Chapter 13

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Unilever is one ol lhe worlds oldesl nullinalional corpora
lions wilh exlensive producl ollerings in lhe lood, deler
genl, and personal care businesses. l generales annual
revenues in excess ol $50 billion and a wide range ol
branded producls in virlually every counlry. Delergenls,
which accounl lor aboul 25 percenl ol corporale revenues,
include wellknown nanes such as Ono, which is sold in
nore lhan 50 counlries. Personal care producls, which ac
counl lor aboul !5 percenl ol sales, include Calvin Klein
Cosnelics, Pepsodenl loolhpasle brands, Faberge hair
care producls, and Vaseline skin lolions. Food producls ac
counl lor lhe renaining 60 percenl ol sales and include
slrong ollerings in nargarine (where Unilevers narkel
share in nosl counlries exceeds 70 percenl, lea, ice
crean, lrozen loods, and bakery producls.
Hislorically, Unilever was organized on a decenlralized
basis. Subsidiary conpanies in each najor nalional narkel
were responsible lor lhe produclion, narkeling, sales, and
dislribulion ol producls in lhal narkel. n veslern Europe,
lor exanple, lhe conpany had !7 subsidiaries in lhe early
!990s, each locused on a dillerenl nalional narkel. Each
was a prolil cenler and each was held accounlable lor ils
own perlornance. This decenlralizalion was viewed as a
source ol slrenglh. The slruclure allowed local nanagers
lo nalch producl ollerings and narkeling slralegy lo local
lasles and prelerences and lo aller sales and dislribulion
slralegies lo lil lhe prevailing relail syslens. To drive lhe
localizalion, Unilever recruiled local nanagers lo run local
organizalions, lhe U.S. subsidiary (Lever Brolhers was run
by Anericans, lhe ndian subsidiary by ndians, and so on.
By lhe nid!990s, lhis decenlralized slruclure was in
creasingly oul ol slep wilh a rapidly changing conpelilive
environnenl. Unilevers global conpelilors, which include
lhe Swiss lirn eslle and Procler & Canble lron lhe
Uniled Slales, had been nore successlul lhan Unilever on
several lronls-building global brands, reducing cosl slruc
lure by consolidaling nanulacluring operalions al a lew
choice localions, and execuling sinullaneous producl
launches in several nalional narkels. Unilevers decenlral
ized slruclure worked againsl ellorls lo build global or re
gional brands. l also neanl lols ol duplicalion, parlicularly
in nanulacluring, a lack ol scale econonies, and a high
cosl slruclure. Unilever also lound lhal il was lalling be
hind rivals in lhe race lo bring new producls lo narkel. n
Europe, lor exanple, while eslle and Procler & Canble
noved loward panEuropean producl launches, il could
lake Unilever lour lo live years lo persuade ils !7 Euro
pean operalions lo adopl a new producl.
Unilever began lo change all lhis in lhe nid!990s. n
!996, il inlroduced a new slruclure based on regional
business groups. vilhin each business group were a
nunber ol divisions, each locusing on a specilic calegory
ol producls. Thus, in lhe European Business Croup, a di
A Decade of Organizational Cbange at Unilever
vision locused on delergenls, anolher on ice crean and
lrozen loods, and so on. These groups and divisions co
ordinaled lhe aclivilies ol nalional subsidiaries wilhin lheir
region lo drive down operaling cosls and speed up lhe
process ol developing and inlroducing new producls.
For exanple, Lever Europe was eslablished lo consol
idale lhe conpanys delergenl operalions. The !7 Euro
pean conpanies reporled direclly lo Lever Europe. Using
ils newlound organizalional cloul, Lever Europe consoli
daled lhe produclion ol delergenls in Europe in a lew key
localions lo reduce cosls and speed up new producl in
lroduclion. nplicil in lhis new approach was a bargain:
lhe !7 conpanies relinquished aulonony in lheir lradi
lional narkels in exchange lor opporlunilies lo help de
velop and execule a unilied panEuropean slralegy. The
nunber ol European planls nanulacluring soap was cul
lron !0 lo 2, and sone new producls were nanulaclured
al only one sile. Producl sizing and packaging were har
nonized lo cul purchasing cosls and lo acconnodale
unilied panEuropean adverlising. By laking lhese sleps,
Unilever eslinaled il saved as nuch as $400 nillion a
year in ils European delergenl operalions.
By 2000, however, Unilever lound lhal il was slill lag
ging ils conpelilors, so lhe conpany enbarked upon an
olher reorganizalion. This line lhe goal was lo cul lhe
nunber ol brands lhal Unilever sold lron !,600 lo jusl
400 lhal could be narkeled on a regional or global scale.
To supporl lhis new locus, lhe conpany planned lo re
duce lhe nunber ol nanulacluring planls lron 330 lo
aboul 230 by 2004. The conpany also eslablished a new
organizalion based on jusl lwo global producl divisions-
a lood division, and a hone personal care division. vilhin
each division are a nunber ol regional business groups
lhal locus on developing, nanulacluring, and narkeling
eilher lood or personal care producls wilhin a given re
gion. For exanple, Unilever Beslloods Europe, which is
headquarlered in Follerdan, locuses on selling lood
brands across veslern and Easlern Europe, while
Unilever Hone and Personal Care Europe does lhe sane
lor hone and personal care producls. A sinilar slruclure
can be lound in orlh Anerica, Lalin Anerica, and Asia.
Thus, Beslloods orlh Anerica, headquarlered in ew
Jersey, has a sinilar charler lo Beslloods Europe, bul in
keeping wilh dillerences in local hislory, nany ol lhe lood
brands narkeled by Unilever in orlh Anerica are diller
enl lron lhose narkeled in Europe.
H. Connon, Unilevers Col lhe inelies Licked, 8LI+YEVHMER ay
24, !993, p. 5, Unilever: A elworked Organizalion, ,EVZEVH&YWM
RIWW 6IZMI[ ovenber-Decenber !996, p. !33, C. Chrislensen
and J. Zobel, Unilevers Buller Bealer: nnovalion lor Clobal Diver
sily, Harvard Business School Case o. 96930!7, arch !993,
. ayer, A. Snilh, and F. vhillinglon, Feslrucluring Foulelle,
*MRERGMEP8MQIW ovenber 3, 2002, p. 3, and Unilevers veb sile al
www.unilever.con
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1lis clapter iJertifies tle or,arizatioral arclitecture tlat irterratioral busiresses use
to mara,e arJ Jirect tleir ,lobal operatiors. Ly organizationa arcbitecture we mear
tle totality of a firm's or,arizatior, ircluJir, formal or,arizatior structure, cortrol sys-
tems arJ ircertives, processes, or,arizatioral culture, arJ people. 1le core ar,umert
outlireJ ir tlis clapter is tlat superior erterprise profitability requires tlree corJitiors
to be fulfilleJ. lirst, tle Jifferert elemerts of a firm's or,arizatioral arclitecture must be
irterrally corsistert. lor example, tle cortrol arJ ircertive systems useJ ir tle firm
must be corsistert witl tle structure of tle erterprise. SecorJ, tle or,arizatioral arcli-
tecture must matcl or fit tle strate,y of tle firm-strate,y arJ arclitecture must be cor-
sistert. lor example, if a firm is pursuir, a ,lobal starJarJizatior strate,y but it las tle
wror, kirJ of or,arizatior arclitecture ir place, it is urlikely tlat it will be able to exe-
cute tlat strate,y effectively arJ poor performarce may result. 1lirJ, tle strate,y arJ ar-
clitecture of tle firm must rot orly be corsistert witl eacl otler, but tley also must be
corsistert witl competitive corJitiors prevailir, ir tle firm's markets-strate,y, arcli-
tecture, arJ competitive ervirormert must all be corsistert. lor example, a firm pursu-
ir, a localizatior strate,y mi,lt lave tle ri,lt kirJ of or,arizatioral arclitecture ir
place for tlat strate,y. However, if it competes ir markets wlere cost pressures are irterse
arJ JemarJs for local resporsiveress are low, it will still lave irferior performarce be-
cause a ,lobal starJarJizatior strate,y is more appropriate ir sucl ar ervirormert. 1le
operir, case or Lrilever toucles or some of tle importart issues lere. Historically
Lrilever las competeJ ir markets wlere local resporsiveress las beer very importart.
1le proJuctior arJ marketir, of fooJ, Jeter,ert, arJ persoral care proJucts lave tra-
Jitiorally beer tailoreJ to tle tastes arJ prefererces of corsumers ir Jifferert ratiors.
Lrilever satisfieJ tlis ervirormertal JemarJ for local resporsiveress by pursuir, a lo-
calizatior strate,y. lts or,arizatioral arclitecture reflecteJ tlis strate,y. Lrilever oper-
ateJ witl a JecertralizeJ structure tlat Jele,ateJ resporsibility for proJuctior,
marketir,, sales, arJ Jistributior Jecisiors to autoromous ratioral operatir, compa-
ries. 1lis alloweJ local mara,ers to corfi,ure proJuct offerir,s, arJ marketir, arJ sales
activities, to tle corJitiors prevailir, ir a particular ratior. lor a lor, time, tlis fit be-
tweer strate,y arJ arclitecture serveJ Lrilever well, lelpir, it to become a Jomirart
corsumer proJucts erterprise.
However, by tle early 199Os tle competitive ervirormert was clar,ir,. 1raJe barri-
ers betweer courtries were fallir,, particularly ir tle Luropear Lrior followir, tle cre-
atior of a sir,le market ir 1992. 1lis maJe it possible to marufacture certair items sucl
as Jeter,erts arJ mar,arire at favorable certral locatiors to realize tle berefits associ-
ateJ witl locatior arJ experierce curve ecoromies. Also, rew proJucts ir areas sucl as
frozer fooJs arJ mar,arire were ,airir, re,ioral or ever ,lobal acceptarce. Lrfortu-
rately for Lrilever, some of its ,lobal competitors moveJ more rapiJly to exploit tlis
clar,e ir tle competitive ervirormert. Lrilever fourJ itself JisaJvarta,eJ by a li,l-
cost structure (causeJ by tle Juplicatior of marufacturir, operatiors) arJ ar irability
to irtroJuce rew proJucts ir several ratioral markets at orce. lr otler worJs, tle com-
petitive ervirormert clar,eJ, but Lrilever JiJ rot clar,e witl it.
