Strategies for Controlling Structures in Multinational Enterprises - Essay Example

Strategies for Controlling Structures in Multinational Enterprises Introduction Managing a multinational enterprise (MNE) could never be a walk in the park because this task involves key changes in a company’s mission, core competencies, structure, processes, and culture. As a member of the strategic planning team of a large MNE, our organisation should be aware of all the changes in organisational strategies and structures to empower our organisation to obtain competitive advantage in a changing global environment. To create a global strategy, a company must carefully define what globalization means for its particular business. This depends on the industry, the product or service, and the requirements for global success. For Coca-Cola, it meant duplicating a substantial part of its value-creation process—from product formulation to marketing and delivery—throughout the world. Intel’s global competitive advantage is based on attaining technological leadership and preferred component supplier status on a global basis. For a midsize company, it may mean setting up a host of small foreign subsidiaries and forging numerous alliances. For still others, it may mean something entirely different (De Kluyver & Pearce, 2006). Thus, although it is tempting to think of global strategy in universal terms, globalization is a highly company-and industry-specific issue. It forces a company to rethink its strategic intent, global architecture, core competencies, and entire current product and service mix. For many companies, the outcome demands dramatic changes in the way they do business—with whom, how, and why. In the study of management, it is already a common knowledge that it involves four basic functions: planning, organizing, leading, and controlling resources (land, labour, capital, and information) to efficiently reach a company’s goals. Controlling is the fourth basic managerial function. In management, controlling means monitoring a firm’s progress toward meeting its organizational goals and objectives, resetting the course if goals or objectives change in response to shifting conditions, and correcting deviations if goals or objectives are not being attained. Managers should strive to maintain a high level of quality—a measure of how closely goods or services conform to predetermined standards and customer expectations. Many firms control for quality through a four-step cycle that involves all levels of management and all employees. In the first step, top managers set standards, or criteria for measuring the performance of the organization as a whole. At the same time, middle and first-line managers set departmental quality standards so they can meet or exceed company standards. Establishing control standards is closely tied to the planning function and depends on information supplied by employees, customers, and other external sources. In the second step of the control cycle, managers assess performance, using both quantitative (specific, numerical) and qualitative (subjective) performance measures. In the third step, managers compare performance with the established standards and search for the cause of any discrepancies. If the performance falls short of standards, the fourth step is to take corrective action, which may be done by either adjusting performance or re-evaluating the standards. If performance meets or exceeds standards, no corrective action is taken. To complement the changing organizational structures in a multinational enterprise (MNE), managers should learn to design efficient coordinating and reporting systems to ensure that actual performance conforms to expected organisational 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 from the control process and the information systems should signal any necessary change in strategy, structure, or operations in a timely manner. Often, the strategy, the coordinating processes, or both, need to be changed to reflect conditions in other countries. Thus, our MNE should move out from a “centrally administered control system” and adopt a “decentralized control system”, which could benefit our new global venture. Determinants of Control Strategies The major determinants of control system are the location and ownership strategies of MNEs. These strategies revolve around the ability of MNEs to subdivide their activities more precisely and to place them in the optimal location. Moreover, there are more sophisticated and wider control strategies ranging from full ownership to market relationships are used to coordinate global activities (Buckley & Ghauri, 2004). The location is a vital determinant of control strategies because as foreign affiliates have become more embedded in host countries, this has led to a deepening of their value chains, and a propensity for them to engage in higher-order (e.g., innovatory) activities. This fact has been documented in numerous studies both on the geographical distribution of R&D and on that of patents registered by MNEs. Another reason is that location-specific assets which MNEs perceive they need to add value to the competitive advantages they are exporting (via FDI) are changing as their downstream activities are becoming more knowledge intensive. Various surveys have demonstrated that, except for some labour or resource investments in developing countries, MNEs are increasingly seeking locations which offer the best economic and institutional facilities for their core competencies to be efficiently utilized (Dunning, 1998). Another gargantuan issue that needs to be considered in engaging into global business is ownership. Ownership strategies in foreign markets can essentially take two routes: acquisitions where the MNE buys up existing companies, or greenfield operations that are started from scratch. As with the other entry modes, full ownership entry entails certain benefits to the MNC but also carries risks. Fully owned subsidiaries give MNEs unlimited control of their operations. It is often the ideal solution for companies that do not want to be saddled with all the risks and anxieties associated with partnerships like joint venturing. Full ownership means that all the profits go to the company. Fully owned enterprises allow the investor to manage and control