speed and in a way that was anticipated by very
few managers.
The rise of the WWW produced a profound change in the environment facing
computer software firms, such as Microsoft, where managers quickly realized that
they needed to shift their strategy, make their products Web enabled, and
position the marketing and sales activities of the firm to compete in this new
landscape. At Microsoft the entire company quickly embraced the WWW, and all
products were soon Web enabled.

Making this shift required tight coordination between different software

engineering groups, such as those working on the software code for Windows,
Office, and MSN, so that all of the products not only were Web enabled but also
worked seamlessly with each other. Microsoft achieved this by forming cross-
functional teams. In addition to formal integrating mechanisms, firms with a high
need for coordination between subunits, such as those based in turbulent high-
technology environments, would do well to foster informal knowledge networks
to facilitate greater coordination between subunits.

In contrast, if a firm is based in a stable environment characterized by little or no

change, and if developing new products is not a central aspect of the firm’s
business strategy, the need for coordination between functions may be lower. In
such cases a firm may be able to function with minimal integrating mechanisms,
such as direct contact or simple liaison roles. These mechanisms, coupled with a
strong culture that encourages employees to share the same goals and to
cooperate with each other for the benefit of the entire organization, may be all
that is required to achieve coordination between functions.

For multibusiness firms organized into product divisions, the need for
coordination varies with the type of diversification strategy managers are
pursuing. In particular, if a firm has diversified into related businesses and is trying
to realize economies of scope by sharing inputs across product divisions, or is
trying to boost profitability by leveraging valuable core competencies across
product divisions, it will need integrating mechanisms to coordinate product
division activities.
Control Systems and Incentives
A major task of a firm's leadership is to control the various subunits of the firm-
whether they be defined on the basis of function, product division, or geographic
area-to ensure their actions are consistent with the firm's overall strategic and
financial objectives. Firms achieve this with various control and incentive systems.
In this section, we first review the various types of control systems firms use to
control their subunits. Then we briefly discuss incentive systems. Then we will
look at how the appropriate control and incentive systems vary according to the
strategy of the multinational enterprise.

Types of Control
There are various modes of control. The most influential ones are the following −

Personal Controls

Personal controls are achieved via personal contact with the subordinates. It is the
most widely used type of control mechanism in small firms for providing direct
supervision of operational and employee management. Personal control is used to
construct relationship processes between managers at different levels of employees in
multinational companies. CEOs of international firms may use a set of personal control
policies to influence the behavior of the subordinates.

Bureaucratic Controls

These are associated with the inherent bureaucracy in an international firm. This
control mechanism is composed of some system of rules and procedure to direct and
influence the actions of sub-units.
The most common example of bureaucratic control is found in case of capital
spending rules that require top management’s approval when it exceeds a certain
limit.

Output Controls

Output Controls are used to set goals for the subsidiaries to achieve the targeted
outputs in various departments. Output control is an important part of international
business management because a company’s efficiency is relative to bureaucratic
control.
The major criteria for judging output controls include productivity, profitability, growth,
market share, and quality of products.
Cultural Controls

Corporate culture is a key for deriving maximum output and profitability and hence
cultural control is a very important attribute to measure the overall efficiency of a firm. It
takes form when employees of the firm try to adopt the norms and values preached by
the firm.
Employees usually tend to control their own behavior following the cultural control
norms of the firm. Hence, it reduces the dependence on direct supervision when
applied well. In a firm with a strong culture, self-control flourishes automatically, which
in turn reduces the need for other types of control mechanisms.