Ly tle miJ-199Os, Lrilever laJ reco,rizeJ its problems arJ clar,eJ botl its strate,y
arJ its or,arizatioral arclitecture so tlat it better matcleJ tle rew competitive reali-
ties. Lrilever be,ar to slift towarJ more of a trarsratioral strate,ic oriertatior, seekir,
to balarce local resporsiveress ir marketir, arJ sales witl tle certralizatior of maru-
facturir, arJ proJuct Jevelopmert activities to realize scale ecoromies arJ execute par-
re,ioral proJuct laurcles. 1o implemert tlis strate,y, Lrilever irtroJuceJ a rew
or,arizatioral arclitecture baseJ or re,ioral busiress ,roups, eacl of wlicl cortaireJ
proJuct Jivisiors. 1lese Jivisiors were ,iver tle resporsibility for certralizir, maru-
facturir, arJ proJuct Jevelopmert activities, wlicl implieJ a reJuctior ir tle autor-
omy traJitiorally ,rarteJ to operatir, subsiJiaries. Ly 2OOO, Lrilever corcluJeJ tlat
tlis process laJ rot ,ore far erou,l, so it reor,arizeJ a,air, tlis time creatir, two
Introduction
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worlJwiJe Jivisiors-ore for fooJ proJucts arJ ore for lome arJ persoral care proJ-
ucts. 1le Jivisiors were maJe resporsible for reJucir, Lrilever's brarJs from 1,6OO to
just +OO, arJ for corsoliJatir, marufacturir, ir fewer, more efficiert factories. However,
reco,rizir, tlat localizatior is still importart ir its markets, Lrilever mairtaireJ a re-
,ioral structure urJer its two Jivisiors. Wlat Lrilever was tryir, to Jo tlrou,l tlese
reor,arizatiors was to reestablisl a fit betweer strate,y, arclitecture, arJ ervirormert
by recorfi,urir, its or,arizatior arJ operatiors to matcl rew competitive realities.
1o explore tle issues illustrateJ by cases sucl as Lrilever's, we oper tle currert clap-
ter by Jiscussir, ir more Jetail tle corcepts of or,arizatioral arclitecture arJ fit. Next
we turr to a more JetaileJ exploratior of various comporerts of arclitecture-structure,
cortrol systems arJ ircertives, or,arizatior culture, arJ processes-arJ explair low
tlese comporerts must be irterrally corsistert. (We Jiscuss tle people" comporert of
arclitecture ir Clapter 18, wler we Jiscuss lumar resource strate,y ir tle multira-
tioral firm.) After reviewir, tle various comporerts of arclitecture, we look at tle ways
ir wlicl arclitecture car be matcleJ to strate,y arJ tle competitive ervirormert to
aclieve li,l performarce. 1le clapter closes witl a Jiscussior of or,arizatioral clar,e,
for as tle Lrilever case illustrates, perioJically firms lave to clar,e tleir or,arizatior
so tlat it matcles rew strate,ic arJ competitive realities.
8LI3VKERMÊXMSRSJ-RXIVREXMSREP&YWMRIWW Cbapter 13 441
As roteJ ir tle irtroJuctior, tle term orcn|,ct|onc| crc||tecture refers to tle totality
of a firm's or,arizatior, ircluJir, formal or,arizatioral structure, cortrol systems arJ
ircertives, or,arizatioral culture, processes, arJ people.
1
li,ure 13.1 illustrates tlese
Jifferert elemerts. Ly organizationa structure, we mear tlree tlir,s: lirst, tle for-
mal Jivisior of tle or,arizatior irto suburits sucl as proJuct Jivisiors, ratioral oper-
atiors, arJ furctiors (most or,arizatioral clarts Jisplay tlis aspect of structure);
secorJ, tle locatior of Jecisior-makir, resporsibilities witlir tlat structure (e.,.,
certralizeJ or JecertralizeJ); arJ tlirJ, tle establislmert of irte,ratir, meclarisms
to coorJirate tle activities of suburits ircluJir, cross-furctioral teams arJ or par-
re,ioral committees.
Contro systems are tle metrics useJ to measure tle performarce of suburits arJ
make juJ,merts about low well mara,ers are rurrir, tlose suburits. lor example, lis-
torically Lrilever measureJ tle performarce of ratioral operatir, subsiJiary comparies
accorJir, to profitability-profitability was tle metric. Incentives are tle Jevices useJ
to rewarJ appropriate mara,erial belavior. lrcertives are very closely tieJ to perfor-
marce metrics. lor example, tle ircertives of a mara,er ir clar,e of a ratioral operat-
ir, subsiJiary mi,lt be lirkeJ to tle performarce of tlat compary. Specifically, sle
mi,lt receive a borus if ler subsiJiary exceeJs its performarce tar,ets.
Processes are tle marrer ir wlicl Jecisiors are maJe arJ work is performeJ witlir
tle or,arizatior. Lxamples are tle processes for formulatir, strate,y, for JeciJir, low
to allocate resources witlir a firm, or for evaluatir, tle performarce of mara,ers arJ
,ivir, feeJback. lrocesses are corceptually Jistirct from tle locatior of Jecisior-
makir, resporsibilities witlir ar or,arizatior, altlou,l botl irvolve Jecisiors. Wlile
tle CL mi,lt lave ultimate resporsibility for JeciJir, wlat tle strate,y of tle firm
sloulJ be (i.e., tle Jecisior-makir, resporsibility is certralizeJ), tle process le or sle
uses to make tlat Jecisior mi,lt ircluJe tle solicitatior of iJeas arJ criticism from
lower-level mara,ers.
Organizationa cuture refers to tle rorms arJ value systems tlat are slareJ amor,
tle employees of ar or,arizatior. Just as societies lave cultures (see Clapter 3 for Je-
tails), so Jo or,arizatiors. r,arizatiors are societies of irJiviJuals wlo come to,etler
to perform collective tasks. 1ley lave tleir owr Jistirctive patterrs of culture arJ sub-
culture.
2
As we slall see, or,arizatioral culture car lave a profourJ impact or low a
firm performs. lirally, by peope we mear rot just tle employees of tle or,arizatior, but
Organizational Arcbitecture
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also tle strate,y useJ to recruit, compersate, arJ retair tlose irJiviJuals arJ tle type of
people tlat tley are ir terms of tleir skills, values, arJ oriertatior (JiscusseJ ir Jeptl ir
Clapter 18).
As illustrateJ by tle arrows ir li,ure 13.1, tle various comporerts of ar or,arizatior's
arclitecture are rot irJeperJert of eacl otler: Lacl comporert slapes, arJ is slapeJ
by, otler comporerts of arclitecture. Ar obvious example is tle strate,y re,arJir, peo-
ple. 1lis car be useJ proactively to lire irJiviJuals wlose irterral values are corsistert
witl tlose tlat tle firm wisles to emplasize ir its or,arizatior culture. 1lus, tle peo-
ple comporert of arclitecture car be useJ to reirforce (or rot) tle prevailir, culture of
tle or,arizatior. lor example, Lrilever las listorically maJe ar effort to lire mara,ers
wlo were sociable arJ placeJ a li,l value or corsersus arJ cooperatior, values tlat tle
erterprise wisleJ to emplasize ir its owr culture.
3
lf a firm is ,oir, to maximize its profitability, it must pay close attertior to aclievir,
irterral corsistercy betweer tle various comporerts of its arclitecture. Let us look at
low structure arJ cortrol systems mi,lt be ircorsistert witl eacl otler. li,ure 13.2
slows ar or,arizatioral clart for low Lrilever's Luropear operatiors mi,lt lave beer
structureJ followir, its miJ-199Os reor,arizatior (tlis clart is lypotletical). Note tlat
tlere are several courtry subsiJiaries, ore for lrarce, ore for Cermary, ore for Spair,
arJ so or, eacl reportir, to tle Luropear Lusiress Croup. 1lere are also several par-
Luropear proJuct Jivisiors, ore for Jeter,erts, ore for frozer fooJ, ore for mar,arire,
arJ so or, a,air eacl reportir, to tle Luropear Lusiress Croup. Witlir tlis structure,
resporsibility for marketir,, sales, arJ Jistributior Jecisiors mi,lt be ,iver to tle cour-
try subsiJiaries, wlile resporsibility for proJuct marufacturir, mi,lt be ,iver to tle
proJuct Jivisiors. As for cortrol systems, ima,ire tlat profitability is tle metric useJ to
evaluate tle performarce of tle courtry subsiJiaries.
re problem witl tlis set of arrar,emerts is tlat tle profitability of tle courtry sub-
siJiaries JeperJs or marufacturir, costs arJ rew-proJuct Jevelopmert, arJ yet tle
mara,ers rurrir, tle various courtry subsiJiaries are rot resporsible for tlose importart
furctiors-resporsibility resiJes ir tle proJuct Jivisiors' 1lus, if tle mara,ers of tle
proJuct Jivisiors Jo rot Jo tleir job properly, proJuctior costs may rise arJ tle prof-
itability of tle courtry subsiJiaries mi,lt fall. lr otler worJs, tle mara,ers of tle cour-
try subsiJiaries are beir, evaluateJ accorJir, to a metric over wlicl tley Jo rot lave
total cortrol. lf tle performarce of a subsiJiary Jeclires, tley may ar,ue tlat tlis is rot
tleir fault; it was Jue to tle irability of tle mara,ers ir tle par-Luropear proJuct Jivi-
siors to Jrive Jowr marufacturir, costs. 1lus, tlere is a potertial corflict betweer
structure arJ tle cortrol systems useJ; tley are potertially ircorsistert.
Processes
ncenlives
and
Conlrols
Slruclure
People
Cullure
FIGURE 13. 1
Organizalion
Archileclure
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Some ircorsistercy is a fact of life ir or,arizatiors. lerfectior ir tle Jesi,r of or,ar-
izatior arclitecture is very Jifficult to aclieve. Nevertleless, tle ircorsistercy betweer
Jifferert comporerts of ar or,arizatior's arclitecture car be mirimizeJ tlrou,l irtelli-
,ert Jesi,r. lr tle example just ,iver, if tle performarce of eacl proJuct Jivisior were
assesseJ or tle basis of marufacturir, costs, it woulJ ,ive tle mara,ers of tle proJuct
Jivisior tle ircertive to optimize marufacturir, efficiercy. 1le problem mi,lt be fur-
tler alleviateJ if tle leaJs of botl tle courtry subsiJiaries arJ tle Luropear proJuct Ji-
visiors were rewarJeJ accorJir, to tle profitability of tle ent|re Luropear Lusiress
Croup (for example, by lavir, tleir borus pay lirkeJ to tle profitability of tle ertire
,roup). 1lis woulJ ,ive tle leaJs of tle Jivisiors a furtler reasor to reJuce marufac-
turir, costs, arJ it woulJ create ar ircertive for tle leaJs of eacl subsiJiary arJ Jivi-
sior to slare ary best practices JevelopeJ ir tleir operatior witl collea,ues across
Lurope to tle bettermert of tle ertire Luropear Lusiress Croup.
lrterral corsistercy is a recessary but rot a sufficiert corJitior for li,l performarce.
Corsistercy betweer arclitecture arJ tle strate,y of tle or,arizatior is also requireJ; ar-
clitecture must fit strate,y. Wler Lrilever be,ar to emplasize cost reJuctior as a ma-
jor strate,ic ,oal, tle firm laJ to clar,e its arclitecture to matcl tlis rew strate,ic
reality. lt laJ to move away from a structure baseJ primarily or starJ-alore ratioral op-
eratir, subsiJiaries ir eacl courtry arJ towarJ ore baseJ more or re,ioral arJ ,lobal
urits. 1lat structure was recessary to pusl tlrou,l Lrilever's plars to reJuce operatir,
costs, close factories, corsoliJate proJuctior ir fewer, more efficiert facilities, arJ reJuce
tle rumber of brarJs from 1,6OO to +OO.