its own processes and tasks in terms of marketing, production, and sourcing decisions. Setting up fully owned subsidiaries also sends a strong commitment signal to the local market. In some markets—China, for example—wholly owned subsidiaries can be erected much faster than joint ventures with local companies which may consume years of negotiations before their final takeoff (Vanhonacker, 1997). The latter point is especially important when there are substantial advantages of being an early entrant in the target market. Despite the advantages of 100 percent ownership, many MNEs are quite reluctant to choose this particular mode of entry. The risks of full ownership cannot be easily discounted. Complete ownership means that the parent company will have to carry the full burden of possible losses. Developing a foreign presence without the support of a third party is also very demanding on the firms resources. Obviously, apart from the market-related risks, substantial political risks (e.g., nationalization) must also be considered. Also, companies that enter via a wholly owned enterprise are sometimes also perceived as a threat to the cultural and/or economic sovereignty of the host country. For many MNEs that want to expand their global operations, joint ventures prove to be the most viable way to enter foreign markets, especially in emerging markets. With a joint venture, the foreign company agrees to share equity and other resources with other partners to establish a new entity in the target country. The partners typically are local companies, but they can also be local government authorities, other foreign companies, or a mixture of local and foreign players. Depending on the equity stake, three forms of partnerships can be distinguished: majority (more than 50 percent ownership), 50-50, and minority (50 percent or less ownership) ventures. Huge infrastructure or high-tech projects that demand a large amount of expertise and money often involve multiple foreign and local partners. Joint ventures can also be classified as either cooperative or equity joint ventures. A cooperative joint venture is an agreement to collaborate between the partners that do not involve any equity investments. For instance, one partner might contribute manufacturing technology, whereas the other partner provides access to distribution channels. Cooperative joint ventures are quite common for partnerships between well-heeled multinational companies and local players in emerging markets. A good example of the collaborative approach is Cisco’s sales strategy in Asia. Instead of investing in its own sales force, Cisco builds up partnerships with hardware vendors (e.g., IBM), consulting agencies (e.g., KPMG), or systems integrators (e.g., Singapore-based Datacraft). These partners in essence act as front people for Cisco. They are the ones that sell and install Ciscos routers and switches (Fortune, 10 January 2000). On the other hand, an equity joint venture goes one step further. It is an arrangement whereby the partners agree to raise capital in proportion to the equity stakes agreed upon. A typical example is the entry strategy of Cable & Wireless (C&W), a British telecommunications firm, in Japan. To gain credibility with the Japanese government, C&W set up a partnership with big Japanese corporations. The three major stakeholders—C&W, Toyota, and C. Itoh—each hold roughly 17 percent; the other partners share the balance. The alliance has gained a 16-percent market share of Japan’s international telecommunications market (Deresky, 2006). The major disadvantage of joint ventures is it entails much less control. MNEs that like to maximize their degree of control prefer full ownership. However, in many instances, local governments (e.g., China) discourage or even forbid wholly owned ventures in certain industries. Under such circumstances, partnerships are a second-best or temporary solution. Despite the fact that the lack of full control is the biggest shortcoming of joint ventures, the MNC can gain more leverage in several ways. The most obvious way is via a majority equity stake. However, government restrictions often rule this option out. Even when for some reason majority ownership is not a viable alternative, MNEs have other means at their disposal to exercise control over the joint venture. MNEs could deploy expatriates in key line positions, thereby controlling financial, marketing, and other critical operations of the venture. MNEs could also offer various types of outside support services to back up their weaker joint ventures in areas such as marketing, quality control, and customer service (Meier, Perez & Woetzel, 1995). However, its benefit over full ownership is that partnerships mean a sharing of capital and risk. Possible contributions brought in by the local partner include land, raw materials, expertise on the local environment (cultural, legal, political), access to a distribution network, personal contacts with suppliers, government officials, and so on. Combined with the skills and resources owned by the foreign partner, these inputs offer the key to a successful market entry. The Sony Ericsson partnership offers an excellent example. The tie-up combined Ericssons technological prowess and strong links to wireless operators with Sonys marketing skills and expertise in consumer electronics. Both partners also stood to gain from helping the other grow in regions where they were weak: Japan for Ericsson and Europe for Sony (Business Week - Asian Edition, 4 November 2002). If full ownership or joint ventures will not apply, another strategy that is gaining momentum in the globalisation of trade is outsourcing. Also called contract sourcing, the company arranges with a local company to take on one aspect of service, manufacture parts of the product or even the entire product. Companies often resort to outsource their manufacturing and focus on sales and marketing. As such, outsourcing became popular because it allowed companies to reduce short-term costs. The benefits of outsourcing are very enticing to many global businesses. Fact is that outsourcing could generate a savings of about 45-55%, with some even reporting 80%. As the process of outsourcing becomes increasingly organized and structured, more benefits are being realized and it is not