managing international organisations: lessons from the field

Pergamon 0263-2373(94)00045-X

European Manqement journal Vol. 12, No. 4, pp. 417-431, 1994 Copyright (~1 1994 Elsevier Science Ltd

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Managing International Organisations: Lessons from the Field IAN TURNER, Lead Tutor in Strategy, Henley Management College, UK; IAN HENRY, Associate Director, Planned Business Development (UK) Ltd., London

This study sets out to understand how ten companies, each of them operating internationally, organise and control their core activities in different countries, business units and market segments. In the process it seeks to address orthodox views on international strategy and structure derived from the work of Stopford and Wells and Egelhoff, as well as the more recent transnational model developed by Bartlett and Ghoshal.

As far as the latter is concerned, the trend towards dispersal of authority outside a company’s domestic market seems to be proceeding only very slowly. On the decentralisation issue, the companies exhibit no clear trend and even when disaggregated into functions there is no common model to which they seem to approximate.

Ian Turner and Ian Henry conclude that, whilst a number of the companies in the sample aspire to transnational status, it is not clear that all will

succeed or that this ambition is necessarily a good thing for all companies in all situations. Moreover, even companies that aspire to be transnationals will have to modify their approach and adopt different organisational solutions where appropriate.

Strategy and Structure in International Business: Development of the Topic The relationship between a firm’s business environment, the strategy which it pursues, and the organisational structure it evolves has been a focal question of management reserach for over 30 years. As is well known, Alfred D. Chandler’s (1962) original study documented the link between the increasing complexity of the business environment and the adoption of multi- divisional (or ‘m-form’) structures in large US companies like Du Pont and General Motors. He showed how the diversity of products and markets caused by a policy of diversification could only be successfully mastered by separating activities into divisions or business units charged with managing operations, whilst responsibility for strategy and control was retained by the centre. Chandler’s proposition that structure followed strategy has since been debated, tested, confirmed (Caves, 1984, pp. 134-170) and extended to a range of national and industrial settings (Rumelt, 1974).

Chandler’s historical approach to the strategy/structure question was also complemented by the work of organisational theorists. Lawrence and Lorsch (1967) developed an influential ‘contingency theory of complex organisations’ which linked environmental uncertainty with structure. Their main contention was that successful firms adapt the organisation of each department or division to the demands of the organisational environment (Miles and Snow, 1978).

An important sub-theme of Chandler’s work was the international spread of modern enterprises. The growth of multi-national activity and the consequent organisa-

EUROI’EAN MANAGEMENT JOURNAL Vol 12 No 4 December 1994 417

MANAGING INTERNATIONAL ORGANISATIONS: LESSONS FROM THE FIELD

Foreign product diversity

I I \ \

Worldwide ’ product \

\ ???

divisions \ \

\ \

\

.\ ‘1

\ ‘\ \

‘\ ‘. \ \ ~_---__--__--~

International ‘, ‘\

Area divisions divisions

‘1.

Percentage foreign sales

Key Foreign product diversity is a measure of the number of different product lines sold abroad

Figure 1 The Stopford and Wells Model of Strategy and Structure in International Companies

tional problem of managing activity in many countries was the focus of some important research in the 1970s (Wilkins, 1970). Particularly influential was the work of Stopford and Wells (1972), which showed how organisational structure had evolved over time in multi-national enterprises. According to their model, the approach favoured by firms initially, when international business was still a comparatively minor and peripheral activity for a company mainly focused on its domestic market, was the international division. Although located in the home market, the international division was often isolated from the locus of decision-making in the mainstream business activities, however. Thus, as the proportion of the firm’s overall business done outside of its domestic market increased, the organisational solution changed. Creating area divisions, which co-

product diiions


_-------

International divisions

Key

I PD = product division AD = area division

ordinated activities in geographical regions like Europe, North America or the Far East, was one answer. An alternative solution where a company had become more diversified in product-market terms at the same time as it extended its international presence, was to structure around world-wide product divisions, directed from the home base but with a remit to control activities globally within each business area.

The Stopford and Wells model related structural choice to two parameters: foreign product diversity and the extent of overseas sales (see Figure 1). It was widely adopted as a prescriptive model of how multi-nationals should organise, although more recent research by Egelhoff (1989) on European multi-nationals has high- lighted the significance of overseas manufacturing as a factor inducing firms to adopt area divisions (see Figure 2).

The late 1970s and early 1980s saw the rise of two important concepts, whose validity has since been challenged. In 1983 Theodore Levitt published his famously iconoclastic article on globalisation. His thesis was that markets and consumer behaviour, influenced by exposure to common experiences, international media and advertising, were becoming more homo-

geneous the world over. It followed, therefore, that successful companies should pursue strategies for global standardisation of goods and services and structure themselves to reap the benefits of economies of scale which standardisation opened up (Levitt, 1983).

Levitt’s proposition was immediately challenged by those who pointed to the significant remaining differences in national markets, the localisation pressures from national governments and the declining importance of economies of scale in manufacturing (Doz, 1986). Companies could not afford to simply ignore national differences or steam-roller over local sensitivi- ties. Multiple tensions had to be resolved structurally and

Worldwide

Foreign product die&j

Low percentage of foreign sales High percentage of foreign sales

I Worldwide 1 PD x AD product 1 matrix divisions 1

I

i Area

I

diisions

Percentage foreign manufacturing I

I 1

Figure 2 Egelhoff’s Model of Strategy and Structure in lnternatlonal Companies

418 EUROPEAN MANAGEMENT JOURNAL Vol 12 No 4 December 1994


one obvious solution was to create multi-dimensional matrix organisations (Davis and Lawrence, 1974). However, despite some well-publicised experimentation in the late 1970s and early 198Os, matrix structures proved to be a dead-end (Bartlett and Ghoshal, 1989, pp. 30-32). Managers for the most part could not cope with multiple reporting lines, conflicts amongst the different organisational dimensions were accentuated rather than mollified and decision-making was made more bureaucratic and cumbersome.

Towards the Transnational Model By the mid-1980s there was an emerging consensus among scholars and practitioners that a new type of organisational structure was required to cope with the challenges of a fast-changing and unpredictable international business environment. Although not alone, Christopher Bartlett and Sumantra Ghoshal (1989) provided the most cogent theoretical framework of international organisation, under-pinned as it was by rigorous and extensive research.