Clar,e, sucl as tlat implemerteJ by Lrilever, is mucl easier saiJ tlar Jore. lt is rel-
atively easy for serior mara,ers to arrource a raJical clar,e ir strate,y, but it is mucl
larJer to actually put tlat clar,e irto actior. Doir, so requires a clar,e ir arclitec-
ture. Strate,y is implemerteJ tlrou,l arclitecture, arJ clar,ir, arclitecture is mucl
more Jifficult tlar arrourcir, a clar,e ir strate,y. We slall Jiscuss wly it is larJ to
clar,e arclitecture later ir tlis clapter. As we slall see, a prime reasor is tlat or,ari-
zatiors terJ to be relative irert; tley are by rature Jifficult to clar,e.
Lver witl irterral corsistercy arJ a fit betweer strate,y arJ arclitecture, li,l perfor-
marce is rot ,uararteeJ. 1le firm must also ersure tlat tle fusior betweer its strate,y arJ
arclitecture is corsistert witl tle competitive JemarJs of tle market, or markets, ir wlicl
tle firm competes. lr tle 198Os Lrilever laJ a ,ooJ fit betweer its strate,y arJ arclitec-
ture-it was pursuir, a localizatior strate,y. A JecertralizeJ arclitecture composeJ of self-
cortaireJ courtry subsiJiaries was well suiteJ to implemertir, tlis strate,y. However, by
France
argarine
Frozen
Food Delergenls
Cernany
Spain
European Business
Croup
FIGURE 13. 2
Ficlional Organizalional
Slruclure al Unilever
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tle 199Os tle strate,y ro lor,er maJe mucl serse Jue to a clar,e ir tle competitive er-
virormert. 1raJe barriers betweer ratiors laJ faller arJ more efficiert ,lobal competitors
were emer,ir,. Lrilever's strate,y ro lor,er fit tle ervirormert ir wlicl it competeJ, so
it laJ to clar,e botl its strate,y arJ its arclitecture to matcl tle rew reality. 1lis type of
or,arizatioral claller,e is rot urusual; markets rarely starJ still, arJ firms ofter lave to
aJjust tleir strate,y arJ arclitecture to matcl rew competitive realities.
r,arizatioral structure car be tlou,lt of ir terms of tlree Jimersiors: (1) vertica Jif-
ferentiation, wlicl refers to tle locatior of Jecisior-makir, resporsibilities witlir a
structure; (2) borizonta Jifferentiation, wlicl refers to tle formal Jivisior of tle or-
,arizatior irto suburits; arJ (3) tle establislmert of integrating mecbanisms, wlicl
are meclarisms for coorJiratir, suburits. We be,ir by Jiscussir, vertical Jifferertia-
tior, tler lorizortal Jifferertiatior, arJ tler irte,ratir, meclarisms.
VERTICAL DIFFERENTIATION: CENTRALIZATION
AND DECENTRALIZATION
A firm's vertical Jifferertiatior Jetermires wlere ir its lierarcly tle Jecisior-makir,
power is corcertrateJ.
+
Are proJuctior arJ marketir, Jecisiors certralizeJ ir tle offices
of upper-level mara,ers, or are tley JecertralizeJ to lower-level mara,ers` Wlere Joes tle
resporsibility for l&D Jecisiors lie` Are importart strate,ic arJ firarcial Jecisiors pusleJ
Jowr to operatir, urits, or are tley corcertrateJ ir tle larJs of top mara,emert` ArJ
so or. 1lere are ar,umerts for certralizatior arJ otler ar,umerts for Jecertralizatior.
Arguments for CentraIization
1lere are four mair ar,umerts for certralizatior. lirst, certralizatior car facilitate co-
orJiratior. lor example, corsiJer a firm tlat las a comporert marufacturir, operatior
ir 1aiwar arJ ar assembly operatior ir Mexico. 1le activities of tlese two operatiors
may reeJ to be coorJirateJ to ersure a smootl flow of proJucts from tle comporert op-
eratior to tle assembly operatior. 1lis mi,lt be aclieveJ by certralizir, proJuctior
scleJulir, at tle firm's leaJ office. SecorJ, certralizatior car lelp ersure tlat Jecisiors
are corsistert witl or,arizatioral objectives. Wler Jecisiors are JecertralizeJ to lower-
level mara,ers, tlose mara,ers may make Jecisiors at variarce witl top mara,emert's
,oals. Certralizatior of importart Jecisiors mirimizes tle clarce of tlis occurrir,.
1lirJ, by corcertratir, power arJ autlority ir ore irJiviJual or a mara,emert team,
certralizatior car ,ive top-level mara,ers tle mears to brir, about reeJeJ major or,a-
rizatioral clar,es. lourtl, certralizatior car avoiJ tle Juplicatior of activities tlat oc-
curs wler similar activities are carrieJ or by various suburits witlir tle or,arizatior.
lor example, mary irterratioral firms certralize tleir l&D furctiors at ore or two lo-
catiors to ersure tlat l&D work is rot JuplicateJ. lroJuctior activities may be cer-
tralizeJ at key locatiors for tle same reasor.
Arguments for DecentraIization
1lere are five mair ar,umerts for Jecertralizatior. lirst, top mara,emert car become
overburJereJ wler Jecisior-makir, autlority is certralizeJ, arJ tlis car result ir poor
Jecisiors. Decertralizatior ,ives top mara,emert time to focus or critical issues by Jel-
e,atir, more routire issues to lower-level mara,ers. SecorJ, motivatioral researcl fa-
vors Jecertralizatior. Lelavioral sciertists lave lor, ar,ueJ tlat people are willir, to
,ive more to tleir jobs wler tley lave a ,reater Je,ree of irJiviJual freeJom arJ cor-
trol over tleir work. 1lirJ, Jecertralizatior permits ,reater flexibility-more rapiJ re-
sporse to ervirormertal clar,es-because Jecisiors Jo rot lave to be referreJ up tle
lierarcly" urless tley are exceptioral ir rature. lourtl, Jecertralizatior car result ir
Organizational Structure
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better Jecisiors. lr a JecertralizeJ structure, Jecisiors are maJe closer to tle spot by ir-
JiviJuals wlo (presumably) lave better irformatior tlar mara,ers several levels up ir
a lierarcly (for ar example of Jecertralizatior to aclieve tlis ,oal, see tle Mara,emert
locus or Wal-Mart's irterratioral Jivisior). liftl, Jecertralizatior car ircrease cortrol.
Decertralizatior car be useJ to establisl relatively autoromous, self-cortaireJ suburits
witlir ar or,arizatior. Suburit mara,ers car tler be lelJ accourtable for suburit per-
formarce. 1le more resporsibility suburit mara,ers lave for Jecisiors tlat impact sub-
urit performarce, tle fewer excuses tley lave for poor performarce.
Strategy and CentraIization in an InternationaI Business
1le cloice betweer certralizatior arJ Jecertralizatior is rot absolute. lrequertly it
makes serse to certralize some Jecisiors arJ to Jecertralize otlers, JeperJir, or tle
type of Jecisior arJ tle firm's strate,y. Decisiors re,arJir, overall firm strate,y, major fi-
rarcial experJitures, firarcial objectives, arJ le,al issues are typically certralizeJ at tle
firm's leaJquarters. However, operatir, Jecisiors, sucl as tlose relatir, to proJuctior,
marketir,, l&D, arJ lumar resource mara,emert, may or may rot be certralizeJ Je-
perJir, or tle firm's strate,y.
CorsiJer firms pursuir, a ,lobal starJarJizatior strate,y. 1ley must JeciJe low to
Jisperse tle various value creatior activities arourJ tle ,lobe so locatior arJ experierce
ecoromies car be realizeJ. 1le leaJ office must make tle Jecisiors about wlere to lo-
cate l&D, proJuctior, marketir,, arJ so or. lr aJJitior, tle ,lobally JisperseJ web of
value creatior activities tlat facilitates a ,lobal strate,y must be coorJirateJ. All of tlis
creates pressures for certralizir, some operatir, Jecisiors.
lr cortrast, tle emplasis or local resporsiveress ir firms pursuir, a localizatior strat-
e,y creates stror, pressures for Jecertralizir, operatir, Jecisiors to forei,r subsiJiaries.
lirms pursuir, ar irterratioral strate,y also terJ to mairtair certralizeJ cortrol over
tleir core competercy arJ to Jecertralize otler Jecisiors to forei,r subsiJiaries. 1ypi-
cally, sucl firms certralize cortrol over l&D ir tleir lome courtry, but Jecertralize op-
eratir, Jecisiors to forei,r subsiJiaries. lor example, Microsoft Corporatior, wlicl fits
tle irterratioral moJe, certralizes its proJuct Jevelopmert activities (wlere its core
competercies lie) at its leJmorJ, Waslir,tor, leaJquarters arJ Jecertralizes market-
ir, activity to various forei,r subsiJiaries. 1lus, wlile proJucts are JevelopeJ at lome,
mara,ers ir tle various forei,r subsiJiaries lave si,rificart latituJe for formulatir,
strate,ies to market tlose proJucts ir tleir particular settir,s.
5
1le situatior ir firms pursuir, a trarsratioral strate,y is more complex. 1le reeJ to
realize locatior arJ experierce curve ecoromies requires some Je,ree of certralizeJ cor-
trol over ,lobal proJuctior certers. However, tle reeJ for local resporsiveress Jictates
tle Jecertralizatior of mary operatir, Jecisiors, particularly for marketir,, to forei,r
subsiJiaries. 1lus, ir firms pursuir, a trarsratioral strate,y, some operatir, Jecisiors are
relatively certralizeJ, wlile otlers are relatively JecertralizeJ. lr aJJitior, ,lobal learr-
ir, baseJ or tle multiJirectioral trarsfer of skills betweer subsiJiaries, arJ betweer sub-
siJiaries arJ tle corporate certer, is a certral feature of a firm pursuir, a trarsratioral
strate,y. 1le corcept of ,lobal learrir, is preJicateJ or tle rotior tlat forei,r sub-
siJiaries witlir a multiratioral firm lave si,rificart freeJom to Jevelop tleir owr skills
arJ competercies. rly tler car tlese be levera,eJ to berefit otler parts of tle or,ar-
izatior. A substartial Je,ree of Jecertralizatior is requireJ if subsiJiaries are ,oir, to
lave tle freeJom to Jo tlis. lor tlis reasor too, tle pursuit of a trarsratioral strate,y re-
quires a li,l Je,ree of Jecertralizatior.
6
HORIZONTAL DIFFERENTIATION: THE DESIGN
OF STRUCTURE
Horizortal Jifferertiatior is corcerreJ witl low tle firm JeciJes to JiviJe itself irto sub-
urits.
