Chapter 13 Outline

Synthesis: Strategy and Structure

Chapter 12 identified four international business strategies: multidomestic, international, global, and transnational. So far in this chapter we have looked at four aspects of organizational structure--vertical differentiation, horizontal differentiation, integration, and control systems--and we have discussed the interrelationships between these dimensions and strategies. Now it is time to synthesize this material. Table 13.2 summarizes our synthesis.

Multidomestic Firms

Firms pursuing a multidomestic strategy focus on local responsiveness. Referring to Table 13.2, we can see that multidomestic firms tend to operate with worldwide area structures, within which operating decisions are decentralized to functionally self-contained foreign subsidiaries. The need for coordination between subunits (areas) is low, so multidomestic firms operate with few interarea integrating mechanisms, either formal or informal. The lack of interdependence implies that the level of performance ambiguity in multidomestic concerns is low, as (by extension) are the costs of control. Thus, headquarters can manage foreign operations by relying primarily on output and bureaucratic controls and a policy of management by exception. The need for cultural controls is low. If these firms were able to profit from the realization of location and experience curve economies or from the transfer of core competencies, their organizational simplicity would make this a very attractive strategy.

International Firms

Firms pursuing an international strategy attempt to create value by transferring core competencies from home to foreign markets. If they are diverse, as most of them are, these firms operate with a worldwide product division structure. Headquarters typically maintains centralized control over the source of the firm's core competency, which is most typically found in the R&D and/or marketing functions. All other operating decisions are decentralized within the firm to national operations (which in diverse firms report to worldwide product divisions). The need for coordination is moderate in such firms, reflecting the need to transfer core competencies. Thus, although such firms operate with some integrating mechanisms, they are not that extensive. The relatively low level of interdependence that results translates into a moderate level of performance ambiguity. Thus, these firms can generally get by with output and bureaucratic controls. Overall, although the organization of international firms is more complex than that of multidomestic firms, the increase in the level of complexity is not that great.

Global Firms

Firms pursuing a global strategy focus on the realization of location and experience curve economies. If they are diverse, as most of them are, these firms operate with a worldwide product division structure. To coordinate the firm's globally dispersed web of value creation activities, headquarters typically maintains ultimate control over most operating decisions. In general, global firms are more centralized than most multinational enterprises. Reflecting the need for coordination of the various stages of the firms' globally dispersed value chains, the need for integration in these firms also is high. Thus, these firms tend to operate with an array of formal and informal integrating mechanisms. The resulting interdependencies can lead to significant performance ambiguities. As a result, in addition to output and bureaucratic controls, global firms tend to stress cultural controls. On average, the organization of global firms is more complex than that of multidomestic and transnational firms.

Transnational Firms

Firms pursuing a transnational strategy focus on the simultaneous attainment of location and experience curve economies, local responsiveness, and global learning (the multidirectional transfer of core competencies). These firms tend to operate with matrix-type structures in which both product divisions and areas have significant influence. The needs to coordinate a globally dispersed value chain and to transfer core competencies create pressures for centralizing some operating decisions (particularly production and R&D). At the same time, the need to be locally responsive creates pressures for decentralizing other operating decisions to national operations (particularly marketing). Consequently, these firms tend to mix relatively high degrees of centralization for some operating decisions with relative high degrees of decentralization for other operating decisions.

The need for coordination is particularly high in transnational firms. This is reflected in the use of a wide array of formal and informal integrating mechanisms, including formal matrix structures and informal management networks. The high level of interdependence of subunits implied by such integration can result in significant performance ambiguities, which raise the costs of control. To reduce these, in addition to output and bureaucratic controls, transnational firms need to cultivate cultural controls.

Environment, Strategy, Structure, and Performance

Underlying the scheme outlined in Table 13.2 is the notion that a "fit" between strategy and structure is necessary for a firm to achieve high performance. For a firm to succeed, two conditions must be fulfilled. First, the firm's strategy must be consistent with the environment in which the firm operates. We discussed this issue in Chapter 12 and noted that in some industries a global strategy is most viable, in others an international or transnational strategy may be most viable, and in still others a multidomestic strategy may be best (although the number of multidomestic industries is on the decline). Second, the firm's organizational structure and control systems must be consistent with its strategy.

If the strategy does not fit the environment, the firm is likely to experience significant performance problems. If the structure does not fit the strategy, the firm is also likely to experience performance problems. Therefore, a firm must strive to achieve a fit of its environment, its strategy, its organizational structure, and its control systems. We saw the importance of this concept in the opening case. Shell switched in 1995 from a matrix structure to a structure based on global product divisions because its matrix structure was no longer consistent with the global strategy that Shell had to pursue, given the extreme cost pressures in Shell's operating environment.

Philips NV, the Dutch electronics firm, provides us with another illustration of the need for this fit. Philips operated until recently with an organization typical of a multidomestic enterprise. Operating decisions were decentralized to largely autonomous foreign subsidiaries. But the industry in which Philips competed was revolutionized by technological change and the emergence of low-cost Japanese competitors who utilized a global strategy. To survive, Philips needed to become a transnational. The firm tried to adopt a transnational posture, but it did little to change its organizational structure. The firm nominally adopted a matrix structure based on worldwide product divisions and national areas. In reality, however, the national areas continued to dominate the organization, and the product divisions had little more than an advisory role. Also, Philips lacked the informal management networks and strong unifying culture that transnationals need to succeed. As a result, the company's structure did not fit the strategy that it had to pursue to survive, and by the early 1990s, Philips was losing money. Only after four years of wrenching change and large losses was Philips finally able to tilt the balance of power in its matrix toward the product divisions. By 1995, the fruits of this effort to realign the company's strategy and structure with the demands of its operating environment were beginning to show up in improved financial performance.²⁰