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What are the challenges in implementing global alliances in competitively sensitive areas?
Your response should be at least 200 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.
Herdesky, H. (2011). International management: Managing across the borders and cultures. (7 ed., pp. 236-238). Upper Saddle River: The Pearson Education Company.
(Herdesky, 2011)
Chapter 7 , C
l
orlal Alliances and Strategy Implementation 233
0pqn]ng Profile: Haeir.Group: Growth Through Strategic Alliances, Acquisitions
,
and GlobalNetworks.’
Chairman and CEO Zhang Ruimin took the reins of the Chinese government-conrrolled Qingdao
Refrigerator Plant in 1984. He took over a company with 100 empioyees and poor qualiry products. To
make matters worse, they were on the verge of bankruptcy. In his dramatic first act as CEO he smashed
76 poor-quality refrigerators with a hammer to drive home his intention to inprove product quality. Ev
er
pragmatic, Zhang Ruimin believes that Haeir has to think alrout talent management and performance
management. They must focus on how they can change the mindset of the employees to get the needed
results.
The foundation of Haier’s human resource management strategy is rigorous performance manage-
ment. They rank ernployees daily on results. Managers are evaluated monthly on pertbrmance and
quarterly on potential, The system is fully transparent, and pedormance management is tightly linked to
employee rewards and deveiopment. This system is highly differentiated from human resource practices
used in other Chinese companies.
Today Haiel Group is the fourth-largest white goods (refrigerators, washing machines, and other
appliances) manufacturer in the world and is a very well known brand in China. As it grew, Haier
acquired 1 8 companies that it identified as running at a loss, Haier acquired these companies because of
their market potential, vitality and expected contributions once Haier’s manufacturing processes and
culture were adopted. Once acquired, Haier then restructured processes and procedures and converted
idle tangible assets into productive assets at a minimum cost and in a short period of time.
Haier has established an extensive sales network around the globe primarily through strategic
alliances with key partners in prospective global markets. Haier learned about the U.S. market by
suppiying small refrigerators to Wal-Mart Stores as Haier built their internationalization competeocies.
Haier uses a three-pronged approach to internationalization that includes a localization strategy
cornbining design, production and marketing network as the core of its global branding straiegy, By the
end of 2006, Haier owned 240 corporate subsidiaries and 18,000 sales outlets throughout the world.
It has 5 research centels, 8 design centers, 6 design branches, 10 inlormation stations, 30 manufacturing
centers, 22 trading companies and almost 59,000 sales network outlets in more than 160 countries.
Haier has their eye on the high-tech future. Zhang believes that people must be connected to the
world during the infbrmation era. He hopes that through this set of solutions, Haier can enable every-
body, especially the Chinese, to enter the information era.
Source: Mary B. Teagarden and Dong Hong Cai, “kaming lrom Dragons who are Learning from Us:
Developmental Lessons from China’s Global Compirnies,” Organizational Dynamics 38, no 1, (2009):
73-81 copyright 2009 Elsevier, used with permission of Elsevier.
STRATESIE A!-LIAruCE
$
It is no longer ail era in which n single company cen. dominate any technology or
business by itseLf. The teclutology hcts become so advanced, and the ntarkets so com-
plex, that yott sintpll, can’t expect to be the best at the vvhole prccess ail), Iottget’
Fuivtto Slro,
CEO, Tosldba Electtonics2
As discussed in the opening profiie, the Haeir Group gained rapid global growth through strate-
gic alliances, acquisit.ions, and giobal networks, leading it to become one of Fortune’s “China’s
Most Admired Companies of 2O47.”
Strategic alliances are partnerships between two or more firms that decide they can better
pursue their mutual goals by combining their resources-financial, rnanagerial, technological-
as well as their existing distinctive competitive advantages. Alliances-otten called cooperative
strcttegies-are transition mechanisms that propel the partners’ strategies forward in a turbulent
environment faster than would be possible for each company alone.r Aliiances typically fall
under one ofthree categories: joint ventures, equity strategic alliances, and non-equity strategic
alliances.
It should be noted that, whiie the last decade brought a surge in companies seeking growth
through mergers and acquisitions (M&As), joint ventures, and other alliances, as of 2009 the
globai economic downturn was causing many companies to postpone or cancel out on such
flans, often instead retlenching or “de-merging.” Examples were Genet’al Motors
and Citigroup
i1auing to spin off partners as u,ell as retrench operations in order to maintain suflicient cash flow’
234 Part 3 ‘ Formulating and Implementing Strategy for Intemarionai and Global Operations
The rate of deals collapsing increased amrd the credit crisis and global equity market volatility.
An example cited in the Financial Times in January 2009 was the C$34.8bn ($28.2bn) leveraged
buy-out of BCE, the Canadian telecoms giant, which was under threat after auditor KPMG said
BCE might not meet solvency tests if it absorbed the C$32bn of debt required ro finance rhe
transaction.4 Other proposed deals were going ahead, but with rcvised terms, such as Dow
Chemical, the largest U. S. chemjcal group, in a deal to inject its low-growth plastics business
into a joinr venture with Kuwait’s state oil company-but at a reduced price.
Still other deals, made under duress, involved government alliances in an atternpt to save
companies and industries from default, as with a number of banks which become subject to par-
tial nationalization. As one example, the British Government struck a deal in March 2009 to
increase its stake in Lloyds’ Banking Group (LBG) to 65 percent from 43 percent. The
Government guaranteed some $575 billion worth of toxic assets as part of the deal, which was
brokered between bank and Treasury officials. Lloyds Banking Group was created early 2009
when Lloyds TSB bought rival lender HBOS, which faced collapse because it was struggling
to raise funds due to the credit crunch.5
J*int Ventures
As discussed in Chapter 6, a joint venture (JV) is a new independent entity jointly created and
owned by two or more palent companies. The JV form for a firm may comprise a majority JV
(where the firm has more than 50 percent equity), a minority JV (less than 50 percent equity), or
a 50-50 fV (where two firms have equal equity). An IJV is a joint venture among companies in
different countries. In that case, the firm shales the profits, costs, and risks with a local partner,
and benefits from the local partner’s local contacts and markets. (Advantages and disadvantages
of IJVs were discussed in Chapter 6). An example of a 50-50 equity IJV is that between France’s
PSA Peugeot-Citroen Group and Japan’s Toyota at Kolin in the Czech Republic. As noted by
Fuiio Cho, president of the world’s richest carmaker, Toyota Motors:
Each company has broaght its own style, culture and way of thinking to this paftner-
sltip-but our different approaches hat e benefited our joint venture enoruwusly.6
The benefits noted by the two companies are that Toyota “gzuns an insight into the mindset
of one ofEurope’s biggest indigenous carmakers and knowledge ofits suppliers and their capa-
bilities.”T And Peugeot-Citroen can gain experience from Toyota’s lean manufacturing system.
The companies acknowledge fhat the IJV has resulted in faster development and increased pro-
duction capacity, and that costs are shared without either company renouncing its independence.s
Equity Strategic Alliances
Abu Dhabi’s state-ounted AdvancedTbclutology Imtestmerfi Company, the latest entrunt
in the $2abn cofttract chipmaking industry, is ptoving it has the capital to back its
antbition of making Abu Dhabi a chip industry heavyweight through yesterday’s
$LSbtt deal ta buy a majority stake in Singapore’s Chaftercd Serniconductor:
FtrvRNcrRr- Trves,
Septentber 9, 2009.9
Two or more partners have different relative ownership shares (equity percentages) in the new
venture in an equity strategic alliance. As do most global manufacturers, Toyota has equity
alliances with suppliers, sub-assemblers, and distributors; mosf r:f these are part of Toyota’s
network of internal family and financial links. Another example is TCl-Thompson Electronics.
France’s Thompson owns 33 percent of the combined company and China’s TCL owns the
remaining 67 percent.l0 Risk-sharing is often the motive behind equity alliances, as when
Daiichi Sank-vo, a Japanese pharmaceutical giant, bought a 51 percent equity share in India’s
Ranbaxy Laboratories in June 2008. The goal for Daiichi was to add value to its research and
development expertise, to use Ranbaxy’s low-cost manufacturing base; in turn Ranbaxy would
gain access to Japan’s markets.i
I
Sometimes an international, or global, joint venture is part of a desperate strategy. This was
the case in January 2009 when Chrysler reached for another lifeline in its equity deal to join
forces nith Italy’s Fiat. The plan was for Fiat to get a 35 percent ownership staiie in Chrysler
Chapter 7 . Global Ailiances and Srategy haplementation 235
with the goal of bringing its Fiat and Alfa Romeo brands back to the United States through
Chrysler’s dealership network. In return Chlysler would get the opportunity to stay alive by pre-
senting a strategic partnership as part of its plan to the U.S. government in its quest for an addi-
tional $3 billion loan to allow it to stay in business.l2 However, f’urther developments led to a
change in plan when some creditors did not make concessions, and President Obama announced
on April30,2009:
Chryslet the third-largest American auto compam), will seek bankruptcy protectio,t
aud enter an alliance with the ltalian automaker Fiat, the White House announced
Thursday.r3
However, the deal with Fiat would be intact after bankruptcy, with Fiat to take part in run-
ning Chrysler, provide technical operalions, and build at least one vehicle in a Chrysler plant.
Fiat did not put up any financing as part of the agreement. Considerable additional financing
from the U.S. government was planned after Chrysler’s restructuring, with the Canadian govern-
ment also offering some financing.la lFot an in-depth look at the Fiat-Chrysler alliance, see the
Comprehensive Case 8, at the end of this section of chapters.)
