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Bottcher· Global Network Management

-
IIIlr
Management International Review

Herausgeber / Editors:

Prof. Dr. Klaus Macharzina


UniversiHit Hohenheim, Stuttgart

Prof. Dr. Martin K. Welge


Universitat Dortmund

Prof. Dr. Michael Kutschker


UniversiHit Eichstatt, Ingolstadt

Prof. Dr. Johann Engelhard


Universitat Bamberg

In der mir-Edition werden wichtige Ergebnisse der wissenschaftlichen Forschung sowie


Werke erfahrener Praktiker auf dem Gebiet des internationalen Managements veroffent-
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The series mir-Edition includes excellent academic contributions and experiential works
of distinguished international managers.
Roland Bottcher

Global Network
Management
Context - Decision-making -
Coordination

GABLER
Dr. Roland Bottcher war wissenschaftlicher Mitarbeiter am Lehrstuhl fUr Unterneh-
mensfiihrung an der Universimt Dortmund. Er ist heute im Bereich Managementberatung
mtig.
Dr. Roland Bottcher was senior lecturer at the Chair of Business Administration, Univer-
simt Dortmund. He is now working in the field of Management Consulting.

Die Deutsche Bibliothek - CIP-Einheitsaufnahme

Bottcher, Roland:
Global network management: context - decision-making -
coordination / Roland Bottcher. - Wiesbaden : Gabler, 1996
(mir-Edition)
Zugl.: Dortmund, Univ., Diss., 1995

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ISBN-13: 978-3-409-12085-2 e-ISBN-13: 978-3-322-84488-0


DOl: 10.1007/978-3-322-84488-0
VORWORT V

VORWORT

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Klaus Macharzina, Martin K Welge,


Micheal Kutschker, Johann Engelhard
FOREWORD VII

FOREWORD

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Klaus Macharzina, Martin K Welge,


Micheal Kutschker, Johann Engelhard
PREFATORY NOTE IX

PREFATORY NOTE

The fact that many multinational corporations (MNCs) are typically operating in all key-markets
since the 1980s has led to the development of a great body of global management literature. In
this literature, two schools of thought can be identified. The literature on global strategies offers
a number of conceptual ideas which different authors relate to the nature of global strategy.
Another group of scholars presumes that globalization foremost influences strategy imple-
mentation and organizational design. This research builds on the conviction that both areas are
highly interdependent and that globalization has serious impact on the management of
international firms as such.

As a specific focus of inquiry the research addresses the general question of how global MNCs
can most effectively adapt their organizational design and administrative systems in order to
respond to the demands imposed by globalization. This issue is closely associated with the dis-
cussion of global networks. Consequently, the author conceptualizes a global MNC-network
framework by integrating social network analysis and interorganizational network research. This
framework is systematically operationalized for the purpose of empirical evaluation.

In the empirical part of the study the author systematically applies the network framework. He
presents in depth case studies of twelve leading European multinationals. The data stem from
personal interviews with 51 executives of these multinationals. The companies studied originate
from countries like Germany, Sweden, France, Italy, United Kingdom, and Belgium. In this
respect the study is among the first to use a European data base and therefore broadens the
perspective of MNC-network research, which has been dominated by American research in the
past.

The empirical findings clearly show that internationally operating fums appear to be depending
on informal processes to accomplish best possible efficiency in operations. The derived fmdings
suggest that both formal and informal coordination mechanisms are closely interdependent and
that both groups are important. Network management, in this respect, seems to serve as an
avenue to re-balance the disequilibrium towards a more appropriate incorporation of informal
processes.

The study represents an extremely valuable piece of research. The relevant literature is integrated
very creatively, the operationalization of the global MNC-network framework is very innova-
tive, and the empirical fmdings are valuable to researchers and to practicing managers as well.
The author deserves great appreciation by having written his thesis in English. I, therefore, hope
that his findings will fmd a much broader audience in academia and in business as publications
written in German normally do.

Martin K Welge
PREFACE XI

PREFACE

1hls book is about global management. A short and simple definition of globalization is that the
world becomes a village in which people from different nations, although thousands of miles
apart, communicate and treat each other like everyday neighbours. People, goods, information,
ideas, and alike move freely around the globe. The function of nation-states is reduced to
inevitable administrative necessities. For to better understand these developments and to be able
to prosper from opportunities residing in the increasing permeability of country borders, comm-
unication beyond borders becomes a central concern. Consequently, many European MNCs have
meanwhile changed their coporate language to English. It is my opinion that research on
international management has only a chance to truly enrich the academic discussion if it is
communicated in a language which is understood by the majority of the 'global' audience. My
conviction led me to write this book in English, even though I am neither a native speaker nor
a natural talent. I have to ask for tolerance for the mistakes in spelling and grammar which may
have survived the spell-checker and my proof-reading.

If there is one thing I learned during the last couple of months it is that conducting an empirical
research and writing a book is not an easy undertaking. Every endeavour of this kind inevitably
depends on the support and assistance of others. Unfortunately it is impossible to mention
everyone to whom I am indebted for contributing to this research. Therefore, I am forced to
restrict my acknowledgements to a few who stand out as particularly helpful and highly valued.

I am grateful to my mentor Prof. Dr. Martin K. Welge who sparked my interest for such a
fascinating academic discipline and who continously supported my work while allowing the
necessary intelectual freedom. I am also indebted to my colleagues and students at the
Department of Management, especially to Nicole Prehn and Martina Muffert, for their passionate
support in producing figures and tables.

lowe a great debt of gratitude to my colleague and friend, Thomas Paul, who accompanied the
conceptual and the empirical work from the beginning. OUf discussions were a great inspiration
to me. Sometimes I had the feeling, Thomas was the only person left understanding what I was
talking about. He constantly helped me to straighten my thinking and went through the first draft
of this study. Beyond our common interest for global management, we shared more than 20.000
kilometers in the car, driving from Uppsala to Milan, from Stratford-upon-Avon to Geneve. We
visited exciting places like London, Stockholm, Paris, Brussels, Amsterdam ... and learned how
long the nights on Swedish ferry boats can be. Thanks to Thomas, I know what perfect
teamwork means.

I also wish to express my appreciation to the corporate executives who participated in the
XII PREFACE

interviews and completed our questionnaires. Without the support provided by these executives,
this research would not have been possible. In this respect, I sincerely hope that the study may
also be of some use for those practitioners who are still struggling with appropriate responses to
the continuous globalization of the international business environment.

Finally, I want to acknowledge the love and support of my family without which I would have
never been able to complete this piece of work. My wife, Marion, has endured my pre-
occupation and often also my frustration with my research, sacrificed her energy to care for me,
and yet motivated me at the worst of times. Both my wife and my kids, Saraphina and Anysia,
kept me from taking myself and my work too seriously, which is why I dedicate this book to
them.

Roland Bottcher
CONTENTS XIII

BRIEF CONTENTS

1. Introduction ................................................ .
2. Philosophical Underpinnings ................................... 7
3. The Globalization Phenomenon ................................. 14
3.1 The Pre-Global School of International Management ....................... 15
3.2 External Factors Reinforcing Globalization .............................. 24
3.3 The Global School of International Management .......................... 25
3.4 Reconsidering Geo-Centrism: A Plea for Global Orientation ................. 42
4. Global Decision-Making ....................................... 51
4.1 Decision-Making in Complex Firms .................................... 51
4.2 The External Environment of MNCs .................................... 55
4.3 The Nature of Global Decision-Making ................................. 63
5. Organizational Implications of Globalization ....................... 68
5.1 Organizational Design in International Management ....................... 68
5.2 Organizational Research in the Tradition of the 'Structure Follows '
Strategy' Paradigm .................................................. 68
5.3 The Global Network Debate .......................................... 77
5.4 General Characteristics of Global Networks ............................. 87
6. Network Research ........................................... 95
6.1 Structural Network Analysis .......................................... 96
6.2 Social Network Analysis ............................................ 101
6.3 Interorganizational Network Research ................................. 110
7. Developing a MNC-Network Perspective ........................ 120
7.1 The MNC between Social and Interorganizational Networks ............... 120
7.2 The MNC-Network Framework ....... , .............................. 131
8. The Coordination and Decision Framework ...................... 152
8.1 Network Management of Change: Planned Evolution . . . . . . . . . . . . . . . . . . . . . 153
8.2 Context Management .............................................. 158
8.3 The C&D Framework ....................................... 165
9. Research Methodology ....................................... 171
10. The Management of Coordination and Decision Processes in
Global Firms .............................................. 189
10.1 Structural Context Management of C&D Interactions .................... 189
10.2 Managerial Context Management of C&D Interactions ................... 236
11. Conclusions and Implications for Future Research ................. 329
11.1 Summary of the Research Findings .................................. 329
11.2 Conclusions ..................................................... 333
11.3 Directions for Future Research ...................................... 341
CONTENTS XV

CONTENTS

List of figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. XVII


List of tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. XIX

1. Introduction .......................................................... 1

2. Philosophical Underpinnings ............................................. 7

3. The Globalization Phenomenon .......................................... 14


3.1 The Pre-Global School of International Management ...................... IS
3.2 External Factors Reinforcing Globalization ............................. 24
3.3 The Global School of International Management ......................... 25
3.3.1 A Brief Explication of Terminology ............................... 25
3.3.2 Literature Review ............................................. 27
3.3.3 Comparison between Global and Pre-Global Focus on
International Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.4 Reconsidering Geo-Centrism: A Plea for Global Orientation . . . . . . . . . . . . . . . . 42
3.4.1 The Nature of Global Orientation ................................. 42
3.4.2 Further Implications and methodological Clarifications
of Global Orientation .......................................... 45

4. Global Decision-Making ............................................... 51


4.1 Decision-Making in Complex Firms ................................... 51
4.2 The External Environment of MNCs .................................. 55
4.2.1 Environmental Variables Affecting the MNC ........................ 56
4.2.2 Environments from an Organization Theory Perspective ............... 58
4.2.3 The Environment of Global Firms ................................. 61
4.3 The Nature of Global Decision-Making ................................ 63

5. Organizational Implications of Globalization ................................ 68


5.1 Organizational Design in International Management ...................... 68
5.2 Organizational Research in the Tradition of the 'Structure Follows Strategy'
Paradigm ...................................................... 68
5.3 The Global Network Debate ......................................... 77
5.4 General Characteristics of Global Networks ............................. 87

6. Network Research .................................................... 95


6.1 Structural Network Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 96
6.2 Social Network Analysis .......................................... 101
6.3 Interorganizational Network Research ................................ 110

7. Developing a MNC-Network Perspective .................................. 120


7.1 The MNC between Social and Interorganizational Networks ............... 120
7.2 The MNC-Network Framework ..................................... 131
XVI CONIENTS

7.2.1 MNC-Network Nodes ......................................... 133


7.2.2 MNC-Network Relations ...................................... 138
7.2.3 Studying the Operating Core ofMNCs from a Network Perspective:
The Vertical and Horizontal Network Level ........................ 139
7.2.4 Studying Managerial Processes: The Coordination and Decision
Network Level .............................................. 145

8.The Coordination and Decision Framework ................................ 152


8.1 Network Management of Change: Planned Evolution .................... 153
8.2 Context Management ............................................. 158
8.3 The C&D Framework ...................................... " ..... 165

9. Research Methodology ................................................ 171

10. The Management of Coordination and Decision Processes in Global Firms. . . . . .. 189
10.1 Structural Context Management of C&D Interactions ................... 189
10.1.1 Formal Structure ............................................ 190
10.1.2 Formulated Strategy ......................................... 203
10.1.3 Activity Configuration ....................................... 223
10.1.4 Formal Configuration of Decision-Making Responsibility ............ 229
10.1.5 Relationships between Variables of the Structural Context ............ 233

10.2 Managerial Context Management of C&D Interactions .................. 236


10.2.1 Key Characteristics of the Operational Process . . . . . . . . . . . . . . . . . . . . . 238
10.2.2 Components of the Managerial Context .......................... 245
10.2.2.1 The Management of Formal C&D Interactions ................. 245
10.2.2.1.1 Formalization ....................................... 245
10.2.2.1.2 Planning and Information Systems . . . . . . . . . . . . . . . . . . . . . . . 249
10.2.2.1.3 Formal Control Mechanisms ........................... 260
10.2.2.2 The Management of Informal C&D Interactions . . . . . . . . . . . . . . . . 275
10.2.2.2.1 Liaison Devices ..................................... 275
10.2.2.2.2 Communication ..................................... 287
10.2.2.2.3 Socialization ........................................ 301
10.2.2.3 Perceived Effectiveness of Formal vs. Informal Mechanisms ...... 316

11. Conclusions and Implications for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . 329


11.1 Summary of the Research Findings ................................. 329
11.2 Conclusions ................................................... 333
11.3 Directions for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 341

Appendix A: Selected Organization Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343


Appendix B: Sample Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
Appendix C: Research Instrument ......................................... 354
Appendix D: Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
LIST OF FIGURES XVII

LIST OF FIGURES

Fig. 1: Line of argumentation


Fig. 2: Exploratory vs. falsificational paradigm of empirical research
Fig. 3: Pattern of reasoning
Fig. 4: Determinants of FDI
Fig. 5: Analytical framework for the administrative system of the MNC
Fig. 6: Categories of interdependence
Fig. 7: Centralized hub model
Fig. 8: Decentralization federation model
Fig. 9: The integration - responsiveness framework
Fig. 10: The value chain
Fig. 11: Development towards transnationalism
Fig. 12: Competitive dimensions of the globalization debate
Fig. 13: Dimensions of global orientation
Fig. 14: Determinants of organizational action
Fig. 15: The basic model of international operations
Fig. 16: Variations in structure or process across subsidiaries of a multinational enterprise
Fig. 17: Local organizational and international dimensional fields ofMNCs
Fig. 18: Pattern of global decision-making
Fig. 19: The environment of global decision-making
Fig. 20: Evolution of organization structures for 180 U.S. based MNCs - Update from
Stopford & Wells (1972)
Fig. 21: Efficacy of alternative mechanisms for managing strategic responsibility
Fig. 22: The 'structure follows strategy' logic
Fig. 23: The integrated network model
Fig. 24: Elements of an alternative logic to the 'structure follows strategy' paradigm
Fig. 25: The development of the MNC-Network perspective from the existing organizational
network literature
Fig. 26: Non-directional sociometric graph
Fig. 27: Hierarchy versus Network
Fig. 28: Types of communication networks
Fig. 29: Relationships and interaction in industrial markets
Fig. 30: Common network types
Fig. 31: Hierarchy of network nodes
Fig. 32: The MNC-network framework
Fig. 33: Basic parts ofMNC organizations
Fig. 34: Vertical and horizontal network level
Fig. 35: Coordination and decision interactions within the MNC-network framework
Fig. 36: The management conception of planned evolution
Fig. 37: Deliberate, realized, and emerged strategies
Fig. 38: The coordination and decision framework
Fig. 39: Prevailing formal archetypes of the sample firms
Fig. 40: Index of relevance of global strategy levers
Fig. 41: Index of relevance of strategic objectives
XVIII LIST OF FIGURES

Fig. 42: Index of relevance of core competencies


Fig. 43: Index of relevance of industry characteristics
Fig. 44: Activity configuration
Fig. 45: Formal configuration of decision-making responsibility
Fig. 46: Interdependencies of the OV AP
Fig. 47: Interconnectedness of subsidiaries
Fig. 48: Degree of formalization in various areas of organizational decision-making
Fig. 49: Strategic planning tools
Fig. 50: Utilization of sources of information about the external environment
Fig. 51: Utilization of sources of information about the internal situation
Fig. 52: Control types and its antecedent conditions
Fig. 53: Degree of control in decentralized areas of decision-making
Fig. 54: Instruments of behavior control of subsidiary executives
Fig. 55: Control devices
Fig. 56: Recognized dimensions of subsidiary performance
Fig. 57: Performance indicators used for subsidiary executives reward systems
Fig. 58: A continuum of liaison devices
Fig. 59: Team based management approach
Fig. 60: Communication media and information richness
Fig. 61: Relationship between characteristics of organizational units and coordination devices
Fig. 62: Utilization of communication devices in cross-border communication
Fig. 63: Visiting pattern of top-management and subsidiary executives
Fig. 64: Prevailing contents of inter-subsidiary communication
Fig. 65: Effect of business meetings on the overall communication intensity
Fig. 66: Models of subsidiary participation
Fig. 67: Influence of organizational groups on strategy formulation
Fig. 68: Objectives of management development programs
Fig. 69: Elements of management development programs
Fig. 70: Means in support of subsidiary executive socialization
Fig. 71: Prevailing contributors to coordination
Fig. 72: Information sources of top-management used for strategy formulation
Fig. 73: Implemented integration mechanism
Fig. 74: Global integration levers
Fig. 75: The normative view of network management
Fig. 76: A more comprehensive conception of network management
LIST OF TABLES XIX

LIST OF TABLES

Table 1: Rationalistic model of deductive reasoning


Table 2: Key characteristics of the pre-global view of international management
Table 3: Selected conceptions of globalization
Table 4: Pressures for global integration and local responsiveness
Table 5: Global strategy: an organizing framework
Table 6: Summary of the pre-global and the global school of international management
Table 7: Factors and components comprising the organizations internal and external en-
vironment
Table 8: Important fits between elements of strategy and types of organizational structure
Table 9: Strategic capabilities, organizational characteristics, and management tasks of
transnational organizations
Table 10: Synthesis of the global network debate
Table 11: Analytical network levels
Table 12: Dyadic network properties
Table 13: Relational network properties
Table 14: Positional network properties
Table 15: Basic dimensions of structural network analysis
Table 16: Communication roles
Table 17: Prescribed and emergent network dimensions
Table 18: The differentiation of social, MNC, and interorganizational networks along selected
dimensions.
Table 19: Predominant exchange focus of social and interorganizational network research.
Table 20: Conceptual MNC-network levels
Table 21: Strategic trade-offs of global configuration
Table 22: Two perspectives on organizational learning
Table 23: Induced versus autonomous strategic behavior
Table 24: Description of types of strategies
Table 25: The 12 sample firms
Table 26: Selected characteristics of the sample
Table 27: Descriptive sample statistics
Table 28: Number of functional segments in different countries per continent
Table 29: Estimated distribution of functional activities across continents
Table 30: Structural characteristics of the sample firms
Table 31: Major dimensions of global strategy content
Table 32: Spearman rank correlations of global strategy variables
Table 33: Descriptive statistics of global strategy dimensions
Table 34: Descriptive statistics of globalization drivers
Table 35: Spearman rank correlations between strategy variables, strategic objectives and
core competencies
xx LIST OF TABLES

Table 36: Spearman rank correlations between strategy variables, industry characteristics and
globalization drivers
Table 37: Configuration of functional activities
Table 38: Configuration of decision-making responsibility
Table 39: Coordination mechanisms
Table 40: Distinguished sources of information about the external environment
Table 41: Distinguished sources of information about the internal environment
Table 42 :Characteristics of global planning processes
Table 43: Pattern of coordination meetings
Table 44: Mann-Whitney-U Test of two clusters management approach for selected contin-
gency variables
Table 45: Mann-Whitney-U Test across communication media
Table 46: Concentration of operational responsibility
Table 47: Descriptive statistics on the effect of informal relationships
Table 48: Spearman rank correlations between integration levers
Table 49: Mann Whitney-U-Test of non-participatory vs. participatory management approach
INTRODUCTION

1. INTRODUCTION

In the 1960s and 1970s, academic attention to international management concentrated very
much on the discussion about the driving forces that led firms to invest outside their home
countries. Theories of foreign direct investment (FDI) sought to explain the rise of multi-
national companies (MNCs) which after the second world war (WW II) expanded with a
tremendous speed. In the early 1980s, a new stream of literature began to emerge within
international management. Less concerned with reasons that explained the existence of
MNCs, a group of scholars began to devote their attention on the managerial challenge of
effectively managing MNCs with worldwide operations. The fact that many MNCs in the
1980s were typically operating in all key-markets led to the development of the global
management literature. The debate on the specific nature of global management, or
globalization respectively, has infused the eighties and remains to be an interesting topic for
academia arid practitioners alike.

A large number of the initial research efforts throughout the eighties was directed at
explaining the heterogeneous and complex phenomenon of globalization by describing
characteristics, elements, dimensions, etc. of the emerging trend. Often, the evident success
of single MNCs like McDonalds or Sony provided rich material on which authors focused
to emphasise promising ways in which firms could benefit from a global management
approach. For various reasons, no commonly accepted definition of globalization has yet
been submitted. Despite a considerable attention in contemporary literature, many scholars
even question that globalization is in fact imposing essential differences to international
management. Among those who believe in the uniqueness of global management, basic
commonalities and the unifying nature that distinguishes global from non-global management
issues is heavily debated.

Building on different schools of thought a number of scholars conceives the phenomenon at


first to imply significant changes to existing strategies. The literature on global strategies
offers a number of conceptual ideas which different authors relate to the nature of a global
strategy. Unfortunately, the variety and ambiguity of these concepts has so far impeded a
congruent definition of what in particular is the defining nature of global strategies.

Although not explicitly denying the importance of strategies, another group of scholars
presumes that globalization foremost influences strategy implementation and organizational
design. From this perspective, competitive advantages arise less from superior ideas and
concepts, but from the appropriate and successful implementation of strategies with a
worldwide focus. Consequently, globalization is conceived as a phenomenon that primarily
requires attention from organizational research.

Regardless of the outlined dispute, this research builds on the conviction that both areas are
2 INTRODUCTION

highly interdependent and that globalization has a serious impact on the management of
international firms as such. In line with the above mentioned group of scholars, this
research builds on the conviction that operating in the global context requires fundamental
changes to management. In this respect, this research fits into the domain of the global
management literature, asking for managerial challenges of internationally operating
entrepreneurial firms.

Being faced with the task of describing the domain of this research it can be noted that the
global management literature can hardly be described as a consistent body of thought.
Applying different often contradicting terminology and focusing on very different areas and
levels of managerial concern the literature presents a very confusing and vague picture.
From a methodological perspective, two major reasons can be attributed to this situation.

Firstly, the tendency to claim universality from case study research has led researchers to
formulate isolated and too narrow concepts which compete for acknowledgement in the
field. Available knowledge to a considerable extent stems from single case studies. On the
ground of isolated case evidence, the studies predominantly report experiences and issues
which are normatively formulated into 'innovative' concepts. Due to the infancy of the
global management school, case studies bear the greatest exploratory potential. Given the
new and unexplored phenomenon, they are indeed the most appropriate research method.
However, normative generalizations of findings derived from single case studies can be
found in many contributions. These are purely speculative and spare every methodological
ground. It appears that the constant publication pressure obliges many scholars to present
immediate results. From this perspective, an aggressive utilization of findings by raising a
good idea or observation into the state of a general theory may be excusable, it is, however,
from a methodological perspective not tolerable. It is important to note that the
methodological objections do not pertain to speCUlations and divergent ideas as such. These
are vital for any scientific progress. The crucial deficiency is rather seen in those works in
which researchers seek to verify their normative expectations with inadequate empirical
rigor, or in other words, where findings derived from case studies are used to verify
normative speCUlations. Ultimately, it is thus not speculations, but their disguise in
unverified 'theories' that accounts for the poor consistency of the global management school.
The briefly described practices have led to the fatal consequence that, despite a large number
of contributions to the literature, the term 'global' is still applied heterogeneously.
Moreover, some normative ideas and concepts appear to have lost touch with the common
practical reality they pretend to describe.

Secondly, the mentioned shortcomings stem from the insufficient incorporation of existing
knowledge. Although this research also builds on the conviction that the global context
imposes some distinct idiosyncrasies to international management, it is argued that this does
not free scholars from taking the applicable knowledge of existing fields of management
science into account. Given the number of different management fields, paradigms,
INTRODUCTION 3

conflicting assertions, etc., this may often seem impossible to achieve. Research on
domestic firms is split into a number of sub-disciplines. The Academy of Management, for
instance, is organized into 21 different divisions, corresponding to the most important areas
of academic interest in the management field. For the international management field,
complexity increases through additional managerial problems which arise from the fact that
management evolves in many different environments. Global management then adds another
dimension, assuming that globalization imposes still other unique peculiarities to
management. Given this, some contributions to the global management school lack the
incorporation of existing theoretical knowledge. Others ground their work on theoretical
knowledge that was derived from the study of domestic firms while inappropriately taking
the limitations stemming from subsuming a new object of research under an existing theory
into account. This results in variously applied paradigms and theories that have not
adequately been verified for the new context they pretend to explain. Due to the poorly
defined state in which the global management school presents itself, however, research that
attempts to contribute to the field must thoroughly describe the theoretical domain on which
it builds and prove that the domain is indeed applicable to the global context.

With respect to the briefly described methodological shortcomings it can be noted that the
global management school is still a very premature area of academic inquiry, or in other
words, it is still in a very early stage of the theory building process. As shown, this phase
is typically characterized by a large range of innovative, but related ideas which are often
presented in a different terminology to emphasize their novel character. Moreover, global
management concepts and approaches are often based on very different, regularly
insufficiently verified, theoretical grounds.

Based on this assessment of the global management literature the general purpose of this
research is to contribute to the development of the global management school towards more
consistency. In this respect, it is argued that before global management can significantly
proceed as a distinct area of inquiry in the field of international management, some
consolidation is needed. For this purpose, 'a step forward requires a step back' approach is
adopted. The present study intends to generate a clearer understanding of the idiosyncrasies
that management in the global context imposes by empirically reflecting a number of
innovative, but to various degrees normative, ideas that have previously been presented by
leading scholars. Please note that the term 'reflects' consciously expresses that the purpose
of this research is not testing. As will be argued in more detail in the next chapter, this
research intends to contribute to the development of the global management literature by
reflecting the appropriateness of a number of innovative and challenging ideas already in the
theory building process. In this respect, the research hopes to facilitate insight that leads to
a more rigorous and accurate process of theory building within the global management
literature.
4 INTRODUCTION

As a specific focus of inquiry this research addresses the general research question of how
global MNCs can most effectively adapt their organizational design and administrative
systems in order to respond to the demands or to exploit the opportunities imposed by
globalization. In the global management literature, this issue is closely associated with the
discussion on global networks. Consequently, the mostly normative literature on global
networks will systematically be reviewed and synthesized for the purpose of studying
existence and scope of network phenomena in global firms. Contrary to prior research, the
framework that will be used to guide the empirical inquiry in the field will not entirely be
developed from the network literature that has been presented in the context of global
MNCs. Instead this research provides an attempt to enrich the network perspective on
MNCs by incorporating the well established bodies of literature of social network analysis
and interorganizational network research. In order to avoid above mentioned
methodological shortcomings, particular attention will be paid to the careful discussion of the
applicability of the analogies derived from related bodies of network literature. The
integration of the literatures on global management and organizational network research
provides ground for the development of the MNC-network framework which is suggested as
a general instrument to study global management related phenomena in MNCs from a
network perspective. In this respect, the conceptual part of this research provides a first
attempt to systematically operationalize the global network concept for the purpose of
empirical evaluation.

The theoretical relevance of this research can thus be summarized as twofold: Firstly, a
framework for evaluating network phenomena in MNCs is developed which facilitates more
rigorous and accurate research in this area. The framework, a number of conceptualizations,
the provision of extensive reviews of the existing literature as well as the incorporation of so
far neglected fields of organizational research also provide some novel thoughts to the
literature. Secondly, the empirical analysis provides important evidence on the question of
which network phenomena can realistically be expected to be found in MNCs with
worldwide operations. This evidence is useful to eliminate and to re-think some ideas on
global networks which, in turn, contributes to a more directed process of theory building.
Based on these methodological foci, it must be noted that the argumentations and findings of
this research primarily address the academic audience. However, this does not necessarily
exclude this research from having practical relevance. Since it would be naive to contend
that consequences for practitioners can only result from well tested and verified theories, it
must be acknowledged that many MNCs are contemporarily struggling with appropriately
implementing strategies formulated in response to the changed environment in the 1990s.
The empirical evidence of this study provides a rich potential to leverage positive and
negative experiences and to contribute to the closing of the often cited 'implementation gap'
of global strategies. Correspondingly, the case study method has been selected as a research
method, because it was felt that an in-depth examination of firms would facilitate the best
platform for the generation of understanding on behalf of both researchers and practitioners.
INTRODUCTION 5

(j) PHILOSOPHICAL
V UNDERPINNINGS
L. V
m. ~.:;:. THE GLOBALIZATION
PHENOMENON
m
L. \j) DECISION-MAKING
GLOBAL

L. f?\ ORGANIZATIONAL
\J/ IMPLICATIONS
®
L. f:K\ NETWORK
RESEARCH
(}i),
L. @ MNC-NETWORK
PERSPECTIVE
CONTEXT OF
L. fi\ COORDINATION AND
LINE OF V DECISION INTERACTIONS
ARGUMENTATION
L. G:\
~
RESEARCH
METHODOLOGY

L. 4B>
\2Y
COORDINATION AND
DECISION-MAKING IN
INT. OPERAT. FIRMS

Fig. 1: Line of argumentation

Fig. 1 exemplifies the line of argumentation followed in this research. In Chapter 2, the
briefly mentioned methodological grounding of this research will be elaborated in more
detail. The previously mentioned state of the global management school merits a thorough
review of the existing literature. Chapter 3, therefore, seeks to identify the general nature
of the globalization phenomenon by asking for the key characteristics which all major
contributions have in common. The imperative to conduct decisions from a worldwide thus
global perspective is finally identified as the unifying premise combining major works.
Global firms, in contrast to their counterparts, are described as conceiving the total of their
operations as an entity rather than as conglomeration of connected, but autonomous units.
Based on the derived conclusions, the context in which decision-making in global firms is
expected to evolve will be further discussed in Chapter 4. It will be argued that the external
environment, from the perspective of a single decision-maker, is a decision-making variable
which comprises of the many organizational fields in which the global firm is operating.

Chapter 5 addresses the organizational implications of globalization. It will be shown that


simply selecting a new structural archetype, for instance, changing from an international
division to a global product structure, is not considered sufficient to meet the imposed
managerial challenges. A review of alternative models of global organization, although
largely normative, provides a richer description of actually existing tasks and challenges.
Through a synthesis of these models it will become evident that the network idea occupies
a central role in all models. In this respect, the network seems to ideally reflect the
6 INTRODUCTION

connectedness which is widely combined with global strategies. However, the network term
is unanimously used in his metaphorical sense. The colloquial use of the network concept is
a far cry from the theoretical and methodological sophistication offered by the network
literature. Therefore, Chapter 6 provides an intensive literature review of existing
organizational network research. The integration of selected concepts and ideas, in
Chapter 7, finally facilitates the delineation of a MNC-network perspective which con-
cludes in the development of a MNC-network framework. The latter is proposed as an
adequate lens through which internationally operating businesses can be studied from a
network perspective. Within the domain of the MNC-network framework, Chapter 8 is
focused on the context in which coordination and decision interactions are most likely to
evolve in networks. In other words, it is asked how management evolves in networks. Based
on the conceptual arguments, a sub-framework of the MNC-network framework, the
coordination and decision framework, will be developed to finally guide the empirical
research in the field. After the research methodology has been introduced in Chapter 9, the
derived findings will be presented and discussed in Chapter 10.
PHILOSOPIDCAL UNDERPINNINGS 7

2. PHILOSOpmCAL UNDERPINNINGS

The general purpose of the second chapter is to outline and describe the methodological
grounding of this research from a scientific research perspective. The briefly presented
methodological argumentation in the introduction highlighted that the purpose of this
research partly stems from a dissatisfaction with the methodological rigor of some works in
the field. To better understand both the outlined criticism as well as how the current research
fits into the general research process of the field, the current chapter is directed at
introducing the philosophical underpinnings of this research.

Given the briefly described state of the global management literature, it will be argued that
the critical rationalism approach to science (Albert 1987, Popper 1976) is inappropriate in
studying social phenomena such as managerial issues in organizations. It will be shown that
quantitative testing of hypotheses closely related to the critical rationalism approach to
science primarily serves the purpose of theory testing rather than theory building. Since the
global management literature is still in the stage of theory building, an exploratory research
design in association with a heuristic framework will be adopted.

Within the paradigm of critical rationalism, the general purpose of scientific research is
the explanation of the observable reality (Albert 1987, for reviews see Kretschmann 1990:
9f., Chalmers 1986: 41f.). The general objective of science is to facilitate a better under-
standing of reality. The outcome of scientific research is a body of valid knowledge which
enables people to understand observable phenomena in reality (plihler 1986). Since knowl-
edge and understanding are not ends in themselves, science is not restricted to prescription.
Pragmatically, it also includes guidance in shaping and changing reality as well as demon-
strating alternative strategies of action (Kieser & Kubicek 1978).

Within the paradigm of critical rationalism, the emphasis of science is placed on the
formulation of theories and the verification of their correctness in logical and rational terms.
Based on the work of Popper (1968), however, logical correctness is a necessary, but not a
sufficient condition to verify a theory. Knowledge expressed in theories must generally also
stand empirical verification to claim validity. Due to the primacy of empirical verification,
theories about the reality can never be absolutely verified for all actually existing situations.
Popper (1968), therefore, demands that the primary purpose of scientific research should be
the formulation of universal theories about the reality. Researchers should then seek to
falsify these theories. According to Popper, the cumulation of knowledge is thus a
systematical elimination of false theories (falsification) rather than a cumulation of true
knowledge. The development of a body of knowledge is a permanent and on-going process
of formulation and falsification of hypotheses.
8 INTRODUCTION

Since empirical verification of hypotheses is inevitably depending on language constructs,


scientific theories are generally subject to considerable interpretation. Additionally, the
selection of research methods can never be objectively true or false. Strictly speaking, the
above formulated formal requirements of scientific research could never be met, because an
objective truth of the reality does not exist. To escape this trap, Popper (1968) argues that
the substance of theoretical truth of theories, due to the lack of an objective measure, should
be evaluated among leading scientists in the field. In order to support the evaluation of
theories by other scholars, research results should additionally reveal the foundation of the
empirical analysis on which their verification was built. From this perspective, theories are
constructed as speculative conjectures created by human intellect in an attempt to overcome
problems encountered by previous theories. Once proposed, theories are to be rigorously
tested. Theories that fail to stand up to empirical observation must be eliminated (Chalmers
1986, 1976).

The practical value of theories lies in their general applicability to a number of events.
Given a valid theory and an observed situation that falls inside the domain of the theory, a
situation can be explained by the theory rather than explaining each single event separately
(Schnell et al. 1992). Once universal theories and laws have been formulated, deductive
reasoning allows the derivation of various consequences that can serve as explanations and
predictions. Deductive reasoning constitutes the discipline of logic. Table 1 illustrates the
pattern of deriving deductive explanations from universal theories.

TheorylLaw When the size of subsidiaries exceeds SR' then executives of the subsidiary are
reluctant to accept directives from headquarters.
Observation Size of Subsidiary A is SA> SR
Prediction The executives of subsidiary A are reluctant to accept directives from head-
quarters.

Table 1: Rationalistic model of deductive reasoning

In the less well-defined field of social science in general and for studying organizations in
particular, the appropriateness of the critical rationalism approach to science as described by
Albert (1987) in combination with the rationalistic model of deductive reasoning for guiding
research proposed by Popper (1968) is for various reasons questioned:
~ By strictly applying all conditions of this research model, it can only be appro-
priately applied in natural science. In a reality shaped by human beings deterministic
theories do not hold. Theories can at most be formulated in a probabilistic manner
(Schnell et al. 1992).
PHILOSOPHICAL UNDERPINNINGS 9

• Organizational processes are largely determined by individuals which do not


necessarily act rationally. Action and behavior in social organizations are subject to
a number of regularly interdependent influencing factors. The resulting complexity
impedes the simultaneous evaluation of all relevant factors in a single research set-
ting. Based on a pre-selection of potentially relevant factors by the researcher, sin-
gular explanations of the organizational reality based on 'ceteris paribus' clauses
never fully explain reality (Kubicek 1977).
• Time and financial constrains of contemporary research both on the side of the
researcher and of the explored firms forbid generous 'trial and error' processes by
testing marginally relevant or isolated hypotheses (Wollnik 1977) .
• Due to the open system character of contemporary firms, empirical evidence can
logically only verify theories at the particular time of testing. Theories about social
behavior in specific situations can thus only claim validity, if the behavior
environment remains unchanged. Theories about social behavior are always only
'quasi'-theories (Albert 1972).

In summary, it can be concluded that the rationalistic conceptualization of theory is too


narrow for the study of social phenomena in organizations. The reason why it is nevertheless
applied in a vast number of empirical studies of organizations primarily stems from the fact
that the critical rationalism approach to scientific research is, due to its logical rigor, often
considered as objective, thus the only true science. However, as Mintzberg notes: "Science
has always been the great smokescreen of the rationalists, worked to a fine art by many
economists who have used all kinds of fancy methodologies to prove the details of their
arguments while obscuring the fundamental premises on which they are based" (1991: 464,
original emphasis).

The missing practical and theoretical relevance of some hypotheses, predominantly formu-
lated and tested in quantitative studies, however, leads to the impression that some research
in the management field lacks adequate rigor also in theory development (Venkatraman
1989). Consequently, many studies too narrowly build on Popper's view of hypotheses
falsification. Although 'true' explanations are produced, it often remains unclear what the
specific contribution to the field actually is. In other words, if a hypothesis does not address
a question of significant relevance in theory building, then the falsification of this
hypothesis does not significantly enhance the relevant knowledge of a field. Research that is
first of all conducted for the sake of proving the correctness of a hypothesis - how marginal
the gain of knowledge may ever be - is an end in itself. In this respect, the current research
adopts the standpoint that scholary work should always be truly oriented at enhancing the
knowledge about reality, no matter how difficult it may later be to convince the academic
field.
10 PHILOSOPlflCAL UNDERPINNINGS

Analogously to research primarily focused on testing marginally relevant hypotheses, the


formulation of normative theories without corresponding methodological rigor and empirical
verification has to be rejected. Subscribing to Popper's demand, a statement or a theory
claiming universality must be empirically verified and indicate the way testing was
conducted. In contrast to the rationalistic model, verifications do not necessarily have to
follow the deterministic pattern of deductive reasoning. The enduring and continuous influ-
ence of a number of exceptional classical works in organization theory based on personal
experiences (e.g. Barnard 1938) and armchair theorizing (e.g. Mintzberg 1979, Thompson
1967) give evidence that inductive reasoning based on qualitative studies can equally contrib-
ute to the body of knowledge of any field of inquiry (Duncan 1979).

Progress of knowledge in any field requires constant interaction between intellectual disco-
very and empirical verification of derived hypotheses in reality (Spender 1979, Kubicek
1975). In contrast to the critical rationalism literature which sees the primary purpose of
empirical research in theory and knowledge verification, this research adopts an exploratory
position in emphasizing the crucial role of empirical research also in the process of
knowledge generation or theory building, respectively (Duncan 1979, Kubicek 1977).

Actually, it is exactly the diffuse state of the global literature which calls for more rigor and
systematic exploration in theory building before theory testing should proceed. As will be
shown in subsequent chapters, the global management field is at an early stage of
development. Research problems of interest still have not been adequately defined in terms
of their components and characteristics. Despite these difficulties, many conjectures and
insufficiently verified conclusions, nevertheless, compete for understanding and
acknowledgement. In this situation, hypotheses worthy of taking the burden of empirical
testing should arise from a determined process of theory building. Thereby, an inductive
rather than a deducting method is considered appropriate (Glaser & Strauss 1967). As part
of the former, the researchers begins with a qualitative exploration and interpretation of the
data in hand and generates hypotheses and a theory from the ground up. Qualitative
exploration and interpretation thus serve the purpose of a more appropriate identification and
conceptualization of problem areas. The purpose of empirical research in this process
abandons the macro-level of hypotheses testing and seeks to exploit the heuristic potential,
residing in the empirical observation of events from an inside perspective. The objective of
exploratory research is the informational exploitation of systematically derived knowledge
from experiences for the purpose of theory building (Wollnik 1977). The exploratory
approach is especially suitable for social science, because a more pragmatic
conceptualization of science is adopted which values enhanced knowledge and understanding
over the verification of meaningless, but testable theories.
PHILOSOPHICAL UNDERPINNINGS 11

In exploratory research, progress results from posing literature induced questions to the
observable reality. In an iterative circle, the reflection of these questions through empirical
research leads to a better understanding and improved knowledge about social phenomena
which ultimately enhances the ability to formulate more complex and appropriate theories
about firms. Exploratory research is not to be mistaken for subjective inductivism,
generalizing the appropriateness of concepts from the study of single cases. The subsequent
review of the field of the global literature will show that exactly inductive speculations based
on case study research are largely responsible for the diffuse state in which the field
currently presents itself. The exploratory research paradigm explicitly obliges researchers
to build their inquiries on existing knowledge. In order to meet these criteria, this study
uses a conceptual framework which builds on a careful conceptual development of central
assumptions and key variables

Conceptual frameworks are used to guide the empirical investigation (see Fig. 2). These
consist of a number of research objects (variables) which are connected by assumed
relations. Relations may include functional and time relations, cause-effect relations as well
as interdependencies. A conceptual framework depicts the general problem orientation of
the researcher with respect to presumed explanations, research related assumptions, and
expectations of relationships between investigated variables.

I Theory r~--------------------------------------------------------------------.

Empirical Re-
Hypotheses search in
Social Science Discovery of
...
1 ...i
Verification 0 f Connections
Connections (Exploratory
(Falsification al Paradigm)
Paradigm) ACtiOn ana
Behavior in r.----------------------------
Situations

Fig. 2 : Exploratory vs. falsificational paradigm of empirical research [Source: translated


from Staehle 1977: 109]
12 PHILOSOPHICAL UNDERPINNINGS

In an exploratory research setting, all literature induced expectations by the researcher are
summarized in heuristic conceptual framework. The latter comprises the most important
variables, possible relationships as well as general questions and issues of interest. Com-
pared to frameworks used for deductive hypotheses testing, heuristic frameworks can, but
do not have to contain hypotheses which assume a specific relation between variables. In
heuristic frameworks, variables as well as relations are with respect to their relevance itself
still variable until their general relevance has been confirmed by first empirical investigation
(Kubicek 1977).

Due the exploratory approach, the complexity of the research phenomenon, and the lack of
prior studies, it was decided to obtain the empirical data of this study by the comparative
case study method. As recommended by Kubicek (1975) a multi-phase research design
should begin with a single case study, followed by replication studies. Only finally, the
theoretical level is raised by conducting large-sample test. This research corresponds to the
middle stage of Kubicek's design, i.e. an in-depth study of a limited number of cases (12
business units of European MNCs with worldwide operations). It was expected that an in-
depth examination of a few firms would provide the best platform for enhanced learning and
understanding of the issues of interest. Furthermore, an in-depth examination of more than
one case was considered appropriate to facilitate case comparisons required to evaluate the
normative concepts derived from single case studies. Data was collected by questionnaires
and corresponding in-depth interviews with 51 top-executives. The obtained data generated
a very clear understanding of network management in the sample companies (see Chapter
9 for a more detailed description of the research design).

The empirical data of this study firstly serves the purpose of verifying the appropriateness
of the developed MNC-network framework. Thus, the framework itself requires empirical
reflection before it can serve as a ground for the derivation of substantial hypotheses.
Empirical evidence is understood as a means to evaluate the relevance of attentional prior-
ities (derived from the normative literature on global networks), pre-selected variables, and
the type of relationships assumed between them as well as the feasibility of the research
process. From its position in the theory building process, the current study and the in-depth
exploration of global network issues in 12 firms is considered as a pilot study which is used
to test first assumptions and central premises in the empirical field. Well beyond the scope
of a pre-test of a large-sample survey, the delineation and empirical exploration of the
developed framework is directed at improving the process of theory building on global
networks. Thus, the present research hopes to facilitate more systematic research on global
networks in the future.

As indicated in the introduction due to the focus on global networks, this research
concentrates on the organizational implications of globalization. In this respect, organization
is considered from an instrumental organizational design perspective, asking for the most
PHILOSOPHICAL UNDERPINNINGS 13

appropriate form of organizing to achieve the objectives of the company. However, due to
the lack of another term, organization is sometimes also used to refer to the MNC as the
subject of study. Global organizations are then synonymous to global firms. Unless
otherwise noted, the use of this terminology does not alter the fact that this research adopts
an instrumental organizational design perspective. More detailedly, organizational design is
discussed from the leadership perspective of top-management. Since the unit of analysis of
the present study is not the MNCs as a whole, the domain of inquiry, i.e. the corresponding
organizational level, requires a more precise specification.

The international scope of activities and thus the exposure to globalization varies
considerably among business units of MNCs. Therefore, the business was selected as the
unit of analysis. In this study, business refers to a set of related product markets and tasks,
not to the MNCs. A business thus covers more than a product line, but typically less than a
whole industry. Throughout this research a business is synonymously referred to as unit,
business unit, or firm. A business encompasses the boundaries of the focal part of the
company and is usually characterized by homogeneous managerial conditions. In most
contemporary MNCs, businesses are on the corporate level grouped into divisions. What in
particular comprises a business largely depends on specific characteristics of the industry
and the particular set of activities pursued by the business unit. A business can thus ulti-
mately only be defined in each single case. For the purpose of this research, it is important
to note that a business refers to a homogeneous domain of competition which is neither
equivalent the corporate, nor to the single product level.

Based on the outlined distinction of a business unit, organizational terms like CEO, top-
management, headquarters, and subsidiary, etc. will be used in their traditional meaning,
however, restricted to the scope of the business units under investigation. Thus, the term
subsidiary refers to all operational activities in a country which are from an organizational
perspective belonging to the business unit. In the case of multi-divisional subsidiaries, i.e.
activities of more than one business unit are grouped under a local subsidiary management,
the analysis is limited to business unit related activities only. Due to the inconsistency of the
literature, as part of the literature review the mentioned terms will be used in the original
meaning of the authors.

Before the organizational implications of globalization can be reviewed in more detail


(Chapter 5), it has to be examined in which way globalization actually influences the
organizational design of firms with significant international operations. In this respect,
organizational implications of globalization define the requirements which are specifically
unique to global business units of MNCs. Since these specific requirements emanate from
the very nature of global businesses, the next chapter is directed at describing and analyzing
the globalization phenomenon in the academic literature in order to derive at major conse-
quences that globalization imposes for organizing international firms.
14 THE GLOBALIZATION PHENOMENON

3. THE GLOBALIZATION PHENOMENON

The emerging phenomenon of globalization has often been proclaimed as imposing funda-
mental changes to the management of MNCs. In the literature, however, it remains unclear
which MNCs are especially influenced and which the crucial implications are that the
phenomenon imposes to the traditional way of managing and organizing MNCs. In order to
be able to analyze the implications of globalization from an organizational perspective, an
interpretation of the phenomenon itself is required before we can proceed to analyze its
implications. In this respect, the purpose of the present chapter is to develop an
understanding of the unifying idea that cuts across the most relevant contributions to the
global management literature. Since the discussion of the question whether a global man-
agement approach is a change of degree or kind is not the main objective of this research,
the developed notion is for the remaining discussion considered as a working premises.
Thus, the validity of developed interpretation is limited to the current research.

Subsequently, a historical perspective will be adopted in order to examine the nature of


globalization. Since the phenomenological conflict of whether globalization is a change of
degree or kind on the first hand is a debate among academics, the evolution of research in
international management will be used to distinguish the novel and unique dimensions of
globalization. In other words, it will be asked from what globalization developed in the
international management literature. This seems appropriate, because the evolution of
research within the last 40 years solidly reflects the corresponding development of MNCs.
The intension of Chapter 3 is, therefore, to compare the pre-global and the global school
of international management through the lens of their reflection in academia, in order to
distinguish novel ideas associated with the emerged phenomenon of globalization. Fig. 3
briefly sketches the line of argumentation pursued in this chapter.

Chapters 3.1 and 3.3 summarize the pre-global and the global school of international
management in regard to a number of important aspects. These also provide the basis for
their comparison and the identification of the nature of globalization (Chapter 3.4). A brief
discussion of external factors that significantly facilitated the emergence of globalization is
given in Chapter 3.2.
THE GLOBALIZATION PHENOMENON 15

Ipre-global school transition Iglobal school


stage
p~trlatio~~tl ....... l tti~I~iri.~fI9M'I ...- -.... 1<>· 9Ioba <j
.. i . :r>
TIME
3.1 3.2 3.3
dispersion of
~

activities
differentiation
I I
extemal
of managerial
responsibility
develop· I I
ments
analytical focus I
mana!lt;lment
mentarlty I
3.4 tg1obalorientation l

Fig. 3: Pattern of reasoning

3.1 THE PRE·GLOBAL SCHOOL OF INTERNATIONAL


MANAGEMENT

The forthcoming paragraph describes characteristics of the pre-global stage of international


management in regard to a number of key dimensions which provide a useful summary of
the cornerstones of this school of thought. In particular, the pre-global management will be
characterized along following dimensions (see Porter 1986, Bartlett & Ghoshal 1986,
Perlmutter 1969): dispersion of activities, distribution of responsibility, analytical focus and
attitudes of executives. The selection of the applied criteria for the comparison was
orientated towards significantly illustrating the difference to the global school which later
will be reviewed. With respect to the amount of contributed literature to the field, the
following brief review of the main ideas does not claim to provide an exhaustive summary
of the field.

DISPERSION OF ACTIVITIES
Starting solely from home market activities, the historical internationalization process of
MNCs was often described in terms of a sequential geographical expansion of foreign direct
investments. Available options ranged from pursuing international strategies, building on
export or licensing, to multinational strategies which typically included the setting up of full
16 THE GLOBALIZATION PHENOMENON

fledged subsidiaries with local production and sales (see Kumar (1989) for a detailed
description of the typical evolution of international engagement).

In academia, research summarized under 'International Business' was mainly interested in


the theoretical foundation of single foreign investment decisions and the explanation of the
rapid expansion of MNCs after the WW II (for reviews see Schulte-ManIer 1988, Kirst
1987, Macharzina 1982, Soldner 1981, Tesch 1980). In the 1960s, the initial and influencing
work of Hymer (fIrst published in 1976) and Kindleberger (1969) examined the evolution of
MNCs in the tradition of the industrial-organization school, assuming that the industry
context is the key determinant for the (competitive) behavior of firms. Translated to the
situation of MNCs, Hymer and Kindleberger argued that MNCs require specific - partly
monopolistic - ownership advantages to compensate disadvantages in competition with
domestic firms. For MNCs, natural barriers to market entry include lack of know-how in
regard to local market conditions, different cultural and environmental circumstances, legal
restrictions, etc.

Another stream of theories on foreign direct investment (FDI) was based on transaction
costs evaluations (Williamson 1975, Coase 1937). Transaction costs theory (see Appendix
A for a review) is based on the basic hypothesis that fIrms internalize activities within
organizational hierarchies whenever the costs of organizing activities through the external
market exceed those of performing these activities within the boundary of the firm. Buckley
& Casson (1976), among other leading exponents of this school (Teece 1983, Hennart 1982,
Magee 1977), conceive MNCs as the hierarchical mode of organizing cross-border transac-
tions. Due to high transaction costs of the external exploitation of intangible assets such as
product, marketing or management know-how, MNCs exploit these advantages inter-
nationally by internalizing them through setting up foreign subsidiaries (see also Kogut &
Zander 1993).

Finally, a third line of arguing building on traditional trade theory describes the expansion
of MNCs into foreign markets and countries as a function of comparative advantages that
those locations offer. These location specific advantages arise from differences in factor
costs, industry productivity, availability of resources, etc. (Veuge1ers 1991). Building on
comparative considerations, Vernon (1966) explains the expansion of American MNCs after
WW II with a Product-Life-Cycle model. Vernon found that most MNCs moved their
production to overseas countries with lower factor costs, once their products had passed the
innovation stage and cost considerations (here, lower labor costs) began to determine
competitiveness.

In an attempt to present a more general framework, Dunning (1980, 1979) summarizes and
integrates leading theories of foreign direct investment into an eclectic theory of interna-
tional production. In his view, the rationale for investing abroad cannot exclusively be
attributed to one of the mentioned advantages, but rather depends on three conditions that
THE GLOBALIZATION PHENOMENON 17

must be satisfied simultaneously, before a MNC will engage in foreign direct investment
(see Fig. 4). Firstly, the MNC must possess net ownership advantages compared to firms
operating in foreign markets. Secondly, it must be more beneficial to exploit these
ownership advantages than to sell or lease them to foreign firms. And finally, the internal
utilization of specific ownership advantages in conjunction with location specific advantages
of a certain country confer particular additional advantages.

OA
ownership
advantages

IA LA
internalization location
advantages advantages

Fig. 4: Determinants of FDI

By offering explanations for the existence of MNCs and their behavior in respect to
geographical expansion, theories of foreign direct investment examine the underlying
advantages which MNCs exploited when they engaged in different countries. Theories of
foreign direct investment are based on the economic logic of net benefit of performing
specific activities in a focal country, compared to restraining from the engagement. This
reflects a perspective which conceives foreign direct investments as a supplement to
domestic business. Foreign direct investments in each single case are assumed to be evalu-
ated against their costs. In this respect, the historical expansion of MNCs is seen as evolving
from the successive exploitation of isolated opportunities, emerging in different countries
(Colberg 1989).
18 THE GLOBALIZATION PHENOMENON

DIFFERENTIATION OF MANAGERIAL RESPONSffiILITY


A second stream of research on MNCs, most often referred to as 'International Manage-
ment', developed partly parallel to international business. Opposed to the economic rationale
of international business, international management scholars focused on the managerial
consequences of the geographical expansion of MNCs. Here, the major question was how
MNCs with a set of foreign subsidiaries could be most effectively managed. Based on the
observation that international operations of MNCs largely emanated from a strong domestic
organization, research in the tradition of international management concentrated on describ-
ing and analyzing the factors that influenced the management of parent-subsidiary relation-
ships. The seminal work of Fayerweather (1982, 1969) on the adaptation of administrative
systems in regard to the management of subsidiary relations provides a typical example and
exemplifies major premises of this stream of literature.

(A) Technical, managerial, and entrepreneurial skills


.!!l
e.G (B) Benefits of unified global strategy
~
.!!
.5
Domestic Organization
Home office
~
III
Local environment (E)
c
o
:;C
"C
C
nI
E
.!!! Distance:

..
iii
c
o
III
C
Time (F)
Information
til - Culture break (C)
~
"C
C
- Nationality break (D)
nI
J: - - - Culture break (C)
.. .......-- Local environment (E)
Foreign Unit
Motivation (H)
Subsidiary S1
dA + dB must be > dC + dO + dE + dF + dG + dH + overhead

Fig. 5: Analytical framework for the administrative system of the MNC [Source:
Fayerweather 1982: 437]

Fayerweather (1969) also takes his starting point in ownership advantages and their inter-
nalization within the boundaries of the MNCs. Within his framework (see Fig. 5), interna-
tional management across-borders is mainly conceived as a unilateral transfer of resources
THE GLOBALIZATION PHENOMENON 19

between headquarters and foreign subsidiaries. The design of the management system, i.e.
organizational processes and administrative planning, has to be adapted to best support the
transfer processes. Thereby, the task of subsidiaries is limited to the implementation of
headquarters' plans within the local environment. This process is assumed to be significantly
influenced by geographical distance, divergent environmental conditions as well as different
cultural and motivational attitudes on the side of subsidiaries. The transfer of information
from subsidiaries to headquarters within the control processes secures that headquarters are
adequately informed about the local situation. Decision makers within headquarters are thus
capable of appropriately incorporating local peculiarities into centralized decision-making
and strategy formulation.

With respect to the distribution of responsibilities within MNCs, Fayerweather's framework,


in place of many other contributions, reflects some basic premises of the international
management literature:

~ Headquarters represent the center of the MNC. Due to the historic evolution,
headquarters are typically considered equivalent to the parent company (e.g. Ford
in Detroit). The latter usually also had the biggest manufacturing facilities (Reich
1991). The parent company is seen as the central control unit in which strategies are
found and all relevant information are processed and analyzed.
~ Overall strategy is decided in the view of and by the parent company and primarily
focused on the domestic market (Jolly 1989). The development of innovations,
resources, know-how, experience, etc. is seen as an exclusive domain of the parent
company. As a matter of principle, innovations are developed for the need of the
home market. Know-how and expertise is only subsequently, via well-established
products, transferred to subsidiaries.
~ Business in foreign markets is welcomed as an additional opportunity to take
advantage of assets already developed for the home country. Foreign subsidiaries are
seen as adjuncts of quick profits or additional revenue (Magaziner & Reich 1985).
The division of roles is also reflected by the terminology which was applied when
firms began to engage outside their home country. Foreign units were called sub-
sidiaries, in contrast to headquarters representing the parent company.
~ Subsidiaries usually serve as agents in taking up and maintaining relationships to
host nations. The management of the MNC-host country relationship is considered
as very critical, since needs and demands of host nations, as formulated through
their governments, often restrict the activities of MNCs. Subsidiaries have to resolve
the conflicting pressures of adapting to the variety and ambiguity of national
demands while maintaining headquarters strategy and direction (Doz et al. 1981).
20 THE GLOBALIZATION PHENOMENON

On balance, it can be noted that international management scholars and the MNCs they
studied, tended to focus on the dyadic management of parent-subsidiary relationships.
Subsidiaries are mostly considered as sources of additional revenue which had to be
controlled by the center.

ANALYTICAL FOCUS
From an analytical perspective, the pre-global MNC was conceptualized in terms of pooled
rather than sequential or reciprocal interdependencies (see Fig. 6).

pooled
interdependence

sequential reciprocal
interdependence interdependence

Fig. 6: Categories of interdependence [Source: Thompson 1967: 54]

Activities and performance of subsidiaries were seen as independent. Each unit contributed
an isolated portion to the overall performance of the MNC. The potential benefit of connec-
tions between subsidiaries was usually ignored. Headquarters were predominantly inclined
to optimize the relationship to subsidiaries on a local for local basis, since each foreign coun-
try, due to unique local peculiarities, was seen as an independent arena of competition,
separated in time and space from others (Jolly 1989: 67). The key question of how to best
manage parent-subsidiary relationships often concentrated on the dichotomy of central
control vs. local autonomy (Welge 1981). Scholars representing this line of inquiry concen-
trated on the investigation of contextual factors influencing the efficiency of parent-
subsidiary relationships in order to depict optimal levels of decentralization and formaliza-
tion for crucial administrative and functional dimensions (Kenter 1985, Dobry 1983, Leksell
1981, Hedlund 1980, Welge 1980). The conceptual focus of this stream of international
THE GLOBALIZATION PHENOMENON 21

management was thus limited to dyadic relationships between headquarters and focal subsidi-
aries. Thereby, the analysis of headquarters-SUB relationships in one region was often
generalized to derive at conclusions for the structure of MNCs in general (e.g. the study of
Hulbert & Brandt 1980). If responsibility in a certain field was delegated to subsidiaries,
delegation usually implied full local autonomy as long as performance expectations of
headquarters were met. Therefore, local activities were primarily aligned to local contextual
factors in order to maximize local profits. Flexibility in decision-making on the level of
subsidiaries was exclusively exercised in favor of local objectives and profits.

MANAGEMENT MENTALITY
In his seminal article, Perlmutter (1969) argued that the international development of MNCs
is strongly related to the way executives think about international business (see Koglmayr
1989 for an empirical examination of international orientations). Based on the analysis of
regional, divisional, and functional decision-processes in MNCs, Perlmutter developed a
typology of headquarters executive orientations towards doing business abroad. Although the
study was focused on the micro-level of executives, the author holds the derived attitudes for
representative to generally reflect the orientation of headquarters towards their subsidiaries.
In particular, Perlmutter distinguished ethnocentric (home country oriented), polycentric
(host country oriented), and geocentric (world oriented) mind-sets of executives (Perlmutter
1969). The first two attitudes fall into the category of pre-global thinking whereas the latter
fits into the global school and will thus be described in the succeeding chapter.

In ethnocentric MNCs, most activities are still performed in the home country. All
activities are believed to be predominantly home country oriented. The identity of the firm
is strongly associated with the historic nationality of headquarters. Well-established routines,
procedures, and systems of the home company are, with only minor adoptions, usually
applied to subsidiaries. "This works at home; therefore it must work in your country"
(perlmutter 1969: 12). Communication, usually in form of orders and directives, unilaterally
flows from headquarters to subsidiaries. To implement parent's strategy and objectives,
ethnocentric MNCs frequently rely on expatriates, delegated to executive positions in sub-
sidiaries. Local staff is regularly considered as incapable of adequately managing the sub-
sidiary according to headquarters' demands.

Studying the influence of administrative heritage on the development of international


operations, Bartlett (1986) derived at a management model (see Fig. 7) which largely
corresponds to the type of ethnocentric MNCs described by Perlmutter (1969). According
to Bartlett, the structural configuration and management pattern illustrated by the
centralized hub model are typical for Japanese MNCs. Thus, crucial upstream activities
such as product design and manufacturing are retained and centrally controlled by the parent
company.
22 THE GLOBALIZATION PHENOMENON

Tight, simple
controls; key
strategic
decisions made
centrally

Fig. 7: Centralized hub model [Source: Bartlett 1986: 375]

The key characteristic of polycentric MNCs, in contrast, builds on the assumption that
requirements imposed by country differences cannot be efficiently controlled by headquar-
ters. Based on the tenet that local people know best how to operate in their own environ-
ment, decision-making responsibility is largely decentralized. Subsidiaries enjoy full
autonomy in optimizing their activities in regard to local conditions. They are usually just
financially controlled by headquarters and headed by local executives with intimate know-
ledge of local peculiarities. Subsidiaries operating in foreign countries aspire to achieve
acceptance as a local company. Due to the autonomy given to subsidiaries, polycentric
MNCs restrain from coordinating their different subsidiary strategies from a global
perspective. Analogously to the ethnocentric mentality, Bartlett's (1986) decentralization
federation model serves as a helpful illustration of the polycentric attitude distinguished by
Perlmutter (see Fig. 8). From this perspective, the MNC is conceived as a federation of
independent and autonomous national subsidiaries which are, apart from ownerships ties,
only loosely connected to the parent company.
THE GLOBALIZATION PHENOMENON 23

" Mainly
financial flows
(capital out;
dividends back)

Fig. 8: Decentralization federation model [Source: Bartlett 1986: 374]

In summary. both the ethno- and the polycentric management mentality reflect a limited
sensitivity of headquarters executives to the potential benefits of coordinating international
operations beyond introducing established products and routines in foreign markets. Pre-
global MNCs are firmly anchored in their home country and view subsidiaries as satellites
established in foreign countries.

Table 2 finally summarizes the key characteristics of the pre-global school along the
discussed dimensions.

PRE-GLOBAL SCHOOL OF INTERNATIONAL MANAGEMENT


Dispersion of sequential foreign Investments, setting up of subsidiaries for the purpose
activities of local sales and/or production
Differentiation of mana- responsibility remains within headquarters which are the center of the
gerial organization, one-way flows of resources from headquarters to sub-
responsibility sidiaries
Analytical focus conceptualization of dyadic headquarters-subsidiary relationships. pooled
interdependencies
Management ethnocentric or polycentric
mentality

Table 2: Key characteristics of the pre-global view of international management


24 THE GLOBALIZATION PHENOMENON

3.2 EXTERNAL FACTORS REINFORCING GLOBALIZATION

The emergence of the globalization phenomenon at the beginning of the 1980s is regularly
attributed to several environmental factors that significantly supported the emergence of the
phenomenon (see VoS 1989 for a more extensive review).

