Chapter 13 Outline

Integrating Mechanisms

In the previous section, we explained that firms divide themselves into subunits. Now we need to examine some means of coordinating those subunits. One way of achieving coordination is through centralization. If the coordination task is complex, however, centralization may not be very effective. Higher-level managers responsible for achieving coordination can soon become overwhelmed by the volume of work required to coordinate the activities of various subunits, particularly if the subunits are large, diverse, and/or geographically dispersed. When this is the case, firms look toward integrating mechanisms, both formal and informal, to help achieve coordination. In this section, we introduce the various integrating mechanisms that international businesses can use. Before doing so, however, let us explore the need for coordination in international firms and some impediments to coordination.

Strategy and Coordination in the International Business

The need for coordination between subunits varies with the strategy of the firm. The need for coordination is lowest in multidomestic companies, is higher in international companies, higher still in global companies, and highest of all in the transnational firms. Multidomestic firms are primarily concerned with local responsiveness. Such firms are likely to operate with a worldwide area structure in which each area has considerable autonomy and its own set of value creation functions. Since each area is established as a stand-alone entity, the need for coordination between areas is minimized.

The need for coordination is greater in firms pursuing an international strategy and trying to profit from the transfer of core competencies between the home country and foreign operations. Coordination is necessary to support the transfer of skills and product offerings from home to foreign operations. The need for coordination is greater still in firms trying to profit from location and experience curve economies; that is, in firms pursuing global strategies. Achieving location and experience economies involves dispersing value creation activities to various locations around the globe. The resulting global web of activities must be coordinated to ensure the smooth flow of inputs into the value chain, the smooth flow of semifinished products through the value chain, and the smooth flow of finished products to markets around the world.

The need for coordination is greatest in transnational firms. Recall that these firms simultaneously pursue location and experience curve economies, local responsiveness, and the multidirectional transfer of core competencies among all the firm's subunits (this is referred to as global learning). As in global companies, coordination is required to ensure the smooth flow of products through the global value chain. As in international companies, coordination is required for ensuring the transfer of core competencies to subunits. However, the transnational goal of achieving multidirectional transfer of competencies requires much greater coordination than in international firms. In addition, transnationals require coordination between foreign subunits and the firm's globally dispersed value creation activities (e.g., production, R&D, marketing) to ensure that any product offering and marketing strategy is sufficiently customized to local conditions.

Impediments to Coordination

Managers of the various subunits have different orientations, partly because they have different tasks. For example, production managers are typically concerned with production issues such as capacity utilization, cost control, and quality control, whereas marketing managers are concerned with marketing issues such as pricing, promotions, distribution, and market share. These differences can inhibit communication between the managers. These managers often do not even "speak the same language." There may also be a lack of respect between subunits (e.g., marketing managers "looking down on" production managers, and vice versa), which further inhibits the communication required to achieve cooperation and coordination.

Differences in subunits' orientations also arise from their differing goals. For example, worldwide product divisions of a multinational firm may be committed to cost goals that require global production of a standardized product, whereas a foreign subsidiary may be committed to increasing its market share in its country, which will require a nonstandard product. In this case, these different goals can lead to conflict.

Such impediments to coordination are not unusual in any firm, but they can be particularly problematic in the multinational enterprise with its profusion of subunits at home and abroad. Also, differences in subunit orientation are often reinforced in multinationals by the separations of time zone, distance, and nationality between managers of the subunits.