Non-equity Strategic Alliances
Agreements are canied out through contract rather than ownership sharing in a non-equity strate-
gic alliance. Such contracts are often with a firm’s suppliers, distributors, or manufactut€rs, or
ihey may be for purposes of marketing and information sharing, such as with many airline part-
nerships. UPS, for example, is a global supply-chain manager for many companies around the
rvorld, such as Nike, which essentially do not touch their own products but contract with UPS to
at1ange the entire process fiom factory to warehouse to customer to repair, even collecting the
money.l5
Global Strategie Alliances
Working partnerships between companies (often more than two) across national boundaries and
increasingly across industries are referred to as global strategic alliances. A glance aI the global ,
airline industry, for example, tells us that global alliances have become a mainstay olcompetitive
strategy. Not one airline is competing alone; each major U.S. carrier has established strategic
links with non-U.S. companies. The Star Alliance, for example, has code sharing among 19 air-
lines around the world.
Frcnch Company Joins Indisn Utitity in a Dealfor Nuclear Plants
www.nytimes,
February 5,20A9.
Alliances are also sometimes fbrmed between a company and a foreign government, or
among companies and governments. In addition, changing regulations and policies by govern-
ments and institutions lead to new oppofiunities fbr alliances with national industries abroad. As
an example, when the Nuclear Suppliers Group, a global consortium that regulates the sale of the
items, voted in September 2008 to Iift the ban on deals with India, that freed up any country to
sign nuclear plant deals there. The company, Areva, which is owned mostly by the French gov-
ernmen! joined with the state-run Nuclear Power Corporation of India to build at least two and
possibly as many as six nuclear power plants in the energy-starved country. Their two-reactor
pro.iect could be worth about $10 billion.16
Alliances may comprise f-ull global pa(nerships, which are often joint ventures in which
two or more companies, while retaining their national identities, develop a common, long-term
strategy aimed at world leadership. The European Airbus Industrie consortium, for example,
comprises France’s Aerospatiale and Germany’s Daimler-Benz Aerospace, each with 37.9 per-
cent of the business; British Aerospace with 20 percent, and Spain’s Construcciones
Aeronauticas with 4.2 percent.
Whereas such ailiances have a broad agenda, others are fbrmed for a narrow and specific func-
tion, including production, marketing, research and development, or financing. More recently these
have included electronic aliiances, such as Covisint, which is redefining the entire system of car
236 Part 3 Itrcrrnulating and Inrplernerting Sa’ategy fbr Iuternalional and Glolral Operations
plor-iuction and distribution tlx-ough a colntrron electronic marketplace, Covisint is an e-business
excltange developed by Ford, General Motors, Nissan, Renault, and (then) DainlerChrysler AG, to
meet ihe needs of the autornotive industry, and is ibcused on procurenent, supply chain, and ploduct
clevelopment solutions. 17
#!q:$**t eFld *fi’&r6s-ffiepre$er S”[$mmces: $We*tFtta?i*p:$ &e’E{‘.{ ffi+ra*fJft*
Some of the tvpical reasons behind cross-border alliances are as follows:
1. To avoid import barriers, licensing requirements, and other protectionist legislation.
Japanese automotive manufacturels, for exarnple, use alliances such as the GM-Toyota
venture. or subsidiaries, to produce cals in the Unitcd States so as to avoid import quotas.
2. To share the costs and risks of the research and development of new products and
processes. In the selniconductor industry, for example, where each new generation of
memory chips is estir-nated to cost more than $1 billion to develop, those costs and the
rapid technological evolution typically require the resources of more than one, or cven two,
lirms. Intel, for exampie, has alliances with Samsung and NMB Semiconductor tbr tech-
nology (DRAM) development; Sun Miclosystems has partners fbr its technology (RISC),
including N, V. Philips, Fujitsu, and Texas Instruments. Toshiba, .Iapan’s third-largest elec-
tronics colrpany, has more tl’ran two dozen rnajor joinf ventures and strategic alliances Europe, LSI Logic in Canada, and Samsung in Korea. Furnio Sato, Toshiba’s CEO, recog-
nized long ago that a g1oba1 strategy lor a high-tech electronics company such as his neces-
sitated toint ventures and stratcgic alliances.
3. To gain access to specilic markets, such as the EU, where regulations favor domestic
companies. Firms around the world ale folming strategic allianccs u’ilh European conlpa-
nies to boister their chances of competing in the European Union (EU) and to gain access
to markets in Eastsrn European countries as they open up to world business. The EU’s new
1aw, passecl in November 2003, was intended to increase the opportunities lbr cross-border
mergers and takeovers, for companies both within ancl outside of the EU.18 U.S. companies
pr.otested that the law did not go far enough to open up a “fbt’tless Europe,” because hostile
bids would be more dilflcult to pursue.19 However, seven of the ten largest deals that
Citigroup cornpleted around the worid in 2003, lbr example. were in Europe-including tive oi the Daewoo Electlonics unit, acknowledges that he is seeking local partners in gale Europe’s still disparate markets, saying “I need to localize our management. It is not Market entry into somc countries may only be attained through alliances-typically South Korean flmrs. Carefuttl, orclzestratetl pctt’tnerships tvitlt govenurtents and other business Stolrps cue
crttcictL to the IDisney] enterttrinment group’s thrust irtto China and the rest oJ’south’
east Asict. Presiclent and COO, Wctlt Disnel?2
Hong Kong Disneyland is jointly owned by the Chinese goverxment, which owns a
-57 percent stake. Beiling is especially interested in promoting toudsrn thl’ough the venture, in rlie employntent 1br the 5,000 workers Disney cmploys directly, as well as the estimated
18.000 in r:elated services.23 Maytag C the restrictive Chinese government while gaining market access, formed a joint venture with
RSD, thc Chinese appliance maker, to manufacture and matket washing machines and reliig-
erators. Maytag also investeci lalge amounts in jointly owned refi’igeration products lacilities
to heip RSD get into rhat market. Coca-Cola-a globai piayer with large-scale alliances-is uses senior citizens in the parly’s neighborhood committees to sell Coke iocally’
.;itrrt 1
$ r* r.-{ i
:$:’: rir ,$t $ :# :13.
,sl ,#. 9a: si.i, *i #i , { Chapter 7 ” Gi.riai Alliances and Strategy Implementation 237
5. To gain rapid entry into a nerv or consolidating industry and to take advantage of :.:
;l
$ Disnel, novv hcts 3.5rn subscribers Jbr content sen,ice,v, offered througlt Jopan’s
SrEve WlnswoRTH, Technology is rapidly providing the means for the overlapping and merging of traditional
industries such as entertainment, computers, and telecommunications in new digital-based and content sales, for example, created Disney mobile operations in Hong Kong, Taiwan, Souih
Korea, Singapore, and the Philippines.25 The company uses joint venture partners such as the In many cases, technological developments ale necessitating strategic alliances across in-
dustries in order for companies to gain rapid entry into areas in which they have no expertise or
manuf’acturing capabilities. Competition is so fierce that they cannot wait to develop those re-
sources alone. Many of these obiectives, such as access to new technology and to new markets,
are eviclent in AT&T’s network of alliances around the world. Agreements with Japan’s NEC, for
example, gave AT&T access to new semiconductor and chip-making technologies, helping it Electronics led to the next generalion of high-definition television (HDTV).27
Chall*nges in ffrnpl*rr:emtims Slerba! Alliances
Effective giobal alliances are usually tediously slow in the making but can be among the best
mechanisms to implement strategies in globai markets, In a highly competitive environment, taken over by Japanese partners. Problems with shared ownership, diffelences in national cul-
tures, the integration of vastly dtfferent structures and systems, the dtstribution of power Hottges, France Telecom finance director, said that the two sides had already agreed on a Often, the form of governance chosen for multinational tirm alliances greatly inf-luences Cross-border partnerships, in particular’, ofien become a “race to learn”-with the faster a new ibrm of competition. In l’act, according to researcher David Lei,
Perhaps the single greatest irnpediment manugers .f’ace vvhen seeking to leant or
rcney, solirces of contpetitive advantage is to realize tltctt co-operation can rcpresent
another forftr of unintentled contpetitiott, particularly to shape and apply nevv skills 238 Part 3 Irormulating and Implementing Strategy for International and Clobal Operations
A1l too often, cross-border allies have difflculty collaborating eft’ectively, especially in com- The curnulative leaming that a partner attains through the alliance could potentially be applied The enticrng benelits of cross-border alliances ofien mask the many pitfalls involved. In *Xt{tffi!?’ 7’J The Dual Role of Strategic Alliances
Source: Dai,c i.er, “Offensive and Defensive Uses of Alliances,” in Heidi Vernon-Wortzel and L. H. ii e $.:
t;: i :|:
4 ,i.&is f3l.
,.i;’ .!g :{ii:
i&,
…c j
#;i
:fi rllP: ,s ij:11′
‘n ri’r ::li
t; Cooperative Competitive Upstream-downslream division of labor Fi1l out product line with components or end Limit investment risk when entering new Create a “critical mass” to learn and develop Assist short-term corporate restnrcturings by Opportunity to learn new intangible skills Accelerate diffusion of industry standards Deny technological and learning initiative to Encircle existing competitols and preempt Form clusters of learning among suppliers Alliances serve as experiential platforms to Chapter 7 ‘ Cl–bal Alliances and Strategy Implementation 239
Efll$PLffiHWffiruTF*S& AtLseh{CKS ffiHTmJfrg{s $MEffis &ffi* fMffies Exhibit 7-2 shows strategies ior SMEs io take advantage of alliances with MNCs, as con- illi{*..lli+t-i ?-,} Strategies for Dancing with Gorillas
Stage of Tladitional Model: New Model: Small Strategies for Small Forming
Consolidating
Extending
A direct frontal approach Well-established processes A relatively predictable Given asymmetry of Given asymmetry of Given asymmetry and . Use local allies such as regional . Use the MNC’s reputational . capitalize on points of . Ensure modular or discrete . Proactively build networks . Adopt an ambiguous approach Source: Shameen prashantham and Julian Birkinshaw, “Dancing with Gorillas: How Small Companies can Partner Effectively with MNCs,”
California Management Review Fall 2008.