The most often quoted factor is the convergence of consumer preferences in industrial
nations after WW ll. With increasing levels of disposable income, so the observed tendency,
people regardless of their cultural or ethnic background begin to develop partly similar tastes
and lifestyles and demand the same products (Ohmae 1987: 10). Irrespective of whether this
tendency results from the universality of human nature, or from the fact that 'Western'
counties like the United States and European nations represent the most advanced industrial
economies, it is today undoubted that Western lifestyle and patterns of consumption have
also been adopted by all newly industrialized countries, with opening economies such as
Russia and China following up. In this respect, it is commonly asserted that the convergence
of consumer preferences is a function of the increasing trend towards deregulated free
market policies which provided ground for the rapid industrialization of the world economy
after WWll.

The diffusion process of western tastes and lifestyle was supported by significant advances
in transport, telecommunication and media technology. These allowed fashions, trends,
ideas, tastes, etc. to diffuse more easily across national borders. In the global era, the power
of national borders in segregating international operations into neat clusters of distinct areas
of competition has faded. Today, large MNCs typically operate allover the world. Due to
the increased permeability of county borders, MNCs are able to raise capital, conduct
research, buy supplies, manufacture and market their products wherever they find the best
opportunity to do so. Political boundaries are only of relevance, if they significantly restrict
the scope of options.

The opening of national economies was facilitated by the GATT achievements which
obliged national economies to liberalize product and factor markets. As a consequence, the
world economy has recently become highly interdependent, leading to a more rapid diffusion
of innovations across countries. Especially the latter development is often held responsible
for the shortening of product life cycles evident in many high-technology industries. This
forces firms to exploit their investments more rapidly and in terms of world market dimen-
sions and volumes.

Based on these developments, patterns of competition and cooperation have rapidly been
altered. The three major trade blocs, NAFTA, EC, and Pacific Rim, have fundamentally
changed the world economy into a global triad (Ohmae 1989). The triad regions serve as
regional hubs for the rest of the world. In industries in which large volumes determine
THE GLOBALIZATION PHENOMENON 25

profitability and competitiveness, the ability of firms to survive is increasingly determined


by the success in the triad markets. Firms operating in industries such as consumer elec-
tronics, pharmaceuticals, or automotives are currently faced with a new competitive
environment.

For MNCs which in the past were often forced to respond to restrictive host country regula-
tions, opportunities arising from the increased permeability of county borders (Kogut 1991)
offer a large range of new competitive options. The changed competitive environment, in
turn, imposes significant changes to the way internationally operating firms have to be
managed effectively.

The specific options and implications arising from the emerging phenomenon of
globalization are subject to a substantial and heterogeneous controversy in the academic
literature. The next chapter gives a brief introduction of major contributions and intends to
synthesize the main ideas.

3.3 THE GLOBAL SCHOOL OF INTERNATIONAL MANAGEMENT

The importance and centrality of the globalization literature to the current study merits a
more comprehensive description, compared to the previously reviewed pre-global school.
Most contributions to global management have been submitted in the area of strategy.
Although the main contributions will be introduced and discussed, it is important to note that
the question of what exactly determines a global strategy, is not the primary purpose of the
subsequent literature review (Chapter 3.3.2). The major objective is rather, to elicit from
leading scholary work what in the different approaches constitutes the phenomenon of
globalization and which particular implications the phenomenon is believed to impose for the
management of internationally operating firms. Based on the selected approach of exemplify-
ing the novelty of the global management school by comparing it to its predecessors,
Chapter 3.3.3 will contrast the thinking of the global with the pre-global school. Due to the
previously mentioned diffuse state of the global management school, it is considered
appropriate to first of all examine the applied vocabulary in more detail (Chapter 3.3.1)

3.3.1 A BRIEF EXPLICATION OF TERMINOLOGY

Over the last decades a large number of contributions to the international management
literature adopted the term 'global' to quite a variety of concepts, models, and ideas causing
a considerable degree of semantic ambiguity. In this respect, the groundless escalation of
vocabulary that Mintzberg (1991: 464) notes for the strategic management field also
accounts for the global management literature. Since globalization or global management can
26 THE GLOBALIZATION PHENOMENON

be seen as the dominating and most popular trend in international management research of
the eighties, a whole range of older concepts and ideas has been re-presented in the light of
globalization. The inflationary usage of the term 'global' contributed significantly the
confusion which currently describes the state of global management (Ghoshal 1987, Porter
1986). Some researchers have even broadened the chaos by creating new expressions with
sometimes subsuming old or marginally new thoughts or ideas to the term. The label
'global' was, for instance, replaced by 'multi-focal' (Prahalad & Doz 1987), 'multi-local'
(Agthe 1982), 'supranational' (Ohmae 1989), or 'transnational' (Bartlett & GhoshalI989).
This makes it even more difficult to delineate a consistent and clear picture of the state of
the art of global management. In accordance to Koontz (1961), one could speak of a 'Global
Management Label Jungle' which accounts for some intricacies in research of international
management. This necessitates a brief discussion of the prevailing connotations of the term
'global'.

The fIrSt important appearance of the label 'global' in international management is found in
the work of Fayerweather (1969)1. The author described his unification strategy as 'global'
in contrast to other strategic options that focused on the management of dyadic relationships
to single subsidiaries. In this respect, 'global' describes an ethnocentric multiple-subsidiary
approach which focuses on more than one subsidiary. In this line of thinking, management
was predominantly dichotomized into local spheres of subsidiaries and the global area of
headquarters responsibilities.
A second dimension was added to the expression, by relating the notion of similarity to
areas affecting all subsidiaries. Here, 'global' was used as a synonym to standardization.
Differing areas, in contrast, were usually captured by the phrase 'local differentiation'.
Since standardization always requires a central coordinating authority, the standardization
dimension considerably overlaps with the 'global responsibility' and centralization perspec-
tive of headquarters (Prahalad & Doz 1987).
A third major interpretation of the term captures the geographical spreading of the firms's
activities. From this perspective something labelled 'global' captures the whole world
(Porter 1986, Kogut 1985). In international management, the geographical interpretation
usually refers to important regions that are believed to be of eminent importance for a
'global' strategy rather than that a 'global' strategy would have to include all countries of the
world (Ohmae 1987).
The fourth meaning of 'global' is closely related to the previous meaning. Thus, 'global'is
often used to refer to the totality of all elements of a system. A characteristic of the total
system, i.e. the system as a whole, is 'global' compared to a characteristic that applies only
to a sub-group of elements. Transferred to the MNC, some authors use 'global' to refer to
all subsidiaries, regardless of their number or location.
Another continuing facet of the term 'global' is its dichotomous usage to the local dimen-
sion of international management. Thereby, 'local' usually refers to the degree of local
content, local or host country managers, or locally distinct organizational pattern (Westney
1993). Frequently, the term 'local' is used to express the necessity to adapt managerial and
THE GLOBALIZATION PHENOMENON 27

operational processes to host country conditions that oppose a general or universal ('global ')
management approach.

Finally, the term 'global' is often applied in contrast to multinational management. From
its basic meaning as reflected in the usage of MNC, the term 'multinational' points to the
fact that a firm operates in more than one country. However, some authors have used the
term to describe the polycentric management pattern, prevailing in the pre-global era
(Bartlett & Ghoshal1989). Opposed to 'global' management which is focused on integrating
operations multinational management stands for a considerable degree of subsidiary
autonomy.

Due to the brief delineation of prevailing connotations of the term 'global', it is subsequently
possible to introduce and discuss the literature contributions in their original terminology.
The intention of the next chapter is to provide an overview of leading contributions to the
body of global management literature in order to identify the core concept or idea that cuts
across most works. For the purpose of the forthcoming review, the term 'global', or the
synonyms applied by the authors, is to be understood as capturing novel thoughts or
advances opposed to managing the MNC on a country-by-country basis which, as argued,
characterizes the pre-global phase of international management. While reviewing the global
literature, it will be referred to the emerged phenomenon as 'globalization'. In pointing to
the implications arising out of it, the term is sometimes also used synonymous to global
management.

3.3.2 LITERATURE REVIEW

The heterogeneous and hardly consistent body of literature on globalization compels every
new research to defme its underlying position in regard to already existing lines of thoughts.
As outlined in the previous chapter, the tendency to distinguish even marginal differences by
finding new labels without sufficiently taking the existing literature into account, has often
contributed to the diffuse state of today's knowledge on globalization. The forthcoming
passage intends to provide an overview of the field of study on the nature of globalization.
Taking the enormous number of contributions into account, this attempt must inevitably
remain incomplete. Selected contributions are considered to reflect the most important
arguments of the globalization debate.

For the sake of clarity, the selected works have been summarized according to a number of
crucial dimensions (Table 3). In particular, contributions are distinguished with respect to
their strategic logic or general understanding of the phenomenon and the strategic impera-
tives they imply. The additional classification in regard to their assumed global source of
advantage, the locus of strategic initiative and the focus of research, provides a more
profound basis for discussing and distinguishing the concepts from one another.
RESEARCH STRATEGIC LOGIC STRA TEGIC IMPERA TlVE SOURCE OF GLOBAL STRATEGIC FOCUS OF
ADVANTAGE INITIATIVE RESEARCH

Levitt sell standardized products worldwide exploit scale economies through standardiz- additional market volume central market-<lriven
1983 ation competitive strat-
egy
Hamel & cross-subsidization across different competitive analyei<; across country markets, presence in various markets central market-<lriven
Prahalad national markets, counter competi- exploit scope economies competitive strat-
1985 tion, create global brands egy
Kogut profit from country variance through exploit sequential network advantages from integrative management of central asset-<lriven
1990, 1989, operational flexibility multinational coordination of dispersed assets assets in different compara- competitive strat-
1985a,b tive e nvi ron m e nts egy

Ohmae focus on triad markets exploit scale economies through supranational additional market volume central ma rket-<l riven
1989, market segmentation, functional insiderization, competitive strat-
1985 equidistance of perspective egy

Porter gain competitive adVantages from a segmentation of the value chain and conflQur- integrative management of central asset-<lriven
1986 concentrated configuration and/or ation of single activities from a global per- assets in different com para- com petitive strat-
from coordinating among dispersed spective tive environments egy
activities
Prahalad & balance between global integration create organizational capabilities to manage integrative management of dispersed rna rket-<l riven
Ooz 1987 and local responSiveness processes of control, change and flexibility dispersed organization competitive strat-
egy
Bartlett & build transnational strategies design integrated network with flexible sub- integrative management of dispersed asset-driven
Ghoshal sidiary roles and a widely shared global com- dispersed organization competitive strat-
1989 mitment egy
Hamel & competitive innovation instead of set targets to enforce commitment, create global focus on competitive central asset-driven
Prahalad imitation sense of urgency, extensive competitor analy- analysis competitive strat-
1989 SIS egy
Nonaka global Information creation support innovations by creating chaos and dispersed organizational dispersed global organiz-
1990 su pport networki ng knowledge ation
Prahalad & leverage embedded core com pet- identify competencies, modular leverage in un iq ue and d Ifficu II to im itate central asset-driven
Hamel encies across multiple business, core products, business and end products competencies competitive strat-
1990 markets egy

Table 3: Selected conceptions of globalization


THE GLOBALIZATION PHENOMENON 29

STRATEGIC LOGIC AND IMPERATIVES

Despite earlier pioneer works from reputable scholars (Doz 1979, Prahalad 1976,
Fayerweather 1969, Perlmutter 1969), the academic debate on the phenomenon of
globalization was very much triggered by Theodore Levitt's (1983) controversial article on
the 'globalization of markets'. Levitt argues that the convergence of consumer preferences
offers MNCs opportunities to produce and market large scales of standardized consumer
products (for discussions and empirical evidence of this hypothesis see Kux & Rall 1990,
Beutelmeyer & Muehlbacher 1986, Meffert 1986, Althans 1982, Wiechmann 1976,
Sorenson & Wiechmann 1975). According to Levitt, originating economies of scale enable
companies to produce low-cost and high-quality goods simultaneously. Due to technological
diffusion and consumer rationality supported by appropriate marketing strategies, these
universal 'global' products can in the long run even overcome cultural differences which
makes adaptation to local peculiarities superfluous: "The modem global corporation
contrasts poweifully from the aging multinational corporation. Instead of adapting to
supeificial and even entrenched differences within and between nations, it will seek sensibly
to force suitably standardized products and practices on the entire globe" (Levitt 1983: 102).
Similar to Levitt, Ohmae (1989, 1987) argues that MNCs should concentrate their efforts on
the triad markets, Europe, United States and Japan, since the GNP of these countries
represents 80% of the world economy. Given that the similar western life style of triad
countries even transcends their cultural differences, firms should conceive these countries
as part of a huge increasingly homogeneous world market rather than as isolated and inde-
pendent areas of activity.

Compared to the views of Levitt (1983) and Ohmae (1989, 1987), Prahalad & Doz (1987)
take an affiliated, but far more differentiated position. Building on the unification - fragmen-
tation framework (Fayerweather 1969) and the seminal work of Lawrence & Lorsch (1967),
they argue that the characteristics of an international business can be divided into pressures
for global integration or coordination and pressures for local responsiveness (Table 4). These

Pressures for GLOBAL INTEGRA TION Pressures for LOCAL RESPONSIVENESS

multinational customers differences In customer needs


multinational competitors differences in distribution channels
investment intensity availability of substitutes and the need to adapt
technology intensity market structure
cost reduction host government demands

universal needs
access to raw material

Table 4: Pressures for global integration and local responsiveness [Source: Prahalad & Doz 1987: 18-21]
30 THE GLOBALIZATION PHENOMENON

pressures or industry levers (Yip 1989) impose corresponding managerial demands which
can be best captured within the Integration-Responsiveness (I-R) grid (Fig. 9).

integrated product strategy I

wor1dwide business management


electronic components !
R&D :
product emphasis in organization
HIGH GLOBAL BUSINESS :

. ,··multifoG:a1 strategy
Need for t~evislon sets.
, niultifQCQ/ organlz:ati<m ' '
Integration MUl,TlFOCALBI,JSINE$$.'

! locally responsive strategy


LOW : autonomous nat. subsidiaries
i comingware
! mar1<eting
: area emphasis in organization
i LOCAL BUSINESS
I

LOW HIGH
Need for Responsiveness
Fig. 9: The integration - responsiveness framework [Source: Prahalad & Doz 1987]

The I-R framework "explicitly recognizes the need for integrative optimization of multiple
and often conflicting pressures in a business" (Doz & Prahalad 1991: 159) across all critical
managerial dimensions. Prahalad & Doz understand integration as "centralized management
of geographically dispersed activities on an ongoing basis" (1987: 14) whereas "local
responsiveness refers to resource commitment decisions taken autonomously by a subsidiary
in response to primarily competitive or customer demands" (1987: 15). Although these
dimensions implicitly reflect a close affinity to the end-product based standardization -
differentiation trade-off (Kogut 1989), the main interest of Prahalad & Doz (1987) is devoted
to the implications of globalization on managerial processes in MNCs. In their view,
conflicting pressures of integration-responsiveness require a differentiated analytical focus
on processes of control, change and flexibility between headquarters and subsidiaries 2 •

For Hamel & Prahalad (1988, 1985) globalization is also market-driven, but goes beyond
lower costs and product standardization. In analyzing the evident success of Japanese MNCs
in the 1970s, they prefer to view globalization as a world spanning competitive battle in
which global businesses compete for success (Watson 1982). In this respect, Hamel &
Prahalad propose cross-subsidization strategies as a thriving weapon for challenging
foreign competitors. These are based on the idea that MNCs, in pursuit of global brand and
distribution positions in key foreign markets, can attack a competitor in those markets in
THE GLOBALIZATION PHENOMENON 31

which the competitor enjoys a considerable strong position. If the attacked competitor reacts,
for instance, by also reducing prices or by intensifying marketing expenditures, it is, due to
his larger percentage of market share, far more disadvantageous for him than for the
contester. The attacking firm usually finances the attack by using cash flows generated in
other countries. 3 Hamel & Prahalad emphasize that "while the pattern of cross-subsidization
and retaliation describes the battle, world brand dominance is what the global war is all
about" (1985: 140).

By emphasizing the crucial role of innovations for the competitiveness of global MNCs,
Hamel & Prahalad in later works adopted a resource based view of the MNC (for an over-
view see Collis 1991, Tallman 1991). Rejecting common competitive concepts such as 'gen-
eric strategies' or 'strategic fit' (Hamel & Prahalad 1989: 63), scholars of the resource
based school argue that current and future competitiveness hinges upon the firm's ability to
identify, cultivate, and exploit its core competencies rather than to imitate successful
competitors or to adapt to external developments (Prahalad & Hamel 1990). The MNC
should be conceived as a portfolio of embedded core competencies which can be leveraged
for competitive advantage across multiple country markets and businesses. The resource
based view of strategy corresponds to a re-focusation on internal resources for the devel-
opment of distinct competencies. In contrast to the widespread industrial-organization view
of strategy, resource based scholars ultimately argue that firm-specific resources, capabil-
ities and external industry characteristics should determine strategy formulation in equal
terms, just as it was first initially articulated by Andrews (1971).

Compared to concepts introduced so far, the concepts proposed by Porter (1986) and Kogut
(1990, 1989, 1985a/b) draw upon comparative differences among countries. These com-
parative differences can be institutional or legal affairs, host government policies, cultural
factors as well as factor cost or market size.

Rooting in the industrial-organization paradigm, Porter's research is based on the industry


as a unit of analysis. He defines a global industry as one" in which a firm's competitive
position in one country is significantly affected by its position in other countries or vice
versa" (1986: 18). Based on his value chain concept (Fig. 10), Porter proposes that single
segments or activities of the value chain should be configurated, to exploit existing
comparative advantages for the benefit of the business as a whole. Comparative advantages
are specific to each single activity and not to the value chain as a whole (Porter 1986: 37).
32 THE GLOBALIZATION PHENOMENON

~ F,~nn---ln-rr-a-s-tr,~,ct-u-r-e----,,--_;
r-______. -_______

Support Huma~ Resource ~anageme~t

L
Activities "
TeCrnOlogy Deyelopment
~------~---------4,---------+,--------~------~

Iprocurem~t
,
,
Inbound Operations Outbbund Marketing
Logistics Log!istics and
: Sales

Upstream Downstream---
'---------Primary Activities - - - - - - - - - - '
Fig. 10: The value chain [Source: Porter 1986: 21]

Downstream activities, for instance, tend to be more related to the customer and typically
require duplication in major locations. Upstream support activities, in contrast, can very
well be concentrated for a number or all locations elsewhere. The isolated configuration of
activities according to comparative evaluations implies that all value-adding activities do not
necessarily have to be located in the same country, i.e. that the global value-added chain can
be broken across country borders. Since value chain activities are closely linked, dispersed
activities have to be tightly coordinated across borders. Thus, Porter defines a global
strategy along two key dimensions, configuration and coordination: With a global strategy
"a finn seeks to gain competitive advantage from its international presence through either a
concentrated configuration, coordination among dispersed activities, or both" (1986: 29).

Compared to Porter who concentrates on the competitive advantages arising out of strategi-
cally concentrating and differentiating activities, Kogut (1990, 1985a1b) emphasizes the
incremental value of operating a network of well-established assets in multiple countries.
The duplication of assets in different comparative settings, he argues, provides operational
flexibility and offers considerable opportunities to benefit from arbitrage of factor costs,
product prices, competition, currencies or government policies (Kogut & Kulatilaka 1994).
A firm can benefit, for instance, from movements of exchange rates (Casal 1989), if it has
the capability to shift production capacity to a more favorable location. Markets can then
be supplied independently from the location of production. For Kogut, the net advantages of
a global management approach thus primarily encompasses the exploitation of sequential
advantages arising out of coordinating already existing multinational subsidiaries.
THE GLOBALIZATION PHENOMENON 33

Another stream of literature is best represented by Nonaka's concept of organizational self-


renewal (1990, 1988) which resides in continuous information creation. For Nonaka, global
competitiveness depends on the "contradictory task of successfully localizing operations
while simultaneously maintaining the advantages of globalization" (1990: 81). This requires
dynamic co-operation and exchange of information between global and regional headquarters
("middle-up management"). The realization of existing synergies through cross fertilization
of various types of organizational knowledge hinges on the ability to cultivate an
entrepreneurial middle management, since information creation and organizational learning
cannot be achieved by top-down control.

Nonaka's (1990) work, among many others (Kogut 1990, Hedlund & Rolander 1990, Porter
1986), stresses the potential benefits of learning processes which are seen as the basis for
the identification of synergies or new opportunities. For Nonaka, the core of globalization
implies the utilization of creative potential that is dispersed across the global organization.
This idea partly draws on the work of Vernon (1979) who first emphasized that firms, by
adopting a global perspective, can gain considerable competitive advantages from exchang-
ing information within the firm thus facilitating cross-fertilization of know-how, information,
and innovation.

Incorporating many aspects of above authors, Bartlett & Ghoshal (1989) have so far
presented the most extensive work on the managerial implications of globalization. Bartlett
& Ghoshal use the term 'transnational' to distinguish their approach from former models.
Since they address the same area of research which was so far discussed under the umbrella
of globalization, transnational will be interpreted as synonymous to global. To contribute to
the confusion, the authors also use the term 'global' which they employ in the sense of stan-
dardization.

Based on the in-depth study of nine internationally operating MNCs, Bartlett & Ghoshal's
approach covers the development of a transnational strategy model and the description of
necessary organizational capabilities for their implementation. On the strategy side, they
describe the characteristics of transnational strategies as a multidimensional combination of
international, multinational, and global approaches (see Fig. 11). International strategies
exploited centrally developed parent know-how, multinational strategies relied on adoptions
to local differences, and global strategies were based on concentrated global scale oper-
ations. In comparison to these one-dimensional concepts, the newly emerged phenomenon
calls to pursue transnational strategies. These are not concentrated on single dimensions, but
incorporate all dimensions of the former models. Transnational strategies are directed at
gaining competitive advantages simultaneously from various sources (Table 5). Bartlett &
Ghoshal derive their conception of transnationalism from Ghoshal's (1987) attempt to
organize existing literature on the topic of global strategy into a framework. By
34 THE GLOBALIZAnON PHENOMENON

I:~ TRANSNATIONAL 1

Fig. 11: Development towards trans nationalism [Source: Kotler 1990: 89]

reviewing the literature in the field, Ghoshal classified major concepts in regard to the
objectives they address and the strategic measures they propose. Based on the strategic
management literature, possible objectives of MNCs were classified into three categories:
efficiency, managing risks, and learning. The accomplishment of these goals was, in turn,
seen as depending on achieving competitive advantages from three sources: national differ-
ences, economies of scale, and economies of scope. Ghoshal, finally, concluded that "the
strategic task of managing globally is to use all three sources of competitive advantage to
optimize efficiency, risk and learning simultaneously in a world-wide business" (1987: 427).

SOURCES OF COMPETITIVE ADVANTAGE


Strategic National Scale Scope
objectives differences economies economies
Achieving effi- Benefiting from differences Expanding and ex- Sharing of investments
ciency in current in factor costs, wages and ploiting potential scale and costs across prod-
operations cost of capital economies in each ucts, markets and busi-
activity nesses
Managing risks Managing different kinds of Balancing scale with Portfolio diversification
risks arising from market or strateg ic and oper- of risks and creation of
policy-induced changes in ational flexibility options and side-bets
comparative advantages of
different countries
Innovation, Learning from societal dlffer- Benefiting from ex- Shared learning across
learning and ences in organizational and perience, cost redUC- organizational compo-
adaptation managerial processes and tion and innovation nents in different prod-
systems ucts, markets or busi-
nesses

Table 5: Global strategy: an organizing framework [Source: Ghoshal1987: 428]


THE GLOBALIZATION PHENOMENON 35

Fig. 12 finally provides an attempt to summarize the global key competitive factors and
options of global competition in regard to their source (internal-external) and their basic
segmental focus of the value chain (downstream, upstream, or both). In the context of
globalization, upstream activities are considered to be subject to the internal options of
process standardization, operational flexibility, and strategic configuration supported by
external factor such as international differences in factors costs, declining transportation
costs, and more sophisticated international logistical systems. Downstream activities can,
in contrast, benefit from worldwide distribution systems, global brands, cross-subsidization,
and the standardization of product/market concepts. Downstream related internal options are
facilitated by external factors such as liberalization of trade, convergence in consumer
demands, increased levels of disposable income in industrialized economies, and improve-
ments in cross border media technology (e.g. satellite TV). For the value-added process in
general, the increased permeability of country borders allows to move goods, services, and
resources more easily from one country to another. This internally opens opportunities to
benefit from economies of scale and scope, the utilization of know-how and integration.
~
Worldwide distribution
Standardization of Utilize worldwide ~
processes Know-how Global brands o
5tl:I
Operational flexibility Cross-susidization ~
Selected configuration Standardization of ~
of activities product/market concepts @
'"d
INTERNAL
OPTIONS ~
o

I
EXTERNAL Declining trans-
FACTORS portation costs
r
International differences in Convergence in consumer
,r
factor costs demands
Improvements in Increase of income levels in
communication technology industrialized countries
mprovements in logistical Improvements in media
systems technology

Fig. 12: Competitive dimensions of the globalization debate


THE GLOBALIZA nON PHENOMENON 37

Based on the influence of these factors, essentially four dimensions determine the interface
between up- and down-stream activities. Product features and volume of production are
largely determined by factors influencing downstream activities, but significantly constrain
the design of upstream activities. For instance, only if external factors and internal options
result in a far-reaching product standardization, a concentration of manufacturing and the
exploitation of economies of scale are possible. Downstream activities are, analogously,
restricted by cost and quality constraints. These are determined by the setting of factors
influencing upstream activities. A cross-subsidization approach, for example, is significantly
constrained by the operational flexibility and the degree to which goods and financial
resources can be transferred between countries.

GLOBAL SOURCE OF ADVANTAGE,


FOCUS OF RESEARCH, AND STRATEGIC INITIATIVE

In his attempt to synthesize recent literature, Kogut (1989: 383) wants new subjects and
concepts to be analyzed through the lens of what is different when one moves from a
domestic to an international context. In the present logic, this question more appropriately
applies to the pre-global stage, which included the analysis of why companies initially
engaged outside their home country.

What apparently distinguishes global from former thinking is that globalization primarily
affects the management of already established MNCs. Theories of initial foreign direct
investment are thus only of minor interest. Therefore, a more appropriate guiding question
of Chapter 3 is, what changes moving from the pre-global to the global era of international
management. This issue has been applied to the different concepts in asking which dis-
tinctive global source of advantage they implicitly or explicitly emphasize.

All of the presented concepts more or less claim to offer comprehensive guidelines of how
to react to the emerged phenomenon. Due to the intension to find a more integrative
formula, each concept will be analyzed with respect to the specific segment of the discussion
it addresses. Given this, it is helpful to distinguish main focus of research and assumed
locus of strategic initiative of each approach.

The concepts of Levitt (1983) and Ohmae (1989, 1985) are solely based on the emerging
trend of homogenizing consumer preferences which in their view offers size-economies in
production and sales, simply from the cumulation of identical segments of market volume.
Especially Levitt's argumentation is too narrow in exclusively focusing on consumer
industries. Ohmae's views oppose the undifferentiated standardization approach partly by
suggesting to address supranational segments which are converging across countries. For
38 THE GLOBALIZATION PHENOMENON

both Levitt and Ohmae, the core global advantage consists of an appropriate market share
in key markets which enables global competitors to benefit from size-economies. For Hamel
& Prahalad (1985), it is also the well established presence in key markets that provides
additional advantage. However, they additionally stress the arising advantages of scope
which allow to augment the competitive battleground across borders.

The I-R framework of Prahalad & Doz (1987) adds the dimension of indispensable local
responsiveness and variation to the global standardization arguments presented by the
previous authors. Kobrin consequently adds that "economic optimization at the global level
may be an unattainable ideal, given local and political or cultural differences" (1988: 106).
The implicit underlying logic of local differentiation is to reduce local differentiations to an
unavoidable minimum while concentrating on maximal exploitation of cost efficient
standardization. Apart from the fact that these approaches miss other important factors, such
as comparative and risk considerations, the notion that a central plant producing the world
market volume provides maximum efficiency, considerably overemphasizes the effect of
size-economies (Kobrin 1991). Empirical studies provide evidence that economies of scale
in many industries are exhausted at relative moderate volume (Abernathy & Wayne 1974,
Scherer et a1. 1973). Thus, it is important to note that "a standardization and national
differentiation typology is too simple and inaccurate if focused only at markets for final
goods" (Kogut 1989: 385).

From their research perspective, the precedingly discussed concepts have in common that
they identify the globalization phenomenon outside the firm which, they argue, imposes
significant changes in the strategic or competitive positioning of MNCs. The strategies
proposed are primarily market-driven strategies of competitive advantage.

For Kogut (1990, 1985a/b) and Porter (1986), the core advantage residing in globalization
is the ability to combine functional competitive with locational advantages for the benefit of
the MNC as a whole. Porter, similar to above concepts, interprets globalization primarily
as a characteristic of certain industries which require adequate adjustments for firms to
remain competitive. The factors influencing competitiveness, however, are more to be found
inside the firm. In Porter's view, a global strategy reflects the optimization of competitive
and comparative advantages in terms of concentration, differentiation and coordination along
the value-chain.

Kogut (1989) strongly emphasizes multinationality itself as the enduring competitive


advantage arising from globalization. He highlights the strategic value of operating assets in
multiple countries which provides operational flexibility to MNCs. His focus is on the
incremental value of integrating subsidiaries whereas Porters's concept highlights
configurational aspects of locating activities internationally. Both concepts distinguish from
the models above in that they are based on the exploitation of differences rather than on
seeking benefits from commonalities, although the latter is not explicitly excluded.
THE GLOBALIZATION PHENOMENON 39

Kogut (1990, 1989, 1985a1b) and Porter place the global source of advantage inside the firm.
Their concepts can, therefore, be classified as internal strategies of competitive advantage
which emanate from an integrative management of tangible assets. This categorization also
applies to the recent works of Hamel and Prahalad (1989, 1990) who, in question of a too
strong external orientation in competitive positioning, demand a concentration on unique
organizational capabilities and a more efficient exploitation and leverage of core
competencies. In line with the argumentation of Nonaka (1990, 1988), this reflects a strong
emphasis on advantages stemming from the worldwide exploitation of intangible assets. In
all, Porter, Kogut, Hamel & Prahalad, and Nonaka propose asset-driven rather than
market-driven strategies of global competitive advantage.

The discussed concepts represent a range of strategic options and different views of how to
gain advantage from the emerged phenomenon of globalization. Apart from the approaches
of Prahalad & Doz (1987), Bartlett & Ghoshal (1989) and Nonaka (1990) who primarily
focused on organizational implications of globalization, all other concepts share the implicit
premise that the offered strategic options exclusively require central initiative and planning
of headquarters. Thereby, the authors largely neglect the implementational problem of how
the proposed strategic options can be put into effect. Sometimes it even seems that some
authors believe the implementational aspect to be of minor importance, i.e. that imple-
mentational problems are more or less resolved since the decision to pursue a specific
strategic option clearly determines implementational requirements. This issue will be further
elaborated in Chapter 5.

The now completed brief review of the literature on globalization provides ground for the
completion of the comparison of the pre-global and the global body of literature.

3.3.3 COMPARISON BETWEEN GLOBAL AND PRE-GLOBAL


FOCUS ON INTERNATIONAL MANAGEMENT

The subsequent chapter will summarize the advances of the global school applying the same
dimensions that were used to highlight the basic elements of the pre-global body of
literature.

DISPERSION OF ACTIVITIES
Within the global context, the analytical focus of foreign direct investment decisions is not
restricted to conceptually isolated ventures in terms of engaging in specific countries
(Ringsletter & Skrobarczyk 1994). Investment decisions in the global era are rather seen
from a broader worldwide perspective, incorporating the configuration of existing operations
40 THE GLOBALIZATION PHENOMENON

(Hedlund 1993, Kogut 1989). In this respect, it is proposed to configurate single functional
elements of the value chain separately (Porter 1986). Thereby, MNCs can gain competitive
advantages arising from strategically configurating segments of the value chain around the
world, following a pattern that focuses on the overall advantage for the system as a whole
rather than narrowly only on local conditions of either the home, or the host country (Porter
1986).

DIFFERENTIATION OF MANAGERIAL RESPONSIBILITY


Due to their strategically configurated activities around the world, internationally operating
firms are less centered on the parent company. Since subsidiaries often outweigh home
country operations in terms of the general importance for the business as a whole, it is
increasingly considered inappropriate to manage an international business exclusively with
a home country orientation (Bartlett & Ghoshal 1989). This implies that subsidiaries are no
longer only seen as implementors of strategic concepts from the home country. They are
considered as crucial sources of expertise and know-how. It is believed that MNCs derive
sustainable competitive advantages from being able to acquire know-how and strategic infor-
mation anywhere in the world, and to benefit from the aggregation and exploitation of these
resources globally (Nonaka 1988). The diffusion of technological and managerial com-
petence creates the opportunity of scanning for internal or external innovations and new
ideas on a global basis (Hedlund & Rolander 1990, Vernon 1979). Competitive advantages
arise from synergetic rather than from additive coupling of units (Hedlund 1993). An
international business examined from a global perspective thus consists of a set of
internationally dispersed operations rather than a parent-company with adjuncts in foreign
countries.

ANALYTICAL FOCUS
The segmentation of MNCs in clusters of dyadic parent-subsidiary relationships is replaced
by a pre-conceptual neglect of country borders that before inevitably separated fields of
activities along the geographical dimension of nation states in distinct subsidiaries. In the
global context, the impact of country borders is only considered when it actually influences
MNC activities across borders, and not beforehand by conceptualizing the object of analysis.

The permeability of country borders as well as the strategic configuration of activities results
in growing interdependencies between operational activities of subsidiaries. Following
Thompson's classification (1967), it is frequently noted that managing an international
business from a global perspective implies a significant increase of reciprocal and sequential
instead of pooled interdependencies (Hedlund 1993, Ghoshal & Nohria 1989, Bartlett &
GhoshalI989). This also leads to relationships between subsidiaries without direct involve-
ment of headquarters. A more integrated approach results in an increase in possible and
actual linkages between organizational units of the MNC.
THE GLOBALIZATION PHENOMENON 41

MANAGEMENT MENTALITY
In the global context, executives are believed to change their attitudes towards foreign
business from an ethnocentric or polycentric to a geocentric management mentality. The
geocentric orientation of executives embodies many features of the previous discussion on
globalization. Partly, it is even recognized that Perlmutter's typology and his description of
geocentric executive attitudes was the initial contribution to the global management school
(Bartlett & Ghoshal 1989). However, it is meanwhile widely shared that mind-sets and
cognitive structures of decision-makers are of increasing importance in successfully man-
aging global businesses (Doz & Prahalad 1988).

For Perlmutter (1969), a geocentric attitude implies adopting a worldwide approach in


headquarters as well as in subsidiaries. "The firms's subsidiaries are thus neither satellites
nor independent city states, but parts of a whole whose focus is on worldwide as well as on
local objectives, each part making its unique contribution with its unique competence" (1969:
13). Geocentrism overcomes the dichotomy between global and local in conceiving the
performance of each unit as a contribution to the overall success of the business as a whole.
This requires "a collaborative effort between subsidiaries and headquarters" (1969: 13) and
an intensive communication between subsidiaries.

On balance, it can be noted that the era of globalization appears to impose significant
differences to the pattern of international management. Compared to the pre-global era,
which segmented the international management approach into dyadic sets of parent-sub-
sidiary relationships, globalization calls for a more integrated view, conceiving all activities
from a worldwide thus global perspective. Table 6 finally summarizes the developed
distinction between the pre-global and the global body of international literature.

PRE-GLOBAL GLOBAL

Dispersion of activities sequential foreign investments, strategic (re-) configuration of


setting up of subsidiaries for the value chain activities
purpose of local sales and/or pro-
duction
Differentiation of mana- responsibility remains with head- partly delegated global respon-
gerial responsibility quarters, which are the center of sibilities to subsidiaries, which
the organization, one-way flows of are considered as potential
resources from headquarters to sources of advantage
subsidiaries
Analytical focus conceptualization of dyadic head- integrated view of the firm as a
quarters-subsidiary relationships, whole , sequential and reci-
pooled interdependencies procal interdependencies

Management mentality ethnocentric and polycentric geocentric

Table 6: Summary of the pre-global and the global school of international management
42 THE GLOBALIZATION PHENOMENON

3.4 RECONSIDERING GEO·CENTRISM: A PLEA FOR


GLOBAL ORIENTATION

Despite the effort to categorize and systemize most important academic contributions, the
picture of globalization nevertheless remains quite iridescent and heterogeneous. The
preceding overview highlighted that approaches differ considerably in underlying global
source of advantage and proposed means for achieving those advantages. Although most
presented contributions add a piece of insight, the discussion is still lacking a consensual
formula or umbrella concept integrating the multitude of rather isolated academic research
(Ghoshal 1987). The next chapter presents the concept of global orientation as a synthesis
derived from the presented discussion on globalization.

3.4.1 THE NATURE OF GLOBAL ORIENTATION

The quintessence of the previous comparison between both schools of thought exemplified
that major contributions to the global debate share the similarity that they emphasize
opportunities which arise out of conceiving the world-market and the global firm as an entity
rather than as a conglomerate of independent country markets and units. The conclusions
researchers derive from this notion, however, are quite heterogeneous and often conflicting
(Ghoshal 1987).

Caproni et al. (1992) recently emphasized a shift in the international management literature
from the initial 'fit' between strategy and structure or environment, respectively, to a
process perspective that relies "on the assumption that the ways that organizations' members
make sense of their organizations and the global environment enhance or inhibit competitive
advantage" (cited by Kobrin 1994: 194). Following this perspective, the impact of
globalization is conceived as a cognitive variable that requires consideration in strategic
decision making processes. Building on the previous comparison between the most important
contributions to the pre-global and the global literature, the unifying idea of the global
management literature is conceived by what in this work is termed 'global orientation'. The
notion of global orientation, proposed as a synthesized understanding of globalization, is
composed of two dimensions, the analytical focus on the total of all internationally dispersed
business activities and a geocentric attitude of executives (see Fig. 13).

A geocentric mind-set is defined in terms of a global systems approach to decision-making


(Kobrin 1994). Building on the briefly reviewed work of Perlmutter (1969) and Heenan &
Perlmutter (1979), geocentric policies try to balance local and global practices. Headquarters
and subsidiaries are conceived as parts of an organic collective in which responsibilities and
ideas "come from any country and go to any country within the finn" (Heenan & Perlmutter
1979: 21). Thus, a particular element of geocentrism is the elimination of the very idea of
THE GLOBALIZATION PHENOMENON 43

AnalYtical focus .
Geo-centric on the total of all
attftudein internatfonally
decision~making
dispersed units

\ GLOBAL
ORIENTATION
I
Fig. 13: Dimensions of global orientation

a home or a host country. Nationality plays only a subordinate role in the staffing of
executive positions. A geocentric mind-set obliges executives, regardless of their origin or
particular assignment, i.e. in headquarters as well as subsidiaries, to make important
decisions from a global perspective. As Pucik (1985: 434) notes: "The globalization of
market competition brings on the need to foster the development of globally oriented
managers and executives" .

If the geocentric mind-set determines the pattern by which decisions are made, the second
dimension of the concept of global orientation, the analytical focus to the total of
worldwide operations, defines the scope of decision content. Compared to the pre-global
focus on the efficient management of dyadic headquarters-subsidiary relationships, a global
orientation establishes the focus of decision-making on a higher level. All geographically
dispersed units are thereby from an analytical perspective conceived in their totality. Again
this includes important decision-making processes in headquarters as well as in subsidiaries.
This encompasses the abdication of the traditional role distribution where subsidiaries
were only responsible for their local market whereas headquarters would take care of all
issues that transcend the single subsidiary level. The concept of global orientation, in
contrast, emphasizes that all units are conceptually equated in performing critical activities
andlor holding responsibilities.

Interpreting the implications of the concept, it has to be noted that the purpose of the concept
is to propose a unifying formula that addresses the uniqueness of the global management
literature compared to the pre-global literature. Due to the large number of quite
heterogeneous approaches that have meanwhile been presented under the umbrella of
globalization, no single strategic logic or unique competitive advantage can without con-
tradiction be attributed to the term 'global'. Thus, it is proposed to primarily conceive 'glo-
bal' as a process characteristic of those strategic decision-making processes having a
44 THE GLOBALIZATION PHENOMENON

potential impact on the total of all operations. In other words, the concept of global
orientation proposes to link tbe logic of globalization to tbe process of decision-making
rather than attributing it to a specific decision content. The conceptual difference to former
applications of the term 'global' is that the notion of global orientation adopts a strategic
process perspective (Chakravarthy & Doz 1992, Huff & Reger 1987) by linking the nature
of globalization to the process by which global strategy content emerges rather than
prescriptively specifying the content of the 'global strategy' in general (Boettcher 1994).
Globalization is interpreted as a decision-making variable which executives need to
consider in any decision-making process of strategic importance.

From this perspective, any decision or decision-based strategy is global, as long as the
evaluations include the analysis of possible implications and consequences for the worldwide
business 4 • In some cases, a global orientation in decision-making may lead executives to
restrain from integrating activities in two or more countries because the situation in local
environments simply requires differentiation. In other areas, the standardization of activities
might, for instance, offer significant economies of scale (Levitt 1983) and thus call for the
concentration of worldwide activities at one location. However, even if a decision-making
process results in choosing a locally responsive approach, the decision or strategy can be
described as global, as long as it was made on the ground of a global orientation.

It remains to be noted that the advanced argumentation, although novel in the degree, was
derived from a synthesis of existing literature on international management. Single argu-
ments have been partly forwarded by other authors, especially by Jeannet (1991, 1988),
Kogut (1989), Ohmae (1989), Kobrin (1988), Doz (1986), Simmonds (1985), and Dunning
(1980). Suffice to mention that the concept of global orientation has its foundation in re-
considering Perlmutter's idea of geocentrism. Although Perlmutter's typology of man-
agement orientations is widely acknowledged, it is felt that geocentrism especially in the
light of globalization entails some implications that go beyond Perlmutter's initial
contribution and thus merit further conceptual discussion. For this purpose, the next chapter
provides some clarifications about the derived concept of global orientation. Since the latter
serves as the interpretation of globalization underlying the further discussion, these
clarifications are considered necessary to support the clarity and comprehensiveness of its
implications. The intention is not, however, to provide rigorous and theoretically stringent
validation of the derived interpretation, since this endeavour would require a separate
research which by far exceeds the scope of this work. Remember that the concept of global
orientation is just proposed as one of many possible interpretations of the phenomenon. In
its function as a working hypothesis, it at first has to meet the demand of being compatible
and appropriate for the forthcoming network discussion (see Chapter 5.3).
THE GLOBALIZATION PHENOMENON 45

3.4.2 FURTHER IMPLICATIONS AND METHODOLOGICAL


CLARIFICATIONS OF GLOBAL ORIENTATION

(1) Global Orientation is not a strategy, but an orientation of managers!

The major methodological difference between the current interpretation of the nature of
globalization and the previously reviewed literature contributions is that the former is a
management orientation while the latter are strategic concepts. What is the crucial difference
between the two?

From a methodological perspective, the current conceptualization of the global logic differs
considerably from above mentioned contributions which emphasize more or less specific
strategies or competitive advantages open to well-established MNCs. Linking the core of
globalization to the imperative of applying a global orientation in decision-making, conceives
the logic on a higher, more abstract level of managerial action. It is considered as a cogni-
tive variable of executives' mind-sets. This interpretation of globalization incorporates
specific strategies and concepts of competitive advantages rather than questioning their
acknowledgement or validity. The pyramid of intended managerial action (Fig. 14)
exemplifies the discussed distinction.

en
en
w Philosophy
z
W
I-
W anagemen
0::: Orientation
U
Z
o Strategic Objectives
U
Strategy
Measures of Implementation

Fig. 14: Determinants of organizational action


46 THE GLOBALIZATION PHENOMENON

Based on the premise that organizational action stems from a deliberate management
approach and does not exclusively result from ad-hoc decisions, Fig. 14 distinguishes five
determinants of organizational action in regard to their degree of concreteness: philosophy,
management orientation, strategic objectives, strategies, and measures of implementation
(see Welge 1985: 24f. for a more detailed description of the connection between philosophy,
management orientation, and objectives).

The basic philosophy of the firm has the highest level of abstraction. It expresses the
general role the firm intends to occupy in economy and society. The philosophy provides the
connecting link between firm and environment and also embodies the value system of the
firm. As a general ideology, it provides the framework from which managerial action
derives. The management orientation is an outcome of the philosophy, but more precise in
its influence on operational action. It is defined as the sum of values and attitudes of
managers towards events and objects relevant for the firm. In this respect, the management
orientation is one of the key-determinants of how executives manage the firm and make
decisions. Most directly, the management orientation influences the objectives of
organizational action. If executives adopt a long-term strategic approach in managing their
areas of responsibility, strategic objectives define the intended outcome of action, i.e. they
provide the input which determines strategy formulation. The strategy, in turn, on the next
level comprises the general means by which strategic objectives are believed to be best
accomplished. In the last stage, concrete measures of implementation are derived from the
general means formulated in the strategy.

The distinguished levels differ considerably in their effect on the organizational processes.
Thus, the concrete influence on the organizational process increases from philosophy to
measures of implementation. Analogously, managerial processes on the different levels
become less explicit, observable and ultimately subject to control towards the lower end of
the pyramid. It is, for instance, much easier to control a specific measure by which a firm
seeks to implement its strategy than it is to control whether managers have incorporated the
firm's philosophy and behave accordingly.

If the outlined discussion on globalization is applied to the presented conceptualization of


organizational action, it becomes obvious that most contributions to the global management
literature discussed the nature of globalization on one of the levels of strategic objectives or
strategy. The logic of global orientation, in contrast, conceives the phenomenon as having
a major impact on the management orientation thus on a higher level of organizational
action. Due to its higher level of abstraction, the logic of global orientation is suitable to
concentrate previous research and their partly contradicting views on what is the core of a
global strategy under a coherent umbrella. This embodies a shift from an explicitly
articulated strategic concept to a tacit cognitive orientation which makes implementation
subject to a (systematic) management development (Evans 1992; Kumar 1992; Pucik 1992,
THE GLOBALIZATION PHENOMENON 47

1985; Evans et al. 1990). On the one hand, this shift enables us from a methodological
perspective to group all contributions under an aspect that most contributions commonly
share. On the other hand, it comprises the disadvantage that, precisely because of its
generality and its abstraction, the notion of global orientation is less applicable to derive at
practical guidelines for action. By evaluating the trade-off between generalization and
specification, it has to be noted that the specific strategic proposals discussed in Chapter
3.3.2, although more specific in deriving practical guidelines for action, lack generality, i.e.
they are only applicable to a limited number of very unique MNCs. Consequently, they are
not appropriate to fully explain the nature and general rationale of globalization. In addition,
it seems that the global management literature is too narrowly focused on large, historically
expanded MNCs. This largely excludes smaller firms, for instance, suppliers operating in
upstream segments of the value chain from discussed concepts. To conceive the nature of
globalization as a management orientation explicitly also includes these cases.

On the ground of these methodological underpinnings it can be concluded that the concept
of global orientation defmes the unifying nature of the globalization phenomenon on a higher
level of the pyramid of organizational action. Since this level is more abstract, it does not
question the previously reviewed explanations of critical success factors and conditions of
their application of the global management literature. It rather incorporates their views on
an aggregated level. As a consequence, the need of change, i.e. the need to adapt to the new
phenomenon, first of all arises on the cognitive orientation level of individual executives
rather than that an immediate reformulation of the existing strategy is required.

(2) A global orientation is an imperative for firms with international operations!

One of the fundamental assumptions of the economic literature on competition (Porter 1980)
is that firms which do not take appropriate advantage of existing opportunities and which
consequently do not perform as efficient as possible will in the long run face severe
problems to survive. Given the described environmental developments of the international
business context (increased permeability of country borders, less protectionism, convergence
of market demands), it follows that international firms not taking advantage of the emerging
competitive opportunities within their industry will be outperformed by their competitors.
Currently even purely domestic businesses are increasingly forced to adopt a broader
perspective and to monitor their environment in regard to internationally operating com-
petitors from other countries (Tung & Miller 1990). In this respect, it is a unique aspect of
the global context, that domestic firms may even face problems to sustain their
competitiveness once a foreign competitor enters the domestic industry. If the competitor
derives his competitive advantage from the fact that he is able to exploit synergies from
integrating his operations in more than one market, competitive rules are changed which
requires appropriate action of all competitors. On the basis of Porter's (1986) previously
cited definition (see Chapter 3.3.2), the industry changes to a global industry, once a firm's
48 THE GLOBALIZATION PHENOMENON

competitive position in one country is affected by its position in another. The globalization
of a number of industries such as the bearings industry, the automotive industry, and the
consumer electronics industry provide prominent examples for formerly regional or domestic
industries in which competitors driven by first-movers or prospectors (firms which are
constantly and pro-actively seeking to improve their competitiveness), were forced to
conceive their business activities from a worldwide perspective. Global industries inevitably
have to be analyzed from a geocentric perspective. However, the analysis does by no means
determine the strategic consequences a firm has to take (e.g. in terms of a generic strategy).
The conclusions a firm derives from the assessment of a global industry are rather firm-
specific and depend on a number of individual characteristics of the firm, such as core-
competencies, geographic dispersion, etc.

In summary, it can be noted that globalization, interpreted as the imperative to adopt a


global orientation, is more a change of kind than degree. In the same way in that Aharoni
(1966) in the 1960s argued that for firms to look beyond their country borders was a
necessary condition for their foreign direct investments, the competitive situation of the
1980s and 1990s forces firms to adopt a global perspective to sustain their competitiveness.

(3) A global orientation does not require activities iu each country of the world!

Closely related to the previous point, it remains to be noted that a global orientation is not
only subject to firms which are operating in a large number of counties in the world.
Drawing on the terminological discussion presented in Chapter 3.3.1, the term global
describes the area of application of strategic analysis thus the fact that the internal analysis
of existing strategic options has to cover all important units of the firm, regardless of their
location. The extent to which any business is able to benefit from a global management
approach is not a question of size, volume, or market share, but rather subject to the
management orientation as such. If, for instance, the major competitive advantage of a firm
with two location in two different countries is the successful integration of activities (e.g. in
terms of an integrated R&D program), the decision to pursue an integrative approach
resulted from a global orientation.

(4) Global orientation emphasizes the efficiency of the firm as a whole!

In contrast to the pre-global school of international management which analytically focused


on optimizing sets of dyadic parent-subsidiary relationships, a global orientation in decision-
making satisfies a higher level of efficiency in abstracting from partly optimization in certain
areas. Before, autonomy of subsidiaries implied that action was exclusively suited to local
conditions. Potential synergies from integrating activities across borders were sacrificed.
THE GLOBALIZATION PHENOMENON 49

Likewise, a central management approach could not assure the appropriateness of derived
measures to all local conditions. A global orientation, instead, demands the worldwide con-
sideration of all interdependencies and threats as well as realization of opportunities and
potentials of synergy for all important activities. Conceptually, a global orientation thus
focuses on the benefits of joint action between dispersed units and the efficiency of the busi-
ness as a whole. It is accepted that efficiency as a construct is not subject to quantification.
However, it can nevertheless be concluded that each step towards integration exceeds the
efficiency of dyadic optimization which completely neglects potential interdependencies
between subsidiary activities. If, for example, one subsidiary benefits from the experiences
and know-how of another, this process is likely to result in a greater efficiency of the total
system. In this respect, it can be concluded that a global orientation is likely to result in
performance improvements.

(5) The coverage of global orientation is not limited to headquarters!

The coverage of global orientation is not limited to headquarters. It covers the entire firm
and all important decision-making processes in headquarters and subsidiaries (Nonaka 1990,
Hedlund 1986). In contrast to most of the approaches presented in Chapter 3.3.2, the
concept of global orientation does not limit the impact of globalization to strategy
formulation at the headquarters (Kumar 1993). The attribute 'global' does not only apply to
decisions of strategic choices, but encompasses all decisions of crucial importance which
may also include operational issues. This explicitly also obliges subsidiary executives to take
decisions within their responsibility from a global perspective, or to secure the compatibility
of their decisions with the remaining firm. The demand to also force subsidiary executives
to adopt a global orientation in managing their local affairs is a major novelty compared to
pre-global thinking. Due to the arising complexity, a global orientation may in its described
conceptual extreme, hardly be accomplishable. Even if not all potential synergies are accom-
plished, the efficiency resulting from the constant attempt to evaluate strategic decisions
from a global perspective, nevertheless, transcends partly optimization prevailing in the
management of dyadic parent-subsidiary relationships. From this perspective, a global
orientation considered as a commitment to continuous improvement, may be regarded as a
form of organizational learning (Garwin 1993, Dixon 1992, Pawlowsky 1992, Huber 1991,
Fiol & Lyles 1985). Ultimately, it is this particular aspect of global orientation which
provides the interface to the forthcoming network discussion (see Chapter 5.3). In this
respect, the strategic rationale of these concepts may be described in terms of the objective
to exploit all relevant learning processes. This requires a global orientation in headquarters
as well as subsidiaries (Hedlund & Rolander 1990, Bartlett & GhoshalI989).

In summary, it can be noted that the necessity to adopt a global orientation in decision-
making results in a considerable increase in cognitive complexity on the side of executives.
50 THE GLOBALIZATION PHENOMENON

Strategic decisions generally warrant the consideration of implications for the total of all far-
flung dispersed units. Since the coverage of global orientation is explicitly not limited to
headquarters, but generally applies to any decision-making process of strategic importance,
globalization compared to the pre-global school of international management is more a
change of kind than just a change of degree.

NOTES

(1) Since Fayerweather, apart from using the label 'global' for his unification strategy, conceives interna-
tional management from a perspective which previously has been distinguished as pre-global,
Fayerweather's work was not included in the review of the global school.

(2) For an empirical analysis of the I-R framework, see Roth & Morrison (1990).

(3) The concept described by Hamel and Prahalad more or less relates to the Michelin-Goodyear case
(Hamel & Prahalad 1985)

(4) With respect to the previously presented explication of terminology, it becomes obvious that this
research is adopting the 'total system' interpretation of 'global' .
GLOBAL DECISION-MAKING 51

4. GLOBAL DECISION-MAKING

So far we have summarized the literature on global management deriving at the conclusion
that globalization requires crucial decisions to be taken from a global perspective. Chapter
3 was devoted to the identification of the general nature of globalization. This was
necessary, since it was initially asserted that globalization imposes significant differences to
the management and organizing of internationally operating firms. In this respect, the
concept of global orientation and the outlined implications are still too universal for the
determination of the specific organizational requirements that stem from the global context.
Thus, the specification of distinct implications requires a more detailed description of the
context in which global decision-making evolves. The next chapter will, therefore, explain
the nature of decision-making environments in complex firms. It will be shown that the
decision-making context consists of an internal and external environment (Chapter 4.1).
Due to the idiosyncrasies of simultaneously operating in a number of different countries,
especially the conceptualization of the external environment merits further discussion
(Chapter 4.2), before in Chapter 4.3 the nature of global decision-making will, finally, be
conceptually described by synthesizing the results of the previous chapters.

4.1 DECISION-MAKING IN COMPLEX FIRMS

For Doz & Prahalad (1991), the major difference between traditional and global firms stems
from implications that result from the significant increase in multidimensionality and
heterogeneity. Multidimensionality builds on the structural indeterminacy of having to
integrate coordination along the structural dimensions of products, functions, regions, and
sometimes even customers. The need to link various organizational units multidimensionally
strongly corresponds to the notion of global orientation and significantly increases the com-
plexity of the management process (Bartlett & Ghoshal 1989: 157). International
management scholars share the unanimous recognition that MNCs, from a conceptual
perspective, are to be considered as highly complex systems, if not the most complex type
of organization at all (Ghoshal & Westney 1993). Despite this intuitively compelling
observation, managerial complexity has so far seldom adequately been conceptualized in its
precise effect on organizational decision-making in MNCs. In organization theory,
complexity has been widely used to describe either the nature of the external environment
(Duncan 1972, Emery & Trist 1965), or to refer to the size or structure of the internal
organization (Lawrence & Lorsch 1967, Simon 1962, Woodward 1958, see Roters 1989 for
a review).

From a system theory perspective, the complexity of a system is a function of three factors:
(1) number of elements, (2) number of possible relationships between the elements, and (3)
variability of the relationships.
52 GLOBAL DECISION-MAKING

Drawing on the previous argumentation, it can be concluded that compared to the pre-global
situation, not necessarily the number of subsidiaries, but the number and the variability of
possible relationships between organizational units has significantly increased (Hedlund
1986). Since the necessity to adopt a global orientation partly stems from the assumed effi-
ciency of integrating and coordinating action between subsidiaries across borders, the
conceptualization of the global firm implies a high degree of pooled, sequential, and
reciprocal interdependencies (Thompson 1967). In the pre-global school, these were
formerly either subject to central control or left uncoordinated. If it is assumed that
coordination between two elements implies a relationship, it follows that from a system
theory perspective an increase of complexity results in the global context.

Another alternative to conceptualize complexity, is to interpret it as a function of relevant


factors to be considered in decision-making. In this respect, Duncan (1972) conceptualized
the decisional environment along two key dimensions: simple-complex and stable-dynamic.
For Duncan, complexity is a function of the number of dissimilar factors that require
evaluation in decision processes whereas the dynamism of environments refers to the
degree and frequency of change of relevant decisional components. Since a highly dynamic
decision environment can also contribute to the change of the set of relevant factors, these
dimensions are not independent. This highlights that complexity itself is a multidimensional
construct.

Drawing on the work of Duncan (1972: 315), this research conceives environment from the
perspective of single organizational decision units. These are defined as ''formally specified
work groups within the organization under a superior charged with aformally defined set of
responsibilities directed toward the attainment of the goals of the organization. Decision
making per se may be centered in the formal leader and/or distributed to various members
of the specific unit" (1972: 313). This conceptualization of decision-making obviously also
fits the MNC as an object of analysis. Consequently, MNCs will subsequently be conceived
as a set of organizational decision units (subsidiaries) which are represented by their
executives. For the purpose of simplicity, it will be assumed that, unless otherwise noted,
the executive representing the subsidiary is aware and informed about all relevant
developments in his area of responsibility.

Duncan (1972) among others (Lawrence & Lorsch 1967, Dill 1958), conceives the
environment as a decision-making variable. Thus, he argues in favor of subjective or
perceptual measures of environmental characteristics, since only factors that participants
perceive can enter into their decision-making behavior. Opposed to authors asking for what
is outside the firm (objective environment), this implies a change in the use of the term
environment. If the environment is conceptualized as a variable of decision-making
processes, the focus changes to asking which factors are actually recognized and considered
in decision-making (decision-making environment). In a large part of the organizational
literature, it is more common to use the label 'environment' exclusively in the former sense.
GLOBAL DECISION-MAKING 53

Since the main objective is to describe the context in which global decision-making evolves,
it seems appropriate to follow Duncan and to subsequently use the term in his broader
interpretation: "... environment is thought of as the totality of physical and social factors that
are taken directly into consideration in the decision-making behaviour of individuals in the
organization." (Duncan 1972: 314).

INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT

(1) Organization personnel component (4) Customer component


educational and technological background distributors of product or service
and skills actual users of product or service
previous technological and management (5) Suppliers component
skill new materials suppliers
individual member's involvement and com- equipments suppliers
mitment to attaining system's goals product parts suppliers
interpersonal behaviour styles labour supply
availability of manpower within the system (6) Competitor component
(2) Organizational functional and staff units competitors for suppliers
component competitors for customers
technological characteristics of organiz- (7) socio-political component
ational units government regulatory control over the
interdependence of organizational units in industry
carrying out their objectives public political attitude towards industry and
intra-unit conflict among organizational func- its particular product
tional and staff units relationship with trade unions with jurisdiction
inter-unit conflict among organizational func- in the organization
tional and staff units (8) Technological component
(3) Organizational level component meeting new technological requirements of
organiZational objectives and goals own industry and related industries in
integrative process integrating individuals production or service
and groups into contributing maximally to improving and developing new products by
attaining organizational goals implementing new technological advances
nature of the organization's product service in the industry

Table 7: Factors and components comprising the organizations internal and external environment [Source:
Duncan 1972: 315]

Conceptually, the environment of each organizational decision unit comprises of two


dimensions, the internal and the external environment (see Table 7). The internal environ-
ment summarizes decision-making factors which have their origin inside the boundaries of
a firm whereas the external environment refers to factors from outside the firm. Table 7 lists
typical components of both dimensions.

On the basis of Duncan's conceptualization of environment, a global orientation inevitably


leads to an increase of relevant internal and external factors that have to be considered in
decision-making. The variability and heterogeneity of subsidiary contexts significantly
contributes to complexity in terms of an increase of the dissimilarity of relevant factors.
Since all internal and external environmental factors are subject to some degree of change,
the aggregation of developments on a global scale may - due to partly overlapping and
counterbalancing effects (e.g. exchange rates, commodity prices, etc.) - also result in an
additional increase in complexity.
54 GLOBAL DECISION-MAKING

In general, it can thus be concluded that globalization imposes a considerable increase in


complexity. Due to the high compatibility with the concept of global orientation, the further
discussion of this issue will draw on Duncan's interpretation of decisional complexity.
Consequently, decisional complexity is conceived as being contingent on the number of
relevant factors and the degree to which these factors are actually considered by decision-
makers. In contrast to other approaches that attempt to analyze the environmental impact at
the boundary of the firm by specifying the organization-environment-interface, the
environmental impact is considered as a dimension which primarily affects organizational
decision-making. Although the objective number of rationally to be considered factors in the
global context may have increased, it ultimately depends on the individual decision-maker
whether all relevant factors are actually taken into account. Thus, complexity is a
subjective construct which is influenced by the bounded rationality (March & Simon 1958)
and the cognitive schemes of individual executives.

The demand to simultaneously consider all worldwide implications in decision-making seems


to dictate an excessive analytical complexity. In this respect, it is important to note that
human beings process decisional complexity by cognitive maps or interpretive schemes
through which they perceive reality (Boettcher & Welge 1994). Dutton et al. note that "the
interpretive lens of a cognitive map selects aspects of an issue as important, ignores others,
and links them to certain action and consequences" (1983: 311). Cognitive abilities thus
enable human beings to selectively attend to data from their environment. By interpreting
data, they aggregate perceived data into categories and to sort these into cause-effect rela-
tionships.

Several scholars (Weick 1969, Duncan 1972) have pointed attention to the fact that when it
comes to the analysis of external factors, the environment cannot entirely be assessed in
terms of objective measures, but that "the human creates the environment to which the
system then adapts" (Weick 1969: 64). The reaction to environmental factors is not a
rational deterministic process which happens mechanically. It is a function of the attention
to and appropriate interpretation of information about the environment by organizational
actors (Huber & Daft 1987). The cognitive perception of the environment by organizational
members ultimately affects decision-making (Duncan 1972) and thus organizational
effectiveness (Hakanson & Snehota 1989). Based on psychological findings, Weick (1969)
even claims that beyond perception, individuals tend to enact their environment. This means
that perceptions are themselves influenced by the cognitive structures of people. Due to
cognitive dissonances (Festinger 1957), for instance, some individuals actively rearrange or
disregard 'objective' features and tend to perceive events that are likely to fit their cognitive
maps and ignore others.

On the ground of the presented psychological arguments, it is now possible to clarify that the
primary consequence of the global orientation is not to always explicitly process all available
information about other subsidiaries in order to evaluate their relevance. A global orientation
GLOBAL DECISION-MAKINO 55

is not a defined set of specified factors relevant in decision-making. On the level of


decision-makers, the concept of global orientation rather emphasizes the need to broaden
the awareness of the general interrelation and interdependency of operating internationally
and to enhance the readiness to pay attention to developments at other locations.

