Implications for Control

The arguments of the previous section and the implications for the costs of control are summarized in Table 13.1. The costs of control might be defined as the amount of time top management must devote to monitoring and evaluating subunits' performance. This will be greater when the amount of performance ambiguity is greater. When performance ambiguity is low, management can use output controls and a system of management by exception; when it is high, they have no such luxury. Output controls do not provide totally unambiguous signals of a subunit's efficiency when the performance of that subunit depends on the performance of another subunit within the organization. Thus, management must devote time to resolving the problems that arise from performance ambiguity, with a corresponding rise in the costs of control.

Table 13.1 reveals a paradox. We saw in Chapter 12 that a transnational strategy is desirable because it gives a firm more ways to profit from international expansion than do multidomestic, international, and global strategies. But now we see that due to the high level of interdependence, the costs of controlling transnational firms are higher than the costs of controlling firms that pursue other strategies. Unless there is some way of reducing these costs, the higher profitability associated with a transnational strategy could be canceled out by the higher costs of control. The same point, although to a lesser extent, can be made with regard to global firms. Although firms pursuing a global strategy can reap the cost benefits of location and experience curve economies, they must cope with a higher level of performance ambiguity, and this raises the costs of control (in comparison with firms pursuing an international or multidomestic strategy).

When we survey the control systems that corporations use to control their subunits, we find that irrespective of their strategy, multinational firms all use output and bureaucratic controls. However, in firms pursuing either global or transnational strategies, substantial performance ambiguities limit the usefulness of output controls. As a result, these firms place greater emphasis on cultural controls. Cultural control--by encouraging managers to want to assume the organization's norms and value systems--gives managers of interdependent subunits an incentive to look for ways to work out problems that arise between them. The result is a reduction in finger-pointing and, accordingly, in the costs of control. Development of cultural controls may be a precondition for the successful pursuit of a transnational strategy, and perhaps of a global strategy as well.¹⁹

		Strategy
Structure and Controls		Multidomestic	International	Global	Transnational
Vertical Differentiation		Decentralized	Core competency centralized; restdecentralized	Some centralized	Mixed centralized and decentralized
Horizontal Differentiation		Worldwide area structure	Worldwide product division	Worldwide product division	Informal Matrix
Need for coordination		Low	Moderate	High	Very high
Integrating mechanisms		None	Few	Many	Very many
Performance ambiguity		Low	Moderate	High	Very high
Need for cultural controls		Low	Moderate	High	Very High

Table 13.2

A Synthesis of Strategy, Structure, and Control Systems

Synthesis: Strategy and Structure

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

Multidomestic Firms

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