7
1le Jecisior is rormally maJe or tle basis of furctior, type of busiress, or ,eo-
,raplical area. lr mary firms, just ore of tlese preJomirates, but more complex solutiors
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are aJopteJ ir otlers. 1lis is particularly likely ir tle case of multiratioral firms, wlere
tle corflictir, JemarJs to or,arize tle compary arourJ Jifferert proJucts (to realize lo-
catior arJ experierce curve ecoromies) arJ Jifferert ratioral markets (to remair locally
resporsive) must be recorcileJ.
The Structure of Domestic Firms
Most firms be,ir witl ro formal structure arJ are rur by a sir,le ertreprereur or a small
team of irJiviJuals. As tley ,row, tle JemarJs of mara,emert become too ,reat for ore
irJiviJual or a small team to larJle. At tlis poirt tle or,arizatior is split irto furctiors
reflectir, tle firm's value creatior activities (e.,., proJuctior, marketir,, l&D, sales).
1lese furctiors are typically coorJirateJ arJ cortrolleJ by top mara,emert (see li,-
ure 13.3). Decisior makir, ir tlis furctioral structure terJs to be certralizeJ.
lurtler lorizortal Jifferertiatior may be requireJ if tle firm si,rificartly Jiversifies
its proJuct offerir,, wlicl takes tle firm irto Jifferert busiress areas. lor example,
Dutcl multiratioral llilips N\ be,ar as a li,ltir, compary, but Jiversificatior took
tle compary irto corsumer electrorics (e.,., visual arJ auJio equipmert), irJustrial
electrorics (irte,rateJ circuits arJ otler electroric comporerts), arJ meJical systems
(Mll scarrers arJ ultrasourJ systems). lr sucl circumstarces, a furctioral structure car
be too clumsy. lroblems of coorJiratior arJ cortrol arise wler Jifferert busiress areas
are mara,eJ witlir tle framework of a furctioral structure.
8
lor ore tlir,, it becomes
Jifficult to iJertify tle profitability of eacl Jistirct busiress area. lor arotler, it is Jiffi-
cult to rur a furctioral Jepartmert, sucl as proJuctior or marketir,, if it is supervisir,
tle value creatior activities of several busiress areas.
1o solve tle problems of coorJiratior arJ cortrol, at tlis sta,e most firms switcl to
a proJuct Jivisioral structure (see li,ure 13.+). Witl a proJuct Jivisioral structure, eacl
Jivisior is resporsible for a Jistirct proJuct lire (busiress area). 1lus, llilips createJ Ji-
visiors for li,ltir,, corsumer electrorics, irJustrial electrorics, arJ meJical systems.
Lacl proJuct Jivisior is set up as a self-cortaireJ, lar,ely autoromous ertity witl its owr
furctiors. 1le resporsibility for operatir, Jecisiors is typically JecertralizeJ to proJuct
Jivisiors, wlicl are tler lelJ accourtable for tleir performarce. HeaJquarters is re-
sporsible for tle overall strate,ic Jevelopmert of tle firm arJ for tle firarcial cortrol
of tle various Jivisiors.
The InternationaI Division
Wler firms iritially exparJ abroaJ, tley ofter ,roup all tleir irterratioral activities
irto ar internationa Jivision. 1lis las terJeJ to be tle case for firms or,arizeJ or tle
basis of furctiors arJ for firms or,arizeJ or tle basis of proJuct Jivisiors. le,arJless of
tle firm's Jomestic structure, its irterratioral Jivisior terJs to be or,arizeJ or ,eo,ra-
ply. li,ure 13.5 illustrates tlis for a firm wlose Jomestic or,arizatior is baseJ or proJ-
uct Jivisiors.
Buying Unils Planls Branch Sales Unils Accounling Unils
Purchasing anulacluring arkeling Finance
Top
anagenenl
FIGURE 13. 3
A Typical Funclional
Slruclure
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Mary marufacturir, firms exparJeJ irterratiorally by exportir, tle proJuct maru-
factureJ at lome to forei,r subsiJiaries to sell. 1lus, ir tle firm illustrateJ ir li,ure 13.5,
tle subsiJiaries ir courtries 1 arJ 2 woulJ sell tle proJucts marufactureJ by Jivisiors A,
L, arJ C. lr time, lowever, it mi,lt prove viable to marufacture tle proJuct ir eacl
courtry, arJ so proJuctior facilities woulJ be aJJeJ or a courtry-by-courtry basis. lor
firms witl a furctioral structure at lome, tlis mi,lt mear replicatir, tle furctioral
structure ir every courtry ir wlicl tle firm Joes busiress. lor firms witl a Jivisioral
structure, tlis mi,lt mear replicatir, tle Jivisioral structure ir every courtry ir wlicl
tle firm Joes busiress.
Buying Unils Planls Branch Sales Unils Accounling Unils
Deparlnenl
Purchasing
Deparlnenl
arkeling
Deparlnenl
anulacluring
Deparlnenl
Finance
Division Producl Line B Division Producl Line C Division Producl Line A
Headquarlers
FIGURE 13. 4
A Typical Producl
Divisional Slruclure
Counlry !
Ceneral anager
(Producl A, B,
and/or C
Counlry 2
Ceneral anager
(Producl A, B,
and/or C
Funclional unils
Funclional unils
Headquarlers
Doneslic Division
Ceneral anager
Producl Line A
Doneslic Division
Ceneral anager
Producl Line B
Doneslic Division
Ceneral anager
Producl Line C
nlernalional Division
Ceneral anager
Area Line
FIGURE 13. 5
One Conpanys nlernalional Divisional Slruclure
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Ihe IoteroatiooaI ivisioo at WaI-Mart
lonville lhal were devoled lo inlernalional operalions by
50 percenl. Counlry leaders were given grealer responsi
bilily, especially in lhe area ol nerchandising and oper
alions. n enzers own words, ve were al lhe
poinl where il was line lo break away a lillle
bil. . . . You canl run lhe world lron one place.
The counlries have lo drive lhe business. . . .
The change has senl a slrong nessage lo
counlry nanagers lhal lhey no longer have lo
wail lor approval lron Benlonville.
Allhough valarl has now decenlralized
decisions wilhin lhe nlernalional Division, il is slill
slruggling lo lind lhe righl lornula lor nanaging
global procurenenl. deally, lhe conpany would like lo
cenlralize procurenenl in Benlonville so lhal il could use
ils enornous purchasing power lo bargain down lhe
prices il pays suppliers. As a praclical naller, however,
lhis has nol been easy lo allain given lhal lhe producl nix
in valarl slores has lo be lailored lo condilions pre
vailing in lhe local narkel. Currenlly, signilicanl responsi
bilily lor procurenenl renains al lhe counlry and regional
level. However, valarl would like lo have a global pro
curenenl slralegy such lhal il can negoliale on a global
basis wilh key suppliers and can sinullaneously inlroduce
new nerchandise inlo ils slores around lhe world.
As nerchandising and operaling decisions have been
decenlralized, lhe nlernalional Division has increasingly
laken on a new role-lhal ol idenlilying besl praclices
and lranslerring lhen belween counlries. For exanple,
lhe division has developed a knowledge nanagenenl
syslen whereby slores in one counlry, lels say Ar
genlina, can quickly connunicale piclures ol ilens,
sales dala, and ideas on how lo narkel and pronole
producls lo slores in anolher counlry, such as Soulh Ko
rea. The division is also slarling lo nove personnel be
lween slores in dillerenl counlries as a way ol lacililaling
lhe llow ol besl praclices across nalional borders. Finally,
lhe division is al lhe culling edge ol noving valarl
away lron ils U.S.cenlric nenlalily, and showing lhe or
ganizalion lhal ideas inplenenled in loreign operalions
nighl also be used lo inprove lhe elliciency and ellec
liveness ol valarls operalions al hone.
Sources: . Troy, valarl Braces lor nlernalional Crowlh wilh
Personnel oves, (726IXEMPMRK8SHE] February 9, 2004, pp. 5-7,
Division Heads Lel unbers Do lhe Talking, (726IXEMPMRK8SHE]
June 2!, 2004, pp. 26-23, and The Division Thal Delines lhe Fu
lure, (726IXEMPMRK8SHE] June 200!, pp. 4-7.
vhen
valarl
slarled lo expand inlernalionally in lhe early !990s, il de
cided lo sel up an inlernalional division lo oversee lhe
process (see lhe opening case lo Chapler !2 lor delails
ol valarls global expansion. The nlernalional Divi
sion was based in Benlonville, Arkansas, al lhe conpany
headquarlers. Today lhe division oversees operalions in
nine counlries lhal colleclively generale close lo $50 bil
lion in sales. n lerns ol reporling slruclure, lhe division
is divided inlo lhree regions-Europe, Asia, and lhe
Anericas, wilh lhe CEO ol each region reporling lo lhe
CEO ol lhe nlernalional Division, who in lurn reporls lo
lhe CEO ol valarl.
nilially, lhe senior nanagenenl ol lhe nlernalional
Division exerled lighl cenlralized conlrol over nerchan
dising slralegy and operalions in dillerenl counlries. The
reasoning was slraighllorward, valarls nanagers
wanled lo nake sure lhal inlernalional slores copied lhe
lornal lor slores, nerchandising, and operalions lhal
had served lhe conpany so well in lhe Uniled Slales.
They believed, naively perhaps, lhal cenlralized conlrol
over nerchandising slralegy and operalions was lhe way
lo nake sure lhis was lhe case.
By lhe lale !990s, wilh lhe inlernalional division ap
proaching $20 billion in sales, valarls nanagers con
cluded lhal lhis cenlralized approach was nol serving
lhen well. Counlry nanagers had lo gel pernission lron
lheir superiors in Benlonville belore changing slralegy
and operalions, and lhis was slowing decision naking.
Cenlralizalion also produced inlornalion overload al lhe
headquarlers, and led lo sone poor decisions. valarl
lound lhal nanagers in Benlonville were nol necessarily
lhe besl ones lo decide on slore layoul in exico, ner
chandising slralegy in Argenlina, or conpensalion policy
in lhe Uniled Kingdon. The need lo adapl nerchandising
slralegy and operalions lo local condilions argued
slrongly lor grealer decenlralizalion.
The pivolal evenl lhal led lo a change in policy al val
arl was lhe conpanys !999 acquisilion ol Brilains
ASDA supernarkel chain. The ASDA acquisilion added a
nalure and successlul $!4 billion operalion lo valarls
inlernalional division. The conpany realized lhal il was
nol appropriale lor nanagers in Benlonville lo be naking
all inporlanl decisions lor ASDA. Accordingly, over lhe
nexl lew nonlhs, John enzer, CEO ol lhe nlernalional
Division, reduced lhe nunber ol slall localed in Ben
MANAGEMENT FOCUS
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1lis structure las beer wiJely useJ; accorJir, to a HarvarJ stuJy, 6O percert of all
firms tlat lave exparJeJ irterratiorally lave iritially aJopteJ it. A ,ooJ recert exam-
ple of a compary tlat uses tlis structure is Wal-Mart, wlicl createJ ar irterratioral Ji-
visior ir 1991 to mara,e its ,lobal exparsior (Wal-Mart's irterratioral Jivisior is
profileJ ir tle accomparyir, Mara,emert locus). Despite its popularity, ar irterra-
tioral Jivisior structure car ,ive rise to problems.
