Organization of multinational

enterprises: Reading- Chapter 10

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Section I. Multinational theories and structures

• Interactions between structures/mindsets

- Actors set up structures in line with their worldviews, which are shaped by structures
they set up.
- Human organizations are living bodies that interact with the outside environment –
success depends on coherency both internally and externally

Where should power be located within the firm?

• Range of replies has generally included
- At a national level (subsidiaries with absolute autonomy)
- At a global level (headquarters with absolute power)
- Mixed system

• Organizational paradigms have shifted over time

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 Early theorist: Stephen Hymer
MNE organizational history divided into 3 stages:

• Stage I: Most firms began with few key managers working on

single product out of single location. First moves abroad would
be run out of an ‘international division’. Very rare nowadays.

• c.f. Hymer, main driver behind internationalization is to achieve

‘monopoliy advantages’ through value chain management

• Search for international vertical integration  division-based

structure known as Unitary U-form = Stage II for MNEs

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 Hymer’s ‘U-form’ MNE
• Simplest form = Functional organization where HQ (the centre)
controls all functions in subsidiaries (the periphery) who simply
obey instructions. Still applicable in firms with narrow product
ranges/little need for differentiation

Executive

Production Marketing Finance HRM

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 Hymer’s multidivisional ‘M-form’ MNE

• Stage 3: response to global consumers’ differentiated demands:

need for greater flexibility

• Version I: Product organization. Divisions as independent profit

centres due to lack of product overlaps (conglomerates)

Group Headquarters (Corporate functions)

Product Division A Product Division B

Area 1 Area 2 Area 1 Area 2

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 Hymer’s multidivisional ‘M-form’ MNE (cont.)

• Version 2: Geographic organization: highlights responsiveness to local

circumstances/empowers subsidiaries

Group Headquarters (Corporate functions)

Area A Area B

Product 1 Product 2 Product 1 Product 2

Multi-domestic logic: adapted but expensive (duplications), lack of

global vision  search for more coordinated structure

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 Global vs. regional focus
• Notion of global convergence  greater sense of need to
service global customers/achieve economies of scale

• Reduction in barriers to trade (GATT etc.) = possibility of more

intra-firm trade  increased specialization of units

• Requires more direction by centre = reassertion of HQ power

over subsidiaries

• ‘Global approach’ was buzzword by 1980s = new paradigm

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 Shortcoming of the global approach

• By 21st century, criticisms of new paradigm:

- Less independent thinking by subsidiary managers
- Resentment/demotivation/de-skilling/confusion
- Knowledge transmitted only vertically, not from sub to sub

Search for organizational compromise:

- Centralize some functions (R&D / manufacturing/finance?)
- Decentralize others (Design / sales / HRM?)

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 Between global and national MNEs

REGIONAL MNEs

• According to some studies (Rugman 2005), in most MNEs region of

origin accounts for 70% of total revenues

• MNEs have regionalized more than they have globalized:

- ‘Clustering’ / ‘nearsourcing’ of manufacturing activities
- (Regional) ‘home bias’
– managers more comfortable with familiar environments
- customers more comfortable with familiar brands

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 Yet global scale remains relevant
i.e. Rise of BRICs (cost advantages/dynamic markets)

Thus efforts to develop a hybrid MNE configuration

the Transational firm (c.f. Bartlett 1986)

• Rejection of excess devotion to any one organization – managerial

mindsets are more important, must be capable of both global
integration/local adaptation.

• Promote two-way flows between HQ/subs and subs/subs

• Glocalization: although managers can find this confusing

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 Organizational dilemma
Where a contradiction exists between the missions that an
organization asks employees to fulfil
Confusion re: reporting lines / responsibilities / rewards
1980s/90s Matrix Organization maximizing info exchanges

Product 1 Product 2 Function 1 Function 2

Area 1 Area 2

Problem: information overload. Has lost popularity

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 Viewing MNEs as alliances of equals

• Burkinshaw (2000): in some MNEs it is in everyone’s interest to

empower HQ or subs. Need for more balanced relationships

• Hedlund (1986): ‘heterarchy’ organization combining diverse and

equal power bases

• MNEs might be viewed as ‘federative organizations’ organized by

‘internal markets’. Question then is which mission is assigned to each
unit. Fight over charters.