Copyright OZ00g, by The Regents of the University of California. Reprinted from the Califarnia Management permission of The Regents. 24O Part 3 ‘ Formulating and Implementing Strategy fbr International and Global Operations
#ff ild*$ *$*s f#r $ueeess$esE d&H fi !emeesil
As discussed earlier. many global companies, such as IBM, The’I’ata Group, and Toyota, build It is clear that many difficulties arise in cross-border ailiances in meiding the national and 1. Choose a partner with cornpatible strategic goals and obiectives and with whom the alliance EXF”ie$lT ?-3 Value Creation and Value Capture in Alliance Portfolios
Value Creation Value Capture Portfolio Management . Complementarity complementary . Enrichment Strategy resources to extend your . Combination Strategy resources with your . Absorptian Strategy network resources in . Coopetition partners that value your . Bargaining Strategy greater stake in yourjoint . Bilateral Competition in your industry il they enjoy bargaining power
. Multilateral Competition in particuiar industries to bargaining power . Interdependencies alliance affects other . Separation technological buffers . Segmentation and assign them to . Coordination units and create a Source: reprir::e.; from: Dovev Lavie, “Capturing Value from Aliiance Portfoiios,” Organizational Dynamics t il r{
t ‘l
:t
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; I .:::
:r Chapter 7 ” G,rbal Alliances and Strategy Impiementation 24’l
F # 2. Seek alliances where complementary skil1s, products, and markels will resuii. ii r’ach part- 3. Work out with the partner how you wrll each deal with proprietary technologl’ or competi- 4. Recognize that most alliances last only a few years and will probably break up once a pal’t- Some of the opportunities and cornplexities in cross-border alliances are illustrated in the
lollowing Compalative Management in Focus on joint ventures in the Russian Federation. Such COMPARATIVE MANAGEMENT IN FOCUS
Joint Ventures in the Russian Federation
Since the Jinancictl exoclus frctm Russict fu the wake of the tvorld credit crisis cutd Moscott”s
hecnt,-lttmded ntilitrt4′ incursiott ittto Georgict, the cottntr.\,’s cctpttcity to tcrlt the tens of hil-
lions af clollars in forcign in.t,estntent it needs to overhaul it,s crcaking irtfrastruclLtre has wwrv.ft.com. Norwegian Stctke in Russian loint Venture Seized cotllptLtl1′ (Telenor) cutrtout’tced that a Siberiarr court lrctcl seized its rntitibilLiott-dollar vw.nytimes.com, The seizure of Telenor in 2009 (see above) is the latest in a series ol events shaking faith in the ileld to Gazprom. the Russian natural gas monopoly. by threatening to revoke the license held by the
TNK-BP joint venture.42 ancl trow-convertible ruble, an underexploited natural resource potential, and a skilled, educated popula-
tion ol 145 million. Many MNCs claim that they must have a presence in Russia to be globally compet- Asia. Their main concerns were corruption anri bribe-taking at al1 lcvels of the state bureaucracy ald er, has founcl that Russian grait on several leve1s has so fetr won out against the company’s cfforts to
ihwart extortion eftbrts by power companies; even the courts found in favor of the power companies.ur
The level ol uncertainty b1, tbreign investors is tueled by the experience of some conrpanies in joint
ventutes in Rgssia, such as the General Motors joint venture with Russia’s biggest car maker, OAO 258 Part 3 Forrnulatir]g and Implenrentirg Strategy fbr Inlernal.ional ancl Clobal Operations
The design of an olganization, as with any other management l-unction, should be contingency
based. taking into account the variables of that parlicular system at that specific point in time. Major
variables incrlucle the f]rm’s strategy, siz-e, and appropriate te,chnology, as well as the environrnent in
those parts ol the wori involvecl in the international context, it is no easy task to design the most suitable organizational
structure and subsysterns. In fact, research shows that most determine r.vhat to c1o to compete globally (strategy) than to decide how to deveiop the organization-
al capability (srructurc) to do it.7 Additional va’iables affecting structural choices-geographic dis-
p”rrion as well as differences in time, language, cultural attiludes, and business practices-introduce
?-urther layers of complication. We will show how organizational structures need to, and typicaily do,
change to accommodate strategies of increasing internationalization.
nV*s-LiTn*ru Afirum t*{&ruffi9 ;ru &SFJ{ Sffi#AruBXA’ Historically, a firm leorganiz-es as it internationalizes to accommodale new stralegies’ The struc-
ture typically continues to change over time with growth and with increasing levels of investment
or cliversity and as a result of the types of entry strategy chosen. Internationalizalion is the market saturation, and the desire for expansion, new tnarkets, and divel’siflcation. As discussed
in Chapter 6, a firm’s n’lanagers weigh alternatives and decide on appropriate entl’y strategies continues to intelnationabzeby engaging injoint ventures or by establishing service, pr”oduction,
or assembly facilttics or aliiances abroad, moving into a global strategy. At each stage, the firm’s
managers redesign the organizational structure to optimize the strategy’s chances to work’ rnak-
ing chlanges in tire firm’s tasks and lclationships and designating authority, responsibility, lines of
comrnunication, geographic dispersai of units, and so folth. This model of structural evolution
has become known as the stages model, resuiting tiorn Stoplbrd’s rese arch on i 87 U.S’ multina-
tional corporations (MNCs;.S Of course, many lirms do not fo11ow the stages model because
they may start their internationali zation at a higher level of involvetnent- perhaps a l’ull-blown
g1obal joint venture without ever having expofied, for exampie’ in strategy-perhaps a change in stlategy from globalization to regionalization (see Chapter 6) or
on improve efficiency or effectiveness. Tl.re reorganization of Aluminum Cornpany o1-
America (Alcoa), fo| exanple, split the company into smailer, more autonomous units, the|eby
giving more focus to gro*itrg businesses, such as automotivc products, where the rnarket for
uluminu* is strong. It also enabied Alcoa to iink businesses with similar lunctions that are at.ou’i aluminum operations in Brazil antl its Australian counterparts’ Alcoa, as with most
MNCs, has lbund the need to continuously adapt its structure to accommodate global expansion
and new ventures. Alcoa has a presence in 41 countries, ernploying 120,000 people lvorldwide’
The typicai ways in which lirms organize their international activities are shown in the
lollowing iist. (Larger companies often use several of these strllctures in dilferent regions or
parts of their organization.) Afier the presentation of some o{ these structural forms, the focus
will turn to transitional organizational arrangements.
. Domestic structul’e plus export department
. Domestic stl’ucture plus fbreign subsidiary
. Inietnationai dir isitln
. Global functional structure
. Global product stt’ucture
. Matrix slructure invoivement by expoi’ting. They may simply use the services of an export management colnpany
fbr this, or rhey may reorganize into a simple donte,stic stt’Ltcture plus expttrt department’
To facilirare access to and developrnent of specilic lbreign narkets, the flrm can take a
further step ror\ard rvorldwide operations by reorganizing into a dornestic strttcture pltts
1oreign suisidittt in one or more countries (see Exhibit 8-1).’fo be clfective, subsidiary ,7 .’: it. ;i + t:i!,l
# Chaprer 8 ‘ Organization Structure and Control Systems 259
FliLllElT S’1 Domestic Structure Plus Foreign Subsidary
Lhret Heodquorters Finonce Production
l__ ___ _ _, *–__—_.*l
I Morketing HRM I I Overseos VP lnlernationol I l– Jopon Germony Mexico
managers should have a great deal of autonomy and be able to adapt and respond quickiy to With further market expansion, the firm may then decide to specialize by creating an {ntegnated GlobeE Stnuct&cres
To respond to increased product diversification and to maximize benefits from both domestic and The global functional structure is designed on the basis of the company’s functions- Mucl-r of the advantage r”esulting from economies of scale and functional specialization may For firms with diversified product lines (or services) that have diff-erent technological bases 264 Parl 3 , For”mulating and Implemenring Srraregy for lnternational and Global Operations
EXF{lBlT 8″3 Glabal Product (Divisional) Structure
cEo
Corporcte I -1
..-t Country B
Areo Speciolists: *-:.i Division
Morketing
I Produclion
concentration, innovation, and l’esponsiveness to new opportunities in a particular environment. With the global product (divisional) grouping, however, ongoing difficulties in the coordi- In the glotral geographic (area) structure-the most common tbrm of organizing With the geographic structure, the focus is on marketing, since products can be adapted to I I. ‘-‘– -*l–*rl ‘l i–‘-*- Country.A
Product 2 l i* -“_- –_-“_- Finonce Chapter b – Organization Sttucture and Control Systerns 261
J.