9
1le Jual structure it creates cortairs
irlerert potertial for corflict arJ coorJiratior problems betweer Jomestic arJ forei,r
operatiors. re problem witl tle structure is tlat tle leaJs of forei,r subsiJiaries are
rot ,iver as mucl voice ir tle or,arizatior as tle leaJs of Jomestic furctiors (ir tle
case of furctioral firms) or Jivisiors (ir tle case of Jivisioral firms). latler, tle leaJ of
tle irterratioral Jivisior is presumeJ to be able to represert tle irterests of all courtries
to leaJquarters. 1lis effectively rele,ates eacl courtry's mara,er to tle secorJ tier of
tle firm's lierarcly, wlicl is ircorsistert witl a strate,y of tryir, to exparJ irterra-
tiorally arJ builJ a true multiratioral or,arizatior.
Arotler problem is tle implieJ lack of coorJiratior betweer Jomestic operatiors arJ
forei,r operatiors, wlicl are isolateJ from eacl otler ir separate parts of tle structural
lierarcly. 1lis car irlibit tle worlJwiJe irtroJuctior of rew proJucts, tle trarsfer of
core competercies betweer Jomestic arJ forei,r operatiors, arJ tle corsoliJatior of
,lobal proJuctior at key locatiors so as to realize locatior arJ experierce curve
ecoromies.
As a result of sucl problems, mary firms tlat cortirue to exparJ irterratiorally abar-
Jor tlis structure arJ aJopt ore of tle worlJwiJe structures we Jiscuss rext. 1le two
iritial cloices are a worlJwiJe proJuct Jivisioral structure, wlicl terJs to be aJopteJ by
JiversifieJ firms tlat lave Jomestic proJuct Jivisiors, arJ a worlJwiJe area structure,
wlicl terJs to be aJopteJ by urJiversifieJ firms wlose Jomestic structures are baseJ or
furctiors. 1lese two alterrative patls of Jevelopmert are illustrateJ ir li,ure 13.6. 1le
moJel ir tle fi,ure is referreJ to as tle irterratioral structural sta,es moJel arJ was Je-
velopeJ by Jolr StopforJ arJ Louis Wells.
1O
WorIdwide Area Structure
A worJwiJe area structure terJs to be favoreJ by firms witl a low Je,ree of Jiversifi-
catior arJ a Jomestic structure baseJ or furctiors (see li,ure 13.7). LrJer tlis struc-
ture, tle worlJ is JiviJeJ irto ,eo,raplic areas. Ar area may be a courtry (if tle market
is lar,e erou,l) or a ,roup of courtries. Lacl area terJs to be a self-cortaireJ, lar,ely
Foreign
Producl
Diversily
Foreign Sales as a Percenlage ol Tolal Sales
Allernale Palhs
ol Developnenl
vorldwide
Producl
Division
Clobal alrix
('Crid'
Area
Division nlernalional
Division
FIGURE 13. 6
The nlernalional
Slruclural Slages odel
Source: AJapteJ from Jolr
M. StopforJ arJ Louis 1. Wells,
Strctey cnJ Structure oj t|e Mu|t|-
nct|onc| nterr|se (New York:
Lasic Looks, 1972).
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autoromous ertity witl its owr set of value creatior activities (e.,., its owr proJuctior,
marketir,, l&D, lumar resources, arJ firarce furctiors). peratiors autlority arJ
strate,ic Jecisiors relatir, to eacl of tlese activities are typically JecertralizeJ to eacl
area, witl leaJquarters retairir, autlority for tle overall strate,ic Jirectior of tle firm
arJ firarcial cortrol.
1lis structure facilitates local resporsiveress. Lecause Jecisior-makir, resporsibili-
ties are JecertralizeJ, eacl area car customize proJuct offerir,s, marketir, strate,y, arJ
busiress strate,y to tle local corJitiors. However, tlis structure ercoura,es fra,merta-
tior of tle or,arizatior irto li,lly autoromous ertities. 1lis car make it Jifficult to
trarsfer core competercies arJ skills betweer areas arJ to realize locatior arJ experi-
erce curve ecoromies. lr otler worJs, tle structure is corsistert witl a localizatior strat-
e,y, but may make it Jifficult to realize ,airs associateJ witl ,lobal starJarJizatior. lirms
structureJ or tlis basis may ercourter si,rificart problems if local resporsiveress is less
critical tlar reJucir, costs or trarsferrir, core competercies for establislir, a competi-
tive aJvarta,e.
WorIdwide Product DivisionaI Structure
A worJwiJe proJuct Jivision structure terJs to be aJopteJ by firms tlat are reasorably
JiversifieJ arJ, accorJir,ly, ori,irally laJ Jomestic structures baseJ or proJuct Jivi-
siors. As witl tle Jomestic proJuct Jivisioral structure, eacl Jivisior is a self-cortaireJ,
lar,ely autoromous ertity witl full resporsibility for its owr value creatior activities.
1le leaJquarters retairs resporsibility for tle overall strate,ic Jevelopmert arJ firar-
cial cortrol of tle firm (see li,ure 13.8).
LrJerpirrir, tle or,arizatior is a belief tlat tle value creatior activities of eacl
proJuct Jivisior sloulJ be coorJirateJ by tlat Jivisior worlJwiJe. 1lus, tle worlJwiJe
proJuct Jivisioral structure is Jesi,reJ to lelp overcome tle coorJiratior problems tlat
arise witl tle irterratioral Jivisior arJ worlJwiJe area structures. 1lis structure pro-
viJes ar or,arizatioral cortext tlat erlarces tle corsoliJatior of value creatior activ-
ities at key locatiors recessary for realizir, locatior arJ experierce curve ecoromies. lt
also facilitates tle trarsfer of core competercies witlir a Jivisior's worlJwiJe operatiors
arJ tle simultareous worlJwiJe irtroJuctior of rew proJucts. 1le mair problem witl
tle structure is tle limiteJ voice it ,ives to area or courtry mara,ers, sirce tley are seer
as subserviert to proJuct Jivisior mara,ers. 1le result car be a lack of local resporsive-
ress, wlicl, as we saw ir Clapter 12, car leaJ to performarce problems.
GIobaI Matrix Structure
Lotl tle worlJwiJe area structure arJ tle worlJwiJe proJuct Jivisioral structure lave
strer,tls arJ weakresses. 1le worlJwiJe area structure facilitates local resporsiveress,
but it car irlibit tle realizatior of locatior arJ experierce curve ecoromies arJ tle
Headquarlers
orlh Anerican
Area
Lalin Anerican
Area
European
Area
iddle Easlern
Alrican Area
Far Easl
Area
FIGURE 13. 7
A vorldwide Area
Slruclure
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trarsfer of core competercies betweer areas. 1le worlJwiJe proJuct Jivisior structure
proviJes a better framework for pursuir, locatior arJ experierce curve ecoromies arJ for
trarsferrir, core competercies, but it is weak ir local resporsiveress. tler tlir,s beir,
equal, tlis su,,ests tlat a worlJwiJe area structure is more appropriate if tle firm is pur-
suir, a localizatior strate,y, wlile a worlJwiJe proJuct Jivisioral structure is more ap-
propriate for firms pursuir, ,lobal starJarJizatior or irterratioral strate,ies. However, as
we saw ir Clapter 12, otler tlir,s are rot equal. As Lartlett arJ Closlal lave ar,ueJ,
to survive ir some irJustries, firms must aJopt a trarsratioral strate,y. 1lat is, tley must
focus simultareously or realizir, locatior arJ experierce curve ecoromies, or local re-
sporsiveress, arJ or tle irterral trarsfer of core competercies (worlJwiJe learrir,).
11
Some firms lave attempteJ to cope witl tle corflictir, JemarJs of a trarsratioral
strate,y by usir, a matrix structure. lr tle classic goba matrix structure, lorizortal
Jifferertiatior proceeJs alor, two Jimersiors: proJuct Jivisior arJ ,eo,raplic area
(see li,ure 13.9). 1le plilosoply is tlat resporsibility for operatir, Jecisiors per-
tairir, to a particular proJuct sloulJ be slareJ by tle proJuct Jivisior arJ tle vari-
ous areas of tle firm. 1lus, tle rature of tle proJuct offerir,, tle marketir, strate,y,
arJ tle busiress strate,y to be pursueJ ir area 1 for tle proJucts proJuceJ by Jivisior
A are JetermireJ by corciliatior betweer Jivisior A arJ area 1 mara,emert. lt is
believeJ tlat tlis Jual Jecisior-makir, resporsibility sloulJ erable tle firm to si-
multareously aclieve its particular objectives. lr a classic matrix structure, ,ivir,
proJuct Jivisiors arJ ,eo,raplical areas equal status witlir tle or,arizatior reir-
forces tle iJea of Jual resporsibility. lrJiviJual mara,ers tlus belor, to two lierar-
clies (a Jivisioral lierarcly arJ ar area lierarcly) arJ lave two bosses (a Jivisioral
boss arJ ar area boss).
1le reality of tle ,lobal matrix structure is tlat it ofter Joes rot work as well as tle
tleory preJicts. lr practice, tle matrix ofter is clumsy arJ bureaucratic. lt car require
so mary meetir,s tlat it is Jifficult to ,et ary work Jore. 1le reeJ to ,et ar area arJ
a proJuct Jivisior to reacl a Jecisior car slow Jecisior makir, arJ proJuce ar ir-
flexible or,arizatior urable to resporJ quickly to market slifts or to irrovate. 1le
Jual-lierarcly structure car leaJ to corflict arJ perpetual power stru,,les betweer tle
areas arJ tle proJuct Jivisiors, catclir, mary mara,ers ir tle miJJle. 1o make mat-
ters worse, it car prove Jifficult to ascertair accourtability ir tlis structure. Wler all
critical Jecisiors are tle proJuct of re,otiatior betweer Jivisiors arJ areas, ore siJe
car always blame tle otler wler tlir,s ,o wror,. As a mara,er ir ore ,lobal matrix
Funclional Unils Funclional Unils
Headquarlers
vorldwide
Producl Croup
or Division A
vorldwide
Producl Croup
or Division B
vorldwide
Producl Croup
or Division C
Area !
(Doneslic
Area 2
(nlernalional
FIGURE 13. 8
A vorldwide Producl
Divisional Slruclure
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structure, reflectir, or a faileJ proJuct laurcl, saiJ to tle autlor, HaJ we beer able
to Jo tlir,s our way, irsteaJ of lavir, to accommoJate tlose ,uys from tle proJuct
Jivisior, tlis woulJ rever lave lappereJ." (A mara,er ir tle proJuct Jivisior ex-
presseJ similar sertimerts.) 1le result of sucl fir,er-poirtir, car be tlat accourta-
bility is compromiseJ, corflict is erlarceJ, arJ leaJquarters loses cortrol over tle
or,arizatior. (See tle Mara,emert locus or Dow Clemical for ar example of tle
problems associateJ witl a matrix structure.)
lr li,lt of tlese problems, mary firms tlat pursue a trarsratioral strate,y lave trieJ
to builJ flexible" matrix structures baseJ more or erterprisewiJe mara,emert krowl-
eJ,e retworks, arJ a slareJ culture arJ visior, tlar or a ri,iJ lierarclical arrar,emert.