Bartlett and Ghoshal contended that successful firms traditionally achieved a fit between what was needed to win in their industry and what the company was good at. Thus, in markets like food and detergents where there were distinct national differences in consumer needs, a company like Unilever decentralised responsibility to national subsidiaries to ensure market responsiveness. When economies of scale and low cost production were critical, however, Japanese consumer electronics companies like Matsushita adopted a centralised global approach, and when rapid dissemina- tion of knowledge from subsidiary to subsidiary was the key to success, as in telecommunications, a successful firm like Ericsson with a small home market became skilled at transferring expertise within the group.

Historically, therefore, a successful company was organised along the lines best suited to its environment. The dominant organisational solution in turn formed part of the firm’s administrative heritage which was shaped by the culture (e.g. the predominance of family business and personal ties in the UK and Germany), the organisation’s history (e.g. Philips’ evolution as a federation of distinct autonomous national subsidiaries) and the firm’s leadership (e.g. the impact of Harold Geneen’s tenure at ITT or Lord Hanson at Hanson PLC). As a consequence, most multi-nationals in the 1980s had one dominant organisational dimension which, despite attempts to reduce its importance, remained the locus of power in the firm: functional (as in Procter and Gamble) world-wide business units (as in Matsushita) or geographical (as in Philips).

Ghoshal and Bartlett’s thesis was that, despite their very different starting points, companies in the 1980s and 1990s would tend to converge towards a common configuration. This was because in all cases the environment was becoming more complex: thus firms in consumer electronics which had been organised for

world-wide efficiency found that the market was dictating greater national responsiveness; detergent companies, meanwhile, found that technological changes and the creation of large integrated markets like Western Europe required a shift from local differentiation to greater central co-ordination, whilst telecommunications companies faced with deregulation and massive investment requirements had to organise to reap economies of scale. The organisational solution to these problems was to move towards what Ghoshal and Bartlett called the transnational model, ‘. . . in which increasingly specialised units world-wide were linked into an integrated network of operations that enabled them to achieve their multi-dimensional strategic objectives of efficiency, responsiveness and innovation’ (Bartlett and Ghoshal, 1989, p. 89).

I Despite criticisms, Bartlett and Ghoshal’s transnational model of a corporation has become the orthodox ambition to which an ‘ideal’ organisation should aspire

The transnational company would be capable of thinking globally, but acting locally. The organising principles would be: dispersal of assets and resources to capitalise on local strengths and minimise political risk; specialisation of task to achieve economies of scale when necessary, but also to achieve greater focus of expertise; and interdependence between organisational units to foster information sharing organisational learning and con- certed implementation. In practical terms that meant not managing everything from the centre, but devolving responsibility for particular business areas or technology to the national unit with the greatest expertise (‘regional centres of excellence’), ‘modularisation’ of products so that products could be locally differentiated by com- bining standard sets of components, thus retaining economies of scale; and international project teams brought together to work on specific ‘off-line’ tasks for the organisation as a whole.

Ghoshal and Bartlett were not arguing that one standard approach should govern all relationships between units of a multi-national company. They recognised that subsidiaries varied in the importance of their markets and the expertise of the local organisation. At one extreme some subsidiaries could be capable of taking the lead within the company, as IBM’s UK operations now does for its world-wide communications business, for instance; whilst at the other extreme subsidiaries may simply not be capable of anything more than implementing existing group policy.

Ghoshal and Bartlett also fully recognised the organisational obstacles to adopting the transnational model. That is why they emphasised the need to manage the process, starting at the top. Instead of relying exclusively on the traditional mechanisms of co-ordination installed

EUROI”EAN MANAGEMENT JOURNAL Vol12 No 4 December 1994 419

MANAGING IN~RNATIONAL ORGANISA~ONS: LESSONS FROM THE FIELD

in companies - centralisation (in Japan), formalisation of controls (in the USA) or socialisation of employees (in European firms) - transnationals should build a balanced portfolio of these co-ordinating processes. But the most important way of achieving co-ordination was not through creating structures but by creating a management mentality conducive to collaboration and interdependence. Matrix ~u~ageme~f, not sfmcfures, was the motto.

Ghoshal and Barlett’s ideas have not been without their critics. Porter’s work on the competitive advantage of nations, for instance, runs counter to the idea that successful multinationals could derive their primary source of competitive advantage from anything other than their domestic markets (Porter, 1990). This was a theme developed by Hu, who showed that most so- called multinationals in the 1990s continued to be dominated by their home market nationalities in strategic and organisational terms (Hu, 1992). In addition to these important issues of substance, it is worth pointing out that Ghoshal and Bartlett’s work barely mentions the other ways in which organisations were changing in the 1980s: the ubiquitous trend towards ‘downsizing’ and de-layering of organisations, the devolution of authority down the organisation to ‘empower’ management (Kanter, 1989) and the impact of information technology on the ‘coming of the new organisation’ (Drucker, 1988). Despite these criticisms, the transnational model has become the orthodox view

of the ‘ideal’ organisation form to which firms in the 1990s should aspire. Indeed, companies with famous names like Unilever (Maljers, 1992), BP (~j~ff~cj~~ Times, 1990)‘ ABB (Business Week, 1990), Nestle (Lorenz, 1991), IBM (Lorenz, 1990) and Electrolux (Lorenz, 1989) have all subsequently been described as actual or potential transnationals by informed observers.

Clearly, the transnational model has been immensely influential in business. Consultants, like Theuerkauf at McKinsey, have also jumped on the bandwagon, in his case operationalising the model into a 3 stage process (Figure 3) (Theuerkauf, 1991). Theuerkauf makes no bones about the implications of the model:

l group headquarters (intervening between corporate headquarters and subsidiaries) should be abolished;

l shared central functions should be reduced and wherever possible placed on a market footing;

l country managers should be phased out; l regional headquarters should assume some of the

functions previously exercised at corporate H.Q.; and

0 corporate headquarters should be dispersed.

