Working Paper 94-4
Structural and Organizational Changes in Global Firms
John Hunt
London Business School
This paper was the basis of a presentation to the Institute's Stuttgart
Conference, "The Challenge of Multinational Competition", May 12 - 14, 1993.
Abstract:
The structures of firms operating globally raise important questions. Central,
culturally bound solutions face highly differentiated and variously integrated
units in diverse markets and cultures. Companies unable to gain strategic
control of their worldwide operations and manage them in an integrated way
face the same process of disintegration as were witnessed in the decline of
successive empires of Western Europe. How much to impose and how much to let
alone is a central question. This paper discusses some of the organizational
issues arising from this dilemma in global corporations.
There are at least two questions to be answered in looking at the design of
any organization. First, what is the reality...what design exists? Second,
what might the design be?
The answers to both questions are subject to a variety of forces including
fashion. Yet the fundamental processes which determine the actual shape, the
current design reality of any organization do not change. The socio-economic
processes identified by Durkheim, Spencer etc, but labelled by Lawrence and
Lorsch (1967) as differentiation and integration determine the actual shape
at any moment in time. People or actors interact with each other. Through
trial and error processes they continually differentiate and integrate ways
of relating. Differentiation is a response from the members of the firm to
the different expectations of the environment in which they are embedded.
Excessive differentiation can lead to the loss of cohesion essential to collective
survival. Integration is the response from the same or other members to over-differentiation.
Integration preserves social cohesion by holding actors together. Excessive
integration can lead to structural rigidity and the demise of the collective.
Organizational design is, in simple terms, about the balance of these two
forces. From time to time, people with power attempt to impose a new and simple
explanation of the reality onto the social phenomenon. That is, the organization
is "redesigned" or "restructured" from the top.
This top down view of design has meant that most of this century has been
notable for our concern with integration. A massive management literature
has concentrated on holding actors and resources in firms together by using
formal devices..declarations of strategies, plans, hierarchies and systems..sometimes
to the point of structural inflexibility and an incapacity to change and respond
to different market conditions. Only recently has there been a resurgence
of interest in actively encouraging differentiation.
This preference for order and design over the social processes has not escaped
the attention of researchers on multinational corporations. A considerable
literature purports to tell the would-be manager of the multinational corporation
how to organize the firm. By "organise" most literature refers to control
through integration. Indeed, as Reve (1990) has noted, there is very little
in the strategy literature which tells the manager what the firm is or how
the shape or the actual design of the firm evolves.
In contrast, to this absence of any understanding of the social phenomenon
called the firm, managers are given extensive advice on how to analyze the
competitive external environment. A firm is no more than a series of interpersonal
relationships or transactions. Design is not a technical question but is the
result of interpersonal processes. Ironically, very little advice is given
managers on how to ensure that the interpersonal processes which lead to differentiation
and integration and consequently the current shape of the firm are stimulated
and rewarded. Integrative structures remain the dominant theme of the management
literature, including highly simplistic views of overarching hierarchical
forms.
However, when a McKinsey consultant (Theuerkauf 1991) can write the following,
times are changing:
"The law of averages does not always apply. This is the hard lesson being
learned by many large multinationals as they grapple with the organizational
complexity generated by product, geography, and function. In the past these
companies usually tried to deal with such complexity by managing by averages....that
is, by applying the same yardsticks, rules and procedures across all their
businesses worldwide. More recently the leading companies have been tailor
making organizational arrangements to fit the specific needs of each of their
different businesses."
That is, the centrally designed template is no longer feasible and a reaction
against simple, technical design solutions for MNC's problems gathers speed.
The reality is unavoidable. As Forrester (1992) says, "The environments in
which we live and operate...corporations, cities and even national economies
are far too complex in their structures and internal processes for any one
individual to have a clear, coherent view of how they work as total systems."
In the past we defended this truism with the thought that we could reduce
complexity to manageable proportions with highly simplistic overviews of structural
form to facilitate managerial action. Now we realize that those pseudo-scientific
simplifications of reality may have led to managerial action but they also
led to major managerial blunders. To the dismay of the designers of corporate
structures, the one best solution which could be sold to numerous clients
was no longer feasible.
Attempts To Explain This Process
Stopford and Wells (1972) were among the first researchers to try to explain
how structures emerge from within the firm as realignments to markets. Adopting
an historical analysis, they described the evolution of a multinational firm
in which a home based parent structure with autonomous foreign subsidiaries,
loosely linked to the parent company, is replaced by one in which subsidiaries
are consolidated under an international division within the central office.
This form was in turn superseded by a global product or area organization
which was then replaced by a multidimensional (or grid) organization structure.
This "stages theory" was based on assessments of sales abroad both in terms
of the number of products sold abroad and the percentage of total sales these
overseas sales represented. However, if sales were found to be an important
variable the underlying social processes leading to this redistribution of
power were taken for granted rather than analyzed as causal. So when matrix
structures became fashionable, top down designs in the 70's and 80's their
underlying social processes were largely ignored leading Bartlett and Ghoshal
(1989) to describe this obsession as "a quagmire" in which axes of product
and geography were further complicated by function. When series studies of
the problems of matrix structures were conducted the underlying social processes
were listed as causes of failure rather than as fundamental to the interpersonal
relationships on which matrices depend. Indeed, in recent studies of matrices
Burns and Wholly (1993) conclude, "It is impossible to discern the precise
motives for decisions to adopt matrix management," suggesting that these designs
were imposed rather than reflecting the interpersonal relationships that determine
the actual form or configurations of the collective effort."
Nevertheless, for the MNC the logic of the global matrix as a method of integration
was appealing. Central control could operate on at least two axes which would
limit local differentiation to ensure that the whole remained in tact. However,
the behavioral consequences were much less appealing. Matrix structures made
little allowance for such important cultural differences as the nature of
social power. In some cultures the concept of dual authority was unacceptable.
The inevitable conflicts and inter-personal problems resulted in the vortex
effect where, often minor, local issues in disputes are sucked up the hierarchy
hoping to find a judicial court to resolve them. With hindsight, it was probably
fortunate that the majority of local employees were excluded from the matrix
and worked within non-matrix, traditional hierarchical structures. Only the
local senior staff had to muddle their way around the labyrinth of the dual
axes.
