Informal Integrating Mechanisms

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

Management Networks

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

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

Figure 13.9

A Simple Management Network

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

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

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

Organization Culture

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

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

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

Summary

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

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

Control Systems

A major task of a firm's leadership is to control the various subunits of the firm--whether they be defined on the basis of function, product division, or geographical area--to ensure their actions are consistent with the firm's overall strategic and financial objectives. Firms achieve this with various control systems. In this section, we review the various types of control systems used, and then we will see that appropriate control systems vary according to international strategies.

Types of Control Systems

Four main types of control systems are used in multinational firms: personal controls, bureaucratic controls, output controls, and cultural controls. In most firms, all four are used, but their relative emphasis tends to vary with the strategy of the firm.

Personal Controls

Personal control is control by personal contact with subordinates. This type of control tends to be most widely used in small firms, where it is seen in the direct supervision of subordinates' actions. However, it also structures the relationships between high-level managers in large multinational enterprises. The CEO may use a great deal of personal control to influence the behavior of his or her immediate subordinates, such as the heads of worldwide product divisions or major geographical areas. These heads may use personal control to influence the behavior of their subordinates, and so on down through the organization. For example, Jack Welch, CEO of General Electric, has regular one-on-one meetings with the heads of all of GE's major businesses (most of which are international). He uses these meetings to probe the managers about the strategy, structure, and financial performance of their operations. In doing so, he is essentially exercising personal control over these managers and over the strategies they favor.

Bureaucratic Controls

Bureaucratic control is control through a system of rules and procedures that direct the actions of subunits. The most important bureaucratic controls in subunits within multinational firms are budgets and capital spending rules. Budgets are essentially a set of rules for allocating a firm's financial resources. A subunit's budget specifies with some precision how much the subunit may spend. Headquarters uses budgets to influence the behavior of subunits. For example, the R&D budget normally specifies how much cash the R&D unit may spend on new-product development. R&D managers know that if they spend too much on one project, they will have less to spend on other projects. Hence, they modify their behavior to stay within the budget. Most budgets are set by negotiation between headquarters management and subunit management. Headquarters management can encourage the growth of certain subunits and restrict the growth of others by manipulating their budgets.

Capital spending rules require headquarters management to approve any capital expenditure by a subunit that exceeds a certain amount (at GE, $50,000). A budget allows headquarters to specify the amount a subunit can spend in a given year, and capital spending rules give headquarters additional control--control over how the money is spent. Top managers can be expected to deny approval for capital spending requests that are at variance with overall firm objectives and to approve those that are congruent with firm objectives.

Output Controls

Output controls involve setting goals for subunits to achieve; expressing those goals in terms of relatively objective criteria such as profitability, productivity, growth, market share, and quality; and then judging the performance of subunit management by their ability to achieve the goals.¹⁸ The kinds of goals subunits are given depends on their role in the firm. Self-contained product divisions or national subsidiaries are typically given goals for profitability, sales growth, and market share. Functions are more likely to be given goals related to their particular activity. Thus, R&D will be given new-product development goals, production will be given productivity and quality goals, marketing will be given market share goals, and so on.

As with budgets, goals are normally established through negotiation between subunits and headquarters. Generally, headquarters tries to set goals that are challenging but realistic, so subunit managers look for ways to improve their operations but are not so pressured that they will resort to dysfunctional activities to do so (such as short-run profit maximization). Output controls foster a system of "management by exception"; as long as subunits meet their goals, they are left alone. If a subunit fails to attain its goals, headquarters management is likely to ask some tough questions. If they don't get satisfactory answers, they are likely to intervene in a subunit, replacing its top management and looking for ways to improve its efficiency.

Output controls are typically reinforced by linking management reward and incentive schemes. For example, if a worldwide product division achieves its profitability goals, its managers may receive a significant pay bonus. The size of the bonus might reflect the extent to which a subunit exceeds its goal so that subunit management has an incentive to optimize performance.