The Research The research we report here did not set out to replicate Ghoshal and Bartlett’s study or to test the validity of

Determine regional

extensions

Consider distribution Definition of

>(->

of skills business unit

Dimension Products Geography Functions

Tasks 1. Disaggregate present 1. Analyze geographic 1. Analyze distribution of skills units into product groups dis~ibution of assets and sales within current cotif guration

2. Analyze affiiities between 2. Analyze benefits derived from 2. Identify know-how leaders product groups global vs. regional integration

3. Reassemble closely-linked 3. Define regional extensions of BUs 3. Define specific BU types product groups into business units

4 I +

Reconsider product grouping Reconsider regional es tensions

if regional BUS have if some BUS have insuffkient

subcritical mass skills in all function

Source: Theuerkauf, 1991

Figure 3 Steps in Defining International Buslness Units

420 EUROPEAN MANAGEME~ JOURNAL Vol 12 No 4 December 1994


the transnational model. The starting point was a more modest attempt to investigate how a sample of international companies integrated and controlled their international operations. A major concern here was how a company is able to preserve its original strategic recipe (Johnson and Scholes, 1988, pp. 39-43) whilst dis- persing its activities and devolving authority outside its hc)me-base (see Box 1). The issues we tried to address were broadly as follows:

What structural solutions had the companies developed to the problem of managing international business? What were the determinants of the structural choice? What mechanisms and processes were instituted to manage the structures, in particular what were the reporting lines, communication channels and capital allocation procedures? What were the main problems presented by the choice of structure, in particular how did the firm cope with the physical dispersal and separation of core functions? What direction was the structure developing towards in the future?

Clearly, however, the answers to these questions bear on the applicability of the transnational model and we shall return to this in our conclusions.

Structural Choices in International Companies As one might expect, most of the businesses in the sample adopted a structure based on one organisational dimension alone. In six of the companies the business unit dimension was dominant, but this group included one company - Sun Microsystems - the bulk of whose activities was concentrated in North America. Only in one case - Ford - was the geographical dimension dominant. (It is interesting to note that Ford commenced in 1994 a major re-organisation on global lines.) In Unilever the area dimension is dominant, but only Jutside the developed countries. Nevertheless, most of tht, business unit dominated firms retained a weaker regional structure either for political reasons, e.g. ICI cbefore the 1993 de-merger), or because they wished to prtsent a common face to important clients (IBM, GM). I\\!0 companies - Boeing and Ford of Europe - retain :htl dominant functional structure, although, like Sun, there have been moves, not wholly successful, to shift authority in these firms from functional hierarchies to cross-functional project teams. In other firms, functional hierarchies have been severely reduced (Nestle) or devolved (GM, Unilever). Only in one - ICI - did the functional dimension appear to be making a comeback at 1:orporate level at the time that the research was done. Our sample also included one company - ABB - whose structure can best be likened to a ‘flexible matrix’, an-i one firm - MAN - structured as a holding company with autonomous operating subsidiaries.

As suggested by Bartlett and Ghoshal(l989, pp. 60-62) and Theuerkauf (1991, pp. 104-106), structural choices, in particular decisions to centralise or decentralise responsibility for specific business, areas or functions, vary even amongst companies with a pronounced bias towards one particular organisational dimension. The model predicted by Theuerkauf would look something like Figure 4, with certain corporate functions (e.g. finance, treasury management) centralised; basic research controlled from the centre, but development devolved; manufacturing centralised but sourcing dispersed and marketing and sales located closer to the end user.

Influencing Factors in Structural Choice As Figure 5 shows, however, the companies in our sample are not always close to this ideal. As Table 1 indicates, the dominant business unit structure is eminently appropriate where a company has diverse products or businesses in its portfolio, needs to stan- dardise to maximise its investment in new technology, requires volume to be efficient, and has a high percentage of foreign sales in markets which are broadly similar (Stopford and Wells, 1972). Dominant functional hierarchies, on the other hand, tend to be adopted in businesses with a single product focus - like car or aeroplane manufacture - and where sales or production are concentrated in the home area. Dominant area units are also associated with a less diverse corporate portfolio, but are often preferred where market differences or political barriers between geographical areas are very distinct. In such a situation, an alternative solution is to adopt a matrix form. This form addresses both the market heterogeneity and the need for economies of scale. Few companies seem capable of operating this form, however. It requires a high tolerance for ambiguity and a natural propensity for consensus: qualities most often associated with Scandinavian companies like ABB or Electrolux. Even in these cases the matrix structure can place a great strain on the organisation leading to employee discomfort and lack of clarity of purpose. Interestingly, in both the companies mentioned, the matrix structure is closely associated with forceful leader figures and doubts have been expressed about its viability after their departure. The remaining organisational solution - the holding company - seems to work best where there is little or no affinity between businesses in the group so that any co-ordination occurs within the autonomous group companies. The holding company is a common structure among Anglo-Saxon conglomerates like Hanson or BTR (Goold and Campbell 1987), but it is surprising to see it adopted by a strategi- cally oriented European engineering company like MAN. Ultimately, the member companies in such a structure must ask what value the corporate centre is adding.

The Transnational: Myth or Reality? To what extent have the firms in our research project

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MANAGING IN~RNAT~~NAL URGAN~SA~~U~S~ LESSONS FRQM THE FlELD

Box 1 The Research

The study set out to understand how a range of companies, operating internationals, organised and controlled their core activities in different countries, business units and market segments. Companies chosen for study were recognised to be leaders in their fields. They were also well-documented and capable of offering insights into how to organise successfuliy on an international level. For the most part they operated in mature, technology-intensive industries.

Table 3 below classifies the sample companies along a range of commonly used dimensions. The sample includes no service companies and is restricted to European and US multinationals.

The companies were first anaiysed through published sources, aitowing us to build up an un~r~anding of their structure and strategies. Key personnel at the companies were then interviewed using a semi-structured quest~onnajre” The results formed the basis of a series of company profiles each written ta a common format for ease of comparison. The research was initially undertaken in 1992 - in the case of ICI this meant the research took place before the 1993 de-merger - information on the companies was updated for this article to 1994.

-

Box 2 Unitever - int~ratj~ around Core Business

Unilever was formed in 1930 through the merger of Margarine Unie of the Netherlands and Lever Bras. of the UK. The ‘joint head offices’ of the two parent companies remain in Rotterdam and London and the holding structure is preserved, ostensibly at least because of tax advantages and protection from take-over.