For example, until recently, the Dutch company Philips had an organization comprising worldwide product divisions and largely autonomous national organizations. The company has long had problems getting its product divisions and national organizations to cooperate on such things as new-product introductions. When Philips developed a VCR format, the V2000 system, it could not get its North American subsidiary to introduce the product. Rather, the North American unit adopted the rival VHS format produced by Philip's global competitor Matsushita. Unilever has experienced a similar problem in its detergents business. The company has found that the need to resolve disputes between its many national organizations and its product divisions can extend the time necessary for introducing a new product across Europe to four years. This denies Unilever the first-mover advantage crucial to building a strong market position.¹⁰

Formal Integrating Mechanisms

The formal mechanisms used to integrate subunits vary in complexity from simple direct contact and liaison roles, to teams, to a matrix structure (see Figure 13.8). In general, the greater the need for coordination, the more complex the formal integrating mechanisms need to be.¹¹

Direct contact between subunit managers is the simplest integrating mechanism. By this "mechanism," managers of the various subunits simply contact each other whenever they have a common concern. Direct contact may not be effective if the managers have differing orientations that act to impede coordination, as pointed out in the previous subsection.

Liaison roles are a bit more complex. When the volume of contacts between subunits increases, coordination can be improved by giving a person in each subunit responsibility for coordinating with another subunit on a regular basis. Through these roles, a permanent relationship is established between the people involved, which helps attenuate the impediments to coordination discussed in the previous subsection.

When the need for coordination is greater still, firms tend to use temporary or permanent teams composed of individuals from the subunits that need to achieve coordination. They are typically used to coordinate new-product development and introduction, but they are useful when any aspect of operations or strategy requires the cooperation of two or more subunits. New-product development and introduction teams are typically composed of personnel from R&D, production, and marketing. The resulting coordination aids the development of products that are tailored to consumer needs and that can be produced at a reasonable cost (design for manufacturing).

When the need for integration is very high, firms may institute some kind of matrix structure, in which all roles are viewed as integrating roles. The structure is designed to facilitate maximum integration among subunits. As explained earlier, the most common matrix in multinational firms is based on geographical areas and world-

Figure 13.8

Formal Integrating
Mechanisms

wide product divisions. This achieves a high level of integration between the product divisions and the areas so that, in theory, the firm can pay close attention to both local responsiveness and the pursuit of location and experience curve economies.

In some multinationals the matrix is more complex still, structuring the firm into geographical areas, worldwide product divisions, and functions, all of which report directly to headquarters. Thus, within a company such as Dow Chemical (see the Management Focus) each manager belongs to three hierarchies (e.g., a plastics marketing manager in Spain is a member of the Spanish subsidiary, the plastics product division, and the marketing function). In addition to facilitating local responsiveness and location and experience curve economies, such a matrix fosters the transfer of core competencies within the organization. This occurs because core competencies tend to reside in functions (e.g., R&D, marketing). A structure such as Dow's facilitates the transfer of competencies existing in functions from division to division and from area to area.

However, as discussed earlier, such matrix solutions can quickly become bogged down in a bureaucratic tangle that creates as many problems as it solves. Matrix structures tend to be bureaucratic, inflexible, and characterized by conflict rather than cooperation. As in the case of Dow Chemical, such a structure needs to be somewhat flexible and supported by informal integrating mechanisms.

Informal Integrating Mechanisms

In attempting to alleviate or avoid the problems associated with formal integrating mechanisms in general, and matrix structures in particular, firms with a high need for integration have been experimenting with two informal integrating mechanisms: management networks and organization culture.¹²

Management Networks

A management network is a system of informal contacts between managers within an enterprise.¹³ For a network to exist, managers at different locations within the organization must be linked to each other at least indirectly. For example, consider Figure 13.9, which shows the simple network relationships between seven managers within a multinational firm. Managers A, B, and C all know each other personally, as do Managers D, E, and F. Although Manager B does not know Manager F personally, they are linked through common acquaintances (Managers C and D). Thus, we can say that Managers A through F are all part of the network, and also that Manager G is not.

Imagine Manager B is a marketing manager in Spain and needs to know the solution to a technical problem to better serve an important European customer. Imagine further that Manager F, an R&D manager in the United States, has the solution to Manager B's problem. Manager B mentions her problem to all of her contacts, including Manager C, and asks them if they know of anyone who might provide a solution.