• Ghemawat (2007): ‘semi-globalization’

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Section II. Managing people across borders

Main principles of organizational sociology

• Centralization: location of power
• Hierarchy: problem in IB with dual reporting lines
• Specialization: especially difficult in SMEs (‘tunnel vision’?)
• Coordination: but some managers try to extend their fiefdom
• Control (organizational performance): feedback/reward
• Learning: platforms for sharing knowledge across borders

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 Push vs. pull paradigms
• Similar to ‘integration vs. responsiveness’ dilemma (Prahalad and
Doz 1987)

• ‘Push’: international efforts driven by MNE’s own identity,

emphasis on standardization rather than adaptation. Often
highlight upstream capabilities. Can be ethnocentric.

• ‘Pull’: international efforts driven by MNE’s perception of

customers, emphasis on adaptation. Focus on downstream
activities. Can be polycentric.

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 Push vs. pull paradigms (cont.)
• ‘Push’ MNE driven by own idea (innovation?). Less competition but
less sure of success. Higher returns but higher potential reward – first
mover advantage

• ‘Pull’ MNE driven by customer signals so sure to offer desirable

product/service but competition also hears same signals so unable to
demand premium pricing. Less risk but less reward.

• Appropriateness of each paradigm depends on sector in question (hi-

tech vs. culturally based consumer good) and on corporate culture

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 What Is Strategy?
A plan of action that channels an organization’s
resources so that it can effectively differentiate itself
from competitors, accomplish distinctive goals, and
achieve superior performance.
• Managers develop strategies based on the organization’s
strengths and weaknesses, and evaluation of
opportunities and threats.
• Managers primarily make decisions about the firm’s
production and marketing activities, and the
development and allocation of resources devoted to
these.

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 Strategy Should Pinpoint to Actions
• Formulate a strong international vision
• Allocate scarce resources on a worldwide basis
• Participate in major markets
• Implement global partnerships
• Engage in global competitive moves
• Configure value-adding activities on a global
scale

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 Four Strategic Objectives
• Efficiency – minimize the cost of operations and
activities
• Effectiveness – maximize revenues
• Flexibility – tap local resources and opportunities
to maximize options for the firm
• Learning – add to proprietary technology, brand
name and management capabilities by
internalizing knowledge gained from
international ventures.
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 Multidomestic and Global Industries
• Multidomestic industries. Firms apply a country-by-country
approach to product development and marketing, as
dictated by specific needs, tastes, laws, and economic
situation. Competition is on a country-by-country basis.
E.g., food and beverage, consumer products, clothing and
fashion industries.
• Global industries. Firms devise products and marketing
appropriate for an entire region or for the world.
Competition takes place on a regional or worldwide scale.
E.g., aerospace, automobiles, telecommunications,
computers, chemicals, and industrial equipment industries.

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Integration Responsiveness framework- competing
pressures on the internationalizing firm

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 Global Integration
• A characteristic of global industries in which firms
coordinate their value-chain activities across
many countries in order to maximize efficiency,
effectiveness, flexibility, and learning.
• Global integration promotes learning and cross-
fertilization, as well as reduction of wasteful
duplication (‘redundancy’), across the firm’s
operations worldwide.

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 Pressures for Global Integration
• Economies of Scale. Concentrating manufacturing in a few select
locations to achieve economies of mass production.
• Capitalize on converging consumer trends and universal needs.
Companies such as Nike, Dell, ING, and Coca-Cola offer products
that appeal to customers everywhere.
• Uniform service to global customers. Services are easier to
standardize when their creation and delivery are centralized
• Global sourcing of raw materials, components, energy, and labor.
Sourcing from large-scale, centralized suppliers provides economies
of scale and consistent performance.
• Global competitors. Global coordination is necessary to monitor
and respond to global competitive threats.
• Availability of media that reaches customers in multiple markets.
Firms now take advantage of the Internet and cross-national
television to promote offerings in many countries simultaneously.

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 Local Responsiveness
• A characteristic of multidomestic industries in which
firms attempt to meet the specific needs of buyers in
individual countries, as well as adapt to the local
competitive environment and distribution structure.
• Although most firms prefer a global integration
approach, some degree of local responsiveness is
necessary due to differences in individual markets.
• For example, given distinctive local conditions, Wal-
Mart store managers in Mexico had to adjust store
hours, the merchandise mix, marketing approaches,
and employee training.