Unilever is one of the world’s largest consumer goods businesses. 75 per cent of its activities is ih branded and packaged consumer goods. Its main business areas are: food and drinks, (approximately 50% of turnover), detergents (22%), personal products (12%) and speciafity chemicals (7%). Sixty per cent of its bus&teas by turnover is in Europe. North America and the rest of the world account for a further 20 per cent each. As of 1992, Unilever produced in 75 countries at some 500 plants.

Originally a loose confederation of national subsidiaries aperating independently around the world and active in a diverse array of businesses, Unilever has moved since the 1980s to reorganise around a set of core activities. Disposals of peripheral businesses and contracting out of previous core functions like distribution, gave Unilever scope to strengthen its core businesses through acquisition of companies with strong brands like Elizabeth Arden and Calvin Klein. Responding to competitive pressures and the need to take advantage of closer economic integration in Europe, Unilever has been restructuring its detergent and food business, reducing and centratfsing production for economies of scale.

At the top, Unilever is governed by a Board of Directors and a three-man Special committee which includes the Chairman of both parent companies, These bodies monitor the strategies and performance of Unilever business. Beneath the top level, power resides with the product groups (previously ‘co-ordinations’) for food, detergents, personal products and speciality chemicals. They are directly responsible for business in Europe and North America. Outside these regions, regional directors - based in London - have responsibility for East Asia and the Pacific, Latin America, Central Asia, Africa and the Middle East. Functional directors are responsibfe for coordinating their respective activities by country an&or product group. Some functionat directors also have product ar regionat responsibilities.

At product group level, each operating company reports to a board director responsible for the business in that region. For each product area (e.g. ice cream and sweets) strategic groups are responsible for implementing global food strategies and supplying specialist skills. In addition there are nationat management functions for each of the major markets. These are functional entities reporting to the appropriate corporate function of HQ.

Box 3 MAN - In Search of a Corporate Structure?

MAN AG is a German based, publicly quoted, industrial holding company with a turnover of around DM 19bn, of which approximately 45 per cent is from domestic German sales and 55 per cent from exports. Financial institutions account for 40 per cent and individuals account for 60 per cent of shares. It is an engineering led group whose overall strategy, set by the executive board, is based around building tong term market positions in its core technologies, namely: trucks, printing presses, steel plant, forge marine and power plant diesels. Meeting strategic pfans in the long run is regarded as more important than achieving short term financiat returns and MAN will accept different rates of return from different subsidiaries.

Cperations are divided into 8 wholly-owned operating subsidiaries and 2 associate companies in which MAN holds significant share- holdings. Each subsidiary operates autonomously, with only occasional product or market overlap; in general, MAN’s strategy explicitly excludes looking for synergies between units, either on a technology or market level.

At corporate level the executive board is monitored by the supervisory board, made up of shareholders and worker representatives, together with non-executive directors form other major German companies. This same structure is repeated for ali the operating subsidiaries.

The headquarters’ roles are: financial control and planning, treasury management and monitoring adherence to strategic plans. All sales and marketing, R & D and other functions are carried out in the operating units.

The budgetary framework and financial targets are set out in a three year rolling strategic plan, updated annually. Day to day financial responsibility is delegated to operating subsidiaries, including capital investment and R % D. In the past, MAN had tried to centratise R & D, but found this added bureaucracy, not value. As a result, product development and existing product-reelated R & D reverted to the operating campanies.

While MAN has strong positions in most of its markets, there is some uncertainty as to where this is leading the company as much of its business is in mature markets, and new sources of revenue growth are not immediately Clear.

EUKUPEAN MA~AGE~~~ JUURNAL Vat 12 No 4 December 1994


Box 4 ABB - Organisation of the Future?

ABB was formed by the merger of ASEA of Sweden and Brown Boveri of Switzerland in 1987. It is an electrical engineering company with global operations, revenues of around US$30 bn and 200,000 employees. It develops, produces, sells and services a wide range of systems related to electricity production, distribution and application. It is owned equally by ASEA AB (Sweden) and BB Brown Boveri (Switzerland). While the shares of ABB itself are not publicly traded, those of the two parent companies are listed on various European stock exchanges.

ABB’s fundamental strategic objective is to become the world’s leading supplier of electrical engineering products and systems. As financial objectives it aims for average operating earnings of 10 per cent on sales and 25 per cent on capital employed.

According to Percy Barnevik, the CEO of ABB, this will be achieved by being simultaneously ‘big and small, radically de-centralised with centralised reporting and control’. Following the merger ABB grew primarily by acquisition. In its first 2 years of existence ABB spent over $3.3 billion on joint ventures and acquisitions involving 60 companies. Since then, there has been a period of ratronalisation particularly at head office of acquired companies. The emphasis now is on consolidation and ‘downsizing’ to improve profitability. The aim is to manage the business in the current recession; reduce working capital; reduce cycle times of large scale projects; and free real estate for re-development or sale. The company is divesting non-core businesses or businesses which have failed to achieve a world leadership position. It wants to reduce the number of manufacturing sites to take advantage of scale factors. Although it has 11 power transmission plants in Europe, business logic suggests only 2 or 3 would be necessary. However, it cannot close some of the more marginal plants without damaging its political relationships.

ABB is effectively a federation of national companies. There are over 1,300 subsidiary companies and 5,000 profit centres with clearly defined accountability. It uses a matrix structure with its activities grouped into 8 Business segments. Managers of each profit centre have profit and loss responsibility and a high degree of operational autonomy. CEO Barnevik and 12 group executive vice presidents form the executive board which is responsible for global strategy and performance. ABB is very lean at the top; it has a small senior management staff with just 100 at headquarters.

The 8 business segments are organised into 65 Business Areas. Each Business Area carries responsibility for global strategies, business plans, allocation of manufacturing responsibilities and product development; the head of each Business Area is known as a world-wide co-ordinator. Geographically, ABB is broken down into sub-groups or companies in industrial countries. In the developing world, it is broken down into regions incorporating a number of countries. Company managers are responsible for operations in each country in line with the global strategies of the business area.

The individual board members are responsible for a business segment or a country or region. Business segments are the largest grouping for which related businesses may be grouped and are made up of business areas (BAs). Each BA has a manager who is responsible for strategy, cost, quality and time standards of the factories around the world. They work with segment leaders to allocate markets to country businesses.