Witlir sucl comparies tle irformal structure plays a ,reater role tlar tle formal struc-
ture. We Jiscuss tlis issue wler we corsiJer irformal irte,ratir, meclarisms ir tle rext
sectior.
INTEGRATING MECHANISMS
lr tle previous sectior, we explaireJ tlat firms JiviJe tlemselves irto suburits. Now we
reeJ to examire some mears of coorJiratir, tlose suburits. re way of aclievir, co-
orJiratior is tlrou,l certralizatior. lf tle coorJiratior task is complex, lowever, cer-
tralizatior may rot be very effective. Hi,ler-level mara,ers resporsible for aclievir,
coorJiratior car soor become overwlelmeJ by tle volume of work requireJ to coorJi-
rate tle activities of various suburits, particularly if tle suburits are lar,e, Jiverse, arJ/or
,eo,raplically JisperseJ. Wler tlis is tle case, firms look towarJ irte,ratir, mecla-
risms, botl formal arJ irformal, to lelp aclieve coorJiratior. lr tlis sectior, we irtro-
Juce tle various irte,ratir, meclarisms tlat irterratioral busiresses car use. Lefore
Joir, so, lowever, let us explore tle reeJ for coorJiratior ir irterratioral firms arJ
some impeJimerts to coorJiratior.
Strategy and Coordination in the InternationaI Business
1le reeJ for coorJiratior betweer suburits varies witl tle strate,y of tle firm. 1le
reeJ for coorJiratior is lowest ir firms pursuir, a localizatior strate,y, is li,ler ir ir-
terratioral comparies, li,ler still ir ,lobal comparies, arJ li,lest of all ir trarsra-
Headquarlers
Area ! Area 2 Area 3
Producl
Division A
Producl
Division B
Producl
Division C
anager Here
Belongs lo Division B
and Area 2
FIGURE 13. 9
A Clobal alrix
Slruclure
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tioral comparies. lirms pursuir, a localizatior strate,y are primarily corcerreJ witl lo-
cal resporsiveress. Sucl firms are likely to operate witl a worlJwiJe area structure ir
wlicl eacl area las corsiJerable autoromy arJ its owr set of value creatior furctiors.
Lecause eacl area is establisleJ as a starJ-alore ertity, tle reeJ for coorJiratior be-
tweer areas is mirimizeJ.
1le reeJ for coorJiratior is ,reater ir firms pursuir, ar irterratioral strate,y arJ
tryir, to profit from tle trarsfer of core competercies arJ skills betweer urits at lome
arJ abroaJ. CoorJiratior is recessary to support tle trarsfer of skills arJ proJuct offer-
ir,s betweer urits. 1le reeJ for coorJiratior is also ,reat ir firms tryir, to profit from
locatior arJ experierce curve ecoromies; tlat is, ir firms pursuir, ,lobal starJarJiza-
tior strate,ies. Aclievir, locatior arJ experierce ecoromies irvolves Jispersir, value
creatior activities to various locatiors arourJ tle ,lobe. 1le resultir, ,lobal web of ac-
tivities must be coorJirateJ to ersure tle smootl flow of irputs irto tle value clair, tle
smootl flow of semifirisleJ proJucts tlrou,l tle value clair, arJ tle smootl flow of
firisleJ proJucts to markets arourJ tle worlJ.
1le reeJ for coorJiratior is ,reatest ir trarsratioral firms, wlicl simultareously
pursue locatior arJ experierce curve ecoromies, local resporsiveress, arJ tle multiJi-
rectioral trarsfer of core competercies arJ skills amor, all of tle firm's suburits (referreJ
to as ,lobal learrir,). As witl a ,lobal starJarJizatior strate,y, coorJiratior is requireJ
to ersure tle smootl flow of proJucts tlrou,l tle ,lobal value clair. As witl ar irter-
ratioral strate,y, coorJiratior is requireJ for ersurir, tle trarsfer of core competercies
to suburits. However, tle trarsratioral ,oal of aclievir, multiJirectioral trarsfer of
competercies requires mucl ,reater coorJiratior tlar ir firms pursuir, ar irterratioral
strate,y. lr aJJitior, a trarsratioral strate,y requires coorJiratior betweer forei,r sub-
urits arJ tle firm's ,lobally JisperseJ value creatior activities (e.,., proJuctior, l&D,
marketir,) to ersure tlat ary proJuct offerir, arJ marketir, strate,y is sufficiertly cus-
tomizeJ to local corJitiors.
Impediments to Coordination
Mara,ers of tle various suburits lave Jifferert oriertatiors, partly because tley lave
Jifferert tasks. lor example, proJuctior mara,ers are typically corcerreJ witl proJuc-
tior issues sucl as capacity utilizatior, cost cortrol, arJ quality cortrol, wlereas mar-
ketir, mara,ers are corcerreJ witl marketir, issues sucl as pricir,, promotiors,
Jistributior, arJ market slare. 1lese Jiffererces car irlibit commuricatior betweer
tle mara,ers. Quite simply, tlese mara,ers ofter Jo rot ever speak tle same lar,ua,e."
1lere may also be a lack of respect betweer suburits (e.,., marketir, mara,ers lookir,
Jowr or" proJuctior mara,ers, arJ vice versa), wlicl furtler irlibits tle commurica-
tior requireJ to aclieve cooperatior arJ coorJiratior.
Differerces ir suburits' oriertatiors also arise from tleir Jifferir, ,oals. lor example,
worlJwiJe proJuct Jivisiors of a multiratioral firm may be committeJ to cost ,oals tlat
require ,lobal proJuctior of a starJarJizeJ proJuct, wlereas a forei,r subsiJiary may be
committeJ to ircreasir, its market slare ir its courtry, wlicl will require a rorstarJarJ
proJuct. 1lese Jifferert ,oals car leaJ to corflict.
Sucl impeJimerts to coorJiratior are rot urusual ir ary firm, but tley car be par-
ticularly problematic ir tle multiratioral erterprise witl its profusior of suburits at
lome arJ abroaJ. Differerces ir suburit oriertatior are ofter reirforceJ ir multira-
tiorals by tle separatiors of time zore, Jistarce, arJ ratiorality betweer mara,ers of tle
suburits.
lor example, urtil recertly tle Dutcl compary llilips laJ ar or,arizatior compris-
ir, worlJwiJe proJuct Jivisiors arJ lar,ely autoromous ratioral or,arizatiors. 1le
compary las lor, laJ problems ,ettir, its proJuct Jivisiors arJ ratioral or,arizatiors
to cooperate or sucl tlir,s as rew-proJuct irtroJuctiors. Wler llilips JevelopeJ a
\Cl format, tle \2OOO system, it coulJ rot ,et its Nortl Americar subsiJiary to irtro-
Juce tle proJuct. latler, tle Nortl Americar urit aJopteJ tle rival \HS format pro-
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JuceJ by llilip's ,lobal competitor, Matsuslita. Lrilever experierceJ a similar problem
ir its Jeter,erts busiress. 1le reeJ to resolve Jisputes betweer Lrilever's mary ratioral
or,arizatiors arJ its proJuct Jivisiors exterJeJ tle time recessary for irtroJucir, a rew
proJuct across Lurope to several years. 1lis JerieJ Lrilever tle first-mover aJvarta,e
crucial to builJir, a stror, market positior.
FormaI Integrating Mechanisms
1le formal meclarisms useJ to irte,rate suburits vary ir complexity from simple Jirect
cortact arJ liaisor roles, to teams, to a matrix structure (see li,ure 13.1O). lr ,ereral,
tle ,reater tle reeJ for coorJiratior, tle more complex tle formal irte,ratir, mecla-
risms reeJ to be.
12
Direct cortact betweer suburit mara,ers is tle simplest irte,ratir, meclarism. Ly
tlis meclarism," mara,ers of tle various suburits simply cortact eacl otler wlerever
tley lave a commor corcerr. Direct cortact may rot be effective if tle mara,ers lave
Jifferir, oriertatiors tlat act to impeJe coorJiratior, as poirteJ out ir tle previous
subsectior.
Liaisor roles are a bit more complex. Wler tle volume of cortacts betweer suburits
ircreases, coorJiratior car be improveJ by ,ivir, a persor ir eacl suburit resporsibil-
ity for coorJiratir, witl arotler suburit or a re,ular basis. 1lrou,l tlese roles, tle peo-
Ihe 8ise aod FaII oI ow 6heicaI's Matrix 8tructure
lo nake Dow operalions responsive lo bolh local narkel
needs and corporale objeclives. Thus, lhe plaslics busi
ness nighl be charged wilh nininizing Dows global
plaslics produclion cosls, while lhe Spanish opera
lion nighl be charged wilh delernining how besl
lo sell plaslics in lhe Spanish narkel.
vhen Dow inlroduced lhis slruclure, lhe
resulls were less lhan pronising, nulliple re
porling channels led lo conlusion and conllicl.
The large nunber ol bosses nade lor an un
wieldy bureaucracy. The overlapping responsi
bililies resulled in lurl ballles and a lack ol
accounlabilily. Area nanagers disagreed wilh nan
agers overseeing business seclors aboul which planls
should be buill and where. n shorl, lhe slruclure didnl
work. nslead ol abandoning lhe slruclure, however,
Dow decided lo see il il could be nade nore llexible.
Dows decision lo keep ils nalrix slruclure was
pronpled by ils nove inlo lhe pharnaceulicals induslry.
The conpany realized lhal lhe pharnaceulical business
is very dillerenl lron lhe bulk chenicals business. n bulk
chenicals, lhe big relurns cone lron achieving
econonies ol scale in produclion. This diclales eslab
lishing large planls in key localions lron which regional
or global narkels can be served. Bul in pharnaceulicals,
regulalory and narkeling requirenenls lor drugs vary so
A handlul
ol najor
players conpele headlohead around lhe world in lhe
chenical induslry. These conpanies are Dow Chenical
and Du Ponl ol lhe Uniled Slales, Creal Brilains C, and
lhe Cernan lrio ol BASF, Hoechsl AC, and Bayer. The
barriers lo lhe lree llow ol chenical producls belween
nalions largely disappeared in lhe !970s. This along wilh
lhe connodily nalure ol nosl bulk chenicals and a se
vere recession in lhe early !930s ushered in a prolonged
period ol inlense price conpelilion. n such an environ
nenl, lhe conpany lhal wins lhe conpelilive race is lhe
one wilh lhe lowesl cosls. Dow Chenicals was long
anong lhe cosl leaders.