Yet it is easy to be critical of designers of organizations. There are three
major problems designers face. First, their concentration on extremely simple,
apparently transferable, models of formal structures (lien and staff, divisional,
matrix global, etc.) minimises complexity and creates a risk of assuming the
simple template is, in fact, the complex social system. That is, the hierarchical
model is reality. By formal structure I refer to those shared and internalized
values among actors about allocating and controlling resources.
Second, a formal structure is only one variable which influences behaviour
in organizations and the degree to which it does so on a day-to-day basis
is debateable. Third, structural designs imposed from the top may give little
attention to the network of inter-personal processes which is the real structure
of organizational life. Nevertheless, despite these problems there has been
no shortage of designers for MNCs (Franko 1976, Kindleberg 1979, Aggarwal
1988, Hedlund and Aman 1984) all of whom concentrate on who controls what
and whom.
However, by the early 1980's the conflict between the actual shape of the
firm, derived from the complex networks of relationships among actors and
the design proposed by senior executives could no longer be avoided. Numerous
attempts to impose structural forms on MNC's from above, which did not reflect
the emergent shape of the firm, aborted or had to be so heavily modified as
to no longer reflect the original design. Whereas in the smaller domestic
firm, any mismatch of emergent shape and imposed structural form could be
reconciled (as they have been for decades) by informal processes, this was
not always possible in the large, multi-product, multi-national firm. Mismatches
were irreconcilable and deeply disturbing for the actors (e.g. Citicorp's
world wide matrix structure; IBM's persistence with the centralised form).
Designers began to accept that organizations are about human beings who interact
with each other and through that process a form develops. So we find Bartlett
(1981), when discussing changes in Eli Lilly, concluding that the late Eli
Lilly had it right:
"Values are, quite simply, the core of both men and institutions. By combining
our thoughts and helping one another we are able to merge the parts of the
corporation into a rational workable system." p. 258
The awareness that organizations are networks of relationships is not new
to social scientists. Organizational Theorists from Barnard (1938) through
Cyert and March (1963), March and Simon (1958), Katz and Kahn (1964), Perrow
(1972) and then a veritable army of social psychologists and sociologists
knew this already. It is this awareness which begins to appear in the strategy
literature in the late 1980's. For example, Ghauri's (1990) initial description
of Swedish multinationals follows a similar "stages of growth" analysis of
the formal structure of the firm from local company, to local company with
overseas subsidiaries, to dominant head office, to head office secondary to
some dominant subsidiaries. However, what was different about this analysis
was the introduction of the network of relationships in which the head office
or the foreign subsidiary were embedded. This network analysis tended to concentrate
on the local geographic networks of suppliers, competitors, governments, regulators,
etc. which had led to the sort of structural configurations that earlier writers
had noted. It was not to be a massive step to conceptualise the MNC as a series
of interpersonal and electronic networks rather than as a simple, structural
map.
Bartlett and Ghoshal come close to this position in their book Managing Across
Boarders (1989). They offer a further step on the stages model for organizing
MNC's the Transnational company. This configuration,
"... manages costs and revenues to achieve global competitive advantage but
recognises that efficiency and innovation are both important and innovations
can arise in many parts of the organization. Therefore, instead of centralising
or decentralising assets the transnational makes selective decisions.
The transnational centralises some resources at home, some abroad, and distributes
yet others among many national operations. The result is a complex configuration
of assets and capabilities that are distributed but specialised. Furthermore,
the company integrates the dispersed resources through strong interdependencies."
(p. 60)
This work, arguably a MNC parallel of configurations for a single firm in
a home market (Hunt 1979, 1992 and Mintzberg 1979), proposed idealised configurations
at different stages of growth as guides to action by managers. However, where
they differed from most of the previous writers in the strategy literature
was their acceptance that central to their transnational model are the interdependencies
and interpersonal relationships of the actors. Like all models or configurations
of complex phenomena (c.f. Emery and Trist's idealised environments 1965)
they do not occur in reality and their usefulness to the practitioner is extremely
limited other than as a rough guide or a possibility. There is no way of proving
that a model of the real world is right. Its value is dependent on how closely
it represents the experience of those who wish to use it. On this criterion
the Transnational has had its critics; we have yet to find the firm that fits
the model although Turner and Henry (1993) believe Unilever, BP, ABB, Nestle,
IBM and Electrolux approximate the configuration. To be fair to Bartlett and
Ghoshal, they do not offer it as a model but argue that it is a "broad organizational
concept or philosophy manifested in organizational capability and management
mentality" (1989, p. 209).
With hindsight it was inevitable that writers on transnational firms, who
had reached the point of trying to reconcile the role of the designer and
the reality of the actors, could only move forward if they returned to the
causes of whatever organizational shape emerges, that is, the networks of
relationships that make up the firm.
In their 1990 paper, The Multinational as an Interorganizational Network,
Ghoshal and Bartlett began to explore the underlying social processes which
produce an organization's shape. It is this view which I wish to expand here.
The Multinational Corporation As A Nexus Of Treaties
Any attempt to produce a structural configuration which would satisfy all
multinational corporations is doomed to fail. The breadth of differentiation
within firms and between firms would make such an attempt frivolous. Whatever
we could say to advise managers on how to organise a multinational at the
macro level would be so general as to risk trivialising the phenomenon. Even
at a theoretical level we are currently unable to predict the structural outcomes;
that is, they are indeterminate given the multiplicity and variety of influences.
Without a systematic vision of causality we have no way of knowing why "well"
crafted strategies and structures frequently produce results directly opposite
those we intended. One explanation is that the models we use are so crude
that they create false expectations in the players rather in the same way
that models of exchange rate movements in the money markets have often led
to erroneous decision and proved to be ineffective. Alternatively, rather
like long range weather forecasters have faded from view as their predictions
were so often wrong, we may have to decide that the complexity of the MNC
is so great that the phenomenon is unknowable.
However, as this is of little comfort to the managers in MNC's the more plausible
route is to get back to understanding the interpersonal processes which lead
to differentiation and integration and the resultant shape of the firm. We
analyze the network of treaties that make up the parts and the whole. We can
also address the sorts of integrative mechanisms available to hold this fragmented
array of social systems together. Organizations are complex social systems
in which human beings interact to control the use of resources to their advantage
or disadvantage. Structure, whether explicit or implicit is no more than a
set of shared values within the heads of those people if it is to affect behaviour.