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 Pressures for Local Responsiveness
• Diversity of local customer needs. E.g., products in the food and
furniture industries require much adaptation.
• Differences in distribution channels. E.g., systems in Japan,
China, India, and Eastern Europe vary greatly.
• Local competition. Where many local rivals are present, it is
best to offer carefully adapted products and have a local
presence to maximize knowledge of competitors.
• Cultural differences. For products where cultural differences are
important, such as books and kitchen appliances, products and
marketing need to be substantially adapted.
• Host government requirements and regulations. The firm must
follow local laws and regulations.

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 Four Strategies Emerging from
the Integration-Responsiveness Framework

1. Home replication strategy

2. Multidomestic strategy
3. Global strategy
4. Transnational strategy

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 Four Distinctive strategies emerging from
the integration responsiveness framework

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 Home Replication Strategy

• The firm views international business as separate

from, and secondary to, its domestic business.
• International business typically pursued to generate
additional sales for domestic products
• Products are designed with domestic customers in
mind; i.e., not adapted for foreign markets.
• The firm expects little knowledge flows from foreign
operations.
• Usually based on simple exporting

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 Multidomestic Strategy
(aka Multi-Local Strategy)
• Headquarters delegates much autonomy to each
country manager, allowing him/her to operate
independently and pursue local responsiveness.
• The managers substantially adapt products and
practices to suit local conditions.
• The managers function independently, with little
incentive to share knowledge with managers
elsewhere.
• The firm ends up with a collection of disconnected
markets, with no coordination or integration of
national markets.

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 Global Strategy
• Headquarters pursues global integration, seeking to
control country operations in order to minimize
duplication, and maximize efficiency, effectiveness, and
learning worldwide.
• Emphasizes centralized coordination and control of R&D,
production, marketing, and after-sales service
• Management views the world as one large marketplace.
• The firm offers standardized products, using standardized
marketing
• Main advantages: lower costs; easier to manage

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 Transnational Strategy
• A tug of war – the firm attempts to strike some ideal
balance between global and multidomestic
strategies.
• Combines the major advantages of multidomestic
and global strategies, while minimizing their
disadvantages.
• Applies the model ‘standardize whenever possible;
adapt when necessary.

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 IKEA Applies a Transnational Strategy
• Some 90% of the product line is identical across
more than two dozen countries. IKEA modifies
some of its furniture to suit individual countries.

• IKEA’s marketing is centrally developed at

company headquarters, but implemented with
local adjustments (e.g., to suit language
differences in catalogs).

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 Organizational Structure
• The reporting relationships inside the firm – “the
boxes and lines” that specify the linkages among
people, functions, and processes that allow the
firm to carry out its operations.
• In larger international firms, organizational
structure includes subsidiaries, affiliates,
suppliers, and various other partners.
• A fundamental issue concerns the choice
between centralization and decentralization of
decision-making and value-chain activities.

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 An MNE Network
Subsidiary Level Network
S: Suppliers R: Regulatory institutions
B: Buyers C: Customers BE SE

RD CE RE
SA BA
RA E
CA
SD
D RB
BD
A SB
B
CD
RC BB
SF BF H
CF F SC CB
RF
BC A : Home plant
C
H: Headquarters
CC B … F: Subsidiaries
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Subsidiary and Headquarters Contributions

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 Alternative Organizational Arrangements

• The export department, with the international

division as a variant.
• The decentralized structure involves geographic
area division
• The centralized structure involve either product or
functional division
• A global matrix structure blends the geographic,
product and functional structures although this is
complex and difficult to achieve.

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The Export Department Structure

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The International Division Structure

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The Geographic Area Structure

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Global Product Structure

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Global Functional Structure

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 Global Matrix Structure
• An arrangement that blends the geographic area,
product, and functional structures in an attempt to
leverage the benefits of a purely global strategy and
maximize global organizational learning, while
remaining responsive to local needs.
• It is an attempt to capture the benefits of the
geographic area, product, and functional organization
structures simultaneously, while minimizing their
shortcomings.
• Closely associated with Transnational Strategy

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International Business: Strategy, Management, and the New Realities 42
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Dimensions of truly global companies

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 Organizational Processes
Managerial routines, mechanisms, and
technologies that allow the firm to function as
intended.
Examples
• GE digitizes all key documents and uses intranets and
the Internet to automate many activities and reduce
operating costs.
• Schlumberger keeps a huge database of skilled
individuals within the firm available to all subsidiaries
on the corporate intranet.

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