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iir EXFllElT S-3 Global Geographic Structure
— — -‘– -t Boord of Directors
i Lhor r
I I_[-_- – -.-t_ __ _-_ ,_ VP Group VP
i VP Norih VP Souih VP VP I \/D
Plostics
-*–j
I VP I Fronce Kingdom
company’s regional business strategy, which then shapes the Therc is no such thing as a global cotlsume,; especially r I–] *–* –*- -* * -t Finonce Production Morketing
local market business strategies. in a sector as pq,chologicallY Psrnn Bnanecr, Grouping a number of countries under a region doesn’t always work ou,t, howevet, as Ford
experienced with its European Group. It soon discovered tensions among the units in Germany, A matrix structure is a hybrid organizaiion of overlapping responsibilities. The structure is tirms, Strikwerda and Stoelhorst concluded fi’om the majority of interviewees that:
executiyes cts,sociafe the ntatrix organigttiort with unclectr respon,sibilities, a lack of CtLtponNIa. MnNect’tr,tgNr REv len’,
Summer 2A09.14 Chat::: : , Oiganization Structure and Control Systems 273
EKltlSlT S-lt Locus of Decision Making in an lnternational Organizational
Heodquorlers ‘F Subsidiory,/locol unit Areo of control Areo of conirol I rc .N
C 1 ‘l’l
,t :n –I –T ond informs ond “sells” to ond recommends consult on monqgers
lll solution to ond “sell” to ond inlorm ;r: :ti
So, too, with stalfing: “ideal” stafTing plans have to be adjusted to reflect the realities of assign- organizing and stafTing decisions more workable than others. ture, and finally on stalling is actually an interdependent set of factors that must be taken into eGruTR* g- SY$T’trtr$,4S fi SR S i-*WAL fl pERAyt ffi ftl 5
The estobli.shntent oJ a single currcncl’ makes it possible, for the first titne, to estrtb- FneNcesco Cnto, To complernent the organizational structure, the internationai manager must design efficient The design and application of coordinating and reporting systems for folei,un subsidiaries For example, in the transnational network structule, decision-making control is centralized to
key netrvork nodes, greatly reducing emphasis on bureaucratic control. Other specific mecha-
nisms are summarized in the next sections.43 274 Part 3 , Formulating and Implementing Strategy lbr International and Globat Operations
l) i r*qt eepeindi ma*l ng fu?eehx$t$ss?rs
Direct mechanisrns that provide the basis for tire overall guidance and management of foreign Othcr direct mechanisms are visits by head-office personnel and regular meetings to fonnance data and new problern-solving techniques. Increasingly, the tools of techaology are forwalding cannot be taken {br granted. An example of this is the logistics monitoring system 6*’a*:€!reet e*srdInati ng ffleeha*risrp”ts
Inclirect coordinating mechanisms typically include sales quotas, budgets, and other ilnancial mance of the subsidiary for the last quarter or year. foreign subsidiaries, financiai statements ancl performance evaluaiions are complicated b1′
financial t,ariabLes in MNC reports, such as exchange rates, inflation leveis, transfer prices, and To reconcile accounting statements, MNCs usually require three different sets of flnan- other MNC subsidiaries. The third set of statements transiates the second set of statements Researchers have noted comparative diff’erences between the use of direct versus indirect
controls among companies headquartered in cliffelent countries. One study by Egelhoff examined
the pracrices ol 50 U.S., U.K., and European 1\4NCs over their foreign subsidiaries. It compared and the use of periormance teporting systerns (that is, con-iparing behavior mechanisms with
output reporting systems).48 The results of this study shorv that considerable differences exist in
practiccs across MNC nationalities. For example, U.S. MNCs monitor subsidiary outputs and relv more pa1’ent-company nationals to key positions in fbreign subsidiaries and can count on a higher
level of behaliol control than tireir U.S. countetparts,aq
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These linclings imply that the U.S. systenr, which rneasures more quantills..ie rspects of a
fbreign subsidiary, provides the means to compare performance amon-s suisidiar-ies. The
European system, on the other hand, measures mo1’e qualitative aspects of a subtidiarl’ and its
environment, which vary among subsidiaries-al1owing a focus on the unique siiuaiion of the
subsidiary but making it dillicult to compare its perlbrmance to other subsidiaries. M&fi’I&# E ru$ HpFtr{“E*Vm e##h3 grsffi EF*s sYsYffi MS
Management practices, locai constlaints, antl expectations regarding autholiiv, time’ and com-
municarion are but a few of the valiables iikely to affect the appropriateness of monitoring
(or control) systems. The degree to which headquarters’ practices and goals are transferable
probably depends on whether top managers are fiom the head oftice, the host country, or a thircl
.ountry. In a deciding on appropriate systems.
y*’ae & g*pr*pr i e€*xt*** c3* pdr**n ;€&ri mg anrl ffi *pcr{i ng $ gst* *t”tu
One example of t1tI’er.ences in the expectations regarcling monitoring practices, and therefbre the neecl fbr coordination systems, is indicated by a study of Japanese and U’S. hnns Ueno ancl
Sekaran state that their research shows that “the U.S. companies, cornpared io ihe Japanese panies, tencl to use colnlrunication and coordination more extensively, build budget slack to a
!r”ut”1. extcnt, and use iong-terrn performance evaluations Ueno and Sekaran conclgde that those difTercnces in reporting systerns are attributable to the
cultut.al var.iatrle of incliviclualism in U.S. society, compared to coiiectivisrn in Japanese society’
For example, U.S. ntanageLs are rnore iikely to use formal communication and coordination
processes, whereas Japa,iese managel’s use infbrmal and irnplicrt processes. In addition, U’S’
,r,unug”rr, who are evaluatecl on individual perlbrrnance, ale more like1y to build slack into budget
caicuiations for a safety net than their Japanese counterparts, who at’e evaluated on group nance. The irnplications of this stu cultural bases tbr differences in controi practices will be more llexible in working with those sys-
tems in other countries.
Ehe ffi*8* erf !rtfc;srli*tlerra Systents
Reporting systents, such as those described in this chapter, require sophisticated inforr-nation
.y.i”*, to enable then to work properly-not only for competitive pulposes but also for purposes of sales, pr.ocluction, and flnancial results to be able to comparc actual perlbtmance with goals and to
take corrective action rvhere necessary. Most international t’eporting sysleins require intbtmation
f’eeclback at one level or another for financial, personnel, production, and marketing variables.
The specific types o1 f-unctional reports, their fiequency, and the arnount of detail required
from subsidiarie s by heaclqtlarters will vary. Neghandi and Welge surveyed the types of func-
rional reporrs subrnitteci by 117 MNCs in Germa-n,v, Japan, ancl the United States,s2 They found
rhat U.S. MNCs typically submit about double the number of reports than do German and
Jlpanese MNCs, rvith the exception of performance reviews. German MNCs submit a f’ew more
..po.t, than clo Japanese MNCs. Thus U.S. MNCs seem to rnonitor much more via spccific crnphasis on personnel pet’tbrmance reviews than do the U.S. and Gcrman MNCs-a finding Unfbrlunately, the accuracy and timeliness of information systems are oftcn iess than pert’ect’
especiaily in less developed countries, where managers typicaliy operate under conditions of
.”i.”-” uncertainiy. Governmenr intbnnation, for example, is often filtered or fabricated; otlter sophisticated information generation, analysis, and reporting systems comlroll in developed coun-
tries. ‘lheir work norms ancl sense of necessity and urgency may also confound the pl’obiern’ In
addition, the hardware technolog-v and the ability to manipulate and transmit data are usuallv lirnit-
ecl. The NIIS adequacy,- in tblei-en affiliates is a sticky probiem for headquarters managers in their
attcmpt to rrraintain eificic-nr coorclination ol activities and consolidation of results. Another p|ob-
1em is the noncomparabilitl of performance data across countries-the controi problem causeci BSffiFhL STffi{“$flYAJffiffiS
Historically, a firm leorganiz-es as it internationalizes to accommodale new stralegies’ The struc- ,7 264 Parl 3 , For”mulating and Implemenring Srraregy for lnternational and Global Operations Chapter b – Organization Sttucture and Control Systerns 261 Chat::: : , Oiganization Structure and Control Systems 273 274 Part 3 , Formulating and Implementing Strategy lbr International and Globat Operations Chall:: ! ‘ Oiganization Structure and Control Systems 275
around the worl
the $2 billion acquisition of British tavern chain Pubmaster.20 Chun Joo Bum, chiel execu-
Europe for two reasons: (1) to provide sorely needed capital and (2) to help Daewoo navi-
one market.”2l
joint ventures. South Korea, Ibr example, has a lirnit of 18 percent on foreign investtnent in
4. To reduce political risk while making inroads into a new market.
Boe IcER,
and
nor beyond using some vely small-scale alliances to be “political” in China. The company
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er
I arg e st mobile op e rators.
P re s irl e nt, I nt e rrte t D iv i s io n, Walt D i s n e1’24
systems, creating an information superhighway. Disney’s business model of cellular partnerships
Hong Kong government, or licensees and distributors such as Oriental Land and NTT
DoCoMo.26
learn how to better in{egrate computers with communications. Another joint venture with Zenith
alliances present a laster and less risky route to globalization. It is extremely complex to fash-
ion such linkages, however, especially where nany interconnecting systems are involved,
forming intricate networks. Many aliiances fail for complex reasons. Many also end up in a
takeover in which one partner swallows the other. McKinsey & Company, a consulting lirm,
surveyed 150 companies that had been in alliances and found that’75 percent of them had been
between the companies involved, and conflicts in their relative locus of dec.ision making and
control are but a f-ew of the organizational issues that must be worked out. When the joint ven-
ture between France Telecom and Deutsche Telekom was announced in September 2009, Tim
“solution mechanism” for potential problems in the United Kingdom, Noting that “This is a
sign that even those who ernbark on such partnerships with optimism t’ecognize that contlict
about who is in charge is a constant risk,” the Finan.cial Times observed that ‘Joint ventures
stalt with smiles, but ofien end in tears.”28
their success, particulariy in technologically intense fields such as pharmaceuticals, computerc,
and semiconductots. In a study of 153 alliances, researchers found that the choice ofthe means
of governance-whether a contractual agreement or a joint venture*depended on a desire to
control information about proprietary technology.2g Thus, joint ventures are often the chosen
fbrm for such alliances because they provide greater control and coordination in high-technoiogy
industries.
learner iatel dominating the alliance and rewriting its terms. In a real sense, an alliance becomes
to,fLttu re p ntdttcts cut d bus i ne s s e s.3o
petitively sensitive areasl this creates mistrust and secrecy. which then undeimine the purpose ol’the
alliance, The ditliculty that they are dealing witl”r is the duai nature of sft’ategic alliances-the bene-
lifs of cooperation versus the dangers of intloducing new conpetition through sharing their knowl-
eclge and technoiogical skills about theil mutual product or the manufactudng process. Managers
may fear that they will lose the competitive advantage of the firm’s proprietary technology or the
specific skrlis that their personnei possess. One example of a situation of potential ioss of proprietary
technology allbcting entire industries became apparent in January 2004 when China announced that
foreign computer and chip makers selling various wireless devices there would have to use Chinese
encryption software and co-produce their proclucts with Chinese companies fiom a clesignated list,-ll
to other products or even other industries that are beyond the scope of the alliance, and therefore
would hoicl no benefll to the parlner holding the original knowledge.3l As noted by Lei, the Japanese
have far overtaken their U.S. allies in developing and applying new technologies l.o other uses.