The degree to which it is explicit or implicit is discussed in a considerable
literature (see Giddings 1906, Barnard 1938, Roethlisberger and Dickson 1939,
Levinson 1959) which divides the values affecting people's behaviours into
informal and formal categories. Subsequently, it has become fashionable to
talk of a formal contract with an actor and a psychological contract (Handy
1976). Unfortunately, this awareness of different degrees of explicitness
or implicitness did lead some writers into a trap of classifying behaviour
as informal or formal which was not a very useful separation. Indeed, Role
Theory (Katz and Kahn 1966) attempted, somewhat disappointingly, to reconcile
the explicit and the implicit expectations of actors by talking about role
expectations.
Behaviour is behaviour and cannot readily be divided into two distinct categories
of formal and informal. However, the dilemma faced by social psychologists
and sociologists, attempting to explain differing expectations of actors,
does remind us that whether explicit or implicit, the values about structure
occur in the heads of the actors. These values are ever emergent and relate
to a wide range of expected behaviours. Structure does not have a lift of
its own; it can only be developed and learnt over time by the people working
within it.
From this position we can regard the firm as a set of actors with values,
beliefs, opinions, attitudes, etc. How they relate to each other can be seen
as a set of implicit or explicit contracts or treaties with one another both
individually and collectively. (Aoki, Gustafasson and Williamson 1990). These
contracts cover a variety of activities but most frequently relate to the
transactions necessary for the firm to achieve its objectives. Similarly,
as actors interact with actors outside the firm we can also see these relationships
in terms of a nexus of contracts or treaties. Many of these treaties governing
transactions are explicit and formal (such as securing resources including
employment contracts) but a large number are implicit and rely on tacit knowledge
and informal processes for their maintenance. Within this nexus of treaties
actors, individually and collectively, transact on a continuous basis. Through
these processes degrees of differentiation and integration are brought into
temporary states of equilibrium through face-to-face, interpersonal relationships.
Hence, within the local unit, the interpersonal processes which lead to explicit
and implicit treaties about transactions can be observed and where necessary
monitored by those with more power to ensure rational self interest is contained
and cooperative endeavor survives.
In contrast, the nexus of treaties between individuals and groups of individuals
which link local organizational units to the larger corporate network do not
have the advantage of continuous face to face monitoring. Many of these treaties
are negotiated through electronic or other non face to face means. So the
budget for the local subsidiary is negotiated by head office actors through
correspondence and telephone discussions. The process of feedback and monitoring
of the treaties between the head office and a subsidiary is therefore not
continuous but intermittent sometimes occurring only when a head office person
travels to that subsidiary.
Organizational economists like Williamson (1985) have argued that the governance
of the firm is determined by properties of the transaction costs between actors
in and outside the firm. These transactions are affected by bounded rationality,
the degree of asset specificity (that is, the degree to which an investment
transaction is specified of a particular exchange), the level of environmental
uncertainty, the frequency of any transaction and opportunism (self interest).
So, for example, if the capacity of actors to process and act on information
is limited, and the asset specificity is low and if the level of environmental
uncertainty is also low but the relevant transactions occur frequently then
the market (external actors with whom internal actors may or may not have
explicit treaties) will determine how those transactions occur in behavioral
terms. Conversely, if the actors are able to process and act on information
easily, and an asset is specified for a particular purpose and the level of
uncertainty is high and there are few transactions, then the actors in the
firm will have more control over that transaction.
In other words, the cost of transactions, claim the economists, will explain
the emergence of structure. So for example, where the asset specificity is
"medium", uncertainty "medium" and the frequency "medium", then the actors
in the firm will enter into bilateral relationships to determine transactions.
If we continue with this analysis, in economic terms, we begin to see that
this literature (see Pitelis and Sugden 1991 for a useful summary) is one
of the few which attempts to give us insights into what happens between actors
and markets to produce organizational forms. That is, what they do in the
sense of tasks. However, the processes within the "black box" of the economists,
that is the firm, remain rather very vague. That is, how these actors do what
they do (not what do they do) is unclear. Essential to this latter question:
How they do what they do, is an explanation of interpersonal processes but
among economists this remains very underdeveloped. How actors negotiate these
and other transactions through treaties depends on their power and styles
of influence in interpersonal exchanges. Sudgen (1991) does provide insights
into questions of power when he proposes that the MNC exists for two reasons
defending against rivals and attacking rivals but there is little about how
actors within the firm deal with the power and resources amongst themselves
or to rival or attack the market.
Contracts between actors depend on skills to supply a product or service and
incentives or rewards for having supplied that product or service. Skills
which are core or essential to providing that product or service are vital
to the firm and are likely to be expensive; they have high asset specificity
and the treaties governing them should be controlled by the actors in the
firm. If the incentives are insufficient and the labour market is positive,
then actors with those skills will leave, break their contract and enter into
a new treaty with externals. (Barnard-Simon theory of Contributions and Inducements
in March and Simon, 1958).
However, core skills are rarely, in themselves, sufficient for a firm's success;
there will always be a demand for supplementary skills which forces the firm
to decide whether to carry those additional skills and hire actors with them
or to seek alliances or cooperative agreements with other actors in other
firms or single person delivery units who sell those complementary skills.
Such treaties with external actors are a function, then, of complementary
skills and inter-organizational and/or interpersonal incentives.
Through an analysis of transactions writers like Reve (1990) propose that
we can regard a firm as a series of internal and external treaties. We can
simplify this to mean the treaties centre on core skills and internal incentives
(wages, salaries, satisfying work, etc) plus external contracts of complementary
skills and interorganizational (and therefore interpersonal) incentives(fees,
costs of supply, etc.). And it is the treaties and whether they are managed
by internal and/or external actors that will determine, at the macro or collective
level, the actual structural shape of the firm whether that firm is a local
entrepreneurial business or a multinational corporation spread over 30 countries.
This view of structure is in sharp contrast to the view that structural shape
is imposed from above by some omnipotent leader.