Figure 13.9

A Simple Management Network

Manager C asks Manager D, who tells Manager F, who then calls Manager B with the solution. In this way, coordination is achieved informally through the network, rather than by formal integrating mechanisms such as teams or a matrix structure.

For such a network to function effectively, however, it must embrace as many managers as possible. For example, if Manager G had a problem similar to Manager B's, he would not be able to utilize the informal network to find a solution; he would have to resort to more formal mechanisms. Establishing firmwide networks is difficult, and although network enthusiasts speak of networks as the "glue" that binds multinational companies together, it is far from clear how successful firms have been at building companywide networks. Two techniques being used to establish firmwide networks are information systems and management development policies.

Firms are using their computer and telecommunications networks to provide the physical foundation for informal information systems networks.¹⁴ Electronic mail, videoconferencing, and high-speed data systems make it much easier for managers scattered over the globe to get to know each other. Without an existing network of personal contacts, however, worldwide information systems are unlikely to meet a firm's need for integration. Firms are using their management development programs to build informal networks. Tactics include rotating managers through various subunits on a regular basis so they build their own informal network and using management education programs to bring managers of subunits together in a single location so they can become acquainted.

Organization Culture

Management networks may not be sufficient to achieve coordination if subunit managers persist in pursuing subgoals that are at variance with firmwide goals. For a management network to function properly--and for a formal matrix structure to work--managers must share a strong commitment to the same goals. To appreciate the nature of the problem, consider again the case of Manager B and Manager F. As before, Manager F hears about Manager B's problem through the network. However, solving Manager B's problem would require Manager F to devote considerable time to the task. Insofar as this would divert Manager F away from his own regular tasks--and the pursuit of subgoals that differ from those of Manager B--he may be unwilling to do it. Thus, Manager F may not call Manager B, and the informal network would fail to provide a solution to Manager B's problem.

To eliminate this flaw, the organization's managers must adhere to a common set of norms and values; that is, the firm's culture should override differing subunit orientations.¹⁵ When this is the case, a manager is willing and able to set aside the interests of his own subunit when doing so benefits the firm as a whole. If Manager B and Manager F are committed to the same organizational norms and value systems, and if these organizational norms and values place the interests of the firm as a whole above the interests of any individual subunit, Manager F should be willing to cooperate with interests of any individual subunit, Manager F should be willing to cooperate with Manager B on solving her subunit's problems.

The critical question then becomes, How can a firm build a common culture? The ability to establish a common vision for the company is critical.¹⁶ Top management needs to determine the mission of the firm and how this should be reflected in the organization's norms and values. These determinations then need to be disseminated throughout the organization. As with building informal networks, this can be achieved in part through management education programs that "socialize" managers into the firm's norms and value system. Leadership by example is another important tool for building a common culture. Human relations policies also seem to play a critical role. There is a need to select managers who are team players. There is also a need to devise reward and incentive policies that encourage managers to cooperate for the good of the firm. Put simply, Manager F is more likely to cooperate with Manager B if he gets credit for doing so than if he is made to suffer in some way for spending time on problems not directly related to his immediate task.

Summary

The message contained in this section is crucial to understanding the problems of managing the multinational firm. Multinationals need integration--particularly if they are pursuing global, international, or transnational strategies--but it can be difficult to achieve due to the impediments to coordination we discussed. Traditionally, firms have tried to achieve coordination by adopting formal integrating mechanisms. These do not always work, however, since they tend to be bureaucratic and do not necessarily address the problems that arise from differing subunit orientations. This is particularly likely with a complex matrix structure, and yet, a complex matrix structure is required for simultaneously achieving location and experience curve economies, local responsiveness, and the multidirectional transfer of core competencies within the organization.

The solution to this dilemma seems twofold. First, the firm must try to establish an informal management network that can do much of the work previously undertaken by a formal matrix structure. Second, the firm must build a common culture. Neither of these partial solutions, however, is easy to achieve.¹⁷