ICENTIVE SYSTEMS
Incentives are generally defined as “what managers put in place to get
people to do their jobs,” says Kaplan. In many organizations, they are
about things other than straight salary, such as bonuses, benefits, a corner
office, a plaque, praise from senior staff, promotions, the ability to work on
high-profile projects, and so forth. “I know from the general business press
that firms are trying these days to do more with non-salary incentives, like
stock options. But no matter what set of incentives a company has, it will
encounter the same problems. For example, some companies found that
when they offered employees more stock options and lower salaries,
employees resisted the move. In a lot of organizations, people only trusted
the old incentives.”
Kaplan and Henderson’s paper deals with incentive structures across the
board, in startups as well as more established firms. But they note that
established firms face particular challenges because they have long
histories of operating — and rewarding employees — in specific, well-
known ways. “Not only do you have to figure out a new method [of
providing incentives to employees], but you also have to break the set of
promises you made based on the old incentive system.”

Kaplan gives her own case as an example. “As a professor at a university,

I would not trust that I would get tenure unless I had seen the university’s
long track record of granting tenure to professors who meet certain criteria.
But when things change, there is no track record. People don’t know
whether to trust the new incentive system.” In such situations, says
Kaplan, “the interpretation, or the cognitive frame of what is going on in the
marketplace, will dramatically affect how employees understand what they
should be doing and thus what incentives might be needed in order to
promote a new set of activities.”

CONTROL SYSTEMS, INCENTIVES, AND STRATEGY IN

THE INTERNATIONAL BUSINESS
The key to understanding the relationship between international strategy,
control and incentive systems is the concept of performance ambiguity.
Ambiguous performance
Ambiguous performance exists when the causes of poor subunit
performance are unclear.This isnot uncommon when the performance
of a subunit depends, in part, on other subunits; that is, when there is a
high degree of interdependence between subunits in the organization.
Consider the case of the French subsidiary of a U.S. company whose
sales process depends on another subsidiary, a plant established in
Italy. The French subsidiary does not achieve its objectives, so the parent
company requires an explanation. The French subsidiary argues that it
receives poor quality goods from its Italian counterpart. Therefore, the
matrix asks the Italian administrators what the problem is. They answer
that their quality is excellent (the best in the industry) and that the French
simply do not know how to sell a good product. Who's right, the
French or the Italians? Without more information, senior
executives don't know. Because they depend on the Italians to sell their
product, the French have a good excuse for their underperformance.
The matrix needs more information to determine who is right. Collecting it
will cost time and money and divert attention from other problems.In other
words, the degree of ambiguous performance raises control
costs.Consider the difference if the French operation were
autonomous, with its own manufacturing, marketing and research and
development plants. In this case it would lack a suitable alibi to justify its
poor performance; their administrators would triumph or fall on their own
merits. They couldn't blame the Italians for the low sales level. Therefore,
the degree of performance ambiguity is a function of the interdependence
of an organization's subunits.
Strategy, interdependence and ambiguity
Now let's consider the relationship between strategy, interdependence and
ambiguous performance. In companies that have implemented a
localization strategy, each national plant is an autonomous entity and can
be judged on its own merits; its degree of performance ambiguity is low. In
an international company, the degree of interdependence is somehow
higher. Integration is necessary to facilitate the transfer of key skills and
competencies. Because the success of a foreign operation depends in
part on the quality of the competition transferred from the country of origin,
there may be performance ambiguity
In companies that intend to adopt a global standardization
strategy, the situation is even more complex. In a pure global
enterprise, the search for economies of location and experience curve
involves the development of a global network of value-creating activities.
Many of a company's activities of this type are interdependent. The ability
of a French subsidiary to sell a product depends on the efficiency with
which plants located in other countries carry out their value creation
activities. Therefore, levels of interdependence and performance
ambiguity are high in global enterprises.The degree of performance
ambiguity is higher in transnational companies,which suffer from the same
performance ambiguity problems as global companies.In addition, due to
the multidirectional transfer of key competencies, they also suffer
problems typical of companies adopting an international strategy. The
highdegree of integration of transnational companies involves making
many decisions together, and the resulting interdependencies create
countless alibis to justify poor performance. The context of transnational
companies is ideal for "pointing to the culprit"