In an attempt to provide an adequate theory of the firm Reve concludes that
there are two dominant networks in multinational organizations. First, a network
built around a powerful corporate group which he calls the strategic core
which is concerned with internal contracts relying on organizational incentives.
The second dominant network of strategic alliances is with small firms with
whom the local firm has external contracts which rely on interorganizational
incentives. Managing the both networks is the most important skill in the
MNC. Internal contracts are tougher and formally based. External contracts
are softer, based on negotiation and less on authority. However, this argument
begins to sound rather like the social psychologists informal and formal behaviour
dichotomy which I have already proposed is not very helpful.
In the strategy literature the nexus of treaties may be acknowledged but the
tendency to reify one or two parts of the nexus seems unavoidable. For example,
Rumelt (1982) proposes "Strategy is an efficient bundle of unique resources
and relationships." However, one consequence of this "bundle" approach is
to reify the myriad of treaties and regard the so called, firm, as a single
entity and to attempt to design or influence it as a totality. The advantage
of viewing it as a nexus of treaties is that there is no single entity, other
than in an accounting or legal sense. And it is this point that both economists
and strategists have difficulty in accepting. The cohesive collective they
describe is a much looser, collection of individuals and treaties than they
want to believe.
If we regard the firm as a group of actors who interact with each other and
with a variety of other actors in supplier, client, regulatory, etc. relationships
then we can overcome the limitations of defining boundaries which enclose
actors in firms. Instead we can regard any social system as a myriad of interactions
governed by explicit and implicit treaties. This perspective also addresses
the reality that in Western firms an increasing number of actors no longer
spend most of their time as an employee relating to other employees in one
firm. Similarly, it is becoming increasingly difficult to apply boundary concepts
to firms or markets. For example, in the electronic data dispersion industry,
what is a market other than a definitional convenience of strategists. The
market for telecommunications is limitless, governed only by the sets of relationships
the actors choose or are compelled to pursue. For many actors, treaties are
forged with numerous other actors some of whom are employed, many of whom,
like actors in the theatre, move from one explicit contract to another with
little regard for the firm who pays their fees. The important control mechanism
is the interpersonal relationship and the implicit or explicit treaty between
actor and actor.
This view of the multinational firm as a vast network of relational treaties
has the further advantage of bypassing national boundaries and false market
borders as well as accepting the reality of different relationships between
individuals and firms as legal entities. However, it also forces us to determine
whether some networks of treaties are more significant than others. Common
sense tells us that this is so; some sub sets of the network have more power
than others. Ghoshal and Bartlett (1990) suggest that significance is related
to frequency of and the density of connections (from competitors, suppliers,
government officials, regulators, banks plus cultural assumptions and artifacts)
within a local unit, between that unit and its local external contracts and
between that local sub set and other parts of the total worldwide network.
They define density as "the ratio of actual to potential ties among all its
(focal firm's) constituents". (p. 610)
When interaction densities within local environments are low the influence
of those interactions on specific actors located in that environment will
be lower than (p. 613) when the density of interactions is high. In this latter
case the local unit is forced to fragment its activities as Lawrence and Lorsch
(1967) reported. That is, the rate of differentiation among actors in the
firm increases with the density of the interactions within that local environment.
There is also the question of the density of connections between the local
sub set and other sets of the firm. Ghoshal and Bartlett refer to this as
"across density". When the linkages across the differential national organization
sets are sparse the MNC's resources configuration follows the influence of
the local densities alone. If the between densities are high then there will
be high dispersal of resources across units and less specialisation within
units. (p. 613)
In short, if we can talk of an overall shape of a firm, it is at best a loose
treaty of interpersonal relationships based on treaties or contracts between
the internal and external actors in various geographic locations. Further,
whatever the current relationships in any sub set of the MNC (including head
office) those relationships are in transition. However, analyzing economic
transactions is insufficient to explain some of these transitions. Whether
density within or across is significant is a value judgement of the actors
involved not of a mechanistic process. Shifts in power and influence among
the actors based on their perceptions of what is significant continuously
modify treaty arrangements and reflect a fact that economic arguments ignore:
those actors with well developed interpersonal skills have an advantage over
those who do not in the distribution of resources. They can affect outcomes.
Social power is the missing link in the transaction view of organizations.
Interpersonal relationships are the basis on which internal and external treaties
are derived. Power and influence are central to any such relationships. The
importance of power is most clearly reflected in the effect of fashion in
organizations design. If the costs of transactions or the density of interpersonal
transactions (both within and between) were sufficient to explain the macro
structure of the MNC, then fashion (other than a reflection of the actor's
treaties) would be of minimal influence. Yet this is not so. One powerful
actor's belief in a particular structural fashion can lead him/her to attempt
to impose that structural form onto actors despite the densities of interactions,
the significance of the transactions and the dispersal of resources. The flirtation
of many CEO's of MNC's with the matrix or grid structure in the 1970-1980's
showed powerful CEO's and interested management consultants could sell a structure
at the top of the hierarchy and impose it onto various environments with little
or no regard for the densities of interpersonal relationships. That is, with
little regard for the existing nexus of treaties.
Power in Multinational Corporations
Power is the capacity to influence the behaviour of actors. Historically,
senior managers of firms have had immense power to influence the structural
form of organizations. This power was most usually based on their authority
to control resources. If a centrally imposed structural form were inappropriate
for the environments in which the firm was embedded we might expect that the
performance of the firm would suffer.
However, the relationship between imposed structure (in hierarchical and systems
terms) and the performance of the firm is, as we know, extremely difficult
to establish probably because the central design is such a crude approximation
of the actual structure, the nexus of treaties, that actors can compensate
for its inadequacies by modifying their behaviour.
Powerful actors are not restricted to authority to affect the behaviour of
others. Pfeffer 1981 argues that the power of actors is dependent on two things:
"What they do in the organization and their skill in doing it" (98). What
an actor does depends on his or her purpose or function. Hickson et al (1971)
argue that the power of a function is affected by the centrality of that function
to the business' purpose, the availability of substitutes and the capacity
of actors in that function to deal with uncertainty. Two of these variables
are clearly related to densities of connectedness either within the firm or
between the firm and its environment. The third variable, dealing with uncertainty,
may or may not involve the densities of connectedness directly but will certainly
involve them indirectly.