In summary, it can be noted that both the external and the internal environment comprises
of those factors that executives representing the decision unit perceive as relevant. Given a
global orientation, the factors that finally constitute the relevant decisional context for
decisions cannot be generally determined. Executives themselves rather defme their relevant
decisional context for each decision. A global orientation in decision-making thus requires
a global commitment of executives in key areas of the firm to align their decisions and action
to the necessities of global coordination and integration. From an implementational point of
view, this makes mind-sets and attitudes of executives critical variables in adequately
reacting to the challenges of globalization (Kumar 1993, Bartlett & GhoshalI992a).

On the basis of the developed argumentation, the next chapter turns to the question of what
are potentially relevant factors of the external environment. At the heart, the question
centers around the problem of defining the organization-environment-interface of MNCs.

4.2 THE EXTERNAL ENVIRONMENT OF MNCs

Today, it is beyond debate that firms as 'open systems' (Scott 1992) are inevitably forced to
exchange with organizations outside their own boundaries. A profound conceptualization of
the decisional context in global firms, therefore, requires the identification of potentially
relevant segments of the external environment in order to identify factors that could affect
goal attainment, success or survival of the firm. In this respect, the present chapter seeks to
answer the question of what constitutes the external environment of the MNC. The
forthcoming passage intends to describe the general nature of the organization-environment-
interface of MNCs. Two bodies of organizational literatures can be identified addressing this
issue.

Firstly, a number of scholars devoted their attention to the empirical exploration of


environmental factors that firms perceive as relevant. The most prominent outcomes of this
literature are typologies of factors belonging to the macro-economical (general or remote)
environment (Richman & Copen 1972, Farmer & Richman 1965) and the task environment
(Dill 1958). Chapter 4.2.1 will briefly sketch this line of thought and its application to the
MNC.
56 GLOBAL DECISION-MAKING

Secondly, the issue of whether and how firms are influenced by their environments has
sparked considerable interest among organization theorists. Chapter 4.2.2 will therefore
introduce previously submitted, more organization theory based conceptualizations of the
MNC environment.

4.2.1 ENVIRONMENTAL VARIABLES AFFECTING THE MNC

Traditionally, it was never substantially debated among scholars of various streams of the
classical organization and management literature that organizational design needs to take
environmental factors into account (Thompson 1967, Katz & Kahn 1966, Farmer &
Richman 1965). However, the more recent literature points out that firms typically differ
considerably in the degree and the way the external environment actually influences
organizational decision-making. Some firms, for instance, adopt a more proactive orientation
towards the environment in that they actively manage their environmental interface. This
may include attempts to influence environmental factors in their favor. Others take a more
defensive orientation and only react to environmental factors, if they are forced to (Miles &
Snow 1978). In any case, from the assumption that firms frequently have to interact with
their environment, it follows that environmental factors potentially influence organizational
decision-making.

As mentioned above, the literature distinguishes between two broad environmental forces,
the remote and the task environment (Pearce & Robinson 1988). The remote environment
consists of factors outside the boundaries of a firm, for example, economic, political, legal,
socio-cultural, technological, and physical/geographical factors. Typically, the firm has little
or no reciprocal influence on the these factors. The task environment refers to the factors
in the immediate operating environment that confront and influence the MNC as it attempts
to attract or acquire needed resources or to market profitably its products or services
(Asheghian & Ebrahimi 1990: 203). The most important factors of the task environment
include the firm's competitive and industry position, customer and market conditions, and
its relationship with its suppliers, its creditors, and its labor market.
GLOBAL DECISION-MAKING 57

Host Country A

Home Country Intemational


Economic
Forces Foreign Remote
Environment A

Host Country B

Intemational Legal
Domestic Remote and Political Forces
Environment oreign Task
Environment
B

Foreign Remote
Environment B

Fig. 15: The basic model of international operations [Source: Asheghian & Ebrahimi 1990:
204]

On the basis of this distinction, the pre-global literature described the MNC as consisting of
three different parts: the domestic, the foreign, and the international environment (see Fig.
15). The domestic environment consists of all remote and task factors that are found in the
home country. These factors not only affect the domestic operations, but also the overseas
activities. The foreign environment refers to all the remote and task factors that are
encountered in the foreign nations in which a MNC operates. Thereby, the same categories
of factors may be encountered in the subsidiary environments, except that they occur in the
foreign host country. Finally, the international environment is created from the interaction
between the domestic and the foreign environments. The international environment is mainly
composed of economic, legal, and political factors that transcend the single country level.
Most prominent examples are international organizations such as the European Community
(EC), Organization of Petroleum Exporting Countries (OPEC), or international agreements
such as GATT (General Agreement of Tariffs and Trade).

A central characteristic of the introduced model and the pre-global perspective it represents
is that previous conceptualizations of the MNC-environment have addressed the underlying
conceptual problem in an additive manner by separately conceptualizing the general and task
environments of the home country and a number of host countries. However, this
58 GLOBAL DECISION-MAKING

perspective does not precisely answer the underlying question of what constitutes the
environment of the MNC as a whole. In the light of the globalization debate, a number of
important questions remain unanswered. Is the environment of the MNC as a whole the sum
of all general and task environmental factors? If, then how do the factors actually influence
the firm? If not, are there relevant environmental factors which originate outside the home
or host countries? Does something like a global environment exist which influences firms
regardless of their geographical location?

Apparently, the context of the globalization serves as a platform for a number of novel
conceptual questions which have so far not been appropriately addressed in the literature.
Subsequently, the arguments of Rosenzweig & Singh (1991) and Ghoshal & Bartlett (1990)
will be reviewed (Chapter 4.2.2) since their views entail some novel thoughts which
significantly support the conceptualization of the environment of global firms pursued in
Chapter 4.2.3.

4.2.2 ENVIRONMENTS FROM AN ORGANIZA nON THEORY PERSPECTIVE

The assessment of what constitutes the relevant environment of firms has a long standing
history in organizational theory. A concept of environment entails the fundamental idea of
what organizations are in general and why and how they interact with their relevant
environments. In organizational theory, especially three theories - institutionalization theory,
population ecology theory, and resource dependence theory (see Appendix A for a detailed
review of these theories) - have evolved offering possible conceptions of environments. Only
very recently have researchers begun to devote their efforts to a more fine-grained
conceptualization of the MNC-environment from an organization theory perspective
(Westney 1993, Rosenzweig & Singh 1991, Ghoshal & Bartlett 1990). As frequently
mentioned, the MNC imposes the unique peculiarity that it consists of several 'sub'-
organizations operating in different national environments (Sundaram & Stewart Black
1992). Subsequently, it will be discussed which elements of the above mentioned
organizational theories can be applied to a corresponding conceptualization of the MNC-
environment.

The brief review of the selected organization theories in Appendix A reveals that traditional
organization theories have so far conceptualized the impact of the environment from the lens
offmns operating in single environments (Ghoshal & Westney 1993). Since the MNC has
rarely been taken as a particular arena of study in organizational theory, a theory explaining
the idiosyncratic nature of the environment of MNCs is evidently missing (Ghoshal &
Westney 1993). In the international literature, however, the concepts submitted by
Rosenzweig & Singh (1991) and Ghoshal & Bartlett (1990) merit to be mentioned.
GLOBAL DECISION-MAKING 59