Control implications and incentives

Control costs, which are defined as the time senior executives
spend monitoring and evaluating subunit performance. This amount will be
higher when the ambiguous performance level is higher. When ambiguity
is low, management can use performance controls and a management
system by exception; when it is elevated, they do not have such luxury.
Production controls do not provide clear signals about the efficiency of the
subunit if its performance depends on that of another subunit in the
organization.Therefore, management should spend time solving
problems that arise from ambiguous performance, with the
corresponding increase in control costs. A transnational strategy
is desirable because it gives the company more opportunities to
take advantage of international expansion than those offered by
multinational, international and global strategies. But we now see that,
because o f the higher level of interdependence, the control costs of
transnational corporations are higher than those of companies that adopt
other strategies. Unless these costs are reduced, the higher profitability
associated with the transnational strategy can be nullified. The same point,
albeit to a lesser extent, counts for global companies adopting a global
standardization strategy. While companies adopting a global
standardization strategy can reap cost benefits from location
economies and experience curves, they must deal with a higher level of
ambiguous performance, which raises control costs (in compared to
companies adopting an international or multinational strategy).This is
where control and incentive systems come in. When we look at the control
systems with which corporations control their subunits, we observe that
,regardless of their strategy, multinational companies use
performance and bureaucratic controls. However, in companies that
adopt a global or transnational strategy, the usefulness of
performance controls is limited by substantial performance
ambiguities. As a result, these companies attach greater importance to
cultural controls. Cultural control by encouraging administrators to assume
the organization's standards and value systems gives administrators of
interdependent subunits an incentive to solve the problems that arise
between them. The result is the reduction of accusations and,
therefore, control costs. The development of cultural controls can
be a precondition for the success of the adoption of a
transnational strategy, and perhaps also a comprehensive
strategy. A bout incentives, the newly analyzed material suggests
that the conflict between the different subunits is reduced, and
the potential for cooperation increases, if systems are somehow
linked to a high degree in the hierarchical structure. Whenambiguous
performance makes it difficult to judge the performance of subunits as
autonomous units, the payment of incentives from administrators to the
entity to which they belong is linked and this reduces the resulting
problems.
Processes
We define processes as the way to make decisions and to carry out the
work of the organization. Processes are present at various organizational
levels.There are processes to formulate strategies, to allocate
resources, to evaluate ideas of new products, to manage requests
for information and customer complaints, to improve product quality,
to evaluate employee performance, etc.Often, a company's core
competencies or valuable capabilities are integrated into these processes.
Efficient and efficient processes lower value creation costs and add
additional value to the product. For example, the global success of
many Japanese companies in the 1980s was based in part on their early
adoption of processes to improve product quality and operational
efficiency, such as total quality management and fair inventory
systems at Time. Today, General Electric's competitive success is
attributable to the processes widely fostered in the company.
These include the Six Sigma process for quality improvement,
"digitization" (with intranet and corporate internet to automate activities
and reduce operating costs), and the idea generation process,
known in the "search for solutions," whereby administrators and
employees meet in intense sessions over several days to identify and
execute ideas that increase productivity. The processes in an
organization are summarized using a flowchart that shows the different
steps and the decisive points in performing a job. Many processes take the
shortest path in functions or divisions and require cooperation
between individuals of the different subunits. For example,
processes for new product development require R&D,
manufacturing, and marketing employees to work together to ensure
that new products address market needs and design are not very
expensive. Because they cross organizational boundaries,
executing processes more effectively often requires formal
integration mechanisms and incentives for inter-unit cooperation .A
detailed analysis of the nature and strategies of the improvement and
reengineering processes is beyond the scope of this book. However, it is
important to make two basic observations on administrative
processes, especially in the context of an international business. The
first is that, in a multinational company, many processes affect not only the
organizational boundaries because they cover different subunits, but also
the national borders. The design of a new product may require the
cooperation of California research and development staff,
production,Taiwan, and marketing, from Europe, the United States and
Asia. The likelihood of achieving this coordination is greatly enriched if the
processes are embedded in the organizational culture that promotes
cooperation between individuals in the different subunits and countries, if