How an actor does what he/she does and the social power he or she has within
the nexus of treaties is influenced by a variety of power bases (French and
Raven 1968). Most of these bases refer to control over the resources of the
firm. However, this is a limited view of potential power bases. Other bases
may include, personal wealth, status in the community, past experience, contacts
or charisma. However, in a network of relational contracts a major source
of power is an actors interpersonal skills. Whether we like it or not, some
people are just much better at getting other people to do things often for
very intangible rewards unrelated to the firm's purpose. It is this capacity
which is vital in understanding networks in organizations especially in those
where traditional concepts of authority are weakening.
The failure of many matrices in the 1980's to achieve the coordination and
closeness to markets that their designers had promised arose in part from
the fact that this structure did not reflect local treaties or the values
of the actors working in the environment in which they were embedded. However,
a further reason was that many actors could not or would not play the interpersonal
games necessary to wade through "the quagmire." Yet a third group of actors,
who were probably politically naive, were unwilling to accept that the matrix
structure is based on ambiguous authority so getting things done is dependent
not on authority but on an actor's political skills. Organizations are political
systems in which negotiating and influencing skills are essential competencies
for the actors within them. What irritated the managerial traditionalists
was that politicians win in the allocation of scarce resources.
Because power and influence in interpersonal relationships are so important
in MNC's it is possible to find actors who have considerable influence over
the nexus of treaties but who do not have substantial authority. Indeed, in
far eastern businesses it is often the case that an external actor who has
no recognized hierarchical power at all and controls no major resources does
have great power within the firm because of past history and/or family connections.
The laterality of the Chinese culture may force us to abandon Western concepts
or organizational boundaries for this reason. Often it is cousins or past
friends with long held credits, who are external to the firm and yet who wield
considerable power.
A metaphor for this structural form may more appropriately be a mafia...a
network of power and influence with few full time actors buy many treaties
some of which remain inactive for long periods of time. While it is clear
to actors that those in charge have power there are other powerful connections
which may operate intermittently and sometimes remain dormant for years.
The more closely actors in the subsidiaries of the MNC are aware of each other,
interact and are dependent on each other the less power the central office
may have in determining their behaviour. (For this reason the mafia keeps
membership very fluid so no one quite knows who is "in" and who is "out".)
Similarly, the fewer the dependencies of the subsidiaries on each other and
the more dependent on the centre the more central office may divide and rule
the nexus of treaties. (In the case of the Mafia dependence is reinforced
by the threat of physical violence.)
What Might The Design For A MNC Be?
There is no easy answer to this question. Sociologically, the actual design
of the nexus is emergent and unknowable to any one person. The paradigm I
am presenting here takes the Bartlett and Ghoshal, Reve, Aoki, Gustafsson
analysis of the firm as a network of contracts or treaties a little further.
These writers are restricted to a notion of the firm as a social as well as
a legal entity. I am proposing that this overstates the case and compels them
to define boundaries instead of an infinity of active and dormant networks.
The social structure of the MNC is no more than interpersonal relationships,
embedded in different environments of differing densities in which the economic
transactions are only part of the behavioral processes affecting outcomes.
I am proposing a much more fluid, "shape" in which the legal entity the firm
is a network of interpersonal relationships, geographically dispersed, operating
in environments of different densities with, at best, fluid and permeable
boundaries and variable inter-set dependencies.
If we continue with the analogy of the secret society or the mafia, the exact
shape, overall, is indeterminate and unknowable in totality. Even at the local
level the nexus of treaties is indeterminate except to a few of the actors.
The boundaries of this shape are much more blurred than the managers of a
typical MNC would ever concede. The essential social lubricant, in the economic
transactions and treaties, are interpersonal relationships and through them
the use of and distribution of social power. Even the formal management information
systems and their hardware and software are little more than a glimpse of
part of one network of many. If we were able to envision the totality it would
be blurred and messy rather than a neat determinate shape.
However, the reality I am describing is unacceptable to most actors who seek
for simplicity and clarity. So creating the rational case, the simplification
of a complex reality, is the function of the general managers. They do this
with a picture, which is, at best, a vague approximation of reality as they
see it or as they want it to be. If the picture is an amalgam of structural
designs of other firms it is unlikely to stick. Indeed, the fact that no central
structural design is ever implemented in its entirety or without major concessions
and modifications tells us that many of these designs are inappropriate and
could have negative consequences. However, if the centre of the MNC were to
adopt the Darwinian position, let an overall configuration evolve through
the nexus of relationships and refuse a rational plan this could be even more
detrimental to the actors who constitute the firm. People need maps. Indeed,
the successful selling of the Bartlett-Ghoshal transnational model as a concept
confirms this fact not only for managers but for academics as well.
Social systems, whether families, groups, firms or societies, do have structures
imposed upon them by actors who we rank, for a variety of reasons, as more
powerful than the rest of us. We accept this process because it reduces the
level of uncertainty by creating grossly simplistic pictures of our reality.
Reality itself, is far too complex for most of us to even contemplate. By
imposed structures we gain comfort.
So what should the CEO in the centre of the MNC do? First, create the Simple
Case. (This will involve an audit of power within the nexus of treaties.)
Second, develop a simple explanation of the strategy of the firm. Third, present
the bare bones of the hierarchy such that actors can see, broadly, how they
fit into the whole. Fourth, collaborate to devise the simple rules of the
game...the relationships between the centre and the parts and the relationship
between the parts. Finally, but most significantly, the CEO needs to see his
or her role as maintaining the interpersonal relationships that are essential
to the nexus.
The Simple Case: Strategy and Structure
* The Power Audit.
Creating the Simple Case, a rational story, the overall design, for the shape
of an organisation is difficult. First, we should let common sense prevail
and avoid the detailed, over prescribed master plan. Instead, we need a simple
picture of the firm in very general terms which encompasses with broad brush
the nexus of treaties I have described. Second, we should accept that an evolving
firm is multi determined, ambiguous and dependent on the processes of differentiation
not just of integration. Third, we should avoid promising long term or very
detailed certainty through a structural solution when one does not exist.
Finally, we should watch for the warning signs that our simplicity is deceptive.
We know when this danger confronts us when managers talk as though the simple
picture of the firm is, in fact, the firm.