Elements of
organization
structure or
process

high
*
Pessures for *
isomorphism
with the local
environment

*
low
~~~ ________________~~~A
ow Ig
Pressures for consistency within the
multinational enterprise
Fig. 16: Variations in structure or process across subsidiaries of a multinational enterprise
[Source: modified from Rosenzweig & Singh 1991: 348]

Largely building on institutional thinking, Rosenzweig & Singh (1991) argue that structures
and processes in each subsidiary are exposed to the conflicting pressures for isomorphism
with the local environment and consistency within the MNC (see Fig. 16). Since pressures
for conformity to local conditions and for internal consistency may vary from subsidiary to
subsidiary, patterns of structure and process are likely to vary within the MNC as a whole.
Consequently, the authors propose to conceive the MNC as a vector along four axes:
element of organizational structure or process, country location of the subsidiary, pressure
for local conformity in the host country, and pressure for consistency within the MNC.

On the basis of this framework, they develop hypotheses in regard to factors, influencing the
similarity of SUB either to other firms in the host country, or to other subsidiaries of the
MNC. The emphasis of analyzing factors relating to similarity of subsidiaries reflects a
strong affinity to the I-R framework of Prahalad & Doz (1987). Moreover, due to the
applied interpretation of consistency (replication of organization structure and the imperative
to control foreign operations), it implicitly entails the assumption that the standardization of
operations in multiple subsidiaries is per se efficient. In this respect, the previous literature
review evidently emphasized that the range of opportunities emanating from horizontal
aggregation of environmental segments across national boundaries by far exceeds the narrow
focus on consistency adopted by Rosenzweig & Singh (1991).
60 GLOBAL DECISION-MAKING

In contrast to Rosenzweig & Singh (1991), the approach of Ghoshal & Bartlett (1990) is
rooted in exchange theory, a form of resource dependence theory. Exchange theory builds
on the concept of organization-sets. According to Ghoshal & Bartlett (1990), each national
operating unit is embedded in a unique context, i.e. it has its unique organization-set which
comprises of the existing exchange relationships with a specific set of suppliers, buyers,
competitors, etc. Due to the different situation in various countries, it is most likely that
these organization-sets have distinct levels of interconnectedness or densities of what the
authors refer to as local 'within networks'. If different external organization-sets of subsidi-
aries are themselves connected through exchange relationships, e.g. internationally operating
competitors or customers, all members of all organization-sets additionally make up the
'external network'. The authors then use different configurations of densities in both
distinguished networks to predict patterns of interactions between subsidiaries within the
MNC. The main thesis of Ghoshal & Bartlett's attempt to describe the MNC as a differen-
tiated inter-organizational rather than as an intra-organizational network of units is that some
attributes of the MNC, such as its configuration of assets and the distribution of power, may
be explained by selected characteristics of the external network in which the MNC is
embedded.

Although Ghoshal & Bartlett's approach, as one of the few first more detailed conception of
the environment of MNCs, comprises many aspects which contribute to a better understand-
ing, it is clearly limited due to the strong inter-organizational focus adopted. By con-
sciously neglecting the influence of ownership-ties, which distinguish subsidiaries from
independent organizations, it is assumed that characteristics like resource and power
configurations are exclusively determined by the density of the external network, i.e. the
degree of connectedness of international suppliers, customers, competitors, etc. An inter-
organizational perspective may be considered as applicable for MNCs, pursuing a pre-global
strategy which was based on subsidiary autonomy and independence (Chapter 7.1 will
provide a more detailed discussion of this issue). Especially within the underlying context of
globalization, however, this seems rather inappropriate, because a global orientation just
requires an integrative perspective that typically cuts across the boundaries and environments
of more than one unit. Additionally, it is not sufficient to conceptualize the external network
rather undifferentiated as homogeneously interconnected organization-sets. To develop a
more profound understanding of the global environment, possible connections between
different environments have to be analyzed in more detail.
GLOBAL DECISION-MAKING 61

4.2.3 THE ENVIRONMENT OF GLOBAL FIRMS

Due to the lack of an organization theory explicitly incorporating the MNC and the outlined
shortcomings of existing conceptions, this research is bound to compose a working hypoth-
esis of the MNC-environment by integrating elements from traditional theories into the
contemporary international management literature. The subsequent argumentation intends to
develop an organizational environment conception which is compatible to the precedingly
delineated notion of global decision-making.

Incorporating elements of resource dependence theory focuses attention to the technical


dimension of organizational environments. For resource dependence oriented approaches,
the prevailing question is on which resources from the environment an firm depends to attain
its goals. In this line of thinking, the previously mentioned conception from Dill (1958: 410)
has gained most prominence. Dill defines the task environment of firms as consisting of all
aspects potentially relevant to goal setting and attainment. According to Dill, an organiz-
ation-set typically comprises of external organizations or actors like competitors, suppliers,
customers, regulatory agencies, etc. Since this research - unlike the works submitted under
the paradigm of population ecology - is not explicitly interested in the explanation of the
macro-structure (organizational populations) of the environment, it seems appropriate to
borrow the level of analysis from resource dependence theory and conceptualize the task
environment from the viewpoint of a focal organization.

For the sake of avoiding duplication of effort, the subsequent argumentation borrows some
constructs and terminological elements from Ghoshal & Bartlett (1990). Thus, it will also be
focused on subsidiaries (A .. N) that comprise the operating body of the MNC. For the
purpose of this discussion, top-management distinguishes from subsidiaries, since the top-
management has primarily coordinative functions and is not an operating unit. Operating
units located at headquarters are also conceived as subsidiaries. Analogously to Ghoshal &
Bartlett (1990), each subsidiary is conceived to have its own environment, consisting of
those organizations and actors with which the subsidiary shares relations. Following Scott
(1992), these environments are interpreted as being made up of both technical and
institutional factors.

The technical environment is constituted by organizations that produce a product or a


service that is exchanged in markets whereas the institutional environment is characterized
by "the elaboration of rules and requirements to which individual organizations must
coriform in order to receive legitimacy and support" (Scott 1992: 132). By explicitly incor-
porating the socio-cultural situation of organizations, institutionalists adopt a broader focus
than resource dependence scholars. The latter restrict their attention to the technical dimen-
sion of the environment and actually existing relationships. Organizational fields, in
contrast to organization-sets, consist of all organizations that constitute a recognized area of
62 GLOBAL DECISION-MAKING

institutional life (DiMaggio & Powell 1983). This obviously includes both the technical and
the institutional dimension. Since organizational fields also incorporate potentially relevant
actors and not only those, with which the organization currently interacts, subsidiaryenvi-
ronments will subsequently be conceived in terms of organizational fields (DiMaggio &
Powell 1983) rather than organization-sets.

As mentioned, each organization has a unique set of institutionalized environmental elements


which constitutes its organizational field. For the purpose of this conceptual discussion, it is
considered sufficient to distinguish competitors, customers, suppliers, legal agencies and the
socio-cultural environment as broad categories of potentially relevant sources of
environmental influence. These categories illustrate a possible segmentation of the institu-
tional environment on the subsidiary level and are described as 'local organizational fields'
(see Fig. 17).

International
Selected SUBSIDIARIES Dimensional
Environmental Fields
Dimensions A B C D E N

Customers IDF (Customers)


Competitors IDF (Competitors)
Suppliers IDF (Suppliers)
Legal Agencies IOF (Legal)

Socio-cultural IDF (Socio-Cultural)


Environment
LOF A LOF B LOF C LOF 0 LOF E LOF N

Local Organizational Fields

Fig. 17: Local organizational and international dimensional fields of MNCs

As the previous chapter revealed, many approaches of globalization are carried by the notion
that the aggregation of similar environmental segments across borders gives rise to con-
siderable opportunities for global businesses. As shown, Levitt (1983), for example, focused
on 'the global customer' while Hamel & Prahalad (1985) emphasized the global, i.e. cross-
border, analysis of competition. Both examples reveal that the focus on globalization was
derived from an analysis of the aggregated influence of a single environmental dimension
across some or all subsidiaries. In Fig. 17, this perspective is referred to as the
GLOBAL DECISION-MAKING 63

'international dimensional field'. As illustrated, each subsidiary has its unique local
organizational field and each distinguishable dimension of the environment constitutes a
distinct international dimensional field.

Compared to the consistency dimensions in the model of Rosenzweig & Singh (1991), the
conceptualization of international dimensional fields depicted in Fig. 17 just emphasizes the
possibility to aggregate environmental segments horizontally across national boundaries. The
range of possible implications emanating from such an integrative view is far too diverse to
allow the determination of any universal impact, such as the quoted tendency towards
consistency. In the contrary, often the existence and identification of differences, e.g. in
regard to dispersed know-how across subsidiaries may provide significant advantages to the
MNC. In this respect, the 'international dimensional field' dimension considerably differs
from the 'local organizational field' dimension which shares a greater similarity with
Rosenzweig & Singh's pressure for local isomorphism. Thus, it is assumed that subsidiaries
are inevitably exposed to at least local pressures of coercive isomorphism and often also to
the pressures of normative isomorphism. Despite these pressures and local peculiarities, note
that the adaption to local environmental conditions is not synonymous to local autonomy or
differentiation. Procedures and experiences developed to meet local regulations (e.g. in the
case of environmental regulations), for instance, may serve to help other subsidiaries to
adapt to their environment and thus call for integration.

Summarizing the argumentation to this stage, the environment of MNCs consists of different
environmental segments which make up the environmental context for each subsidiary.
Horizontally, these segments comprise the worldwide aggregation of this category across all
units. In general, the MNC-environment can thus be described in terms of aggregations of
either local organizational fields, international dimensional fields or both. Depending on the
focus of analysis, both dimensions are considered sufficient to describe the general envi-
ronment of MNCs. The sum of local organizational and international dimensional fields thus
comprises the environmental factors that are potentially relevant in organizational decision-
making in MNCs.

4.3 THE NATURE OF GLOBAL DECISION-MAKING

If the above delineated conception of the MNC-environment is accepted, it still remains to


be discussed precisely in which way globalization affects decision-making. One could argue
that especially the integration of the international dimensional fields is unique to the global
literature and that the conceptualization of both dimensions corresponds to the I-R
framework. Thus, the conception seems more appropriate to describe the global firm rather
than MNCs in general. In this respect, it is important to note that the above outlined
64 GLOBAL DECISION-MAKING

definition refers to potentially relevant factors which are only in degree (homogenization,
permeability of national borders, etc.) different from the past. The MNC in pre-global terms
also comprised of local subsidiary environments, and it seems just to assume that some of
these local segments also shared cross-border similarities or interdependencies.

A closer look at how environmental factors actually find their way into the firm supports our
argument that the developed conception of the global environment goes beyond the above
enfolded definition. It becomes evident that the assumed clear distinction between the firm
and the external environment becomes blurred when the implications of adopting a global
orientation in decision-making come into play.

Based on the preceding argumentation, together with the notion of global orientation
enfolded in the previous chapter, it is argued that what has to be conceived as the relevant
global environment, firstly, depends on the very nature of the focal decision. Secondly, the
global organizational field in regard to a focal decision may consist of not necessarily similar
components from different organizational fields. As highlighted before, the era of
globalization imposes the imperative to evaluate important decisions from a global per-
spective. It was claimed that globalization interpreted in these terms was not a fixed strategy
or set of activities, but a cognitive concept which imposed demands on the pattern of
decision-making without exactly specifying the decisional contents. Analogously, what has
to be conceived as the relevant global environment can only be specified in terms of
potentially relevant segments. Following institutionalization theory, what in particular
constitutes the relevant environment cannot be determined a priori and in general
(DiMaggio & Powell 1983: 148). Each focal decision rather constitutes an environment of
its own. An unique dimension of adopting a global orientation is that evaluations start by
taking the global situation into account. In regard to the problem of specifying the global
environment, this results in a conception in which the total set of potentially relevant
environmental factors comprises of all segments of all locations. Thus, the environmental
context of any focal decision is not restricted to either the local organizational field or the
international dimensional field, but potentially consists of the totality of aU environmental
factors.
GLOBAL DECISION-MAKING 65

International
Selected SUBSIDIARIES Dimensional
Environmental
Dimensions A I B I C D E I ... N Fields

f::==t==:>

CPI!
I

i \1
Customers IDF(Customers)
Competitors IDF (C ompetitors)
Suppliers IDF (Suppliers)

Legal Agencies IDF (Legal)

Socia-cultural
Environment
I
I
I
I
I

LOF A LOF B LOF C LOF 0 LOF E


I
I 116 LOF N
IDF (Socia-Cultural)

Local Organizational Fields

Fig. 18: Patterns of global decision-making

Fig. 18 displays examples of possible configurations of decision-making environments. For


some decisions, it might, for instance, be relevant that customers (B,C) or competitors
(C,D,E) share similarities. Thus, external and internal environmental aspects of other
subsidiaries have to be considered in decision-making in all affected units. In another case,
supplies could be regionally concentrated at one subsidiary (B) and via quality have an
important influence on the competitive position in other subsidiaries (A).

Conceiving the MNC as an aggregation of subsidiaries, it becomes obvious that the internal-
external dichotomy fails to address existing inter-dimensional interdependencies between
subsidiary environments. It was already argued that the global context imposes a consider-
able increase in interdependencies between subsidiaries. Thus, it follows that decision-
making processes in subsidiaries are increasingly affected by the situation of other
subsidiaries which may include aspects from both internal and external dimensions of these
subsidiaries. From the perspective of a focal unit, these factors may be considered as
external because they originate outside their (local) boundaries. From the higher level of the
MNC as a firm consisting of partly interdependent subsidiaries, however, they have to be
considered as internal. The two dimensions delineated so far, both ignore this intra-
organizational impact and are thus not sufficient to describe the decisional environment in
global firms.
66 GLOBAL DECISION-MAKING

Building on the developed argumentation, subsidiary environments additionally consist of a


third dimension that subsidiaries do not encounter directly, but that indirectly affects them
through their connectedness to other subsidiaries within the MNC. This dimension is called
the 'intra-organizational field' (see Fig. 19). The intra-organizational field of any focal
subsidiary comprises of all external and internal environments of other subsidiaries. The
explicit inclusion of internal environments of other subsidiaries builds on the logic that a
global orientation requires to consider the global situation of the business as a whole. In this
respect, internal developments or factors, e.g. the set of activities performed at other
locations, can have a serious impact on decision-making in a focal subsidiary. This issue has
largely been neglected by management studies of global firms. Fig. 19 formally exemplifies
the delineated distinction between different environmental layers of the MNC.

Subsidiaries
1 2 n
intemational
1 dimensional
field
2
IDF EDm : L m, 1 ..n

Environ-
mental intra-
Dimensions organizational
field
IOF D1 : L 1.. m, 2.. n

local organizational field


LOF Sn : L l..m, n

Fig. 19: The environment of global decision-making

The environmental dimensions (EDl..m) of a single subsidiary (S J are conceptualized as a


local organizational field (LOF Sn)' The aggregation of a single environmental dimension
(EDm) across all subsidiaries (Sl..n) constitutes the international dimensional field (lDF EDm)
of that particular dimension m. Applying a global orientation, the relevant decisional
environment of a single decision-making process (D 1) is called intra-organizational field
(IOFDl ) and comprises of all local organizational fields of other subsidiaries (LOFsz.. J and
all international dimensional fields (IDFEDl.. m)'
GLOBAL DECISION-MAKING 67

The distinction of three different environmental layers consciously restrains from indicating
specific internal or external environmental dimensions. On the one hand, it is difficult to
clearly differentiate between internal, external, technological, and institutional dimensions,
since the conception attempts to integrate the influence of the environment from the different
perspectives. On the other hand, the line of argumentation to this stage did not require any
specification of factors, since it attempted to conceptually distinguish between the layers.
The set of environmental segments is defined in terms of organizational fields. What in
particular constitutes relevant components can conceptually only be specified in potentially
relevant categories. In this respect, the need was emphasized to consider the intra-organiz-
ational field as an important source of influencing factors to be considered in global decision-
making. As noted before, the precise specification of environmental contexts in terms of
relevant dimensions varies from decision to decision and is ultimately subject to empirical
investigation in each case.

It was the initial intention to develop a conceptualization of the context in which global
decision-making evolves and which allows the flexible integration of varying situational
factors and dimensions. According to the derived conceptualization, relevant decisional
factors can stem from three dimensions: Focusing on local organizational fields adopts a
perspective of single firms operating in their unique environments. International dimensional
fields, in contrast, comprise of similar environmental dimensions which are aggregated
across borders and analyzed in their effect on the MNC as a whole. The dimension of intra-
organizational fields, finally, falls between both preceding categories in that a focal subsidi-
ary considers the situation of the whole which includes internal, external, technological, and
institutional aspects of other subsidiaries.

Now that the nature of globalization and its impact has been clarified and described, we can
turn to the question of how globalization, or the concept of global orientation, respectively
influences the organizing of internationally operating firms. Thus, the next chapter discusses
the organizational implications of globalization in more detail.
68 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

5. ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

The concentration on organizational implications of globalization leads to the general


question of how firms should change their organizational design in order to meet the
demands arising from a global approach as described in the previous chapter!. Since the
expansion of firms into foreign countries already imposed considerable changes to domestic
firms, the problem of organizational design in the international context is far from being
new. Forthcoming, it appears useful to analyze the existing literature on organizational
design to identify the extend to which reliable and established mechanisms of organizational
adjustment offered in literature can be applied to the developed discussion (Chapter 5.1). In
Chapter 5.2, the prevailing 'structure follows strategy' paradigm will be subject to a
critical reflection with respect to extent to which conventional thinking about organizational
adaption is adequate for the conceptualization of emerging organizational requirements of
global firms. Chapter 5.3 then provides a review of the global network debate. The
discussion about networks centers around alternative models which are proposing new
pattern of how global firms should organize. Finally, the global network debate will be
synthesized according to its major characteristics (Chapter 5.4).

5.1 ORGANIZATIONAL DESIGN IN INTERNATIONAL MANAGEMENT

The literature on international organizational design was greatly influenced by the seminal
study of Stopford & Wells (1972) who investigated the structural evolution of internationally
operating U.S. manufacturing firms with at least 6 foreign subsidiaries. In relating interna-
tional strategy pattern like product diversification or geographical expansion to structural
archetypes, they found across multiple industries a close relationship between strategy and
structure. In particular, their results revealed that MNCs were adopting different organiz-
ational structures as they went through different stages of their international development.
MNCs facing considerable growth of their international business and the need to adopt more
complex international strategies, either by one or by two reorganizations, finally moved
towards global structures (see Fig. 20).

In a parallel study, Franko (1976) examined the structural evolution of 85 industrial firms
from continental Europe. Contrary to the study of Stopford & Wells, Franko found that
some European MNCs retained direct relationships between corporate headquarters and
subsidiaries. The majority, however, moved directly from a dyadic parent-subsidiary to a
global structure, leaving out the intermediate form of international division prevailing in
American MNCs (Daniels et al. 1985).
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 69

II:!J.R.Q
STRUCTURE STRUCTURE
Domestic
Functional
with
international
==---
~
Domestic
Product with
international
Division Division

Domestic
Products @§aIAre8J
with
international
Product Division
Divisions 3~ I Global Product
(96 Firms)
I=G=IO=b=al=A=re=a=l~
I Global Product I 3 .
6 I Matnx
I Matrix I

Fig. 20: Evolution of organization structures for 180 U.S. based MNCs - Update from
Stopford & Wells (1972) [Source: Davidson 1982: 277]

Based on these findings, most international management scholars conceptualized the problem
of organizational design as being a function of the firm's internationalization process. These
'stages theories' assumed that MNCs regularly reorganized according to a common pattern
of organizational change (Bartlett 1983). The reorganization sequence usually started with
export departments, followed by an international division in which the export business was
concentrated after it had considerably grown in size. In case of further growth of interna-
tional sales and the establishment of foreign subsidiaries, firms tended to adopt global struc-
tures which restrained from explicitly differentiating the MNC in national and international
activities (Macharzina 1986, Welge 1980). Regardless of the prevailing dimensional priority,
one-dimensional global structures share the similarity that a primary dimension has the
overall managerial responsibility over remaining secondary and tertiary alternatives. For
example, in a global functional structure, a manager heading the procurement department is
responsible for the planning, organizing, and controlling of his function for all products and
areas. One-dimensional structures adopt a monistic pattern of organizing which presumes
a single hierarchy of power and unity of command. The division of labor into a hierarchical
pyramid, therefore, must be defmed either by function, by product, or by area (Davis 1979).

In questions of organizational design, the dual needs of specialization and coordination are
generally conceived as being inversely related. Structuring along a single dimension
assumes integration to be primarily focused along the selected dimension, sacrificing the
70 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

benefits of coordinating along the remaining ones (prahalad & Doz 1987: 172; Davidson
1982: 283). The choice of a particular structure is, therefore, always a choice for the
benefits of one dimension against the potential advantages of the other two and vice versa.
The acknowledged strength (and weakness) of organizational archetype models is their
ability to simplify complex decision processes by emphasizing single types of advantage
(White & Poynter 1990: 97).

The literature on international organizational design largely elaborates on the question of


which form of structural specialization to adopt in which strategic situation (Macharzina
1992, Robock & Simmonds 1989, Lemack & Bracker 1988, Daniels et al. 1984, Davis
1979, Robinson 1978).

A functional structure, classifying the firm on the basis of job activities required to produce
the organizational output, is proposed when the current strategy builds on effectiveness and
cost efficiency. A functional structure facilitates a worldwide concentration of knowledge
and experience in functional fields. A global divisional structure, assigning worldwide
responsibility to product executives, is considered appropriate when competitiveness in all
markets strongly relies on product innovations and technology or specific marketing know-
how (Davidson & Haspeslagh 1982). Global area structures, finally, are recommended
when the competitive environment in local country markets requires a strong local respon-
siveness calling for local manufacturing and customer service.
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 71

FUNCTIONAL INTERNATIONAL GEOGRAPHI- PRODUCT


DIVISIONS DIVISIONS CAL REGIONS DIVISIONS

Foreign product Low foreign product High foreign


diversity diversity product diver-
sity
Product modifica- Low product modi-
tion differences fication differences
between subsidl- between subsidI-
aries aries
Product change High rate of
product
change
Size of foreign Relatively small Relatively large Relatively
operations foreign operations foreign oper- large foreign
ations operations
Size of foreign
manufacturing
Number of foreign Few foreign sub- Low to moderate Large num-
subsidiaries sidiaries number of foreign bers of for-
subsidiaries eign subsidi-
aries
Extent of outside Low level of outside
ownership in for- ownership in foreign
eign subsidiaries subsidiaries
Extent of foreign Few foreign acqui-
acguisitions sitions

Table 8: Important fits between elements of strategy and types of organizational structure. [Source:
Egelhoff 1988: 86]

From a methodological perspective the study of Egelhoff (1988, 1982) in place of others,
provides a good example of traditional research on structural adjustment in the international
context. Adopting an information-processing perspective (Nadler & Tushman 1988,
Galbraith 1973, Thompson 1967), Egelhoff examined crucial relationships between strategy
and structure in MNCs. In his study of 34 American and European MNCs, he found fits
between selected elements of strategy and types of organizational structures (Table 8). Thus,
MNCs with many subsidiaries are likely to adopt worldwide product divisions whereas in
case of a low number of subsidiaries, a worldwide functional structure is considered
appropriate. Given the validity of these findings, so the implicit thought, firms can choose
the appropriate structure on the basis of their business characteristics or strategy elements,
respectively.

Faced with the emerging phenomenon of globalization and the evident diversity, the aca-
demic discussion soon evolved around how the required multidimensionality could be appro-
72 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

priately incorporated from an organizational perspective. As previously mentioned, scholars


investigating this issue had noted that the global competitive environment called for the
simultaneous consideration of both integration and local responsiveness. Obviously, a one-
dimensional structure would not meet these requirements (Doz et al. 1981). Many authors
in the tradition of the well established stage theories continuously proposed to conceive the
problem in terms of selecting dimensional priorities (Egelhoff 1984, Davidson 1982). If stra-
tegic considerations call for flexible integration along more than one dimension, so the argu-
mentation, a global matrix structure could be considered as an adequate solution to the
organizational requirements imposed by worldwide strategies (Hill 1994, Hodgetts &
Luthans 1991, Asheghian & Ebrahimi 1990, Robock & Simmonds 1989).

Strategic and Strategic and


Organizational Organizational
Clarity Ambiguity

HIGH HIGH

E
F
F
E
C :-:·:CII .·
"=",
U)
E
....CII
.:2~
~

-
T ~

. : !: :~
- ~ m D-
U
o
I
V
E ',;, .;.: ..:.::.
u CII
a.. 2
en
. -.- . .. , ' -, .. "
N .:-;,:«,~ :-:,:,:-,-:,'
E
S \/\:IUm·"'.·.<. .<"'. "::,...:::~:?~:: :-:::.:I
S :>:li!:? :::.:::~.!::.:~~:::.:>:::::.:.:?
LOW LOW
•••••••••••••••••••••••••••••••••••••••••

Fig. 21: Efficacy of alternative mechanisms for managing strategic responsibility [Source:
Hamel & Prahalad 1983: 349]

However, the well documented problems of effectively implementing matrix structures nat-
urally also apply to the MNC (Bartlett & Ghoshall989, Galbraith & Kazanjian 1986, Davis
& Lawrence 1978). Due to the institutionalization of conflicts, evolving management pro-
cesses bear the risk of being too slow to provide an adequate basis to manage strategic tasks
facing global businesses. In the global management literature, the shortcomings of matrix
structures gave rise to the recognition that reorganizations of formal structures alone
could not meet the ambiguous challenges imposed by globalization (Bartlett 1983). Hamel
& Prahalad (1983), for instance, argue that due to the prevailing strategic and organizational
ambiguity in the global context (see Fig. 21), formal structures increasingly loose their
effectiveness in appropriately managing strategic responsibility.
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 73

Although the identified reasons for the outlined shortcomings of organizational archetype
selection in meeting the new organizational requirements vary among scholars investigating
this issue, criticism is commonly related to the inflexibility of formal structural arrange-
ments in efficiently integrating multiple often conflicting dimensions (Hedlund 1993, Bartlett
& Ghoshal1989, Prahalad & Doz 1987). Again, a more methodological perspective on the
underlying logic of approaching the problem of international organizing is helpful in
identifying the reasons for the depicted shortcomings.

5.2 ORGANIZATIONAL RESEARCH IN THE TRADITION OF


THE 'STRUCTURE FOLLOWS STRATEGY' PARADIGM

The briefly outlined method of advancing organizational problems in the international


context stems from a very influencing stream of traditional strategic management literature:
the 'structure follows strategy' paradigm.

Environment: to Strategy: t1 Structure: t2


Given, common
constraints
- ----.1 Deduced action
~
program
_ _ _+ Appropriate type
~ of hierarchy

Fig. 22: The 'structure follows strategy' logic [Source: Hedlund & Rolander 1990: 23]

The 'structure follows strategy' paradigm derived from Chandlers (1962) seminallongitudi-
nal examination of the evolution of 4 American firms. Although Chandler's work had a
clearly descriptive background, his findings that diversifying firms tended to adopt a divi-
sional structure soon served as the universal foundation of the reasoning that changes in
strategic focus require adequate adjustments of the organizational structure. Chandler (1962:
314) concluded that "unless structure follows strategy, inefficiency results". Integrated into
industrial organization literature (Porter 1980) and thus also incorporating the environment,
the 'structure follows strategy' paradigm provides a clear causal arguing and a determination
of necessary managerial action. Changes in the competitive environment, i.e. the industry
in which a business is operating, have to lead to according changes of the strategic posture
of the firm which, in turn, necessitates an appropriate change of the organizational structure
(Fig. 22).

Despite its intuitive and simple logic, the 'structure follows strategy' paradigm has been, and
still is, subject to an intensive debate in the academic management literature (Melin 1992,
Hedlund & Rolander 1990, Burgelman 1983, Hall & Saias 1980, Bower & Doz 1979).
Chandler himself pointed out that even for the firms he studied there was a considerable
74 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

"time lag between appearance of the administrative needs and their satisfaction" (1962:
315). A number of follow-up studies found evidence that firms went through a series of
strategic reorientations without, or without immediately, changing their formal structure
(Skivington & Daft 1991). Consistently, empirical studies have revealed that the interna-
tional expansion of many MNCs followed an incremental rather than a strategy driven
pattern (Stopford & Wells 1972).

From a methodological perspective, the evaluation of the appropriateness of the 'structure


follows strategy' - thesis and the casual argumentation it has caused, hinges on the
operationalization of the core variables, strategy and structure. If strategy is in more general
terms thought of as an intended change of the status quo and structure is interpreted
synonymous to organizing in the widest sense, then the 'structure follows strategy' - thesis
pertains to the rather trivial statement that a different output requires changes in the process
by which the output is achieved. This relationship is since long well established and common
knowledge in system theory. Thus, decisions directed at realizing a different output
(strategy) require adaption of activities by which the output is normally achieved (structure).
If, however, it is not clearly specified what is subsumed under the labels strategy and
structure, the formula that structure has to follow changes of strategy and in particular the
determinism it bears, cannot claim universal validity. If the described logic of discussing
organizational design pattern in the international context is once again reflected in light of
these methodological arguments, it becomes evident that 'strategy' was mainly conceived in
terms of geographical expansion of business activities whereas 'structure' most commonly
referred to structural archetypes.

One reason contributing to this deficit is certainly the inaccuracy in terminology used by
management scholars. Two meanings of structure are prevailing in literature. Structure in
its first, broader meaning usually encompasses elements like authority, hierarchy, specializ-
ation of functions, specification of rules as well as formal communication and decision-
making within the firm. From this perspective, organizational structure is understood as the
infrastructure of the organization which consists of all formally sanctioned and prescribed
arrangements and relationships (Kbandwalla 1977: 482).

A second meaning of structure is narrowly focused on forms of departmentalization. Here,


structure is depicted by the organizational chart which corresponds to generic structural
archetypes. Apparently, Stopford & Wells and others conceived structure primarily in this
latter, narrow meaning. Given the common predominance of discussing organizational issues
in terms of structural archetypes in literature as well as in practice, the question of the
particular benefits and dangers of structural archetypes merits a closer examination.

According to Mintzberg (1979), archetypes or macro-structural models of organizations


abstract from specific processes that evolve on the basis of the structure. It remains unclear
how organizations actually function. Especially, it is assumed that organizational processes
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 75

relate to formal rules and procedures which are set by the structural model. Thus, formal
archetypes "obscure the differences between kinds of relations and put the command
structure as the primary one" (Hedlund 1993: 231). The use of archetypes enables research
to formulate and derive at hypotheses and assertions without having to analyze limiting
conditions of application in each single case. Through generalization, models significantly
simplify the theoretical discussion for the purpose of explaining cause-effect relationships.
They hold the danger, however, that the basic assumptions on which the models ground do
not fit the characteristics of the reality to which they are applied. In this respect, Ghoshal &
Westney (1993: 8) interestingly argued that one reason for the evident gap between the field
of organization theory and international management is that organization theorists use
simplifying assumptions which just don't fit the complex reality of modern MNCs.

Subsequently, the analysis and critique on organizational archetypes will serve as a


reasoning for the inappropriateness of discussing the organizational requirements arising
from globalization restrictively in terms of selecting a formal structural archetype.
~ If the organizational structure is depicted in an organization chart, this is just a
shorthand way of describing underlying processes (Prahalad & Doz 1987: 178).
Formal structures adopt a vertical perspective due to their restrictive focus on the
hierarchical command structure. Thus, only one organizational variable is explicitly
recognized. Other important aspects of organizational design (i.e. management
systems, communication processes, and the shared culture) typically do not entirely
follow the vertical line of command (White & Poynter 1990).
~ One-dimensional formal archetypes assume uniformity of roles and responsibilities
of units. They are presumed to provide an unambiguous indicator to the nature of the
key management process and decisional priorities (Doz & Prahalad 1984: 59).
Thereby, the stable dimensionality along the dominant dimension is considered
appropriate for all parts of the firm (Hedlund 1993: 225).
~ Formal archetypes build on the rational system model of organizations (Scott
1992). Organizational forms dominate and determine the nature of gathered informa-
tion, the power to allocate resources, and responsibilities in administrative processes.
It is implicitly presumed that cognitive, strategic, power, and administrative orienta-
tions generally tend to be aligned with the prevailing structural dimension (Doz &
Prahalad 1981).
~ The uniform conceptualization of subsidiaries in formal structures does not reflect
their differentiated importance.
~ Due to the hierarchical premises of formal archetypes, subordinate units are
conceived as automatically coordinated and integrated by being connected to the
superior unit. Subsidiaries concentrated under regional headquarters are thus per
definition integrated.
76 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

~ Hierarchical structuring presumes that coordination goes along with authority and

that responsibility and authority always have to match. Since only top-management
is presumed to have the overall authority over the entire firm, it follows that strategic
decision-making and coordination with respect to the firm as a whole is exclusively
pursued at the top.

Based on the outlined critique of the tacit assumptions hidden in the concept of structural
archetypes, the debate on globalization sparked a shift in thinking about organizational
design of MNCs. Although the value of structures with respect to some functions is recog-
nized, many contemporary works on organizing in the global context appear to impose a
shift away from discussing organizational issues entirely in structural terms (Ghoshal &
Westney 1993: 22). In this respect, it is commonly noted that the task of organizational
design in internationally operating firms is far more complex and thus well beyond choosing
a formal structure. A structural solution alone is not seen as being able to facilitate the
multidimensionality and flexibility required by global firms (Doz et al. 1981). Bartlett (1981:
143) concluded from his studies: "While change in the formal organization has been thought
of by managers as the principal means of adapting the decision processes, the subtlety and
complexity of a flexible, multidimensional decision process appears difficult to achieve solely
(or even primarily) through formal organizational change" .

Given the briefly sketched shortcomings of the formal archetype related literature on
international organizational design, the following chapter will review the most important
contributions to the literature on global networks. Although these works jointly address the
organizational task in the global context beyond the choice of a generic structural archetype,
they differ considerably in their use of terminology. In addition, each piece of research
illuminates different aspects of the managerial task of operating in a global context. Taken
together, the cumulative work marks a paradigm shift (Doz & Prahalad 1991). Irrespective
of the terminology applied to describe characteristics of this new paradigm, it is argued that
what cuts across all conceptualizations is that the global firm is conceived as a network of
interdependent and connected subsidiaries rather than as a conglomerate of dyadic and inde-
pendent headquarters-subsidiary relationships.
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 77

5.3 THE GLOBAL NETWORK DEBATE

After a decade of initial and intensive research on global strategy and competition, scholars
increasingly forward arguments in favor of a more organizational perspective on the
implications of the global phenomenon. A wide body of publications and literature indicates
that the initial problem has shifted from the initial problem of What to do? to How to
implement the strategic options effectively? (Martinez & Jarillo 1989).

While a large number of MNCs appears to be quite aware of what they want to do, they
increasingly consider the organizational implementation as the bottleneck in adequately
reacting to the emerged phenomenon. As Kogut (1989: 387) noted: "... having the potential
to pursue global strategies is afar cry from having the management system to do it". Doz &
Prahalad (1988) even argue that cost and technology advantages as discussed in Chapter 3,
do not fully explain the patterns of global competition, since factors like the portfolio of
market presence of major global competitors and comparative differences between countries
are increasingly converging. Thus, "quality of management - providing the ability to
conceive and implement complex and differentiated strategies in the context of a large
diversified multinational company (MNC) - is likely to become an increasing source of com-
petitive advantage between global competitors" (1988: 347).

A number of writers relate the often quoted implementation gap of global strategies to the
deficiencies of the conventional organization literature to cope with the requirements
imposed by globalization. In particular, Prahalad & Doz (1987), Bartlett & Ghoshal (1989),
Hedlund (1986) and White & Poynter (1990) have developed alternative approaches directed
at closing the gap. Thereby, the focus is less on strategic positioning and more on
organizational implications of globalization, although Bartlett & Ghoshal and Prahalad &
Doz also address the issue of global strategy content. Commonly, all models share the
contention that the global firm should be conceived as an integrative network of units.
They differ in degree, however, in what exactly constitutes a global network. Partly in
contrast to the perception of the works of scholars introduced in Chapter 3, they make the
point that considerable competitive advantages in the global context stem from operational,
organizational, managerial, andlor learning processes within such networks rather than from
the selection of, for example, a standardization strategy. Due to the arising complexity,
network processes cannot be captured by frameworks which are too narrowly focused on
archetype selection.

Subsequently, the mentioned approaches applying the network image to the global firm will
be introduced. It will be highlighted what in particular is combined with the image of
network organizations or networking. Due to cross-references and terminological
differences, the contributions are not distinct in the arguments they present, in the contrary,
they rather overlap considerably. The description of each model will, therefore, seek to
78 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

extricate core ideas and arguments that the authors forward with respect to how global firms
should organize. The portrayal of the models, however, does neither claim comprehen-
siveness nor that the approaches sign responsible for the initial introduction of the cited
arguments to literature.

THE IDEAL DMNC ORGANIZATION (Prahalad & Doz 1987)

Based on their integration - responsiveness framework, for Prahalad & Doz2 the complexity
of the managerial task in the global context stems from the necessity to integrate the con-
flicting demands of control, change, and flexibility. In their view, the implementation of
a global strategy requires a centralized management of dispersed operations. This
encompasses the capability to secure efficiency in executing any agreed-upon strategies
through a process of control of subsidiary action. Thereby, headquarters rely on the depend-
ency of subsidiaries for resources (operational control) and, increasingly, on a shared vision
on strategy (strategic control). Due to their focus on I-R sub-strategies, the authors further
argue that the abilities required to change an existing strategy, for instance in response to
new competitive dynamics, are often in conflict to the roles required to implement strategies.
The modification of a given strategy, e.g. from local responsiveness to global integration
strategy, then involves a significant change in the nature of headquarters - subsidiary
relationships, from less control to tight control.

Furthermore, Prahalad & Doz note that in certain areas it is necessary to balance carefully
between the orientations of integration and responsiveness. This requires organizational
flexibility to shift between these orientations on a decision-by-decision basis. Given the
necessity to manage these outlined trade-offs and the evident limitations of formal one-
dimensional structures, Prahalad & Doz (1987: 173-175) emphasize the need to adopt more
complex organizational arrangements. These can range from the interference of top-
management on an issue basis to coalition management where top-management in a
substantive decision management process tries to influence the process through which the
decision evolves rather than the decision itself. Prahalad & Doz favor organizational
arrangements that go beyond the formalistic view of management authority and structure
and, instead, concentrate on the management of processes evolving between headquarters
and subsidiaries. This encompasses a commonly shared world view of all key managers in
all areas of the firm, a strategic consensus among headquarters and subsidiaries, and the
creation of legitimacy for constantly challenging existing procedures in order to maintain the
flexibility required to remain competitive.

In conclusion, Prahalad & Doz derive at an enumeration of dimensions which determine the
competitiveness of global firms (1987: 259). Their 'ideal DMNC organization' builds on
strategic capabilities required to facilitate effective strategy development and implementation
processes in the global context:
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 79

~ Information processing capabilities


In order to develop complex strategies, all managers have to gather and process a
variety of multidimensional quantitative and qualitative data. Information has to be
effectively communicated and integrated into decision-making.
~ Creating a differentiated management system
The development and maintenance of strategic capabilities often impedes uniform
management systems and organizational arrangements across multiple dimensions
and thus requires a differentiated management system. This may imply to manage
functions and countries very differently according to their distinct characteristics
(e.g. centralize R&D - decentralize marketing, assignment of key-responsibilities to
certain subsidiaries).
~ Managing strategic change

The capability to respond to changing competitive environments requires fast and


flexible strategic redirection. This, in turn, can only be achieved, if managers share
a common vision, transcend parochialism and explicitly examine conflicting
dimensions in decision-making.
~ Managing innovations
The creation of new opportunities requires to involve subsidiaries into innovation
development processes and to secure their input of information on market and cus-
tomer requirements.
~ Establishing pivots
Constant strategic changes and administrative variety, nevertheless, require stable
basic principles and a strong culture. These provide anchors around which the
flexible organization can be build.

On balance, it can be noted that the ideal organization that meets these requirements is based
on a comprehensive decision-making culture which explicitly creates a certain legitimacy
to dissent and allows multiple perspectives on conflicting issues to emerge. In this respect,
the above outlined principles towards subsidiary participation and socialization are explicitly
considered as necessary to obligate organizational actors to the discipline of implementing
what jointly has been agreed upon.

In a later publication, Doz & Prahalad (1991) summarized a large part of the discussion
about new organizational requirements in the global context. Their call for a new paradigm
distinctively documents a fundamental hallmark of change in research on well established
MNCs. Based on a review of the literature, Doz & Prahalad (1991: 147) extricated several
demands which they hold essential to provide a suitable framework for the analysis of
management processes in MNCs. In addition to their earlier work, they emphasize that the
management perspective has to change from 'divide et impera' to the management of formal
and informal information flows (information intensity), since these are the key sources of
80 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

competitive advantage. Especially, informal relationships are of great importance and serve
as a dual structure which supports the self-adjusting of decentralized processes. This is
considered as necessary, because complexity prevents the prediction and determination of
linkages and interdependencies between dispersed organizational units (latent linkages).
"Management in the DMNC thus calls for providing decentralized, delegated decision
contexts within which opportunities for linkages between subunits will arise at various points,
levels in organization, and times" (Doz & Prahalad, 1991: 146).

THE TRANSNATIONAL ORGANIZATION (Bartlett & Ghoshall989)

Based on a case study research of nine internationally operating MNCs, Bartlett & Ghoshal
(1989) describe how MNCs can successfully be managed under the changed conditions that
MNCs are currently exposed to. The authors refer to this newly emerged trend as
transnationalism and describe patterns of transnational strategies and organizational
capabilities required to successfully implement these strategies. Table 9 summarizes the core
issues around which Bartlett & Ghoshal develop their arguments.

STRA TEGIC CAPABILITY ORGANIZA TlONAL MANAGEMENT TASKS


CHARACTERISTICS
Global competitiveness Dispersed and interdependent Legitimizing diverse perspectives
assets and resources and capabilities
Multinational flexibility Differentiated and specialized Developing multiple and flexible
subsidiary roles coordination processes
Worldwide learning Joint development and worldwide Building shared vision and indi-
sharing of knowledge vidual commitment

Table 9: Strategic capabilities, organizational characteristics, and management tasks of transnational


organizations [Source: Bartlett & Ghoshal 1989: 67]

Due to Bartlett & Ghoshal, the changing global environment calls for transnational strategies
which seek to gain competitive advantages from simultaneously achieving global
competitiveness, multinational flexibility, and the ability to exploit worldwide know-how.
Based on the identified requirements, Bartlett & Ghoshal turn to the organizational capabil-
ities needed to develop, implement, and maintain transnational strategies. Similar to other
scholars, they reject the choice of a formal structural archetype as an exclusively appropriate
or sufficient solution to cope with the existing complexities. By selecting different organiz-
ational components and features from the examined sample firms, they develop a trans-
national organization model which they describe in its major characteristics. Finally, they
briefly sketch the most important management tasks required to build the described ideal
organization. Bartlett & Ghoshal describe the structural framework of the transnational firm
as an integrated network of dispersed, specialized, and interdependent organizational units
(see Fig. 23).
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 81

Tight complex
controls and
coordination;
shared strategic
decision process

-
Heavy flows of
technology.
finances . peopl
and materials
between inter-
dependent unit

Fig. 23: The integrated network model [Source: Bartlett 1986: 381]

The strategic dispersion of assets enables the firm to capitalize on factor cost differentials
between countries and provides opportunities to sense trends and advances allover the
world. Whereas traditional pattern of configurating activities often followed to the require-
ments of local responsiveness in maximizing local content, converging consumer prefer-
ences, changed technological and environmental conditions offer considerable scale
economies from specializing operations. Thus, MNCs can concentrate and specialize some
activities in their home country while centralizing others in other countries. Bartlett &
Ghoshal emphasize that the configuration must fit the administrative heritage and that re-
configuration must take the existing pattern of organizing explicitly into account rather than
that the entire firm could be re-designed on the drawing board.

Contrary to traditional international firms, dispersed units of the integrated network are
closely linked by relationships emanating from reciprocal interdependencies. These are
encouraged, because top-management is believed to be unable to dictate all relationships of
collaborative information, resource sharing, and collective implementation. Reciprocal
interdependencies force subsidiaries to collaborate for the sake of their own objectives.
Cooperation becomes self-enforcing.

Based on the assumption that the reinforced exposure to a diverse range of environmental
stimuli and a common access of all organizational units to all organizational capabilities and
resources is advantageous, Bartlett & Ghoshal favor a transnational management process
in which "national subsidiaries become partners whose knowledge and capabilities are vital
to the corporation's ability to maintain a long-term competitive advantage" (1989: 102). The
need to maintain a strategic flexibility requires to differentiate roles, responsibilities, and
relationships by business, product, function, and tasks. Opposed to traditional MNC-
conceptualizations, which they see as being based on hierarchical headquarters-subsidiary
82 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

relationships, Bartlett & Ghoshal conceive the transnational firm as a network of units in
which subsidiaries adopt differentiated roles according to their strategic importance for the
MNC as a whole.

Another dimension of Bartlett & Ghoshal' s transnational model emphasizes the importance
of worldwide learning processes. Global competition requires firms to respond creatively to
worldwide opportunities and threats by effectively exploiting innovations, know-how, and
products throughout the integrated network. The transnational firm facilitates the
simultaneous evolution of multiple innovation processes for the mutual benefit of the whole
firm. Thus, central innovations, local innovations, and transnational innovations, i.e. locally
leveraged and globally linked innovations, are supported by the development and
maintenance of multiple linkages between differentiated units. These linkages result from the
outlined interdependence of resources and responsibilities, transfers of personnel, or inter-
unit integrating devices.

The final chapter of Bartlett & Ghoshal' s work is devoted to the description of management
tasks which in the sample companies proved useful in building elements of the transnational
organization. The authors emphasize the need to legitimize diversity and multiple
perspectives by modifying norms and changing the attitudes of executives. To provide a
structural basis for flexible and multidimensional linkages between differentiated
subsidiaries, a portfolio of coordinating tools with an emphasis on informal mechanisms is
proposed. A shared vision and commitment is described as the global glue which builds the
frame of reference and provides stability and consistency. The outlined model builds on the
enforcement of multidimensionality, interdependency, and flexibility. Due to the resulting
complexity, a successful implementation of the model hinges upon the extent to which a
global culture and building on that the global commitment of executives is able to
counterbalance the lack of clear cut rules, responsibilities and relationships. Consequently,
a change process is suggested that starts by changing individual attitudes and mentalities.
Next, interpersonal relationships and processes have to be adapted, before in a last
sequence, formal structure and responsibilities are modified.

Bartlett & Ghoshal report that, although all examined companies were to some degree con-
verging towards the ideal of transnationalism, none had by the time of their investigation
fully accomplished the transformation. Consistently, empirical studies (Turner & Henry
1994, Leong & Tan 1993) have found only limited evidence of the pure transnational model.
Bartlett & Ghoshal, nevertheless, conceive transnationalism as a clearly emerging trend that
is likely to determine the competitiveness of MNCs in future.
ORGANIZAnONAL lMPLiCAnONS OF GLOBALIZAnON 83

THE LATERAL ORGANIZATION (White & Poynter 1990, 1989)

Building on a competitive rationale, White & Poynter argue that global MNCs should be
conceived as lateral organizations. They hold that global strategies exploit a mosaic of both
locally and globally based advantages and that strategy formulation is an organizational
rather than an analytic process. In the face of the increased complexity of international
operations, the authors reject the ability of conventional models of organizing to cope with
the variety combined with identifying, balancing and exploiting advantages from different
heterogeneous sources. Based on the assumption of individual cognitive limitations and
information impactedness of decision-makers centralized at single points in the MNC, lateral
processes are considered as essential to resolve and reconcile the complex, uncertain, and
often subtle choices of worldwide advantages.

In contrast to hierarchical models, White & Poynter propose the horizontal organization
model, in which "the geographically dispersedfunctional units are held together not so much
by the vertical chain of command as by a flexible horizontal network accompanied by lateral
decision processes and, underlying it ali, a common set of shared premises upon which
decision are based and action are assessed" (1990: 98). In the model, decisions, that
subsequently determine action and results, stem from lateral decision processes between
members of the organization, representing units most affected by the outcome of the
decision.

The lateral decision-making process encompasses strategy formulation as well as


coordination of the on-going value-adding process. Based on generally formulated
objectives and the strategic direction set in collaboration with headquarters, the overall
control of the business and the strategic initiative is decentralized and placed on the
collaborative responsibility of selected units which position themselves to the overall advan-
tage of the MNC. This requires that information and knowledge about production costs,
sales volumes, innovative ideas, experiences, etc. are widely shared and mutually available.
Lateral processes may be accompanied by general guidelines which channel
interdependencies and interactions to a certain degree. In this respect, White & Poynter
provide examples of internal markets and shared budget approvals accompanied by
institutionalized areas of collaboration like joint development programmes. These serve as
an internal mechanism to adjust lateral processes to the overall competitive advantage of the
MNC. Thereby, functional units are decoupled from the vertical hierarchy in which they
usually either report to a local subsidiary manager or a global product manager. In the
horizontal organization, instead, they operate on a discrete basis and are linked into a
horizontal network.

Quite in contrast to the conventional hierarchical logic underlying organizational models, the
'conditio sine qua non' of the horizontal organization model is that all executives "have a
84 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

strongly held sense of the firm's purpose, a common set of premises upon which they base
decisions, take action and assess results" (1990: 111).

THE HETERARCHICAL ORGANIZATION


(Hedlund 1994, 1993, 1986; Hedlund & Rolander 1990)

For a group of researchers from the Stockholm School of Economics led by Hedlund, the
complexity of the managerial task in the global context demands novel approaches in
organizing and controlling international operations in the 1980s and beyond. Hedlund
considers the hierarchical nature of traditional models as the primary reason for the observed
shortcomings (1993: 214-215). He contends that the MNC is confronted by a world which
invalidates the fundamental assumptions of hierarchy, in particular, one-dimensionality and
pre-specification of interdependence. Thus, he rejects hierarchical design principles and
proposes a heterarchy model of the MNC which more appropriately captures the empirical
reality of modern MNCs.

Hedlund also grounds his argumentation on competitive evaluations. He argues that modern
MNCs are at first well established and typically compete with rivals in the same situation.
Rather than comparative advantages in focal countries, the ability to utilize opportunities
resulting from conceiving the MNC as a network of subsidiaries, is considered as the major
source of competitive advantage of the internationally operating MNC. Advantages of being
multinational are exploited by strategies which rely on programs of experimentation and
exploitation. While experimental programs seek to develop the future potential, programs
of exploitation aim at the effective utilization of current potentials. Especially for the latter,
the global spread provides opportunities to utilize synergistic potential by combining aspects
so far considered as unrelated (Hedlund & Rolander 1990: 30).

Heterarchies conceived in these terms, share the characteristic that they delegate the
responsibility to learn and search for new opportunities as well as the utilization of existing
advantages to the entire organization. By dispersing the strategic initiative to all parts of
the heterarchy, the MNC resembles the ''firm as a brain" image in which "thinking is not
only restricted to one exclusive centre" (Hedlund & Rolander 1990: 26), but goes on
throughout the dispersed organization. This requires a radical problem orientation and a
large extent of know-how and information sharing among all units. Global firms are
described as being 'holographic'. Thus, each subsidiary is aware of the worldwide
operations of the firm.

Opposed to the perspective of dyadic headquarters-subsidiary relations prevailing in


hierarchical models, the heterarchical MNC is a many center structure. Headquarters'
functions are diffused and none of the core structuring dimensions product, country or
function is subordinate to the rest (Hedlund 1986). Geographically dispersed expertise leads
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 85

to a high degree of international specialization. Instead of conceptualizing relationships


between units exclusively following the command structure, the heterarchy rather
incorporates a mix of multidimensional organizing principles. This can result in multiple
responsibilities of and diverse linkages between subsidiaries. Thus, it is possible that a
particular subsidiary can be a global coordinator with managerial authority for one task or
area while at the same time being a subordinate in another field. The key idea is to
emphasize the mentality that subsidiaries do not only have a local responsibility, but also
take responsibility for the MNC as a whole. A certain messiness of structural regulations
and overlapping responsibilities are explicitly considered as necessary and essential for
complex and dispersed organizations like MNCs. In this respect, it is noteworthy that the
heterarchy is not to be considered as an instrument, but rather as "a meta institution which
continuously creates new institutional arrangements in the light of the expertise concerning
what works best for each specific purpose" (1986: 24).

In the absence of any uniform superordinate structure, integration in a heterarchy is at first


accomplished through normative and, only secondly, through pre-defmed coercive or
bureaucratic rules. Due to the negative effect on motivation caused by bureaucratic control,
the strong involvement of subsidiaries, on which the heterarchy heavily builds, can only be
realized if mutual trust and a commitment to the overall objectives evolves on the subsidiary
level. Normative control thus primarily stems from a strong corporate culture and common
management ethics which are widely shared in all units.

ACTION
Programs of
experimentation
and exploitation
ENVIRONMENT

1
STRUCTURE
~ Created, utilization of
..- - - - - - - - symbiotic potential
relative to firm

Heterarchy; many
centres

Fig. 24: Elements of an alternative logic to the 'structure follows strategy' paradigm
[Source: Hedlund & Rolander 1990: 23]

From a methodological perspective it is important to note that the heterarchical MNC rejects
the assumed determinism of the 'structure follows strategy' paradigm (see Fig. 24). The
heterarchy model conceives strategy, structure, and environment to be reciprocally inter-
twined and hardly analytically distinguishable (Hedlund & Rolander 1990). In conceiving
86 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

structure in a much broader sense than in terms of formal archetypes, strategies are more
determined by the constraints of the existing rules and routines than that they determine the
same. " ... the hypermodern MNC first defines its structural properties and then looks for
strategic options following from these properties" (Hedlund 1986: 20).

In summary, the previously introduced approaches provide rich descriptions of the new
pattern of global organizing and its distinguishing characteristics from conventional con-
ceptualizations of firms. However, due to the often blue-eyed and normative style in which
features like 'global commitment', 'shared responsibility,' or 'multidimensional flexibility'
of these 'networked' organizations are predominantly presented, a rather iridescent picture
evolves which partly even seems to go into the realm of fantasy. Issues of global
organizational design are thus only illustratively described rather than conceptually
delineated and confirmed. Contributing to the scepticism, apart from the 9 case studies
conducted by Bartlett & Ghoshal, all models emanated from arm chair theorizing or
insufficiently described empirical research. Thus, all researchers have mainly used a clinical
or phenomenological research method which is seldom explained in detail (Melin 1992).
Work and conceptual developments are simply described as 'intensive' research suggest
(Doz & Prahalad 1984).

Thus, it is not surprising that many subsequent studies (Turner & Henry 1994, Leong & Tan
1993, Roth & Morrison 1990) found only partly evidence of different model elements. No
study has yet reported a complete match of existing MNCs with the described 'ideal' types.
Given the limited empirical support, resistance and reluctance towards such path-breaking
ideas like heterarchy and lateral processes appears intelligible. Consistently, the extent to
which MNCs are in fact moving towards these normative ideals is currently debated (Melin
1992).

Despite normativeness and lack of comprehensive empirical support, however, all


approaches offer compelling arguments and propositions of how the undoubted organiz-
ational challenge in the global context can be appropriately met. The previously outlined
purpose of this research is to provide first heuristic and exploratory empirical research, to
evaluate to which extent these normatively proposed features are actually applied. If they
are, the examination of the particular concepts may provide confirmation and further
clarification. In the other case, a closer examination of the conditions which constrain the
application may facilitate an improved conceptualization. Due to the exploratory focus of
this study, the examination of the organizational context in case of missing evidence of the
distinguished features is likely to enhance the understanding of the particular situation and
to reveal reasons why normatively proposed concepts fall short.

The next chapter intends to synthesize introduced scholary work in order to derive at the
general characteristics that the different approaches share beyond detail. These characteris-
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 87

tics determine the structure and scope of the framework that will later be developed to study
the described phenomena.

5.4 GENERAL CHARACTERISTICS OF GLOBAL NETWORKS

Subsequently, the precedingly introduced models are synthesized along a number of selected
dimensions. These are considered to capture the most important aspects of the preceding
discussion on global networks. In particular, the concepts will be distinguished with respect
to the
.. emphasized organizational requirements stemming from globalization
.. dominant role of headquarters and subsidiaries
.. assumed location of strategic initiative
.. dominant role of subsidiaries
.. primarily assumed integration driver on the subsidiary level
.. assumed nature of the organizational process
.. assumed type of major interdependence
.. assumed pattern of strategy implementation
.. dominant control mechanism

The differentiation of the presented global network models according to these organizational
dimensions will be used to synthesize major characteristics that cut across all approaches
(see Table 10). The derived characteristics will subsequently be interpreted as the general
organizational requirement criteria imposed by globalization. Through the transformation
into research questions, these criteria will then determine the set of most important issues
that a framework for the study of global firms has to capture3 .
IDEALDMNC TRANSNA TlONAL HETERARCHY SYNTHESIZED
ORGANIZA TION ORGANIZA TlON CHARACTERISTICS
Dimension Prahalad & Doz 198 Bartlett & Ghoshal1989
Organizational Simultaneously manage Simultaneously achieve Simultaneously achieve Flexible Intra-firm I Multidimensionality,
requirements processes of control, advantages of global locally and globally based exploitation and structural flexibility
change, and flexibility competitiveness, multidi- advantages experimentation of
mensional flexibility, and advantages
worldwide learning
Role of head- Central decision-making , Context management of Institutionalizing lateral deci- Context management I Context management
quarters strategic direction decision-making and sion contexts of decision-making
coordination and coordination
Strategic Headquarters seeking sub- Joint responsibility of head- Delegated and dispersed to Delegated and dis- Increased subsidiary
initiative sidiary participation quarters and subsidiaries all subsidiaries persed to all subsidi- involvement
aries
Role of Undifferentiated roles, Specialization, varying roles Undifferentiated roles, oper- Specialization, varying Increased subsidiary
Subsidiaries subsidiaries provide stra- according to strategic ational actors roles according to involvement
tegic input and implement importance from strategic activity from center to
resulting action leader to implementor implementor
Integration Strategic decision-making Self-enforcing reciprocal Delegation of strategic Delegation of strategic I Increased subsidiary
driver on sub- participation interdependencies responsibility responsibility involvement
sidiary level
Nature of Additive coupling of sub- Cross-flows of resources in Lateral network of subsidi- Synergistic coupling in Growing
organizational sidiaries under headquar- an integrated network of aries a network of subsidi- interdependencies
process ters governance subsidiaries aries between all units
Major Common objective of Common objective of global Common objective of global Common objective of Growing
interdependence global competitiveness competitiveness, exchange competitiveness, Collabora- global competitive- interdependencies
of goods and components, tive creation of competitive ness, Collaborative between all units
Collaborative creation of advantages creation of competitive
competitive advantages advantages
Dominant con- Traditional! Cultural Cultural Cultural Increased subsidiary
trol mechanism Coercive commitment
Strategy Deterministic Self-enforced Cooperative and voluntary Cooperative and Self-designing pro-
im lementation volunta cesses

Table 10: Synthesis of the global network debate


ORGANIZATIONAL lMPLICATIONS OF GLOBALIZATION 89

ORGANIZATIONAL REQUIREMENTS
All models unanimously conceive the major organizational requirement stemming from
globalization as the need to flexibly integrate business activities along multiple structural
dimensions, e.g. product, area, and function. In explicitly adopting a process perspective,
Prahalad & Doz demand structural indeterminacy for the simultaneous management of pro-
cesses of change, control, and flexibility. The remaining authors call for flexibility in the
exploitation of various competitive advantages. All concepts demand multidimensionality and
structural flexibility rather than one-dimensional structural arrangements. This results in
following research question:

RQ5-1 (Multidimensionality): Do global firms simultaneously seek to achieve advan-


tages from multiple structural dimensions?

ROLE OF HEADQUARTERS
Based on the general assumption of increased complexity, most models assume a changed
role of headquarters. In this respect, the ideal DMNC model represents the most central
approach and shows the strongest affInity to the traditional rationale, building on hierarchical
authority. Despite strategic input from subsidiaries, strategic responsibility more or less
remains with headquarters which decide which elements are to be integrated across borders
and which require local responsiveness. In the other models, the key role of headquarters
has changed from direct governance and interference to the provision of a framework on
which the processes of strategy formulation and coordination between subsidiaries can
evolve. The conventional role distribution in terms of headquarters=strategy, subsidia-
ries=implementation is described as becoming increasingly blurred. Context management
of headquarters embodies an indirect management approach which only exceptionally relies
on central direction-setting or governance.

Figuratively, the situation of headquarters may be exemplifIed by comparing the conductor


of a symphony orchestra with the coach of a soccer team. Excellent performance in the case
of the orchestra depends on discipline to the instructions of the conductor. In soccer,
however, the coach is in a different situation. Since every single move of a soccer match
cannot be determined, his players (subsidiaries) have to learn his tactical ideas (strategy)
prior to the actual game. Thus, success is a function of the combination of individual
performance of single players on the ground of the internalization of the coach's tactics.

RQ5-2: (Context management): Does headquarters enforce strategiC objectives by


designing and maintaining the managerial context in which strategic decision-
making and coordination processes evolve?
90 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

STRATEGIC INITIATIVE
Closely related to the different role of headquarters, all models share some form of
subsidiary participation in the strategic process. Whereas Prahalad & Doz propose the
participation of subsidiaries primarily for legitimation reasons of the subsequent implemen-
tation process, other models are building on the delegation of strategic responsibility. Thus,
the responsibility for strategic initiative, i.e. to create innovative solutions and to effectively
utilize existing opportunities, is delegated and relies on the voluntary engagement of
subsidiaries. In the transnational model, and to a lesser extent also in the horizontal model,
headquarters thereby take a more active and influencing stance towards providing forums in
which the desired processes can evolve than in the heterarchy. Due to the non-hierarchical
nature, typical top-management functions in a heterarchy are dispersed and provide the basis
for an equally distributed strategic responsibility.

ROLE OF SUBSIDIARIES
In contrast to Prahalad & Doz and White & Poynter, who do not address the role of subsidi-
aries beyond implementational or operational responsibilities, the models of Bartlett &
Ghoshal and Hedlund discuss a differentiation of subsidiary roles in more detail. This is
based on a far-reaching specialization in which each subsidiary or center concentrates on its
specific capabilities. However, the differentiation of different subsidiary roles serves a
different purpose in both models. Due to their focus on pooling homogeneous activities, the
key idea driving Bartlett & Ghoshal's differentiation is the effectiveness of organizational
processes. Hedlund, in contrast, suggests to disperse as much top-management functions as
possible among subsidiaries.

INTEGRATION DRIVER ON SUBSIDIARY LEVEL


With respect to the question of what in particular is assumed to encourage the motivation of
subsidiaries to also pursue a global integration focus, the models offer different, but closely
related integration drivers. Prahalad & Doz assume that subsidiary participation in strategic
decision-making is sufficient to create a sense of integration. Bartlett & Ghoshal argue in
favor of the establishment of reciprocal interdependencies which forces subsidiaries to
collaborate for the sake of their own objectives. In the heterarchy and the horizontal
organization model, all units are enforced to collaborate, since strategic responsibility is
equally distributed, i.e. subsidiaries are center and periphery at the same time.

In summary, the three previous dimensions emphasize an active role of subsidiaries in


setting up global strategic initiatives and in implementing strategic programs across borders.
Subsidiaries are considered as emancipated assets rather than peripheral subordinates.

RQ5-3: (Subsidiary involvement): To which degree are subsidiaries actively involved


in the management of the firm as a whole?
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 91

NATURE OF ORGANIZATIONAL PROCESS


In the transnational, the heterarchy, and the lateral organization, crucial competitive
advantages stem from the more effective creation and implementation of organizational
processes that evolve between subsidiaries. Commonly, the exploitation of advantages
arising from being multinational itself are highlighted, e.g. the exposure to rich sources of
experiences know-how, information, etc. Through the exchange of these resources between
multiply linked units, the organizational process is described as synergistic rather than
additive, like in the ideal DMNC model. Due to the assumed complexity in MNCs, the
models share that they consider it as extremely difficult to determine all linkages between
subsidiaries that are necessary or useful to realize the desired organizational process.

MAJOR INTERDEPENDENCE
All models unanimously share that the major interdependence between subsidiaries results
from the common objective of achieving global competitiveness. The transnational, horizon-
tal, and heterarchy models also emphasize that competitive advantages stem from collabor-
ation between units. In this respect, it is argued that extensive cross-flows of resources and
an increased extent of cross-border division of labor between all units offer new opportun-
ities to gain competitive advantages.

RQ5_4 (Interdependencies): To which degree are subsidiaries embedded in a dense


network of interdependent relations?

DOMINANT CONTROL MECHANISM


Given the far-flung dispersion of activities and global responsibilities, it is commonly
asserted that strong mechanisms of control are needed to prevent the inherent centrifugal
forces from destabilizing the global firm. In contrast to the model of Prahalad & Doz, the
remaining approaches are unanimously building on the conviction that strong central control
and governance results in dysfunctional effects on the competitiveness and overall efficiency.
The delegation and dispersion of competencies and global responsibilities is indeed the
'conditio sine qua non' of the three latter models. As a substitute for coercive control, they
emphasize the crucial importance of a strong culture and commitment to the global success.

RQs-s: (Subsidiary commitment): To which extent are subsidiaries committed to local


and global objectives Simultaneously?
92 ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION

STRATEGY IMPLEMENTA TION


The implementation of the formulated strategy into the on-going operational process again
differs significantly between the first and the three latter models. The ideal DMNC grounds
on the idea that subsidiary participation in decision-making secures significant incentives to
adequate implementation. Necessary activities are thought to evidently result from the
formulated strategy. Subsidiaries are assumed to implement strategies accordingly, since
they initially participated in strategy formulation. The latter three models, in contrast, adopt
a different view of strategy formulation and implementation. Thus, neither strategic moves
nor activities for their implementation are precisely determined. Based on the mutually
agreed upon strategic direction and a universal culture (Schreyogg 1994), strategic programs
evolve voluntarily and on a cooperative basis between involved units rather than determin-
istically in terms of masterplans and central control.

RQu: (Self-sustained processes): Are operational processes self-organizing and self-


enforcing in adapting to new strategic imperatives?

The proposed characteristics of global networks, as summarized by the highlighted research


questions, reflect a tendency which increasingly contrasts traditional assumptions of hier-
archical and formal organizing. In this respect, it is important to note that the emerging
paradigm of global firm does not promote anarchy. The models are rather led by the
conviction that existing and emerging processes can be analyzed more accurately by
overcoming the drawback of exclusively viewing them through the restricted hierarchical
and formal lens.

The previous description of contributions to the discussion on a new paradigm has revealed
that most approaches explicitly or implicitly described the normative pattern of how MNCs
should organizationally adapt to globalization in network terms. Thus, in almost any
contemporary contribution to global organizing, figuratively, a phrase like 'the MNC as a
network of subsidiaries' can be found (Ghoshal & Westney 1993, Kogut 1990, White &
Poynter 1990, Bartlett & Ghoshall989, Prahalad & Doz 1987). However, instead of adop-
ting the network perspective by taking the wide body of well established network literature
into account, most of the approaches applied the network-construct rather metaphorically
(Nohria 1992, Bartlett & Ghoshal 1990, Tichy 1981). Due to the frequent application with
differing connotations, the term is increasingly loosing operational preciseness. The key
characteristics of a MNC-network remain vague. In this respect, the presented normative
and partly speculative literature which proposes that internationally operating firms should
adopt network structures appears to be based on a number of implicit assumptions. A
number of question are left unaddressed.
ORGANIZATIONAL IMPLICATIONS OF GLOBALIZATION 93

What is the general benefit (and what are the costs) of conceiving a global firm as a
network? Is a network a structural alternative to an organizational structure such as an global
area structure, or is it a management philosophy? Do all units necessarily have to be
connected? For which firms (and for which not) are network concepts particularly useful to
organize their worldwide operations?

An operational definition of a MNC-network as well as an initial network theory of the


global firm which could be used to operationalize network concepts is evidently missing. As
indicated in the introduction, this research seeks to provide an empirical reflection of the
network idea in internationally operating firms. Since the global management literature,
beyond the presented works, provides only sparse information on how network concepts
can be operationalized, the framework of this study will subsequently be developed from
an integration of the normative global network literature and existing organizational network
literature. The fact that the latter stream of research has so far not been explicitly utilized for
international management questions necessitates a careful and systematic review of findings
and explanations offered by the literature. The network research literature will be reviewed
in the next chapter.

Building on the previously outlined synthesis of the normative network literature this
research generally supports the approach to study global firms from a network
perspective. What is required, however, is a framework that systematically and based on
careful conceptual considerations, integrates existing contributions to the literature. In order
to avoid the initially formulated criticism (Chapter 2), the framework should not exclusively
be developed from the previously reviewed normative literature. Instead, it is asserted that
the existing organizational network literature provides adequate ground from which a
MNC-network conceptualization has to proceed. A network-approach incorporating the well-
established body of network research offers valuable insights to serve as a basis for develop-
ing a paradigm within which question of organizational design of global firms can be con-
ceptualized from a network perspective. Beyond a metaphorical application, this requires to
build a coherent platform on the basis of which a network perspective can meaningfully be
applied to study organizational phenomena in MNCs (see Fig. 25).

The purpose of Chapter 6 is to introduce methodology (Chapter 6.1), concepts, and


fmdings of existing streams of organizational network literature. Consequently, in Chapter
6.2 the literature of social network analysis which conceptualizes network relations between
persons or individuals will be reviewed. Chapter 6.3 then summarizes the findings of
interorganizational network research. Here, networks are conceived as consisting of
distinct organizations. On the ground of the developed understanding, Chapter 7 will seek to
94 NETWORK RESEARCH

Chapter 6 .2 Chapter 6.1 Chapter 6.3

Social
Network
Analysis
..-. Structural
Network
Analysis
....... Interorgani
zational
Network
Research

I I
Chapter 7.1: The MNC between Social and Interorganizational Networks
I
Network Network
of of
Individuals Organizations

I
Chapter 7.2
MNC
Network
Framework

Fig. 25: The development of the MNC-Network Perspective (Chapter 7) from the existing
organizational network literature (Chapter 6).

develop a MNC-network perspective (Chapter 7.1) from analogies and delimiting the
different network applications from one another. In this respect, Chapter 6 provides the
necessary groundwork which facilitates the argumentation pursued in Chapter 7. The final
objective of the line of reasoning of pursued in both chapters is the application of the MNC-
network perspective (Chapter 7.1) in developing the MNC-network framework in Chapter
7.2.

NOTES

(I) Throughout Chapters 5 to 9, the term 'organization' refers to the subject of organizational design, i.e.
the global firm. Since the anglo-saxon literature on organizations fails to provide an adequate distinction
between the instrumental and the institutional meaning of 'organization' , it is considered appropriate to use
the term in the described meaning. 'Organization' refers to what is organized and not to institutional
aspects of organizations.

(2) The major focus of Prahalad & Doz's work is the management of diversified MNCs thus a corporate
perspective. Since this research entirely adopts a business unit perspective, only Prahalad & Doz's
contributions pertaining to the management of businesses in a global context are summarized.

(3) The purpose of the research question is to provide an anchor for the subsequent conceptual discussion.
Ultimately, the complete Chapter 10 will be devoted to the successive operationalization of these research
questions. The correspondence of these research questions to the questions used for the data collection (see
the research instrument in Appendix C) will be established via the heuristic framework which will be
developed in Chapter 8.3.
NETWORK RESEARCH 95

6. NETWORK RESEARCH

In line with international management scholars, various streams of organization literature


recently developed an interest in applying network concepts to the study of organizational
issues. Thereby, quite a number of different social objects - from groups to societies - have
been described in network terms. Too often, however, the term was used to describe a
normative pattern rather than being applied in tradition of the well established network
literature. In a recent attempt to consolidate the state of the art in network research, Nohria
formulated the threat that the network could become just another tired metaphor: "the indis-
criminate proliferation of the network concept threatens to relegate it to the status of an
evocative metaphor, applied so loosely that it ceases to mean anything" (1992: 3).

The network paradigm has its roots in the early work of Moreno (1934) who used socio-
metrical methods (i.e. quantitative analysis of inter-personal relationships) to study
interaction pattern in small groups. Meanwhile network research enjoys a long and distin-
guished history in sociology, anthropology and role theory. The principal objective within
these areas of study was the analysis of social relations between individuals, groups or
populations. By patterning emerging relationships with socio-metrical methods, researchers
tried to relate evolving structures to the causes and consequences of human behavior.
Recently network research has gained further attention in business, economics, and,
especially, in the area of interorganization theory (Nohria & Eccles 1992).

The network perspective and the initial development of socio-metrical tools jointly originate
in the field of sociology. Due to a strong affinity between the historic sophistication of the
methodological apparatus and its application in social settings, it is often very difficult to
separate analytic devices from their primary use. However, it is considered important to
clearly distinguish both areas. Since this chapter intends to extract both applicable tools and
transferable results from established network literature, a general overview of network
definitions and appropriate measures to describe distinct network properties is provided