Each BA has a management board which includes the heads of the larger companies operating in that business area. In addition there are functional staff with specific responsibilities for purchasing and R & D. The BAs are further broken down into 1,300 companies, with an average of 160 employees, and within the companies, into profit centres.

Alongside the product-oriented BA structure lies the country or regional structure. ABB’s operations in each country are administered by a national company with an executive board and a corporate structure. Every person working for ABB within that country is an employee of the national company, irrespective of the business area.

R 8 D is kept as close as possible to the core manufacturing facility. Particular countries or locations may become a ‘centre for excellence’ in a particular product or technology. Basic research is carried out in centrally funded centres of exellence. ABB has core manufacturing bases in most of its established markets. The decision to build a manufacturing site in a developing market depends firstly on the size of the market and secondly on the political necessity for a local manufacturing source within the market. All of the core manufacturing countries, particularly in Europe, export a large proportion of their product because of the stagnant nature of the domestic markets in these countries.

adopted the organising principles of the transnational model, as described by Ghoshal and Bartlett? Table 2 (page 428) takes Ghoshal and Bartlett’s three organising principles of dispersal, specialisation and interdependence. TO this we have added a column on control mechanisms. We should disregard for this purpose those companies whose domestic sales are dominant, or whose principal activities are located in the home- base (e.g. Sun, Boeing), as these firms cannot be expected to be subject to the same organisational tensions which were said to necessitate the transnational solution. Of the others, it is striking how many of the world-wide business units in such companies are still directed from the firm’s home country. IBM’s Com- munications Division is a good example of the dispersal of responsibility for a line of business to the geographical area which makes the best strategic sense. But this is the only one out of 8 ‘lines of business’ whose HQ’s is located outside the home country. Ford has made

moves in this direction, by devolving responsibility for launch manufacturing of a ‘world car’ to Europe, but it remains to be seen whether it can successfully combine global co-ordination with regional differentiation by this means. Nestle and Unilever come closer to the ideal, but even here the intended creation of Nestle’s ‘strategic business units’ with headquarters in France (mineral water) and the UK (chocolate), owes much to Nestle’s acquisition strategy and still has to fulfil its promise, while the continuation of Unilever’s dual location of headquarters - with all the cost this entails - seems to owe more to internal balance of power politics than any explicit business logic. ABB probably has gone further down the track on dispersal but not just by following the centres of excellence approach. The firm relies in addition on very small but highly mobile headquarters staff at corporate and business unit level allied to devolution of decision-making to country managers. ABB notwithstanding, there are clearly still

EUROPEAN MANAGEMENT JOURNAL Vol 12 No 4 December 1994 423


_

powerful forces within international companies restrain- ing the dispersal of assets and responsibilities:

0 The continued domination of the home market (even where the proportion of foreign sales is

high, the home market is very often the largest single market).

l The hegemony of home country nationals who resist transfer to other locations.

l The political pressures from home country

Box 5 GM Europe - Jewel in the Crown of a Fading Ruler?

GM Europe is part of General Motors, the world’s largest industrial corporation and therefore the world’s largest car company. It is a public company quoted on the New York and other US stock exchanges. It has faced major economic difficulties in recent years, with the North American operations having been a particularly severe problem to the company: its European operations have been profitable for several years.

In 1991, GM announced a loss of $4.5bn, the largest ever recorded in business history. Following this a major programme of reorganisation began involving:

. The closure or temporary shutdown of several US manufacturing and assembly plants

. The more efficient use of remaining plants

. The sale of non-core businesses

. Workforce reduction: by 1995 the total US workforce will be less than half the 1985 level of around 700,000

. Manufacturing cost-cutting

. Product development process acceleration

. Developing the non-GM business of its component subsidiaries

. Restructuring of relationships with suppliers, including a complete re-negotation of present supply contracts

The company as a whole, like other major vehicle manufacturers, is having to address a range of issues which pull its strategy in several directions, in particular:

. Globalisation: Car manufacturers are striving to make fewer models in fewer plants on a world-wide basis, with a greater degree of product commonality; as yet, however, GM has yet to develop cars off the same basic platform for both the US and Europe.

. Focus on core businesses: Car manufacturers are becoming less vertically integrated and are concentrating on vehicle and powertrain design and assembly; component development and manufacture is delegated to suppliers, not all of whom are yet as global as the vehicle manufacturers themselves; non-core businesses are being sold.

. Faster product development focused on customer needs: The constant reduction of time available to bring new vehicles to market, themselves closely attuned to local markets contradicts the standardisation and globalisation trend.

It is primarily a car, commercial vehicle and automotive component manufacturer; it also has: a small railway locomotive division; GM Hughes Electronics, a defence/electronics business which includes Delco Electronics, the automotive electronics arm; EDS, a computer systems company founded by one-time US independent presidential candidate Ross Perot; a financial services operation, GMAC, to support its vehicles sales - this is the largest non-bank finance company in the US.

Over 85 per cent of its turnover comes from manufactured goods; over 90 per cent of its business is automotive related. Its product range is vast, encompassing vehicles, components, defence electronics, locomotives, factory equipment and financial services. GM, however, is best known for its cars, trucks and components.

The European operations of the company appear to have remained substantially unaffected by the company’s largely US-based problems and it is with GM Europe that the research was mainly concerned. GM Europe’s headquarters is in Zurich -this is where product planning and sales/marketing for GM Europe’s cars are based. In addition, there are the components companies which are grouped into the Automotive Components Group (ACG) Europe, headquarters in Paris.

All GM’s European operations are wholly owned by GM in the US (except where a European activity is not itself wholly owned by GM Europe, e.g. Saab which is part owned by Scania Trucks of Sweden).

The component companies are becoming fully independent operations and are regarded as business units in thier own right, with their own business plans and financial targets. The European component companies are actively building up their own non-GM business, supplying other vehicle builders - already nearly one-third of their business is with non-GM customers, a level targeted to reach over 50 per cent by the end of the decade. In the US, by contrast, non-GM business accounts for only around 5 to 10 per cent of GM components companies’ turnover.

The current GM Europe structure was established in 1986. It was located in Zurich, Switzerland, away from the traditional manufacturing centres in Germany and the UK, partly to facilitate the development of a pan-European perspective and strategy, uninfluenced by a particular market. GM Europe is responsible primarily for vehicle assembly and sales. At the same time, although ACG Europe and its components companies do liaise with GM Europe, their primary reporting line is actually to the ACG headquarters in the US. ACG Europe companies have a dual reporting line, to Paris and to their own parallel company in the US.