No MNC falls into the neat segments or sectors we tend to draw on paper. (In
fact one of the attractions for designers of the Divisional form was the fourth
or fifth division, the garbage can into which we threw all the bits that did
not fit our concept of divisional neatness.) Further, very few MNC's do, in
fact, manage their segments on a global scale and nor are they heading in
that direction, Some of the units are run globally, some regionally some locally,
Despite all their international intentions, every MNC is dominated by a home
nation culture; Swedish MNC's are Swedish; American are American, British
are British. Indeed, given the uncertainties facing the actors around the
world, this cultural bias rather than being a limitation should be seen as
a strength...at least some ambiguity is reduced by our capacity to locate
the home base in a national culture. Finally, even attempts to develop formalised,
global information networks which we could expect to be a universal feature
of a MNC "appear to be more complex than commonly suggested and the solutions
far from neat and tidy" (Earl and Feeny 1993). In short, the global firm as
described by various authors is a myth.
The first step in understanding structural options for the simple picture
must be to assess the foci of power by locating the most powerful interpersonal
treaties within the existing nexus. These are likely to centre on the home
base and the core businesses but may also centre on share holders (especially
in the family owned MNC), sources of supply of resources (including people
with skills) or powerful external actors (government regulators). Most MNC's
have a dominant structural dimension affecting the allocation of power: for
some this is the business unit, for others geography, for others region or
area dominates and for yet others functions dominate. Once we have determined
where the dominant treaties are we can decide whether these are significant
for assessing the overall performance of the firm. Assessing performance will
determine what informational flows we need and what control options are feasible.
In short, we can design the infrastructure around the power blocks within
the nexus of treaties.
We should not be surprised to find that the actors, through the trial and
error processes of differentiation and integration have already sorted much
of this out. In any firm, but especially in cross national firms, the allocation
of resources and the acquisition of power occurs over years. The existing
structure is not a hit or miss exercise but the product of the actor's endless
learning experiences as differentiation and integration struggle for dominance
as common sense necessitates. So whatever the current arrangements, to be
sensible. Indeed, we should avoid the massive top down restructuring based
on the latest structural fashion unless we have strong evidence from actors
within and outside the nexus of treaties that the current arrangements are
dysfunctional.
Indeed, if we examine some of the world's major MNC's (Unilever, Shell, Matushita)
they have not had major structural changes for over a decade. Evolutionary
shifts have occurred but not dramatic shifts. In contrast, IBM's recent change
to 13 business and British Petroleum's agonizing restructuring are examples
of top down, dramatic structural change. These changes are so atypical as
to attract media attention and the removal of the chief executive officer
in both cases. Massive top down designs are the deviants from the norm. The
norm is less dramatic; the gradual modification to the internal and external
interpersonal relationships lead to modifications to the nexus of treaties
as environments and interpersonal skills dictate.
The power audit asks where power lies and why? The intellectual exercise for
the CEO is to decide if this allocation of power and resources is optimal
at this time. Is it time to re-allocate power? To challenge, for example,
the dominance of the Singapore manufacturing subsidiary by creating a new
unit in Taiwan. To centre a product group in another location (as IBM did
with its Communications business in London; or Hewlett Packard with its Word
Processing business in Paris). This cognitive exercise examines the potential
linkages for shared resources, the supply of core skills, similar technologies,
identical distribution channels, customer similarity, tax benefits etc. In
nearly all successful cases there is no overall structural model (for example,
a consultant's view of a global matrix) but rather a muddling though, an unscientific
process of collecting data of debating options, of negotiating to make what
may seem to the outsider as rather arbitrary decisions (e.g. Africa will report
to France; Human Resources will report to Finance; Europe will be divided
into west and east), which are settled into new treaties.
Underlying this muddling through (or what some people call organizational
learning) is a gold mine of tacit knowledge which is not known to the outsider
but against which the multitude of the relevant interpersonal relationships,
past histories, knowledge of people and markets, of local power centres, of
government regulations, of possible sources of supply, of long standing but
undeclared secret deals etc. are woven into the negotiations of the next phase
of the explicit or implicit treaty. Ironically, it is this tacit knowledge
that writers on Strategy are now attempting to model in their latest attempts
to devise contingency models for global firms (Ghoshal and Nohria 1993). As
outsiders the researcher has an enormous disadvantage over the actors who
live and breathe the business day to day.
From time to time a top team, usually a new one, decides that serious interventions
must be made to force a redistribution of power within the nexus of treaties
at local and/or central levels. Large firms, including MNCs do stagnate; the
nexus of explicit treaties solidifies; the implicit treaties become taken
for granted and lead to inertia; differentiation and innovation become blocked
and strategic change is necessary. After some agonizing by powerful players,
the processes of analysis, of relating tacit knowledge to the central issues
described above occurs again. There is little science in this process and,
fortunately, less and less of the pseudo science adopted by some design consultants
in the 1980's. Rather this is a political process presented as a debate of
options but it is based as much on hunch, experience, power and social skills
as any other renegotiation within a context of a nexus of treaties. Rigorous
analysis will be used to present the rational case but that is no less political
than an emotive appeal for action. Once the picture of the next arrangements
is agreed, the muddling through is disguised and the simple, sensible case
is prepared for communicating to the actors world wide.
Who conducts this audit. Preferably people from different parts of the total
network to ensure that different views are expressed and incorporated in the
analysis. Certainly, not just the current head office strategists for this
year's favorite consultants. There are numerous models, paradigms, exercises
and analyses we can draw on for help to reduce the complex to the simple (for
example, Ghoshal and Nohria 1993) plus the How To Do It papers (Theuerkauf
1991). The analysis is likely to consider four levels of the nexus: the head
office, the regional or area structure, the local subsidiary and the inter-unit
networks The audit will produce a map or organization chart of the segments
as they will appear for linkages, reporting relationships, and resource allocation.
Systems of information retrieval, storage and dispersion will doubtlessly
be found wanting and be refined. But these maps, while important in reducing
uncertainty, are no more the complex nexus of treaties that we have been discussing
than a plan represents action. These are the communication documents necessary
to reduce complexity to simplicity; we know this is not the reality. The network
will survive not because of an intellectual exercise in neatness, but on the
strength of the interpersonal relationships within the network. Indeed, while
the entire design exercise progresses, the networks of relationships around
the world continues to produce goods or services without the master plan.