For years, Dows nanagers insisled lhal parl ol lhe
credil should be placed al lhe leel ol ils nalrix organ
izalion. Dows organizalional nalrix had lhree inleracling
elenenls: lunclions (e.g., F&D, nanulacluring, narkel
ing, businesses (e.g., elhylene, plaslics, pharnaceuli
cals, and geography (e.g., Spain, Cernany, Brazil.
anagers job lilles incorporaled all lhree elenenls-lor
exanple, plaslics narkeling nanager lor Spain-and
nosl nanagers reporled lo al leasl lwo bosses. The
plaslics narkeling nanager in Spain nighl reporl lo bolh
lhe head ol lhe worldwide plaslics business and lhe head
ol lhe Spanish operalions. The inlenl ol lhe nalrix was
MANAGEMENT FOCUS
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ple irvolveJ establisl a permarert relatiorslip. 1lis lelps atteruate tle impeJimerts
to coorJiratior JiscusseJ ir tle previous subsectior.
Wler tle reeJ for coorJiratior is ,reater still, firms terJ to use temporary or perma-
rert teams composeJ of irJiviJuals from tle suburits tlat reeJ to aclieve coorJiratior.
1ley typically coorJirate proJuct Jevelopmert arJ irtroJuctior, but tley are useful
wler ary aspect of operatiors or strate,y requires tle cooperatior of two or more sub-
urits. lroJuct Jevelopmert arJ irtroJuctior teams are typically composeJ of persorrel
from l&D, proJuctior, arJ marketir,. 1le resultir, coorJiratior aiJs tle Jevelopmert
of proJucts tlat are tailoreJ to corsumer reeJs arJ tlat car be proJuceJ at a reasorable
cost (Jesi,r for marufacturir,).
Wler tle reeJ for irte,ratior is very li,l, firms may irstitute a matrix structure, ir
wlicl all roles are vieweJ as irte,ratir, roles. 1le structure is Jesi,reJ to facilitate max-
imum irte,ratior amor, suburits. 1le most commor matrix ir multiratioral firms is
baseJ or ,eo,raplical areas arJ worlJwiJe proJuct Jivisiors. 1lis aclieves a li,l level
of irte,ratior betweer tle proJuct Jivisiors arJ tle areas so tlat, ir tleory, tle firm car
pay close attertior to botl local resporsiveress arJ tle pursuit of locatior arJ experi-
erce curve ecoromies.
lr some multiratiorals, tle matrix is more complex still, structurir, tle firm irto ,e-
o,raplical areas, worlJwiJe proJuct Jivisiors, arJ furctiors, all of wlicl report Jirectly
nuch lron counlry lo counlry lhal local needs are lar
nore inporlanl lhan reducing nanulacluring cosls
lhrough scale econonies. A high degree ol local respon
siveness is essenlial. Dow realized ils pharnaceulical
business would never lhrive il il were nanaged by lhe
sane priorilies as ils nainslrean chenical operalions.
Accordingly, inslead ol abandoning ils nalrix, Dow de
cided lo nake il nore llexible so il could beller acconno
dale lhe dillerenl businesses, each wilh ils own priorilies,
wilhin a single nanagenenl syslen. A snall lean ol sen
ior execulives al headquarlers helped sel lhe priorilies lor
each lype ol business. Aller priorilies were idenlilied lor
each business seclor, one ol lhe lhree elenenls ol lhe na
lrix-lunclion, business, or geographic area-was given
prinary aulhorily in decision naking. vhich elenenl look
lhe lead varied according lo lhe lype ol decision and lhe
narkel or localion in which lhe conpany was conpeling.
Such llexibilily required lhal all enployees undersland
whal was occurring in lhe resl ol lhe nalrix. Allhough lhis
nay seen conlusing, lor years Dow clained lhis llexible
syslen worked well and crediled nuch ol ils success lo
lhe qualily ol lhe decisions il lacililaled
By lhe nid!990s, however, Dow had relocused ils
business on lhe chenicals induslry, divesling ilsell ol ils
pharnaceulical aclivilies where lhe conpanys perlor
nance had been unsalislaclory. Fellecling lhe change in
corporale slralegy, in !995 Dow decided lo abandon ils
nalrix slruclure in lavor ol a nore slreanlined slruclure
based on global business divisions. The change was also
driven by realizalion lhal lhe nalrix slruclure was jusl loo
conplex and coslly lo nanage in lhe inlense conpelilive
environnenl ol lhe !990s, parlicularly given lhe con
panys renewed locus on ils connodily chenicals
where conpelilive advanlage ollen wenl lo lhe lowcosl
producer. As Dows lhen CEO pul il in a !999 inlerview,
ve were an organizalion lhal was nalrixed and de
pended on leanwork, bul lhere was no one in charge.
vhen lhings wenl well, we didnl know whon lo re
ward, and when lhings wenl poorly, we didnl know
whon lo blane. So we crealed a global divisional slruc
lure, and cul oul layers ol nanagenenl. There used lo be
!! layers ol nanagenenl belween ne and lhe lowesl
level enployees, now lhere are live. n shorl, Dow ulli
nalely lound lhal a nalrix slruclure was unsuiled lo a
conpany lhal was conpeling in very coslconpelilive
global induslries, and il had lo abandon ils nalrix lo drive
down operaling cosls.
Source: Dow Draws ls alrix Again, and Again, and Again, 8LI
)GSRSQMWX Augusl 5, !939, pp. 55-56, Dow Coes lor Clobal Slruc
lure, 'LIQMGEP1EVOIXMRK6ITSVXIV Decenber !!, !995, pp. 4-5,
and F. . Hodgells, Dow Chenical CEO villian Slavropoulos on
Slruclure and Decision aking, %GEHIQ]SJ1EREKIQIRX)\IGY
XMZI ovenber !999, pp. 29-35.
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to leaJquarters. 1lus, witlir a compary sucl as Dow Clemical before it abarJoreJ its
matrix ir tle miJ-199Os (see tle Mara,emert locus), eacl mara,er belor,eJ to tlree
lierarclies (e.,., a plastics marketir, mara,er ir Spair was a member of tle Sparisl sub-
siJiary, tle plastics proJuct Jivisior, arJ tle marketir, furctior). lr aJJitior to facili-
tatir, local resporsiveress arJ locatior arJ experierce curve ecoromies, sucl a matrix
fosters tle trarsfer of core competercies witlir tle or,arizatior. 1lis occurs because
core competercies terJ to resiJe ir furctiors (e.,., l&D, marketir,). A structure sucl
as tlis ir tleory facilitates tle trarsfer of competercies existir, ir furctiors from Jivi-
sior to Jivisior arJ from area to area.
However, as JiscusseJ earlier, sucl matrix solutiors to coorJiratior problems ir multi-
ratioral erterprises car quickly become bo,,eJ Jowr ir a bureaucratic tar,le tlat cre-
ates as mary problems as it solves. Matrix structures terJ to be bureaucratic, irflexible,
arJ claracterizeJ by corflict ratler tlar tle lopeJ-for cooperatior. lor sucl a structure
to work it reeJs to be somewlat flexible arJ to be supporteJ by irformal irte,ratir,
meclarisms.
13
InformaI Integrating Mechanism: KnowIedge Networks
lr attemptir, to alleviate or avoiJ tle problems associateJ witl formal irte,ratir, mecl-
arisms ir ,ereral, arJ matrix structures ir particular, firms witl a li,l reeJ for irte,ra-
tior lave beer experimertir, witl ar irformal irte,ratir, meclarism: krowleJ,e
retworks tlat are supporteJ by ar or,arizatior culture tlat values teamwork arJ cross-
urit cooperatior.
1+
A knoweJge network is a retwork for trarsmittir, irformatior
witlir ar or,arizatior tlat is baseJ rot or formal or,arizatior structure, but or irfor-
mal cortacts betweer mara,ers witlir ar erterprise arJ or JistributeJ irformatior sys-
tems.
15
1le ,reat strer,tl of sucl a retwork is tlat it car be useJ as a rorbureaucratic
corJuit for krowleJ,e flows witlir a multiratioral erterprise.
16
lor a retwork to exist,
mara,ers at Jifferert locatiors witlir tle or,arizatior must be lirkeJ to eacl otler at
least irJirectly. lor example, li,ure 13.11 slows tle simple retwork relatiorslips be-
tweer sever mara,ers witlir a multiratioral firm. Mara,ers A, L, arJ C all krow eacl
otler persorally, as Jo mara,ers D, L, arJ l. Altlou,l mara,er L Joes rot krow mar-
a,er l persorally, tley are lirkeJ tlrou,l commor acquairtarces (mara,ers C arJ D).
1lus, we car say tlat mara,ers A tlrou,l l are all part of tle retwork, arJ also tlat
mara,er C is rot.
lma,ire mara,er L is a marketir, mara,er ir Spair arJ reeJs to krow tle solutior
to a teclrical problem to better serve ar importart Luropear customer. Mara,er l, ar
l&D mara,er ir tle LriteJ States, las tle solutior to mara,er L's problem. Mara,er
Direcl Conlacl
Liaison Foles
Teans
alrix Slruclures
ncreasing Conplexily
ol nlegraling echanisn
FIGURE 13. 10
Fornal nlegraling
echanisns
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L mertiors ler problem to all of ler cortacts, ircluJir, mara,er C, arJ asks if tley
krow of aryore wlo mi,lt be able to proviJe a solutior. Mara,er C asks mara,er D,
wlo tells mara,er l, wlo tler calls mara,er L witl tle solutior. lr tlis way, coorJira-
tior is aclieveJ irformally tlrou,l tle retwork, ratler tlar by formal irte,ratir, mecl-
arisms sucl as teams or a matrix structure.
lor sucl a retwork to furctior effectively, lowever, it must embrace as mary mar-
a,ers as possible. lor example, if mara,er C laJ a problem similar to mara,er L's, le
woulJ rot be able to utilize tle irformal retwork to firJ a solutior; le woulJ lave to re-
sort to more formal meclarisms. Lstablislir, firmwiJe krowleJ,e retworks is Jifficult,
arJ altlou,l retwork ertlusiasts speak of retworks as tle ,lue" tlat birJs multira-
tioral comparies to,etler, it is far from clear low successful firms lave beer at builJir,
comparywiJe retworks. 1wo teclriques beir, useJ to establisl retworks are irforma-
tior systems arJ mara,emert Jevelopmert policies.
lirms are usir, tleir JistributeJ computer arJ telecommuricatiors irformatior sys-
tems to proviJe tle fourJatior for irformal krowleJ,e retworks.