There is a major potential tension in this structure because, on the one hand, each component company is meant to be profit accountable in its own right, while on the other, GM wants to develop the ACG brand as a single, major force in automotive components supply, similar to Bosch or Siemens for example: such development could threaten the independent business unit status of the ACG companies.

In terms of future development, the fundamental challenge facing GM at present is to organise its US operations’ affairs simply in order to survive. Its senior management is presently undergoing a major restructuring as it tries to accelerate the cost and capacity reductions required by the market and its major institutional shareholders. Some of the senior management who were responsible for the turnaround of the European operations in the 1980s are now in senior positions in the US and despite the ‘defection’ of its charismatic pruchasing and logistics supremo, J I Lopez, to Volkswagen, a similar organisational structure and culture to that operating in Europe may well emerge in North America - assuming the entire company can be kept together.



FINANCE & TREASURY

DE-CENTRALISED

SALES & R&D MARKETING

- DE-CENTRALISFD

DECENTRALISED I

MANUFACTURING & SOURCING

Based on Theuerkauf, 1991 -

Figure 4 Centralisatlon and De-centrallsatlon of Functions In Multlnatlonal Companies

governments not to abandon the home-base (and place the firm outside the state’s jurisdiction for tax and other economic benefits).

As one might expect, the process appears to be much more advanced within regions, where in companies like Ford, Unilever, IBM and GM, responsibilities are di:+persed to national ‘centres of excellence’.

In task specialisafion the firms again exhibited great variations in approach, which reflected their different starting points. In general, the firms were concerned to reduce overheads and bureaucracy by cutting down corporate functions and stripping out layers of management. Thus, decentralisation was frequently invoked at M,\N, Nestle, ABB and Sun as a tenet of the organisation. On the other hand, two companies (Unilever and ICI pre-1993) were making conscious efforts to re- centralise. In the case of the former, this was to achieve operating economies from rationalisation and co- ordination whilst, in ICI’s case, the main aim seems to be to control activities more closely. Moreover, in two other firms - Ford of Europe and GM - already centralised organisations were centralising certain core processes like R & D, product planning and purchasing even further in response to economic and political integration in Europe. However, even in firms where control is being centralised, manufacturing and assembly oprrrations are becoming increasingly dispersed, e.g. Ford has established a seat cover plant in Poland and a lighting plant in the Czech Republic, while GM has car assembly in Hungary. Nor do these trends necessarily imply convergence on an approximate common

model - these structural decisions remain contingen on the organisation, its strategy and environment.

Turning to the principle of interdependence between units clearly all the companies have evolved mechanisms fo satisfying the conflicting tendencies in their organisa tions and encouraging collaboration and consensus These included:

0 Encouraging greater sharing of information (e.g in ABB).

0 Socialisation through in-house training (e.g. ir Unilever).

0 Committees to integrate different organisationa perspectives (e.g. at Ford and ICI).

0 Specially developed information systems tc facilitate dispersal of knowledge (e.g. in ABB am IBM).

l Allocating responsibility to senior executives fo business units and geographical areas of functiona responsibilities (e.g. in ABB, Unilever and ICI)

In general, there seems to be a trend away from multipk reporting lines, although GM, ABB and ICI an exceptions. This reflects the necessity of streamlining decision-making to encourage greater organisationa responsiveness. One co-ordinating mechanism which is clearly becoming more prevalent is the use of inter national project teams. Ghoshal and Bartlett describec this in their work as a way of exploiting expertise locatec in different parts of the organisation and as a mean: of promoting organisational learning. Whilst this ir undoubtedly the case, much of the project team activit)

t

I

r

r 1

EUROPEAN MANAGEMENT JOURNAI. Vol 12 No 4 December 1994 425


r I1NANcK dTREu!URY

NESTLE UNILEVER

Company F&i T R&D M&S S&M

ABB 40 40 75 75 Boeing 0 0 30 30 GM 5 15 25 80 MAN 0 100 100 100 Nestle 10 10 75 90 Unilever 10 15 90 90

Based on Theuerkauf, 1991

Figure 5 Centrallsatlon and Decentrallsatlon of Functions In Multlnatlonal Companles