What are the outputs, the essentials of the Simple Case?
The documented and articulated messages of the Simple Case are crude approximations
of the blurred boundaries surrounding the nexus of treaties derived by people
interacting with each other. For this reason any top down structural change
in a democratic society will only be implemented if the people involved internalize
it. Seeing the firm as a nexus of treaties has the advantage, in theory, of
placing every actor into the role of negotiator and in that way involves him
or her in the structuring processes.
The function of the simple case is to communicate messages to actors such
that they know or feel they know the game and can contribute to it. Indeed,
the recent shrinkage of the strategy guidelines from the long and complex
GE style planning models of the 1970's to the buzz words of today ("Intent",
"Competencies", "Core Values", "Vision", "Mission", "Total Quality ") reflects
a failure to model organizations so they might be managed scientifically and,
secondly, a realistic search for the simple case; the approximation no longer
the scientifically defensible. Similarly, the wide spread use of metaphor
and dramaturgy to explain behaviour in firms may reflect some disillusionment
with the turgid terminology of some social sciences in the search for simplicity.
The documented design outputs include a statement of direction or strategy
in very simple terms. Second, a picture of the hierarchy, the organization
chart of relationships...the simpler the better. Third, the rules of the game,
the relationships by function between the centre and the parts. These rules
are often quite arbitrary (for example, Europe will be divided into two parts)
but they are designed to establish controls and delegations and to reduce
ambiguity. Fourth, the rules of the game for the relationship between the
segments. Finally, an explanation of the function of the centre as the managers
of change, the communicators of dogma, the "princes and princesses of the
realm" who lubricate the networks to ensure information flows.
Maintaining the relationships
The most important design questions in MNC's relate to maintaining the nexus
of treaties and the interpersonal relationships behind them. However, relationships
occur within contexts. Contexts have structures derived by the actors within
them. So we cannot ignore formal structures and their importance in maintaining
relationships. Ironically, people tend to believe that only other people impose
structure on them; rarely do they see that they are part of the social processes
which lead to differentiation and integration and, hence, to structures.
Nor can we underestimate the importance to actors of the dominant logic of
mission/strategy/structure/systems as ways of clarifying an actor's part in
the grand scheme. But these are the artifacts of structure not the core. Little
of an actors day-to-day activity is directly influenced by these artifacts
although values associated with them may underlay important behaviours. In
contrast, day-to-day activities are dominated by interpersonal relationships
within the firm, outside the firm and between the parts of the firm.
For this reason I suggest, designers have concentrated on the wrong questions.
The most significant issue is maintaining the interpersonal relationships.
This is even more vital when the MNC is not a traditional mother (Home office)
with daughters (local subsidiaries) model but is a complex mixture of mother,
daughters, step children, alliances, and technical agreements with unrelated
firms such as agents, licensees, even competitors with no genetic connection
at all. Out of these interpersonal relationships new alliances are formed,
new control systems are designed, new opportunities are exploited. Some of
the relationships with non-members of the family are long term licensing agreements,
others are little more than what some writers refer to as creating the "virtual
firm" (Freidheim 1993 Economist) where a temporary network of companies combines
to exploit a specific market opportunity in the way construction firms have
formed consortia on major projects have for decades.
If the real structure of the firm is the nexus of treaties then it must be
lubricated. This is not the place to go into details of the lubrication processes.
They are well known to most of us. There are formal devices (information systems,
committees, task forces, international project teams, conferences, meetings,
segmentation etc.) and there are more subtle devices such as shared vision
or intent, shared opportunities, shared values, shared experiences etc. Maintaining
relationships within the smaller segments where identity and smaller size
stimulate cohesion and cooperation is much easier than across the segments.
Subsidiaries or local alliances spread across the world in many locations
raise interesting problems for maintaining relationships. This is even more
an issue where joint ventures by two or more MNC's create a third structure
over and above the already complex network of relationships linking centre
to the parts within either one of the parent companies. And as political restrictions
to protect local employment or anti-competitive regulations limit options,
more and more MNC'S must enter into relationships with local firms to ensure
access to those markets.
In the empires of the 19th century the role of the head of state in any colony
was one of integration. He was not local but the representative of the head
office whether that was in London or The Hague or Berlin. This local Governor
transmitted the values of the head office, enforced the laws of head office
and even imposed the language and religion of head office. He transmitted
the simple case. As the vast majority of these organizations have ceased to
survive one might speculate as to what went wrong. Distance from head office
and poor communications posed problems in maintaining the essential link between
local treaties and the head office treaties. Differences between the parts
of the empire were less problematical as the model of the colony was presumed
transferable regardless of environment. In these empires, the parts were more
significant than the whole and integration, through close, interpersonal relationships
between the actors in the centre and those in the colonies was missing. As
a consequence local treaties overpowered head office treaties. We could speculate
that today's empires, the MNC's, can reduce the threat of disintegration through
two integrative techniques: first information systems to facilitate speedier
communication and second, interpersonal relationships to communicate and update
the simple case. Compared with the empires of the last century the MNCs have
enormous advantages in information systems. However, the integrative potential
of the global information networks appears to be more illusion than real.
Such world wide systems are extremely elusive. In recent survey, the Financial
Times concluded that it will be 10 to 20 years before the large global firm
currently using systems from a wide range of suppliers, will be able to migrate
from the stand alone to a global system. (Financial Times, February 1993).
Which brings us back to interpersonal relationships. If the parts are to combine
to produce a more significant whole such that weaknesses in some markets are
compensated by strengths in others then it comes back to networks, relationships
and the nexus of treaties rather than technology. Today's MNC problem is the
sheer complexity of the whole. No single person has the data or the intellectual
capacity to visualise the whole of Unilever or General Motors in action. At
best a team of touring "princes of the realm" can, collectively, know enough
about the parts to combine their knowledge to create the simple case or the
vision to integrate the whole .. at least, in a stationary state.