regardless of which elements the network comprises (Chapter 6.1). Subsequent chapters will
then review two streams of organizational research in which the network perspective has
frequently been applied. Firstly, social network research focusing on individuals as network
members (Chapter 6.2). Secondly, interorganizational research which regularly studies
relationships between organizations from a network perspective (Chapter 6.3).
96 NETWORK RESEARCH

6.1 STRUCTURAL NETWORK ANALYSIS

In general terms, literature shows a considerable consensus as to what a network comprises


of: a defined set of units which are directly or indirectly connected by relations (Alba
1982). Tichy et al. add that within a given set of potential linkages "not all pairs of
objectives are directly joined, and some are joined by multiple relationships" (1979: 507).
Relations between network units are typically long-term in nature and have to be distin-
guished from one-time interactions (Rogers & Agarwala-Rogers 1976). Network units are
synonymously called nodes, points, participants, entities, etc. whereas relations are typically
referred to as links, linkages, connections, ties, or dyads.

The increased contemporary interest in the network paradigm largely stems from the
extraordinary flexibility and multilevel applicability of the network perspective (Tichy &
Fombrun 1979). Thus, neither the essential number of units nor the minimum degree of
connectedness between network nodes are defined. Hammerkvist et al. note that "a critical
mass in terms of quality and quantity of relationships is required before one can talk about
networks - with difficulties of defining and measuring this mass" (cited by Thorelli 1986: 39).
At the lower end, networks have to include a minimum of three units which have to be
linked by at least two relations. The higher end of possible network configurations is only
limited by the analytic capacity of simultaneously analyzing a large set of relations.

Depending on the primary focus of inquiry both units and relations can be conceptualized
on multiple levels.

NETWORK UNITS
Typical network units in organizational research are commonly either individuals, or
collectives of organizational actors such as work groups, departments, divisions, and even
complete organizations. With respect to the different possibilities of conceptualizing nodes
(see Table 11), literature increasingly emphasizes the necessity to observe organizational
networks on different analytical levels (Rogers & Kincaid 1981, Tichy 1981, Fombrun
1982).

ANAL YTICAL LEVEL PREVAILING RELATIONAL FOCUS


Node relations that a network member shares with others
Dyad relation between two network members
Cluster relations between all network members within a sub-network

Network relations between sub-network within a network


Inter-network relations between distinct networks, e.g. organizations

Table 11: Analytical network levels


NETWORK RESEARCH 97

Network nodes and dyads are the smallest analytical devices which are frequently used to
study single network participants and their position in the network. Network analysis on the
cluster and total network level, in contrast, is primarily focused on the structure and the
pattern of connections between larger units of network participants. Studies on the inter-net-
work level, finally, examine relationships between distinct units which themselves, in tum,
comprise of networks, clusters dyads, or nodes. The successive and sequential character of
this categorization exemplifies the strong affinity to system theory (Thorelli 1986). Thus,
an inter-network always comprises of sub-networks, these of clusters whereby clusters
comprise of pairs of nodes which are linked by dyads.

If the network perspective is, for instance, applied to the study of interorganizational
relationships, an interorganizational network in fact comprises of a number of sub-network
on lower levels. A technological strategic alliance thus typically links research laboratories
of firms. Each laboratory conceptually constitutes a network of scientists. From this
perspective, the interorganizational network lastly composes of dyads and networks between
scientists from different firms. Since organizational action in general is performed by indi-
viduals, relationships between organizations, and within the organization between intra-
organizational units, can always be conceptualized in terms of interpersonal networks
(Hakansson & Snehota 1989, Walker 1988).

NETWORK RELATIONS
The most outstanding characteristic of networks is their focus on patterns of exchanges. In
contrast to one-time exchanges, a network relation is constituted by institutionalized and
continuous exchanges or interactions between two network nodes. Network interactions are
usually distinguished in regard to their content, since each form of exchange has an
individual logic and a number of quite unique characteristics (Wellman 1988). A frequent
distinction of network interactions is based on the type exchange flowing between a pair of
network entities. Tichy & Fombrun (1979: 927) distinguish the exchange of
~ goods and services (physical),
~ affect and liking (expressive),
~ information and ideas (cognitive) and
~ influence and power (prescriptive)

between network participants. Irrespective of the type of interaction which initially


constituted a relation, once a relation is institutionalized, it provides an avenue for all types
of interactions. If individuals, for instance, frequently interact due to a task related exchange
of services, the established relation between both actors potentially also serves as an avenue
for subsequent exchanges of information, the development of friendship, or attempts to
influence the behavior of the others for personal interests. An existing relation between two
98 NETWORK RESEARCH

network members thus provides the channel through which interactions can flexibly evolve.

Opposed to the conventional literature which conceives organizations primarily in structural


terms (see Chapter 5.2), the relational focus on interactions in networks adds a process
dimension to organizational analysis (Krackhardt 1992). The major difference between both
modi of analysis is their basic premise in regard to the relationship between structure and
process. Whereas an emphasis on structural analysis is based on the assumption that the
organizational process is shaped by formal structural arrangements, network analysts are at
flrst concerned with the process, i.e. the pattern of linkages which in their view constitutes
the structure. In other words, 'process follows structure' rather than 'structure follows pro-
cess' .

Besides their specific content, network relations can also be described in terms of other
measures which more specifically characterize the nature of the dyadic relation between two
focal nodes. Structural properties which are frequently used to describe characteristics of
network ties include symmetry, reciprocity, and multiplexity (Monge & Eisenberg 1987).
The most important properties measuring the strength and qualitative nature of a relation are
summarized in Table 12.

DYADIC NETWORK PROPERTIES


Symmetry To what degree are relationships symmetric (kinship) or
asymmetric (power relation)?
Reciprocity To which extent do related parties commonly perceive and
agree about existence and intensity of the relationship?
Multiplexity In how many ways are nodes related?
Strength Degree to which a link is stable, binding and demanding

Table 12: Dyadic network properties [Source: adapted from: Lincoln 1982: 4, Tichy et al. 1979: 508]

STRUCTURAL NETWORK PROPERTIES


The most striking characteristic distinguishing the network perspective from other methods
of studying organizations is that network analysis, by examining the structure and patterning
of relationships, seeks to identify both their causes and consequences (Tichy 1981). Mitchell
who defmes a network "as a specific set of linkages among a defined set of actors" thus adds
the property "that the characteristics of these linkages as a whole may be used to interpret
the social behaviour of the actors involved"(1969: 2).

Network structures are commonly visualized with the help of graph theory (Harary 1969)
in which a network consists of nodes connected by directional or nondirectionallines. Since
graphs portray networks one-dimensionally in terms of present or absent relations, they lack
the differentiation of different types of relation content. Due to this limitation, each different
NETWORK RESEARCH 99

type of network content has to be illustrated by a separate graph. In directional graphs, the
length and direction of lines is often used to indicate the symmetry and the extent of a
relation as a weighting factor between two nodes. Due to the additional information per
dyad, a graph consisting of paths is far more complex and difficult to interpret, compared to
lines which just symbolize connectedness (for an example see Tichy et al. 1979: 515). With
reference to the visualized shape, network arrangements are intuitively often conceived as
incorporating all potential linkages between different layers of entities inside a given
overall system. In this respect, the previously introduced 'Integrated Network Model' of
Bartlett & Ghoshal (Chapter 5.3) provides a vivid example. In contrast to these intuitive
approaches, the literature of network analysis has meanwhile developed far more sophis-
ticated sets of measures to describe structural characteristics of networks. Following Burt
(1980), these can be divided into two broad groups: relational and positional measures.

RELATIONAL NETWORK PROPERTIES


Relational network properties focus on the analysis of direct and indirect links between
nodes which typically leads to the identification of clusters within the network. Table 13
provides a summary of the most frequently applied relational properties in network studies
(see Lincoln 1982: 6-7, Alba 1982: 53-59 for a more detailed discussion of relational
measures).

RELATIONAL
NETWORK PROPERTIES

Density Off all possible relationships among participants, what portion actually
exists?
Size Of how many nodes does the network comprise?
Clustering How many densely connected clusters exist?
Openness How many relationships do clusters connect with other clusters?
Reachability What is the average number of links separating two participants?
Connectivity The degree to which members of the network are linked through direct
or indirect ties.
Vertical density What portion of all hierarchical levels does the network encompass?

Table 13: Relational network properties [Source: adapted from: Tichy et al. 1979: 508]

The most prominent and frequently applied, and yet most simplest, structural property is
density. It is usually defined as the ratio of actual to potential links within the network
(Mitchell 1969). Clusters of densely connected nodes (Boissevain 1974), for instance, enable
researchers to identify important groups. Furthermore, relational properties provide
aggregated information about general characteristics of the network. Thereby, they facilitate
the description of complex structures and the comparison of their key characteristics.
100 NETWORK RESEARCH

POSITIONAL NETWORK PROPERTIES


The second category of properties to describe network structures consists of positional
characteristics. These center on the analysis of single network nodes, comparing patterns
and number of relations to others (Krackhardt & Hanson 1993). Positional methods typically
identify critical positions in networks which, drawing on role theory (Merton 1957), are
mostly attributed to specific roles or statuses. Table 14 depicts the most important positional
properties.

POSfTlONAL
NETWORK PROPERTIES

Star Node who has many relationships with other nodes


Liaison Node who links clusters that would be separate otherwise
Bridge Node who belongs to multiple clusters
Gatekeeper Node who controls the flow between different sections
Isolate Node who has no relationships to others

Table 14: Positional network properties [Source: adapted from: Tichy et al. 1979: 508J

Listed network roles are further illustrated by means of socio-metric graphs (see Fig. 26).
The most prominent positional network property is the star ('G'). Stars are of eminent
importance to the network, since they have the most links to different nodes. They are the
most densely connected elements in the network. Bridges and liaisons (Jacobson & Seashore
1951) are network elements serving as linking pins between multiple clusters. They distin-
guish from one another, however, in that the linking unit in case of bridges is a member of

/ 0 - - o Gatekeeper
@]\ Isolate
[IJ
"@]
"~
/Liason >
/ ~'"
~[!] @]
Star
~ Bridge
Fig. 27: Non-directional sociometric graph
NETWORK RESEARCH 101

one of the connected clusters ('E') whereas liaisons link two or more groups without being
a member of these groups ('K'). Isolates ('F') are only poorly connected network nodes
(Tushman 1977) which can either be attributed to their minor importance or their neglect in
regard to integration. Gatekeepers (Lewin 1943) hold interface positions ('B') in which they
control the flow between others (Allen 1977).

Table 15 summarizes the precedingly introduced network analytical apparatus. Organiz-


ational networks have been described in terms of possible analytical levels on which
networks of different elements - from nodes to inter-networks - can be conceptualized.
Network relations possibly include physical, expressive, cognitive, and prescriptive
exchanges. The overall structure and shape of a network can be described with the help of
relational properties whereas positional properties allow to examine roles of selected
network members and their influence on interaction patterns between other participants.

NETWORK UNITS NETWORK RELA TIONAL NET- POSITIONAL NETWORK


INTERACTIONS WORK PROPERTIES PROPERTIES
nodes physical exchanges density, size stars
dyads expressive exchanges clustering liaisons
clusters cognitive exchanges openness bridges
networks prescriptive exchanges reachability gatekeeper
inter-network connectivity isolates

Table 15: Basic dimensions of structural network analysis

6.2 SOCIAL NETWORK ANALYSIS

The basic rationale of reviewing the work of the body of literature of social network analysis
is the same that provides legitimation to such fields as organizational behavior,
organizational psychology, etc. Since economic action is generally embedded in structures
of social relations (Nohria 1992, Granovetter 1985), organizational processes are ultimately
always also social processes. Any organizational inquiry must, therefore, also consider
social implications. In this respect, network scholars assert that studying organizations from
a network perspective provides additional insight for understanding action (attitudes and
behaviors) of organizational actors (Nohria 1992).

The subsequent discussion intends to introduce organizational applications of network


research. Drawing on Rogers & Kincaid (1981) who argue in favor of a network node
related categorization of network research, it is considered useful to group network
research with respect to the specific network nodes in focus. Drawing on the explication of
102 NETWORK RESEARCH

network nodes in the previous chapter, the following levels of organizational network
literature can be distinguished:

• networks on the organizational level,


• network clusters within organizations,
• network dyads and
• individual actor networks.

With respect to the amount of contributed literature to organizational network research, the
following review does not claim to provide an exhaustive summary. The selection of cited
findings is thus more orientated towards significantly illustrating the key applications of this
school of thought. Furthermore, especially those concepts were chosen that promise to
provide additional insight for the delineation of a framework to study the global organization.

NETWORK. RESEARCH ON THE ORGANIZATIONAL LEVEL

One of the most important outcomes of network research on the organizational level is the
emphasis on the indispensable dualism between prescribed and emergent structures and pro-
cesses in organizations (Krackhardt & Hanson 1993, Ibarra 1992, Monge & Eisenberg 1987,
Lincoln 1982, Tichy & Fombrun 1979, Roberts & O'Reilly ill 1978, Rogers & Agarwala-
Rogers 1976).

While traditional organizational studies tended to exclusively focus on formal or structural


variables (Blau 1964, Lawrence & Lorsch 1967, Pugh et al. 1969), the network paradigm
has turned scholary attention to the interrelated perspective of investigating organizations
beyond formal arrangements. As Tichy & Fombrun (1979) unfold, prescribed structures
and processes are complemented by what they call emergent structures and processes.
These capture the informal behavior of involved actors. The prescription of social processes
in organizations first of all requires that the same are subject to comprehensive planning and
control. Since this accounts for only a limited number of processes, as first indicated by
Roethlisberger and Dickson (1939), it is meanwhile generally accepted that unplanned,
informal structures and behavior patterns emerge in every organization. Tichy attributes
this to the complexity prevailing in most organizations: "unplanned structures and behaviour
patterns, specifically networks, emerge because organizations are so complex that plans can
never anticipate all contingencies" (1981: 225). Katz & Kahn see informal structures
primarily arising out of the "inevitable conflict between the collective task demands and
individual interest" (1966: 80).
NETWORK RESEARCH 103

Emergent networks, however, are not necessarily always ineffective as implicitly often
considered in the traditional organizational literature. With reference to the work of
motivation theorists (McClelland et al. 1961, McClelland & Winter 1969), it is increasingly
emphasized that emergent processes also capture the dynamic and motivational dimension
of human behavior. Motivational theorists observed that where formal prescriptions fall
short, organizational action is regularly complemented by individually initiated activities
(Monge & Eisenberg 1987). These behaviors are frequently attributed to the effects of intrin-
sic motivation of achievement or to the organizational culture. Several researchers have
meanwhile argued that prescribed and emergent structures and processes are closely
intertwined and therefore should be considered as two sides of the same medal (Stevenson
1990, Monge & Eisenberg 1987, Tichy & Fombrun 1979, Roberts & O'Reilly ill 1978,
Rogers & Agarwala-Rogers 1976, Farace & McDonald 1974, Katz & Kahn 1966). Meta-
phorically, "a prescribed organizational network provides pegs from which emergent
networks hang" (Tichy 1981: 227). Variations in the pegs therefore always also influence the
structure of the interrelated emergent network.

Although literature seems to share unanimous consensus with respect to the significance of
prescribed and emergent factors studying organizations, insufficient research has so far been
devoted to the identification of determinants of the interdependence between the two
dimensions (for an exception see Stevenson 1990). If any, empirical effort has mostly been
directed towards factors influencing network patterning in emergent networks. Thereby, the
majority of studies focused on characteristics shaping communication processes. For
instance, it was found that the degree of work discretion, the differentiation of tasks and the
density of people in the work area was positively associated to the overall amount of
communication that occurred (Wade 1968, Blau 1964). Research by Roberts & O'Reilly ill
(1978) indicated that where the organizational culture supported an open communication
climate, a larger number of people tended to be network participants. Furthermore, proxim-
ity and amount of interaction have found to be strongly correlated in organizations (Monge
& Kriste 1980, Allen 1977).

Another recently emerged stream of mostly normative literature applied the network concept
to organizations to express their growing concern about the appropriateness of traditional
paradigms to cope with the challenges imposed by today's dynamic environments (Bush &
Frohman 1991, Lipnack & Stamps 1987, Mueller 1986, Hine 1984, Naisbitt 1982). Similar
to Hedlund (1986), these scholars primarily question the premises of bureaucratic structures
by highlighting the shortcomings of organizational problem solving in exclusively formal
structural terms. Uniformly, these authors favor the network image to describe what they
see as an alternative to the exclusive hierarchical structuring of organizations. Mostly
rooting in the work of Burns & Stalker (1961) who argued that dynamic environments
require more organic organizations, it is asserted that symmetrical hierarchies based on the
causal-linear management principle of 'divide et impera', top-down decision-making, and
tight control are increasingly losing efficiency in coping with prevailing organizational and
104 NETWORK RESEARCH

environmental complexity (see Fig. 27). Eccles & Crane (1988, 1987), for instance,
concluded from a study of investment banks that network structures can be characterised by
overlapping and shared responsibilities, dual reporting relationships, vague roles and
responsibilities, inverse management hierarchies, and structural dynamics (for similar
descriptions see Charan 1991, Rockart & Short 1991, Lipnack & Stamps 1987).

Hierarchy Network

o?r
o hierarchy

o object-orientation
o heterarchy

o meta-orientation
o convergence o divergence
o fixed roles and functions o flexible roles and functions
o dependence from the top o interdependence of all units
o vertical flow of information 0 free flow of information

o top-down decision-making 0 decentralized decision-making


o structurandeterminism o self-sus~ined process
management principle: management principle:
"Divide et impera" "Global orientation"

Fig. 27: Hierarchy versus Network [Source: Paul et al. 1993]

NETWORK CLUSTERS WITHIN ORGANIZATIONS

Another basic purpose of social network analysis is the identification of network clusters
which themselves constitute sub-networks. In relational terms, these clusters distinguish
from other network areas in regard to their higher density of linkages. In organizations,
clusters are formations of individuals which interact with one another relatively more often
than with other parts of the organization (Rogers & Agarwala-Rogers 1976). The analysis
of networks in terms of clusters is mostly legitimated by the fact that the cluster is
considered as a closer contingent factor or determinant of individual behavior than the larger
NETWORK RESEARCH 105

network of which the cluster is only a part. In accordance to the above made distinction,
network clusters can be distinguished into prescribed and emergent clusters.

PRESCRIBED NETWORK CLUSTERS


Prescribed network clusters are organizational entities or units which comprise of organiz-
ation members according to a specific criteria, e.g. performing the same function, marketing
the same product, or using the same office. Besides these formally assigned, more perma-
nent network memberships, organizational actors can additionally also be involved in
networks which are only constituted for a specific purpose or a certain period of time.
Project teams, task forces, coordination committees, etc. often comprise of people from
different units which are formally assigned to assemble and build a temporary network, for
instance, to serve as an integrative device for a certain issue (Galbraith 1977).

EMERGENT NETWORK CLUSTERS


Research on emergent clusters within networks has centered on the identification and
investigation of cliques and coalitions in organizations. Coalitions are temporary alliances of
organizational members built to exercise power, control, or influence for a limited purpose
that lies in the common interest of the coalition members (Tichy & Fombrun 1979).
Empirical studies have documented that coalitions often pursue their goals at the expense of
other members of the organization (Crozier 1964, Burns & Stalker 1961). In this respect,
organizational power was found to mainly stem from network centrality in work flow and
communication (Brass & Burckhardt 1992, Stevenson 1990, Brass 1984, Blau & Alba 1982).
Cliques (Burt 1980), opposed to coalitions, mainly build on initially affective links between
clique members which later provide the basis for an increased exchange of influence or
information. The sustainment of cliques typically requires dense relationships and regular
face-to-face encounters (Nohria & Eccles 1992, Tichy 1973).1

Besides focusing on clusters of power and affective relations in organizations, some scholars
have used network constructs to study the effectiveness of work-related interactions. Leavitt
(1951) in his laboratory study, for example, has examined the effect of different types of
communication networks on task performance. In particular, he distinguished four basic five
person group structures (see Fig. 28).
106 NETWORK RESEARCH

A E
CIRCLE

B.D . . .
C

.. ..
ABC D E

A E
ALL-CHANNEL CHAIN

Fig. 28: Types of communication networks [Source: Leavitt 1951]

Leavitt found that 'wheel' configurations were considerably faster in solving assigned prob-
lems than other structures. He attributed this to the relational simplicity and communication
efficiency of the 'wheel'.2 However, Shaw's (1954) study, building on Leavitt's work, has
indicated that saturation (information overload), leading to a decrease in task efficiency, was
highest for the individual 'A' in the center of the 'wheel' network. Moreover, the study
revealed that independence and individual satisfaction was greater in decentralized networks
('circle' or 'all channel'). Since these findings were gained in laboratory settings, Katz &
Kahn (1978) legitimately note that the observed deficiencies of centralized communications
structures have to be subject to further empirical testing in real-life organizations.

NETWORK DYADS

Another very important stream of research within the stream of organizational network
research concentrates on the nature of network dyads and the conditions under which ties are
most likely to occur. In this respect, the 'homophily'-hypothesis (Homans 1950) has gained
most prominence in explaining the emergence of dyadic ties between individuals. Due to this
hypothesis, communication is likely to be most effective if communication source and
receiver are homophile, i.e. are similar in regard to certain attributes such as beliefs,
education, social status, values, perception, etc. In other words, when source and receiver
share meanings, communication inefficiencies like message distortion or cognitive
dissonance, are less likely.
NETWORK RESEARCH 107

Work by Granovetter (1973, 1985) has centered on the impact of tie-intensity on network
performance. He argued that work-related information flows in networks are considerably
influenced by the intensity of inter-personal ties, connecting network members. Granovetter
defines the strength of a tie as "a (probably linear) combination of the amount of time, the
emotional intensity, the intimacy (mutual confiding), and the reciprocal services which
characterize the tie" (1973: 1361). Empirical research by Friedkin (1982) has supported
Granovetter's, on the first glance, counter-intuitive argument that especially weak inter-
personal network-ties are more effective in communicating information and innovation
across the organization. Due to the time and emotional resources absorbing nature of close
relationships, people typically keep up only a very limited number of strong ties. In contrast,
weak ties require far less individual involvement and commitment. "The strength of weak
ties in promoting boundary spanning information flows lies not in their individual efficiency,
but in their numbers" (Friedkin 1982: 273). Thus, bridges are typically connected by weak
ties to other network members (Granovetter 1973: 1364). Studies by Allen (1977) and
Monge & Kriste (1980), in addition, found that the strength of ties is significantly influenced
by the geographical distance they have to bridge.

INDIVIDUAL ACTOR NETWORKS

Network studies focusing on a focal individual and its position in organizational networks
are frequently used to distinguish different types of organizational roles which are then
analyzed in regard to their influence on the overall organizational process.

Organizational roles formally comprise of a set of specific tasks, associated with a desig-
nated behavior and obligatory relations to perform the task. An organizational structure can
thus be seen as a set of formally defined positions in which people assigned to these positions
are expected to perform a number of roles. Positions and attached roles usually stem from
an organizational task analysis which determines the required number and types of activities
to be performed. Prescribed roles and positions are defined independently of the individuals
who fill them (Lincoln 1982). From a formal perspective, the organizational structure thus
largely determines communication and interaction patterns between organizational members.

Scholars seeking insight from positional network analysis emphasize that processes in organ-
izations are influenced by a number of factors which not necessarily relate to formally
defined roles or positions. In studying the actual pattern of a specific behavioral dimension
(e.g. communication, interaction) within a specified network, they are trying to identify the
determinants of individual behavior beyond formal structure.

The study of roles in social settings follows a common pattern. Thereby, emergent roles in
communication or influence networks are in a first step identified with the help of positional
network properties. In order to identify the actual determinants of the role behavior, the
108 NETWORK RESEARCH

interrelation of communication behavior and social characteristics of the studied individual


is analyzed in more detail. Researchers typically derive at a number of key characteristics
which successful role occupants possess. Empirically verified profiles, finally, enable
organizational decision-makers to assign individuals to positions and roles according to their
specific role profiles.

A typical example of this approach is the study of opinion leadership, rooting in an empirical
study of the American 1940 presidential election by Lazarsfe1d et al. (1948). Lazarsfeld and
his colleagues have found that the public is mainly influenced by opinion leaders, who
initially take up messages from mass media channels. The variety of opinion leader studies
(Rogers & Shoemaker 1971) - mostly conducted in non-commercial organizations or other
sociological populations - indicate that leaders mainly obtain their influence from network
centrality (Astley & Sachdeva 1984). Opinion leaders are typically also sociometric stars.

Adopting a similar approach most positional studies of formal structures have focused on
liaison, gatekeeper, and boundary spanner roles in communication networks. Liaisons or
'linking pins', as first emphasized by the seminal study of Jacobson & Seashore (1951),
interpersonally connect network clusters without themselves belonging to any group. By
linking organizational sub-systems, they are of eminent importance in facilitating cross-
organizational information flows (Rogers & Agarwala-Rogers 1976). Empirical studies
revealed that liaisons are more open in communication (MacDonald 1976) and tend to be of
higher status and education. Compared to non-liaisons, they are also able to process a higher
cognitive complexity (Schwartz & Jacobson 1977). The gatekeeper role originates in the
work of Lewin (1943) who initially studied how housewives controlled the flow of new foods
(sweetbreads) into their families. With a gatekeeper Lewin associated a person controlling
messages flowing through a communication channel. In subsequent studies, the gatekeeper
role has been used to study power relations arising from boundary spanning (Brass &
Burckhardt 1992) as well as the diffusion of news and innovations in newspaper organiz-
ations (Breed 1955) and in scientific laboratories (Allen 1977). 'Boundary spanners'
(Tushman & Scanlan 1981) or 'cosmopolites' are network members which monitor and
communicate with the organizational environment. Thus, they are very critical in linking the
organization's internal network to the external sources of information. Tushman (1977)
supported the existence and crucial importance of boundary spanners in mediating
communication across several organizational interfaces. He found that boundary spanners of
R&D laboratories were well connected in the internal as well as the external network.
NETWORK RESEARCH 109

COMMUNICATION ROLE FUNCTION IN THE NETWORK


Gatekeeper Prevents information overload by filtering and screening messages
Liaison Integrates and interconnects the parts (cliques) of the network
Opinion Leader Facilitates informal decision-making in the network
Cosmopolite Relates the system to its environment by providing openness

Table 16: Communication roles [Source: Rogers & Agarwala-Rogers 1976: 140]

Especially, research on boundary spanners highlights that the initial distinction between
prescribed and emergent roles becomes blurred, if emergent roles, combined with a specific
task, are assigned to formal positions. Rogers & Agarwala-Rogers (1976) attributed distinct
functions to communication roles in networks which, although largely emergent in origin,
provide the rationale of prescribing these roles to certain positions as part of formal
arrangements (Table 16).

A growing body of research developed independently from the positional network analysis,
but also focuses on the individual and his embeddedness in the organizational web of rela-
tions. Building on the 'work-activity school' (Kotter 1982, Kanter 1983, Mintzberg 1973),
these researchers emphasize the favorableness of informal relations and contacts in support-
ing work-related goals.

Lincoln, for instance, asserts that adaptive organizations "must regularly mobilize the
spontaneous informal and interpersonal ties of sentiment and collegially in order to achieve
organizational goals" (1982: 11). Other authors argue that these individual strategies of
'networking' (Baker 1994, Barham 1990, Smith 1989) meanwhile dominate the organiz-
ational behavior of especially executives over the definition of formal roles. Kaplan (1984)
describes the fate of modern managers as trading power on resources to initiate activities.
Managers "provide services to others in exchange for the services that they themselves
require" (1984: 40). In correspondence to the discussion on informal networks
supplementing formal arrangements, it is argued that informal relationships increasingly
provide key channels of getting things done (Ibarra 1992). In contrast to the view of
Granovetter (1985), these authors emphasize the importance of strong ties in organizations.
The literature on networking is largely normative in nature and overlaps considerably with
approaches proposing networks as alternative forms of organizations.

In conclusion, Table 17 summarizes the discussed distinction between prescribed and


emergent dimensions across the different network levels.
110 NETWORK RESEARCH

PRESCRIBED EMERGENT

Organization formal structure determines process emergent processes constitute real struc-
ture
Cluster formally defined organizational parties real groupings
Individual roles attached to formally defined posi- real roles stemming from network posi-
tions tion

Table 17: Prescribed and emergent network dimensions

From the previously reviewed findings of organizational network research, it follows that
informal networks are indispensable to the functioning of contemporary organizations. Due
to the equally outlined limits of both structural archetype selection and formal prescription
of organizational processes, it is assumed that the understanding and incorporation of the
emergent organizational dimension significantly enhances top-management's abilities to
effectively manage and control a internationally operating business.

Next, basic arguments and concepts of interorganizational network research will be


introduced.

6.3 INTERORGANIZATIONAL NETWORK RESEARCH

Triggered by the drastic increase of all forms of interorganizational collaboration, inter-


organizational network research has recently gained considerable attention in the academic
literature (Welge 1995; RaIl 1993; Sydow 1992; Hamel 1991; Zajac et al. 1991; Astley &
Brahm 1989; Geringer & Herbert 1989; Auster 1987; Harrigan 1987, 1985, 1984; Prow an
1983). With respect to the purpose of cooperation, interorganizational network research will
be distinguished into two streams of literature focusing on horizontal and vertical relations
between organizations. The second literature emphasizes the distinction between one-time
interactions and enduring relationships. After these more general explanations, two
interorganizational network models - the industrial market model and the dynamic network
model - will be introduced as examples of network applications between independent
organizations.

Compared to the social network literature, the term network is applied very loosely in inter-
organizational research. Since the network perspective has seldom been explicitly defined in
interorganizational research, numerous and heterogenous ideas and concepts have been
related to the network term. Thorelli, for instance, refers to networks as "two or more
organizations involved in long-term relationships" (1986: 37). Emerson (1972) and subse-
quent studies (Cook et al. 1983, Cook 1977) conceive exchange networks as consisting of
NETWORK RESEARCH III

two or more connected thus interdependent exchange relations. In the social network termi-
nology, these definitions would rather apply to a network dyad. Interorganizational network
conceptions, however, share that they focus on relationships between organizations. Similar
to the familiar terminology, interorganizational networks can thus be described in terms of
nodes and relations.

NETWORK NODES
Interorganizational network nodes are typically distinct firms which are legally, physically,
and economically independent. In contrast to the social network literature,
interorganizational research is far less centered on variations in network nodes, although
some works concentrate on public organizations instead of commercial firms. Since the
underlying focus of this research is that of internationally operating commercial firms, the
case of interorganizational relations to or between public organizations will be neglected.

NETWORK RELATIONS
Most contributions to the interorganizationalliterature concentrate on nature and implications
of relations between organizations. Interorganizational relations - as the network constituting
connections among organizations - are usually established voluntarily and sustained over a
longer period of time. Thereby, the reason to commit to a relation primarily stems from
strategic considerations, and not from affect or chance which are the driving forces of social
networks.

Strategically enforced relationships between organizations have to be distinguished from


other links which exist for different purposes or which do not have a voluntary origin.
Regional networks (interorganizational networks in a community or industry districts (Birley
1985)) or institutional networks (membership of organizations in associations) are only part
of the current review if relations, beyond mere membership, are strategically enforced
(Powell 1990: 305-322).

With respect to different types of relations prevailing in interorganizational networks, one


sub-stream of interorganizational research is especially seeking explanations for the emerg-
ence of horizontal relations between firms whereas another stream of literature primarily
focuses on vertical relations in which firms link along the value-added-process.

HORIZONTAL RELATIONS BETWEEN FIRMS

The 1980s have witnessed a drastic increase of strategic alliances between large global com-
panies which were formerly often considered as arch rivals (Nohria & Garcia-Pont 1991).
Interfirm agreements are considered as horizontal, if firms as part of the relationship engage
in multidirectional exchanges for mutual benefit (Welge 1995, Doz et al. 1990).
112 NETWORK RESEARCH

Although motivations for interorganizational collaboration in general are quite varied and
diverse, they do nevertheless commonly share their strategic origin. Thus, firms at first
pursue cooperative arrangements to achieve strategic goals which they are unable to
accomplish on their own. Joint ventures, strategic alliances, equity partnerships,
collaborative research pacts, federations, etc. allow firms to gain faster access to new tech-
nologies or markets, to share costs and risks for high technology investments, or to benefit
from know-how of other firms (Powell & Brantley 1992, Powell 1990). Especially in high
technology industries, loose partnership networks of global firms (Barley et al. 1992, Con-
tractor & Lorange 1988: 24) partly shift the basis of competition to a different level, from
interfirm rivalry to that of transnational groupings (Perlmutter & Heenan 1986, Porter &
Fuller 1986). As a consequence, the locus of innovation becomes the network rather than a
particular firm (Powell & Brantley 1992). Due to high investments involved or because the
technological knowledge is tacit in character (Nelson & Winter 1982), relations constituting
global coalitions are typically multidimensional and long-term in nature. This largely
excludes knowledge acquisition through licensing. Strategic goals pursued by horizontal
relations are offensive and striving to improve the competitive position. Rather than agreeing
on specific terms for exchanges, collaboration per se is to the fore of horizontal
arrangements .

The characteristic that may best describe horizontal relations between firms is symmetry
(Burt 1980). The nature of horizontal relations is symmetric, in contrast to the asymmetric
exchange in supplier-customer relationships. Horizontal relations are negotiated on equal
terms of the partners' strategic interest. For both, the relation is primarily a strategic option,
making equal commitment and advantage a during requisite. This does not necessarily
exclude partnerships in which each party contributes specific, but distinct competencies or
sets of resources for a clearly defmed purpose (Walker 1988). Such partnerships differ from
vertical relations in that the relationship between involved parties rests on shared objectives
rather than pursuing individual goals together.

Due to the dyadic nature and rationale of horizontal relations, researchers have only recently
begun to study cooperative arrangements among firms as interorganizational networks.
Especially studies making use of the well established structural network properties are very
rare (see Barley et al. 1992, Walker 1988 for exceptions).

VERTICAL RELATIONS BETWEEN FIRMS

In contrast to horizontal agreements between firms, the focus of vertical relations is primar-
ily on the coordination of one-directional exchanges among firms (Levine & White 1961).
Due to the inevitable division of labor among firms, each firm depends on exchanges with
other organizations to obtain necessary resources and to market outputs (Pfeffer & Salancik
1978). The limited availability of resources thus determines interorganizational interdepen-
NETWORK RESEARCH 113

dence (Cook 1977: 67) which Pennings defines as the "similarity of organizations' input
acquisition or output disposal" (1981: 433). Interdependence, in turn, gives substance to the
stratification of influence among organizations and an emerging power structure (Astley &
Zajac 1990).

In this respect, interorganizationalliterature clearly distinguishes between interactions and


relations. It is important to note that resource dependence first of all explains the occur-
rence of interactions among firms. Relations, in contrast, provide the context in which the
exchange takes place and go far beyond a single interaction3 • Interorganizational relations
are most frequently discussed in the framework of exchange theory, initially introduced by
Levine & White (1961) and extended by Thompson (1967). In essence, exchange theory
assumes a strong correlation between exchange interactions and the emergence of
interorganizational relations.

Thompson (1967) explains vertical relations as stemming from the attempt to reduce
environmental uncertainty by creating negotiated environments. Firms are willing to make
a commitment to the exchange relation, if this makes the terms of future exchanges more
predictable. Although this is based upon reciprocal reinforcement (Cook 1977: 64) and
provides mutual benefit for both parties, in contrast to horizontal relations, the focus of
vertical relations is on reducing uncertainty rather than benefiting from additional advantage.
The verticality of the relations is expressed by the fact that exchange relations typically
comprise of interactions along the value-added process.

Similar to social relations, vertical relations cannot be completely established at once, but
require a longer process to evolve. Blau notes: "Social relations evolve in a slow process,
starting with minor interactions in which little trust is required because little risk is involved
and in which both partners can prove their trustworthiness, enabling them to expand their
relation and engage in major transactions" (1968: 453). Van de Ven & Walker (1984)
discovered that the institutionalization of interorganizational relationships was fostered by
frequent and intense communication, supporting the building of consensus. In support of
exchange theory, communication and interaction intensity was found to be positively
correlated to resource dependence.
114 NETWORK RESEARCH

MUTUAL ORIENTATIO EXCHANGE PROCESSES


- PREPAREDNESS TO INTERACT - SOCIAL EXCHANGE
- MUTUAL KNOWLEDGE -BUSrnESSEXCHANGE
- RESPECT FOR EACH OTHER'S -ThWORMATIONEXCHANGE
INTERESTS ADAPT ATION PROCESSES
INVESTMENTS -PRODUCTS
BONDS - PRODUCTION
DEPENDENCE -ROUTINES

Fig. 29: Relationships and interaction in industrial markets [Source: Johanson & Mattson
1987: 38]

Fig. 29 depicts the interdependence between interorganizational interactions and relation-


ships. Exchange and adaptation processes require mutual orientation and a commitment from
the involved parties. Over the time, frequent interactions between firms increasingly lead to
bonds which enhance interorganizational dependence.

Two contributions focusing on vertical relations between firms have explicitly tried to
conceptualize vertical relations between firms from a network perspective. These
interorganizational network models will be described in more detail below.

INTERORGANIZATIONAL NETWORK MODELS

Compared to the frequent use of the network term, only a very limited number of contri-
butions has so far defined interorganizational arrangements explicitly in network terms
(Cook 1977, Benson 1975, Emerson 1972). If at all, networks are discussed in terms of
exchange networks in the context of public or non-commercial organizations. Two more
recent contributions, in contrast, have adopted an interorganizational network perspective to
study business firms: Miles & Snow's (1986) 'Dynamic Network' and the 'Industrial
Network' model (Hakansson 1990) from a group of Swedish researchers. Both models
emphasize the efficiency of their network models, contemplating them as both cause and
consequence of changed environmental conditions.
NETWORK RESEARCH 115

Rooting in the resource dependence and exchange literature both models further share that
they adopt a very narrow interorganizational network perspective (see Emerson 1972 for a
wider definition). Thus, interorganizational networks are conceptualized in terms of single
actor networks or organization sets (Aldrich & Whetten 1981, Evan 1966). These focus on
isolated firms and their immediate counterparts, neglecting relations among partners or
partner' relations to firms outside the network (Barley et al. 1992). Linkages between
satellite organizations are conceptually ignored, so the implicit rationale, because from the
perspective of the focal firm they are not intentionally initiated and thus do not exist for stra-
tegic purposes. Furthermore, both network models largely adopt a vertical perspective in
concentrating on relations to other firms along the value chain. The focus of vertical single
actor networks is thus limited to interorganizational relations to supplying and distributing
firms.

Despite these limitations, both models nevertheless promise to provide a rich source of
applicable insight to the subject under investigation. The industrial network model represents
a network conception that attempts to integrate exchange and resource dependence theories
into the business strategy literature. Here, focal firms are seen as being embedded in
interorganizational industry networks. The dynamic network model, in contrast, transcends
the resource dependence perspective and proliferates an organizational form in which the
value-added is jointly produced by a number of distinct and highly specialized firms.

THE INDUSTRIAL MARKET MODEL


A group of Swedish scholars from the University of Uppsala (Hakansson 1990, Hakansson
& Snehota 1989, Johanson & Mattson 1987) has proposed to conceive the task environment
of firms from a network perspective. They argue that the complex set of interdependencies
resulting from various interactions and exchanges between firms within an industry could
best be examined in terms of the industrial market model.

The basic premise of the industrial market model is that frequent interactions typically result
in the development of relations between involved firms. Due to the resources required to
establish and maintain a substantial relation, for instance to a supplier, interorganizational
relations are continuous rather than limited to a discrete interaction. Thereby, repeated
interactions constitute a framework for further exchange processes. In this respect,
Johanson & Mattson (1987) refer to bonds that are developed among firms. Bonds evolve
from product and process adjustments, logistical coordination, personal confidence, credit
agreements, and long-term contracts.

Although these bonds constrain the flexible change and substitution of counterparts, the
network is complimentary in nature. Since network firms are sovereign (Jarillo & Ricart
1987) and relations are generally established under market conditions, there is always
competition for access to specific relations in an industry. If, for example, a firm has the
116 NETWORK RESEARCH

opportunity to achieve a long-term agreement with another counterpart, offering better


conditions and more convenient terms of exchange, the firm may even substitute an
established and reliable relation (Thorelli 1986). Johanson & Mattson state: "This model of
industrial markets implies that a firm' s activities in industrial markets are cumulative in the
sense that relationships are constantly being established, maintained developed and broken
in order to give satisfactory, short term economic returns and to create positions in the
network that will assure the long-term survival and development of the firm. Through its
activities in the network the firm develops the relationships that secure its access to
important resources ... " (1987: 36, original emphasis). Thus, the network position of the
firm comprises "partially controlled, intangible, market assets" (1987: 36, original empha-
sis). This perspective has crucial implications for the leadership perspective of managing
organizational effectiveness. In contrast to the common business strategy doctrine in which
legal organizational boundaries typically determine the number and range of controllable
variables, Hakansson & Snehota (1989) argue that the network model enlarges the strategic
focus to the context of firms, i.e. the critical activities and resources that potentially can be
mobilized within the industrial network. In other words, existing relations to external
organizations are exploited as a source of additional competitive advantage (Hiikansson
1987).

In essence, the Swedish school conceives industries or markets primarily as networks of


relations between fmns. In the context of linked firms (Hiikansson & Snehota 1989), "com-
peting is more a matter of positioning in the network than attacking the environment" (Jarillo
1988: 32).

THE DYNAMIC NETWORK MODEL OF MILES & SNOW


Miles &Snow (1986) proliferate the network as a new organizational form to cope with the
changed competitive environment of the 1980s. The central suggestion of the dynamic net-
work model is that some firms may obtain considerable competitive advantage from
vertically disaggregating certain business functions. Rather than relying on central planning
and control to organize activities along the value chain, network forms are coordinated by
market mechanisms. Depending on the degree of vertical disaggregation, Snow et al. (1992)
distinguish three different types of networks: the internal, the stable, and the dynamic
network (Fig. 30).
NETWORK RESEARCH 117

,•
Designers
I IProducers I
Producers
ISuppliers I ISuppliers I I Designers

ISuppliers I ISuppliers I
/
'

'ROkE
.... . , .. ,

, 'S
:::::::::::::;:::::::>
.... ,

Suppliers Distributors
I Suppliers I IDistributor~

INTERNAL STABLE DYNAMIC


NETWORK NETWORK NETWORK

Fig. 30: Common network types [Source: Adapted from Miles et al. 1992: 12]

Within the internal network most or all assets are still held by the firm. To utilize innova-
tive and performance efficiency of market mechanisms, however, internal units exchange on
the basis of market prices rather than artificial transfer prices. In a stable network, a core
firm typically outsources a number of activities to several distinct firms. Although legally
separate, satellite firms are closely linked to the core firm by either providing its inputs or
distributing its outputs. In the dynamic network, finally, all firms concentrate only on those
activities in which they have expert skills. Dynamic networks are established and managed
by 'hub-firms' or 'brokers' who, for the set of interactions required to build and market the
value-added, install external relationships to other firms. Thus, in a dynamic network,
"business functions as product design and development, manufacturing, marketing, and
distribution, typically conducted within a single organization, are performed by independent
organizations within a network" (Miles & Snow 1986: 64). Broker firms execute three key
roles within dynamic networks: They serve as network architects, lead operators and
caretakers. Based on a focal product concept and the required value chain, the broker in the
architect role designs the network by selecting specialized firms with appropriate skills to
perform single activities. When it comes to operating the network, brokers use contracts
and negotiations to "hook together firms into more-or-Iess permanent alliances" (Miles et al.
1992: 16). As a caretaker the broker firm takes a pro-active attitude towards information
exchange and learning processes which secure continual efficiency and adaptations to
changes of the competitive environment. 4

Closely related to the dynamic network model is the conception of strategic networks by
118 NETWORK RESEARCH

Jarillo (1988). Jarillo provides a more precise definition and theoretical grounding of what
he calls strategic networks. He defines strategic networks "as long-term, purposeful
arrangements among distinct, but related for-profit organization that allow those firms in
them to gain or sustain competitive advantage vis-a-vis their competitors outside the
network" (1988: 32). This definition emphasizes the intentional and purposeful character of
strategic networks in which firms perform only those activities in which they have distinct
competence. Jarillo suggests the value chain (Porter 1986) to analytically distinguish the
activities which contribute most to the overall competitive advantage. A firm concentrating
on these activities is able to reap all the benefits of specialization, focus, and size. Through
the cumulation of distinct competencies, a strategic network is assumed to enjoy significant
advantage compared to fully integrated competitors.

The basic rationale of interorganizational relationships between firms as part of the


preceding models is some form of cooperation. So far, the subject has entirely been exam-
ined from the perspective of a focal firm which seeks to improve its competitive position.
From a industry perspective, however, collaboration between firms substitute the market
mechanism which would otherwise govern exchanges between market participants. From
this perspective, some authors argue that interorganizational networks constitute an inter-
mediate form of organizing economic activities between markets and hierarchies (Sydow
1992) .

On the basis of the now completed review of the selected streams of network research, the
next chapter intends to use both the streams of social network analysis and
interorganizational network research to develop a more profound idea of how a MNC-
network may be distinguished from these previous applications of network research.

NOTES

(l) Initially network research in organizations was often considered synonymous to the study of coalitions
and cliques. This has largely contributed to the widespread prejudice of the dysfunctionality combined
with networks. Coalitions were seen as lobbies of powerful elites actively seeking to pursue selfish
interests. In accordance, cliques were considered as germ cells of unmotivational gossip that distracted
people from their formally assigned task.

(2) As Lincoln notes, these findings were often interpreted as providing the rationale for hierarchical
structures in organizations (Lincoln 1982: 10).

(3) In this research, the terms interaction and transaction are used synonymously.

(4) Much of the popularity of the Miles & Snow's dynamic network model builds on the emerging trend
of outsourcing of functions, intrinsic to recently debated concepts like just-in-time production or lean
NETWORK RESEARCH 119

management. These concepts have in common that they attempt to enhance managerial efficiency by
reducing organizational complexity. Activities along the value chain are either vertically delegated to
suppliers and distributers, farmed out to profit responsible affiliates, or externally sourced from sovereign
organizations (D'Aveni & Ravenscraft 1994).

The popularity of vertical disintegration has to be evaluated in its historical context. Due to growth
emphasizing strategies based on scale and scope considerations throughout the first seven decades of this
century, combined with dramatically changed competitive conditions, many large, especially
manufacturing, corporations recently began to show signs of their limited capacities to organize
effectively. Led by such giants like ffiM, General Motors, or Volkswagen, all companies moved through
a number of reorganizations without enduring success. Based on these negative examples, mostly
normative oriented scholars began to promote new concepts like flat hierarchies, lean management, and
outsourcing at all costs. However, due to their superficiality, these concepts seldom exceeded the status
of promoting an interesting idea. Furthermore, empirical research by D'Aveni & Ravenscraft (1994)
found vertical integration rather than disintegration to be associated with superior performance.
120 A MNC-NETWORK PERSPECTIVE

7. DEVELOPING A MNC-NETWORK PERSPECTIVE

Last chapters' review of the existing network literature was targeted at identifying possible
analogies which, in turn, would enhance the capability to conceptualize the MNC from a
network perspective. This intention arose from the previous, largely inappropriate,
metaphorical application of the network term. Chapter 7.1 will now seek to elicit these anal-
ogies in more detail. The basic MNC-network perspective which will be delineated
throughout Chapter 7.1 builds the foundation for the development of the 'MNC-Network
Framework' in Chapter 7.2. Ultimately, the assumptions and premises on what will be
considered a MNC-network throughout the remaining discussion root in the forthcoming
positioning of the MNC between the streams of social and interorganizational network
research.

7.1 THE MNC BETWEEN SOCIAL AND INTERORGANIZATIONAL


NETWORKS

The review of the streams of social and interorganizational network research revealed that
the level of sophistication in adopting a network perspective for the study of organizational
phenomena in both streams by far exceeds that of the phenomenological applications
reviewed in Chapter 5.3. In order to develop a MNC-network perspective, the first question
to be addressed is whether or not it is useful to conceptualize the MNC-network as a social
or as an interorganizational network. Obviously both options appear to be possible. It was
on the one hand outlined that organizations per se can be conceptualized as social networks,
since every organization is always also a social system. In this respect, the MNC, just like
any other grouping of people belonging to an organization, can be analyzed from a social
network perspective. On the other hand, it is evident that subsidiaries, depending on the
perspective, can always be interpreted as distinct organizations which makes the MNC also
subject to interorganizational inquiries.

In order to address the above outlined question, it will be discussed what the existing
literature has to offer with respect to both distinguished options to conceptualize the MNC-
network. It will be argued that none of the existing bodies of literatures fits the present
research purpose and that therefore a unique MNC-network paradigm is required. On the
basis of this demand, analogies that can be drawn from existing research will be exemplified
in more detail by positioning the MNC as an intra(!)organizational network between both
distinguished streams of organizational network research.
A MNC-NETWORK PERSPECTIVE 121

THE MNC AS A SOCIAL NETWORK

The MNC is an organization in which individuals perform organizational roles. Hence, the
MNC, like any other organization, is subject to social network analysis (Nohria 1992:4).
This makes methods and results of this stream, although with constraints, a powerful and
rich source of understanding organizations in general, and MNCs in particular. So far, social
network research has been conducted studying the determinants of actual behavior in
organizations almost exclusively in case studies of domestic organizations. Probably due
to the specific difficulties of conducting social network research across borders, no
substantial research examining the idiosyncrasies of the MNC from a social network
perspective has yet been submitted.

THE MNC AS AN INTERORGANIZATIONAL NETWORK

In contrast to the lack of social network applications to MNCs, some scholars have previous-
ly argued to conceive MNCs from an interorganizational perspective. Due to the
organizational uniqueness of MNCs which stems from simultaneously operating in a number
of countries, these approaches consider it more appropriate to view subsidiaries as distinct
organizations rather than as sub-units of MNCs which are subject to uniform organizational
conditions.

The most comprehensive contribution explicitly conceptualizing the MNC as an


interorganizational network has been submitted by Ghoshal & Bartlett (1990). In Chapter 4,
their model was already used to develop a terminology for the description of the envi-
ronment of MNCs. The work of Ghoshal & Bartlett (1990) grounds on the notion "that
interorganizational theory, properly adapted, can provide new insights about a complex and
geographically dispersed organizational system like the MNC" (1990: 603). The fact that
interorganizational networks comprise of groupings which are not connected by ownership
ties is thereby not seen as a precluding condition. Rather it is argued that, due to the weak
connection between ownership and hierarchical power in complex organizations, actual
relations tend to be more federative than unitary. Although it is accepted that subsidiaries
are conceptually subject to some form of hierarchical power and control, Ghoshal & Bartlett
assume that discretionary behaviors of subsidiaries resemble that of unconnected
organizations .

Drawing on exchange theory they identify the distribution of resources among different
affiliated units and the structural characteristics of power and centrality as crucial
determinants meditating internal exchange relationships within the MNC. Based on
institutional arguments (Westney 1993, Zucker 1988, DiMaggio & Powell 1983), Ghoshal
& Bartlett (1990) argue that the MNC-network is shaped by isomorphistic pressures from the
network of cross-border relationships between external organization-sets (Aldrich &
I I
122 A MNC-NETWORK PERSPECTIVE

Whetten 1981). These interdependencies between external environments of different


locations, together with power relations, determine the internal configuration of resources
and the density of exchange relationships within the internal network of the MNC. From an
exchange theory perspective, organizational processes are dependent on internal power
relationships which, in turn, are contingent upon the internal distribution of organizational
resources. From this perspective, resource dependence is considered as the key-
determinant of the internal structure of exchange relationships within the MNC (Ghoshal &
Nohria 1989: 324).

Based on the fundamental premises outlined above, arguments and conclusions of Ghoshal
& Bartlett's work are developed with theoretical rigor. However, the overall contribution to
the field, especially with respect to a coherent body of MNC-network research, is limited.
Due to the strong emphasis on exchange processes, the 'Interorganizational Network' model
of Ghoshal & Bartlett (1990) represents an approach which attempts to adjust major charac-
teristics of the MNC to fit existing and considerably well developed exchange theory!.
However tempting the conceptualization of the MNC in terms of existing (in this case
interorganizational) theories may be, it is important to keep in mind that as long as the MNC
does not exactly match all characteristics and premises on which the theory is grounded, the
development of specific theories on behalf of the MNC remains indispensable. Furthermore,
it is essential to note that the explanatory and the methodological focus of social and
interorganizational network research is considerably different from that of studying the
MNC.

Social network research studies determinants of social behavior in organizational settings at


first from a macro-perspective2• Here, the network concept is strongly related to the analyti-
cal methodology of conducting research. Interorganizational research, on the other hand,
seeks to explain the strategic, competitive, and economic rationale of cooperative relation-
ships between firms. Depending on the level of analysis, researchers adopt both micro-
orientations (e.g. by delineating the logic of setting up strategic networks from the per-
spective of a single firm) and macro-orientations (e.g. by relating the origin of strategic
alliances to the structure of the industry or the nature of competition). Here, the network
perspective is more or less corresponding to the application of prevailing theories (e.g.
exchange theory, transaction cost theory, institutionalization theory, etc.).

Compared to the managerial focus of research on global networks, it becomes clear that
both streams of social and interorganizational network research do not exactly match the
research orientation of global management. As outlined, the purpose of network research in
the context of MNCs initially arose from the dissatisfaction with prevailing organizational
models to cope with the complexity and the multidimensionality stemming from the strategic
imperative to manage the business from a global perspective. In this respect, the network
perspective was normatively introduced as facilitating the foundation on which a complex
firm can be controlled according to global strategic imperatives. Here, the network perspec-
A MNC-NETWORK PERSPECTIVE 123

tive is strongly related to calls for a new paradigm through which the MNC can be
managed or studied more appropriately (Doz & Prahalad 1991).

In conclusion, this study rejects the appropriateness of conceiving the MNC as a social
or as an interorganizationai network because of the different premises, explanatory, and
methodological focus of international management compared these streams. The peculiarities
imposed by the organizational reality of MNCs restricts the conceptualization of the MNC-
network as sub-streams of existing network conceptions. Rather than delineating a social or
an interorganizational network concept of the MNC, this research emphasizes the necessity
to develop a separate body of MNC-network research. However, the findings and analogies
of the well developed streams of network research still remain the initial position of the
forthcoming argumentation. Consequently, social and interorganizational network research
subsequently epitomize the two extremes of existing organizational network research
between which the MNC as an intraorganizationai network of subsidiaries will be posi-
tioned (Table 18). Since the first two dimensions of Table 18 have already been discussed,
they will not be explicitly repeated in the forthcoming conceptualization of the MNC as an
intraorganizational network.

SOCIAL NETWORK MNC-NETWORK INTERORGANIZA T/ONAL


NETWORK
Explanatory social behavior in control processes in cooperative relations
focus of organizational settings complex organizations between organizations
research
Methodological analytical normative theoretical
focus
Nodes individuals dependent organiz- independent organizations
ations
Linkages personal relationships personal and exchan- exchange of resources
of affect, influence ge relationships (goods, services, informa-
and power tion, know-how)
Membership voluntary enforced by ownership voluntary
Boundaries diffuse strategically defined contractual
Purpose social integration, enhance organiz- managing uncertainties and
support task fulfil- ational effectiveness, resource dependencies
ment, gain political managerial control of competitively
influence complex organization
Type emergent structure prescribed, prescribed
process emergent
Concluding network is primarily network is a meta- network is a contractual
Assessment considered as socially structure, illustrating structure of strategically
induced, continuous normative pattern of enforced relationships to
processes organizing other organizations

Table 18: The differentiation of social, MNC, and interorganizational networks along selected dimensions.
124 A MNC-NETWORK PERSPECTIVE

THE MNC AS AN INTRAORGANIZATIONAL NETWORK

Building on the developed interpretation of the globalization phenomenon and its organiz-
ational implications as outlined in previous chapters, the MNC is subsequently described as
an intraorganizational network. Thereby, the MNC-network incorporates a number of
elements of both social and interorganizational networks. This section intends to position the
MNC-network on the social-interorganizational continuum separately for a number of
selected dimensions. Positioning largely depends on the extent to which existing network
streams for specific dimensions at focus match the peculiarities imposed by the global
context. Thus, the question of whether the area of social network analysis or
interorganizational network research offers more insights to the conceptualization of the
MNC will not be addressed generally, but will be examined within the context of each sub-
dimension.
The characteristics that will be derived from distinguishing the MNC-network to both
existing streams of network research will in Chapter 7.2 be aggregated into the 'MNC-
Network Framework' which is proposed to serve as a lens through which global firms can
be studied from a network perspective.

NETWORK NODES

The most apparent distinctive characteristic of network models is the type of nodes. As
previously mentioned, the network continuum - from the perspective of its constituting nodes
- can be defined by the extremes of interacting individuals on one end, and a number of
connected but distinct organizations on the other. The subsidiary considered as a network
node of a MNC-network obviously falls between these two extremes (see Fig. 31).

< <

Fig. 31: Hierarchy of network nodes

Since subsidiaries typically consist of more than just a few individuals, grouped in a unique
local organization, the conceptualization of a network of subsidiaries is well beyond the
scope of social networks. On the other hand, subsidiaries considered as intraorganizational
sub-units, do not match the characteristics of interorganizational networks either.
A MNC-NETWORK PERSPECTIVE 125

The question of whether the MNC-network is an inter- or rather an intraorganizational


network lies at the heart of the fundamental view of MNCs as such. The key issue dividing
both scholars and practitioners is, whether a subsidiary conceptually and actually is an
independent organization or simply an organizational sub-unit which happens to be located
in another country.

It is beyond debate that subsidiaries due to local regulations typically have a legal form of
their own. In some cases, subsidiaries may even have an individual name and shares listed
at the local stock exchange. However, from an ownership perspective subsidiaries are still
per definition subject to the formal control of the MNC's top management. Thus, even if a
subsidiary under the codes of law of a foreign country may be in legal terms considered an
independent firm, it is from the managerial perspective still a dependent part of the MNC.

What permanently fuels the above mentioned debate is that the organizational reality of
exercising control over internationally dispersed affiliates is influenced by a number of
factors of which legally legitimated hierarchical power, although very important, is only
one. As outlined, many authors assert that the link between ownership and hierarchical
power especially in the case of the MNC is extremely weak (Ghoshal & Bartlett 1990,
Otterbeck 1981). Due to cultural and physical distance and an increased resource accumu-
lation, it is argued, subsidiaries with the time grow more independent from resources of the
parent company (prahalad & Doz 1987). With decreasing dependence, hierarchical authority
loses efficiency in actually exerting control over subsidiaries. Hence, Ghoshal & Bartlett
(1993: 79) conclude that " ... large MNCs can be more appropriately conceptualized as an
interorganizational grouping rather than as a unitary organization ... " .

The crucial consequence of this notion is that the neglect of ownership based
intraorganizational control reduces the conceptual role of headquarters to that of a holding
company which independently manages subsidiaries as a portfolio (Prahalad & Hamel 1990).
Even more importantly, it is implicitly assumed that subsidiary managers are exclusively
adopting a local focus in managing their operations, since subsidiaries as distinct organiz-
ations in economic terms first of all seek to maximize their local performance (Simmonds
1984). With reference to the reviewed literature in Chapter 3, it can be noted that this
assumption rather fits the pre-global phase of managing MNCs and stands in opposition to
largely all factors that have been elicited as contributing to the necessity of managing
international operations from a global perspective. Since all previously presented global
network concepts are based on the fundamental idea to conceive the collective of all
internationally dispersed entities as a 'unitary organization', the appropriateness of
conceptualizing subsidiaries as distinct and thus autonomous organizations is explicitly
questioned.

Compared to an independent organization which decides to pursue its strategic objectives


within an interorganizational network, managerial options available to single subsidiaries in
126 A MNC-NETWORK PERSPECTIVE

MNCs are exactly limited and subject to the overall global strategy of the business unit as
a whole. Thus, the fundamental difference between the MNC-network and an
interorganizational network is that top-management as the network broker and architect has
the option of exercising full strategic and organizational control over network units. Even
in the case of decentralized decision-making responsibility, subsidiaries are, because of
ownership bonds, inevitably subject to the hierarchical authority of top-management. The
fact that top-management in some cases deliberately restrains from exercising authority,
does not generally alter their legitimation to do it.

Consequently, it is considered appropriate to conceive the MNC as a network of dependent


subsidiaries, i.e. as an unitary collection of subsidiaries headed by headquarters, opposed
to a collection of independent organizations. Implications of this notion become evident, if
we distinguish network types with respect to membership and boundary characteristics.

NETWORK MEMBERSHIP AND BOUNDARIES

In terms of membership, the vital difference between social and interorganizational networks
and the MNC-network is that in social and interorganizational networks each network
participant joins the network voluntarily. In MNC-networks, however, subsidiaries are not
voluntary members. Since subsidiaries, as was argued, are organizational sub-units, top-
management can enforce network membership on the basis of existing ownership ties. These
allow top-management to assert control on subsidiary activities and thus to determine
network membership. However, it is important to note that subsidiaries do not per se have
to be network members. Due to the prescribed nature of the MNC-network, the selection of
network participants is rather subject to strategic considerations. These are strongly related
to the original purpose of network establishment.

Whenever network membership is based on clearly defined criteria, these measures


simultaneously specify network boundaries. Since interorganizational networks originate
from contractual relations between network members, similar to the MNC, network
boundaries are always explicitly specifiable. Social Networks, in contrast, are typically
diffuse. Since membership in a social network is not definite, neither can be the specification
of network boundaries. Due to the lack of conceptually formulated criteria, the final
specification of social network boundaries is subject to empirical investigation (Laumann et
al. 1983).

NETWORK TYPE AND PURPOSE

What primarily separates a MNC-network from the type of social networks described in
Chapter 6.2, is physical distance. Although members of different subsidiaries belong to the
A MNC-NETWORK PERSPECTIVE 127

same organization, geographical distance limits the scope of personal interactions between
members of different subsidiaries. Abstracting from travel activities and communication
between subsidiaries, it follows that social networks can only emerge within subsidiary
organizations because only then can people interact personally. Under these circumstances,
social network research would only be of limited value with reference to the initial intention
of conceptualizing a network between subsidiaries.

Abolishing above the assumption, it is beyond debate that subsidiary members most likely
communicate and interace with members from other subsidiaries. However, it has to be
noted that these contacts initially emerge for organizational, and only subsequently for per-
sonal reasons. If the interaction process primarily stems from organizational purposes, the
scope of inter-subsidiary networking is more or less restricted to persons to which an
organizational actor interacts as part of accomplishing his organizational task. 4 In other
words, due to geographical distance, interactions between members of different subsidiaries
require initial prescription before informal and personal pattern can emerge. Thereby,
the initial prescription primarily arises from organizational necessities. Interdependencies
between subsidiaries, for instance, may require coordination which, depending on the
coordination mechanism at stake, provides the opportunity for individuals to interact
personally.

If all network relations are prescribed, the ex-post interpretation of relation patterns with the
help of structural properties is redundant, since the factors that determined the prescriptive
network design in the fIrst place are evident. In certain cases, however, structural properties
promise to be very helpful in accompanying the design of prescribed network structures.
Positional structural analysis could, for instance, provide the rationale for the integration of
key subsidiaries into strategy formulation. Furthermore, structural analysis could assist
network designers in matching the communication structure with the requirements stemming
from coordination.

Consequently, it can be concluded that MNCs, similar to interorganizational networks, are


essentially prescribed. In contrast to interorganizational networks, however, the focus of
MNC-networks is not entirely restricted to the prescribed structure. Instead, the analysis of
emergent value-adding, coordination, and communication processes within the limitations of
the prescribed structure remains a signifIcant area of network inquiry.

Irrespective of the type of network at focus, the formation of a network or the decision to
engage in a network is never an end in itself, but always pursued for a specifIc pnrpose. In
order to further develop an applicable network concept of the MNC, it is useful to take the
purpose of the existing network concepts into account.

In the case of voluntary membership, the purpose of network membership is congruent with
128 A MNC-NETWORK PERSPECTIVE

the objectives of the network participants that independently decide on their membership. In
this case, the overall purpose of network establishment is the aggregation of individual
objectives of all network members. A common purpose often does not exist. Individual
determinants of network participation are typically quite heterogeneous. They, for instance,
relate to emotional well-being (social integration), improved opportunities to fulfill organ-
izational tasks or the achievement of personal objectives within the organization (political
influence). If any, the overriding motive of social network formation seems to be embedded
in the nature of human beings and their social behavior in organizations.

The purpose of interorganizational relations, for instance in the case of strategic alliances,
is more obvious because related firms engage for more or less similar reasons. Participants
of interorganizational networks seek to improve their competitive position by sharing
investments or by pro-actively managing external uncertainties and resource dependencies.
Thereby, firms partly substitute the price mechanism for organizing these activities by
contractual coordination. Interorganizational networks exist for mutually accepted, shared,
and mostly exchange related purposes. Their structure is clearly prescribed on the basis of
contractual agreements which partly replace the market mechanism as a mode of
coordinating activities between involved firms.

Interorganizational single actor networks, such as the network models of Miles & Snow
(1986) and Jarillo (1988), impose a fundamental difference in regard to the question of
overall purpose. Here, the prescribed structure of network relations is entirely determined
by the individual purpose of the broker firm. Although other participating firms may also
be able to pursue their individual objectives, network existence is exclusively based on
strategic considerations of the network architect who initially laid the foundation of the
network.

Compared to social and interorganizational networks, the examination of individual deter-


minants of network engagement from the perspective of a single network participant is inap-
propriate, since the membership of subsidiaries in MNC-networks is not voluntary, but
enforced by the strategic focus of the top-management, substantiated by ownership ties.
Therefore, it is important to note that in the case of the prescribed MNC-network, the focus
changes from the purposes of network engagement on behalf of voluntary and independent
network members to reasons for network formation on the side of the network designer.
From this perspective, the role of the top-management shares a strong affinity to the broker
in strategic networks who initially establishes and maintains the network. However, in
MNC-networks the broker does not need to be a network member himself. For example, it
could be considered necessary that a number of subsidiaries link on account of a specific
issue in which top-management, apart from network initiation and formation, does not get
involved. This example illustrates the generally different purpose of MNC-networks
compared to interorganizational networks. The conceptualization of the MNC as a network
of subsidiaries primarily follows the purpose of enhancing the organizational effectiveness
A MNC-NETWORK PERSPECTIVE 129

of global business units. From the perspective of top-management, this translates into the
necessity of finding organizational solutions that provide appropriate opportunities of
managing a internationally dispersed thus complex firm, due to the requirements imposed by
a global orientation. Building on global network debate (see Chapter 5.3), the
conceptualization of the MNC as a network primarily serves control purposes of the top-
management.

NETWORK LINKAGES

Network links comprise the second major network constituting dimension, besides
previously discussed nodes. Organizational network research has in common that network
links typically refer to exchange relations between network members. The term relation
emphasizes the fact that research is predominantly concerned with durabfe links which, in
contrast to one-time interactions, reflect the common organizational pattern for the situation
of interest.

Based on the assertion that specific types of exchanges impose very different network
characteristics, the necessity was emphasized to differentiate network imalysis according to
the linkage content at focus (see Chapter 6.1). Before it will be subsequently sought to
evaluate the relevance of different categories of linkage content for the conceptualization for
the MNC-network, it is worth to examine the dimension of linkage content for the previously
distinguished network streams, since the different exchange categories, although generally
relevant, are not equally important for both types of networks.

The stream of social network research typically refers to network links as interpersonal
relationships. Most studies implicitly assume that interactions evolve during personal
encounters of network members. Since the prevailing purpose of social network analysis is
to explain determinants of social behavior in organizations, interpersonal interactions are
predominantly conceptualized in terms of expressive and prescriptive exchanges.
Interorganizational relationships originate from transactions which may be described as
non-personal opposed to interpersonal exchanges, because the exchanges principally occur
regardless of the individuals involved. Interorganizational relations thus at first include
physical and cognitive exchanges (Table 19).

SOCIAL NETWORK RESEARCH INTERORGANIZA TlONAL


NETWORK RESEARCH
Predominant expressive physical
Exchange Focus (exchange of affect) (exchange of goods)
prescriptive cognitive
(exchange of influence) (exchange of information)

Table 19: Predominant exchange focus of social and interorganizational network research.
130 A MNC-NETWORK PERSPECTIVE

Turning to the discretionary scope of relationships that may be relevant between subsidi-
aries, it becomes obvious that, due to the extensive intersection with both network types, all
of the above mentioned categories generally apply to the MNC-network. As part of the
reviewed debate on globalization, it was frequently emphasized that the fading impact of
country borders opens opportunities to integrate value-added processes on a global scale.
The concentration and specialization of activities in subsidiaries, for instance, results in a
significant increase of physical exchanges between subsidiaries. Global synergies, on the
other hand, are largely exploited by the exchange of strategic information and know-how
between subsidiaries. As mentioned, frequent encounters of organization members as part
of their task-fulfIlment provide significant opportunities for personal encounters from which
more enduring and closer relationships are likely to develop (exchange of affect). Given the
necessity to adopt a global orientation, it can finally also be assumed that decision-making
from a global perspective leads to an increase of personal interactions and mutual influence
between key-decision makers. Consequently, it can be concluded that a conceptualization of
MNC-network linkages should include all four categories of network exchange content.

CONCLUDING ASSESSMENT

The preceding discussion differentiated social, MNC, and interorganizational network


characteristics across a number of selected dimensions. Delineated differences and
distinctions allow a more systematic generalization of the three network applications.

Due to the primary focus of social networks on individuals and their behavior in organiz-
ational settings, the network perspective encompasses a large number of different forms and
purposes. Since the boundaries of social networks are exceptionally difficult to specify, the
overall characteristics are very numerous and definitions of social networks remain vague.
One characteristic that social network definitions generally share is the process dimension.
In social networks, interactions are typically self-enforced and dynamic. Network members
themselves choose to whom , when, and for which purpose they link. The structure of a
social network is thus always a snapshot of continuous processes that evolve between
individuals in organizations. This significantly distinguishes social networks from the other
network conceptualizations. Within the stream of social network analysis, networks are
primarily considered as socially induced continuous processes.

Quite contrary to the flexibility and diffuseness of social networks, interorganizational


networks are generally more static in nature. Since network links are based on well specified
contractual agreements between firms, purpose, scope, and boundaries of
interorganizational networks are typically well defined. The rationale for engaging in
interorganizational relations primarily sterns from strategic considerations. Within the stream
of interorganizational research, the network is conceived as a contractual structure of
strategically enforced relationships to other organizations.
A MNC-NETWORK PERSPECTIVE 131

The precedingly developed notion of the MNC-network, finally, differs from its counter-
parts, in that it seeks to illustrate strategically desirable linkages between subsidiaries. By
both incorporating the dynamics of informally emerging processes and the prescription of an
efficiency induced structure, it enables top-management to more effectively control the firm
in regard to multidimensional and conflicting demands. In this respect, the network is
conceived as a meta-structure which normatively illustrates a superior pattern of organizing
aMNC.

7.2 THE MNC-NETWORK FRAMEWORK

The purpose of this chapter is to introduce the MNC-network framework as a conceptual


framework for the study of internationally operating firms from a network perspective (see
Fig. 32). The framework builds on the previously developed MNC-network perspective and
integrates the literature on globalization and on organizational networks. In this respect, the
framework provides ground for the operationalization of the network concept in MNCs.
Conceiving the MNC as a network of subsidiaries, the MNC-network framework is
proposed to guide further empirical research on global firms from a network perspective.

Subsequently, the framework as well as the assumptions, premises, and conceptualizations


on which it builds will be introduced in more detail. It will be shown that the nodes of a
MNC-network correspond to headquarters and subsidiaries (Chapter 7.2.1) whereas
interactions capture the organizational process between operating subsidiaries (Chapter
7.2.2). The general focus of the MNC-network framework is on organizational processes
evolving between headquarters and subsidiaries, and between subsidiaries. With respect
to the different interaction contents, organizational processes will be conceptualized on three
sub-network levels: the vertical, the horizontal, and the coordination & decision (c&d) level.
The vertical network level adopts a value-added perspective in conceptualizing physical
exchanges between subsidiaries along the value-added chain (Chapter 7.2.3). The horizontal
network level centers on exchanges of information and know-how between units carrying out
similar value activities (Chapter 7.2.3). The coordination and decision network level, finally,
captures all managerial processes required to manage operational processes on the former
two levels (Chapter 7.2.4).
132 A MNC-NETWORK PERSPECTIVE

~
i ~~~r~n !i Control

(l)
Q::'

Mechanisms

Relations

Fig. 32: The MNC-network framework


A MNC-NETWORK PERSPECTIVE 133

7.2.1 MNC-NETWORK NODES

The imperative to adopt a global orientation in decision-making on all levels of the global
fIrm has crucial implications for the conceptualization of the actual elements of which MNCs
consist. The analysis of MNCs from a network perspective requires a (re-) conceptualization
of constituting elements. A large part of the pre-global literature has differentiated between
subsidiaries and the parent company, adopting either an evolutionary or an ownership
perspective. Different from this literature, the present research draws on the previous
discussion on the nature of global orientation and follows a conceptualization that differenti-
ates headquarters and subsidiaries from a functional perspective asking for their principal
role within the MNC.

THE DISTINCTION BETWEEN HEADQUARTERS AND SUBSIDIARIES

As partly reflected by the literature review in Chapter 3, the prevailing conceptualization of


headquarters and subsidiaries is dominated by a regional focus. Thus, all organizational units
in the home country comprise the parent company or headquarters whereas subsidiaries
general consist of all organizational activities in a particular foreign country. Due to the
fading impact of country borders in international business, this conceptualization is no longer
considered as appropriate. Instead, the MNC-network framework builds on a functional