MANAGING IN~R~A~~UNAL ~RGAN~SA~ONS: LESSONS FROM THE FIELD

Table 1 Determinants of Structural Choice --.-

~~~~~~~~ BU ~~~i#e~i ~e~~~a~~ Flex&le ~e~~j~~ Functional Area Unit Matrix Company Hierarchy

-“.. -

Diversity of Products & Business (v Synergy) xxx 0 X xxx xxx

Importance of Technology xxx xxx X xxx X

Economies of Scale XX xx X xxx X

Proportion of Foreign Sales xxx 0 xxx xxx X

Proportion of Foreign Production xx 0 xxx xxx X

Homogeneity of World Markets xxx xxx 0 0 X Sample Companies Nsstle, Unilever Boeing Ford ABB MAN

Sun, GM, ICI, Ford of Europe Unitever* lBM

--.. _-

K&’ XXX Strongly Associated XX Somewhat Associated X Not Associated 0 Negatively Associated * Outside of Europe and North America

is clearly linked to new product development. As such it reflects the adoption of ‘simultaneous engineering’ techniques designed to reduce ‘time to market’ cycles in a period of increased technological competition (Womack & al., 1990).

Managing International Organisations - Implications and Future Trends it is clear that for most international companies the transnational made1 is more of an aspiration than a reality. The trend towards closer economic integration and the rapid transfer of patterns of cansumer behaviour across borders coupled with the advantages of economies of scale have induced many companies to organise around world-wide product divisians. This trend was anticipated in the 1970s by Stopford and Wells. How- ever, from the evidence available we would hypothesise that the world-wide product division is becoming the ‘standard’ model in most situations, with the other three ideal-typical structural solutions increasingly marginat- ised. Compare Figure 1 with our uwn updated version in Figure 6.

If the product line dimension has been dominant, what of the other key organisational dimensions: the functional hierarchies and the geographical unit? This is where, arguably, organisational diagrams fail to convey the true reality of organisational life. In most, but not all, organisations we looked at, functional hierarchies hate lost influence at the expense of business units and/or cross-functional teams. It has recently been suggested that in the ‘lean enterprises’ of the future functions would make a comeback. But their new role would not be executive (these tasks would be carried out by cross-functional teams). Rather, they would act as repositories of expertise, collators of new thinking and disseminators of skills (Womack and Jones, 1994).

This is a fascinating prospect and a logical development of the lean production/time-based competition philo- sophy* However, it is some way from the current organisational reality of the firms we studied. The fact is that, irrespective of organisational charts, functions still dominate in many companies: several of our respondents testified to the pervasive influence of finance in Ford and Boeing, for instance, or marketing in Unilever .

What, then, about the geographical dimension in organisations? In the late 1980s Egelhoff hypothesised that a trend towards locating manufacturing activities in separate regions would lead to the adoption of the area division structure (Egelhoff, 1989). In fact, this only seems to occur with businesses focused on one core market or technology feg_ cars). With increased diversity comes separate product divisions who clearly guard their power jealously, Rather than dominant area division structures, we see the evolution of regional structures within business units (Lever Europe in Unilever or GM Europe, for example) coupled with the devolution of authority within the respective business units to a particular national subsidiary for co-ordinating activities across the region (as IBM has done in Europe, for instance), Will the trend towards homogeneity - at least within trading blocs - encourage greater devolution of power from the home-base to the other ‘triad regions’? Could the ‘ideal typical’ international company of the future take a balanced approach which is global (in Ohmae’s terms, 1990) or transnational (to use Ghoshal and Bartlett’s terminology)?

As Yip (1989) and others have observed, this will depend on the inherent global potential of the market as well as the need for companies in the industry to take advantage of the situation by organising globally for competitive edge (see Figure 7). Thus, both Boeing and Sony operate in markets which are international and where the advantages from standardising products on

EURC)PEAN MANAG~ME~ jOURNAL Vol12 No 4 December 1994 427


Table 2 Elements of ‘Transnatlonallsm’ In Sample Companies

Dispersal of Assets and Resources

Specialisation of Task Interdependence of Control and Planning Units

Small corporate HQ Permanently mobile

business segments

based in Zurich

Centralisation of key

component production Board members have

BU and area responsibility; trust

fostered through teams and information

exchange

Core functions directed, but not

controlled from HQ.

Country and BU operations highly autonomous in product

development, logistics

High centralised, reflecting concentration

of company location

Boeing

Ford of Europe

Main assets and

resources concentrated in one area of USA

Centralisation of

functions 777 project team seen

as new model for ‘simultaneous

engineering’

Co-ordination through committees and new vehicle teams

Research and Centralisation of

manufacture integrated design and in Europe. Attempt to manufacture on

integrate world-wide by European bases. De-

making Europe centralisation of sales

responsible for new car and marketing

GM Europe responsible for

development in all non- US business

Components manufacture decentralised vehicle assembly increasingly

concentrated

Separation of

manufacturing and

development from marketing and sales

Central control and co- ordination of functions. De-centralised R and D

Centralised finance

and planning

GM

IBM

ICI - (pre-1993 de-merger)

MAN

Dual reporting to BU and geographical HOs

Ultimate control resides in US, but European autonomy

increasing

All BU HQs in USA except communications

(UK). Regional dispersal in Europe

BU HQs in UK, dispersal of

manufacturing and marketing

Use of teams and IT to

collaborate on process

Historic centralisation

being reduced and

delegated to operations

Performance and policy committee

integrates strategy; directors have BUI

functional/area

responsibilities

Linkages only

encouraged at lower levels e.g. via NPD

All highly centralised

Centralised finance

and strategy. Decentralised operations and finance

responsibility/

accountability

Highly centralised and

directed from HQ in all core functions, especially local marketing initiatives,

but some financial

independence

BUS decentralised,

with P & L responsibility. HQ carries out treasury

management

Corporate and BU HQs

located in Germany but operating companies

dispersed in Europe

Radical decentralisation within framework of financial

control

Nestle Most SBUs based in Switzerland except

mineral water and confectionery

Centralisation of basic

research, decentralisation of applied research and

manufacture

Directed from the centre

All BUS have HQs in

USA. Certain design and development operations located in

France, Japan and Canada

De-centralisation to

(dominant) BU - except purchasing, which is controlled irom the centre > 75% product value

bought in

Centralisation of detergent and food manufacture. Centralisation of basic

research, de-

centralisation of development

New programme introductions uses

simultaneous engineering

SUN

Product groups located in London or

Rotterdam

Transnational ‘network’ directors can have duel

functions. Conflicts between units resolved

at product or regional

group level

Centralised finance and product planning. Company culture

dispersed through rotation of staff across

organisation

Unilever

428 EUROPEAN MANAGEMENT JOURNAL Vol12 No 4 December 1994

MANAGING I~~A~ONAL ORGA~SA~ONS: LESSONS FROM THE FIELD

Table 3 Sample Companies: Home Market Dominance and Characteristics -

ASS Boeing Ford of GM ISM ICI MAN Nest\& SUN U~~lever EM.

-

Home Nationality ;;vv;shl US USI US US UK German Swiss US UK/Dutch European

Dominance of Home Market - (1) Low High Low High High High High Low High 7 High/Low Volume Low Low High High High High Low High ? High ~ntinuous Process/Project Based PB CP CP CP CP CP PB CP CP CP Consumer Goods/ Producer Goods PG PG CG C G C G Both P G C G CG CG Diversified/Focused - (2) D F F D F D D D 0 D Vertically Integrated/De-integrated - (3) V D VD VD VI VI Vl VI VI VD VI -