Cultural Controls

We touched on the issue of cultural controls in the previous section when we discussed organization culture as a means of facilitating cooperation. Cultural controls exist when employees "buy into" the norms and value systems of the firm. When this occurs, employees tend to control their own behavior, which reduces the need for direct supervision. In a firm with a strong culture, self-control can reduce the need for other control systems.

McDonald's is a good example of a firm that actively promotes organizational norms and values. McDonald's refers to its franchisees and suppliers as partners and emphasizes its long-term commitment to them. This commitment is not just a public relations exercise; it is backed up by actions, including a willingness to help suppliers and franchisees improve their operations by providing capital and/or management assistance when needed. In response, McDonald's franchisees and suppliers are integrated into the firm's culture and become committed to helping McDonald's succeed. One result is that McDonald's can devote less time than would otherwise be necessary to controlling its franchisees and suppliers.

Cultural control is very difficult to build. Substantial investments of time and money are required to cultivate organizationwide norms and value systems. As we saw earlier, this involves defining and clarifying the company mission or vision, disseminating the desired norms and value systems through management education programs, leading by example, and adopting appropriate human relations policies. Even with all these devices in place, it may take years to establish a common, cohesive culture in an organization.

Control Systems and Strategy in the International Business

The key to understanding the relationship between international strategy and control systems is the concept of performance ambiguity.

Performance Ambiguity

Performance ambiguity exists when the causes of a subunit's poor performance are ambiguous. This is not uncommon when a subunit's performance depends partly on the performance of other subunits; that is, when there is a high degree of interdependence between subunits within the organization. Consider the case of a French subsidiary of a US firm that depends on another subsidiary, a manufacturer based in Italy, for the products it sells. The French subsidiary is failing to achieve its sales goals, and the US management asks the managers to explain. They reply that they are receiving poor-quality goods from the Italian subsidiary. So the US management asks the managers of the Italian operation what the problem is. They reply that their product quality is excellent--the best in the industry--and that the French simply don't know how to sell a good product. Who is right, the French or the Italians? Without more information, top management cannot tell. Collecting this information will be expensive and time consuming, and it will divert attention away from other issues. Performance ambiguity raises the costs of control.

Consider how different things would be if the French operation were self-contained, with its own manufacturing, marketing, and R&D facilities. Then the French operation would lack a convenient alibi for its poor performance; the French managers would stand or fall on their own merits. They could not blame the Italians for their poor sales. The level of performance ambiguity is a function of the extent of interdependence of subunits in an organization.

Strategy, Interdependence, and Ambiguity

Now let us consider the relationship among international strategy, interdependence, and performance ambiguity. In multidomestic firms, each national operation is a stand-alone entity and can be judged on its own merits. The level of performance ambiguity is low. In an international firm, the level of interdependence is somewhat higher. Integration is required to facilitate the transfer of core competencies. Since the success of a foreign operation depends partly on the quality of the competency transferred from the home country, performance ambiguity can exist.

In global firms, the situation is still more complex. In a pure global firm, the pursuit of location and experience curve economies leads to the development of a global web

Table 13.1

Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies 

		Performance	Costs of
Strategy	Interdependence	Ambiguity	Control
Multidomestic	Low	Low	Low
International	Moderate	Moderate	Moderate
Global	High	High	High
Transnational	Very high	Very high	Very high

of value creation activities. Many of the activities in a global firm are interdependent. A French subsidiary's ability to sell a product depends on how well other operations in other countries perform their value creation activities. Thus, the levels of interdependence and performance ambiguity are high in global companies.

The level of performance ambiguity is highest of all in transnational firms. Transnational firms suffer from the same performance ambiguity problems that global firms do. In addition, because they emphasize the multidirectional transfer of core competencies, they also suffer from the problems of firms pursuing an international strategy. The extremely high level of integration within transnational firms implies a high degree of joint decision making, and the resulting interdependencies create plenty of alibis for poor performance. There is lots of room for finger-pointing in transnational firms.