Such integration is not easy and is indeed, becoming much less so. For example,
reconciling MNC home national interest with local subsidiary national interest
has always been an issue for the MNC's and made them the subject of intense
political analysis in the 1960's and 70's. However, debating and resolving
these conflicts about national strategy were relatively easy compared with
explaining to the dedicated locals of a MNC that the new, head office strategy
of a joint venture with the firm's major competitor in their market is a sensible
strategy when the competitor has long been regarded as the enemy. Similarly,
asking the local staff in a major subsidiary to accept the latest joint venture
which places them in a junior position to the staff of a Japanese partner
will require patience and reassurance. It is not surprising to see the high
failure rate of acquisitions and joint ventures when we consider the emotional
volte face some of them require from the people in both camps. How does a
crafts person at Jaguar accept that Ford now owns his talent. How does the
stressed employee at Virgin Records accept that the arch predator, Thorn-EMI,
now pays his salary or the factory worker at Airbus reconcile that those competitors
at Boeing are now planning to build an 800 seat aeroplane ... with his help.
One essential role of the centre is to develop a cadre of touring "princes
and princesses" whose major function is to understand the "real" structure
of the firm, that is the nexus of relationships and treaties and the potential
opportunities within the nexus. These travelling information absorbers and
communicators transmit and explain the Simple Case and try to reconcile differences.
One consistent story may require one voice and one face even if this has to
be on video. These travelling envoys oversee the total network, speak several
languages, spend most of their time "on the road" and are the lateral linking
devices essential to the total network; reconciling differences, observing
opportunities, explaining direction, answering questions. They are the designers
of the networks, the lubricators of the relationships in the same way as the
parish priest linked the families of 19th century villages.
As Forrester (1992) recently put it: "The role of senior management, especially
of chief executive officers should be that of corporate designers and not
of corporate operators. Designing support for the nexus of relationships will
not be easy." Friedheim (1993) has already proposed that the MNC firm on a
global platform is obsolete. He argued recently, that the Relationship Enterprise
will be the next form. These enterprises will be networks of strategic alliances
among already large firms spanning different industries and countries but
held together by common goals which compel them to act as a single firm. His
example of Boeing, British Airways, Siemens, TNT and SNECMA together winning
a project to build ten new airports in China makes the proposal seem more
a case of project management than a long term alliance. However, the relationship
enterprise would be able to by-pass national restrictions by involving locals
in a world wide network rather than maintain the network of owned subsidiaries
around the world.
If Freidheim is correct then the issue of maintaining the nexus of treaties
becomes more complex not less. If we have difficulties maintaining the essential
interpersonal links between parts of, say, Phillips, world wide, or parts
of IBM world wide it will be an even greater challenge to maintain the networks
of relationships between different firms with different nationalities, different
dominant home treaties and different dominant languages than occurs within
the global firm now. What this will lead to is concentration on the end result
and less interference at the local level in structures and systems as the
alliance will not own the local firm. Here the - Simple Case and the touring
communicators will be the essential links for holding the complex networks
together.
Developing the managers to manage either of these forms ...the Global firm
(transnational or not) or the Relationship Enterprise ...will be essential.
One of the major sources of competitive advantage will be their managerial
talent. Moreover, they have a world market from which to recruit. Theuerkauf
(1991) observes correctly, "a systematic international management development
system, with the objective of creating and carefully allocating a higher calibre
truly international top management group is vital for the MNC" (p. 118). This
is not very different from the history of the diplomatic corps of any major
country with the exception that managerial skills will be essential not just
analytical and social skills.
The Dangers of the Simple Case
As firms move away from imposing detailed structures from above, with restrictive
resource allocation and control policies and practices to the simple case
and more local autonomy over day to day issues, there are also dangers. "Ultimately,"
writes Miller (1993) "a rich and complex organization becomes excessively
simple". The managerial cadre trained to oversee the complex nexus of relational
treaties begins to believe its own simple messages, even to believe that the
simple case is reality, that the complex network of relationships is, in fact,
simple.
The business literature is full of such accounts especially among MNC's (see
for example Wright (1979) on General Motors, Halberstam (1986) on Ford, even
Iacocoa (1984) on Chrysler). Weik (1979) explained the phenomenon of simplicity
in systems terms.
"If a simple process is applied to complicated data, then only a small portion
of that data will be registered, attended to and made unequivocal. Most of
the input will remain untouched and will remain a puzzle to people concerning
what is up and why they are unable to manage it." (p. 128)
In presenting the Simple Case the richness of the MNC may become a caricature.
We have all seen it when a central office of a MNC decides to change the culture
of the firm world wide. Emotive statements of strategic intent, cute statements
of values and exotic management development programmes are symptomatic of
the dangers of over simplification. How many of Peters and Waterman (1982)
excellent companies, exponents of the simple case, are performing well today?
Over time, a simple case can become so internalised by actors that deviations
from it are rationalised and ambiguities are ignored until all aspects of
the organization reflect the core set of values, the vision, the espoused
strategy. The learning organization has ceased to learn; randomness and surprise
have been eliminated. The head office communicators and analysts become locked
into their own grossly simplified perceptions of the relationships and treaties.
The lateral communicators, whose tireless overseeing of the complex nexus
and endless travel make them disgruntled tourists, become blinded by the essential
repetition of the simple case. At the local level where irritations are most
likely to arise, discussions of inconsistencies and apparent stupidities are
suppressed to preserve the dominate logic of the simple case.
It is possible in the design process of the MNC to minimise this outcome.
Miller (1993) argues that there are several ways to minimise the dangers of
the simple case. First, bring in top managers from outside. To do this one
manager at a time is often insufficient; it is necessary to so dilute the
top team that it cannot return to its former status. Miller's second proposal
is to pursue a generalist (not too specific) strategy. Third, to encourage
cultural and structural heterogeneity. Fourth, get more people to participate
in decisions. Fifth, operate in a very demanding environment and, finally,
is restrict the number of institutional constraints on managers. An alternative
scenario is the virtual firm, the temporary nexus of treaties in which the
inertia of the overexposed simple case does not occur. The luxury of the simple
story is not available simply because the complex set of relationships prohibits
such a story.
However, whichever scenario we like to adopt, the conclusion is the same:
the prime function of design is not the simple case. The prime function of
design is to monitor and maintain the interpersonal relationships which underly
the nexus of treaties. If that is done effectively the simple case will evolve.
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