anymore limited to costs savings. One key benefit is that it accords the companies increased business controls. Improvements cited that are associated with this includes better planning, higher levels of operational reliability and rapid implementation of new strategies and initiatives. These benefits, in the long run, add up to further increase in the productivity and cost savings for the company. In fact, Haag et al. (2006) enumerated the numerous benefits associated with outsourcing. These are: Increased quality and efficiency of a process, service, or function. Reduced operating expenses. Outsourcing non-core processes or non-revenue producing areas allows businesses to focus resources on their core profit-generating competencies. Reduced exposure to risks involved with large capital investments. Access to outsourcing service providers economies of scale. Access to outsourcing services providers expertise and best-in-class practices. Access to advanced technologies. Increased flexibility with the ability to respond quickly to changing market demands. Avoid costly outlay of capital funds. Reduced headcount and associated overhead expense. Reduced frustration and expense related to hiring and retaining employees in an exceptionally tight job market. Reduced time to market for products or services. At the downside, outsourcing is causing massive unemployment and is stripping the host country’s job market. The impacts related to eliminating these jobs are slowly turning up: most immediately it affects the individual who loses a job and their dependents; their surrounding community follows soon; it would eventually affect consumer-based economy. Another is that outsourcing offers less flexibility to respond to sudden market demand changes. Sony Ericsson Mobile Communications, which heavily relies on contracting for the manufacturing of its cellular phones, lost potential sales when its first color-screen model quickly sold out in Europe. Nokia, on the other hand, makes most of its products in-house. When it faced a last-minute glitch for the roll-out of its first color-screen model, it plugged the gap by increasing the output of an existing model by 50 percent, using its plants in Finland, Germany, and China (Asian Wall Street Journal, 6 January 2003). Organizational Structures When companies seek to globalize, organizational structures must change to accommodate a firm’s evolving internationalization in response to worldwide competition. Considerable research has shown that a firm’s structure must be conducive to the implementation of its strategy.3 In other words, the structure must “fit” the strategy, or it will not work. Managers are faced with how best to attain that fit in organizing the companys systems and tasks. The design of an organization, as with any other management function, should be contingency based, taking into account the variables of that particular system at that specific point in time. Major variables include the firms strategy, size, and appropriate technology, as well as the environment in those parts of the world in which the firm operates. Given the increased complexity of the variables involved in the international context, it is no easy task to design the most suitable organizational structure and subsystems. In fact, research shows that most international managers find it easier to determine what to do to compete globally (strategy) than to decide how to develop the organizational capability (structure) to do it.4 Additional variables affecting structural choices—geographic dispersion as well as differences in time, language, cultural attitudes, and business practices—introduce further layers of complication. We will show how organizational structures need to, and typically do, change to accommodate strategies of increasing internationalization. Deresky (2006) identified that the typical ways in which firms organize their international activities are: Domestic structure plus export department Domestic structure plus foreign subsidiary International division Global functional structure Global product structure Larger companies often use several of these structures in different regions or parts of their organization. For our interest, facilitating access to and development of specific foreign markets, our firm can take a step toward worldwide operations by reorganizing into a domestic structure plus foreign subsidiary in one or more countries (Figure 1). To be effective, subsidiary managers should have a great deal of autonomy and should be able to adapt and respond quickly to serve local markets. This structure works well for companies with one or a few subsidiaries located relatively close to headquarters. Figure 1. Organizational Structure with Overseas Subsidiaries (Deresky, 2006). With further market expansion, our firm may then decide to specialize by creating an international division, organized along functional, product, or geographic lines. With this structure, the various foreign subsidiaries are organized under the international division, and subsidiary managers report 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 global strategy. It permits managers to allocate and coordinate resources for foreign activities under one roof, and so it enhances the firm’s ability to respond, both reactively and proactively, to market opportunities. Some conflicts may arise among the divisions of the firm because more resources 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. However, there are some successful companies, such as IBM, PepsiCo, and Gillette that have international divisions. In their rush to get on the globalization bandwagon, many firms may sacrifice the ability to respond to local market structures and consumer preferences. Managers are now realizing that—depending on the type of products, markets, and so forth—a compromise must be made along the globalization–regionalization continuum, and they are experimenting with various structural configurations to “be global and act local.” Colgate-Palmolive’s organizational structure illustrates such a compromise. The primary operating structure is geographic—that is, localized. The presidents of four major regions—North America, Europe, Latin America, and Asia Pacific—report to the COO while other developing regions such as Africa, Eastern Europe, and