the incentive systems of the explicitly reward such cooperation, and
whether formal and informal integration mechanisms facilitate
coordination between subunits.Second, it is particularly important for a
multinational company to recognize that the valuable innovative processes
that could involve a competitive advantage are developed anywhere within
the organization's operational global network. The subsidiary can develop
the new processes in response to the conditions of its market. Such
processes can then be useful in other parts of the multinational
company. For example, in response to competition in Japan and local
obsession with product quality, Japanese companies were at the forefront
of Total Quality Management (TQM) processes in the 1970s. Because few
U.S. companies had Japanese subsidiaries at the time, they did not
know about this trend until the following decade, when high-quality
Japanese products began selling in the United States. An exception to the
above was Hewlett-Packard, which had a successful company in Japan,
Yokogwa Hewlett-Packard (YHP). YHP pioneered the total quality
management process in Japan and won the prestigious Deming Award for
improving product quality. Through YHP,Hewlett-Packard learned about
the movement towards quality before many of its fellow Americans and
was one of the first Western companies to introduce the process of
managing total quality into their operations World. Not only did the
Japanese operation of Hewlett-Packard give the company access
to valuable processes, but it was able to transfer its knowledge within its
global operational network, which elevated the performance of the entire
company. Therefore, the ability to create valuable processes is not
enough, it is also important to promote them. This requires both formal and
informal integration mechanisms, as well as knowledge networks.
Organizational culture
Culture is a social term typical of societies and organizations. Therefore,
we prefer to talk about organizational culture and subculture. The basic
definition of culture is still the same, whether we apply it to a large society
of a state or to a small one such as an organization or one of its subunits.
Culture refers to a system of values and norms that people share. Values
are abstract ideas about what a group considers good, correct, and
desirable. Standards mean social rules and guide lines that prescribe
appropriate behavior situations. Values and standards express the
patterns of behavior or style of the organization with which employees
automatically motivate their new colleagues. Although an organization's
culture is rarely static, it tends to change relatively slowly.
Creating and Maintaining Organizational Culture
Organizational culture has diverse backgrounds. First, there is
extensive agreement that founders or important leaders have a profound
effect on the culture of the organization, and often leave their own values
in it. A famous example of afounder is the Japanese company Matsushita.
Konosuke Matsushita's zen-style personal philosophy was coded in
Matsushita's "seven spiritual values," which all new employees learn to
this day: 1) national service within industry, 2) justice, 3)harmony and
cooperation, 4) struggle for improvement, 5) courtesy and humility,
6)adjustment and assimilation, and 7) gratitude. A leader does not have to
be the founder to exert a profound influence on organizational
culture. Jack Welch is credited with GE's culture change, first, for
highlighting, when it became its CEO, a set of countercultural values,
such as risk acceptance, entrepreneurial ability ,leadership and
borderless conduct. For a leader it is more difficult, however,
mandatory, to change an established organizational culture than to create
a new one in the company. Another important influence on organizational
culture is thebroad social culture of the country where the company was
founded. In the United States, for example, the competitive ethics of
individualism are important, and there is enormous social stress to
create winners. Many U.S. companies come up with creative ways to
reward and motivate individuals to see the self as winners. American
companies' values often reflect those of their country's culture. Similarly,
it is stated that the values of cooperation in many Japanese companies
reflect the values of traditional Japanese society, emphasizing group
cooperation, reciprocal obligations and harmony. Thus, in general,
the argument that organizational culture is influenced by the
national culture can have a little sustenance. A third influence
on organizational culture is the history of the company, which
over time can shape the values of the organization. In the
language of historians, organizational culture depends on the path of
organization over time. For example, Philips NV, a Dutch
multinational company, has long operated with a culture that places
high value on the independence of national operating companies. This
culture is a product of the company's history. During World War II, the
Germans occupied Holland. With the headquarters in occupied territories,
several foreign operating companies, such as subsidiaries established
inthe United States and Britain, were given more powers. After
the war, they maintained a very autonomous operation. The belief that
this was the right thing became a key value of the company.High-
performance decisions tend to be institutionalized in a
company's values. In the 1920s, 3M was mostly a sandpaper
manufacturer. Richard Drew, a young lab assistant, proposed what
he considered a new product, a piece of adhesive-coated paper,
which he called "sticky tape." Drew saw the application of the product in
the automotive industry, where it would serve to cover some parts of a
vehicle during the application of paint .

