The company was thus able to reduce the number of basis models on the range from 48 to 18, with 80% of sales from standardised models. This would clearly aid in the standardisation and thus help achieve scale economies.
Another factor that will affect an organisations global strategy is the nature of the product itself. If a product is aimed at a specific niche, the home market may become saturated very quickly, which will push firms into new markets. The size of the niche will affect the extent of the globalisation of the given product.
The next major factor that will affect globalisation is the market in which the firm is operating. If the home country has reached saturation point, the firm will automatically look to new markets to reinforce growth. However, the major issue with the marketplace is the fall of quotas and tariffs on cross border trade have meant that clients have been able to source internationally at no additional cost, and often providing great savings on necessary goods. Therefore the home country organisations have been pushed into global trade in order to compete for local and global trade by gaining economies of scale. Ohmae argues that success in the ‘Triad’ (US, Europe and Japan) is based on popular prices, based on aggressive cost reduction and global economies of scale.
This leads us to the next point, which is the necessity of global firms to spread costs into global markets. The cost of research and development (R & D), and the development of production lines can be astronomical in certain industries. It thought that the average cost of a production line in the automotive industry is $1 billion. Another industry that relies heavily on global markets is the pharmaceutical industry due high R&D costs and stringent political control. With discovery to market time lags of 12 years and development costs of $600 million per product global exploitation is imperative. With 80% of world trade taking place in 9 nine markets, presence in each of them is essential. The capacity to lower costs through scale economies varies within industry and thus the extent of globalisation will depend on the scale economies available to each specific organisation.
Finally, developments in communication technology, namely the Internet, have allowed organisations and consumers to become more globally conscious. The Internet also provides organisations with the ability to cut the cost of ordering and communicating over long distances. These factors affect industry directly. For example, direct to consumer advertising of pharmaceutical products is banned in the EU, but those with Internet access can find out information at will about new products. In 2000, the second most searched for issue on the Internet was health, with 75% of those who searched admitted to discussing findings with their GP. This of course means that the global transfer of information is creating greater interest and concern about the industry. These developments in communication affect industries differently and provide different opportunities. The finance sector, for example has been completely re-designed due to the IT age.
The important concern for organisations is how is globalisation controlled and can it be controlled effectively? The structure of firms is inevitably affected by globalisation.
Changing Structures
One approach to globalisation has been demonstrated by Coca-Cola in Japan, whereby it used the ‘insiderisation’ model, which aims to develop the subsidiary as a true insider in the host market. Successful ‘insiderisation’ in the Japanese market. By becoming a full-fledged insider it was able to move not just soft drinks but also fruit juice, sports drinks, vitamin drinks as well as canned coffee. Its competitors were not able to even dent its 70% market share by spending huge amounts on advertising because of not having built up their own distinctive insider strengths.
The typical progression of a firm in its path to becoming a truly global organisation starts with exporting from the home country, moves on to setting up local sales and distribution centres, then to local assembly/packaging and finally to establishing full manufacturing and associate activities in foreign locations. This maybe by Greenfield development or by acquisition and may include a variety of joint ventures.
In all organisations managers have to establish structures and provide a basis for the co-ordination and control of activities and these structures become more important the more global an organisation becomes.
As these corporations expand their operations into different environments, they increase the level of uncertainty associated with their investment as well as facing complex issues of organisational control in order to ensure that the different parts of the enterprise are contributing as required to the overall goals (Change and Taylor, 1999). It is due to this reason that Kamoche, (1996) argues that the relationship between the corporate centre and the country-based subsidiaries is one of the most significant issues for global firms. It is said that structure and control has to be consistent with strategy and global firms tend to choose either a multidomestic or a global strategy. This choice will be strongly influenced by the industry the firm is in.
- Multidomestic – Local responsiveness with a structure that gives a great deal of autonomy to local subsidiaries.
- Global – Emphasises efficiency and requires a structure that provides varying degrees of co-ordination of policy and operations.