the Middle East report to the chief of operations of international business development. Then that person reports to the CEO of Colgate-Palmolive, who oversees the centralized coordinating operations (that is, the “globalized” aspects), for technology, finance, marketing, human resources management, and so on (Rosenzweig, 1995). Levi Strauss is another example of a company attempting to maximize the advantages of different structural configurations. First, the company has ensured its ability to respond to local needs in a different way by allowing its managers to act independently: Levi’s success turns on its ability to fashion a global strategy that does not draw out local initiative. It is a delicate balancing act, one that often means giving foreign managers the freedom needed to adjust their tactics to meet the changing tastes of their home markets (Business Week, 5 November 1990). Second, Levi Strauss keeps centralized control of some aspects of its business but decentralizes control to its foreign operations, organized as subsidiaries. These subsidiaries are supplied by a global manufacturing network of Levi plants and contract manufacturers. This approach allows local coordination and the flexibility to respond to ever-changing fashion trends and fads in denim shading (Business Week, 5 November 1990). Another company’s plan to go global by acting local does not involve changing the companys basic structure. Fujitsu, a Japanese high-technology conglomerate producing computers, telecommunications equipment, and semiconductors, has found a way to internationalize by proxy. Fujitsu has substantial stakes in two foreign companies—Amdahl, a Silicon Valley maker of IBM-compatible mainframes, and International Computers Ltd. (ICL), Britains biggest computer company—that accounts for nearly half of Fujitsus overseas revenues. These firms are run by Westerners, who are given free reign to manage and even compete against each other. The plan is doing so well that Fujitsu is looking for similar deals in Europe. As Fujitsus president, Takuma Yamamoto, explains, “We are doing business in a borderless economy, but there is a rising tide of nationalism, and you have to find ways to avoid conflict. That is one reason we give our partners autonomy” (Schlender, 1 July 1991). Although strategy may be the primary means to a companys competitive advantage, the burden of realizing that advantage rests on the organizational structure and design. Because of the difficulties experienced by companies trying to be “glocal” companies (global and local), researchers are suggesting new, more flexible organizational designs involving interorganisational networks and transnational design. Recommendations My recommendation is that our firm should undertake joint venture first, using the organizational structure with overseas subsidiaries. After weighing the pros and cons, it is more advantageous for our firm to create subsidiaries because it entails lesser risks than full ownership. Although our firm may have lesser control over the operations, most joint ventures prosper by choosing a suitable partner. That means that our company can invest by identifying proper candidates. A careful screening of the joint venture partner is an absolute necessity. It is not easy to sketch a profile of the “ideal” partner. The presence of complementary skills and resources that lead to synergies is one characteristic of successful joint ventures. Prospective partners should also have compatible goals. Also, joint ventures can be successful by patching up cultural differences between the local and foreign partners. A lot of agony and frustration can be avoided when the foreign investor makes an attempt to bridge cultural differences. For instance, when setting up joint ventures in China, having an ethnic Chinese as a middleman often helps a great deal. It is also important to consider the design and application of coordinating and reporting systems for foreign subsidiaries and activities can take any form that management wishes. Our firm can employ a variety of direct and indirect coordinating and control mechanisms suitable with our organization structure. More coordination is needed in global companies because of uncertain working environments and information systems and because of the variable flow of decision making. Headquarters managers should be able to design appropriate systems to take into account those variables and to evaluate performance. To address the globalization–localization dilemma, our company should evolve through the multinational form and the global company that seeking the advantages of horizontal organization in the pursuit of transnational capability—that is, the ability to manage across national boundaries, retaining local flexibility while achieving global integration. This capability involves linking foreign operations to each other and to headquarters in a flexible way, thereby leveraging local and central capabilities. References Asian Wall Street Journal. 2003, January 6. Nokia defies odds and thrives,, pp. A1, A9. Buckley, P. J., & Ghauri, P. N. 2004. Globalisation, Economic Geography and the Strategy of Multinational Enterprises. Journal of International Business Studies, 35(2), 81-102. Business Week - Asian Edition. 2002, November 4. Sony Ericsson: In big bloody trouble, pp. 54–55. Business Week. 1990, November 5. For Levi’s, a flattering fit overseas, pp. 76–77. De Kluyver, C.A. & Pearce, J.A. 2006. Strategy: A View from the Top (An Executive Perspective), 2nd ed. London: Pearson Education, Inc. Deresky, H. 2006. Chapter 8: Organization structure and control systems. International Management: Managing Across Borders and Cultures, 5th ed. London: Pearson Education, Inc. Fortune. 2000, January 10. Cisco’s Asian gambit. pp. 52–54. Haag, S., Baltzan, P. and Phillips, A. 2006. Business Driven Technology. New York: The McGraw-Hill Companies, Inc. Meier, J., Perez, J., & Woetzel, J.R. 1995. Solving the puzzle—MNCs in China, The McKinsey Quarterly, No. 2, pp. 20–33. Rosenzweig, P.M. 1995. Colgate-Palmolive: Managing international careers, Harvard Business School Case. Schlender, B.R. 1991, July 1. How Fujitsu will tackle the giants, Fortune. Vanhonacker, W. 1997, March-April. Entering China: An unconventional approach, Harvard Business Review. Read More