Organizational culture AND performance in

international business
Often, authors of administration-related concepts talk about
"strong cultures." In a culture with this feature almost all administrators
share a set of very consistent values and standards that have a clear
effect on the way the work is done. New employees adopt these values
very quickly, and those who don't adapttend to retire. In such a culture it is
possible that a new executive may be corrected by his subordinates or
his superiors if he violates the values and norms of
organizational culture. Usually, a company with a strong culture is
perceived from the outside as an organization possessing a certain style
or way of doing things.Lincoln Electric, which we presented in the next
"Administrative Overview" section is an example of a company with
a strong culture. However, "solid" doesn't necessarily mean "good."
A culture can be solid but bad. Nazi culture in Germany was certainly
solid, but it was not good; also, a strong culture does not always imply high
performance. One study revealed that, in the 1980s, General Motors had
a "solid culture", but discouraged low-level employees from
demonstrating initiative and taking risks, which was dysfunctional and
underperforming GM. A strong culture can be beneficial at one point if it
encourages high performance, but inappropriate at another.
The qualities of a culture depend on context. In the1980s,
when IBM's performance was very good, several authors related
to administrative issues praised its strong culture, which among other
things greatly valued decision-making by common accord. These
authors argue that such a decision-making process was
appropriate because of IBM's substantial investments in new
technology. However, this process proved to be a weakness in the
growing computer industry in the late 1980s and the next. Joint
decision-making was slow, bureaucratic and did not lead to corporate risk-
taking. While this worked in the 1970s, IBM needed to make quick
decisions and entrepreneurial risk-taking in the 1990s, but its culture
discouraged such behavior. At the time, the company was overtaken by
small businesses, such as Microsoft.An academic study concluded that
companies that show high performance over an extended period tend to
have a strong but adaptable culture. According to this study, in an
adaptable culture most managers are interested in customers,
shareholders and employees, and value them in a remarkable way, as well
as the people and processes that generate useful changes in the
company. This attitude is interesting, but it reduces the subject to a high
level of abstraction; after all, which company would you say you don't care
about your customers, shareholders and employees? A different
perspective is to argue that the company's culture must match the rest
of its structure, strategy and demands for a competitive
environment, in order to achieve superior performance. All these elements
must be consistent with each other. Lincoln Electric gives us another
useful example. The company operates in a very competitive sector,
where cost reduction is critical to achieving and maintaining a competitive
advantage. Both Lincoln's culture and its incentive system encourage
employees to strive for high levels of productivity that translate into low
costs, indispensable to the company's success. Lincoln's example
also demonstrates another important point that international
business must consider: a culture that drives high performance in its own
country may not be so easily imposed on foreign subsidiaries. To be sure,
Lincoln's culture contributed to the company's superior performance in the
U.S. market, but this same culture is very "American" and difficult to
implement in other countries. The administrators and employees of several
European subsidiaries saw that this culture overlook edits own values and
were unwilling to adopt it. The result was that Lincoln struggled to double
his success in foreign markets. The problem became complicated when