Firms operating in such a global market realise that they must be able to co-ordinate their strategy and activities across nations. The demands of standardisation, centralisation and strategic alignment are best met by a global orientation, with strong centre, rather than a multidomestic orientation with fairly autonomous national subsidiaries. However although multinationals are seeking global economies they must also meet the needs of their customers and therefore be locally responsive.
Bartlet and Ghosal (1988,1992) suggest that in the past companies must follow one of three strategies in order to prosper: Developing either local responsiveness, transfer of know-how or lastly Global Efficiency. However now it is vital for a global firm to follow all three strategies in order to be prosperous. This is referred to by them as the “Transnational solution”
The evolution of management attitudes during the globalisation process moves from an initial ethnocentric, to polycentric and last of all a geocentric approach.
The ethnocentric approach emphasises parent company knowledge and control and can generally be found in Stopford and Wells’ “Autonomous Subsidiary” model. This is an effective way to run an organisation that has a small percentage of operations overseas. The limitations however are that Headquarters has little knowledge of the host market and this does not provide a sufficient basis for growth into a multinational organisation.
A more polycentric approach gives more local recognition and can be found in the Stopford and Wells’ “International Division” model or the “Multidomestic” structure. The International division will still prioritise its home market, however it will move towards a 50% split of home and foreign operations. Even though it does encourage the foreign subsidiary to perform crucial tasks such as arbitrage and leverage issues, Stopford and Wells believe that the organisation will still not acquire the full benefits of a global company as it will encounter difficulties when it comes to R&D, Communications and levels of power in the international division. This structure still remains very bureaucratic and “Top Down although control will be generally decentralised.
However a Transnational strategy or Stopford and Wells’ “Global Structure” would require the Geocentric approach which sees the subsidiaries as part of the whole organisation and focuses itself on both worldwide and local objectives. In theory the global structure will either be ‘Geographically’ or ‘Product’ based however in practice an organisation would never be 100% committed to either strategy. Both structures have their benefits and weaknesses. A geographical based organisation will be able to maximise coordination and marketing locally along with increasing leverage with host governments however it sacrifices product development and R&D economies of scale as duplication of products can occur. The product orientated organisation have strong levels of innovation and will operate most efficiently where the product is standardised and globalised however it will not be coordinated as effectively when it comes to local consumer preferences.
Stopford and Wells have also developed a fourth option that combined both Geographically and Product based structure. This “Matrix” structure however has been criticised by theorists such as Bartlett and Ghoshal.
This structure emphasises interdependence of subsidiaries but a loss of specific management responsibilities can be identified, as the structure is too complex. This results in slow decision-making in a changing environment.
Management Control
Cultural and Geographical distances between parent companies and their international subsidiaries will bring uncertainties on whether local management will always align their decision towards the general corporate objectives. Effective global operations require an ‘Equidistance’ of perspective from head office managers, i.e. treating customers equally regardless of their geographical location. I.e. The primary rule of equidistance is to see-and to think-global.
This equidistance can be hard to develop and maintain and therefore certain management controls related to structure. There are three management controls suggested; Behavioural, Output and Cultural and correspond to three main categories of structure and strategy. The first being that of the global company with a dependant relationship with head office, i.e. an ethnocentric orientation. The parent company uses behavioural control over the subsidiary to influence management decisions. The predominant source of control is expatriate managers or head office systems.
In more recently established subsidiaries, as operations begin to go well, H.Q begins to pay close attention. Functionaries of all types itch to intervene. Corporate heavyweights and all the powers that be want a say in what has become a critical portion of the overall company’s operations. When minor difficulties arise, no one is willing to let local managers continue to handle things themselves. Overeager and overanxious headquarter managers by trying to supervise things in a regular ‘corporate’ fashion can destroy the very profitably of the business because of their lack of knowledge of the host market. Persistence and perseverance are the keys to long-term survival and success when it comes to local unit managers. This is the major danger of ethnocentricity leading to organisations looking to alternative approach.