Examples ale in the power equipment industry (e.9., Weslinghouse-Mitsubishi), the ofllce
equipment industry (Kodak-Canon), and the consumcr elcctronics industly (General Elcctric-
Samsung). Sorne of the trade-of}’s of the duality of closs-border ventures are shown in Exhibit 7-1.
addirion to potential loss of technology and knowledge or skill base, other areas of incompatibil-
ity often ar”ise, such as conflicting strategic goals and objectives, cultural clashes, and disputes
over management.and contlol systems. Sornetimes it takes a while for such problems to evidence
themselves, particularly if insufficient homework has been done in meetings between the two
sides to lvork out the implementation details. The alliance between KLM Royal Dutch Airlines
and Northwest Airiines linking their hubs in Detroit and Amsterdam. for example, resuited in a
bitter feud among the top oflcials of both companies over methods of running an airline busi-
ness-the European way or the Anerican rvay-and over cultural dif’lbrences between the com-
panies, as well as a power struggle at lhe top over who should call the shots.33
Wortzel, Str.;leglc Management in Global Economy,3rd ed. (NewYork: John Wiley & Sons, 1997)
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Economies of scale in tangible a^ssets
(e.g., plant and equipment).
among paftners.
products provided by supplier.
markets or unceftain technological fields via
shared i€sources.
new technologies to protect domestic,
strategic industries.
lowering exit bariers in mature or declining
industrier.
from parlner, often tacit or olganization
embedded.
and new technologies to erect barriers to
enffy.
pafiner via outsourcing and long-term
supply affangements.
the rise of new competitors with alliance
partners in ‘proxy wars” to control market
access, distribution, and access to new
technologies.
and related firms to avoid or reduce lbreign
dependence for crilical inputs and skills.
“demature” and transform existing mature
industries via new components,
technologies, or skills to enhance the value
of future growth options.
Ai1 countries have a lalge proportion of business enterprises, as well as NGOs, which are small
or medium-sized (SMEs). But, increasingly, MNCs are dominating the markets in which SMEs
operate, often crowding them ou{ of business altogether. However, astute managers of SMEs can
oflen find oppoilunities for alliances with those rrultinationals, providing “courplementary
resources and capabilities that can lead to, lor instance, an innovative product offerrng being
roiled out on a globai scale, or a worldrvicle licensing agreement.”34
cluded by Prasl-rantham and Birkinshaw fi’om their research with 15 companies. For example,
MNCs oiten partner with local small enterprises to capture new ideas and innovations. Sun
Microsystems, lbr instance, engaged with a number of small enterprises in Scotland on RFID
projects in olcler to bolstc-r its competitiveness in this emerging a.ea.35 SMEs shoulcl seek out
those opportunities to offer MNCs complementary technologies as well as local narket nelworks.
Relationship
MNCs Partnering
with Each Other
Enterprises Partnering
Locally with MNCs
Enterprises Partnering
with MNCs
through a dedicated
ailiance department or key
individuals who are direct
countelparts
for structuring,
goverlance, and staffing
alliances
pattern for the further
developmeni of alliances,
including built-in
contingencies for instability
and dissolution
access and attention, the
direct approach is likely
to fail; so use indirect
meants of access
resources and long term
objectives, these
processes don’t appiy; so
plcm for the sltoft iernt
witlz an eye on the long
tem
therefore dispensability of
small enterprises, there’s
grealer uncefl ainty vis-a-vis
MNCs’ own plans and
pritrrities; so be t,ague by
desigtt with an eye on the
bigger prize
institutions or partnering
programs;”make your luck” by
convcfl ing low-key inlcractions
itrto concrete relationships
strength to gain suppofi through
written commitment and
bringing to bear social sanctions
technology by proactivelY
demonstrating skills and
creating opportunltles
knowledge transf’er t0 ensure
tangible outcomes (e.9., a
product prototype) if the
partnership is prematureiY
terminated
within the MNC and add value
(e.g., extending from
technological to commercial
activities, and from local to
international business)
by design; pursue oblique goals
without showing all cards
initially. anti keep options oPcn
for as long as possible
Review,51, no l By
extensive alliance portfolios that involve multiple concunent alliances. Oracle’s Partner Network,
lbr example, includes 19,500 partners. Alliance paltners can providc synergies and value to corpo-
rate pertix-mance by providing access to new resources and markets, generating economies of scale
and scope, reducing costs, sharing risks, ancl enhancing 11exibility.36 Unfortunateiy, the complexities
involved in mannging many alliances often means that many- around half by most estimates-are
unsuccessful, clften because ofpoor pafiner selections initially, and then also because ofpoor man-
agement to ensure that the expected conpetencies and synergies are realized. Research by Dovev
Lavie of 20,000 alliances involving about 8,800 unique partners provides some insight into how
managers can manage their alliances in ways that will incrcase the likelihood of success. Thc results
enabled the identification of “r,alue-crcation ancl value-capturc strategies that can guide partner
seiection decisions, and developed alliance portfolio managelnent practices to help nanagers extract
more value from their ailiance portfolios.”37 These stlategies are detailecl in Exhibit 7-3. One key
factol in managing alliance portfolios, {br exarnple, is to consider not only what each alliance parl-
ner will bring to the company, but also how that partner will affect other partners in the portfblio.
colporate cultures of the parties, in overcoming language and coinmunication barriers, and in
building trust hetween the parties over how to share proplietaly assets and management process-
es. Some basic guidelines, as follow, will help to minirnize potential problerns. However, nothing
is as important aS having a long “courtship” with a potential partner to establish compatibility
strategically and interpersonally and set up a plan with the prospective partner. Even setting up
some pilot programs on a short-term basis lbr some of lhe planned cotlbined activities can high-
light areas that may become problematic.
will r’esuit in synergies through the combined markels, technologies, and management cadre.
Strategies
Strategies
Practices
” Seek Partners that offer
tesoufces
. Leverage network
matket opportunities
. Integraie network
internal resources to
create synergies
. Learn and assimilate
order to develop new
ski11s and capabilities
. Watch out for opportunistic
business more than your
partnership
. Seek pafiners that have
alliances and fewer
partnering altematives
Strategy
. Avoid partners that compete
superior
Strategy
. Ally with multiple pafiners
neutralize each partner’s
. Considerhow each
alliances in the portfoiio
. Set organizational and
between competing
partners
. Benchmark paltners
market opportunities
‘ Align organizational
coherent interface with
each pafiner
38, no. 1 (20C3, 26-36, copyright Eisevier, used with permission of Elsevier, www.elsevier.com
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ner brings distinctive skills and assets to the venture, there r.vill be reduced Fotential for
direct competition in end products and rnarkets. In addition, eacl”r partner *ill begin the
alliance in a balanced relationship.3s
tively sensitive inlbrmation-what wili be shared and what will not, and horv shared tech-
nology wili be handled. Trust is an essential ingledient of an ailiance, particularl)’ in these
aleas; but this must be backed up by contlactual agrcenents.
ner t-eels it has incorporated the skilis and intbrmation it needs to go it alone. With this in
mind, managers need to “learn thoroughly and rapidly about a partner technology and
managelnent: transf’er valuable ideas and piactices promptly into one’s own opelations'”39
ailiances are fulther complicated by tlie diff’erent hisl.ory of the two parties’ econonlic systems
nnd Ihe lesulting business placticcs.
beett throvvrt into doLrbt.lo
Se7rember 30, 2008
Already jittert, inve,stors x,ere cilarmed on Thtu’stlcty u;hett ct Nonvegicttt cellphone
investnrcrt in n Russitm joint t’enturc cutd v’oLtld tunt it orer to ct cotnpatry thought to be
ct!!iecl with ct Russicut oli.garch.4l
Maich 13,2009
Russian malket. Foreign companies have started to think twice about investing in international
joint ventures (IJVs) in Russia since (then) President Putin’s moves to take control ofkey industries.
including banks, newspapers, and oil assets. He partly re-nationalized the Yukos oil company,
Russia’s biggest, atter jailing its lbrrner chiel Mikhail Khodorkovsky for eight years. In May 2008,
President Putin signed the Strategic Industries Bill, which regulates tbreign itrvestment. The new law
identifies 42 strategic sectors (compared to 16 in 2005) in which foreign investors have to seek special
permissicrn before investing. In June 20Oi , Puttn lbrced BP (British Petroleum) to sell the largest gas
All in all, investors are confused, though many are determined to take advantage of a tnore stable
itive. But a survey ol 158 corporate investors and non-investors itr Russia indicated that respondents
thought that doing business in Russia was more risky ancl less profitable than China, India, or South-east
weak legislative and enforcement regirnes.4S Rr.rssia was rankcd 1471h out of 180 countries by
Transparency International. base<1 on ciean government ancl business.44 Indeecl, Ikea, the Srvedish retail-
jntemational managers hnd it easier to
process by which a tirm graclually changes in response to inlernational competition, domestic
pei-hapi the f-inn starts by exporting or by acting as a licensor or licensee^ and then over time
Even a mature MNC nust make structural changes from time to time to lacilitate changes
“ffoJio
geographically divided-that is, to improve previously insulticient communication between
As previously statecl, many firms-especially smaller ones-start their international
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serve local markets. This structure works well for comllanies with one or a few subsidiaries
iocated reiatively close to headquarters.
international division, organized along lunctional, product, or geographic lines. With this
structure, the various fbreign subsidiaries are organized under the international division, and sub-
sidiary managers rcport to its head and are typically given the title Vice President, International
Division. This vice president, in turn, reports directly to the CEO of the corporation. The creation
of an international division facilitates the beginning of a g1oba1 strategy. It permits managers to
allocate and coordinate resources for foreign activities under one roof, and thus enhances the
lirm’s ability to respond, both reactively and proactively, to market opportunities. Some conflicts
may arise among the divjsions of the firm because firore resout’ces and management attention tend
to get channeled toward the international division than toward the domestic divisions and because
of the different orientations of various division managers. Companies such as IBM and PepsiCo
have international divisions called, respectively, IBM Wolid Trade and PepsiCola Internationai.
lbreign operations, a firm may choose to replace its international division with an integrated global
structure. This slructure can be organized along f’unctional, product, geographic, or matrix lines.
production, marketing, finance, and so forth. Foreign opemtions are integrated into the activities
and responsibilities of each department to gain iunctional specialization and economies of scaie.