(1) Dominance defined here as being the largest market the company operates in and accounting for 40% or more of its business. (2) Most of the businesses here are diversified around a limited number of core businesses (e.g. Food and drinks; chemicals, paints

and pharmaceuticals). GM’s interests in aerospace and information systems are the exception. (3) Measured relative to sector norms, most of the businesses here are becoming less ve~i~aliy-integrated.

High


Low

World-wide product division

~j Area division

Low Extent of foreign sales

High

Figure 6 The (modlfled) Stopford and Welts IWodel of the 1996s

High

potential of market

Low

L’ ow High

Roll out from the home market

(e.g. Boeing)

Local strategies

(e.g. Hotpoint in white goods)

Multi-national

Neccessity to organise globally for competitive advantage

Ftgure 7 Not All Companles Need Be GlobaUTransnatlonal to Be Successful

II global basis are decisive. But only Sony needs to structure its business operations in a global way in order to ensure market penetration across the world. Boeing, \vhich has a huge domestic market and substantial scale Tidvantages, can afford to roll out its products from its home market.

At the other end of the globalisation spectrum, companies operating in industries where minimum efficient scales are low and national differences in consumer characteristics decisive, can afford to base their competitive strategy on their domestic market as Hotpoint have done in the UK. In the cement industry, by contrast, the cost of transport outweighs any benefits frorn centralisation, thus severely restricting the globalisation potential of the market, but dominant national and regional players like the Italian cement producer, Ital Cimente, are compelled to sustain their companies’ growth by replicating their position in a number of different markets which operate on a relatively autonomous basis. Only in more stable environments will internal structural solutions be preferred: global or multinational, depending upon how easy it is in political, organisational or logistical terms to co-ordinate activities internationally.

In propounding this contingency view of international structure over some of the more prescriptive views mentioned earlier in this article, our findings are congruent with a school of thought on organisational design which originates with Lawrence and Lorsch (1967) and Stopford and Wells (1972). It is also consistent with the findings of Ghoshal and Nohria (1993). Their research suggests that ‘companies require different organisational horses to manage superior performance in different environmental courses’ (Ghoshal and Nohria 1993, p. 33). Ghoshal and Nohria also argue persuasively that companies which adopt an organisational structure which conforms with their environmental characteristics perform better than companies which do not achieve a fit between their structure and their environment.

Moreover, not all companies need the degree of cross- national interdependence posited by the transnational model or indeed possess the necessary skills to make it work. In Figure 8 we suggest some possible approaches.

Where success in overseas markets is dependent to a large degree upon the transfer of resources or expertise from the home base and where the national culture, location and administrative heritage have produced an

FX‘ROPEAN MANAGEMEh~ JOURNAL Vol 12 No 4 December 1994 429

MANAGING I~~RNATIONAL ORGANISATIONS: LESSONS FROM THE FIELD

r

High

replication of home base

systems

Centres of Excellence, international

project teams

Degree of interdependence

Expatriates seconded to

foreign outposts

Arms length control

management devolved to

locals Low _.._I

Low l-l&J Firm’s cross-cultural expertise

F igure 8 Approaches to Managing lnternatfonal a bperations Can Differ

High

Ease of international co-ordination

Global structures

(e.g. GM and Ford)

Strategic alliances

with international

players

LOW

.ow Degree of environmental turbulence

Hi

L F C

lgure 9 Managlng international Operatlons in ihanging Times

0

d al e: bl n a: et ‘I S

n

: n a 0

ir tl Cl

rganisational culture which is conducive to integrating iversity, then the ~ansnation~ integrating mechanisms dvanced by Bartlett and Ghoshal like centres of xcellence and international product teams are likely to e highly desirable. If, on the other hand, the firm does ot have a history of exposure to cross-border activities nd the home market is still dominant, then the 3mpany will often find it easier to replicate systems and *ecipes’ from its domestic market. Again, however, 3me companies will continue to conduct their inter- ational operations on an autonomous basis. Depending n their experience and histories such subsidiaries can e managed through local devolution, where local lanagers are deemed capable of managing operations nd of understanding the demands of the parent rganisation. Alternatively, and this often occurs in the litial stages of internationalisation, this can be achieved Irough the secondment of expatriates to ensure ompliance with parents’ aims.

F inally, when looking to the future we should recognise tl nat some businesses and some areas are likely to C hange more quickly and be subject to greater uncer- ti iinty than others. This poses challenges to international 0 _rganisations particularly in parts of the world where

for technological, political or cultural reasons close co-ordination and control may not be possible. The solutions identified above in Figure 9 will be a key element in the way firms organise for international business, Thus, where it is possible to co-ordinate and integrate activities internationally, but uncertainty and therefore risk is high, less permanent arrangements like strategic alliances may be used. When integration is less easy for reasons of political barriers or distance from core operations and uncertainty is still high, joint ventures with local organisations may be preferred.

Acknowledgement The authors would like to acknowledge the contribu- tions of members of an international research team who provided much of the raw material for this study: Sophie Balsarin, Steve Beldon, Paul Costelloe, Arvind Devalia, Laila Houtzager and Ranjit Singh.

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and Structure, Co~~~jfjz~ Strategic Manag~enf, Prentice- Hall Inc., Englewood Cliffs, N.J., 1984, pp. 134-170.

Chandler, Alfred D., Jr. Strategy and Structure: Chapfers in the History ofthe Industrial Enterprise, Cambridge: MIT Press, 1962.

Davis, S.M., and Lawrence, P.R., Matrix Management. Reading, MA: Addison-Wesley, 1974.

Doz, Y., Sfrufegic Management in Mulfinafi~na~ Colonies, Oxford, Pergamon Press, 1986.

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~ Ohmae, Kenichi, The Borderless World: Power and Strategy in the Interlinked Economy, Collins, UK, 1990.

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IAN TURNER, Henley Management College, Greenlands, Henley-on- Thames, Oxon. RG9 3AU

lan Turner is Lead Tutor in Strategy at Henley Manage- ment College. In addition to teaching on the College’s Executive and MBA Pro- gramme, lan is responsible for academic development of the

Strategy subject. His other duties include project specialises in the automotive and general engineering leadership of an EC funded programme to develop an sectors where he carries out strategy, market develop- MBA in Russia. His research interests include strategy ment and competitor studies for car manufacturers, and structure, strategy in regulated industries and component suppliers and government bodies. He has strategy for project based organisations. lan has been at written two special reports for the Economist lntelli- Henley since 1984 and has previous experience gence Unit on the automotive sector. He is a working in Germany at Volkswagen and in the British geography graduate from Cambridge University and Army. gained his MBA from Henley Management College.

IAN HENRY, Planned Business Development (UK) Ltd., 70, Old Brompton Road, London. SW7 3LQ

lan Henry is an Associate Director at Planned Business Development (UK) Ltd, an international marketing and strategy consultancy with offices in London, New York, Madrid and Tokyo. lan

.-

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managing international organisations: lessons from the field

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