the company acquired established companies, with their own
organizational culture. Thus, when he tried to impose his culture
on the foreign operational organizational culture of those units, Lincoln
had to face two problems: how to change the organizational culture
established in them and how to introduce a culture whose basic values
may be foreign to the values of the members of that society. These
problems are not only Lincoln's; many international businesses face the
same difficulties. The solution Lincoln adopted was to establish new
subsidiaries rather than acquire them and adapt them to their own culture.
It is much easier to set a set of values in a new company than to change
the values in an already established one .
A second solution was to devote a lot of time and attention to
transmitting the organizational culture of the company to its foreign
operators. This was something Lincoln omitted at first. Other companies
make this an important part strategy for internationalization. When MTV
Networks started operations in a new country, it began with an
administrative corps of several expatriates. Their job was to hire local
employees whose values were consistent with MTV's culture, and they
conveyed the values and standards that distinguish the way the
company operates. Once this goal was achieved, expats moved on to their
next task and local employees handled the operation. A third solution was
to recognize that it was necessary to adapt some aspects of the
company's culture to that of the host country. For example, many
Japanese companies use symbolic behavior, such as songs or morning
group exercise sessions, to reinforce values and norms of
cooperation. However, such symbolic behavior is considered strange in
Western cultures, so many Japanese companies do not employ
them in Western subsidiaries. The need for a common organizational
culture for the entire global network of multinational subsidiaries may
vary according to the company's strategy. Shared norms and values
facilitate coordination and cooperation between individuals from different
subunits. A strong common culture allows congruence towards a goal
and attenuates the problems emanating from interdependence,
ambiguous performance and conflict among the administrators of
different subsidiaries. As we have already mentioned, a shared culture
helps streng then informal integration mechanisms, such as knowledge
networks, to operate more efficiently. A common culture may be of
greater value in a multinational that implements a strategy that
requires cooperation and coordination among globally decentralized
subsidiaries. This suggests that, for companies using a transnational
strategy, it is more important to have a common culture than
those with a localization strategy, with global or international strategies
that are located between these two extremes.
Localization strategy
Companies adopting a localization strategy focus on local
sensitivity. Companies tend to operate with a global structure by
area, within which operational decisions are decentralized and left to
autonomous subsidiaries. The need for coordination between
subunits (areas and subsidiaries) is low. This suggests that
companies looking for a localization strategy do not have a high need
for formal or informal integration mechanisms to unite different
national operations. Lack of interdependence suggests that the
level of ambiguous performance in such companies is low, as well as
(by extension) control costs. In this way, matrices manage foreign
operations based mainly on bureaucratic production and controls,
and administration policy by exception. Incentives may be tied to the
measure of performance in subsidiaries. Because the need for integration
and coordination is low, the need for integration of common processes and
organizational culture is also very low. If it were not for these companies
not being able to benefit from the economies of localization and curve of
experience or the transfer of basic competences, their
organizational simplicity would make it an attractive strategy.