This form of organization is primarily used by small firms with highly centralized systems. It is
particulariy appropriate for product iines using sirnilar technology and fbr businesses with a nar-
row spectrum of customers. This structure results in plants that are highly integrated across
products and that serve single or similal malkets.
be lost if the managels and the work systems become too narrowly defined to have the necessary
flexibility to respond to local environments. An alternative structure can be based on product lines.
and that are aimed at dissimilar or dispersed rnarkets, a glotral product (divisional) structure
may be more strategically advantageous than a functional structure. In this structure. a single
product (or product line) is represented by a separate division. Each division is headed by its
own general manager! and each is responsible for its own production and sales functions. Usually,
each division is a strategic business unit (SBU)-a self-contained business with its orvn tunc-
tional departments and accounting systems. The advantages of ihis organiz,ationai form are market
Functionol Stoff
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Norlh Americo
Lofin Americs
Europe
For Eos!
Product 3
It also tacilitates diversification and rapid growth, sometimes at the expense of scale economies
and functional specialization. H. J. Heinz Company CEO Wiliiam R. Johnson catne on board in
April 1998 and decided that the company should restructure to impiement a globai strategy. He
changed the fccus of the company from a multidomestic intemational strategy using the global
geographic area structure to a global strategy using the global product divisional structure. His
goal was further growth overseas by building international operations; this structure also readily
incorporated Heinz’s Specialty Pet Food Division for marteting those proclucts around the world.9
Particularly appropriate in a dynamic and divelse environment, the global product structure is
iliustlated in Exhibit 8-2.
nation of widely dispersed operations may result. One answer to this problem, particularly for
iarge MNCs, is to reorganize into a global geographic structure.
foreign opel’ations-divisions are crcated to cover geographic regions (see Exhibit 8-3). Each
regional manager is responsible for the operations and performance of the counlries within
a given region. In this way, country and regionai needs and relative market knowledge take
precedence over product expertise. Local managers are lamilial with the cultural environment,
government regulations, and business transactions. In addition, their ianguage skills and local
contacts facilitate daily transactions and responsiveness to the market and the customer. While
this is a good structure for consolidating regional expertise, problems of coordination across
regions may arise.
local requirements. Therefbre, rnarketing-oriented companies, such as Nestl6 and Unilever,
which produce a range of products that can be marketed through similar (or common) channels
of distribution to simileu customers, wiil usually opt fbr this structure. Nestl6 SA, tbr example,
uses this decentralized structure, which is more typical of European companies, because “it is
not Nestl6’s policy to generate most of its sales in Switzerland, supplemented by a f’ew satellite
subsidiaries abroad. Nestl6 strives to be an insider in every countty in whrch it operates, not an
outsider.”i0 in 2005, Nestl6 reinforced its global business strategy o1’emphasizing its brands
by making its head o1- marketing responsible for Nest16’s seven SBUs-dairy, confectionery,
beverages- ice cream, food, pet cale, and fbod services. Those SBUs help deterrnine the
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Still Nest16’s marketing manager, Mr. Brabeck, insists that
and cLtlturaLll; loadetl as.food. . . . This means having cL
j
1t
1 I
local chtracter
N e stll M arketin g M atwge r12
Britain, and France resulting from differences in their national systems and cultures, and in
particular management styles. Nevertheless, it has pursued its consolidation into five regionai-
ized global centers ibr the design, manufacture, and marketing of 70 lines of cars around the
world. In 2001, under Ford’s CEO Jac Nasser-born in Lebanon and raised in Australia-Ford
negotiated a presence in more than 200 countries, with 140 manufacturing plants.13
deveioped to combine geogaphic suppol’t tbr both global integration and locai responsiveness; also
it can be used to take advantage cif personnel skills and experience shared across both l’unctional
and divisional structures. In the matrix structure the lines of responsibility are drawn both vertically
and horizontally as illustrated in Exhibit 8-4. While this mcthod of management and organization
maximizes tire focus of skills and experience in the company to bring to beal on a particular product
as well as region, it often brings confusion, communication pfoblems, and conflict over having more
than one boss to whom to report and strcss over prioritizing tirne among overlapping and conflicting
responsibilities. Indeed, in their research of 36 Dutch organizations, including subsidiaries of giobal
ctccountabiliry, and political battles over resoutces, resultittg in risk-cryerse behatior
cutd loss oJ narket .share
Authority
Authoril.y
by heodquoriers
oi locol Jevel
o
6
o:
o
N
oo-
c)
ou
.ii:
il..ii
l
ri
,f
lE
r
HQ monogement HQ monogement HQ monogemeni HQ ond locol
mokes decision mokes decision mokes decision monogers
locol monogers subsidiory fir locol monogers decisions
Locol monogers Locol monogers Locol monogers
oresent oroblem mqke dectston moke declslon
‘ond
HG for decision HQ HO
:.ilj
ing managers from various sources and the locai regulations or cultural variables that make some
What may at first seem a linear management process of deciding on strategy, then on slruc-
considelation and worked out as a set of decisions. Chaptff 9 explores how staffing decisions
are-ot should be-intricately intertwined with other decisions legarding strategy, structure, and
so forth. A unique set of management cadre and skills in a particular location can be a competi-
tive advantage in itsell’, and so it may be a smart move to build strategic and organizational
ciecisions around ihat resource rather than risk losing that advantage. The following sections
present some olher processes that ale involved in impiementing strategy and are interconnected
with coordinating I’unctions through organizational structure.
I i s h,s h a re cl, c e n t ra I ize d ac c o urt tin g a n d a d mi n i s ttativ e s)| s t e ms.
CEO, M e rloni Ele tt ro donte st ic i42
coordinating and reporting sysiems to ensure that aclual per’formance conforms to expected
organizational standards and goals. The challenge is to coordinate far-flung operations in
vastly different environments with various work processes; rules; and economic, political,
legal, and cultural norms. The feedback trom the controi process and the information systems
should signal any necessary change in strategy, structure, or operations in a timely manner.
Otien the strategy, the coordinating processes, or both, need to be changed to reflect condi-
lions in other countr;cs,
and activities can iake any tbrm that management wishes. MNCs usually employ a variety of
direct and indirect coordinating and control mechanisms suitable for their organization strtlcture.
operations include the design o1’appropdate structures (discussed previously in this chapter)
and the use of eff’ective staffing practices (discussed in Chapters 9 and 10). Such decisions
proactiveiy set the stage lbr operations to meet goals, rather than troubleshooting deviations or
problems after they have occurred. When McDonald’s filst opened its doors in Moscorv in
1990, the biggest controi problem was that of quality control fbr its lbod products. McDonald’s
anticipated that chailenge and adopted a strategy of vertical integration for its sourcing of rara’
malerials.44 To contrcl the quality, distribution, and reliability of its ingredients, McDonald’s
built a $40 miliion, 1 10,000-square-foot plant in a Moscow suburb to process the required beef,
mi1k, buns, vegetables, sauces, and potatoes. In addition, the company brought the managers to
Toronto, Canada, for five months of training.as Top management at McDonald’s anticipated dif’-
ficulties with the setup and daily operations of this IJV and, indeed, had been rvorking toward
the opening day for i3 years. Through careful planning for the control of crucial operational
factors, they solved the sourcing, distribution, and employment problems inherent in the former’
Soviet Union.46
allow employees around the world to consult and troubleshoot. Increasingly those rneetings
contprise videocont’erences to allow i’ace-to-face, if not physical, interaction among managers
around the world to enable faster and less expensive frequent meetings. Top executives from
heaclquarters may use periodic visits to subsidiaries to check performance and help to anticipate
future problems. The meetings allow each general manager to keep in touch with her or his
associates, with the overall mission and strategy of the organi zation, and with comparative per-
being applied as dilect mechanisms to ensure up liont that operations will bc caried oul as
planned, in particulal in countries where processes such as efficient infi’astructure and goods
set up by Air Express lnternational in Latin America to minimize its many problems there.4l
toois, as well as feedback l’eports, which give information about the sales and {lnancial perfbr-
Domestic companies invariably rely on budgets and trnancial statement analyses, but for
accounting standards.
cial statements from subsirliaries. One set must meet the national accounting standards and
proceclules prescribed by law in the host country. This set also aids management in cornparing
subsidialies in the same country. A second set must be prepared according to the accounting
principles and stanrlards required by the home country. This set allolvs some comparison with
(with certain adjustments) into the currency of the home countly lbr consolidation purposes, in
accorclance wirh FASB Ruling Number 52 of 1982. A foreign subsidiary’s financial statements
must be consolidated line by line r.l,ith those of the parent company, according to International
Accounting Standarcl Nurnber 3, adopted in the United States.
