Chapter 13 Outline

Introduction

The objective of this chapter is to identify the organizational structures and internal control mechanisms international businesses use to manage and direct their global operations. We will be concerned not just with formal structures and control mechanisms but also with informal structures and control mechanisms such as corporate culture and companywide networks. To succeed, an international business must have appropriate formal and informal organizational structure and control mechanisms. The strategy of the firm determines what is "appropriate." Firms pursuing a global strategy require different structures and control mechanisms than firms pursuing a multidomestic or a transnational strategy. To succeed, a firm's structure and control systems must match its strategy in discriminating ways.

The opening case illustrates this. From the 1960s to the late 1980s, the matrix structure utilized by Royal Dutch Shell served the company well. It enabled Shell to respond to national differences in consumer tastes and preferences, government regulations, and competitive conditions while giving the head office control over major strategic decisions and investments. The structure was consistent with the multidomestic strategy Shell was pursuing at the time. However, this structure made sense only as long as the firm did not have to worry about high overhead costs, slow decision making, and duplication of facilities that resulted from the structure. By the early 1990s, increasing cost pressures made it imperative for Shell to look for ways to drive down its cost structure. The matrix structure became a distinct drawback. The environment had become more cost competitive, and Shell had to respond by adopting a global strategy. Implementing this strategy required a change of structure, both to reduce overhead costs and to give the corporate center the power required to minimize operating costs by eliminating unnecessary duplication of operating facilities and consolidating production in large facilities that could reap scale economies. The structure that Shell chose to adopt, which was based on global product divisions, was consistent with this new emphasis on a global strategy.

Another example of the need for a fit between strategy and structure concerns the recent history of Philips Electronics NV. One of the largest industrial companies in the world (with operations in more than 60 countries), this Dutch company has long been a dominant force in the global electronics, consumer appliances, and lighting industries. However, its performance started to slip in the 1970s, and by the early 1990s, Philips was suffering a string of record financial losses. During the 1970s and 80s, Philips's markets were attacked by Japanese companies such as Matsushita and Sony. These companies were pursuing a global strategy, using their resulting low costs to undercut Philips. To compete on an equal footing with Matsushita and Sony, Philips had to realize experience curve and location economies (see Chapter 12). Unfortunately, its attempts to do this were hindered by an organization more suited to a multidomestic strategy. Most of Philips's foreign subsidiaries were self-contained operations with their own production facilities. Like Shell, Philips desperately needed to consolidate production in a few facilities to realize location and experience curve economies, but it was hindered by resistance from its national operations and by the sheer scale of the needed reorganization. As a consequence of this misfit of structure and strategy, Philips suffered a decade of financial trouble. The company began to get its financial act together in the mid-1990s, primarily because it changed its organizational structure, moving away from a structure based on national organizations and toward one based on worldwide product divisions. This new structure was much better suited to the global strategy Philips was now trying to pursue, and it allowed the company to start driving down its cost structure.¹

To come to grips with issues of structure and control in international business, in the next four sections we consider the basic dimensions of structure and control: vertical differentiation, horizontal differentiation, integration, and control systems. Vertical differentiation is the distribution of decision-making authority within a hierarchy (i.e., centralized versus decentralized). Horizontal differentiation is the division of an organization into subunits (e.g., into functions, divisions, or subsidiaries). Integration refers to the body of mechanisms that coordinate and integrate the subunits. These mechanisms are formal and informal. Control systems are the systems that top management uses to direct and control subunits, and these also are formal and informal. Throughout these sections, we will focus on the implications of the four dimensions for the international firm. Then we will attempt to determine the optimal structures and controls for multidomestic, global, international, and transnational firms.