The multidomestic organisation has a polycentric approach and emphasises the autonomy of the subsidiary. Therefore head office implements an output control using targets for profit and turnover. Polycentric organisations move towards a employing host country nationals.
The Transnational organisation with interdependent structure and geocentric approach uses cultural control of the equally important subsidiaries. The more geocentrically orientated the organisation becomes, the criteria for appointment becomes to select the best person whatever their nationality, and as a result third country national appointments become more common.
The Transfer of Information
The structure of the organisation has bearing on the way in which information is moved about the organisation, and the type of information that is moved. Whilst new subsidiaries rely on information about how certain processes and operations are carried out and tend to give very little feedback. More established subsidiaries take part in two-way dialogue with head office and perhaps pass on information to other subsidiaries making the transfer three-way. I.e. Transnational organisations take part in a multidimensional approach to the transfer of knowledge. This type of subsidiary will be involved in the development of new processes and may learn “why” rather than “how”.
In the more established global firms the transfer of information should be free flowing and unhindered. The multidomestic structure however, experiences little or no communication in either direction. The information that is transferred is likely to be about “how” parent company systems are used and the learning is unlikely to benefit the organisation.
The Evolution of the Global Firm. Product or Geography?
The multidomestic, polycentric style of firm may be successful if the structure is appropriate for the industry. Increasing international competition point to the increasing pressure on multidomestic firms to turn to global product standardisation in order to achieve economies of scale and thus, competitive advantage. As customers continue to look for the most cost effective suppliers, looking abroad is putting pressure on firms to converge practices to maintain consistent levels of quality.
The consequence is that global firms are switching from an organisation based on countries to one that emphasises product divisions. This is a knee-jerk reaction to the concept of globalisation. Globalisation is considered as marketing to customers regardless of their geographical location, thus leading to the view that customers are based in industry sectors and not in countries. Secondly the concept that manufacturing should be integrated across countries to obtain scale economies and consistent quality. The product-based subsidiary is epitomised by the automotive industry when factories are used for the manufacturing of all variations of a given model and then exported to the markets where they will be adjusted for local preference, for example Vauxhall Astra at Ellesmere Port, Cheshire. This at the expense of arbitrage practice such as production switching as it is not easy to move production if the production line is different. Furthermore, the organisation only obtains leverage opportunities in the host country, not necessarily in the all the markets where the product will be sold.
References And Bibliography
Module Material
- BUSAE3070 ‘Module Handout’
Literature
-
“Strategic Management, An Integrated Approach” 4th Edition
Charles W.L Hill & Gareth R. Jones (1998) Houghton Mifflin Company
- “Managing the Multinational Enterprise”
JM Stopford & LT Wells (1972) Longman
Journals
- Harvard Business Review, May-June 1983
“The Globalization of Markets”, by Theodore Levitt
- Harvard Business Review, May June 1989
“Managing in a Borderless World”, by Kenichi Ohmae
Electronic Journals
(Found at )
- Journal of Operations &Production Management, Volume 18, 1988
New Organisation Structures for Global Businesses: an empirical study, by D.T. Wright &N.D. Burns
- Journal of Employee Relations, Volume 24 No. 1, 2002
“Management Structures in Multinational Enterprises, Responding to Globalisation” by Peter J. Kidger
The Globalisation of Markets. Levitt, T
Managing in a Borderless World, Ohmae, K
Strategic Management: an integrated approach, Hill & Jones
Managing in a Borderless World, Ohmae, K
Managing in a Borderless World, Ohmae, K
The pharmaceutical industry 2000, Bátiz-Lazo, B & Holland, S
The pharmaceutical industry 2000, Bátiz-Lazo, B & Holland, S
Managing In A Borderless World, Ohmae. K
Management Structures in Multinational Enterprises, Peter J. Kidger
Managing The Multinational Enterprise, Stopford and Wells
Managing In A Borderless World, Ohmae. K
Management Structures in Multinational Enterprises, Peter J. Kidger
Managing In A Borderless World, Ohmae. K