perspective which fIrst of all centers on the function of any unit for the fIrm as a whole. The
peculiarity that some of these units are located in different countries will only afterwards be
considered in terms of a mediating influence.

With the help of the terminology developed by Mintzberg (1979: 18-34)5, the MNC-network
framework conceptually divides the MNC in a number of subsidiaries and headquarters (Fig.
33)6. The conceptual rule of distinction between the two is that subsidiaries are operating
units whereas non-operating, i.e. managerial units belong to headquarters.
134 A MNC-NETWORK PERSPECTIVE

Strategic Apex

Middle
Line

Operating Core

Fig. 33: Basic parts of MNC organizations

Subsidiaries perform any kind of operational activity which contributes to the global
value-added process (Porter 1986). They typically comprise of a defined group of
organizational actors which use physical assets to perform one or more value-added
activities. The sum of all subsidiaries makes up the operating core of the business. Applying
Mintzberg's framework to the MNC results in the extension that units of the operating core
(SUB!..n) are located in different countries.

The defining characteristic of headquarters is the global responsibility in managing and


coordinating the internationally dispersed operating core. This differentiation makes the
strategic apex or top-management by definition part of headquarters. Top-management
embodies the top decision-making authority of the firm, exemplified by the management
committee or executive board. Additionally, all non-operating units which share the
characteristic of overall responsibility for their field of activity, i.e. units of the
technostructure, the support staff, or middle managers (with worldwide responsibility for
any function, division, or region), conceptually belong to headquarters. Technostructural or
support departments specifically assigned to one or more subsidiaries belong to the operating
core and are to be distinguished from those with global responsibility.

It is generally important to note that global responsibility does not automatically correspond
to central control as assumed in large parts of the pre-global literature. In the global context,
advances in communication systems have led to a fading significance of the location of world
headquarters. Thus, neither do all units of headquarters have to be located at one location,
nor do headquarters have to be located near any operating unit (Nonaka 1990). As Reich
expressed it provocatively: "Headquarters for the new global web can even be a suite of
rooms in an office park near an international airport - a communications centre where many
A MNC-NETWORK PERSPECTIVE 135

of the web's threads intersect" (1991: 80).

At this stage it is very important to reflect, why a conceptualization different from the pre-
vailing regional differentiation between headquarters and subsidiaries is indispensable. An
analytical focus on the total of all units results in the necessity to keep an "genuine
equidistance of perspective" to all subsidiaries (Ohmae 1989). The regional dimension in
terms of the fact that subsidiaries are located in different countries is, despite managerial
constraints, conceptually only of minor relevance. In other words, the fact that an oper-
ational unit is located in another country does neither pre-determine the required extent and
focus of local responsiveness nor the strategic importance and the primary function of a unit
for the business unit as a whole. Since the primary function of headquarters is managing and
coordinating business activities opposed to producing any value-added output, operational
activities are conceptually always part of subsidiaries. Consequently, operational activities
at the same location of top-management, or any other part of headquarters, have to be distin-
guished from headquarters. Due to their operational character, these activities are conceived
as a subsidiary, just as any operational unit overseas. Consequently, operational units at the
same location of headquarters are subject to the same conceptual distance, headquarters
apply to other subsidiaries.

The described conceptualization of headquarters and subsidiaries overcomes the traditional


dichotomy of national and international business. Due to the analytical focus on the entire
firm, the historically strong position of operating units in the home country is reduced to
their actual importance for the firm as a whole. The previous discussion on the prevailing
differences between the global and the pre-global literature indicated some of the drawbacks
arising from a too narrow focus on the circumstances of the home market. In this respect,
the competitive position of the subsidiary in the home market may, for instance, in terms of
cost efficiencies differ substantially from that of other subsidiaries located in different envi-
ronments. An exaggerated influence of home country operations leads to a competitive posi-
tioning which is dominated by the structure of home industry and which may not be repre-
sentative to sustain the global competitiveness in the long run. Given previous arguments
following research question can be formulated:

RQ7.1: To which extent do global firms reflect a clear distinction between top-
management and operational subsidiaries?

FLEXIBLE SUBSIDIARY CONCEPTUALIZATION

Due to the above developed distinction, all organizational units, activities, and processes that
contribute to the final producing of the output form the operating core. Translated to the
136 A MNC-NETWORK PERSPECTIVE

present context it follows that the international value-added process evolves between geo-
graphically dispersed subsidiaries. Since the above delineated distinction emphasized the
equidistance of headquarters to subsidiaries, it is important to note that conceptual equality
is not synonymous to actual uniformity. Conceptual equality primarily refers to the
influence of subsidiaries on decisions of headquarters. The importance of subsidiaries, i.e.
their relative impact on the management of the business, should exclusively stem from their
value for the system as a whole and not from the historic heritage or the geographical
closeness to headquarters.

On the basis of these arguments, it follows that the boundaries of subsidiaries do not
necessarily always have to parallel country borders. What is thought of as a subsidiary rather
depends on factors such as the number of different locations in a country, the structural
dimension along which organizational activities are organized, the hierarchical level of
analysis as well as the characteristics of the underlying focus of analysis. These factors vary
from decision to decision and from analysis to analysis. If, for instance, an American sub-
sidiary has full responsibility over Canadian operations, it is, in regard to a problem
concerning the strategic decision-making process, sufficient to treat operations in both
countries as one entity. If, however, the focus changes to local differences in the
environment, it can be necessary to conceptualize both locations as separate units.

As part of the previously discussed global standardization and national differentiation


trade-off (Ohmae 1987, Prahalad & Doz 1987, Levitt 1983), subsidiaries are too narrowly
conceived as country organizations that are generally forced to adapt to local conditions.
Recently a growing literature emphasizes the need to conceive subsidiaries more comprehen-
sively on different analytical levels (Morrison & Birkinshaw 1993, Roth et al. 1991, Gupta
& Govindarajan 1991). In this respect, it is frequently pointed out that subsidiaries in
specific areas are appointed to very differeut responsibilities. One subsidiary may, for
example, take a leading role in the global or regional development of a marketing concept
for a specific product (lead-country) which at the same time is only assembled and not
manufactured in that particular subsidiary. In regard to its marketing activities, the strategic
role of this subsidiary may call for its participation in the global marketing strategy foqnula-
tion process whereas in regard to its production activities it could be sufficient to familiarize
the subsidiary with the global production strategy which was decided upon without her
participation.

Strategic evaluations from a global perspective explicitly acknowledge the divergent nature
of subsidiaries. Notwithstanding their conceptual equality, subsidiaries differ substantially
in their tasks, roles, and their strategic importance for the business as a whole (Bartlett &
Ghoshal 1986). In this respect, the network perspective facilitates a flexible conceptuali-
zation of subsidiaries that transcends the one-dimensional distribution of functions, respon-
sibilities, and roles along structural dimensions prevailing in the conventional literature on
organizational design. Consequently, what in particular has to be conceived as a network
A MNC-NETWORK PERSPECTIVE 137

node varies considerably and depends largely on the focus and purpose of analysis.
Explicitly integrated in the MNC-network framework are the three most important
conceptualizations: representing individual, group of activity and local organization:

(1) THE SUBSIDIARY REPRESENTED BY INDIVIDUALS


In processes of personal communication and coordination, a subsidiary is often repre-
sented by one of its leading executives. Often it is even possible that a single individual
personifies a subsidiary. If, for instance, the CEO of the subsidiary participates in a
strategy formulation meeting, he represents his subsidiary on behalf of all important
aspects. In this case, the MNC-network is corresponding to the characteristics of an
inter-personal network.

(2) THE SUBSIDIARY AS AN ANALYTICALLY DISTINCT GROUP OF FUNC-


TIONAL ACTIVITY
As briefly outlined in Chapter 3.3, the suggestions of Porter (1986) lead to the isolated
configuration of functional activities. From this perspective, not the subsidiary in its
totality of all the activities performed at a given location, but an analytically distinct
functional segment of value-added activities is the predominant focus of analysis.
Although Porter, building on his value chain concept, primarily argues in favor of a
functional segmentation, the criteria according to which activities may be grouped,
largely depend on the purpose of analysis. In this respect, activities could very well
also be clustered along divisional or customer considerations.

(3) THE SUBSIDIARY AS AN UNIQUE LOCAL ORGANIZATION


From a regional perspective every configuration of activities at one location always
constitutes a local organization with its own culture and unique environmental
conditions (Dtilfer 1992). The local impact is even more significant, if the regional
dimension in terms of the structural archetype is given dimensional priority over the
divisional or the functional dimension. It is expected that the local dimension imposes
substantial legal, cultural, and motivational impediments which restrict the concept-
ually unlimited configuration of groups of activities following competitive evaluations.
Thus, a network perspective always has to conceive the subsidiary as a distinct organ-
ization with its own formal and informal procedures and peculiarities.

The brief overview of meaningful subsidiary conceptualizations indicated that what in


particular defines a network node largely also depends on the given focus and purpose of the
network analysis.

After the conceptualization of network nodes within the MNC-network framework has been
described in more detail, the subsequent argumentation will focus on the description of
network linkages. In this respect, organizational network literature has pointed attention to
the fact that network analysis requires to differentiate the contents of interactions at focus,
138 A MNC-NETWORK PERSPECTIVE

because each different type of contents is regularly subject to a particular logic.

7.2.2 MNC-NETWORK RELATIONS

On the basis of the outlined explication of headquarters and subsidiaries, the global operating
process is constituted by relations between subsidiaries. Relations provide the channels
through which various kinds of interactions are flexibly exchanged. Interactions capture
major dimensions of the cross-border value-added process as well as the coordination and
control activities related to them.

As mentioned, previous network conceptualizations of the MNC failed to differentiate


between different types of inter-subsidiary interactions and addressed relations between
subsidiaries rather simplistic (Bartlett & Ghoshal1990, 1989; White & Poynter 1990). From
a strategic perspective, interactions between subsidiaries are not an end in themselves. Due
to the prescribed nature of MNC-networks, an interaction requires a specific purpose.
Therefore, sets of interactions have to be examined within their distinctive context. Drawing
on the typology of Tichy & Fombrun (1979), three distinct types of network interactions are
distinguished:
• exchange of goods and services
• exchange of information and know-how
• exchange of affect and influence

Due to the very heterogenous nature of these interactions, each type of contents constitutes
a distinct level of MNC-network inquiry. In contrast to the fields of social and
interorganizational network research, which at first differ in their conceptualization of
nodes, this approach separates different network levels according to the prevailing linkage
content. These different types. of interactions, in turn, determine the corresponding
conceptualization of the network nodes on the respective level. In particular, the vertical, the
horizontal, and the coordination and decision network level are distinguished.

As part of the global value-added process, exchanges of goods, components, and services
occur between units performing primary activities (vertical network). Similarly, exchanges
of information and know-how are most necessary and likely to occur between units
performing similar activities (horizontal network). In both cases, appropriate network
nodes are single units of functional activity (e.g. production). Since relationships of affect
and influence by definition evolve between individuals, the third group of interactions relates
to a conceptualization which focuses on key individuals representing their subsidiaries
(coordination and decision network).
A MNC-NETWORK PERSPECTIVE 139

Subsequently, the vertical, the horizontal, and the coordination and decision network are
proposed as the three major levels of analysis through which intraorganizational processes
within the MNC can be studied from a network perspective. Each level is conceptualized as
a distinct network level. Thereby, each specific type of linkage content corresponds to a
special form of subsidiary conceptualization (Table 20).

Network Level LINKAGE CONTENT NETWORK NODE


vertical network exchange of goods and services single unit of functional activity
horizontal network exchange of information and know- single unit of functional actMty
how
coordination and deci- exchanges of meaning. affect and executives representing single or
sion network influence aggregations of units of func-
tional activity

Table 20: Conceptual MNC-network levels

Since the horizontal level encompasses all exchanges of information and know-how directed
at optimizing a specific value-added activity with respect to its functioning in the global
value-added process, the horizontal and vertical network levels compose a conceptual appar-
atus which allows to examine operational processes between subsidiaries from a network
perspective. Due to our previous terminological differentiation, vertical and horizontal
network analysis is limited to exchange processes between subsidiaries. Both network levels
provide a framework to study the consequences of globalization and its impact on the operat-
ing core of MNCs.

Vertical and horizontal networks are overlapped by a coordination and decision (c&d)
network which focuses on all managerial processes directed at coordinating the operating
process from a global perspective. The c&d network level differs from vertical and horizon-
tal networks in that headquarters are assumed to be significant network actors. Head-
quarters, in the role of the network architect, are typically involved in crucial coordination
as well as strategy formulation processes.

7.2.3 STUDYING THE OPERATING CORE OF MNCs FROM A NETWORK


PERSPECTIVE: THE VERTICAL AND HORIZONTAL NETWORK LEVEL

The conceptual segmentation of subsidiaries into homogenous groups of activities facilitates


the differentiation of the MNC into a vertical or a set of horizontal networks (see Fig. 34).
Since interaction patterns of each network level are strongly shaped by quite unique
intra-network determinants and the subsequent section mainly intends to exemplify the
conceptual difference between both levels, each network level will subsequently be examined
separately. The coordination and decision network re-integrates the preceding differentiation
140 A MNC-NETWORK PERSPECTIVE

into a comprehensive analysis which includes the identification of prevailing interdepen-


dencies between both operating levels. Due to the operational nature of the vertical and
horizontal networks, note that strategic issues (e.g. global product development) are always
part of the coordination and decision network.

SALES

DISTRIBUTION A 1------1

GI". . ·"·"'ctJ
! ....... _-._-.... ... .......~~......~:....,,::: ....... !

« . .-:;.:~'.-.:."." Vertical Network


PRODUCTION Horizontal Network
A -F Subsidiaries

LOGISTICS

SOURCING 1--------lDI--------lF

Fig. 34: Vertical and horizontal network level

THE VERTICAL NETWORK LEVEL

The vertical network adopts a value-creating perspective of the global firm. Conceptually,
it links groups of related value-added activities along the value-added process. If the business
comprises of more than one distinct product group, different value-added processes may be
conceptually distinguished on several vertical network levels.

The density of the vertical network, as the percentage of actual to possible linkages, indi-
cates the degree of cross-border division of labor between different subsidiaries. The density
is maximal when each activity is only performed by one subsidiary. It is minimal when the
complete value chain is performed by each subsidiary. Between these conceptually possible,
but actually very unlikely extremes, there exists a continuum of configurations in which
some activities might only be present at a few subsidiaries whereas others may be performed
at many or all subsidiaries. Whenever an activity is concentrated for a few or all
subsidiaries, an exchange of goods or services between delivering and receiving subsidiaries
results. Given opportunities to strategically configurate value-adding activities, following
A MNC-NETWORK PERSPECTIVE 141

research question can be formulated:

RQ7_~ To which extent do interdependencies between subsidiaries result from dense


vertical exchange relationships?

Corresponding to the previously described interdependencies Porter (1986: 50) distinguishes


three modes of transshipping components, semi-finished, or finished goods between
specialized and dispersed value-adding locations:

~ network by stage of process


~ network of product varieties
~ network of technologies

If the configuration is designed along the different stages of the production process, the
components are shipped from countries with components plants to countries with assembly
units which, in turn, deliver end markets (network by stage of process). If country sub-
sidiaries are specialized on the exclusive production of product varieties, these plants are
responsible for the worldwide supply of these products to all markets (network of product
varieties). If, finally, a firm employs different manufacturing technologies, it may locate
plants specializing on each of the different technologies in a different country to optimally
exploit existing economies of scale or comparative advantages (network of technologies).

Besides mapping the present value-adding process between subsidiaries, vertical network
analysis also portrays the consequences of the global configuration strategy. Generally, the
concentration of activities allows maximal exploitation of scale economies whereas the
duplication and differentiation of activities results in additional costs, but opens opportunities
to benefit from economies of scope (Table 21).
142 A MNC-NETWORK PERSPECTIVE

CONCENTRA TlON DUPUCATION


Competitive advantages of activities in a few locations of activities in many locations
National Differences +
Economies of Scale +
Economies of Scope +
CONCENTRATION DUPUCATION
Strategic objectives of activities in a few locations of activities in many 10ca1ions
Efficiency +
Managing Risk.s +
Learning + +

Table 21: strategic trade-offs of global configuration [Source: adapted and modified from Ghoshal 1987]

The major advantage of a far-reaching concentration of an activity is the maximal exploita-


tion of scale economies which in terms of lower costs significantly contributes to global
efficiency (Hout et al. 1982). Due to learning and experience effects, performing the activity
at one location and at higher volume leads to further cost reductions. The extent to which a
firm can benefit from a concentrated configuration pattern is, however, significantly
restricted by international transportation costs, legal constraints in regard to minimum levels
of local content, and the increase in supply risk for assembly plants and end-markets.
Furthermore, resulting interdependencies are expected to increase the need to coordinate
exchanges of goods and services between subsidiaries. Thus, the following research question
results:

RQ7.3: To which extent does a high degree of inter-subsidiary interdependencies


result in a high degree of coordination between activities of subsidiaries?

The highlighted restrictions of strategic configuration simultaneously provide the rationale


for the dispersion and duplication of activities. In contrast to the pre-global international
management literature, the existence of many local entities is not considered as an
indispensable constraint, but as a unique opportunity of internationally operating MNCs to
exploit national price differentials in assets, products, and factor costs. Arbitrage oppor-
tunities include the ability to build excess capacity in order to shift production in case of
volatile exchange rates, tax-minimization by strategic transfer prices, and to globally benefit
from choosing locations with maximal local investment incentives and subsidies (Kogut
1985a/b). Finally, due to their access to all important markets, internationally present firms
can monitor multiple markets in order to exploit potential advantages in terms of strategic
A MNC-NETWORK PERSPECTIVE 143

information and innovations.

As initially indicated, both options - concentration and duplication - epitomize the extremes
between which single groups of activities can be configurated according to the maximal
exploitation of resulting competitive advantages. Irrespective of the configuration in
particular, the extent to which a firm can benefit from a strategic configuration of its
activities is significantly depending on the flexibility of existing structures and management
systems (Kogut 1989).

THE HORIZONTAL NETWORK LEVEL

The horizontal network perspective connects all segments of duplicated, i.e. similar activ-
ities from different locations. Since it can be assumed that each type of activity is subject
to its own specific characteristics and know-how, conceptually a number of different hori-
zontal network levels can be conceptualized. A horizontal network level integrates the
specific expertise of a type of functional activity (e.g. R&D) on a global scale. A
minimum of two locations performing a specific activity form a distinct horizontal network.
The maximum number of conceptually distinguishable horizontal network layers depends on
the degree to which activities can be grouped into meaningful segments. The prevailing link-
age content of horizontal networks is the exchange of information and know-how.
Horizontal network analysis facilitates a framework through which organizational learning
processes between dispersed subsidiaries can be examined.

As previously mentioned, especially the systematic and worldwide exploitation of strategic


and operational information and know-how between units carrying out similar activities is
increasingly emphasized as an unique competitive advantage of global MNCs (Hedlund &
Rolander 1990, Porter 1986). As part of the discussion on the nature of global orientation,
it was noted that competencies, skills, know-how, and valuable information do not
automatically reside at headquarters (Ghoshal 1987). The diversity internalized by MNCs
rather provides significant learning opportunities in the form of accumulation and cross-ferti-
lization of know-how and competencies (Bartlett & GhoshalI989). Following the definition
of Duncan & Weiss (1979), organizational learning is interpreted in terms of adding knowl-
edge to the firm without implicitly connecting it to a predefmed purpose: Organizational
learning is "... the process within the organization by which knowledge about action-outcome
relationships and the effect of the environment on these relationships is developed" (Duncan
& Weiss 1979: 84). The work of Nonaka (1990, 1988) distinctively illustrates that organ-
izationallearning in the global context is not simply a matter of processing objective infor-
mation. "The key factor in this process is global information creation through cross fertiliz-
ation of various types of organizational knowledge" (Nonaka 1990: 82). Since knowledge is
created through mutual communication (Scholl 1990), it can be expected that learning in the
MNC results from interactions and communication between dispersed subsidiaries. This
144 A MNC-NETWORK PERSPECTIVE

results in following research question:

RQ7-4: To which extent do strategically important learning processes In the global


firm interdependently evolve between internationally dispersed units rather than at
distinguished locations?

Organizational knowledge composed of cognitive knowledge, skills and knowledge embodied


in products, services, and procedures can generally occur as articulated and tacit knowledge
(Hedlund & Nonaka 1993). Thereby, the growing stream of resource-based literature
especially supports the eminent importance of tacit capabilities, and skills for the creation of
new and innovative knowledge (Tallman 1991, Barney 1991, Wernerfelt 1984). The
outstanding importance of mutual interpretation and sharing of meaning is also emphasized
by the work of Daft & Huber (1987). From their review of the organizational learning litera-
ture, the authors distinguish the systems-structural and the interpretative perspective on
organizational learning (see Table 22).

SYSTEMS-STRUCTURAL PERSPECTIVE INTERPRETIVE PERSPECTIVE


The organization is a system of transmitting vs. The organization is a system for giving
data. meaning to data .
Amount, frequency , direction, physical vs. Purpose, meaning of symbols, sense
characteristics of messages. making of participants.

The environment is objective and can be vs. The environment is equivocal and is
learned through data acquisition. learned through shared definition and
enactment.
Organizations learn by acquiring data; vs. Organizations learn by discussion and
rational analysis and new behavior is then shared interpretation of events, changing
directed by top decision makers. assumptions, and trial and error.
Understanding leads to action. vs. Action teads to understanding.

Table 22: Two perspectives on organizational learning [Source: Daft & Huber 1987: 9]

The systems-structural perspective can be generally described as a more analytical


approach to organizational learning. "Information is treated as if it were a tangible good that
is transported in containers called messages" (Daft & Huber 1987: 8). A special charac-
teristic of the systems-structural perspective is that the information is implicitly clear to
everybody. Information carries its distinct interpretation in itself. This makes organizational
learning processes subject to prescription whereby only the value of a specific information
has to be evaluated before it can without further notice be disseminated to an appropriate
addressee within the organization.
A MNC-NETWORK PERSPECTIVE 145

The interpretive perspective, in contrast, conceives information about organizational issues


as complex, divergent and ambiguous. It is primarily concerned about meaning. Inter-
pretation and meaning giving are typically multi-personal and multidimensional processes
which emerge between mutually involved individuals (Boettcher & Welge 1994). Learning
evolves through sharing of divergent interpretations of a generally equivocal environment.

Daft & Huber (1987) conclude that the systems-structural and the interpretative perspective
on organizational learning (Table 22) must be seen complementary rather than exclusive:
"To fully understand organizationalleaming, one must view the organization as a structure
both for acquiring and distributing data and for interpreting and sharing meaning"
(1987: 10). The distinction of two perspectives of organizational learning implies that
horizontal networks, in contrast to prescribed vertical networks, encompass both prescribed
and emergent dimensions. Transferred to the initial purpose of fostering learning and the
creation of knowledge on a global scale, a horizontal network analysis could, for instance,
reveal that prescribed efforts to capture knowledge potentials, e.g. in terms of an informa-
tion system, may have to be complemented by structures and means that support the ad-hoc
and informal transfer of strategic information between possibly involved units.

Given the previous discussion, it can be asked:

RQ7.S: To which extent are learning processes within horizontal networks accom-
plished by prescribed and emergent interactions between functional units of
subsidiaries carrying out similar activities?

In summary, it was shown that horizontal and vertical network levels provide an appropriate
framework to study operational processes in internationally operating businesses.
Subsequently, however, it will be concentrated on managerial processes and interactions
which are part of the third network level: the coordination and decision network level.

7.2.4 STUDYING MANAGERIAL PROCESSES:


THE COORDINATION AND DECISION NETWORK LEVEL

In contrast to the two previously distinguished network levels, the coordination and decision
(c&d) level focuses on all managerial processes which are required to manage vertical and
horizontal processes between subsidiaries7 from a global perspective. In this respect, the
c&d level of the of the MNC-network framework conceptualizes the key-actors as well as
their possible roles and relationships in the management process. In particular, it is asked
how coordination processes and decisions directed at integrating operating processes from
146 A MNC-NETWORK PERSPECTIVE

a global perspective are likely to evolve on the basis of the outlined premises of the MNC-
network. In contrast to both previous network levels, headquarters can be significant
network actors (see Fig. 35).

(')

It
%~.
Infof- Control ~.
matlon ~

~0-
a~
~.
~.
~
~
w
....
~~.
~<II

Fig. 35: Coordination and decision interactions within the MNC-network framework

The c&d network generally joins two crucial sources of managerial initiative. C&D
interactions can either originate from the managerial core (HQ) or stem from subsidiaries
which seek to coordinate interdependencies with other operating units. The extent to which
headquarters on the one side and subsidiaries on the other engage in c&d processes largely
depends on the general role of headquarters and the degree of participation of
subsidiaries in the overall management process. Together, c&d processes initiated by these
actors comprise the sum of all managerial processes directed at coordinating the operating
value-added process evolving across borders.
A MNC-NETWORK PERSPECTIVE 147

Drawing on interorganizational network research, it is assumed that the conceptualization of


the role of headquarters implies a strong congruence to the broker role in strategic net-
works. As reflected by the previous distinction between headquarters and subsidiaries, the
main responsibility of headquarters within the MNC-network framework is to control the
organization, i.e. to ensure that business activities are in accord to both objectives and the
formulated strategy to achieve the same (Child 1973).
Managing a network of subsidiaries from a global perspective at first depends on the ability
to aggregate and interpret dispersed strategic information (Boettcher & Welge 1994). In
this respect, headquarters depend on the input of subsidiaries as sources of information. Due
to the limits of formal information-processing in complex and dynamic contexts (Nadler &
Tushman 1988, Egelhoff 1988, Galbraith 1977), it can be assumed that headquarters, apart
from very narrow sets of control information, cannot pre-determine all their particular
information needs. Thus, it is expected that the decision to transfer information in case of
internal and external developments of strategic relevance demands considerable delegation
to subsidiaries. In this respect, recent research by Kim & Mauborgne (1993, 1991) indicated
that the exercise of procedural justice, i.e. the extent to which the strategy-making process
of MNCs is judged to be fair by subsidiary executives, simultaneously increased subsidiary
compliance to strategy implementation. Furthermore, procedural justice was found to be
associated with enhanced subsidiary commitment to provide strategic input. These findings
suggest that global learning processes lead to superior worldwide strategy content.

The decentralization of responsibility to submit strategically relevant information and to


implement strategic decisions is not congruent with autonomy, even if subsidiaries enjoy a
considerable degree of managerial discretion. With respect to the global orientation, subsidi-
aries enjoy a conditioned autonomy which includes the responsibility to adopt a global
orientation in decision-making also on subsidiary level. This, in turn, requires a deep com-
mitment to the global objectives as well as a substantial participation of subsidiaries in the
strategic decision-making process (prahalad & Doz 1987). In extending RQ5_3 (subsidiary
involvement) and RQ5_5 (subsidiary commitment) formulated in Chapter 5.4, following
research question results:

RQ7_S: To which extent is a substantial partiCipation of subsidiaries in the strategiC


process considered as necessary for the formulation and implementation of global
strategies?

Based on the earlier argumentation, ownership ties enable headquarters to influence the pat-
tern of the global value-added process by exercising direct formal control over subsidiaries
and indirect control over interactions evolving between the same. On the basis of the previ-
ously outlined increase of complexity in MNCs (see Chapter 4.2), it must be assumed that
top-management has only limited knowledge of the actual contingencies of the operational
148 A MNC-NETWORK PERSPECTIVE

transition process (Quchi 1980). This significantly confines the degree to which top-
management is able to centrally specify operational activities required to implement
strategies or to optimize operations from a global perspective (Doz & Prahalad 1991,
Hedlund & Rolander 1990, Bartlett & GhoshaI1989). As a consequence, it is assumed that
headquarters largely depend on the cooperation of subsidiaries in acting according to the
acknowledged strategies and in coordinating and integrating the business from a global
perspective. Given this, following research question can be formulated:

RQ707: To which extent do top-management executives in the face of complexity still


have sufficient knowledge of the contingencies of the actual transition process?

Complexity is also likely to limit the extent to which headquarters can exert direct control
over interactions between subsidiaries. Since the value-added process was conceptualized as
being independently performed by subsidiaries, it follows that it is beyond the responsibility
of headquarters to direct and control each single interaction. Conceptually, the control of
interactions is thus directed at designing the structural basis on which subsidiaries interact
without permanent involvement and directing of headquarters. These structural
mechanisms are at best self-adjusting and self-sustaining (Eccles & Crane 1988), since all
possible linkages and interdependencies cannot be planned or predicted (Doz & Prahalad
1991). Compared to the parent company of the pre-global MNC, the role of headquarters
indicates a shift from a conductor, without who's permanent direction the collective would
fail to perform the desired output, to a caretaker who only gets involved when the system
apparently fails to operate regularly. Due to the increased complexity of the operational
process, it is expected that top-management is either not willing or not able to prescribe all
c&d interactions in advance. Rather than emphasising direct control over managerial
activities of subsidiaries, it is assumed that top-management activities are focused on
establishing and maintaining a structure on which subsidiaries act independently according
to the agreed upon objectives and strategies. Thus, it can be formulated:

RQ7 8: Are top-management activities primarily focused on the design of structures


0

and systems which seek to support a self-sustaining organizational process (between


subsidiaries) or do they seek to provide the legitimation for an on-going supervision?

Another crucial dimension of the c&d network level is that c&d processes are conceived to
evolve between individuals rather than abstractly between subsidiaries or between head-
quarters and subsidiaries. In this respect, the flexibility of the network perspective provides
ground to conceptualize organizational units in terms of individuals acting and deciding on
behalf of the units they represent. To reduce analytical complexity, it is suggested to limit
the focus on the leading executives of these units, since, given any form of comprehensible
A MNC-NETWORK PERSPECTIVE 149

local structuring, it can be assumed that executives are conceptually well aware of the
situation of their units 8 •

The fact that the c&d network comprises of individuals, does not imply that above mentioned
structural mechanisms and regulations of coordination and decision process are generally
excluded. The actual behavior of involved individuals is rather conceived as being driven by
two primary factors: formal regulations and informal, more personal motivations. Formally
defined coordination and decision-making processes to a degree determine context,
frequency, and content of inter-personal reconciliation. Given the frequently mentioned
inability to pre-specify all coordination and communication needs and related interactions
within given clusters of inter-personal relationships, social network literature suggests that
in situations where formally defmed coordination falls short, executives compensate the lack
of formal prescription through emergent informal reconciliation (Lincoln 1982). Since it was
further asserted that formal and informal patterns of personal ties always evolve simulta-
neously, it is expected that the formal structure also significantly facilitates the emergence
of appropriate (informal) interactions, as the need for them arises (Doz & Prahalad 1991).
Thus, it follows:

RQ709: To which extent does top-management prescribe a formal structural context


which is intentionally also directed at supporting organizationally desired informal
patterns of communication and the establishment of personal ties between key-
executives?

In summary, it should have become evident that the MNC-network framework provides a
rich and flexible lens through which global firms can be studied. In particular, the frame-
work allows to incorporate major demands resulting from the paradigm shift that recently
began to emerge in the global management literature. Due to the primary focus on pro-
cesses, the MNC-network framework transcends too narrow structural inquiries and
facilitates a flexible examination of scale, scope, and learning based competitive advantages.
The differentiation of horizontal and vertical network levels provides an analytical tool to
examine the collaborative development and exploitation of advantages arising from vertical
and horizontal cross-flows between subsidiaries. Finally, the MNC-network framework
recognizes the vital role of subsidiaries as the actual value creating units. Although directive
control of headquarters over subsidiaries is still conceptually considered, the participation of
subsidiaries in c&d process also captures opportunities to build up subsidiary commitment
to both overall objectives and commonly accepted norms and values of how to achieve the
same.

With respect to the managerial and organizational view of globalization adopted by this
research the subsequent discussion will concentrate on further specifying, operationalizing,
150 A MNC-NETWORK PERSPECTIVE

and empirically exploring the third level of coordination and decision (c&d) interactions
of the MNC-network framework. This restriction of focus is considered legitimate, since
every research is inevitably limited. Although the two excluded network levels are ultimately
the objects on which the managerial processes is directed, the contents of the two levels
primarily captures the operational effect of globalization on crucial functions which is not the
main focus of this research.

NOTES

(1) In this respect, it is even more surprising that Bartlett and Ghoshal's attempt to adopt a more theory
based focus for the study of MNCs is largely incompatible with much of their previous research on global
management (Bartlett & Ghoshal1991, 1989).

(2) The distinction between micro- and macro orientation was drawn from Johanson & Mattson (1988:
293).

(3) The primary difference between communication and interaction is that interaction encompasses all
dimensions of interpersonal relationships whereas communication is limited to oral exchanges. Interactions
typically require actual and regular personal contacts between individuals. Communication processes, in
contrast, limit the spectrum of interpersonal relationships that can possibly evolve between individuals.

(4) In this respect, it becomes quite evident that research on the dysfunctionality of informal cliques,
although always relevant in social organizations, is only of limited value for the conceptualization of the
MNC as a network of subsidiaries.

(5) In the view of Mintzberg, larger organizations generally consist of a core of operators, who are
conducting the basic work of producing products, and a group of people who supervise the former and
take some responsibility for coordinating their work. The latter, so called managerial core consists of all
non-operating, therefore, administrative components of the organization. The managerial core can further
be divided into four distinct parts: the strategic apex, the middle line, the technostructure, and the support
staff (see also Fig. 33).
The operating core is the heart of every organization. From a systems perspective, the operating core
performs all functions directly related to producing the output of the organization. Operators secure the
inputs, transform inputs into outputs, distribute the outputs, and provide direct support activities to input,
transformation and output functions.
The strategic apex encompasses all managers at the top of the hierarchy which are heading the organiz-
ation. These managers, usually referred to as the board of directors, top-management or management
committee, are charged with the overall responsibility for the firm as a whole. In this respect, strategy
development, resource allocation, the design of the structure, and representing the firm in the environment
falls into the duties of the top-management.
Since the span of control of an individual manager is clearly limited, in larger organizations middle line
managers with formal authority support the strategic apex in coordinating the operating core. As inter-
mediate elements in the chain of command, middle managers typically take responsibility for organiz-
ational sub-units. In managing these units, they serve as a vital interface between all parts of the organiz-
ation. By coordinating with internal and external boundaries of his unit, the middle manager contributes
to the horizontal interface management within the organization. Along the vertical dimension middle
managers collect selective information and pass it up the hierarchy and, in turn, implement directives
from the strategic apex for the operating core.
The technostructure consists of all analysts, engineers, researchers, and controllers who use their
expertise for formally designing, planning, and controlling the work of the operating core without
performing the work themselves. Control analysts focusing on the design and functioning of structure are
A MNC-NETWORK PERSPECTIVE 151

largely engaged in three forms of standardization, since this reduces the need for direct supervision:
standardization of work processes, outputs, and skills.
The support staff finally encompasses all units which generally provide support to the firm outside the
operating work flow. Support units are often self-contained mini-organizations with their own operating
core and strategic apex. They obtain resources from the larger firm and provide a specific service in
return.

(6) Since both technostructure and support staff can be found at various hierarchical levels, it is important
to note that Fig. 33 is but a broad schematic logo and not like conventional organizational charts an one-
dimensional portray of the organizational hierarchy.

(7) In this research, management will be generally conceived to mainly comprise of coordination and
decision-making processes.

(8) If a subsidiary meets the same characteristics of complexity that provided ground for the alternative
conceptualization of the global firm, the outlined organizational restriction naturally also applies to the
sub-unit, adding another level of intra-subsidiary network analysis. Due to the limited scope of this
research, this aspect will subsequently be neglected.
152 THE C&D FRAMEWORK

8. THE COORDINATION AND DECISION FRAMEWORK

Now that the c&d level of the MNC-network framework has been developed as a broad lens
which enables us to study management processes in MNCs from a network perspective, we
have to further delineate some of the unique idiosyncrasies that are likely to influence and
determine c&d interactions in global networks.

Chapter 8.3 intends to incorporate the previously developed discussion into the coordination
and decision (c&d) framework. The c&d framework is proposed as a sub-framework
conceptualizing the third (c&d) level of the MNC-network framework and will be used
to guide the subsequent empirical analysis presented in Chapter 10.

Before the c&d-framework can be introduced, however, we still have to discuss in more
detail the issue of how the management process actually evolves in global networks of the
kind described in Chapter 5.3. More precisely the question arises how the new managerial
requirements of global networks as expressed by RQS.i to RQS.6 in Chapter 5.4 actually
influence the evolving managerial process. The developed MNC-network framework
provides the lens which directs the focus of our inquiry. Furthermore, some first thoughts
on what network management may be were presented as part of the description of the c&d
network level. The picture how management in networks actually takes place, however, still
remains vague and leaves open a number of questions.

Normative network models in some aspects mark a considerable departure from some long
established premises in organization theory. On the ground of the initial key assumption that
the complexity prevailing in the global context requires new forms of management, it was
among other characteristics for instance claimed that 'global network firms' delegate global
responsibilities to subsidiaries and that each subsidiaries as an integrative unit of the network
would pursue collective objectives. If decision-making is delegated to subsidiaries because
headquarters are not able to efficiently handle a top-down management approach, then how
are strategies formulated and implemented?i. The pre-global literature was based on the
clear division of responsibilities with regard to this issue. Strategies were formulated by
headquarters and subsidiaries had to implement what was required. The fact that subsidiaries
are now supposed to develop strategic initiatives and that subsidiaries are considered as 'an
integrative part of the whole' results in a number of unique concerns for internationally
operating firms. Who is the final authority when it comes to conflicts or trade-offs? In
which cases, and in which not, do headquarters become directly involved? Given the
described distribution of responsibilities and tasks who coordinates activities according to the
formulated purpose and/or strategy?

With respect to these questions, it is felt that the organizational literature offers some ideas
and conceptualizations which have so far not been adequately incorporated in the global
THE C&D FRAMEWORK 153

network literature. Consequently, Chapter 8.1 and 8.2 will introduce findings of the
contemporary literature which are considered applicable to some of the outlined idio-
syncrasies of managing an internationally operating firm from a network perspective. The
question of how strategy formulation evolves in a network and how strategy changes over
time will in particular be addressed in Chapter 8.1 (network management of change).
Chapter 8.2 (context management) will then concentrate on the question of how managerial
and operational processes may best be controlled and managed with respect to the
formulated objectives. In this respect, Chapters 8.1 and 8.2 intend to develop first thoughts
towards a network management approach which will provide ground for the delineation of
the c&d framework in Chapter 8.3. The latter will be used to guide data collection and
interpretation of this research.

8.1 NETWORK MANAGEMENT OF CHANGE: PLANNED EVOLUTION

The unique problem of how strategy formulation evolves in global networks requires a closer
examination, since the normative literature presumes multiple executives from all parts of
the firm to be involved in the strategic process. This presumption primarily resulted from the
acknowledgement of complexity. Thus, due to complexity, top-management is seen
incapable to explicitly realize all existing synergies and opportunities in a top-down
management process. If, however, subsidiary executives are then called to forward strategic
initiatives on behalf of the firm as a whole, how do these 'unforseen' opportunities fit into
the formulated strategy? Subsidiary executives, due to their more detailed knowledge of
local conditions, lack the overall knowledge of the situation of other subsidiaries, since this
is only aggregated at the top-management level. Top-management executives, on the other
hand, are not able to implement the consequences of their global perspective adequately into
the existing operational process. In other words, while subsidiaries have the detailed
knowledge and lack the overall perspective, top-management has the overall perspective, but
lacks the detailed knowledge. If global responsibility (and the imperative to adopt a global
orientation) under these conditions is delegated to subsidiary executives, is it then still
appropriate to think in terms of a deliberate strategy formulation and implementation by top-
management? If not, does this imply that the global firm is not managed in a deliberate and
predictable direction at all?

Based on delineated premises, the current chapter seeks to elaborate and extent RQ7.6
(subsidiary participation) and RQ7.7 (limited knowledge of top-management) which were
developed in Chapter 7.2.4. The network management approach adopts a pragmatic position
in neither assuming that top-management formulates a strategy on the basis of limited
knowledge and imposes the same inconsiderately in a deterministic top-down implementa-
tion. Nor is it expected that strategies formulated by top-management are ex-post dec-
larations of existing and well-established incremental operational processes initiated by
single subsidiaries (Quinn 1980). Adopting the management conception of 'planned
154 THE C&D FRAMEWORK

evolution' developed by Kirsch (1990), the network management process is assumed to


focus on evolutionary rather than revolutionary changes of existing routines (McKern 1993,
Kogut 1991, Malik 1986, Bartlett 1981).

D D D

DU DU DU
'1~~eD 1~Ii~a IiIi a
Fig. 36: The management conception of planned evolution [Source: Kirsch 1990: 332]
c:)

The basic premise of Kirsch's (1990) management model (see Fig. 36) is that the on-going
organizational process is largely influenced by a conceptual view of the firm and its
purpose. In this respect, the conceptual view is compatible with what Hamel & Prahalad
(1989) call 'strategic intent'. Rather than on the organizational process directly, the planned
evolution conception centers on the deliberate management of the evolution of the conceptual
view over time. The model builds on the key-assumption that the organizational process,
controlled by the conceptual view, changes evolutionistically in an on-going learning
process. This change process evolves in series of well-defmed easy comprehensible steps or
programs that, on the basis of the status quo, seek to adapt the organizational process to
internal and external actual developments, disturbances, and defects (see also Pellegrinelli
& Bowman 1994). Due to the learning character of this process, the stepwise change is not
entirely restricted to the adjustment of the organizational process. Combined with the incor-
poration of new ideas, it rather also leads to an evolutionistic modification of the conceptual
view of the firm which is guiding the organizational process. In other words, the
evolutionistic modification of the organizational process and the conceptual view governing
the same, is in itself highly interdependent and intertwined. Since on the one hand the
conceptual view generally governs the organizational process (i.e. the organizational process
THE C&D FRAMEWORK 155

is to a degree planned), and on the other hand, conceptual view and organizational process
incrementally adapt to emerging developments as they occur and become influential, the
management approach lends itself to the notion of a planned evolution. The role of top-
management in this process is to facilitate and enhance potential variety and to focus the
variety to appropriate contexts (Kieser 1994, Probst 1987).

The program character of strategic change (pellegrinelli & Bowman 1994) as reflected by
the Kirsch's (1990) model is also emphasized in the strategic issue management literature
which grounds on the seminal work of Ansoff (1991, 1980). In the face of steadily
increasing environmental turbulence, complexity, and disturbance in the 1970s, Ansoff
argues that anticipatory management systems which predetermine strategies in advance of
challenges more and more prove inadequate. He observed that firms reacted with 'real time'
responses focused on specific strategic issues rather than that they immediately introduced
a process of strategic change or redirection (Ansoff 1980). Ottensmeyer & Dutton define
strategic issues as " ... developments or trends emerging from an organization's internal or
external environment that are perceived to have the potential to significantly affect the or-
ganizations's strategy, performance, or survival" (1989: 204).

The management of strategic issues evolves over a longer period of time and frequently
occurs in the form of differentiated programs which are either directed at following or solv-
ing the issue (Quinn 1980). Single executives as well as the strategic apex, constantly follow
a number of strategic issue programs which are successively resolved. Typically, only in the
case of a cumulation of a specific strategic issue or development, top-management will
decide on an adaption or reformulation of the current strategy (Boettcher & Welge 1994).2

Hedlund & Rolander (1990) were among the first to explicitly emphasize the need to
conceive change processes in complex MNCs from an evolutionary perspective (see also
Hedlund 1994, McKern 1993, Burgelman 1991, Kogut 1991). They described strategic
action to evolve in programs of exploitation and experimentation: " ... what the firm does
is seen as action involving both programmes of exploitation of given (in the short run)
environments, capabilities and resources and programmes of experimentation, changing
relationships to the external world as well as internally. These programmes of experi-
mentation embody a heuristic search orientation, deliberately adopted to escape the tyranny
of inordinate time lags of response to changing conditions" (Hedlund & Rolander 1990: 24).
March (1991) points out that maintaining an appropriate balance between exploration and
exploitation is a primary factor in system survival.

Given the previous argumentation, it has be questioned whether processes of information


creation, preceding the establishment of programs of exploitation and experimentation, can
entirely be prescribed by top-management. Egelhoff notes: "To the extent that the MNC is
less hierarchically organized, it becomes more difficult to generalize about were strategic
and tactical perspectives exist in an organization" (1993: 192). The previously highlighted
156 THE C&D FRAMEWORK

complexity of the organizational process in the global context rather indicates that strategic
programs in their early stages require a considerable degree of initiative of lower
(subsidiary) executive levels. The dualism between expected and self-initiated strategic
behavior, residing in these arguments, is more clearly expressed by Burge1man (1991, 1983)
and Hutt et al. (1988) who, with reference to Bower & Doz (1979), distinguish between
induced and autonomous strategic behavior (see Table 23).

INDUCED AUTONOMOUS
Activation of Individual manager defines organization Individual manager defines orga-
strategic deci- need that converges with organization's nization need that diverges from
sion process concept of strategy organization's concept of strategy
Nature of Formal screening of technical and market Reliance on informal network in
screening pro- merit by established administrative assessing technical and market
cess procedures merit
Type of inno- Incremental (e.g. new product develop- Major (e.g. new product develop-
vation ment for present markets using present ment projects requiring new com-
organizational resources) binations of organizational
resources)
Nature of com- Consistent with organizational work flow Departs from organizational work
munication pattern flow pattern in early phase of deci-
process sion process
Major actors Prescribed by regular channel of hier- Informal network emerges based on
archical decision-making mobilization efforts of product
champion
Decision roles Well-defined roles and responsibilities for Roles and responsibilities of par-
participants in strategy formulation ticipants poorly defined in initial
process phases, but become more forma-
lized as strategy formulation pro-
cess evolves
Properties of High density throughout decision process Low density in early phases; high
communication density in later phases
network
Implications for Strategic alternatives considered; com- Commitment to particular course
strategy formu- mitment to particular strategic course emerges in early phases through
lation evolves sponsorship efforts of product
champion

Table 23: Induced versus autonomous strategic behavior [Source: adapted from Hutt et al. 1988: 9]

Induced strategic activities evolve in the familiar internal and external environment. They
are primarily shaped by administrative mechanisms by which top-management seeks to align
middle organizational levels to act in line with the current strategy. Induced strategic
behavior is predominantly focused on routine or non-innovative activities. Strategic pro-
grams evolving on this basis, primarily draw upon the current resource base. In their
establishing process, induced programs follow the prescribed organizational channels.
Autonomous strategic behavior, in contrast, usually falls outside the scope of the current
strategy and comprises the emergent entrepreneurial behavior of non top-management levels
that is directed at streamlining internal operations and exploiting new categories of opportun-
THE C&D FRAMEWORK 157

ities. In early stages, project champions primarily use their informal network to gain
necessary resources and approval for further pursuing the project. With increasing
organizational support, formerly autonomously initiated programs become official and more
formalized.

The work of Mintzberg (1988) and Mintzberg & Waters (1985) highlights that in contempor-
ary organizations both types of strategic behavior are complementary rather than exclusive
(see Fig. 37).

unrealized
strategy realized
.,." strategy
//
///
./' emergent
/ ./' strategy

Fig. 37: Deliberate, realized and emerged strategies [Source: Mintzberg 1988: 15]

Rather than only from plans or intentions, for Mintzberg a strategy is consistency in behav-
ior, 'whether or not intended' (1988: 14). A realized strategy, understood as a pattern in a
stream of action, encompasses deliberate and emergent behavioral elements. Thereby,
deliberate behavior originates from implementing intensions whereas emergent behavior
comprises patterns that develop in the absence of intensions or despite of them. Realized
strategies are typically neither truly deliberate nor truly emergent.

Informal strategic behavior exemplified by autonomous or emergent Imt:J.at:J.ves is


'pathological' (Bourgeois & Brodwin 1984). It typically diverges from the prescribed organ-
izational pattern and embodies a not explicitly unwanted departure from existing and other-
wise required rules and procedures. This toleration of informal processes requires a careful
balance between uniformity and diversity (Bartlett 1981, Bower & Doz 1979).
158 THE C&D FRAMEWORK

The integration of previously formulated research questions into the argumentation unfolded
to this point facilitates a more precisely formulation of the expected consequences of the
increased complexity in the global context. RQ8-1 expresses the assumption that firms facing
complexity increasingly rely on emergent strategic behavior as well as informal mechanisms
of coordination and communication (Martinez & Jarillo 1989).

RQ8-1: Does a high degree of complexity correspond to informal control of strategiC


processes as well as to an increase of informal coordination and communication?

In summary, it can be noted that the network management approach adopts an evolutionary
perspective which, besides formally formulated strategic intentions, incorporates the
incremental adaptation of processes via well-focused autonomous as well as induced pro-
grams of experimentation and exploitation. The clinical distinction between the strategic
process capturing strategy formulation activities and the operational process including all
necessary steps for strategy implementation becomes increasingly blurred. The preceding
discussion highlighted that strategic programs in global firms are likely to emerge also from
subsidiaries engaged in operational processes. Thus, the impetus for programs stems from
both top-management and lower levels of the organization. Rather than with an exclusive
top-down or bottom-up orientation, the evolutionary management process is indirectly man-
aged by top-management through manipulating the administrative context in which strategic
behavior is to evolve. This results in following research question:

RQ'.2: Do strategic changes evolve in the form of well-focused autonomous as well


as induced programs of experimentation and exploitation or in the form of major
strategic re-orientations? If, do programs seek to accomplish a stepwise approach to
the realization of intended goals?

8.2 CONTEXT MANAGEMENT

Based on the frequently outlined limits of imposing a strategic direction on complex firms,
the current chapter intends to elaborate on RQ7_8 (design of structures vs. supervision) and
RQ7_9 (prescription of formal structural context). In this respect, the network management
approach explicitly incorporates a number of different management modes which differ in
regard to the degree of top-management involvement in decision-making processes. Due to
the outlined incremental and evolutionary nature of the strategic change process, it was
argued that strategic issues primarily evolve from and are directed at streamlining the oper-
ational process with respect to global opportunities. From this perspective, strategic changes
THE C&D FRAMEWORK 159

ultimately result from adopting a global orientation in operational decision-making. Thus,


the network management approach generally focuses on decision-making processes of
strategic importance, including operational strategic issues as well as the strategy
formulation process.

On the basis of the developed understanding, the specific rationale of context management
in global firms rests upon the insight to the particular circumstances of enforcing a global
orientation in operational decision-making. In other words, the central question is how can
top-management ensure adequate managerial behavior of subsidiary executives without
explicitly determining and regulating all required activities (ethnocentric approach) and
without allowing subsidiaries to autonomously align their activities to local requirements
(polycentric approach). In this respect, agency theory provides a powerful vocabulary to
describe the idiosyncrasies of strategic decision-making processes in MNCs (see Appendix
A).

Applied to the situation of managing a global firm (Bourgeois & Brodwin 1984), the top-
management in the position of the principal delegates strategic responsibility to subsidiary
executives (agents). As frequently mentioned, information asymmetry occurs, since the
ability of top-management to effectively monitor either the effort or the outcome of the stra-
tegic behavior of subsidiary executives is limited.

Due to the subtleness of strategic behavior, the effort that managers put into a specific
strategic proposal or in assuring the compatibility of their decisions with the overall strategy
is hardly subject to any quantification. In the same way, the outcome of strategic behavior
can neither in the case of strategy formulation nor in the case of strategy implementation be
accurately determined. For example, it doesn't make sense to count the number of proposals
a focal subsidiary executive provides to the process of strategy formulation without evaluat-
ing the quality of his suggestions. The evaluation of the quality of strategic behavior,
however, lacks a measure on which both principal and agent could mutually agree.
Likewise, the degree to which the activities of the agent are conform to implementational
requirements cannot be determined, if all the specific activities required are uncertain. Thus,
top-management for strategy formulation and implementation depends on accurate behav-
ior of subsidiary managers whereby the possibilities of evaluating the accuracy of both
received information as part of strategy formulation and actual behavior as part of strategy
implementation are very limited.

If further goal, interest, and risk divergences are taken into consideration, top management
faces problems of moral hazard. In contrast to top management's prime responsibility of
optimizing the firm from a global perspective, subsidiary managers were in the pre-global
literature commonly presumed to exclusively emphasize the optimization of local
profitability. Thereby, it was usually neglected whether this affected other parts of the firm
or even the profitability of the firm as a whole. On the ground of this division of responsi-
160 THE C&D FRAMEWORK

bilities a subsidiary executive may


• bias his strategic estimates/proposals to increase the profitability of his subsidiary,
• withhold strategic proposals that could lead to a decrease of the profitability of his
subsidiary, but result in an increase in the profitability of the firm as a whole,
• divert resources from their intended uses to meet fmancial performance standards,
• withhold effort to implement strategies appropriately, since implementational
measures generally decrease the profitability of his subsidiary.

In the light of the described information asymmetries, monitoring problems, and moral
hazards, top-management faces following options: If top management absolves subsidiary
managers from local accountability, they have an incentive to shirk. If top management
forces subsidiary managers to bear the risk of local activities, they have an incentive to bias
estimates, divert resources, etc. Even if top management forces subsidiary managers to bear
the responsibility for outcomes and finds a way to prevent them from biasing estimates and
diverting resources, the behavior of subsidiary managers will be more risk-averse than a
global orientation would call for.

Applying the vocabulary of agency theory, in conclusion, reveals more clearly the fact that
top-management faces the challenge of enforcing an effective strategic behavior of subsidi-
ary executives in terms of a global orientation in decision-making while maintaining the
accountability for the local area of responsibility for control and motivation purposes. For
this trade-off the literature on context management highlights a management pattern which
partly avoids the outlined conflict. Subsequently, this literature will be briefly reviewed.

Abstracting from simply selecting a formal archetype to solve the consideration of a global
orientation in crucial decision-processes, process oriented research of Harvard scholars in
the 1970s emphasized the need to apply more subtle mechanisms to manage decision-making
processes in MNCs. As students of Bower at the Harvard Business School, Doz (1975),
Prahalad (1976) together with Bartlett (1979) laid the foundation of the 'process school' of
research on MNCs (Doz & Prahalad 1991).

From the study of the structural evolution of MNCs, Bartlett (1981) found that successful
MNCs rather than through a series of structural archetype related reorganizations, accom-
plished an increased integration of multiple dimensions in decision-making through an evol-
utionary process that involved interrelated changes of management perspectives, structures,
systems, and the organizational climate. In association with each stage of organizational
development, he identified a predominant management mode. In this respect, a substantive
decision management developed towards a temporary coalition management which, finally,
THE C&D FRAMEWORK 161

lead to a decision context management.

In the substantive decision management mode, critical managerial decisions are generally
elevated to and decided by the top-management. Centralized decision-making thus serves as
the primary conflict resolution mechanism in case of conflicting strategic demands resulting
from international operations. However, the efficiency of this management mode is
dependent on the reliability of inputs from subsidiary executives as well as their commitment
to actually implement the decision output. Due to information overload of top-management,
a centralized decision-making of all key issues further tends to delay decision processes con-
siderably, diminishing organizational flexibility.

If the substantive decision management can be interpreted in terms of top-management's


endeavour to solve critical issues themselves, the temporary coalition management com-
bines top-management efforts to formally approach the problem of ensuring multidimen-
sional decision-making processes. In case of prevailing conflicts, for instance, the simul-
taneous consideration of both functional and regional aspects in the product development
process, top-management relies on temporary structural devices such as coordination teams,
standing committees, etc. for broadening perspectives in the strategic decision processes.
The development of interrelationships and communication between involved executives
through temporary devices, supplementing the original formal structure, facilitates the inte-
gration of conflicting pressures in crucial decision processes. Rather than being directly
involved in decision-processes, top-management, by appointing, restructuring, and dissolving
coalitions, concentrates on ensuring appropriate influence of relevant perspectives in the
decision processes. The extent to which temporary coalition management actually accom-
plishes an integration of multiple perspectives in decision-making is largely dependent on the
cooperative attitudes of coalition members.

The decision context management mode, finally, comprises all conscious attempts of top-
management to influence the informal system in accord to the requirements of multidimen-
sional decision-making. Here, top-management focuses on the establishment of an
appropriate decision-making environment which institutionalizes flexible, constructive, and
cooperative interactions among executives. In this environment, decision-making is
conceptually largely self-regulating, without permanent interference and involvement of top-
management. In this respect, a successful context management is contingent on a deeply
rooted value system which saves the firm from disintegration while simultaneously encour-
aging executives to adopt divergent positions.

In association with the evolutionary perspective of Bartlett's research, the network manage-
ment approach assumes context management to be the dominantly required management
mode of contemporary internationally operating firms. However, rather than conceiving the
other modes as alternatives of preceding development stages, it is expected that depending
on the types of decisions at focus, all three modes are likely to be applied (Bourgeois &
162 THE C&D FRAMEWORK

Brodwin 1984). From the managerial perspective of the top-management, the Bartlett
typology of management modes is interpreted as a continuum along possible degrees of
direct top-management involvement in operational decision-making.

This view is consistent with the work of Mintzberg & Waters (1985) who describe different
types of strategies along the deliberate - emergent continuum of strategy origin.
According to this typology, strategic behavior can be grouped in three different categories
of assumed top-management control.

The first group comprises planned, entrepreneurial, and ideological strategic behavior which
share the unanimous characteristic of tight bureaucratic, personal, or ideological control of
top-management. A second, dichotomous group encompasses three types of strategic
behavior - unconnected, consensus, imposed - in which missing influence of top-
management is prevailing. The predominant characteristic of the third group, consisting of
umbrella and process strategies, is that top-management is assumed to have only partial
control over the firm (see Table 24).

Umbrella and process strategies apply primarily in situations in which, due to complexity
and unpredictable environments, "... the patterns in organizational action cannot be set
deliberately in one central place ... " Mintzberg & Waters (1985: 263). Whereas in the case
of an umbrella strategy top-management tries to influence strategy content by the setting of
general guidelines, boundaries, and targets for strategic behavior, it only influences the
process by which strategic behavior emerges in the case of a process strategy. From a
leadership perspective, as Mintzberg & Waters argue, partial control strategies can thus be
labelled "not only deliberate and emergent (intended at the centre in its broad outlines, but
not in its specific details), but also 'deliberately emergent' (in the sense that the central
leadership intentionally creates the conditions under which strategies can emerge)" (1985:
263).
CONTROL OF STRA TEGIC STRATEGY PA TTERN MAJOR FEA TURES
PROCESS
Planned Strategies originate in formal plans: precise intentions exist, formulated and articulated by central
leadership, backed up by formal controls to ensure surprise-free implementation in benign, con-
trollable or predictable environment; strategies most deliberate

top-management largely con- Entrepreneurial Strategies originate in central vision: intentions exist as personal, unarticulated vision of single
trols strategic process leader, and so adaptable to new opportunities; organization under personal control of leader and
located in protected niche in environment; strategies relatively deliberate, but can emerge
Ideological Strategies originate in shared beliefs: intentions exist as collective vision of all actors, in inspira-
tional form and relatively immutable, controlled normatively through indoctrination andlor
socialization; organization often pro-active vis-a-vis environment; strategies rather deliberate

Umbrella Strategies originate in constrains: leadership, in partial control of organizational action, defines
strategic boundaries or targets within which other actors respond to own forces or to complex,
top-management partially con- perhaps also unpredictable environment; strategies partly deliberate, partly emergent and
trols strategic process deliberately emergent
Process Strategies originate in process: leadership controls process aspect of strategy (Hiring, structure,
etc.), leaving content aspects to other actors; strategies partly deliberate, partly emergent (and
again, deliberately emergerill

Unconnected Strategies originate in enclaves: actor(s) loosely coupled to rest of organization produce(s) pat-
terns in own action in absence of, or in direct contradiction to, central or common intentions;
strategies organizationally emergent whether or not deliberate for actor(s)

top-management has little Consensus Strategies originate in consensus: through mutual adjustment, actors converge on patterns that
~
control over the strategic pro- become pervasive in absence of central or common intentions; strategies rather emergent Q
cess t:l
Imposed Strategies originate in environment: environment dictates pattems in action either through direct
imposition orthrough implicitly pre-empting or bounding organizational choice; strategies most
emergent, although may be internalized by organization and made deliberate

Table 24: Description of types of strategies [adapted and complemented from Mintzberg & Waters 1985:270)
I
...$
164 THE C&D FRAMEWORK

The deliberate emergent leadership perspective is also strongly emphasized in Quinn's work
on 'logical incrementalism' (1980). Due to this management conception, executives accept-
ing their limitations in handling complexity and predicting future events consciously set
broad goals, strategic postures, and policies in order to build up resource bases. These
provide the necessary flexibility, enabling organizational actors to cope with unexpected
developments. On the basis of this logically derived frame, short-term developments can
then be handled incrementally as the occur. The establishment and maintenance of the frame
is an on-going continuous process in which top-management executives "... constantly
reassess the future, find new congruencies as events unfurl, and blend the organization's
skills and resources into new balances of dominance and risk aversion as various forces
intersect to suggest better -, but never perfect - alignments" (Quinn 1988: 104). Quinn
(1989) explicitly distinguishes logic incrementalism from anti-planning and the disjoint
incrementalism on which Lindblom (1959) focused. He emphasizes logic incrementalism to
be a conscious management process based on top-management's well defined intensions
and strategies, overcoming the clinical distinction between strategy formulation and
implementation (Quinn 1989).

In summary, the core of context management epitomizes a deliberately emergent manage-


ment approach in which top-management restrains from both generally prescribing all
intended organizational processes and from delegating an unconditioned discretion to
subsidiaries. Contrary, it is assumed that top-management adopts a mixture of instruments
of which some rely on prescription, some seek to influence organizational action by either
setting up boundaries and formulating guidelines in which actors can manoeuvre flexibly,
and still others control the process of decision-making which shapes organizational action
(see RQS.3)' Only in single cases, it is expected that top-management will directly get
involved and decide on specific problem-solving.

RQs.s: To which degree do internationally operating businesses follow a deliberately


emergent context management approach in which top-management restrains from
generally prescribing all intended organizational processes? Are operational
activities aligned to the overall objectives and strategy by adequately shaping the
context in which decision making on the subsidiary level evolves?

The integration of the overall direction into operational processes is accomplished by


adequately influencing the context in which operational decision-making evolves. Due to
the close interrelatedness of the on-going operational process and diverting strategic
programs, context management is also focused on the behavior directed at strategic issues.
As previously mentioned, the strategic process especially in MNCs largely relies on
widespread strategic initiative, although the final strategy may ultimately be formulated by
top-management (Bourgeois & Brodwin 1984). In this respect, context management also
covers strategic decision-making as part of the strategy formulation process.
THE C&D FRAMEWORK 165

Now that the picture of how management may evolve in networks has been developed more
precisely, the next chapter intends to incorporate the previously developed discussion into a
heuristic framework.

8.3 THE (C&D) FRAMEWORK

The c&d framework summarizes all assumptions, premises, and expectations developed on
the basis of the existing literature in preceding Chapters (see Fig. 38). In this respect, the
c&d framework summarizes and incorporates all literature induced expectations of the
researcher. In Chapter 10, the framework will be used to guide the empirical data collection
with respect to the outlined questions, variables, and relationships of interest.

The c&d framework generally adopts a managerial perspective on the coordination of the
on-going value-added process (OV AP). It is asked, how the OVAP is coordinated, i.e. in
which way c&d interactions directed at managing the OVAP evolve and from which vari-
ables these c&d processes are influenced. Due to previous assumptions, c&d interactions are
conceived to evolve between executives from both headquarters and subsidiaries. Executives
are seen as representatives of their particular areas of responsibility. For example, an
executive involved in c&d interactions may be the head of manufacturing at a location A or
the top-management team member responsible for region X. Due to the precedingly
delineated imperative to conceive the business from a global perspective, the c&d frame-
work is primarily concerned with the OVAP as it evolves across borders.

The OVAP - or synonymously operational process - is conceived to be constituted by


vertical and horizontal exchanges (see Chapter 7.2.3). As previously outlined, the vertical
dimension captures exchanges of components, goods, and/or services between functional
segments of the value chain whereas horizontal exchanges include knowledge and infor-
mation transfers between similar functional segments. Due to the explicit inclusion of the
horizontal dimension (utilization of segment specific know-how), global interdependencies
and thus integration requirements do not exclusively stem from the concentration of specific
tasks at specific locations. In global firms with considerably dispersed activities, the OVAP
conceptually evolves per se across borders. If, for example, a new product which was
recently launched in market A, is also scheduled for market B this constitutes a global
interdependency of the OVAP, since a global orientation demands that existing experiences
and know-how have to be systematically exploited. Since this study concentrates on the c&d
network level, however, the pattern of OV AP itself is not the primary target of empirical
analysis. By investigating the existing degree of interdependencies between units of the
operating core, the pattern of the OVAP is rather controlled as an intermediate variable
(Chapter 10.1.6). Ultimately, it is assumed that c&d interactions in pursuit of global
integration result from the existence of operational interdependencies.
.....
8i

~
Decision-
making ~
Config uration

FORMAL
MECHANISMS
I
,,.,' . ~ .. , j/ i« :/I Activity
Forma I ~ IOVAP ,. :j . t%~.:;;;
... ,. ' Co.n f·Igu-
Structure 'f:::::::::i JI ~ .:::::::::::::1 ration
INFORMAL
MECHANISMS

Formulated
Strategy

Fig. 38: The coordination and decision framework


THE C&D FRAMEwORK 167

For shaping activities of the operating core in accord to the overall objectives of the business
unit, the c&d framework basically differentiates two levels of top-management's influence.
Corresponding to the terminology developed by Bower (1970) and Burgelman (1983), these
two levels are labelled the structural and the managerial context. The conception of
different management contexts by which top-management influences the operational process
builds on the previously reviewed context management literature and the developed
distinction between headquarters and subsidiaries. On this basis, it was argued that the
OVAP evolves between subsidiaries. Taking the also introduced complexity, restricting the
ability of top-management to pre-determine all necessary coordination interactions, into
account (see RQ7.7 in Chapter 7.2.4), it follows that top-management has only an indirect
influence on the established OV AP. Consequently, it was assumed that the primary focus
of top-management is the design of structures and systems (called mechanisms in the
MNC-network framework) on the basis of which the operational process can evolve without
continuing intervention of top-management (see RQ7_S in Chapter 7.2.4). Context manage-
ment was described to be focused on deliberate emergent c&d interactions (see RQS_3 in
Chapter 8.2).

Given this understanding, the structural and managerial context level primarily differ with
respect to the degree of top-management control and influence on c&d interactions. The
structural context at first comprises variables that from the process perspective of the OVAP
have a fundamental and boundary-setting, i.e. structural character whereas the managerial
context encompasses the setting in which c&d interactions actually evolve.

STRUCTURAL CONTEXT

The structural context comprises variables which on c&d interactions have a long-term and
enduring effect which does not change on a day-by-day basis. These variables (or managerial
instruments, respectively) are mostly formal and prescribe the general behavior pattern of
how the OVAP should be managed. Structural context variables share the common
characteristic that they are typically under most direct control of top-management. Based on
preceding arguments, however, these mechanisms also have the most distant influence on
operational processes. Structural context variables have the character of boundaries which
only broadly confme the range of expected behavior. Such a conceptualization of the
structural context matches many characteristics of Mintzberg & Waters' (1985) umbrella
strategies (see Chapter 8.2). Thus, top-management defines objectives and boundaries in
which other actors respond to the actually emerging managerial requirements. In their effect
on the management of the OVAP, variables of the structural context build the foundation on
which organizational processes generally evolve.

For the purpose of the subsequent analysis, the c&d framework explicitly conceives four
structural context variables: the formulated strategy, the formal structure, the formal
168 THE C&D FRAMEWORK

decision-making configuration, and the existing activity configuration. The selection of these
variables was derived from asking what builds the fundamental basis on which the
managerial process in MNCs is likely to evolve. In this respect, selected variables most
obviously match the above described characteristics of structural context variables. They
unanimously share that they define boundaries of managerial action rather than that they
provide the basis for a decision-by-decision intervention of top-management.

Based on the developed network management approach which incorporated the management
conception of planned e"volution, the formulated strategy is conceived as a variable of the
structural context. Derived from strategic objectives and posture, the formulated strategy is
expected to outline the currently intended course of organizational action. Opposed to the
rational management paradigm, it is not assumed that operational action is entirely
determined by the officially formulated and prescribed strategy. The formal structure
encompasses the current pattern of specialization as reflected in the organization chart. From
this perspective, the formal structure is conceived in terms of the formal archetype,
depicting the selected organization structural priority, i.e. the structural dimension along
which the business is formally coordinated. Often closely related to the selected structural
priority, is the configuration of decision-making responsibility which generally captures
the division of authority in a hierarchy. With respect to the MNC as the primary research
object, the official configuration of decision-making responsibility indicates the degree of
centralization and decentralization between headquarters and subsidiaries. The current
activity configuration, [mally, encompasses the distribution of value-added activities among
dispersed subsidiaries (Porter 1986). In this respect, the activity configuration also
determines the degree of concentration and duplication of functional activities.

Drawing on the preceding discussion of the 'structure follows strategy' paradigm and its
criticism in the management field (Melin 1992, Hedlund & Rolander 1990, Pascale 1984,
Hall & Saias 1980), variables of the structural context are considered to be highly interde-
pendent rather than that they determine each other in a distinct and clearly identifiable
sequence. Thus, it is neither assumed that the selected formal archetype stems from the
formulated strategy nor that the existing activity configuration is a result of the formulated
strategy or that the decision-making configuration determines the degree of influence of
subsidiaries on the content of the formulated strategy. Irrespective of existing relationships
between variables of the structural context, it is assumed that the structural context as a
whole influences the managerial context in which c&d interactions actually evolve.

MANAGERIAL CONTEXT

Within the c&d framework, the managerial context captures the decision-making
environment in which c&d interactions evolve between executives. In association with the
key characteristics of context management, the c&d framework assumes that top-
THE C&D FRAMEWORK 169

management relies on a mixture of deliberate, deliberate emergent, and emergent


management modes in exercising its leadership function directed at influencing evolving c&d
interactions. Based on the reviewed network literature, the managerial context in particular
distinguishes between formal and informal interactions which from the perspective of top-
management can be influenced by formal and informal mechanisms (Martinez & larillo
1989).

Formal c&d interactions are expected to emanate from formal coordination mechanisms,
such as planning and information systems and formal control mechanisms. Formal c&d
interactions are characterized by the fact that resulting interactions and their integrative
effects are prescribed. Informal interactions, in contrast, are outcomes of emergent
processes which from a top-management perspective can not be prescribed. Based on the
previously expressed assumption, it is expected that global firms increasingly seek to
mobilize the informal potential for the management of the OVAP across borders (see RQ7.9
in Chapter 7.2.4) and RQS.l in Chapter 8.1). Informal coordination mechanisms are thus at
first directed at supporting the emergence of informal c&d interactions. Informal
coordination mechanisms, for instance, include liaison devices or a cooperative culture.
Although these informal mechanisms, like in the case of liaison devices, themselves can
have a prescribed nature (establishment of a coordination group), they are considered as
informal coordination mechanisms because their application is assumed to be predominantly
focused at supporting emergent rather than prescribed c&d interactions.

Due to the assumed evolutionary and incremental nature of strategic changes (see Chapter
8.1), it was assumed that strategic initiatives as well as changes of the structural context are
not exclusively determined by the prescribed strategy formulation process. It follows, that
strategic programs which include changes of the OVAP and changes of the structural
context are expected to also evolve from the managerial context, i.e. from formal and
informal c&d interactions. Although the formal strategy formulation process is through the
conception of the planning system as a formal coordination mechanism explicitly considered,
it is assumed that evolutionary induced strategic programs also emanate from OV AP
directed c&d interactions (see RQ8_2 in Chapter 8.1). Analogously to the structural context,
the leadership role of top-management with respect to the managerial context matches many
characteristics of Mintzberg & Waters' (1985) process strategies (see Chapter 8.2). Thus,
top-management controls general aspects of strategy leaving contents aspects to executives
involved in managing the OV AP across borders.

The fact that the conceptual argumentation until now restrained from explicitly differentiat-
ing (operational) coordination and (strategic) decision interactions is a consequence of the
assumption that strategic decision-making is not necessarily restricted to the strategy
formulation process. The frequently expressed expectation that the top-management of global
firms increasingly relies on the participation of subsidiaries in the managerial process (see
RQ7_6 in Chapter 7.2.4) induces the assumption that top-management, despite its formal
170 THE C&D FRAMEWORK

authority, increasingly restrains from designing the structural context without substantial