the use of {.”r’o mcchanisms-the assignment of parent-company managers to foreign subsidiaries
more on fi’equently repofied perfbrmance data than clo European MNCs. The latter tend to assign
t*
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,9:
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:{
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in
com-
to a lesser extent.”5l Furthermore,
perfor-
p”rtbr1nun.” cvaluation. 1bp management must receivs accurate and timely infonnation rcgarding
lunctional reports than do German and Japanese MNCs. The Japanese MNCs put far less
consistent with the Japanese culture of gloup decision making, conscnsus, and responsibility.
sources of data tbr dccision rnaking are usually iimited. Ernployees are not used to the kinds of
ture typically continues to change over time with growth and with increasing levels of investment
or cliversity and as a result of the types of entry strategy chosen. Internationalizalion is the
process by which a tirm graclually changes in response to inlernational competition, domestic
market saturation, and the desire for expansion, new tnarkets, and divel’siflcation. As discussed
in Chapter 6, a firm’s n’lanagers weigh alternatives and decide on appropriate entl’y strategies
pei-hapi the f-inn starts by exporting or by acting as a licensor or licensee^ and then over time
continues to intelnationabzeby engaging injoint ventures or by establishing service, pr”oduction,
or assembly facilttics or aliiances abroad, moving into a global strategy. At each stage, the firm’s
managers redesign the organizational structure to optimize the strategy’s chances to work’ rnak-
ing chlanges in tire firm’s tasks and lclationships and designating authority, responsibility, lines of
comrnunication, geographic dispersai of units, and so folth. This model of structural evolution
has become known as the stages model, resuiting tiorn Stoplbrd’s rese arch on i 87 U.S’ multina-
tional corporations (MNCs;.S Of course, many lirms do not fo11ow the stages model because
they may start their internationali zation at a higher level of involvetnent- perhaps a l’ull-blown
g1obal joint venture without ever having expofied, for exampie’
Even a mature MNC nust make structural changes from time to time to lacilitate changes
in strategy-perhaps a change in stlategy from globalization to regionalization (see Chapter 6) or
on
“ffoJio
improve efficiency or effectiveness. Tl.re reorganization of Aluminum Cornpany o1-
America (Alcoa), fo| exanple, split the company into smailer, more autonomous units, the|eby
giving more focus to gro*itrg businesses, such as automotivc products, where the rnarket for
uluminu* is strong. It also enabied Alcoa to iink businesses with similar lunctions that are
geographically divided-that is, to improve previously insulticient communication between
at.ou’i aluminum operations in Brazil antl its Australian counterparts’ Alcoa, as with most
MNCs, has lbund the need to continuously adapt its structure to accommodate global expansion
and new ventures. Alcoa has a presence in 41 countries, ernploying 120,000 people lvorldwide’
The typicai ways in which lirms organize their international activities are shown in the
lollowing iist. (Larger companies often use several of these strllctures in dilferent regions or
parts of their organization.) Afier the presentation of some o{ these structural forms, the focus
will turn to transitional organizational arrangements.
. Domestic structul’e plus export department
. Domestic stl’ucture plus fbreign subsidiary
. Inietnationai dir isitln
. Global functional structure
. Global product stt’ucture
. Matrix slructure
As previously statecl, many firms-especially smaller ones-start their international
invoivement by expoi’ting. They may simply use the services of an export management colnpany
fbr this, or rhey may reorganize into a simple donte,stic stt’Ltcture plus expttrt department’
To facilirare access to and developrnent of specilic lbreign narkets, the flrm can take a
further step ror\ard rvorldwide operations by reorganizing into a dornestic strttcture pltts
1oreign suisidittt in one or more countries (see Exhibit 8-1).’fo be clfective, subsidiary
l:
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it.
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+
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Chaprer 8 ‘ Organization Structure and Control Systems 259
FliLllElT S’1 Domestic Structure Plus Foreign Subsidary
Lhret
Executive
Officer
Heodquorters
deportments
Finonce Production
l__ ___ _ _,
1-*–*- I —‘
*–__—_.*l
I Morketing HRM
I
I
I
I
I
Overseos
subsidiories
VP lnlernationol
Operotions
I
l–
i
Jopon Germony Mexico
managers should have a great deal of autonomy and be able to adapt and respond quickiy to
serve local markets. This structure works well for comllanies with one or a few subsidiaries
iocated reiatively close to headquarters.
With further market expansion, the firm may then decide to specialize by creating an
international division, organized along lunctional, product, or geographic lines. With this
structure, the various fbreign subsidiaries are organized under the international division, and sub-
sidiary managers rcport to its head and are typically given the title Vice President, International
Division. This vice president, in turn, reports directly to the CEO of the corporation. The creation
of an international division facilitates the beginning of a g1oba1 strategy. It permits managers to
allocate and coordinate resources for foreign activities under one roof, and thus enhances the
lirm’s ability to respond, both reactively and proactively, to market opportunities. Some conflicts
may arise among the divjsions of the firm because firore resout’ces and management attention tend
to get channeled toward the international division than toward the domestic divisions and because
of the different orientations of various division managers. Companies such as IBM and PepsiCo
have international divisions called, respectively, IBM Wolid Trade and PepsiCola Internationai.
{ntegnated GlobeE Stnuct&cres
To respond to increased product diversification and to maximize benefits from both domestic and
lbreign operations, a firm may choose to replace its international division with an integrated global
structure. This slructure can be organized along f’unctional, product, geographic, or matrix lines.
The global functional structure is designed on the basis of the company’s functions-
production, marketing, finance, and so forth. Foreign opemtions are integrated into the activities
and responsibilities of each department to gain iunctional specialization and economies of scaie.
This form of organization is primarily used by small firms with highly centralized systems. It is
particulariy appropriate for product iines using sirnilar technology and fbr businesses with a nar-
row spectrum of customers. This structure results in plants that are highly integrated across
products and that serve single or similal malkets.
Mucl-r of the advantage r”esulting from economies of scale and functional specialization may
be lost if the managels and the work systems become too narrowly defined to have the necessary
flexibility to respond to local environments. An alternative structure can be based on product lines.
For firms with diversified product lines (or services) that have diff-erent technological bases
and that are aimed at dissimilar or dispersed rnarkets, a glotral product (divisional) structure
may be more strategically advantageous than a functional structure. In this structure. a single
product (or product line) is represented by a separate division. Each division is headed by its
own general manager! and each is responsible for its own production and sales functions. Usually,
each division is a strategic business unit (SBU)-a self-contained business with its orvn tunc-
tional departments and accounting systems. The advantages of ihis organiz,ationai form are market
EXF{lBlT 8″3 Glabal Product (Divisional) Structure
cEo
Corporcte
Functionol Stoff
I
-1
..-t
i
Country B
Areo Speciolists:
Norlh Americo
Lofin Americs
Europe
For Eos!
*-:.i
Product 3
Division
Morketing
I
Produclion
concentration, innovation, and l’esponsiveness to new opportunities in a particular environment.
It also tacilitates diversification and rapid growth, sometimes at the expense of scale economies
and functional specialization. H. J. Heinz Company CEO Wiliiam R. Johnson catne on board in
April 1998 and decided that the company should restructure to impiement a globai strategy. He
changed the fccus of the company from a multidomestic intemational strategy using the global
geographic area structure to a global strategy using the global product divisional structure. His
goal was further growth overseas by building international operations; this structure also readily
incorporated Heinz’s Specialty Pet Food Division for marteting those proclucts around the world.9
Particularly appropriate in a dynamic and divelse environment, the global product structure is
iliustlated in Exhibit 8-2.
With the global product (divisional) grouping, however, ongoing difficulties in the coordi-
nation of widely dispersed operations may result. One answer to this problem, particularly for
iarge MNCs, is to reorganize into a global geographic structure.
In the glotral geographic (area) structure-the most common tbrm of organizing
foreign opel’ations-divisions are crcated to cover geographic regions (see Exhibit 8-3). Each
regional manager is responsible for the operations and performance of the counlries within
a given region. In this way, country and regionai needs and relative market knowledge take
precedence over product expertise. Local managers are lamilial with the cultural environment,
government regulations, and business transactions. In addition, their ianguage skills and local
contacts facilitate daily transactions and responsiveness to the market and the customer. While
this is a good structure for consolidating regional expertise, problems of coordination across
regions may arise.
With the geographic structure, the focus is on marketing, since products can be adapted to
local requirements. Therefbre, rnarketing-oriented companies, such as Nestl6 and Unilever,
which produce a range of products that can be marketed through similar (or common) channels
of distribution to simileu customers, wiil usually opt fbr this structure. Nestl6 SA, tbr example,
uses this decentralized structure, which is more typical of European companies, because “it is
not Nestl6’s policy to generate most of its sales in Switzerland, supplemented by a f’ew satellite
subsidiaries abroad. Nestl6 strives to be an insider in every countty in whrch it operates, not an
outsider.”i0 in 2005, Nestl6 reinforced its global business strategy o1’emphasizing its brands
by making its head o1- marketing responsible for Nest16’s seven SBUs-dairy, confectionery,
beverages- ice cream, food, pet cale, and fbod services. Those SBUs help deterrnine the
I
I
I
I. ‘-‘– -*l–*rl
Product
‘l
Division
i–‘-*-
I
Country.A
Product 2
Division
l
!
i* -“_- –_-“_-
I
Finonce
J.
lr;r
.];
iir
jii
:f
EXFllElT S-3 Global Geographic Structure
— — -‘– -t
!
Boord of Directors
i
i
Lhor r
I
cEo
I_[-_- – -.-t_ __ _-_ ,_
li
VP
Finonce
Group VP
i
VP Norih
.Americo
VP Souih
Americo
VP
Poci{ic
VP
Europe
I
\/D
Plostics
-*–j
I
l
VP
Agriculture
I
I
j
Fronce
United
Kingdom
company’s regional business strategy, which then shapes the
Still Nest16’s marketing manager, Mr. Brabeck, insists that
Therc is no such thing as a global cotlsume,; especially
and cLtlturaLll; loadetl as.food. . . . This means having cL
r
j
I–] *–* –*- -* * -t
1t
Finonce Production Morketing
local market business strategies.