International strategy
Companies that adopt an international strategy create value by
transferring basic competences from the country of origin to subsidiaries
abroad. If they are diverse, like most, these companies operate
with a global product division structure. Generally, the parent
company maintains centralized control over the basic competence of the
company, which usually focuses on the company's r&d or marketing
functions. All other operating decisions are decentralized and delegatedto
the subsidiaries of each country (which, in various companies, report to
global product divisions). The need for coordination is moderate in such
enterprises, as it reflects the need for transfer of core
competences. Therefore, although such companies operate with
certain integration mechanisms that are not so broad, the relatively low
level of interdependence results in a low level of performance. In this way,
these companies often subsist on bureaucratic and performance controls,
and with incentives based on performance measures in subsidiaries. The
need for an organizational culture and common processes is not
so great. An important exception arises when the basic capabilities of
the company are interlocked in the processes and culture, in which case
the company must pay more attention to transferring those processes and
their associated culture from the corporate to the subsidiaries. In
general, although the organization requiring an international
lstrategy is more complex than multinational companies, the increase in
complexity is not as great.

Global standardization strategy

Companies adopting a global standardization strategy focus on
building localization and experience curve economies. If they are diverse,
like most, these companies operate with a global product division
structure. To coordinate the globally dispersed network of value
creation activities, the array generally must maintain control of most
operation decisions. In general, such companies are more centralized
than most multinational companies. Reflecting the need for
coordination of the various stages of the company's globally dispersed
value chain, the need for integration into them is also high. Therefore,
these companies tend to operate on a series of formal and informal
integration mechanisms. The resulting interdependencies generate
significant performance ambiguities. As a result, in addition to
performance and bureaucratic controls, companies implementing a
global standardization strategy tend to highlight the need to
build a strong organizational culture that facilitates coordination and
cooperation .

Transnational strategy
Companies adopting a transnational strategy focus on the
simultaneous achievement of localization and experience curve
economies, local sensitivity and global learning (multidirectional transfer of
core competencies). These companies tend to operate with matrix
structures, in which both product and area divisions have an important
influence.The need to coordinate a globally dispersed value chain and
transfer basic capabilities creates pressures for the centralization of some
operational decisions(especially production and research and
development). At the same time, the need to be locally sensitive creates
pressures to decentralize other operational decisions to national
operations (especially marketing). Therefore, these companies tend to
combine relatively high degrees of centralization in the case of some
operational decisions with relatively high degrees of decentralization to
make other decisions of the same type. The need for coordination is high
in transnational companies.This is reflected in a wide range of formal and
informal integration mechanisms,such as formal matrix structures and
informal management networks. The high degree of interdependence
of subunits means that such integration generates significant
performance ambiguities, raising control costs. To reduce them,
in addition to performance and bureaucratic controls, companies
seeking a transnational strategy need to cultivate a strong culture and
establish incentives that promote cooperation between subunits.

Environment, strategy, structure and

performance
An "adjustment" between strategy and structure is necessary for a
company to achieve high performance. Two conditions must be met for
successful success.First, the company's strategy must be consistent with
the environment in which it operates, some industries, a global strategy is
the most feasible, and, in others, a multinational strategy may be the best.
Second, the organizational structure must be consistent with this
strategy.If the strategy is not consistent with the environment, the
company is likely to experience significant performance issues. If the
structure is not consistent with the strategy, you may also experience
performance issues. Therefore, a company must seek consistency
between its environment, strategy, organizational structure,and control
systems. Philips NV, the Dutch electronics company is another
example of the need for this adjustment. For reasons rooted in the
company's history, until recently it operated with the usual organization of
a location-based company, the operating decisions were
decentralized and therefore were the responsibility of foreign
subsidiaries. Historically, electronic markets were segmented from
another by large tariff barriers, so it was wise to maintain an
organization according to the localization strategy. However, by the mid-
1980s, the industry in which Philips competed experienced the
revolution of falling tariff barriers, technological changes and the
emergence of low-cost Japanese competitors using a global
strategy. To survive, Philips needed to become a transnational.
The company acknowledged this situation and tried to take a global stance
but did little to change its organizational structure.Nominally, the
company adopted a matrix structure based on the global product
division and national areas. However, the national areas
continued to dominate the organization, and the product divisions
had little more than an advisory role. As a result, Philips' structure did
not conform to strategy, and in the early 1990s, Philips lost money. Only
after four years of change and huge losses did the company tip the
balance of power in its matrix structure towards the product divisions. By
the mid-1990s this effort was successful to realign the company's strategy
and structure with the demands of its operating environment with better
financial performance.

Organizational change
Multinational companies periodically must adapt their structure to meet
the changes in the environment in which they compete and the strategy
they pursue.To be profitable, Philips NV had to adapt its strategy and
structure in the 1990s for them to match the demands of the
competitive environment in the technology industry, which shifted the
company from a localization strategy to a on a global scale. While a
detailed consideration of organizational change transcends the
scope of this book, some comments are warranted regarding
the origins of organizational inertia, and strategies and tactics to
implement change Organizational.