subsidiary participation.

On the basis of the previously described c&d framework which summarizes our conceptual
arguments as to this point, the empirical evidence generated by this study will subsequently
be presented (Chapter 10). Beforehand, the applied research methodology will be introduced
in the next Chapter.

NOTES

(1) The terms strategy formulation and implementation are for the purpose of the underlying
argumentation explicitly interpreted in their widest meaning. Thus, strategy formulation includes the
organizational purpose in terms of the general vision and objectives as well as the formulation of the
intended direction.

(2) Notice that the terms 'strategic decision-making', 'strategic behavior', and 'strategic activities'
generally refer to the process of executives coping with strategic issues, irrespective of whether this
process leads to a reformulation of the strategy or just to the realization of an unexpected opportunity
which leaves the strategy unchanged. Thus, the term ' strategic' is also associated with the assumed
importance of an issue (Mintzberg et al. 1976) and not only for the process of strategy formulation.
REsEARCH METHODOLOGY 171

9. RESEARCH METHODOLOGY

This chapter discusses the research design and general instrument characteristics of the
present study. The sample selection process as well as general characteristics of the firms
of the fmal sample are also introduced.

RESEARCH DESIGN

On account of the philosophical underpinnings of the present study, an exploratory effort in


the process of theory building was assumed to be a predecessor of a more rigorous testing
of theory derived hypotheses. Corresponding to the exploratory research focus it was felt
that the in-depth stndy of a few firms would capture richer information than a large scale
mail survey. In-depth studies permit a micro-perspective of the researcher which facilitates
a heuristic problem examination. Especially the current interest in network processes which
were shown to be deeply rooted within organizational processes, restricted the appropriacy
of an anonymous mail survey. The major drawback of in-depth studies is, however, that
given limited time and fmancial resources, a more thorough examination of a few firms has
to be traded off against the ability to generalize obtained findings.

According to Bruns & Kaplan "... case studies are intensive examinations of a single
organizational unit during a single time period; ... case studies can develop extensive
information about a single entity and suggest hypotheses, but they cannot conduct formal
tests on hypotheses, except perhaps to serve as counter examples." (1987: 8).

However, given the large amount of submitted, although hardly consistent research on
globalization, the single case study approach was rejected, because it was expected that
findings on the basis of a special case would more add to inconsistency rather than help
resolving it. Instead, an exploratory comparative case study approach was selected on
account of the previously reviewed state of knowledge of the field and the outlined research
objectives.

In exploratory case studies (Pihlanto 1994, Yin 1993, Marshall & Rossman 1989),
empirical fieldwork and data collection are conducted prior to the actual formulation of
theories and testing of hypotheses of cause-effect relationships. Exploratory case studies are
typically considered as a general prelude to social research (Guba & Lincoln 1981). The
conclusions derived from exploratory case studies are used for theory development rather
than for theory testing. An exploratory research design allows researchers - partly guided by
the existing knowledge, but also intuitively - to capture the full heuristic potential of the
observed phenomenon (Abercrombie et al. 1984). Exploratory case studies are therefore
often considered as sloppy and ill-structured. However, as previously highlighted (see
172 RESEARCH METHODOLOGY

Chapter 1), in contemporary research hardly any social research object is distinctively novel
and completely unexamined. Beyond conceptual freedom, every exploratory study thus also
has to develop from an established knowledge base which obliges researchers to clearly
define their research assumptions and premises. In this respect, it is argued that research
regardless of the objectives, i.e. whether directed at theory building or testing, has to meet
the same requirements of objectivism and methodological rigor.

Corresponding to these demands, the current research builds on the previously delineated
framework. Due to the confuse state of the literature and the often conflicting cause-effect
relationships which, derived from various studies, compete for acknowledgement, the
framework first of all epitomizes a research instrument. The feasibility of this instrument
needs to be verified to provide ground for more rigorous research towards theory
development.

In order to be able to exploit the full heuristic potential of the studied cases, a mixture of
qualitative and quantitative data collection methods was used (lick 1979). In particular, data
was collected by means of personal interviews and corresponding questionnaires which had
to be completed by interviewees prior to the actual interview'.

On the basis of a structured interviewguide, personal interviews were held in the offices of
the respondents. This provided the opportunity to answer questions and to ensure a mutual
understanding about both questionnaire and interview questions. Besides the exploration of
open-ended questions, the interviews provided the opportunity to ensure that the background
and scope of questionnaire measures were well understood and that all questions were
appropriately completed. For the interviewers, the questionnaires together with available
secondary data facilitated a better preparation and initial understanding of the business units
under investigation. With a few exceptions, two interviewers gathered data from the respon-
dents. On average the interviews lasted 1.5-3 hours. All interviews were taped. The tapes
were used to document the interviews and supported the researcher by categorizing received
information to the research questions listed in the interviewguide. To ensure the accuracy of
received information, the documentation of the research questions for all interviews was
completed no later than 24h after the interview took place.

Corresponding to the managerial perspective of the delineated framework the top-executive


level was chosen as a target group, because it was expected that top-executives, due to their
overall perspective, would be the richest available source of information. To allow reliability
checks and a greater familiarization with each firm, it was attempted to interview at least
three top-executives per firm. Moreover, the questioning of multiple managers permitted
cross referencing and double checking of issues in which strong top-management bias was
expected. In some cases, interviewees were explicitly asked to comment on the universality
of their answers, especially with respect to questions which according to the existing
literature were expected to be subject to divergent views between headquarters and
RESEARCH METHODOLOGY 173

subsidiaries.

Although executives on the subsidiary level were not explicitly interviewed, a subsidiary
perspective was partly obtained through many interviewees who, prior to their top-executive
assignments, held positions in subsidiaries. In a few cases, it was even possible to
additionally interview subsidiary executives which happened to visit top-management during
the interview period. On the bases of these additional sources, top-management bias from
the perception of the interviewers appeared to be limited. With a very few exceptions,
questioned managers appeared to be well aware of the nature and implications of
globalization and the areas in which their firms still lacked appropriate adaption. However,
this does not generally alter the fact that findings are reported from the top-executive
perspective and that these findings might be subject to a considerable top-management bias.

RESEARCH INSTRUMENT

For the purpose of interviewing, questions, measures, and issues of interest resulting from
the operationalization of the c&d framework were grouped into three distinct
interviewguides. It was expected that theses would correspond with typical top-management
positions or responsibilities, facilitating a more appropriate selection of interview partners.
In particular, structured interviewguides for the areas of strategy/competition, organization
and administrative systems were developed. Copies of the interviewguides comprising ques-
tionnaire measures and interview questions are enclosed in Appendix C.

Corresponding to each interviewguide, the pre-interview questionnaire comprised all closed


multi-item measures. With very few exceptions all items were measured on I to 7 Likert
scales with scale ends indicating dichotomised characteristics such as relevance or import-
ance. In total, the three questionnaires consisted of 43 measures which distinguished 339
items (see Appendix C).

Many measures included an additional item 'OTHER' and free space to provide respondents
with the possibility to add an item which they conceived as particularly important for the
question of interest. Since none of the respondents made any use of this possibility,
subsequent description of measures and findings will restrain from indicating the existence
of the 'OTHER' item in each single case.

For the purpose of reducing misinterpretations of questions and items, the introductory
section of each questionnaire provided some explanations of the used terminology (see
Appendix C). To further verify the reliability of the questions and items, the questionnaires
were pre-tested with a consultant, specialized in international management.
174 RESEARCH METHODOLOGY

SAMPLE SELECTION

With respect to financial constraints, it was decided to limit the sample to European MNCs.
The initial selection of potential participants was derived from the "European Top 500
Listing 1992", which ranked the 10 leading European companies within the industries of
Automotive, Chemicals, Electronics, Data Processing, Energy/Raw Materials, Mechanical
Engineering, Metals, Food, Textile, Papers/Wood, Glass/Ceramics, Transport, and Diver-
sified Combines. Since the ranking only covered the corporate level and the unit of analysis
of interest was the business unit, supplementary secondary data was obtained from current
annual reports, business publications, and management journals. The prevailing criterion of
final selection of businesses on the divisional level was significant presence of
international activities. Thus, primarily exporting companies were not included in the
study.

On the basis of this pre-selection, a four page leaflet and a covering letter (see Appendix B)
asking for an opportunity to introduce the research endeavour personally, was posted to the
CEOs of 252 divisionslbusiness units in 129 European MNCs. From this mailing, 34
positive responses (13%) were received. In 25 companies (10%) the research project was
presented, introducing contents and scope of the study. The CEOs of the respective
businesses, in turn, were asked to introduce their businesses and structures.

At the end of each presentation, the researcher and CEO typically jointly decided on a
participation. In case of a positive decision, it was additionally agreed on the number and
names of participating executives and a mutually convenient interview date. On the basis of
the described process, a total number of 15 firms were selected as final participants. The
terms 'firm', 'unit' or 'business' will subsequently exclusively refer to the 15 business areas
that were selected as units of analysis. A detailed description of the selected businesses will
be provided in the next section.

As previously outlined, it was assumed that not only large MNCs would be influenced by the
phenomenon of globalization. Therefore, this study explicitly restrained from the definition
of specific criteria such as size, volume, number of subsidiaries, etc. for the inclusion of
firms into the study. Personal project presentations rather provided the opportunity to
generally discuss the appropriateness of the business unit for the study. Thereby, the CEO
was, for instance, asked to evaluate the importance of international vs. domestic activities
and to explain his valence. In retrospect, all participating firms turned out to have a
considerable global market share, assets outside the home country of more than 50%, or a
leading global industry position. However, it is important to note that these were not the
exclusive criteria of the inclusion of these firms. In fact, the 15 final participants were not
selected from the set of 25 initially responding firms. Since the sample size was not pre-
determined, the number of ultimately participating firms rather resulted from the described
introduction process.
RESEARCH METHODOLOGY 175

Since in three firms business activities covered multiple product groups, one product group
was selected in collaboration with the CEO of the business unit. As mentioned in Chapter 2,
the business unit level was selected in order to ensure that organizational units subject to
homogeneous managerial conditions were examined. As part of the sample selection
process, it was not possible to use specific criteria for the selection of what was a
homogeneous area of business. Therefore, an individual analysis of each business unit was
necessary to determine what for the purpose of the study should be considered as unit of
analysis. In some cases, it was possible to take the whole company as unit of analysis,
because organizing principles and managerial responsibilities homogeneously covered the
whole firm. In other cases, these were found to be very different among different divisions
of MNCs. The divisional level was then selected. In still other cases, divisions comprised
of different competing in different industry segments. When product groups were subject to
very different business conditions, the product group was selected as unit of analysis.

After completion of data collection, three firms had to be eliminated from the sample,
because it was for various reasons not possible to complete all interviews or to obtain all
questionnaires. On average, 4.3 executives (min.: 2; max.: 7) per firm have been personally
interviewed by the author and another interviewer between September 1992 and February
1994. In conclusion, data collection was based on interviews with 51 executives of the 12
sample firms (5% of contacted firms). Table 25 indicates the corporate names, the
industries of the participating business units and the countries of origin of the sample firms.

COMPANY INDUSTRY OF SELECTED BUSINESS COUNTRY OF ORIGIN


Hoechst Pharmaceuticals Germany

Volvo Automobile Sweden

Chargeurs Textile France

Mannesmann Mechanical Engineering Germany

Siemens Electrical Engineering Germany

Pirelii Automotive Supplies Italy

SKF Mechanical Engineering Sweden

Schwarzkopf Cosmetics Germany

DSM Chemicals Netherlands

Coats Viyelia Mechanical Engineering United Kingdom


Solvay Pharmaceuticals Belgium

E. Merck Chemicals Germany

Table 25: The 12 sample firms


176 RESEARCH METHODOLOGY

As part of the discussion on global orientation, it was argued that rather than a specific
strategy content, the overall global management perspective has to be interpreted as the
unifying idea of globalization. As a consequence of this understanding, an organizational
focus was adopted which asked for particular patterns of organizing which required
adjustment in the global context. Due to this focus, the sample was selected from multiple
industries. In contrast to research focusing on global strategy (Morrison 1990, Prahalad &
Doz 1987, Porter 1986), it was assumed that the adjustments of the organizational process
are - similar to the shifted management orientation - not limited to a specific set of industries
(for a similar approach see Bartlett & GhoshalI989). Due to the early stage of the research
process that this study addresses, a heterogenous mix of businesses was desirable to
maximize variation of the examined variables. However, the need to carefully control the
effect of the contingency factor industry on the derived results was recognized.

SAMPLE DESCRIPTION

The final sample consisting of selected business units of 12 European MNCs will
subsequently be introduced in more detail. In particular, key characteristics such as size,
dispersion of activities, type of products, etc. are described.

MANNES MANN Demag Foerdertechnik AG, Wetter (D)


Mannesmann Demal is a leading German mechanical engineering company specialized on
heavy equipment, iron and steel work machinery, plastics machinery, and material handling
systems. In regard to its strong international position (global market share 20%), the
material handling (MH) division was selected as unit of analysis for this study.
Mannesmann(MH) had sales of 390 million US$ in 1992. As a separate legal entity, the firm
employs a total of 2,600 people worldwide. Fully owned subsidiaries, often with
manufacturing activities, are located in all important industrial markets such as the US,
Asia, and several European countries.

Besides providing tailor-made and integrated materials handling systems for manufacturing
factories and warehouse systems, Mannesmann(MH) offers the largest range of mechanical,
electrical, and electronic material handling components such as hoists, travelling cranes,
slewing cranes, roller and belt conveyors, etc. Thereby, the product philosophy is explicitly
based on a modular approach to ensure that all components are compatible with each other.
This enables Mannesmann(MH) to provide individual logistical solutions for its customers.
Mannesmann(MH) operates 15 production facilities worldwide and is associated to 18
independent partners which on the basis of the adopted technology provide a uniform quality
standard. Through a 100 agencies worldwide and more than 1,000 service depots,
Mannesmann(MH) is able to provide an adequate after sales and replacement service.
RESEARCH METHODOLOGY 177

SIEMENS AG, Erlangen (D)


The German electrical engineering and electronics group Siemens is divided into 17 quite
autonomous divisions. For the purpose of the present study, the business unit Energy Meters,
Substation Secondary Equipment, and Power Systems Control (ESP) of the Power
Transmission and Distribution division was selected as unit of analysis. In 1992,
Siemens(ESP) had sales of 220 million US$, 1,900 employees, and a global market share of
approx. 11%. The most important products of Siemens(ESP) are electromechanical and solid
standard energy meters, used in public and industry power supply systems. Since many
countries have historically developed very unique power supply systems, the market
structure in different countries ranges from a single customer (the national power agency)
to the sum of all landlords demanding power meters to measure the power consumption of
their tenants.

The industry structure in the international energy meter industry is relatively stable and
concentrated. Due to high barriers of entry, the global market volume is divided-up between
a small number of global players which each have a strong regional base and only minor
activities outside. In this respect, the key-market of Siemens(ESP) is Central and Eastern
Europe. Manufacturing and R&D activities are entirely concentrated in Britain, Italy,
Austria, and Germany.

The primary driver towards a global approach was described as the necessity to integrate all
business activities for efficiency reasons, regardless of regional considerations. In this
respect, a number of core competencies were found to be concentrated at selected
subsidiaries.

AB VOLVO, Gothenburg (S)


In the Swedish Volvo group, the automotive division was investigated. Volvo Car
Corporation (VCC) manufactures Volvo cars in three major plants located in Sweden,
Belgium, and the Netherlands. Volvo cars are sold in almost 100 countries in the world.
Volvo(vcc) is to 75% owned by AB Volvo and to 25% by the French car-maker Renault.
Volvo(vcC) employs 30,000 people worldwide. In 1992, Volvo(vcC) sold approx. 300,000 cars
amounting to sales of $7.4bn.

Volvo(vcc) coordinates a sales organization which consists of 44,250 people in associated


dealerships, sales outlets, and workshops. Since the mid-seventies, the US, followed by
Great Britain and Sweden have been the largest single markets. The product range of
Volvo(vcC) consists of three major vehicle lines, the 900/700 series (mainly manufactured in
Gothenburg (Sweden», the 800 series (mainly manufactured in Gent (Belgium» and the 400
series (mainly manufactured in Born (Netherlands». The plant in Born is jointly operated
by an equal joint venture with Mitsubishi Motors. In addition, Volvo(vcC) has larger assembly
plants in Sweden (Kalmar, Uddevalla), Canada (Halifax) and smaller plants in Malaysia,
178 RESEARCH METHODOLOGY

Thailand, and Indonesia. In Sweden, a number of highly specialized plants manufacture body
parts (Olofstrom), engines (Skovde), and transmission units (Koping).

The 900/700 and the 800 series are both positioned in the niche of high-end estate limousines
and station wagons. Here, Volvo(VcC) has a leading position primarily due to the high product
quality, an outstanding design, and a number of safety innovations. Volvo(vcc) similarly
addresses the same (end) customers demands in all major industrial markets. The total world
market share is 1%. In the segments in which Volvo cars compete, the global market is
approx.4%.

The primary driver towards a global approach was described as industry specific. Car
producers are currently per se forced to market their products in all major industrial markets
to gain the volume required to exploit economies of scale in production costs and amortize
high investments, given the observable shortening of product life cycles.

DYNACAST International Ltd, Alcester (GB)


Dynacast International is an affiliate of Coats Viyella, a leading UK-based textile group.
Apart from its textile activities, Coats Viyella holds a 100% share of Dynacast, a
mechanical engineering firm which is the world leader in the manufacturing of high
precision parts and components made from magnesium, aluminium, zinc, and plastic. Due
to its different field of activity, Dynacast, apart from financial links, enjoys a considerable
managerial autonomy from corporate headquarters of the Coats Viyella group.
Internationally, Dynacastoperates 26 plants with 1,800 employees in 17 countries. In 1992,
the firm made sales of 190 million US$. The headquarters of Dynacast, consisting of the
CEO and four other top managers, are located in Alcester, England. Apart from
headquarters and a centralized R&D department, the firm has only minor operational
activities in the UK.

A unique and highly sophisticated manufacturing technology enables Dynacast to produce


small zinc parts with high precision and speed. The production process is facilitated by
machines blowing heated and liquid metals into containers or tools (casting). The machines
used in the casting process are relatively small and simple. They have a technically limited
output in terms of parts per unit of time. The maximum plant output of different high
precision components is determined by the number of available casting machines. Each type
of part or component requires a specific tool which is for each different production process
attached to the casting machine. In order to guarantee the precision and quality of the parts,
tools are typically developed in close cooperation with the customer. Given the degree of
high sophistication which Dynacast has developed in the casting technology, the quality of
the production process is largely determined by the tool-making process. Since precision
parts are mostly used for the fabrication of technical appliances, for instance drilling
machines or vacuum cleaners, the parts, although typically very small, have to be precise
RESEARCH METHODOLOGY 179

in shape and size within a minimum tolerance. Due to the required responsiveness to
customer needs and the relatively simple manufacturing process, the complete value-added
process is duplicated at each location entirely serving the local demand. In some countries
such as the United States, the firm has of a number of geographically dispersed plants.

Dynacast is technologically the world leader in its industry segment. The firm has no
considerable competitor who is equally operating internationally. The increasing number of
internationally operating customers was considered as the primary globalization driver. The
majority of the customers (85%), however, is exclusively operating in local markets.

AB 8KF, Gothenburg (8)


The SKF group, incorporated in 1907 and headquartered in Gothenburg, was the originator
of the self-aligning ball bearing and is now the world's leading company in the rolling
bearing industry. SKFs global market share is approx. 20%, making it twice as large as its
nearest competitor. With 45,100 employees in more than 130 countries, the SKF Group in
1992 realized a sales volume of $5.4bn. The firm has manufacturing units in 14 countries
and marketing units in 54 countries all over the world. As of year-end 1992, over 90% of
the Group's manufacturing and labor force and 95% of its sales were outside Sweden.

The function of a roller bearing is to eliminate or reduce the friction between a fixed and a
moving surface, and to carry a load. Thus, wherever there is rotation, there is a need for
some form of bearing. The product range of SKF includes all major types of bearings: deep
groove ball bearings, cylindrical roller bearings, spherical roller bearings, angular contact
ball bearings, etc. The bearing industry is a highly concentrated and mature industry. Rather
than by innovation, competitiveness is determined by qUality with respect to precision and
service measured in regional availability. SKF seeks to provide a full range of rolling
bearings in size and type in all countries of the world.

SKF's marketing units are complemented by 200 branch offices and more than 7,000
distributors and dealers. 64% of the customers of SKF are OEM (Original Equipment
Manufacturers) customers such as the automotive industry (28%) and the machinery industry
(36%). Customers in the automotive industry include car and truck manufacturers, primarily
in Europe and North America, and railways. Customers in the machinery industry include
general machinery manufacturers, end users of bearings and seals, heavy industry
manufacturers, the electrical industry (including white goods), and aerospace companies.
The remaining 36% of the business is made up of aftermarket and replacement sales.

The primary driver towards a rapid international expansion has historically been the
outstanding technical competence originating in the invention of roller bearings. As early as
in 1910, subsidiaries were found in the UK and the US. Beginning of the 1970s, SKF began
to face serious competition from a handful of competitors which in the meantime were
180 RESEARCH METHODOLOGY

equally able to produce large numbers of quality bearings. The management decided to
concentrate its resources on the core business and to emphasize the worldwide integration
of its operations. This strategic emphasis had not substantially changed until 1993.
Competing on the exploitation of the established network of subsidiaries rather than on
further economies of scale, the management decided that each type of bearing should only
be manufactured at one location. In a series of re-organizations, it took until 1993 to re-
configurate international manufacturing structure accordingly.

DSM N.V., Heerlen (NL)


DSM is an international chemicals group based in the Limburg area in the southern part of
the Netherlands. DSM's activities are divided over 25 core business areas which are grouped
into nine divisions. Due to its international scope and its leading position, the Elastomers
(ELTM) division was selected as a unit of analysis. DSM(ELTM) employs 1,100 people spread
over the main manufacturing subsidiaries Netherlands, US, and Japan. A sales office has
recently been opened in Singapore. Apart from activities in these countries, there is a
DSM(ELTM) sales representative at each of DSM's subsidiaries, located all over the world. In
1992, annual sales of 320 million US$ were to 57% made in the US, to 30% in Europe, 3%
in Japan, and 10% to the rest of the world.

Besides the production of different types of synthetic rubbers, termoplastic rubber, and high
performance fibers, DSM(ELTM) is a leading global supplier of ethylene-propylene synthetic
rubbers (EPDM) and their derivates. EPDM traded under the global brand KELTAN is a
synthetic easy-to-process rubber which due to its high UV, ozone, and weather resistance is
primarily used in automotive, wire and cable, and construction industry. In its industry
segment, DSM(ELTM) is the 2nd largest competitor holding a global market share of 18%. The
customer base is made up of 80% local end customers, 10% internationally operating
industry customers, and 10% of customers with homogeneous product needs across different
markets.

E. MERCK, Darmstadt (D)


E. Merck, a family-owned chemical and pharmaceutical group, is headquartered in
Darmstadt, Germany. Because of its international presence and the leading position in its
industry segment, the pearlescent pigment (PGMT) division was selected as unit of
analysis for this study. With a world-market share of 50%, Merck(PGMT) is the largest
competitor in its industry segment. Manufacturing in the three triad regions North America,
Japan, and Europe, 600 employees worldwide accounted sales of 188 million US$ in 1992.

Operating in a niche of the (paint) pigments industry, Merck(PGMT) produces pearlescent


pigments which are required to create metallic color effects. Colors based on pearle scent
pigments are used for packing materials and printing, plastics and ceramics, paints and
RESEARCH METHODOLOGY 181

lacquers as well as for such cosmetics as lipsticks and nail-polish. In the automotive
industry, pearlescent pigment paints are increasingly used in stylings.

Given the range of possible applications, Merck(PGMT) has a set of very diverse customers.
60% of Merck(PGMT) sales are to industry customers who operate in more than one country.
The other 40% of Merck(PGMT) customers operate only in a single country. A unique
requirement of the pigment industry is a high demand for quality in terms of similarity of the
color effects. Irrespective of the time and place of production, customers demand that
pigments produce exactly the same color effects. Merck(PGMT) is therefore forced to use
exactly the same production process in all plants. Changes of pigment compositions and
manufacturing facilities always have to be implemented simultaneously.

CHARGEURS S.A., Paris (F)


In Chargeurs, a French conglomerate of entertainment and textile activities, the wool
trading and processing (WTP) division was selected as unit of analysis. In 1992,
Chargeurs(WTP) represented sales of 743 million US$ and had more than 3,300 employees in
14 different countries. 80% of the assets of the division are located outside the home country
France. The division headquarters, located near the corporate headquarters in the heart of
Paris, consist of the CEO and five other top executives.

Chargeurs entered the wool trading and processing business in 1988 through the acquisition
of the world leader French Prouvost and extended its operations with the acquisition of the
competitors Hart (Argentina) in 1989, and Otegui (Uruguay) in 1990. Currently,
Chargeurs(wrP) is the world leader in the wool trading and processing industry, being the only
firm present in all leading wool-producing countries (Australia, New Zealand, South Africa,
South America) as well as in all major wool-consuming countries and regions (Europe,
North America, Far East). Wool processing includes the stages cleaning (removing
vegetable impurities and grease), carding (arranging the fibers in parallel), and combing
(producing fine slivers of wool). The end-products of this process (wool tops) are sold to
only approximately one thousand different weaving, spinning, or knitting companies all over
the world.

The quality of the raw wool to a large extent determines the quality of the textiles to be
produced. Since the quality of raw wool differs significantly among producing regions,
Chargeurs(wrP) offers its customer over 70 different types of wool tops mixed from different
types of raw wool. To meet the traditionally very unique product and quality requirements
of its customers, Chargeurs(wrP) has processing units in all major markets. The processing
units in the southern hemisphere produce mostly for local demand while units within Europe
and the United States trade and process wool tops worldwide. Organizationally, the
management of Chargeurs(wrP) introduced a regional structure with decentralized
responsibilities of subsidiary managers for their local operations. Each subsidiary is divided
182 RESEARCH METHODOLOGY

into independent profit-responsible trade (buying and selling of raw wool) and processing
(manufacturing oftops) units.

HANS SCHWARZKOPF GmbH, Hamburg (D)


Schwarzkopf is a German hair cosmetic group which was founded in 1898. In 1903,
Schwarzkopf was the first company to introduce a hair shampoo to the German market.
Since then Schwarzkopf has sustained a technologically leading position due to a number of
inventions and product innovations. Currently, Schwarzkopf is represented in more than 100
countries by subsidiaries, license holders, and distribution companies. In 1992, the
Schwarzkopf group realized a sales volume 700 million US$ with two different product
divisions: retail products ($500m) and hairdresser products ($2oom). With respect to its
worldwide approach, the hairdresser division (salon) supplying hair dresser salons with
professional products was selected as a unit of analysis. The product range of the salon
division includes products such as shampoos, balsams, hair colors, hair care and styling,
conditioning, perming systems, etc. for professional use. SchwarzkopirSALON) has 1,100
employees worldwide and manufactures the entire demand in three plants units in Germany,
in the Netherlands, and in Australia.

SchwarzkopirSALON) markets all salon products under common global brands. It is the 10th
largest competitor holding a global market share of approx. 2% in the hairdresser supply
industry segment. In its 14 wholly-owned subsidiaries (11 major European countries,
Australia, New Zealand, and Brazil) salon products are traded through own sales forces
directly to hairdresser salons and a few wholesaler chains. All other major markets are
covered by licensees. Since most of these agreements exist for 30 years and more,
SchwarzkopirSALON) was able to gain a strong influence on his partners with respect to a
consistent marketing and service. In the salon business, 30% of the sales fall to customers
with homogeneous needs. The remaining majority of the customers, however, demands
relatively tailored products which forces SchwarzkopirSALON) to some adaptations on the basis
of the core products.

PIRELLI SpA, Milan (I)


In the Italian tire, cable, and rubber conglomerate Pirelli, the tire division was selected as
unit of analysis. Pirelli(I1RE) is the fifth largest manufacturer of tires, holding 6% of the world
market which represents sales of 3.3 billion US$. Pirelli(TlRE) is headquartered in Milan, Italy
and employs 29,000 people in 26 subsidiaries, mainly in Europe, North and South America.
Thirty-five percent of the tires produced in the firm's 10 manufacturing plants are sold to
Original Equipment Manufacturers (OEM) customers which deliver their vehicles with
Pirelli tires. The remaining 65 % of the sales are to replacement wholesalers.

Despite activities in North America, South America, and Europe has historically been the
RESEARCH METHODOLOGY 183

most important market region, representing 70% of the sales. The firm has only minor
activities in the Far East. Due to regional differences in demand, the North and South
American operations share a great deal of autonomy. The European operation, in contrast,
is highly integrated and tightly controlled by the Milan headquarters.

Due to an increasing concentration in the global tire industry, a decision towards a global
strategy was made in the late eighties. Pirelli(TIRE) experienced serious turbulence in the early
1990s after the unfriendly takeover of the German Continental group failed. Half of the top
management had to resign. Pirelli(TIRE) changed its strategy from a volume-based cost
leadership to a quality-based differentiation strategy. Focusing on high-performance tires in
the upper price range, the firm began to emphasize its global brand and to create a global
image of Pirelli as a producer of high quality automobile tires. Through internationally
coordinated pricing policies and standardized advertising and promotion campaigns, Pirelli(cAR)
meanwhile realized a consistent international market positioning. The reorientation to high-
performance tires was internally accompanied by a stronger focus on product innovations and
manufacturing quality. Furthermore, the firm is seeking to reduce the reduplicate production
of similar tire types or sizes in all or many countries, since the differentiation strategy had
resulted in an increase of product varieties which were mainly produced in small volume.

SOLVAY & Cie, S.A. Brussels (B)


In 1863, Ernest Solvay invented the ammonia process for making soda ash. He founded the
Belgium chemicals group Solvay which has now become the world largest producer of alkalies
and a leader in thermoplastics and peroxygens. The smallest but fast growing business unit of
Solvay is the health division which was selected as unit of analysis.

The health division was formed in 1980 when Solvay acquired the German Kali-Chemie and
the Dutch Duphar, both international companies with a number of foreign subsidiaries. In
1986, Solvay also acquired the small American pharmaceutical company Reid-Rowell as a base
of expansion in the US market. Until the end of the eighties, the top-management of
SolvaY(PHARMA) pursued only moderate attempts to integrate the two former independent MNCs.
A new CEO appointed in 1989, however, decided to finally exploit all the synergies from the
acquisition. Therefore, the managing directors of Kali-Chemie, Duphar, and Reid-Rowell
were besides their other responsibilities appointed to the management board of SolvaY(PHARMA)'
All responsibilities and activities are now structured on an international base. The
headquarters consist of only 15 people located at the Solvay headquarters in Brussels. Apart
from a small sales office, SolvaY(PHARMA) has no significant activities in Belgium. In total,
SolvaY(PHARMA) has 5,000 employees and worldwide sales of $lbn.

SolvaY(PHARMA) is actively researching and trading pharmaceuticals in the areas of central


nervous system, cardiovascular products, gastrointestinal, immunology, and hormone-
replacement franchises. SolvaY(PHARMA) is number 48 in the global pharmaceutical industry and
184 RESEARCH METHODOLOGY

number 20 in Europe. The firm has R&D activities in Germany, Netherlands, US, and
through an equal joint venture also in Japan. SolvaY(PHARMA) has manufacturing plants in six
countries and marketing subsidiaries in 17 countries allover the world.

HOECHST AG, Frankfnrt (D)


The Hoechst Group is the largest German chemical and pharmaceutical company. The Group
has 15 business divisions, including chemicals, paints, fibers, argro-chemicals, polymers, and
pharmaceuticals. The pharmaceutical division is the largest division and was selected as unit
of analysis. In 1992, Hoechst(PHARMA) had sales of $5.7bn and employed 32,500 people in 125
subsidiaries and agencies in over 90 countries.

Hoechst(PHARMA) is the sixth largest pharmaceutical firm and has a global market share of
approx. 6%. Its main products are indications in the areas of cardiovasculars, antiinfectives,
metabolism/endocrinology, and immunology Irheumatology. Hoechst(PHARMA) recently intro-
duced business units around these product fields to shorten the average development process
of drugs. The main objective is to closer coordinate and integrate the activities of the 26
research centers dispersed in 18 countries. Given the quite unique industry characteristics in
the pharmaceutical industry, the strategic emphasis of Hoechst(PHARMA) is to compete on the
exploitation of its worldwide dispersion and to decrease its development costs by
internationally harmonizing its clinical research and marketing activities.

A special characteristic and simultaneously the primary globalization driver for pharmaceutical
companies3 is the long research and development process of new drugs. From the time a
certain substance is found, it takes years of pre-clinical and clinical tests and trails until a new
drug can be submitted for approval by the national health care authorities of any country.
Although recently many European countries increasingly accept drugs which have been
approved by other European nations or the American Food and Drug Association (FDA), the
two largest pharmaceutical markets (US and Japan) besides Europe, usually still ask for some
country specific trials. Given these idiosyncratic requirements, the development period for a
new drug ranges from 10 to 20 years. During this period, the researching firm bears
development costs of several million US$ and the risk that the drug will finally fail the trails
and will never be sold. To prevent their products from imitation, pharmaceutical companies
usually apply for patents which grants them an exclusive period in which high R&D
investments can be amortized. Once the patent of a successful drug expires, the original
product (e.g. Aspirin) often faces serious price competition by generic imitations.

Compared to R&D, the manufacturing of drugs is relatively simple and inexpensive. The
marketing of drugs is very personnel intensive, since it requires a separate sales forces of
highly educated pharmaceutical agents in each country. These agents personally visit private
doctors and clinics to inform them about their drugs and latest developments. An exception is
the growing market of self-indication or OTC (over the counter) drugs which are sold in
RESEARCH METHODOLOGY 185

supermarkets and pharmacies. OTC drugs are increasingly sold under global brands. From
a marketing perspective, they are increasingly converging towards consumer products.

SAMPLE CHARACTERISTICS

Table 26 characterizes the sample with respect to a number of selected dimensions. All
figures are indicated on the basis of 1992. Despite the fact that corporate names are
indicated, please note that all data refer to the selected business units only.

SALES PERS. GLO. ASSETS FOR. GLO. GLO. LaC. IND. IND.
(million. ('000) MA.SH. (million ASSETS IND. END. END. CON. RANK
FIRM US $) (%) US $) (%) CUS CUS CUS
Mannes. 390 2.6 20 110 25 - - 100 60 1
Siemens 220 1.9 11 150 20 - - 100 70 3
Volvo 7,400 30 4 65
, 00 45 - 100 - 70 10
Dynacast 190 1.8 15 63 80 15 - 85 100 1
SKF 5,400 45.1 20 6,500 85 40 - 60 88 1
DSM 320 1.1 18 250 60 10 10 80 100 2
Merck 188 0.6 50 55 50 60 - 40 100 1
Charg . 743 3 35 500 80 - - 100 100 1
Schwarz. 200 1.1 2 115 35 - 30 70 30 10
Pirelli 3.300 29 6 187 50 35 65 - 70 5
Solvay 850 5.5 0 .5 480 95 - - 100 30 48
Hoechst 5,700 32.5 3 5 100
, 75 - - 100 28 6

Table 26: Selected characteristics of the sample (Basis: 1992)

In particular, Table 26 lists sales, number of personnel, estimated global market share,
total assets, and percentage of assets outside the home country of the examined business
units. To obtain more detailed information about the customer structure, respondents were
asked to divide up 100% of their sales to the categories global industry customers, global
end-customers and local end-customers. Thereby, the first category represents international-
ly operating customers to which the selected businesses delivered. Global end-customers
comprise the group of internationally homogeneous consumers whereas local end customers
are consumers with country specific needs. The indicated figures reveal that in the sample
with the exception of Vo[vo(vcC)' Merck(PGMT!, and Pirelli(TIRE) the customer structure was
dominated by local consumers. With respect to the degree of industry concentration
(IND.CON.), respondents were asked to estimate the global market share that was held by
the 10 leading competitors of the respective industry. Apart from Schwarzkop/rSALON)'
Solvay(PHARMA)' and Hoechst(PHARMA) all firms were operating in highly concentrated industries.
With respect to their industry rank, five of the sample firms were global industry leaders,
186 REsEARCH METHODOLOGY

two were among the first three and five among the top ten. The lowest ranking firm was
Solvay(PHARMA) ranking 48 in a highly differentiated industry.

MEAN MEDIAN S.D. DISP. SKEW. KURT.


Sales (MIO $) 2,075 566.5 2,651 0.91 1.14 -0.29
Personnel (TSD.) 13 2.8 16 0.91 1.02 -0.65
Global Market Share (%) 15 13 5 0.67 1.32 -1.57
Assets (MIO $) 1,228 187 2,287 0.63 1.99 2.59
Foreign Assets (%) 58 55 25 0.33 -0.11 -1.25

(S.D.: Standard Deviation; Disp.: Dispersion Coefficient; Skew.: Skewness; Kurt.: Kurtosis)
Table 27: Descriptive sample statistics

Table 27 provides some descriptive statistics on selected sample characteristics. Sample


firms had average sales of2,075m US$, 13,000 employees, assets of 1,228m US$ of which
58% tended to be located outside their home country. In their respective industries, sample
firms had an average global market share of 15%. The large differences of means and
median, high values of the dispersion coefficient4 as well as values of skewness5 different
from 0 underscore the explicitly intended heterogeneity of the sample. Kurtosis 6 measures
around 0 indicate that the 'peakedness' of the distribution of sample characteristics
resembles that of normal distribution.

NORTH SOUTH EUROPE AFRICA ASIA


AMERICA AMERICA
FIRM R&D PRO MAR R&D PRO MAR R&D PRO MAR R&D PRO MAR R&D PRO MAR
Mannes. 2 2 5 9 16 2 2 6
Siemens 3 3 6
Volvo 2 2 5 10 3 3
Dynacast 1 4 4 1 8 8 4 4
SKF 2 2 3 9 5 8 21 6 3 16
DSM 1 1 2
Merck 2 1 5 3
Charg. 2 2 3 6 2 4
Schwarz. 2 2 2 11 2
Pirelli 2 2 3 4 2 5 14 2 4
Solvay 2 3 7 11 2 4
Hoechst 3 3 2 17 4 10 21 2 5 4 16

Table 28: Number of functional segments in different countries per continent

To further quantify the degree of activity dispersion of each sample firm, Table 28 lists the
number of functional segments in different countries per continent for the areas of R&D,
production, and marketing. Note that figures do not report the number of plants or locations
RESEARCH METHODOLOGY 187

within a country. Table 28 just demonstrates that, for instance, Mannesmann(MH) has
manufacturing activities in two North American countries. With respect to the low numbers
it has to be noted that North America, due to the geographical size of the US, consists of a
considerably lesser number of nation states than Europe or Asia. As can be deduced, sample
firms were well dispersed among the triad regions, North America, Europe, and Asia.
Consistent with expectations, marketing followed by production and R&D activities tended
to be the most dispersed activity. Since all subsidiaries had at least some form of marketing
activity, the sum of all marketing segments also indicates the overall number of subsidiaries
of each firm.

Since the dispersion in terms of numbers of subsidiaries does not allow any conclusions with
respect to the actual distribution of activities among different subsidiaries, respondents were
additionally asked to estimate the percentage to which segments located in each continent
contributed to the overall output of the type of functional activity. Table 29 depicts that,
although activities are predominantly distributed among the triad regions, most activities are
still performed in European countries. Given the European origin of the sample firms, this
evidence is not surprising.

NORTH SOUTH EUROPE AFRICA ASIA


AMERICA AMERICA
FIRM R&D PRO MAR R&D PRO MAR R&D PRO MAR R&D PRO MAR R&D PRO MAR
Mannes. 30 15 5 4 100 50 73 5 3 10 5
Siemens 100 100 97 1
Volvo 15 3 15 85 95 77 2 8
Oynacast 30 15 5 5 100 60 75 5 5
SKF 10 15 20 5 5 90 70 60 2 5 8 10
DSM 30 40 50 40 40 40 30 20 10
Merck 15 25 25 70 60 55 15 15 20
Charg. 12 15 30 23 5 70 40 60 7 5 18 15
Schwarz. 5 95 95 80 5 5 15
Pirelli 10 15 7 15 25 10 75 60 75 3 5
Solvay 30 20 15 60 75 75 10 5 10
Hoechst 20 25 20 3 5 70 60 60 3 5 10 9 10

Table 29: Estimated distribution of functional activities across continents (in %)

NOTES
(1) The empirical evidence derived from the interviews will subsequently be referred to as 'case'
evidence whereas findings based on the questionnaire constructs will be addressed as 'data' evidence.
188 RESEARCH METHODOLOGY

(2) For the sake of simplicity, subsequently the corporate names will be used as case names. To
emphasize the present focus on the business rather than the corporate level, however, the business studied
will be indicated in parentheses.

(3) The description of the international pharmaceutical industry also applies to the previous case
SolvaY(PHARMA)·

(4) The dispersion coefficient indicates the distribution of values around the mean. On a [0-1] continuum,
low values indicate high frequencies close to the mean whereas high values point to a differentiated data
distribution. The dispersion coefficient is computed as

Dispersion coefficient = (7S'th quartile - 2S'th quartile)/(7S'th quartile + 2S'th quartile).


(5) Skewness measures the deviation of the distribution from symmetry. If the skewness is clearly
different from 0, then a distribution is asymmetrical, while normal distributions are perfectly symmetrical.

Skewness = n*M3/(n-l)*(n-2)*a. 3
Where
Mi is the j'th moment of the mean: = L(xj-MeanxY
(J,3 is the standard deviation raised to the third power
n is the valid number of cases.

(6) Kurtosis measures the 'peakedness' of a distribution. If the kurtosis is clearly different than 0, then
the distribution is either flatter or more peaked than normal; the kurtosis of the normal distribution is O.
Kurtosis is computed as:

Kurtosis = [n*(n + 1)*M4 - 3*M2*M2*(n-l)]/[(n-l)*(n-2)*(n-3)*a.4 ]

Where
Mi is the j'th moment of the mean: = L(xj-MeanxY
(J,4 is the standard deviation raised to the fourth power
n is the valid number of cases.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 189

10. THE MANAGEMENT OF COORDINATION AND DECISION PROCESSES


IN GLOBAL FIRMS

This chapter reports the empirical evidence of the study of internationally operating business
units in 12 European MNCs. On account of the c&d framework developed in Chapter 8.3,
the [mdings on variables of the structural context will be reported (Chapter 10.1) before the
managerial context in which c&d interactions were expected to evolve will be described
(Chapter 10.2).

Presenting empirical findings, subsequent Chapters will report the evidence separately for
the distinguished variables of the c&d framework. For the purpose of consistency, each of
the following chapters will have the same structure. Thus, a summary of the conceptual
arguments leading to the formulation of heuristic research questions is given at the beginning
of each chapter. Following, the measure used to operationalize the questions (see Appendix
C for the complete interviewguide) and the obtained findings will be presented. The findings
section intentionally restrains from interpreting the [mdings. In the discussion section the
data evidence will be analyzed and interpreted together with the case evidence. Rather than
interpreting data and case evidence separately, it was felt that the combined analysis of both
data sources facilitated an improved exploitation of the heuristic potential of the empirical
examinations.

10.1 STRUCTURAL CONTEXT MANAGEMENT OF C&D INTERACTIONS

As previously noted, the structural context comprises all managerial variables directed at
providing the structural foundation of the OVAP evolving across borders. Corresponding to
the structural context variables distinguished in the c&d framework, empirical evidence on
the formal structure (Chapter 10.1.1), formulated strategy (Chapter 10.1.2), decision-
making configuration (Chapter 10.1.3), and activity configuration (Chapter 10.1.4) will
be introduced and discussed. Chapter 10.1.5 will then focus on the identification of possible
relationships between structural context variables.
190 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMs

10.1.1 FORMAL STRUCTURE

According to the arguments reflected in Chapter 5, the formal structure is not conceived as
a representative indicator of the organizational process. The structure is just as one of many
organizational variables. Although it was shown that in the global context alone the selection
of a structural archetype is not likely to resolve all organizational problems and
requirements, the formal structure, nevertheless, remains an important managerial
variable which is assumed to significantly influence the evolving organizational processes.

The dominating structural dimension highlights the managerial focus along which business
activities are integrated. In Chapter 5.1 it was argued that the overall responsibility in one-
dimensional structures is delegated along functional lines when competitiveness builds on
worldwide concentration of knowledge and experience. It is delegated to product managers
when competitiveness builds on product innovations, technology, and marketing know how.
Finally, area structures usually combined with decision-making autonomy on the subsidiary
level are prevailing when competitiveness builds on responsiveness pursued by local
manufacturing and customer service.

In the case of functional or product structures, the firm and resulting interdependencies
between activities at dispersed locations are coordinated under the responsibility of func-
tional or product executives. Area structures, in contrast, emphasize the interface manage-
ment between conflicting structural demands on a regional level. Thereby, the integration of
interdependencies between similar functional or product activities at different locations is
sacrificed. From a formal structural perspective, the imperative to adopt a global
orientation, i.e. the flexible and simultaneous achievement of advantages from different
structural dimensions, inevitably results in overlapping and conflicting responsibilities.

With respect to formal structural issues, the global management literature presents a very
heterogenous and partly inconsistent picture. Partly corresponding to above sketched com-
petitive requirements, three common lines of argumentation leading to the emphasis of (1)
area structures, (2) functional or product structures or (3) matrix structures are important.

AREA STRUCTURE
As indicated, the literature on international organizing presumes MNCs with a considerable
number of subsidiaries to adopt some kind of area structures (Egelhoff 1988). Predominantly
it is argued that, facing the complexity of operating in numerous countries, the inescapable
adaptation to local environments requires a considerable degree of decentralization, i.e.
overall local responsibility and thus autonomy. Furthermore, it is held that for control needs
of top-management and for the motivation and commitment of local managers, a regional
profit accountability is indispensable. As part of the introduction of the MNC-network
framework in Chapter 7.2, it was demanded that an examination of internationally operating
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 191

businesses should take different subsidiary conceptualizations into account. The


conceptualization of subsidiaries as organizational entities comprising all activities in a
country is closely associated with area structures. Area structures emphasize the identity of
similarly operating in a foreign country over task related commonalities. This
distinguishes the internationally operating firm into distinct subsidiaries, separated by
country borders.

FUNCTIONAL AND PRODUCT STRUCTURES


While not generally questioning the fact that activities to a certain degree have to be adapted
to local peculiarities, another line of argumentation asserts that local adaptation does not
necessitate exclusive local responsibility over product or functional issues. From a con-
ceptual perspective, an area structure is thus considered as inefficient when significant
synergy or economy of scope potentials exist for a number (i.e. in a region) or all subsidi-
aries which outweigh the advantages of local autonomy. Both views primarily differ with
respect to their assumption on the order in which the optimization of business activities is to
be pursued. Proponents of subsidiary autonomy and accountability over global integration
along functional or product requirements believe that the best overall result is achieved, if
each subsidiary maximizes its results. Supporters of global functional or product structures,
in contrast, assert that the results of a joint optimization of multiple subsidiaries exceed the
sum of isolated sub-system optimization:

Joint Optimization Isolated Optimization

Area max L (S,. S2' ... , SJ L [max (S,), max (SJ, ...,max (SJ)

Function/Product max L (S,. S2•... , SJ > L [max (S,), max (SJ •... ,max (SJ]

Due to the imperative to adopt a global orientation, it follows that in the global context firms
can be expected to adopt product or functional structures over area structures. If firms are
able to gain considerable competitive advantages from exploiting cross-national synergies,
an isolated optimization on the subsidiary level limits the ability to exploit these advantages,
since profits and costs are likely to amount at different subsidiaries. If each subsidiary
strictly focuses on maximizing its local performance measured in profit terms, overall
profitability of the firm decreases, since projects, ventures, etc. - although profitable from
a global perspective - are not enforced because they reduce local profits.

Following example may illustrate the pursued argumentation. If headquarters of the biggest
customer of any firm are located in country A, then it might be profitable for the firm to
have a cadre of managers responsible for establishing and maintaining close relationships to
that customer on multiple levels. Important information about expected changes,
developments, new ventures, etc. can so be passed to subsidiaries in countries in which the
customer is operating enhancing local performance. Vice versa, lobbying at customer's
192 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

headquarters may significantly enhance the possibility of subsidiaries to obtain orders from
the subsidiaries of the customer. In any case, costs of relationship establishment and
maintenance are hardly quantifiable and accumulate at subsidiary A. If in an extreme, in
country A the market volume apart from the focal customer is extremely low (e.g. the
Belgium subsidiary of any firm would be supplying SoivaY(PHARMA)' even negative results of
subsidiary A could imply an increased profitability of the business unit as a whole.

As a consequence this argumentation leads to the assumption that firms increasingly seek to
implement non-area structures which allow to integrate activities along product,
functional, or a mixture of both dimensions. Area structures focus on local interface
management between product and/or functional demands under the responsibility of country
manager. The previous discussion on globalization, in contrast, emphasizes that increasingly
processes cutting across borders are of eminent importance for internationally operating
businesses. This implies a worldwide integration along functional and/or product dimensions
rather than a dominating responsibility of area managers. The fact that business activities to
a certain degree have to be adapted to local conditions does not require an overall respon-
sible subsidiary manager. In global functional or product structures, value-added segments
within a common administrative subsidiary environment are rather expected to report to
internationally responsible executives which have the worldwide profit responsibility and
accountability for their area. As a consequence, subsidiaries are accumulations of functional
or product segments rather than homogeneous entities under a common authority structure.
This understanding emphasizes task related commonalities over the local identity and the
need to consistently respond to local conditions.

MATRIX STRUCTURES
Due to the conflicting outcomes of the debate on area vs. non-area structures, it was already
mentioned that matrix structures are increasingly proposed as structural means through
which internationally operating firms can simultaneously achieve advantages from the
integration across multiple structural dimensions. Corresponding to RQ5_1 (structural
multidimensionality) it was expected that multidimensional formal structures are more often
applied than one-dimensional solutions. Although conflicts are equally prevailing, matrix
structures share the advantage that the most important areas of conflicts are institutionalized
and subject to flexible coordination. However, some authors point out that matrix structures
generally lack the inherent coordinative efficiency of one-dimensional structures and tend to
lead to an increase of coordination related communication and slow decision-making pro-
cesses (Bartlett & Ghoshall989, Prahalad & Doz 1987, Galbraith & Kazanjian 1986, Davis
& Lawrence 1978). Moreover, due to the lack of a clear profit accountability, other control
mechanisms have to be adopted.

In conclusion, it can be noted that area structures provide clear profit accountability
supporting motivation and control of local management. Functional and products structures,
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 193

in contrast, appear to be better suited to exploit global synergies. Matrix structures facilitate
strategic optimization along multiple structural dimensions, but lack operational profit
accountability .

With respect to the focus on the business unit level of the present study, most of the sample
firms were internationally operating business units or divisions of MNCs. Due to the
embeddedness in larger corporations, corporate structure was expected to have some influ-
ence on business unit management. Thus, the corporate structure was controlled as a
moderating variable.

As first emphasized by Chandler (1962), most contemporary diversified MNCs tend be


divisionalized, i.e. to be organized in M-forms. Given the decentralized orientation of divi-
sional corporate structures (Mintzberg 1979), most corporate management boards adopt
some sort of holding functions delegating managerial responsibility and accountability to
division executives. Therefore, it was assumed that investigated businesses had an individual
management and a set of operational activities well distinguished from other divisions. From
this perspective only a limited corporate influence, typically in the areas of finance and/or
accounting, on the strategic management of the business was expected. In the light of the
presented conceptual argumentation, following exploratory research questions with respect
to the structural context variable 'formal structure' can be formulated:

- Which are the dominant structural archetypes adopted by internationally operating


businesses?

- Are multidimensional structures dominating?

- To which degree is profit accountability clearly organized?

- How do corporate structures actually influence the management of the sample


businesses?

MEASURES

For the purpose of ascertaining formal structures of the sample firms, specialization on the
highest hierarchical level was examined. In this respect it was asked, along which structural
dimension the business as a whole was predominantly managed (dominating strategic
dimension). Although the assumptions of hierarchical structuring implicitly suggest
hierarchical specialization, managerial responsibility and accountability to be congruent,
194 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

firms were additionally characterized with respect to structural focus of operational profit
accountability (see Question C.L5 and Fig. 39 for fmdings). Both structural dimensions were
distinguished according to seven options:

~ one-dimensional structures product


area
function
~ two-dimensional structures area/function
area/product
• product/function
~ three-dimensional structures product/area/function

Again, it is important to note that the reported structural dimensions pertain to the structures
of the business units under investigation and not to the corporate level. The latter was
controlled separately (Question C.LI). Implications and managerial consequences of
corporate membership were ascertained by categorizing the sample into managerially
interdependent single business firms (e.g. SKF) and MNC bnsiness units (e.g.
Merck(PGMT). Thereby, the evidence of substantial influence from the corporate body was
used to group the firms with respect of the two categories. Four firms were grouped under
the category 'single business firm' although they belonged to a corporate body. In these
cases, the examination of the formal corporate structure and the actual influence of the
corporate body on the management of the business unit revealed that the delegated autonomy
resembled that of independent business firms.

FINDINGS

"" One-dimensional formal structures dominating.

"" Operational profit accountability predominantly delegated area executives.

The previously highlighted expectation that the strategic objective of seeking advantage from
multiple structural dimensions would be associated with an increased nse of multidimen-
sional formal structures was not supported by the obtained data. The examination of
structural dimensions for the 12 cases revealed a dominance of one-dimensional over
multidimensional formal structures (Fig. 39). The structural flexibility expressed by RQS_l
(Chapter 5.4) was not supported by evidence of multidimensional structures. With respect
to the dominating strategic orientation of the top-management level, eight firms were
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMs 195

found to be structured along the functional dimension. The typical management board of
these firms consisted of a CEO and a number top-executives responsible for marketing,
R&D, manufacturing, personnel, etc. In the remaining cases, one firm was organized in
product terms whereas the rest had adopted some form of matrix structures. The
operational profit accountability was predominantly delegated to area executives (eight
firms), followed by functional executives (three firms). One firm also adopted a matrix
solution on the operational level by delegating profit responsibility and accountability
uniformly to product and area executives.

Prevailing Structural Dimensions

Function

Operational Profit Accountability

Dominating Strategic Dimension

Fig. 39: Prevailing structural archetypes of the sample firms

Table 30 categorizes the sample with respect to the precedingly distinguished variables. The
reported combinations of both distinguished structural levels reveal an unexpected lack of
congruence between managerial and operational formal structures. OnIy in four cases one
of the dimensions of the dominating strategic dimension corresponded to operational profit
accountability.
196 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

FIRM Dominating Operational Corporate


Strategic Dimension Profit Accountability Membership
MannesmannlM/Il product area Single Business Firm
Siemen~e$P) function area MNC Business Unit
Volvo(Vcc} producllfunction/area product/area Single Business Firm
Dynacast function/area area Single Business Firm
SKF function function Single Business Firm
DSMcem.) function area Single Business Firm
MercktPGMT) function area MNC Business Unit
Chargeurs(Wl'p) function area Single Business Firm
Sc hwa rzkopf(SoIon) function area Single Business Firm
Pirelli(1lRE) function area Single Business Firm
SolvaYCPHARMA) function function Single Business Firm
Hoechs~PHARMAl product/function area MNC Business Unit

Table 30: Structural characteristics of the sample firms

As can be seen from the last column, only Siemens(ESP)' Merck(PGMT)' and Hoechst(PHARMA)
experienced significant organizational influence from their corporate environment, primarily
in form of corporate area structures granting country organizations a far reaching autonomy.
In countries where activities of the business units were grouped under a common MNC-
country management, business managers were not able to enforce their influence directly
through hierarchical authority.

An interpretative examination of similarities across cases is facilitated by Table 30. With


respect to the two distinguished structural levels - dominating strategic dimension and oper-
ational profit accountability - it is evident that functional emphasis on the former predomi-
nantly corresponds to an area emphasis of the latter. The most frequent combination linked
a strategic focus along functional dimensions with operational profit responsibility delegated
to area executives.

DISCUSSION

Empirical evidence revealed that most firms distinguished their structures into a strategic
and an operational component. Only in three cases, managerial and operational structures
were congruently structured along the same dimension(s). From this perspective, the sample
falls into two distinct groups which foremost differ with respect to the consistency of the
structural solutions. The first group consists of nine firms with structural differentiations
between managerial and operating structure. Thereby, operational profit responsibility
unanimously tended to be structured along the area dimension. The second group comprises
of Volvo(vcC), SKF, and Solvay(PHARMA) which consistently structured their firms from
managerial to operational responsibility along functional or product lines, resulting in de-
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 197

localized structures.

STRUCTURAL DUALISM BETWEEN MANAGERIAL AND OPERATIONAL LEVEL

The empirical data of nine cases showed different structural priorities for the strategic and
the operational management of their business. Based on a decentralized subsidiary respon-
sibility for operational activities, local discretion was predominantly found to be associated
with profit accountability on the area level. Consistently, top-management executives of this
group of firms held a decentralization of operational responsibility and accountability for
indispensable. The most frequently mentioned reasons against greater centralization included
geographical distance, volatile environments, and unfamiliar operational conditions, resulting
overall complexity due to large numbers of subsidiaries in different countries, etc. A
delegation of operating responsibility was primarily favored for motivational and efficiency
reasons. In this respect, executives in favor of local autonomy expressed their conviction
that a too central management approach hinders managerial initiative on the subsidiary level.
Since managerial responsibility was generally connected with profit accountability, most
subsidiaries were organized as local profit-centers. Goods and services between
subsidiaries were predominantly exchanged on a transfer-price basis. The surveillance of
local profits by top-management provided a means of simultaneously ensuring local
optimization of operations and enforcing motivation of subsidiary executives. Output control
of subsidiaries enabled top-management to reduce interference into the local operational
process to a minimum.

A decentralized local responsibility was valued for reasons of efficient operational


implementation. At the same time it considerably impaired the management of strategic
issues transcending country borders. In this respect, changes of configuration, e.g. regional
concentration of manufacturing capacities, and joint activities of subsidiaries, for instance in
regard to global customers or competitors, were frequently reported to have failed because
of subsidiary resistance to either give up responsibility (reduction of local content) or to
accept expenditures not related to local revenues.

Given these drawbacks, the delegation of local profit accountability was often described as
a trade-off between the outlined advantages of local accountability and giving up potential
synergies from global operation. The decision towards subsidiary autonomy mostly grounded
on the argument that top-management could take responsibility of global issues while
subsidiaries remained responsible for local activities. This specialization was found to be the
primary determinant of the structural differentiation in the sample.

Consequently, the main task of subsidiary managers was in most cases seen as optimizing
local performance under some restrictions imposed by the global perspective of top-
management. Acknowledging the necessity to also oblige subsidiary executives to adopt a
198 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

global perspective in managing their local business, the CEO of Merck(PGMT!, for instance,
explicitly emphasized the outstanding importance of global consolidated results against single
local results. However, since he, on the other hand, left no doubt that a deterioration of
results would not be continuously accepted, subsidiary executives appeared to have
maintained their restrictive local perspective. In this respect, the CEO of the largest sub-
sidiary of Merck(PGMT)' interviewed during a visit at headquarters, expressed that on the
subsidiary level top-management's continuing demands to also focus on consolidated results
were conceived as a lip-service, since, for instance in case of local expenditures leading to
an increased performance of another subsidiary, others would be credited for the perform-
ance and their contribution would soon be forgotten. Due to these experiences, the local
management would primarily focus on optimizing local results, irrespective of global impli-
cations.

With respect to the previously outlined expectation that firms would predominantly adopt
forms of matrix structures, the structural dualism between strategic focus on the top-
management and profit accountability on subsidiary level can be seen as reflecting a kind of
vertical matrix. Especially with respect to activities transcending the single country level,
however, the nine firms revealed an unequal influence of top-management and subsidiary
executives. Due to the initial reasoning in favor of a greater operational autonomy and profit
accountability of subsidiaries, top-management executives commonly expressed their
reluctance to assert their hierarchical authority. Opposed to the premises of hierarchical
structuring, superiority of the managerial level was only occasionally associated with mana-
gerial authority. Based on the philosophy that a subsidiary manager would not resist a
successful product, subsidiaries were in the case of Hoechst(PHARMA) even free to adopt prod-
ucts developed by concentrated R&D centers. More generally, however, most executives
underlined that the lack of formal authority in structural terms was compensated by other
means of influence. Functional or divisional top-management executives responsible for the
global optimization of their area of responsibility thus predominantly relied on indirect
and/or informal controls. These will be discussed in later chapters.

Limited managerial influence on the operational process, although more hierarchically


imposed than voluntarily accepted, was also experienced by Siemens(ESP)' Merck(PGMT)' and
Hoechst(PHARMA) which due to the prevailing corporate area structure had to cope with
autonomous subsidiaries. With respect to business related activities, the business unit's top-
management thus lacked formal hierarchical authority to enforce business strategies on the
subsidiary level. Although business managers in these often called zebra-subsidiaries were
professionally reporting to the global business unit management, they hierarchically
remained under the control of the country manager. In all three cases, affected business unit
managers considered cross-subsidization of financial resources between divisions on the
subsidiary level as the main restriction of their activities. The primary focus of a country
manager, representing multiple divisional activities in a country, was maximizing local
profitability without particular attention to divisional constraints. Country executives of
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 199

zebra-subsidiaries often conceived their set of divisional activities as portfolios. Cash-flow


generating business were, thereby, regularly used to subsidize less or non-profitable
businesses.

In summary, it can be noted that firms relying on structural dualism between the dominating
strategic orientation and operational profit responsibility showed considerable problems in
integrating strategic changes into operational measures. Top-management executives,
although formally superior, were to varying degrees able to actually assert their influence in
regard to a greater integration of business activities across borders. In this respect, case
evidence suggested that centrifugal tendencies resulting from subsidiary profit accountability
partly outweighed the integrating clench of top-management authority.

DE-LOCALIZED STRUCTURES

The outstanding difference between the former group of firms and Volvo(vcc), SKF, and
SolvaY(PHARMA) is a consistent structuring along functional or product lines resulting in a
changed subsidiary conceptualization. The division of responsibility on a higher hierarchical
level separates segments of functional activities located in a country. Internationally
consistent structures are thus always de-localized structures, grouping types of local activ-
ities under different global responsibility.

In all three cases, the introduction of de-localized structures was decisively supported by a
considerable concentration of manufacturing and R&D activities at selected locations. The
decoupling of local up-and downstream activities was mostly related to volume based scale
and efficiency considerations. Thereby, the process by which each of the firms developed
towards a global concentration of upstream activities, however, differed considerably.

• Volvo(vcC) historically depended on only a few production locations which


concentrated on different product lines and served the entire demand of dispersed
sales units.
• Solvay(PHARMA) was a merger of three formerly independent firms from different
foreign countries. All three firms had historically established sets of
internationally dispersed subsidiaries. A concentration of both up- and down-
stream activities was introduced as management decided to pursue a greater inte-
gration among the acquired companies by successively eliminating duplicated or
conflicting activities.
200 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

~ SKF already in the fIrst decades of the century began to establish subsidiaries all
over the world. Due to poorly developed communication systems and transport
means, subsidiaries were traditionally producing similar products for their local
demand. Since the core product, apart from size varieties, was relatively homo-
geneous, top-management at the beginning of the seventies decided that each
product should only be produced at one location which could then supply all other
units.

In summary, it can be noted that the concentration of functional activities in each case was
largely depending on relatively standardized products which were only to a minor degree
subject to local adaptations.

Irrespective of the contingent factors which led to described concentration processes, all
three firms shared the idiosyncrasy that different functional activities or product groups in
the countries were not reporting to an overall responsible country manager, but to the
executive who had the global responsibility for the particular segment of interest. Since oper-
ational profIt responsibility was delegated to functions or product groups, performance was
not any longer synonymous to the fInancial profIt of a country. Related expenditures and
revenues were rather dispersed over different subsidiaries, operating in different currency
zones. In order to maintain accountability of all units, firms with de-localized structures
typically established systems of transfer prices in which producing units to a fixed
percentage participated from the net operating profIt of sales units.

In the case of SKF, the performance evaluation system was based on a performance standard
which was derived from the revolving average of production costs of related product
varieties in different currencies. This internal performance standard was set by top-
management and served as a common measure to evaluate both product divisions responsible
for manufacturing and development as well as sales divisions (see textbox).

Due to this system of performance evaluation, SKF was able to integrate sales and manufac-
turing division across borders. Research activities were likewise concentrated in a handful
of separate research centers. The interface management between these internationally
coordinated functions was primarily achieved by flexibly installed coordination groups,
integrating the perspectives of variously involved executives representing their particular
functions. Results on the country level were only determined for legal purposes and without
any managerial relevance. The main responsibility of the legally indispensable CEO of the
subsidiary was reduced to the management and maintenance of the commonly used adminis-
trative infrastructure (e.g. accounting, offIce, etc.).
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 201

Performance Evaluation Performance Evaluation


Sales Division: Product Division:

price performance standard


- performance standard - actual costs
- costs of sales - administrative costs
- administrative costs + profit contribution product

operating profit (OP) product division result

x % of OP = sales division result

(100-x) % of OP = profit contribution


product

In summary, it can be noted that firms by adopting de-localized structures pursued an


interface management on a global level instead of sacrificing advantages from global
integration for local motivation, efficiency, and accountability. The case material suggests
that the centralization/decentralization debate prevailing in literatur, and admittedly also in
practice, proves to be too narrow to explain the observed effect of formal structure on the
organizational process. Empirical data analysis further showed that the adaption to local
peculiarities in terms of customer service and different distribution systems was maintained
by sales units operating in each market while manufacturing and R&D activities were
typically concentrated in selected locations. In this respect, the evidence of the firms with
de-localised structures partly supported the views of Porter (1986). Sophisticated transfer
price systems ensured unit optimization and efficiency and allowed top-management to
evaluate and promote functional units by their output.

The examination of formal structures underlined the previously discussed argument that
formal structure is but one of many variables that shapes the organizational processes
(Chapter 5.2). Especially the peculiarities of internationally operating businesses clearly
revealed that actual influence and coordination are not necessarily congruent with profit
responsibility. Furthermore, formal responsibility may sometimes be meaningless, if the
internal management system relies on other than officially presented results. In this respect,
the evidence of de-localized structures stands in direct opposition to the previously reviewed
argumentation in favor of area profit responsibility. It appeared that area responsibility in
many cases survived traditionally accepted subsidiary autonomy and that top-management
was too reluctant to break the historically strong power of subsidiary executives. On the
other hand, many questioned managers agreed that the global integration and coordination
of activities across borders in the long run offers advantages which outweigh those of
202 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

isolated country optimization.

It has to be remembered that de-localized structures may not be equally suitable for all busi-
nesses. A few cases of the first group disapproved the general advantageousness of de-
localization. In the case of Dynacast, for instance, a simple and well distinguished
production process without considerable scale potential allowed flexible establishment of
manufacturing plants serving local sales units. Due to the lack of up-stream synergy
potentials, the CEO vehemently argued against alternative structural solutions which
endangered the risk of softening up the clear cut profit accountability of subsidiary
executives.

The example of Dynacast indicates that concentration and structuring along functional lines
may not be beneficial per se. However, cases in which, due to the lack of considerable
similarities and interdependencies, the described specialization between global integration on
the top-management level and local optimization on subsidiary level appeared to be efficient
were exceptions. The majority of firms in the first group formally delegated profit responsi-
bility to subsidiary executives, since top-management lacked appropriate formal alterna-
tives of simultaneously achieving global integration and adequate subsidiary commitment to
optimize their area of responsibility. The formal sacrifice of global coordination and
integration advantages, however, was partly found to be compensated by other, often more
informal and indirect means of asserting influence.

Next, empirical evidence on strategies adopted by the sample firms will be discussed.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 203

10.1.2 FORMULATED STRATEGY

A strategy describes the intended way to achieve the objectives of the firm. The distinction
between strategy, objectives, and the existing situation is not always clear cut in the strategic
management literature. Pioneer works in this field, for instance, tended to also include the
formulation of objectives into their strategy definitions (Chandler 1962, Ansoff 1965,
Andrews 1971). Hofer & Schendel (1978), on the other hand, emphasize the definition of
product/market combinations and geographic territories as well as resource deployments,
distinctive competencies, and competitive advantages as vital strategy dimensions. Quinn et
al. (1988) see strategy as a pattern integrating established goals, policies, and action
sequences into a cohesive whole.

As previously mentioned, this study from a conceptual perspective restrains from asserting
that actually evolving organizational processes necessarily match with the officially formu-
lated strategy (Chapter 8.1). Thus, a strategy definition is adopted which understands
strategy as the officially formulated means by which the firm intends to achieve its
formulated objectives.

Notwithstanding considerable academic attention on global business-level strategies, the


global management school still lacks consensus on the final dimensions which constitute
global strategies (Boettcher 1994). The review in Chapter 3.3 revealed that the literature
offers a number of different strategic variables of global strategy content which are alterna-
tively proposed as most enduring means to sustain the competitiveness of internationally

GLOBAL STRATEGY VARIABLES

Standardize marketing Utilize internationally available know-how

Standardize product design Utilize synergies from global operations

Enforce global brand identification Benefit from operational flexibility

Standardize manufacturing Challenge competitor internationally

Strategic configuration of activities Exploit internationally available information

Total control of value chain Minimize tax liabilities


DMde value chain across borders Build up strategic alliances in sales

Utilize scale economies Build up strategic alliances In manufacturing

Concentration of production in key-locations Build up strategic alliances in R&D

Concentration on global key-markets Build up global market presence through licens-


ing

Table 31: Major dimensions of global strategy content


204 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

operating businesses (see Table 31)1. Unfortunately, the variety and ambiguity of these
concepts impedes a congruent defInition of what in particular is the defIning nature of global
strategies. In other words, literature describes many different strategy dimensions which do
not fit under a coherent global strategy umbrella. In Chapter 3.4 the concept of global
orientation was thus proposed as a more appropriate platform to describe the distinctness of
globalization. Although this from a methodological perspective clarified the question of what
global strategies share in common, a number of alternative dimensions of strategy content
remain. For the purpose of this research, the formulated strategy as a variable of the
structural context is examined in order to control the influence of different elements of
strategy content and their direct impact on c&d processes. An important research question
following from the heterogenous state of literature on global strategy thus addresses
prevailing elements of strategy content.

As described, a large part of literature on globalization has predominantly focused on geo-


graphical aspects of product-market scope and has classifIed generic categories of interna-
tional strategy along a global/non-global dichotomy. Mostly building on contingency and
industrial organization theory, it is commonly asserted that the characteristics of global
strategies primarily stem from the distinct - 'global' - nature of the industry in which the
business is operating.

Global industries are thus frequently described in terms of homogeneous customer needs and
purchasing practices and a uniform product awareness. These similarities allow fIrms to
market uniform products which can be produced with a standardized product technology.
Competition largely occurs between fIrms equally operating in all key-markets rather than
with domestic fIrms. The marketing of standardized world products is subject to consider-
able scale economies. Similarly, distribution channels often are concentrated.

The literature on global networks (Chapter 5.3) indicates that besides industry characteristics
also organizational factors have a vital influence on the formulation and implementation of
global strategies. In particular, the idea of a deterministic relationship between industry
and strategy, frequently presumed in literature, is challenged. This reflects a strategy con-
ception which does not limit elements of strategy exclusively to externally imposed industry
pressures, but explicitly recognizes the vital role of internal characteristics in shaping strat-
egy. In this respect, resource-based literature asserts that global strategies should systemati-
cally exploit core competencies of the fIrm on a global scale (Collis 1991, Tallman 1991,
Prahalad & Hamel 1990, Wernerfeldt 1984). Therefore, rather than a deterministic rela-
tionship between industry characteristics and strategy pattern, an interdependent
relationship between external variables such as industry, environment, internal objectives,
competencies, and strategy is assumed. Consequently, the second major research question
raised in this chapter addresses factors determining the formnlation of global strategy
content.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 205

&" Which are the prevailing elements of global strategy content?

&" Do specific strategy drivers lead to prevailing pattern of strategy content?

MEASURES

The examination of prevailing strategy patterns as well as the context in which strategies
were formulated builds on the evaluation of five sets of variables. Although it was generally
attempted to use existing measures of global strategy research, most constructs had to be
developed to meet the specific requirements of this study.

The first construct consisted of the 20 variables listed in Table 32. It was designed to capture
the core [mdings of the previously reviewed literature on strategy content (Chapter 3.3). In
particular, respondents were asked to evaluate the relevance of each of the 20 items for their
current strategy (see Question A.II.I and Fig. 40). To ensure the reliability of the measure,
in the interviews respondents were also instructed to verbally describe their current strategy
and to comment on their scores. In case of outstanding scores, especially in the case of
challenging competitors and configuration issues, interviewees were also requested to
provide explanations and examples.

In order to address the second research question, four additional constructs to the strategy
measure were directed at capturing (1) strategic objectives, (2) core competencies, (3)
industry characteristics and (4) perceived globalization drivers.

To further interpret the context in which global strategy patterns were formulated, respon-
dents were asked to indicate the importance of 11 strategic objectives for their businesses
(see Question A.I.I and Fig. 41). The measure distinguished: I-profitability, 2-rate of
growth, 3-country market shares, 4-global market share, 5-product quality, 6-productivity,
7-rentability, 8-innovation, 9-flexible organization, lO-modern equipment, and ll-employees
satisfaction2 • Due to its general significance for any form of economic activity, the objective
of profitability has the character of an overall objective whereas the subsequent goals can be
interpreted as sub-objectives which to some extent reveal the perceived importance in
contributing to the overriding objective.

The construct designed to reveal information about the internal resource configuration on
which the current strategy was based comprised of 9 items indicating typical core compet-
206 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

encies discussed in literature: I-technology, 2-innovation, 3-quality, 4-cost efficiency, 5-


management know-how, 6-market know-how, 7-personnel, 8-capital, and 9-information.
Respondents were asked to evaluate the importance of each item for the competitiveness in
their business and to indicate areas in which their firm had a strong position (see Question
A.II.7 and Fig. 42). In a more general question, interviewees were also asked whether they
considered the success of their business unit to be a function of competitive positioning or as
an outcome of optimal utilization of unique internal resources.

Industry cbaracteristics were captured using a 13 item industry construct which was
adapted from Morrison's (1990) study of strategies in global industries. This measure