1 I
in a sector as pq,chologicallY
local chtracter
Psrnn Bnanecr,
N e stll M arketin g M atwge r12
Grouping a number of countries under a region doesn’t always work ou,t, howevet, as Ford
experienced with its European Group. It soon discovered tensions among the units in Germany,
Britain, and France resulting from differences in their national systems and cultures, and in
particular management styles. Nevertheless, it has pursued its consolidation into five regionai-
ized global centers ibr the design, manufacture, and marketing of 70 lines of cars around the
world. In 2001, under Ford’s CEO Jac Nasser-born in Lebanon and raised in Australia-Ford
negotiated a presence in more than 200 countries, with 140 manufacturing plants.13
A matrix structure is a hybrid organizaiion of overlapping responsibilities. The structure is
deveioped to combine geogaphic suppol’t tbr both global integration and locai responsiveness; also
it can be used to take advantage cif personnel skills and experience shared across both l’unctional
and divisional structures. In the matrix structure the lines of responsibility are drawn both vertically
and horizontally as illustrated in Exhibit 8-4. While this mcthod of management and organization
maximizes tire focus of skills and experience in the company to bring to beal on a particular product
as well as region, it often brings confusion, communication pfoblems, and conflict over having more
than one boss to whom to report and strcss over prioritizing tirne among overlapping and conflicting
responsibilities. Indeed, in their research of 36 Dutch organizations, including subsidiaries of giobal
tirms, Strikwerda and Stoelhorst concluded fi’om the majority of interviewees that:
executiyes cts,sociafe the ntatrix organigttiort with unclectr respon,sibilities, a lack of
ctccountabiliry, and political battles over resoutces, resultittg in risk-cryerse behatior
cutd loss oJ narket .share
CtLtponNIa. MnNect’tr,tgNr REv len’,
Summer 2A09.14
EKltlSlT S-lt Locus of Decision Making in an lnternational Organizational
Heodquorlers
Authority
‘F Subsidiory,/locol unit
Authoril.y
Areo of control
by heodquoriers
Areo of conirol
oi locol Jevel
I
o
6
o:
o
N
oo-
rc
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.N
C
ou
1
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ri
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–T
HQ monogement HQ monogement HQ monogemeni HQ ond locol
mokes decision mokes decision mokes decision monogers
ond informs ond “sells” to ond recommends consult on
locol monogers subsidiory fir locol monogers decisions
monqgers
lll
Locol monogers Locol monogers Locol monogers
oresent oroblem mqke dectston moke declslon
‘ond
solution to ond “sell” to ond inlorm
HG for decision HQ HO
;r:
:.ilj
:ti
So, too, with stalfing: “ideal” stafTing plans have to be adjusted to reflect the realities of assign-
ing managers from various sources and the locai regulations or cultural variables that make some
organizing and stafTing decisions more workable than others.
What may at first seem a linear management process of deciding on strategy, then on slruc-
ture, and finally on stalling is actually an interdependent set of factors that must be taken into
considelation and worked out as a set of decisions. Chaptff 9 explores how staffing decisions
are-ot should be-intricately intertwined with other decisions legarding strategy, structure, and
so forth. A unique set of management cadre and skills in a particular location can be a competi-
tive advantage in itsell’, and so it may be a smart move to build strategic and organizational
ciecisions around ihat resource rather than risk losing that advantage. The following sections
present some olher processes that ale involved in impiementing strategy and are interconnected
with coordinating I’unctions through organizational structure.
eGruTR* g- SY$T’trtr$,4S fi SR S i-*WAL fl pERAyt ffi ftl 5
The estobli.shntent oJ a single currcncl’ makes it possible, for the first titne, to estrtb-
I i s h,s h a re cl, c e n t ra I ize d ac c o urt tin g a n d a d mi n i s ttativ e s)| s t e ms.
FneNcesco Cnto,
CEO, M e rloni Ele tt ro donte st ic i42
To complernent the organizational structure, the internationai manager must design efficient
coordinating and reporting sysiems to ensure that aclual per’formance conforms to expected
organizational standards and goals. The challenge is to coordinate far-flung operations in
vastly different environments with various work processes; rules; and economic, political,
legal, and cultural norms. The feedback trom the controi process and the information systems
should signal any necessary change in strategy, structure, or operations in a timely manner.
Otien the strategy, the coordinating processes, or both, need to be changed to reflect condi-
lions in other countr;cs,
The design and application of coordinating and reporting systems for folei,un subsidiaries
and activities can iake any tbrm that management wishes. MNCs usually employ a variety of
direct and indirect coordinating and control mechanisms suitable for their organization strtlcture.
For example, in the transnational network structule, decision-making control is centralized to
key netrvork nodes, greatly reducing emphasis on bureaucratic control. Other specific mecha-
nisms are summarized in the next sections.43
l) i r*qt eepeindi ma*l ng fu?eehx$t$ss?rs
Direct mechanisrns that provide the basis for tire overall guidance and management of foreign
operations include the design o1’appropdate structures (discussed previously in this chapter)
and the use of eff’ective staffing practices (discussed in Chapters 9 and 10). Such decisions
proactiveiy set the stage lbr operations to meet goals, rather than troubleshooting deviations or
problems after they have occurred. When McDonald’s filst opened its doors in Moscorv in
1990, the biggest controi problem was that of quality control fbr its lbod products. McDonald’s
anticipated that chailenge and adopted a strategy of vertical integration for its sourcing of rara’
malerials.44 To contrcl the quality, distribution, and reliability of its ingredients, McDonald’s
built a $40 miliion, 1 10,000-square-foot plant in a Moscow suburb to process the required beef,
mi1k, buns, vegetables, sauces, and potatoes. In addition, the company brought the managers to
Toronto, Canada, for five months of training.as Top management at McDonald’s anticipated dif’-
ficulties with the setup and daily operations of this IJV and, indeed, had been rvorking toward
the opening day for i3 years. Through careful planning for the control of crucial operational
factors, they solved the sourcing, distribution, and employment problems inherent in the former’
Soviet Union.46
Othcr direct mechanisms are visits by head-office personnel and regular meetings to
allow employees around the world to consult and troubleshoot. Increasingly those rneetings
contprise videocont’erences to allow i’ace-to-face, if not physical, interaction among managers
around the world to enable faster and less expensive frequent meetings. Top executives from
heaclquarters may use periodic visits to subsidiaries to check performance and help to anticipate
future problems. The meetings allow each general manager to keep in touch with her or his
associates, with the overall mission and strategy of the organi zation, and with comparative per-
fonnance data and new problern-solving techniques. Increasingly, the tools of techaology are
being applied as dilect mechanisms to ensure up liont that operations will bc caried oul as
planned, in particulal in countries where processes such as efficient infi’astructure and goods
forwalding cannot be taken {br granted. An example of this is the logistics monitoring system
set up by Air Express lnternational in Latin America to minimize its many problems there.4l
6*’a*:€!reet e*srdInati ng ffleeha*risrp”ts
Inclirect coordinating mechanisms typically include sales quotas, budgets, and other ilnancial
toois, as well as feedback l’eports, which give information about the sales and {lnancial perfbr-
mance of the subsidiary for the last quarter or year.
Domestic companies invariably rely on budgets and trnancial statement analyses, but for
foreign subsidiaries, financiai statements ancl performance evaluaiions are complicated b1′
financial t,ariabLes in MNC reports, such as exchange rates, inflation leveis, transfer prices, and
accounting standards.
To reconcile accounting statements, MNCs usually require three different sets of flnan-
cial statements from subsirliaries. One set must meet the national accounting standards and
proceclules prescribed by law in the host country. This set also aids management in cornparing
subsidialies in the same country. A second set must be prepared according to the accounting
principles and stanrlards required by the home country. This set allolvs some comparison with
other MNC subsidiaries. The third set of statements transiates the second set of statements
(with certain adjustments) into the currency of the home countly lbr consolidation purposes, in
accorclance wirh FASB Ruling Number 52 of 1982. A foreign subsidiary’s financial statements
must be consolidated line by line r.l,ith those of the parent company, according to International
Accounting Standarcl Nurnber 3, adopted in the United States.
Researchers have noted comparative diff’erences between the use of direct versus indirect
controls among companies headquartered in cliffelent countries. One study by Egelhoff examined
the pracrices ol 50 U.S., U.K., and European 1\4NCs over their foreign subsidiaries. It compared
the use of {.”r’o mcchanisms-the assignment of parent-company managers to foreign subsidiaries
and the use of periormance teporting systerns (that is, con-iparing behavior mechanisms with
output reporting systems).48 The results of this study shorv that considerable differences exist in
practiccs across MNC nationalities. For example, U.S. MNCs monitor subsidiary outputs and relv
more on fi’equently repofied perfbrmance data than clo European MNCs. The latter tend to assign
more pa1’ent-company nationals to key positions in fbreign subsidiaries and can count on a higher
level of behaliol control than tireir U.S. countetparts,aq
:i*
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These linclings imply that the U.S. systenr, which rneasures more quantills..ie rspects of a
fbreign subsidiary, provides the means to compare performance amon-s suisidiar-ies. The
European system, on the other hand, measures mo1’e qualitative aspects of a subtidiarl’ and its
environment, which vary among subsidiaries-al1owing a focus on the unique siiuaiion of the
subsidiary but making it dillicult to compare its perlbrmance to other subsidiaries.
‘
M&fi’I&# E ru$ HpFtr{“E*Vm e##h3 grsffi EF*s sYsYffi MS
Management practices, locai constlaints, antl expectations regarding autholiiv, time’ and com-
municarion are but a few of the valiables iikely to affect the appropriateness of monitoring
(or control) systems. The degree to which headquarters’ practices and goals are transferable
probably depends on whether top managers are fiom the head oftice, the host country, or a thircl
.ountry. In a