Organizational inertia
It's hard for organizations to change. In most of them there are sectors that
resist change. These inertial forces come from various sources. One of
them is the distribution of power and influence in the organization. The
power and influence of administrators is partly a function of their role in the
organizational hierarchy, as defined in the structural position. The most
significant changes in an organization require adapting the structure,
and by extension, the distribution of power and influence. Some
individuals see the increase in their power and influence as a result of
organizational change and others will see them deteriorate. For example,
in the 1990s, Philips NV increased the roles and
responsibilities of its global product divisions and diminished those of
foreign subsidiaries. This meant that the administrators of the global
product division increased their power and influence, while for those of the
subsidiaries they were reduced. Unsurprisingly, some foreign subsidiary
managers did not like the change and resisted, slowing down
the change process. This resistance is understandable on the part of those
who will lose power and influence, especially in arguing that change may
not work. To the extent successful, they will be a source of organizational
inertia that can slow or stop change. Another source of inertia is culture, as
expressed in systems of norms and values. Value systems reflect well-
established beliefs, and so it can be very difficult to change them. If the
organization's formal and informal socialization mechanisms highlighted a
set of values for an extended period, and if the recruitment, promotion and
incentive schemes consolidated these values, a sudden announcement
that these values are no longer must be changed can lead to
resistance and dissonance among employees. For example, historically,
Philips NV gave great value to local autonomy. The changes of the 1990s
represented a reduction in the autonomy enjoyed by foreign
subsidiaries, which contradicted the values established in the
company, so they resisted. Organizational inertia can also come from
senior executive stench of the appropriate business model or paradigm.
When a certain paradigm worked well in the past, administrators may have
trouble accepting that it no longer works well. At Philips, conferring
considerable autonomy on foreign subsidiaries worked very well in the
past, allowing local administrators to customize a product and
business strategy and adapt them to the prevailing conditions in some
Country. Because this paradigm worked so well, it was difficult for many
administrators to understand why it would no longer apply in the
future.Therefore, they find it difficult to accept a new business model and
tended to fall into their paradigm and established ways of doing things.
This change required administrators to leave their ingrained ideas about
what worked and what didn't, something many couldn't do. Institutional
constraints can also act as a source of inertia. National
regulations involve content standards and labor policies that can make it
difficult for a multinational to adapt its global value chain. A multinational
company may want to take control of the manufacturing process by its
local subsidiaries, transfer that control to global product divisions,
and consolidate the development in a few locations. However, if
local content rules require a certain degree of local production,
and if labor regulations make it difficult or more difficult to
close operations in a country, a multinational may conclude that these
restrictions make it difficult to adopt more effective strategies and
structures .
Instrumentation of organizational change
While all organizations suffer from inertia, the global complexity and
spread of many multinationals can make it very difficult to change their
strategy and structure to coincide with new organizational realities.
But at the same time, the trend towards globalization in many
industries is already so ineshable that countless multinationals must
adapt. Industry after industry, the decline of trade and
investment barriers generate swings in the nature of the competitive
environment.

Re-freezing the organization

Freezing the organization takes longer. It may require a new culture to be
established while the old one is dismantled. Therefore,
refreezing requires employees to get used to the new way of doing
things. Companies often use administrative training programs to achieve
this. General Electric, whose life time president, Jack Welch, established a
major change in the company's culture, used administrative training
programs as a tool to communicate new values to members of the
organization.However, administrative training programmed alone
are not enough.Recruitment policies must be changed to reflect
the new reality and attract individuals whose values match those of
the new culture the company is trying to forge. Similarly, control and
incentive systems must be consistent with the new reality of the
organization, or change will never happen. Senior executives must
recognize that changing culture takes a long time. Any decrease in the
pressure to change can allow previous culture to resurface if employees
fall into old ways of doing things. Therefore, the communication task faced
by executives represents a long-term effort that requires them to be
relentless and persistent in their quest for change. For example, an
outstanding feature of Jack Welch's twenty-year tenure at GE is that he
never stopped pushing his change agenda. It was the consistent motto of
his mandate. He always invented new programs and initiatives to continue
to drive the culture of the organization on the desired path
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