contained relevant competitive factors which in the literature are frequently applied to
describe global industries (see Question A.II.5 and Fig. 43). In particular, Morrison
distinguished following industry characteristics: I-standardized customer needs, 2-
standardized purchasing practices, 3-competitor presence in all key-markets, 4-intensity of
domestic competition, 5-intensity international competition, 6-internationally concentrated
distribution channels, 7-scale economies determine profitability, 8-global product awareness,
9-legal restrains of international activities, lO-standardized product technology, ll-local
customer service required, I2-standardized competitor products, and 13-factor cost differ
from country to country. Respondents were asked to characterize the industry in which they
were operating by evaluating each item on a [1 (not characteristic) to 7 (extremely charac-
teristic)] scale.

Based on the literature review on globalization, another set of variables consisting of six
items was developed to capture the core globalization drivers underlying the current
strategy. Respondents were asked to indicate which factors primarily contributed to the
decision to pursue a global strategy (see Question A.II.4.I and Table 35). Pre-formulated
factors included I-global customers, 2-global competitors, 3-efficiency, 4-investrnent
amortization, 5-technology utilization, and 6-cost reductions (scale economies). In the
interviews, the issue of what in particular was considered as the major driving force towards
globalization was also discussed verbally.

FINDINGS

w Utilization of internationally available know-how and concentration on global key-


markets are the most evident elements of global strategy content.

On the basis of the received responses, Fig. 40 shows mean scores of the 20 strategy items
transformed from a scale of 1 (not relevant) to 7 (extremely relevant) to a [-100/100] index
of relevance.
Global Strategy Levers I
-
marketing standardization -~
product design standardi~ation
- I
JII
-
global brand identification

standardi~ed manufacturing JII



- -
strategic configuration
total control of the value chain
.-
, •
cross-border division of labour i
II1II f
o
utilize economies of scale JII
production In key-markets
~
concentrate on global key-markets
• ~
utilize globally available know-how
•III o
"r:I

utilize synergies from global operations Q


operational flexibility
• o
L~ '"'d
challenge competitor globally :::0
JII o
exploit global information
minimize tax liabilities
• §
~
strategic alliances in sales
Z
strategic alliances in manufacturing J o
strategic alliances in R&D S
licensing r- ~
I I I t""
-100 -75 -50 -25 o 25 50 75 100
Index of application
~
~
Fig. 40: Index of relevance of global strategy levers ~
208 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

Of all items, respondents rated the utilization of internationally available know-how and the
concentration on global key-markets followed by the enforcement of a global brand identifi-
cation as the most relevant elements of their current strategies. Following up are the utili-
zation of global synergies and the standardization of manufacturing. At the lower end,
results indicate little relevance of strategic alliances. The strikingly low relevance of dividing
the value chain across borders as well as that fact that firms hardly capitalize on the stan-
dardization of marketing activities seems to indicate that country borders are in reality far
more significant than conceptually conceived. The data also show that strategic dimensions
which in literature are assumed to be strongly related (e.g. standardization of marketing and
global brand enforcement) were not rated with equal importance. Spearman Rank correla-
tions (Table 32) as well as descriptive statistics (Table 33) were thus computed to analyze
data with respect to the independence of the variables and the distribution of the scores.
S~earman Rank Correlations
Strate9~ Variables' Mn. S.D. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 marketing standardization 4,3 1,1 1,0
2 product design standardization 5,2 1,9 0,1 1,0
3 global brand identification 6,2 0,8 0,0 0,4 1,0
4 standardized manufacturing 5,3 1,4 0,2 0,4 -0,3 1,0
5 strategic configuration 4,1 1,4 -0,1 ·0,3 0,0 -0,2 1,0
6 total control of the value chain 4,4 1,8 -0,4 0,2 0,3 0,4 0,1 1,0 C)
7 cross-border division of labour 3,0 1,1 0,0 0,1 0,1 0,1 0,1 0,0 1,0
~
m
8 utilize economies of scale 5,1 1,6 -0,1 0,3 0,4 -0,1 0,3 0,5 -0,3 1,0 ~
9 production in key-markets 5,0 1,7 0,1 0,0 -0,2 0,2 -0,4 -0,1 0,0 -0,1 1,0
10 concentrale on global key-markets 6,3 0,9 -0,4 0,3 0,2 0,1 -0,4 0,1 0,1 -0,1 0,0 1,0
~
11 utilize globally available know-how 6,3 0,9 0,0 -0,3 -0,3 0,2 -0,7 -0,1 0,0 -0,6 0,3 0,1 1,0 0"rj
12 utilize global synergies 5,4 0,9 0,0 -0,3 -0,2 0,1 0,0 0,0 0,0 0,1 0,7 0,3 0 ,0 1 ,0 n
13 operational flexibility 3,8 1,8 0,0 -0,3 0,1 -0,3 -0,2 -0,3 0,2 -0,2 0,6 -0,1 0,2 0,5 1,0 iI:'
14 challenge competilor globally 4,7 2,0 0,0 -0,4 0,2 0,0 0,1 0,0 -0,3 0,0 0,0 0,2 0,2 0,4 0,2 1,0 0
15 exploit global information 4,5 1,9 -0,1 -0,6 0,0 0,0 0,3 0,2 -0,2 0,2 -0,1 0,0 0,2 0,4 0,1 0,9 1,0 "'d
::>:l
16 minimize tax liabilities 3,3 1,1 -0,4 0,0 0,5 -0,3 0,4 0,1 0,6 -0,1 -0,5 0,3 -0,1 -0,3 -0,1 0,2 0,2 1,0 0
17 strategic alliances in sales 3,3 2,3 -0,3 0,0 0,6 -0,3 0,5 0,2 0,2 0,1 -0,8 0,1 -0,4 -0,4 -0,3 0,2 0,2 0,8 1,0 (")

18 stralegic alliances in manufac. 2,5 2,2 0,1 -0,2 0,4 -0,6 0,4 -0,3 0,0 0,2 -0,3 -0,4 -0,4 -0,1 0,4 0,3 0,2 0,4 0,5 1,0
m
C/l
C/l
19 strategic alliances in R&D 2,6 2,1 -0,2 -0,3 0,3 -0,7 0,5 -0,3 0,3 -0,1 -0,5 0,0 -0,4 -0,2 0,2 0,0 0,0 0,7 0,7 0,7 1,0
20 licensin~ 3,8 2,2 0,3 0,4 0,2 -0,1 0,2 0,0 0,0 0,5 -0,1 -0,6 -0,4 -0,5 -0,3 -0,6 -0,6 -0,2 -0,1 0,1 0,0 1,0 m
......
Z
• All variables mearsured on a 7-point scale ranging from 1 - not at all important for the current strategy to 7 - extremely important for the current strategy
0
S
IJj
Table 32: Spearman rank correlations of global strategy variables >
t"'"

~
~
C/l

N
0
\0
210 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMs

Listing inter-variable correlations, Table 32 indicates that the three standardization variables
(marketing, product design, manufacturing) and a global brand enforcement were not found
to be strongly related. All 20 strategy items were relatively independent showing only few
high correlations between one another. Exceptions of positive correlations included chal-
lenging competitors internationally which appeared to rest on the exploitation of global infor-
mation as well as utilization of global synergies. The latter item together with operational
flexibility, in tum, corresponded to manufacturing concentration in key-locations. The rela-
tionship shows that respondents did not necessarily interpret operational flexibility and a
strategic concentration of manufacturing as a trade-off. To the contrary, a concentration of
manufacturing at a few locations appeared to provide the flexibility which in turn facilitated
an exploitation of global synergies. Another expected exception was the strong positive
correlation between strategic alliances in different functional areas. This indicates that, if at
all independent firms engage in strategic alliances, cooperation is likely to span the entire
spectrum of managerial activity rather than only a specific functional area. Consistent with
the literature, results further revealed a negative relationship between the utilization of
internationally available know-how and both strategic configuration and utilization of scale
economies, two variables which typically stand for a concentration of activities.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 211

Mean Median S.D. Quartile Disp. Skewn Kur-


Strategy Dimensions Range Coeff. ess tosls
marketing standardization 4.3 4.0 1.1 2.0 0.25 0.3 -1.26
product design standardization 5.2 6,0 1.9 2.0 0.20 -1.3 0.95
global brand identification 6.2 6.0 0.8 1.5 0.12 -0.4 -1.45
standardized manufacturing 5.3 5.5 1.4 1.0 0.09 -1 .2 2.35
strategic configuration 4.1 4 .0 1.4 2.0 0.25 -0.4 -0.92
total control of the value chain 4.4 5.0 1.8 3.0 0.33 -0.5 -0.64
cross-border division of labor 3.0 3.0 1 .1 2.0 0.33 0.0 -0.34
utilize economies of scale 5.1 5.5 1.6 2.0 0 2. 0 -0.8 -0.43
production in key-locations 5.0 5.0 1.7 1.5 0 1. 4 -1.2 1.70
concentrate on global key-markets 6.3 6 .5 0 .9 1.5 0.12 -0.6 -1.45
utilize lnt. available know-how 6.3 6.5 0.9 1.5 0.12 -0.6 -1.45
utilize synergies from global operations 5.4 6.0 0.9 1.0 0.09 -2.0 4.37
operational flexibility 3.8 3.5 1.8 2.5 0.33 0.3 -0.47
challenge competitor internationally 4.7 5.0 2.0 3.0 0.33 -0.6 -0.73
exploit global information 4.5 4.5 1.9 2.5 0.26 -0.4 -0.49
minimize tax liabilities 3.3 3.5 1.1 1.0 0.14 -0.8 0.90
strategic alliances in sales 3.3 3.0 2.3 4.0 0.67 0.6 -1.07
strategic alliances in manufacturing 2.5 1.0 2.2 3.5 0.64 1.1 -0.16
strategic alliances in R&D 2.6 1.5 2.1 2.5 0.56 1.2 0.42
licensing 3.8 4.0 2.2 4.0 0.50 0.0 -1.82

(S.D.: Standard Deviation; Disp. Coeff.: Dispersion Coefficient)

Table 33: Descriptive statistics of global strategy dimensions

Table 33 illustrates moderate differences between means and medians of strategy scores as
well as low values of skewness. These measures of variability indicate that scores spread
equally and tightly around reported means. Except for external variables, low standard devi-
ations as well as moderate values of the distribution coefficient further support the homo-
geneity of means. Given these indicators of distribution, it can be concluded that reported
means in Fig. 40 validly represent the average strategy pattern of the sample.

Fig. 41 reports the relevance of strategic objectives as evaluated by respondents. Consistent


with expectations, profitability proved to be the dominating objective in regard to which
executives sought to optimize their business activities (mean: 6.75; s.d.: 0.45 on a 1-7
scale). Among the sub-objectives interpreted as significant contributors to profitability,
quality (mean: 6.00; s.d.: 1.41) outweighed the importance of other sub-objectives followed
by more or less equally ranging profitability, market share, and rate of growth. Especially
with respect to the literature emphasizing the converging nature of consumer markets, it was
expected that the global market share would be more relevant than the market share in single
country markets. Data, in contrast, showed these items to be equally relevant. The emphasis
on organizational flexibility by the literature on global networks reviewed in Chapter 5.3
212 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

tended to be only moderately expressed in the strategic objectives of the sample firms.

Strategic Objectives of Global Businesses

"
profitability
- - .,---
rate of growth
0- I

J!'

"
country market share

"
global market share

"
quality

productivity
• , J!'
rentability

innovation -- I
,
.
,
j
fiexible organization
• - -'I
modern equ ipment
-,-' .J!'

employee satisfaction III --
o
r
25 50 75
---
100

Index of relevance

Fig. 41 : Index of relevance of strategic objectives

In order to further understand internal strategy drivers, besides strategic objectives respon-
dents were also asked to evaluate typical core competencies with respect to their perceived
impact on competitiveness. As illustrated by Fig. 42, respondents considered market know-
how followed by quality and cost efficiency as the most relevant core competencies. Similar
to strategic objectives, technology and innovation were rated considerably lower. However,
it has to be noted that this measure did not show much variation. On average all items were
considered as relevant. Due to the moderate difference between means of the lowest and the
highest scoring item (6.42-4.42 = 2.(0), data evidence is only to a limited extent suitable to
distinguish the relevance of the items between one another.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 213

Core-Competencies determining Competitiveness

technology
III
.,
innovation

quality
-"

., •
cost efficiency

management know· how



,
market know· how
III - - II'
personnel

o 25 50 75 100
Index of relevance

Fig. 42: Index of relevan.ce of core competencies

As discussed earlier, this study examines the phenomenon of globalization without specifi-
cally concentrating on pre-classified global industries. Sample selection was rather oriented
at the selection of business units with considerable international presence. In chapter 9 it was
noted that data and case evidence was drawn from firms operating in industries ranging from
automotive (2), pharmaceutical (2), chemical (2), mechanical engineering (3), electronics
0), textile (1), to cosmetics (1).

Fig. 43 reports the average characteristics of these industries. Highest ranking items were
competitor presence in all key-markets and the requirement to provide a local customer
service. On average business activities in these industries were only to a limited degree
restricted by legal regulations. The existence of similar customer needs and a global product
awareness across country markets "allows firms competing in these industries to market more
standardized products. Competition occurs between internationally operating firms rather
than with domestic firms. Scale economies are reported to determine profitability. Although
these characteristics to some degree match the description of global industries, customer
service, differentiated distribution channels, and a low standardization of purchasing
practices still impose some differentiation of business activities between
214 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

Prevailing Industry Characteristics

standardized customer
needs
-
- - r
,
--"1---' - ' - - '

-~
,
standard ized purchasing
practices
- -
competitor presence in all
key-markets

,
intense domestic
competition
intense intemational
competition

,...
globally concen. distribution
channels -
-

,
scate economies determine
profitability ,
' -
"'''lE .., .......
:
I

global product awareness

,
/:"-"", ~
legal restrains of internat.
activities 1_-
standardized product
:wttr.4.
'." "
-,
technology
-
local customer service
required
I~
--
standardized competitor

~/
products
factor costs differ from
country to country /
I I I I I I I
-100 -75 -50 -25 o 25 50 75 100
Index of relevance

Fig. 43: Index of relevance of industry characteristics

country markets. However, it has to be noted that reported means show a high degree of
variability which indicates that industry characteristics varied to a considerable degree within
the sample (see Appendix D for detailed descriptive analysis).

Finally, the data on the most important drivers forcing management to adopt a global
approach, revealed only unsatisfactory descriptive results. Here, the high degree of homo-
geneity among score means significantly limits the identification of any outstanding items.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 215

The difference between means of the lowest and the highest scoring items is only 0.9 (5.3-
4.4). As reported in Table 34, measures of variability rank considerably high.

Globalization Drivers Mean Median S.D. Disp. Skew. Kurt.


customers are operating internationally 4.7 7 2.90 0.64 -0.43 -2.14
competitors are operating internationally 5.3 6 2 2. 3 0.21 -1.39 0.74
efficiency of operations 4.9 5 1.56 0.25 -0.52 -0.35
investment intensity 4.8 4.5 1.86 0.30 -0.17 -1.34
technology intensity 4.5 5.5 2.24 0.41 -0.59 -1.24
cost reductions 4.4 5 20
.2 0.41 -0.37 -1.10

(S.D.: Standard Deviation; Disp.: Dispersion Coefficient; ; Skew.: Skewness; Kurt.: Kurtosis)

Table 34: Descriptive statistics of globalization drivers

DISCUSSION

Subsequently, derived empirical evidence will be discussed separately for both previously
emphasized research questions. Thus, issues of global strategy content will be analyzed
before the question to which prevailing drivers different strategy elements relate is
addressed.

STRATEGY CONTENT

The literature on global strategy centers around a limited number of key ideas and concepts.
Elements of each of these core concepts were found in the sample. However, neither was
one of the concepts found to be exclusively applied, nor did any firm exactly match the cir-
cumstances in which the concepts are conceptually described in literature.

STANDARDIZATION
Although empirical evidence indicates a certain strategic relevance of standardization, a
general significance of standardization of products or marketing was not supported. Despite
the existence of both global customers (customer relationships to a single firm in multiple
countries) and similar customer segments in multiple countries, none of the firms was found
to have a completely standardized marketing. Similarities across country markets rather led
firms to standardize product design and enforce global brands. However, it has to be noted
that standardization of product design mostly led to identical core products which if
necessary were tailored to the specific local requirements. Firms operating in end customer
industries such as pharmaceuticals, automotive, or cosmetics typically ensured overall
adaptability of products by early and pro-actively anticipating indispensable variations
within the product development process. Rather than for similar global customer segments,
216 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

truly standardized products were more evident in firms serving global industry customers.
Here, delivering firms mostly provided an integrated service to all locations of customers,
for instance, by guaranteeing similar products, quality, delivering service, etc. at an inter-
nationally comparable price level. However, executives frequently expressed their dis-
comfort with describing this issue as standardization, preferring consistency or integration
instead.

Similar to the degree of product standardization, the sample showed a heterogeneous picture
with respect to the concentration of production capacity to utilize maximal scale
economies. On the one end, none of the firms had a world factory from which the entire
world demand was produced. Dynacast, on the other end, was the only firm which, due to
the lack of possible scale economies, produced in each country in which it was present. In
this particular case, the simple production process was realized on a single machine with a
limited technical capacity. An increase of output thus always required additional machines.
The establishment of a new production location, besides the necessary number of machines
to produce the market demand, required only minor additional investments which allowed
the firm to move production as close as possible to its markets. The rest of the sample firms
either concentrated their production capacities by product variations (Mannesmann(MH)'
DSM(ELTM)' Merck(PGMT)' Chargeurs(WTP)' Pirelli(TlRE)' Solvay(PHARMA)' Hoechst(PHARMA) ) or
regions (Siemens(ESP)' Volvo(VcC), SKF, Schwarzkopj(SALON»). Resulting manufacturing centers
were responsible for supplying the demand to multiple countries. In support of the literature
(Porter 1986), specializations by product variations were predominantly driven by economies
of scale. Regional concentrations, in contrast, were related to economies of scope, i.e.
sharing fixed asset among a number of subsidiaries.

In-depth analysis of the case material revealed that manufacturing processes were less
standardized because of identical products. In 6 of 12 cases (Siemens(ESP)' Dynacast, SKF,
DSM(ELTM)' Merck(PGMT)' Pirelli(TlRE»)' firms used some kind of prototype plant which served
as a model for the establishment of largely identical manufacturing facilities all over the
world (this includes also firms which specialized their manufacturing by product variations).
Executives predominantly related this evidence to high development costs of technologically
sophisticated machinery which impeded the development of individual plants tailored to the
requirements of each location. The adoption of similar manufacturing technologies further
enabled subsidiaries to interchangeably benefit from learning processes.

CONFIGURAnON
Another critical dimension of global strategy content is the configuration concept of Porter
(1986) which was briefly introduced in Chapter 3.3. Empirical evidence revealed only little
support of breaking the value chain across borders by concentrating functional segments
either for the sake of economies of scale or comparative advantages. As indicated above, if
at all, concentration appeared in the form of specialized manufacturing of products or
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 217

product variations. However, these configuration patterns only in case of Volvo(vcc) and SKF
resulted from strategic considerations. Both firms traditionally operated in industries which
technically required high volumes to sustain a minimum level of competitiveness. Volvo(vcC)
specialized on the manufacturing of a limited number of core components which with minor
variations were supplied to regionally neighboured production centers.

As the major impediment to Porter's views, executives expressed their concern about
missing risk considerations in the 'idealistic' concept. High transport and coordination costs
of intercontinental cross shipments of components as well as risks of disruption were
unanimously seen as outweighing possible scale economies from serving the worldwide
demand of any functional activity from a single location. However, apart from an extreme
application, elements of Porter's suggestions were frequently found. Many firms, for
instance, concentrated R&D activities in technologically leading countries to source available
know-how and cross-fertilize it throughout the rest of the firm. Similarly, changes of the
existing configuration, e.g. regional re-arrangements of the manufacturing structure, were
generally conducted from a global perspective.

OPERATIONAL FLEXIBILITY
In opposition to Porter's strategic configuration and concentration dimensions, operational
flexibility emphasize sequential advantages that can be gained from managing a network3
of well established assets in environments with different factor endowments. In case of
unfavorable exchange rate movements, for instance, established production capacities in dif-
ferent currency zones enable firms to shift orders on a short notice from one location to
another.

Similar to the previous strategy concepts, none of the sample firms practised the concept of
operational flexibility in the way it was described by Kogut (1985alb). Although volatile
environmental conditions as well as comparative considerations (i.e. shifting production
capacity to low-wage countries) were generally acknowledged, permanent rather than short
term solutions to changing environmental conditions were prevailing. With respect to volatile
exchange rates, fums proved to be more inclined to protect themselves rather than to benefit
from these developments. The most effective approach to hedge exchange rate developments
was seen in balancing demand and capacity in each currency zone.

In general, case evidence supported Kogut's (1989) reference to the crucial importance of
the management system that limits the ability of firms to exploit competitive advantages
arising from operational flexibility. In explaining their reluctance to the concept, most
executives cited reasons such as lack of equal quality standards and organizational flexibility,
limited managerial capabilities to coordinate short-term shifts, etc. Given poor organiz-
ational capabilities to implement sophisticated operational strategies, risks of failures were
again considered as outweighing potential pay-offs.
218 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

OTHER
Other core concepts of the global strategy debate in literature were equally not substantially
supported by the sample in their pretended exclusiveness. Although data analysis revealed
a low, but positive relevance of challenging competitors internationally, case evidence did
not provide any comparable example of cross-subsidization as described by Hamel &
Prahalad (1985) in the Michelin-Goodyear case. Although competition by top-management
was generally conceived in global terms, competitive battles explicitly transcending country
borders were not reported. Similarly, substantial evidence of horizontal strategic alliances
was only found in three cases. DSM(ELTM) and SolvaY(PHARMA) engaged in cooperative
agreements primarily for reasons of geographical expansion, i.e. to gain access to market
regions for which greenfield investments were considered too costly. On the basis of the
established relations, those firms then also began to cooperate in other fields (R&D,
manufacturing) .

Volvo(VCC)' the remaining case, strategically sought to compensate existing weaknesses by


engaging in partnerships with competitors. For instance, manufacturing know-how was
acquired through jointly operating the Dutch manufacturing plant with Mitsubishi. On the
corporate level Volvo was cooperating across multiple divisions with Renault, although this
only to a minor degree led to joint activities of the car divisions of both companies. In
prospect of the intended merger between Volvo and Renault, a closer cooperation also of the
car division was planned on multiple levels. Due to the reluctance of Volvo shareholders, the
merger was called off in late 1993. Although both firms expressed their willingness to
maintain the developed cooperative relationships, the future degree of actual cooperation was
generally considered as uncertain by the executives of Volvo's car division.

On balance, the empirical evidence allows the conclusion that different elements of global
strategy content were applied simultaneously and not in an exclusive pattern as regularly
pretended by the literature. Despite the low representativeness of the sample, the derived
empirical evidence clearly indicated that in 12 cases which all held a world leading position
in their industry segments none of the strategy concept was supported in the form it was
described in literature. It is important to note that these findings do not imply the
inappropriateness of discussed strategic options. To the opposite, many elements and
characteristics of concepts dominating the literature on global strategy content have been
found. However, literature provides only scant knowledge about interdependencies and the
context in which different elements of global strategy content are applied. The derived evi-
dence seems to suggest that prior studies have too narrowly focused on their specific field
of interest, ignoring other contributions to the field. More integrative research on global
strategy content conceiving different strategic dimensions as supplements rather than as
alternatives is needed (Boettcher 1994).
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marketing standaidization 0,5 0,2 -0,4 -0,5 0,0 -0,1 -0,2 0,0 0,2 -0,1
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product design standardization 0,0 0,4 0,0 0,3 -0,3 0,0 0,0 0,1 0,1 -0,6 -0,1 0,0 0,1 0,0 -0,3 0,0 -0,1 -0,2 -0,4 -0,3 ~
global brand identification 0,1 0,4 0,6 0,4 0,2 0,6 0,4 0,2 0,0 0,0 0,5 0,5 0,0 0,2 0,5 0,3 -0,3 0,0 0,2 0,3
standardized manufacturing -0,1 0,0 -0,3 0,1 0,1 -0,2 -0,7 0,0 0,4 -0,2 0,0 -0,1 0,1 0,1 -0,3 0,2 -0,1 0,1 -0,6 -0,4 ~
strategic configuration -0,4 0,0 -0,3 0,1 0,0 0,2 0,1 -0,3 -0,1 0,2 0,1 -0,1 -0,1 0,1 0,5 -0,4 0,2 -0,2 -0,2 0,2 0
total control 01 the value chain -0,4 -0,1 0,4 0,3 -0,1 0,4 -0,3 0,1 -0,1 0,1 0,2 0,4 0,4 0,3 -O,i 0.3 0,1 0,4 -0,3 0,2 '-r:I
cross-border division of labour -0,1 0,4 0,1 0,3 -0,2 -0,2 -0,4 0,2 -0,2 -0,5 -0,4 -0,2 0,4 -0,3 -0,1 -0,3 -0,1 -0,2 -0,1 0,3 n
utilize economies of scale -0,2 -0,2 0,3 0,1 -0,1 0,5 0,4 -0,2 -0,1 0,2 O,S 0,4 -0,4 0,5 0,2 0,0 0,1 0,0 -0,2 0,1 Ro
0,5 -0,2 0,3 -0,3 0,4 -0,4 0,5 0,3 -0,2
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production in key-markets 0,3 0,1 0,0 -0,1 0,2 0,1 -0,2 0,2 0,6 0,2 0,2 '"CI
concentrate on global key-markets -0,1 0,2 0,3 0,8 0,1 n,1 0,0 -0,1 0,1 -0,3 -0,1 0,0 -0,1 0,3 -0,1 0,2 0,2 0,2 0,1 0,2
utilize globally available know-how 0,0 -0,1 0,3 -0,1 0,3 -0,2 -0,1 0,5 0,0 0,1 0,0 0,1 0,2 -0,1 -0,1 0,4 0,0 0,3 0,4 0,3 ~
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utilize global synergies 0,2 -0,1 -0,1 0,2 0,5 0,3 -0,1 -0,3 0,6 0,4 0,2 0,4 -0,5 0,7 0,1 0,3 -0,3 0,5 0,3 0,0
operational flexibility 0,6 0,0 0,2 -0,2 0,5 0,1 0,0 0,1 0,4 0,3 0,3 0,5 -0,1 0,2 0,2 0,4 -0,4 0,4 0,6 0,1
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challenge competitor globally 0,1 -0,2 0,3 0,3 0,9 0,4 0,2 -0,3 0,4 0,6 0,6 0,4 -0,5 0,6 0,8 0,5 0,0 0,4 0,3 0,4 ~
exploit global information -0,1 -0,4 0,4 0,2 0,7 0,4 0,1 -0,3 0,1 0,6 0,5 0,4 -0,3 0,6 0,7 0,4 0,1 0,4 0,2 0,6 ......
minimize tax liabilities -0,4 0,2 0,4 0,7 0,1 0,1 0,2 0,0 -0,3 -0,2 0,0 0,0 0,3 0,0 0,5 -0,2 0,3 -0,1 0,0 0,7 Z
strategic alliances in sales -0,3 0,2 0,3 0,5 0,1 0,3 0,2 -0,1 -0,3 -0,1 0,2 0,0 0,3 -0,1 0,5 -0,1 0,2 -0,1 -0,1 0,4 0
strategiC alliances in manufac. 0,5 -0,2 0,1 -0,1 0,3 0,1 0,3 -0,3 0,0 0,1 0,2 0,1 -0,2 0,1 0,7 -0,1 -0,1 -0,2 0,1 0,1 S
strategic alliances in R&D 0,1 0,1 0,0 0,2 0,0 0,0 0,3 -0,2 -0,2 -0,1 -0,1 -0,2 0,0 -0,2 0,4 -0,4 0,1 -0,3 0,2 0,3
licensing -0,1 0,2 -0,2 -0,4 -0,6 0,0 0,3 0,2 -0,3 -0,2 -0,1 -0,1 0,0 -0,4 -0,2 -0,4 0,0 -0,5 -0,3 -0,3
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Table 35: Spearman rank correlations between strategy variables, strategic objectives, and core competencies en
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marketing standardization -0,2 0,6 -0,1 0,3 -0,1 -0,1 0,0 -0,5 -0,1 0,3 -0,3 0,0 0,0 0,0 -0,2 0,5 -0,5 -0,3 0,1 0
product design standardization 0,6 0,1 0,0 0,0 0,4 0,1 -0,1 -0,1 0,2 -0,2 0,0 0,7 -0,6 0,3 0,4 0,2 -0,1 -0,2 0,2 (")
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global brand identification 0,3 0,2 0,6 0,4 0,5 0,1 0,2 0,2 0,3 -0,3 -0,2 0,3 0,0 0,4 -0,2 0,1 0,0 0,3 0,3 CI.l
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standflrdized manufacturing 0,2 -0,4 -0,3 -0,3 -0,3 0,0 -0,3 0,0 -0,4 0,2 0,2 0,2 -0,4 0,4 0,4 0,0 -0,2 -0,1 -0,2
strategic configuration -0,5 -0,1 0,3 0,3 -0,4 -0,2 0,4 0,0 0,0 0,0 0,0 -0,2 0,0 -0,2 -0,1 0,3 0,1 0,1 0,3 m
total control of the value chain 0,2 -0,4 0,2 0,0 0,0 0,3 0,2 0,5 0,0 -0,6 0,2 -0,1 -0,3 0,3 0,3 -0,3 0,4 0,3 0,2 Z
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cross-border division of labour 0,4 -0,3 0,6 -0,2 -0,1 -0,1 0,4 -0,4 0,4 -0,1 -0,6 0,6 -0,3 -0,1 0,6 -0,1 0,5 -0,3 0,0 0
utilize economies of scale -0,2 0,3 0,1 0,1 0,3 0,3 0,3 0,3 -0,1 -0,3 0,1 -0,2 0,2 0,1 -0,1 0,3 0,2 0,6 0,8
production in key-markets -0,3 0,1 -0,6 0,1 -0,3 0,5 -0,4 0,4 -0,3 0,3 0,4 0,0 0,5 0,5 0,1 0,4 0,1 0,3 0,3
S
concentrate on global key-markets 0,5 -0,3 0,1 -0,6 0,5 -0,3 0,1 0,3 -0,1 -0,1 0,1 0,3 -0,1 0,1 -0,2 -0,1 0,1 0,0 -0,2 ~
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utilize globally available know-how 0,3 -0,3 -0,1 -0,3 0,1 -0,2 -0,5 0,0 -0,3 0,0 -0,2 -0,1 0,2 0,1 0,1 -0,5 0,0 0,1 -0,6
utilize global synergies -0,5 0,0 -0,3 -0,1 -0,3 0,2 0,1 0,5 -0,5 0,3 0,4 -0,3 0,6 0,4 -0,4 0,5 0,1 0,4 0,4 ::!t
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operational flexibility -0,4 0,3 -0,1 0,3 -0,3 0,5 0,0 0,2 0,0 0,5 0,1 0,0 0,7 0,4 -0,2 0,1 0,0 0,2 0,3 3::
challenge competitor globally -0,3 -0,2 0,1 -0,1 0,0 -0,3 0,0 0,4 -0,7 0,4 0,1 -0,5 0,6 0,4 -0,6 0,0 -0,4 0,6 0,0 CI.l
exploit global information -0,4 -0,3 0,3 -0,2 0,0 -0,3 0,2 0,3 -0,6 0,1 0,0 -0,6 0,5 0,2 -0,4 -0,1 -0,1 0,6 0,1
minimize tax liabilities 0,4 -0,4 0,9 -0,2 0,3 -0,4 0,4 -0,1 0,3 -0,1 -0,5 0,4 -0,2 -0,2 0,2 -0,3 0,2 0,1 -0,1
strategic alliances in sales 0,3 -0,2 0,7 0,1 0,3 -0,3 0,3 0,0 0,3 -0,2 -0,2 0,1 -0,3 -0,1 -0,1 -0,3 0,0 0,0 -0,1
strategic alliances in manufac_ -0,4 0,5 0,4 0,4 0,0 0,2 0,4 -0,2 0,3 0,4 -0,2 0,1 0,3 0,0 -0,3 0,1 -0,3 0,1 0,4
strategic alliances in R&D -0,1 0,1 0,6 0,2 0,0 -0,1 0,5 -0,3 0,5 0,1 -0,3 0,2 0,0 -0,4 -0,2 0,0 0,1 -0,2 0,1
licensing 0,0 0,4 -0,1 0,4 0,1 0,2 0,0 -0,3 0,3 -0,3 -0,2 0,2 -0,2 -0,2 0,4 0,3 0,1 -0,1 0,4

Table 36: Spearman rank correlations between strategy variables, industry characteristics, and globalization drivers
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 221

STRATEGY DRIVERS

The second research question raised in the introductory section of this chapter was con-
cerned with relationships between strategic objectives, core competencies, industry
characteristics, and perceived globalization drivers. Based on the previously reported
fmdings, this section seeks to identify possible relationships between these constructs which
beyond single cases may be generalized for the sample.

In order to statistically identify possible strategy determinants, Spearman rank correlations


have been computed between the four context (strategic objectives, core competencies,
industry characteristics, globalization drivers) and the strategy construct (see Table 35 and
Table 36).

The most outstanding case evidence that is also reflected by the data is that the sample firms
were predominantly competing on quality rather than on price or on-going technological
innovations. 6 of 12 firms owed their exceptional competitive position to technological
leadership in their industry segment. Technological superiority, however, in all cases
evolved historically. The achieved competitive position was mostly relatively stable. Similar
to those firms which were primarily competing on downstream advantages (e.g. positioning
of product, addressing of market niches), sustaining the leadership position was depending
on quality improvements rather than on on-going technological innovations or price
competitiveness. This evidence is also supported by the data which reveal that quality as a
global objective and as a core competencies was consistently highly correlated with a
strategic emphasis on global competition and the utilization of global synergies. Apparently
due to the lack of control over partners in foreign countries, it was negatively correlated
with licensing. Besides the quality focus of strategies, other relationships that can be
interpreted from the data include:
~ Firms seeking to maximize their global market share, concentrated on global key-
markets and engaged in strategic sales alliances rather than they attempted to be
equally present in all countries. They relied to a lesser degree on marketing standard-
ization.
~ Contrary to what was expected from the literature, marketing standardization was
found to be negatively correlated with global market share maximization and global
product awareness. However, it was positively correlated with standardized purchas-
ing practices. Due to the overall low relevance of standardized purchasing practices,
it seems that firms are more often seeking to exploit the benefits of global brands.
~ Consistent with expectations, product standardization related to identical customer
needs and competitors equally marketing standardized products. With respect to this
particular aspect, data and case evidence supported a strong industry-strategy link
indicating that forever which reason relatively standardized products were prevailing.
222 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

~ Strategy elements which seek to benefit from global dispersion corresponded to


industries in which high factor cost differentials were prevailing.
~ Cost reductions and technology intensity were mostly perceived as primary
globalization drivers by firms which sought to exploit economies of scale. The low
correlation of scale utilization and industries in which scale economies determine
profitability indicates that scale based strategies were not necessarily imposed by the
industry environment. Consequently, a strategic focus on scale economies to a degree
also resulted from individual strategic considerations of particular firms.

Neglecting for a moment the unverified representativeness of the findings, the dominance
of quality bears interesting implications for the debate on global competitiveness. Based on
Schumpeter's views, the importance of on-going mostly technology or product driven
innovations as most enduring means for sustained competitive advantage is frequently
emphasized in the strategic management literature. The present data of strategic objectives
and core competencies, in contrast, suggest that sample firms notwithstanding on-going inno-
vations place much greater emphasis on actually implementing a given technology to a
degree that results in enhanced competitive advantages in the form of product and service
quality. The relevance of this evidence is additionally supported by the fact that sample firms
were predominantly global leaders in their particular industry segments. Suffice to mention
that both technological competence and cost efficiency were still found to be enduring pre-
requisites of competitiveness. However, findings indicate that competitive focus has shifted
from technological to quality leadership. With respect to the current study, the shift
towards quality objectives is in line with the basic assumption that rather than strategic posi-
tioning, the organizational implementation of strategic concepts imposes the greatest
challenge for most international firms4.

On balance, it can be noted that the derived evidence neither with respect to strategy content
nor with respect to strategy drivers revealed a consistent pattern. In this respect, global
strategy content proved to be too complex for simple explanations in terms of linear cause-
effect-relationships such as homogeneous customer needs require standardization, etc. What
is required, is a global strategy typology building on the in-depth analysis of global strategy
content (see Boettcher 1994).

Next, the empirical evidence on the structural context variable activity configuration will be
introduced.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 223

10.1.3 ACTIVITY CONFIGURATION

Drawing on the c&d framework the existing activity configuration is conceived as the third
variable of the structural context. The configuration of functional activities captures the
physical distribution of functional activities across geographically dispersed organizational
units and, in particular, their degree of concentration and duplication across these units. The
activity configuration thus determines the degree of international coordination required to
integrate the dispersed value-added process (Roth 1992). From this perspective, the existing
activity configuration to a degree even allows to draw general conclusions regarding the
geographical pattern of the value-added process. If, for instance, the analysis of the activity
configuration reveals a certain degree of activity concentration, some degree of division of
labor across borders can be expected. This accounts, if functional activities are concentrated
in other locations than that of the top-management and different types of concentrated
activities are configurated in different countries. The centralization of functional activities
at headquarters as well as the duplication of functional activities at many locations, in
contrast, is assumed to reflect a low degree of division of labor across borders. As previ-
ously outlined, the application of Porter's (1986) ideas in a conceptual extreme results in an
activity configuration in which different types of functional activities are located in different
countries whereby each functional center is serving the worldwide demand of its kind.

However, it is important to note that the current activity configuration does not validly
reflect the extent to which the configuration is an outcome of strategic considerations in
the sense of Porter (1986), or whether it is the result of any deliberate decision-making
process at all. Previous empirical studies on the patterns of foreign direct investments of
MNCs rather indicated that the historic expansion of MNCs, in terms of geographical locus
of initial investments as well as the degree of local content, evolved over time.
Configuration decisions seldom followed a deliberate strategy, but emanated from the
realization of short term and unexpected opportunities (Stopford & Wells 1972). It is,
therefore, recognized that the current configuration to a considerable degree may be an
outcome of the historic evolution of the firm. Since changes in the configuration are
regularly associated with high in- or divestments, it is assumed that the adaption towards a
global configuration is a long-term and incremental process. In this case, the examination
of the current configuration is thus only a snapshot which is not appropriate to generally
support or reject Porter's strategic presumptions described in Chapter 3.3 and 7.2.3.

A second conclusion that can be derived from the examination of the current activity con-
figuration is the status of headquarters. With respect to the previously highlighted change
in the role of headquarters, it was expected that headquarters activities of global firms would
be limited to managerial tasks and that this would also be reflected by a lower number of
functional activities at the location of headquarters. Headquarters of pre-global firms tended
to centralize activities at their historic location (e.g. Ford, Bayer) which often resulted in a
224 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

too close affinity between headquarters and the domestic operation. In these cases, top-
management tended to manage the worldwide business with an ethnocentric attitude
(perlmutter 1969). In the era of globalization, in contrast, it was demanded that all country
activities should be conceptually emancipated (Ohmae 1989).

Recently, many MNCs are reported to have moved their headquarters away from their
historic sites, since the location of headquarters is of declining importance as long as appro-
priate communication links are installed to dispersed operational units. Based on some
prominent examples such as ABB (Taylor 1991) or IKEA (Bartlett & Ghoshal 1992b: 69-
87), it is asserted that global firms take advantage of lean headquarters which, decoupled
from operational activities, primarily serve as managerial communication centers. These
typically only comprise the most essential management facilities required to coordinate
internationally dispersed operational activities. On the basis of the conceptual distinction
between the managerial and the operating core, it was expected that global firms would
reflect a clear distinction between top-management and operational activities (see RQ7_1 in
Chapter 7.2.1). In this respect, the extent to which headquarters are geographically distanced
from essential functional activities is interpreted as an indicator of this distinction.

In summary, following research questions emanating from the previous discussion can be
noted:

&> To which extent does the existing activity configuration of firms reflect patterns of
a strategic configuration?

&> To which extent are headquarters of global firms separated from operational

activities?

MEASURES

The configuration construct used to describe the distribution of functional activities within
global firms builds on a measure for the study of configuration and coordination issues in
international firms developed by Roth et al. (1991). Since the present focus concentrates on
the physical configuration, the measure had to be adapted to the specific needs of this study.

In order to capture the current activity configuration, respondents were asked to indicate the
pattern of configuration for different categories of functional activity (see Question c.rr.l
and Fig. 44). Corresponding to Porter's concept of the value chain six categories of primary
and five categories of support activities were distinguished. Respondents had to indicate their
functional configuration by selecting one of four possible options for each type of activity.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 225

In particular, following options were given:

(1) The activity is performed at multiple international locations, serving the local
demand.
(2) The activity is only performed at the location of the top-management, serving the
entire business unit.
(3) The activity is performed at multiple international locations, serving both the
local market and neighboured markets.
(4) The activity is only performed at one international location, serving the entire
business unit.

Options (1) and (2) reflect a low extent of dividing the value chain across borders. The
configuration of functions according to option (1) points to a high degree of local self-supply
and thus to a low degree of division of labor across borders. High frequencies of option (2)
for many functional segments are assumed to indicate large centralized headquarters while
low frequencies are associated with the previously described image of headquarters as a lean
communication centers. It is important to note that option (2) only refers to activities which
are serving the entire business from the location of headquarters. Thus, a low indication of
this option does not exclude activities serving the local demand or that of neighboured coun-
tries. Options (3) and (4) indicate some degree of concentration of functional activities
reflecting that components, goods, or services are at least to some degree exchanged among
subsidiaries.

In the interviews, executives were additionally asked to evaluate the costs and risks of
coordinating the value-added process across borders on the basis of a concentrated
configuration (Question C.III.S).

FINDINGS

8" Support activities tended to be more concentrated than primary activities.

8" Downstream activities tended to be duplicated, upstream activities tend to be

concentrated.

Table 38 lists the frequencies of each of the four options for each of the distinguished
categories of functional activity. Data evidence reveals that support activities tended to be
more concentrated than primary activities. Support activities generally present a hetero-
226 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

geneous picture. R&D activities showed the highest degree of concentration at headquarters
or at selected subsidiaries. While information systems were found to be equally located at
headquarters and subsidiaries, accounting and human resource activities tended to be
performed locally by each subsidiary.

Performed by each Concentrated Concentrated at Concentrated at one


Subsidiary atHQ some Subsidiaries Subsidiary
Product R&D 33% 59% 8%
Process R&D 50% 33% 17%
Accounting 67% 25% 8%
Info Systems 41% 42% 17%
HRM 83% 17%
Sourcing 25% 17% 50% 8%
Manufacturing 8% 8% 67% 17%
logistics 67% 8% 17% 8%
Service 92% 8%
Promotion 75% 25%
Marketing 83% 17%

Table 37: Configuration of functional activities

The [mdings reported in Table 37 and Fig. 45 reveal that downstream activities tended to be
located at each subsidiary, mainly serving the local demand. This includes activities in the
fields of logistics, service, promotion, and marketing. Consequently, a low degree of
division of labor across borders in these areas can be concluded. More upstream based
activities such as sourcing and manufacturing, in contrast, tended to be more concentrated
either at headquarters or at selected subsidiaries. The fact that manufacturing activities were
predominantly concentrated in some locations points to a high relevance of regional
production centers, serving regional demands.

In general, findings indicate that the vertical network density between upstream activities
was much higher than that of downstream activities which each subsidiary was found to
perform rather independently. However, since the applied measure did not distinguish
different manufacturing process activities, the data does not allow to derive at any con-
clusion with respect to the actual degree of cross-shipments of semi-finished products or
components between subsidiaries.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 227

Configuration of Functional Activities

1000/.

Performed by each Subsidiary

Concentrated at some Subsidiaries


Concentrated at one Subsidiary

Fig. 44: Activity configuration

DISCUSSION

Due to the lack of a longitudinal perspective, the results are not generally appropriate to
support or reject the ideas of Porter (1986) with respect to a strategic configuration of
activities on a global scale. They allow, however, to speculate on the suitability of some of
his conceptual presumptions.

The empirical evidence, for instance, supports his notion that upstream activities are more
subject to concentration while downstream activities tend to be duplicated at each local unit.
Apart from manufacturing and R&D, the low indication of concentration of activities serving
the worldwide demand from a single location was striking. In this respect, findings indicate
228 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

that Porter's configuration concept appears to be more relevant on a regional scale. This
conclusion was also supported by case evidence. Executives predominately classified the
risks and costs of coordinating the value chain across as far exceeding potential scale econ-
omies. As previously noted, with the exception of Volvo rvcc), no other firm had a truly
concentrated value-added process in which the worldwide demand of single components was
manufactured in specialized locations. More often than strategic configurations along
different stages of the production process, some forms of subsidiary specialization in regard
to product varieties and technologies were reported.

The findings further disclosed a low degree of functional concentration at the location of
headquarters. Although data did not reveal information about the actual size of activities at
the location of headquarters, it shows that the sample firms did not clearly resemble the
previously described historic center image. However, interviews and verbal discussions led
to the conclusion that the idea of a lean headquarters serving as a communication center was
only supported by 3 of the 12 firms (Dynacast, ChargeursrWTP)' SolvayrPHARMA). In case of
Chargeurs rWTP) and Solvay(PHARMA)' business unit headquarters comprised of only 10-15
persons. Located at corporate headquarters, top-management executives of these business
unit were geographically distanced from operational activities. Thereby, Solvay(PHARMA)' apart
from headquarters, had no other substantial business activities in the country. In the case of
Dynacast, top-management executives shared the location with the centralized R&D depart-
ment. All other business activities were geographically dispersed among subsidiaries. The
remaining firms did not show a decisive separation between headquarters and operational
units in terms of geographical distance.

On balance, the activity configuration can be described as neither extremely concentrated


nor totally undifferentiated. Support and upstream activities tended to be more concentrated
while downstream activities were mostly found to be duplicated at each subsidiary.

Next, empirical evidence on the forth structural context variable - decision-making


configuration - will be discussed.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 229

10.1.4 FORMAL CONFIGURATION OF DECISION-MAKING


RESPONSmILITY

Decision-making is considered as a fundamental dimension of organizational design. For the


present argumentation it is understood as the formal decision-making power along the
hierarchical line of authority (Mintzberg 1979). The formal configuration of decision-
making responsibility captures the trade-off between centralization and decentralization of
managerial responsibility among headquarters and subsidiaries (Welge 1983). Centralization
is often seen as contributing to a better functioning of firms, since decision-making at the top
ensures goal consistency and coordinated behavior among organizational sub-units. Given a
complex organizational process, however, centralized decision-making tends to result in top-
management overburden, poor quality of decisions (lack of specific knowledge about
conditions at the subsidiary level), and a poor motivation of subsidiary managers (Mintzberg
1979, Galbraith 1977). Consistently, many studies have found organizational complexity to
be associated with more decentralization (Goehle 1980, Picard 1977, Lawrence & Lorsch
1967). On the basis of the sketched dichotomy, decentralization on the subsidiary level is
predominantly connected with decision-making autonomy (Welge 1985). Given the apparent
variety of managerial decisions, the appropriate degree of centralization is subject to a
number of factors which are not likely to be homogeneous. Thus, it is expected that the
configuration of decision-making responsibility between headquarters and subsidiaries varies
from functional area to functional area.

Interpreting the formal configuration of decision-making responsibility as a variable of the


structural context results from the assumption that the decision-making configuration is an
important formal determinant of c&d interactions. Since both a complete centralization or
decentralization conceptually neglects c&d interactions between subsidiaries involved in
the operational process, formal configuration of decision-making responsibility is considered
as a continuum in which degrees of centralization vary across different managerial areas.
Intermediate levels of the centralization-decentralization continuum, for instance, include
joint decision-making and forms of conditioned autonomy. In the latter case, decentralized
decision-making is subject to certain conditions and overall guidelines. Regardless of the
specific pattern, the formal decision-making configuration is conceived as the stable environ-
ment in which c&d interactions are expected to emerge.

Given the presumed hierarchical relationship between top-management and subsidiaries (see
Chapter 8.1.2), the primary focus of this chapter is on the extent to which operational
decision-making responsibility is formally delegated to subsidiaries. Thereby, the present
chapter does not follow the purpose of reflecting the general appropriateness of these formal
arrangements in the specific context of each firm. The delegation of formal decision-making
responsibility is rather interpreted as a moderating factor which is controlled for its
potential impact on c&d interactions. Consequently, this chapter will restrain from a
230 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

discussion of the reported findings. The focus will be on the presentation of the reported
findings while their discussion and interpretation will be discussed in combination with the
evidence of managerial context variables.

MEASURES

Respondents were asked to indicate the extent to which decision-making responsibility was
centralized or delegated to subsidiaries for 12 different areas of decision-making (see
Question C.VII.I and Fig. 45). In particular, I-competitive approach, 2-strategy, 3-
structure, 4-operational procedure, 5-market prices, 6-marketing-mix, 7-investments, 8-
finance,9-accounting, lO-manufacturing, ll-management staffing, and I2-R&D have been
distinguished as distinct areas of decision-making. To enable respondents to also indicate
intermediate degrees of centralization or decentralization, a five item measure was used:
(1) top-management decides alone
(2) top-management decides, but subsidiaries can and do provide suggestions
(3) top-management and subsidiaries have roughly equal influence on decisions
(4) subsidiaries decide, but top-management can and does provide suggestions
(5) subsidiaries decide alone

In the interviews, top-executives were additionally questioned whether they considered the
implementation of a global approach to require a centralization or a decentralization of
decision-making (Question C. VII.2).

FINDINGS

8" Cooperative forms of decision-making are dominating over autonomous decision-

making either on top-management or subsidiary level.

Table 38 and Fig. 45 present the frequencies with which respondents rated each of the given
options for each area of decision-making. Across all areas it can be noted that decision-
making configurations in which top-management and subsidiaries have some degree of
influence are clearly dominating. In particular, the second option, reflecting top-management
decision-making on subsidiaries suggestions, tended to be the most representative pattern of
decision-making across the sample. Only very few firms relied on forms of autonomous
decision-making either on the top-management or the subsidiary level. These results support
the initial assumption that prevailing configurations of formal decision-making transcend the
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 231

Configuration of Decision-Making Responsibility

100%

structure
operational procedure
market prices

TM decides alone
TM decides on SUBs suggestions
TM and SUBs jointly decide
SUBs decide on TM suggestions
SUBs decida alone

Fig. 45: Formal configuration of decision-making responsibility

dichotomous straightjacket of centralization vs. decentralization. Consistent with previous


studies (Neghandi & Welge 1984, Hedlund 1981, Welge 1981), in important areas such as
competition, strategy, structure, finance, accounting, and R&D the influence of top-
management on decision-making was found to be dominating. Decision-making
responsibility in downstream areas such as operational procedure and market prices, in
contrast, was more often delegated to subsidiaries.

Executives often expressed their conviction that operating on a global scale due to
complexity and motivational reasons inevitably required a decentralization of operational
decision-making. With respect to strategic issues, however, it was predominantly felt that
for final decision-making, centralization at the top-management level was ultimately
required. Executives frequently pointed out that they at any level considered autouomous
decision-making in the face of manyfold and steadily increasing interdependencies as
inappropriate.
232 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

Autonomously TM decides on TMend SUBs decide Autonomously


decided by TM SUBsugges- SUBs decide on TMsug- decided by
lions jointfy gestions SUBs
competitive approach 50% 25% 25%
strategy 17% 50% 33%
structure 17% 42% 33% 8%
operational procedure 8% 17% 42% 33%
market prices 8% 17% 42% 33%
marketing-mix 83% 17%
investments 8% 34% 33% 25%
finance 92% 8%
accounting 42% 42% 8% 8%
manufacturing 25% 33% 9% 25% 8%
management staffing 33% 34% 33%
R&D 25% 58% 17%

(TM = Top-Management; SUB = Subsidiary)

Table 38: Configuration of decision-making responsibility

On balance, formal configuration of decision-making responsibility varied across different


functional areas. It can be noted that sample fIrms, apart from a few administrative areas,
predominantly relied on forms of joint decision-making. Although decentralization in
operational areas was considered as indispensable, decision-making autonomy was largely
rejected as being inappropriate.

The next chapter is devoted to the discussion of patterns of possible relationships between
the distinguished structural context variables.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 233

10.1.5 RELATIONSHIPS BETWEEN VARIABLES OF THE STRUCTURAL CON-


TEXT

After the evidence on formal structure, strategy, activity, and decision-making configuration
have previously been discussed isolatedly, the purpose of this chapter is to briefly discuss
possible relationships between the distinguished structural context variables.

In Chapter 5.2, it was shown that much of the literature grounding on the 'structure follows
strategy' paradigm was only to a limited extent able to describe and explain existing organiz-
ational problems of MNCs. A closer examination of the assumptions underlying prevailing
argumentations revealed that presumed cause-effect relationships tended to narrowly focus
on strategy typologies and formal archetypes. Especially for MNCs, these broad
conceptualizations failed to adequately reflect the managerial situation of responding to the
emerging trend of globalization.

Addressing these deficiencies, the empirical examination of formulated strategies in chapter


10.1.2 was not based on the operationalization of a conceptually developed generic strategy
typology, but focused on the different areas of strategy content discussed in the relevant lit-
erature. Formal structure, on the other hand, was similar to the 'structure follows strategy'
literature operationalized as the existing formal archetype. Different from this literature,
however, this research has conceptualized the formal structure exclusively as a variable of
the structural context. This explicitly recognized the outlined limitations of formal arrange-
ments in actually determining the organizational process. Furthermore, activity and decision-
making configuration, due to their structural character, have been introduced as additional
variables. Since the delineation of the c&d framework was based on the general assumption
that different structural context variables do not generally determine each other in a clearly
identifiable pattern, the subsequent discussion intends to verify this assumption in the light
of the derived empirical evidence.

For the identification of possible relationships between structural context variables, the small
sample size restricts a meaningful statistical examination of the data. The identification
of deterministic relationships thus has to emanate from exploratory exploitation of the
derived evidence. In order to support the interpretation of this issue, executives were asked
to briefly introduce the history of their firms with respect to the distinguished structural
context variables. Moreover, they were questioned to comment on the factors which they
conceived as the core determinants of the current arrangement of the structural context
(Question A.I1.W, C.1.8, C.II.6).

In general, the interviews did not reveal any clear determinism between variables of the
structural context. The evidence derived from the description of the firms' 'administrative
heritages' (Bartlett 1986) revealed that in most firms structural context variables
234 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

interdependently influenced each other in the course of time. Especially the previously
challenged 'strategy follows structure' paradigm was not supported in its presumed linear
cause-effect determinism.

SKF, for instance, decided in the early seventies not to follow the by that time fashionable
trend towards diversification. Instead, the fIrm committed itself to a further concentration on
the core business in which it was operating for more than 50 years. Based on the confIrma-
tion of the existing strategy, it was decided to strengthen competitiveness by concentrating
the so far duplicated manufacturing facilities in a few selected locations. The objective was
that each product group should only be produced at one location. Due to the expected
improvements in cost efficiency and quality, a global functional structure was considered as
the most appropriate formal structure. At the time the fIrm was examined in 1993, the reor-
ganization and re-confIguration process was with the introduction of the 5th formal
reorganization since 1970 fInally completed. Executives attributed the long duration of the
process to the successive learning approach which the fIrm underwent. Rather than
establishing intended changes immediately, the fIrm relied on evolutionary steps which
focused on maintaining successfully established achievements while introducing organiz-
ational changes in areas requiring improvement.

The described example exemplifIes that in the case of dynamic changes, the interrelation of
structural context variables makes it extremely difficult to distinguish cause from effect
and vice versa. Based on executives' comments on the most important factors that deter-
mined their existing structural context, it became evident that the structural context across
all 12 cases appeared to have been determined by a whole number of partly very unique
factors. These include the appointment of a new CEO (Volvo(vcC)), related and unrelated
acquisitions of fIrms (Dynacast, Chargeurs(WTP), Solvay(PHARMA) , historically derived
geographical dispersion (Pirelli(TlRE) , Hoechst(PHARMA) , historically derived culture
(Mannesmann(MH) , Schwarzkop/rSALON)' changing environmental conditions (Siemens(ESP) ,
Dynacast) , negative results due to the recession of the world economy (Volvo(vcc) ,
Schwarzkop/rSALON)' enduring shifts in exchange rates (Dynacast, DSM(ELTM) ' Merck(PGMT)'
emergence of new technologies or competitors (SKF), failed take-overs of competitors
(Pirelli(TlRE)' etc.

All these factors have in common that neither changes in industry nor in strategic
reorientations inevitably led to changes of structure as asserted by the 'structure follows
strategy' paradigm. In contrast to the previously described case of SKF, other sample fIrms
predominantly maintained their formal structures even in case of strategic re-orientations and
changes of the activity confIguration.

Similar to SKF, a number of fIrms pursued re-confIguration projects directed at concen-


trating a certain functional activity for a region or a product group. Depending on the
underlying situation, these projects were found to be implemented both in pursuit and in spite
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 235

of the formulated strategy or formal structure. In other cases, management sought to enforce
a more homogenous market approach by standardizing product design, brand image, and
some marketing mix elements. These strategic re-orientations equally proceeded with the
managerial or operational formal structure left unchanged. Changes in the formal structure,
on the other hand, were often initiated by new executives or imposed by the corporate body.
In case of Volvo(vcc) and SKF the interviews coincided with top-management's struggle to
formulate a new strategy after a major reorganization of the formal structure was
introduced. As will be discussed in more detail in a subsequent chapter, the formal
configuration of decision-making responsibility between headquarters and subsidiaries was
often modified on the basis of an unchanged formal structure. Likewise, changes in the
formulated strategy and activity configuration were not described as regularly leading to
modifications of the decision-making configuration.

By generally evaluating the industry-strategy-structure interface, it has to be noted that the


sample firms with very few exceptions had worldwide leading positions in their particular
industries. 7 out of 12 firms (Chargeurs(WTP)' Mannesmann(MH)' Siemens(ESP)' SKF, Dynacast,
DSM(ELTM)' Merck (PGMT) mostly due to technological barriers of market entry, enjoyed
relatively stable competitive conditions. Based on a long established know-how basis and the
achieved technological leadership position, the success of these firms primarily appeared to
be depending on factors like efficiency, quality, flexibility, etc. This made the internal
organizational process a primary object of top-management attention.

From the remaining group of five firms, three firms (Volvo(vcc), SchwarzkopfrsAwN)'
Pirelii(71RE} were primarily competing on end-consumer markets in which permanent product
improvements, quality, and excessive consumer marketing were prevailing. Finally, the 2
pharmaceutical business units in the sample (Solvay(PHARMA)' Hoechst(PHARMA) faced rather
unique competitive conditions (see Chapter 9).

In summary, it can be concluded that considering outlined limitations no consistent pattern


of relationships between variables of structural context were identifiable. Due to the underly-
ing exploratory approach, note that testing of relationships is not one of the core-objectives
of this study. In this respect, the opportunity to obtain in-depth knowledge of a few cases
was traded off against the ability to generalize the derived findings. Thus, it is important to
bear in mind that the reported [mdings at first provide exploratory insight for the verification
of premises and assumptions which crucially influence the current research approach. Only
from this particular perspective, it can be noted that expectations with respect to the
indeterminacy of structural context variables were supported by the derived empirical evi-
dence.

With the completion of the description of the structural context, the subsequent discussion
will focus on the managerial context and the environment in which c&d interactions were
found to evolve.
236 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

10.2 MANAGERIAL CONTEXT MANAGEMENT OF C&D INTERACTIONS

The c&d framework grounded on the basic premise that the confluence of factors shaping
the OVAP could meaningful be distinguished in a structural and a managerial context. In the
former, top-management was supposed to have a greater influence on the design of general
parameters on which the OVAP evolved. Formal structure, formulated strategy, activity and
decision-making configuration have been interpreted as the key variables of the structural
framework.

The managerial context was conceived to consist of variables influencing both interactions
directed at coordinating the OVAP across borders and interactions that contribute to
strategic decision-making. The latter include processes focused on the change of the
structural context. Due to the operational character of the OVAP, subsidiary besides top-
management executives were assumed to be key players. Although it was acknowledged that
top-management, due to its authority, was likely to have a general influence on evolving c&d
interactions, it was for a number of reasons assumed that top-management would ultimately
not be able to completely determine their pattern.

Subsequently, the managerial context will be described by means of discussing generally


available managerial mechanisms in their effect on strategic decision-making and the
integration of the OV AP. Due to the general interrelation of coordination and decision
interactions, the discussion will not generally distinguish interactions with respect to their
particular focus, i.e. whether they are part of the coordination of the OVAP or whether
they are directed at decisions leading to strategic changes. Instead, the managerial context
will be interpreted as a framework in which coordination and decision processes jointly
emerge as a result of formal and informal interactions directed at integrating the total of
internationally dispersed business activities. Thereby, integration refers to the coordination
of all activities which directly and indirectly influence the operational process. This
explicitly includes strategic decision processes directed at changing the 0 VAP, the structural
context, and the managerial context. Integration describes the degree to which the total
business is coordinated whereas single coordination activities are directed at achieving the
state of overall integration.

The following depiction and description of general managerial variables available to influ-
ence emerging formal and informal c&d interactions, builds on a typology submitted by
Martinez & Jarillo (1989). Through an exhaustive literature review, Martinez & Jarillo
provided a list of most commonly applied formal and informal coordination mechanisms 5
in MNCs (Table 39). Thereby, coordination mechanism is understood as a general term for
any administrative tool available to achieve integration among different units of the firm.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 237

STRUCTURAL AND FORMAL MECHANISMS


1. Formal Structure

2. Centralization or Decentralization of Decision-Making

3. Formalization

4. Planning and Information Systems

5. Formal Control Mechanisms

OTHER MECHANISMS, MORE INFORMAL AND SUBTLE


6. Liaison Devices
7. Communication

8. Socialization/Participation

Table 39: Coordination mechanisms [Source: adapted from Martinez & Jarillo 1989: 491]

The fIrst two categories of the typology of Martinez & Jarillo - formal structure and central-
ization or decentralization of decision-making - in the present line of reasoning have already
been discussed as variables of the structural context. This conceptualization grounded on the
literature based assumption that the formal structure and the confIguration of the decision-
making responsibility, compared to the remaining mechanisms, are less suitable to specifI-
cally influence the interaction behavior of subsidiary executives. Consequently, the three
remaining formal mechanisms (formalization, planning and information systems, control
mechanisms) and the three informal mechanisms (liaison devices, communication, socializ-
ation/participation) will be conceived as basic variables of the managerial context.

With respect to the distinction between formal and informal mechanisms, it is important to
note that the differentiation is based on the primary type of interaction facilitated by the
respective mechanism. Thus, formal mechanisms are prescribing formal interactions
whereas informal mechanisms are directed at supporting the emergence of informal
interactions. Although a liaison device may be formally institutionalized, and in this respect
constitute a prescribed coordination forum, the interactions that fInally achieve coordination
are not prescribed. Liaison devices are thus conceived as informal mechanisms.

As previously outlined in Chapter 5, it is assumed that informal mechanisms complement


rather than substitute formal mechanisms. Therefore, neither the two categories nor single
mechanisms are independent. Although the subsequent analysis will generally seek to
describe the empirical evidence of the respective mechanisms isolatedly, existing
interdependencies between mechanisms lead to a cumulative effect.

Prior to the detailed discussion of the managerial context, the next chapter seeks to charac-
238 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

terize the OV AP of the sample firms in more detail.

10.2.1 KEY CHARACTERISTICS OF THE OPERATIONAL PROCESS

Since the OV APultimately embodies the object on which c&d interactions are focused, the
OV AP merits a more detailed description in order to identify to which extent the operational
processes of the investigated firms actually evolve across borders. Due to the previously
outlined decision to conduct a multi-industry study, however, the sample firms relied on very
different value-added processes (see Paul forthcoming 1996 for a more detailed description
of the OVAPes of the sample firms).

The heterogeneity of the sample restricted the value of a detailed description of the value-
added processes on the basis of each single firm. Instead, it was decided to operationalize
the OV AP with respect to the resulting effects that constitute international coordination
needs. Thus, the degree of actually existing interdependencies between subsidiaries involved
in the OV AP was measured.

Much of the previous argumentation implicitly reflected the notion that an increase in
interdependencies between subsidiaries resulted in an increase of complexity which, in turn,
required a new management approach to lead internationally operating businesses. As part
of the differentiation of global, in contrast to pre-global, management issues it was, for
instance, asserted that global firms would predominantly reflect forms of reciprocal and
sequential rather than pooled interdependencies. This was primarily attributed to the
necessity of adopting a global management orientation. It was expected that a global
perspective would result in an increased integration of operational activities across borders.
Consequently, RQ5.4 asked for the degree to which subsidiaries were actually embedded in
a network of interdependent relations. By distinguishing different network layers, types of
interdependencies have then been further specified.

Interdependencies caused by vertical exchanges among operational units were described as


including forms of concentration and specialization by stage of process, product varieties,
and technologies. In this respect, RQ7_Z asked for the extent to which interdependencies
between subsidiaries resulted from dense vertical exchange relationships.

Interdependencies from horizontal exchanges were conceived to arise from efficiency con-
siderations. It was assumed that organizational learning processes would be realized by the
exchange of information and know-how between similar functional segments (RQ7_4: learning
evolves independently between subsidiaries).
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 239

In contrast to vertical interdependencies which are an outcome of the actual degree of the
international division of labor between subsidiaries, horizontal interdependencies per se arise
from a global orientation and the imperative to realize all identifiable synergies. Thus,
whenever subsidiaries are involved in a specific activity, a global management orientation
requires that subsidiaries engaged in the same activity must be able to benefit from valuable
experience and know-how existing elsewhere in the firm. If, for instance, subsidiary A is the
first to launch a new product, a global orientation requires that other subsidiaries must be
able to benefit from subsidiary A's experiences, even if their market conditions are com-
pletely different. Compared to the situation of independent and unconnected subsidiaries, it
was assumed that the exchange of activity related know-how in any case increases overall
efficiency.

In summary it was expected that sample firms show a high degree of operational
interdependency, predominately enforced by vertical and/or horizontal relationships between
subsidiaries.

MEASURES

Due to the selected research design, data gathering was restricted to top-management execu-
tives as information sources. Interdependencies thus had to be generally measured on the
overall business level.

The first construct used to operationalize interdependencies relied on the visual presentation
of three previously distinguished models of pooled, sequential, and reciprocal interdepen-
dence (see Question C.IILI and Fig. 46). Respondents were asked to evaluate their value-
added processes by choosing one of the models. To further enhance the understanding of the
particular forces contributing to interdependencies, a second measure asking for the current
degree of interconnectedness between subsidiaries was constructed (see Question C.V.4 and
Fig. 47). In particular, respondents had to evaluate the interconnectedness of subsidiaries for
six items: I-internal interdependencies (e.g. division of labor), 2-external interdependencies
(e.g. global customer), 3-sharing of strategic know-how and information, 4-sharing of
personnel, 5-informal relationships, and 6-' corporate identity' of the business unit.

In order to ascertain interdependence from a leadership perspective, executives were further


asked to elaborate on the extent to which they characterized their firms as a set of dyadic
headquarters-subsidiary relationships or whether headquarters relationships to subsidiaries
were generally considered as being interdependent. To prevent misconceptions, both options
were further explained. Dyadic headquarters-subsidiary relationships were referred to as
relationships to single subsidiaries being independent whereas interdependency was charac-
terized as relationships in which decisions concerning one subsidiary significantly influence
240 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

relationships to other subsidiaries. In case of interdependent relations between subsidiaries,


interviewees were further asked to explain their choice with the help of an example
(Question C.V.2)

FINDINGS

,... High support of sequential and reciprocal interdependencies.

,... Horizontal more prevalent than vertical interdependencies.

Consistent with expectations, in eight firms (66%) the value-added process was described as
being reciprocal. Mannesmann(MH) and Hoechst(PHARMA) (17%), in contrast, reported primarily
pooled, and Volvo(vcC) and Solvay(PHARMA) (17%) primarily sequential interdependencies (Fig.
46).

17%
Fig. 46: Interdependencies of the OV AP
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 241

Degree of Interconnectedness of Subsidiaries

,
. ,
::..
Internal
interdependencies

,
,:..II
External
interdependencies
,.,.
.. ,
E:
Know-how and

,
information exchange

Sharing of personnel
.. .,.
Informal ties
..
' Corporate Identity" of
the BU

o
""-

25 50
,/ • /'
75
/'
100

Index of relevance

Fig. 47: Interconnectedness of subsidiaries

Fig. 47 reports the findings on the interconnectedness of subsidiaries. Due to the derived
data, subsidiaries of the sample firms were found to be predominantly connected by the
exchange of information, know-how, and informal relationships. While for external
relationships the average relevance was still rated as slightly positive, internal
interdependencies and the exchange of personnel were less considered as prevalent patterns
of subsidiary interconnectedness. Many firms also conceived their subsidiaries as being
connected by strong cultural bounds.

DISCUSSION

The outlined [mdings reveal that subsidiaries of the sample firms were to a far lesser degree
connected by vertical exchange relationships than initially expected. In line with the findings
on the specific content of global strategies, interdependencies primarily appeared to result
from other than the vertical exchange of components and semi-finished products among
subsidiaries. With the exception of Volvo(vcc), none of the sample firms showed a consider-
able degree of international division of labor, i.e. a concentration of different production
242 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

stages in different countries. With respect to the transfer of parts and components, empirical
evidence disclosed that the separating impact of country borders had a greater influence on
strategic considerations of firms than expected by literature. Thus, although a high relevance
of sequential and reciprocal interdependencies was reported, different factors than division
of labor across borders primarily accounted for inter-subsidiary interdependencies. The
high extent of informational and know-how interconnectedness appears to support the initial
assumption that strategically important learning processes predominantly occur between dis-
persed units. These processes appear to be facilitated by a strong business unit culture and
the establishment of informal ties between members of different subsidiaries.

In the interviews following examples of interdependencies demanding a greater integration


of the OVAP between subsidiaries were most frequently mentioned:

GLOBAL CUSTOMERS
One of the most often quoted source of interdependence was serving the same customers
with different subsidiaries (Dynacast, SKF, DSM(ELTM)' Merck(PGMT)' Pirelli(TIRE») and serving
identical market segments in geographically neighbouring countries (Volvo(vcc),
SchwarzkopfisALON»)' Although themselves belonging to a MNC, many sample firms had a
considerable number of internationally operating MNCs as customers (see Chapter 9 for
details). In cases where these customers began to internationally coordinate their procure-
ment policies across different subsidiaries, firms serving these customers were equally
forced to integrate their customer related activities. The most frequently mentioned pressures
for a greater integration of customer policies included:

~ Guaranteeing a uniform quality standard irrespective of the place of delivery

(Dynacast, SKF, Merck(PGMT)' and Chargeurs(WTP»)'


~ Coordinated pricing policies, after customers had discovered price differentials of
up to 30% for identical products purchased from the same supplier in different
countries (Dynacast, DSM(ELTM)' and Merck(PGMT»)' Dynacast even pursued integrated
purchasing agreements with global customers when these did not yet coordinate their
activities on a global scale. Here, a proactive approach was considered offering valu-
able opportunities to establish long-term relationships and simultaneously protect
individual interests. Executives of firms supplying downstream segments of
internationally operating customers frequently pronounced their impression that their
proposals often served as the initial impetus for their customers to internationally
integrate their purchasing activities.
~ Coordinated pricing policies of firms serving similar market segments in common
markets (NAFTA, EC) or regionally neighbouring markets. Due to the increased
permeability of country markets, some firms experienced cases of massive re-
imports and drastic slumps in sales where goods were offered with considerable price
differentials in neighboured countries (Volvo(vcc), SchwarzkopfisALON)' Pirelli(TIRE»)'
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 243

GLOBAL COMPETITORS
A second area of dense subsidiary interrelation was reported where global competitors were
equally operating in multiple countries. In this respect, subsidiary managers frequently
exchanged strategic information about activities, ventures, and projects of the competitor.
One executive of SKF reported a case in which a competitor tried to attack the firm in
approaching an important global customer in some smaller markets. Since the attacking
competitor was of the same nationality like the global customer, it soon became evident that
the competitor was trying to reach worldwide agreement with the customer who so far had
not coordinated the procurement policies of his subsidiaries. Due to the exchange of
information between all subsidiaries of SKF, the move was discovered early enough to
pressure the subsidiaries executives of the global customer to which SKF subsidiary
managers had independently developed long-lasting relationships to intervene at their head-
quarters and assert their influence. On account of the sum of all existing relationships, SKF
was finally able to reach a worldwide agreement with the global customer.

DISPERSION/CONCENTRATION
Due to the high currency volatility experienced by world economies in the last decades,
many firms increasingly considered their competitiveness as being exogenous influenced by
uncontrollable exchange rate movements. To equalize the influence, some sample firms tried
to balance their demands and capacities between the $ (North America), YEN (Asia), and
DM (Europe) zones. The duplication of production capacities in these areas provided firms
with potentials to flexibly satisfy customer demands from different locations, compensating
currency related deterioration of their cost positions. Although forms of operational
flexibility were on average very rarely found, in those firms it was exercised (Vo!vo(VCC)'
Chargeurs(WTP)' and Pirelli(TIRE)' high interdependencies resulted. In SKF, DSM(ELTM)' and
Merck(PGMT) further interdependencies resulted from subsidiary specialization on the manufac-
turing of product varieties.

STANDARDIZATION
A last area which was frequently mentioned as being a primary driver of interdependence
between subsidiaries was standardization. As previously outlined, the standardization of
product design and manufacturing was far more prevailing than the standardization of
marketing. In order to maintain an equal quality standard, Dynacast, DSM(ELTM)' and
Merck(PGMT) pursued a standardized production technology in all manufacturing units. Since
this restricted subsidiaries from uncoordinated changes of the production process, a
standardized production technology was frequently considered as a major source of inter-
subsidiary interdependence.

In conclusion, findings seem to imply that interdependencies between subsidiaries of


244 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

international firms occur as influencing factors of decision-making processes rather than as


physically visible consequences of globalization. These results further support the initial
argumentation on the necessity to adopt a global orientation in decision-making. The
leitmotif evident in all cases was that, regardless of the single situation, interconnectedness
and interdependencies automatically resulted, if management conceived the business from
a global perspective. In this respect, it was also interesting to note that apparently larger
internationally operating MNCs (repeatedly reported as being customers of some sample
firms) were considerably lacking behind smaller and more flexible firms. Given this,
fmdings appear to suggest that organizational size obviously has an important impact on the
ability to adapt organizational decision-making processes to the requirements of global
orientation. This point will be further followed in the subsequent discussion.
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 245

10.2.2 COMPONENTS OF THE MANAGERIAL CONTEXT

Based on the previously developed distinction, the managerial context will be described by
means of discussing both available managerial mechanisms to influence formal (Chapter
10.2.2.1) and informal c&d interactions (Chapter 10.2.2.2).

10.2.2.1 THE MANAGEMENT OF FORMAL C&D INTERACTIONS

The present chapter intends to portray the sample with respect to the implementation of
managerial mechanisms directed at formal interactions. In particular, formalization and
standardization (Chapter 10.2.2.1.1), planning and information systems (Chapter
10.2.2.1.2), and formal control mechanisms (Chapter 10.2.2.1.3) are introduced.

10.2.2.1.1 FORMALIZATION

Based on the seminal study of Pugh et al. (1968), formalization is commonly referred to as
the extent to which policies, rules, and job descriptions are codified and procedures are
established through standard routines. In this respect, formalization of subordinate behavior
by superiors is one of the most characteristic outcomes of a rational management
conceptualization. The application of formalization as an administrative tool to influence the
behavior of subsidiary executives presumes a stable decision context. This includes a
predictable development of the formalized area, well defined objectives, and clear and
unambiguous means of achievement. Given a presumed comprehensive knowledge of the
decision context of the formalized area by top-management, or any other intermediate entity,
formalization is a form of ex-ante coordination (Welge & Boettcher 1991, Welge 1985).
Possible alternatives and implications are generally anticipated in advance of the actual
coordination situation. The organizational behavior required to achieve the anticipated state
of integration is then prescribed, typically in the form of rules, guidelines, manuals, etc.
Due to the reduction of variability and uncertainty, interactions and complicated recon-
ciliations in single situations become conceptually superfluous. Given these advantages in
combination with overall organizational complexity, it was expected that firms would make
intensive use of formalization.

At the same time, it was previously noted that the ability of top-management to anticipate all
existing interdependencies and their future development in the face of dynamic environments
and general complexity is assumed to be limited (Doz & Prahalad 1991). Furthermore, the
extensive formalization of organizational behavior bears a number of dysfunctionalities.
Formalization leads to low flexibility and rigidity restricting innovative potential and the
246 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

ability to adequately respond to unforseen situations. Due to the instructive nature of


formalization, most human beings show an inherent propensity to resist formalization and
impersonalization. Formalization is ultimately an attempt to predict and fully control the
organizational process. The formulation of rules and guidelines creates monitoring and
surveillance needs contributing to the aversion of operational units against an extrinsic
determination of their behavior.

Given the briefly described advantages and dysfunctionalities of formalization, it was in


summary expected that degrees of formalization would vary across various parts of organiz-
ation. Routine activities like accounting, subject to relative stable environmental conditions,
appear to be more formalizable than creative activities like marketing or R&D.

The outlined discussion results in following research question:

"' To which extent do internationally operating firms rely on formalization as a tool


to influence decision-making behavior of subsidiaries?

MEASURES

Respondents were asked to indicate the extent to which subsidiary decision-making was
formalized for 9 different areas of decision-making (see Question C.VI.I and Fig. 48).
Formalization was further explained as setting up of standards or instructions. In particular,
I-planning/strategy, 2-organization, 3-controlling, 4-marketing, 5-production, 6-R&D, 7-
personnel, 8-finance/accounting, and 9-data processing were distinguished as distinct areas
of decision-making. In order to gain further insight in the specific conditions in which top-
management relied on means of formalization to influence operational processes, inter-
viewees were additionally asked to evaluate the appropriateness of formalization as a tool to
influence behavior in subsidiaries (Question c. VI. 3).
MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS 247

FINDINGS

&' Financial, accounting, and planning issues tended to be most formalized.

&' Apart from production, operational activities were found to be less formalized.

Consistent with the previously developed expectations, finance/accounting, data-processing,


planning, and controlling were found to be areas in which firms tended to formalize
subsidiary discretion (Fig. 48). The high degree of formalization in the field of planning in
most cases resulted from the standardization of budgeting regulations. This was directed at
ensuring consistency of subsidiary planning within the annual planning and strategy
formulation process. Analogously, controlling regulations tended to be directed at harmon-
izing corresponding reporting requirements.

[Formalization I
planning/strategy

organization , J'

controlling

marketing
-r-
, J'

production
-r
, J'
research & development

,
personnel

finance and accounting


-
-
,
data processing ~
f----. -f- ('
o 25 50 75 100

Index of application

Fig. 48: Degree of formalization in various areas of organizational decision-making

Among operational activities which due to the variability of the different subsidiary environ-
ments were expected to be less formalized, production against the trend showed a moderate
to high degree of formalization. Although this, in combination with the empirical evidence
on global strategy content (Chapter 10.1.2), appeared to be related to a strategic emphasis
of some firms on global manufacturing standardization, a positive correlation between both
variables was not found (Spearman r = - 0.15).
248 MANAGEMENT OF C&D PROCESSES IN GLOBAL FIRMS

DISCUSSION

The general discussion of formalization issues with interviewees revealed that formalization
was not considered as an appropriate tool to influence the behavior of subsidiary execu-
tives. Most of the questioned executives expressed a reluctance towards using formalization
to direct or control operational beha