17
Llectroric mail,
viJeocorferercir,, li,l-barJwiJtl Jata systems, arJ Web-baseJ searcl er,ires make
it mucl easier for mara,ers scattereJ over tle ,lobe to ,et to krow eacl otler, to iJer-
tify cortacts tlat mi,lt lelp to solve a particular problem, arJ to publicize arJ slare
best practices witlir tle or,arizatior. Wal-Mart, for example, row uses its irtraret sys-
tem to commuricate iJeas about merclarJisir, strate,y betweer stores locateJ ir Jif-
ferert courtries.
lirms are also usir, tleir mara,emert Jevelopmert pro,rams to builJ irformal
retworks. 1actics ircluJe rotatir, mara,ers tlrou,l various suburits or a re,ular ba-
sis so tley builJ tleir owr irformal retwork arJ usir, mara,emert eJucatior pro-
,rams to brir, mara,ers of suburits to,etler ir a sir,le locatior so tley car become
acquairteJ.
lrowleJ,e retworks by tlemselves may rot be sufficiert to aclieve coorJiratior if
suburit mara,ers persist ir pursuir, sub,oals tlat are at variarce witl firmwiJe ,oals.
lor a krowleJ,e retwork to furctior properly-arJ for a formal matrix structure to work
also-mara,ers must slare a stror, commitmert to tle same ,oals. 1o appreciate tle ra-
ture of tle problem, corsiJer a,air tle case of mara,er L arJ mara,er l. As before, mar-
a,er l lears about mara,er L's problem tlrou,l tle retwork. However, solvir, mara,er
L's problem woulJ require mara,er l to Jevote corsiJerable time to tle task. lrsofar as
tlis woulJ Jivert mara,er l away from lis owr re,ular tasks-arJ tle pursuit of sub,oals
tlat Jiffer from tlose of mara,er L-le may be urwillir, to Jo it. 1lus, mara,er l may
rot call mara,er L, arJ tle irformal retwork woulJ fail to proviJe a solutior to mar-
a,er L's problem.
A
B
F
E
C
C D
FIGURE 13. 11
A Sinple anagenenl
elwork
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1o elimirate tlis flaw, or,arizatior's mara,ers must aJlere to a commor set of rorms
arJ values tlat overriJe Jifferir, suburit oriertatiors.
18
lr otler worJs, tle firm must lave
a stror, or,arizatioral culture tlat promotes teamwork arJ cooperatior. Wler tlis is tle
case, a mara,er is willir, arJ able to set asiJe tle irterests of lis owr suburit wler Joir,
so berefits tle firm as a wlole. lf mara,er L arJ mara,er l are committeJ to tle same or-
,arizatioral rorms arJ value systems, arJ if tlese or,arizatioral rorms arJ values place
tle irterests of tle firm as a wlole above tle irterests of ary irJiviJual suburit, mara,er
l sloulJ be willir, to cooperate witl mara,er L or solvir, ler suburit's problems.
Summary
1le messa,e cortaireJ ir tlis sectior is crucial to urJerstarJir, tle problems of mar-
a,ir, tle multiratioral firm. Multiratiorals reeJ irte,ratior-particularly if tley are
pursuir, ,lobal starJarJizatior, irterratioral, or trarsratioral strate,ies-but it car be
Jifficult to aclieve Jue to tle impeJimerts to coorJiratior we JiscusseJ. lirms traJi-
tiorally lave trieJ to aclieve coorJiratior by aJoptir, formal irte,ratir, meclarisms.
1lese Jo rot always work, lowever, sirce tley terJ to be bureaucratic arJ Jo rot rec-
essarily aJJress tle problems tlat arise from Jifferir, suburit oriertatiors. 1lis is par-
ticularly likely witl a complex matrix structure, arJ yet, a complex matrix structure is
requireJ for simultareously aclievir, locatior arJ experierce curve ecoromies, local re-
sporsiveress, arJ tle multiJirectioral trarsfer of core competercies witlir tle or,ari-
zatior. 1le solutior to tlis Jilemma seems twofolJ. lirst, tle firm must try to establisl
ar irformal krowleJ,e retwork tlat car Jo mucl of tle work previously urJertaker by
a formal matrix structure. SecorJ, tle firm must builJ a commor culture. Neitler of
tlese partial solutiors, lowever, is easy to aclieve.
19
A major task of a firm's leaJerslip is to cortrol tle various suburits of tle firm-wletler
tley be JefireJ or tle basis of furctior, proJuct Jivisior, or ,eo,raplic area-to ersure
tleir actiors are corsistert witl tle firm's overall strate,ic arJ firarcial objectives. lirms
aclieve tlis witl various cortrol arJ ircertive systems. lr tlis sectior, we first review
tle various types of cortrol systems firms use to cortrol tleir suburits. 1ler we briefly
Jiscuss ircertive systems. 1ler we will look at low tle appropriate cortrol arJ ircer-
tive systems vary accorJir, to tle strate,y of tle multiratioral erterprise.
TYPES OF CONTROL SYSTEMS
lour mair types of cortrol systems are useJ ir multiratioral firms: persoral cortrols, bu-
reaucratic cortrols, output cortrols, arJ cultural cortrols. lr most firms, all four are useJ,
but tleir relative emplasis varies witl tle strate,y of tle firm.
PersonaI ControIs
Persona contro is cortrol by persoral cortact witl suborJirates. 1lis type of cortrol
terJs to be most wiJely useJ ir small firms, wlere it is seer ir tle Jirect supervisior of
suborJirates' actiors. However, it also structures tle relatiorslips betweer mara,ers at
Jifferert levels ir multiratioral erterprises. lor example, tle CL may use a ,reat Jeal
of persoral cortrol to irfluerce tle belavior of lis or ler immeJiate suborJirates, sucl
as tle leaJs of worlJwiJe proJuct Jivisiors or major ,eo,raplic areas. lr turr, tlese
leaJs may use persoral cortrol to irfluerce tle belavior of tleir suborJirates, arJ so or
Jowr tlrou,l tle or,arizatior. Jack Welcl, tle lor,time CL of Cereral Llectric wlo
retireJ ir 2OO1, laJ re,ular ore-or-ore meetir,s witl tle leaJs of all of CL's major busi-
resses (most of wlicl are irterratioral).
2O
He useJ tlese meetir,s to probe tle mara,ers
about tle strate,y, structure, arJ firarcial performarce of tleir operatiors. lr Joir, so,
le essertially exerciseJ persoral cortrol over tlese mara,ers arJ, urJoubteJly, over tle
strate,ies tlat tley favoreJ.
Control Systems and Incentives
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Bureaucratic ControIs
Bureaucratic contro is cortrol tlrou,l a system of rules arJ proceJures tlat Jirects tle
actiors of suburits. 1le most importart bureaucratic cortrols ir suburits witlir multi-
ratioral firms are buJ,ets arJ capital sperJir, rules. LuJ,ets are essertially a set of rules
for allocatir, a firm's firarcial resources. A suburit's buJ,et specifies witl some precisior
low mucl tle suburit may sperJ. HeaJquarters uses buJ,ets to irfluerce tle belavior of
suburits. lor example, tle l&D buJ,et rormally specifies low mucl casl tle l&D urit
may sperJ or proJuct Jevelopmert. l&D mara,ers krow tlat if tley sperJ too mucl or
ore project, tley will lave less to sperJ or otler projects, so tley moJify tleir belavior
to stay witlir tle buJ,et. Most buJ,ets are set by re,otiatior betweer leaJquarters mar-
a,emert arJ suburit mara,emert. HeaJquarters mara,emert car ercoura,e tle ,rowtl
of certair suburits arJ restrict tle ,rowtl of otlers by maripulatir, tleir buJ,ets.
Capital sperJir, rules require leaJquarters mara,emert to approve ary capital ex-
perJiture by a suburit tlat exceeJs a certair amourt. A buJ,et allows leaJquarters to
specify tle amourt a suburit car sperJ ir a ,iver year, arJ capital sperJir, rules ,ive
leaJquarters aJJitioral cortrol over low tle morey is spert. HeaJquarters car be ex-
pecteJ to Jery approval for capital sperJir, requests tlat are at variarce witl overall
firm objectives arJ to approve tlose tlat are cor,ruert witl firm objectives.
Output ControIs
Output contros irvolve settir, ,oals for suburits to aclieve arJ expressir, tlose ,oals
ir terms of relatively objective performarce metrics sucl as profitability, proJuctivity,
,rowtl, market slare, arJ quality. 1le performarce of suburit mara,ers is tler juJ,eJ
by tleir ability to aclieve tle ,oals.
21
lf ,oals are met or exceeJeJ, suburit mara,ers will
be rewarJeJ. lf ,oals are rot met, top mara,emert will rormally irtervere to firJ out
wly arJ take appropriate corrective actior. 1lus, cortrol is aclieveJ by comparir, ac-
tual performarce a,airst tar,ets arJ irterverir, selectively to take corrective actior.
Suburits' ,oals JeperJ or tleir role ir tle firm. Self-cortaireJ proJuct Jivisiors or ra-
tioral subsiJiaries are typically ,iver ,oals for profitability, sales ,rowtl, arJ market
slare. lurctiors are more likely to be ,iver ,oals relateJ to tleir particular activity. 1lus,
l&D will be ,iver proJuct Jevelopmert ,oals, proJuctior will be ,iver proJuctivity arJ
quality ,oals, marketir, will be ,iver market slare ,oals, arJ so or.
As witl buJ,ets, ,oals are rormally establisleJ tlrou,l re,otiatior betweer suburits
arJ leaJquarters. Cererally, leaJquarters tries to set ,oals tlat are claller,ir, but real-
istic, so suburit mara,ers are forceJ to look for ways to improve tleir operatiors but are
rot so pressureJ tlat tley will resort to Jysfurctioral activities to Jo so (sucl as slort-
rur profit maximizatior). utput cortrols foster a system of mara,emert by exceptior,"
ir tlat so lor, as suburits meet tleir ,oals, tley are left alore. lf a suburit fails to attair
its ,oals, lowever, leaJquarters mara,ers are likely to ask some tou,l questiors. lf tley
Jor't ,et satisfactory arswers, tley are likely to irtervere proactively ir a suburit, re-
placir, top mara,emert arJ lookir, for ways to improve efficiercy.
CuIturaI ControIs
Cutura contros exist wler employees buy irto" tle rorms arJ value systems of tle
firm. Wler tlis occurs, employees terJ to cortrol tleir owr belavior, wlicl reJuces tle
reeJ for Jirect supervisior. lr a firm witl a stror, culture, self-cortrol car reJuce tle reeJ
for otler cortrol systems. We slall Jiscuss or,arizatioral culture later. McDoralJ's ac-
tively promotes or,arizatioral rorms arJ values, referrir, to its frarclisees arJ suppliers
as partrers arJ emplasizir, its lor,-term commitmert to tlem. 1lis commitmert is rot
just a public relatiors exercise; it is backeJ by actiors, ircluJir, a willir,ress to lelp sup-
pliers arJ frarclisees improve tleir operatiors by proviJir, capital arJ/or mara,emert
assistarce wler reeJeJ. lr resporse, McDoralJ's frarclisees arJ suppliers are irte,rateJ
irto tle firm's culture arJ tlus become committeJ to lelpir, McDoralJ's succeeJ. re
result is tlat McDoralJ's car Jevote less time tlar woulJ otlerwise be recessary to cor-
trollir, its frarclisees arJ suppliers.
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INCENTIVE SYSTEMS
lrcertives refer to tle Jevices useJ to rewarJ appropriate employee belavior. Mary em-
ployees receive ircertives ir tle form of arrual borus pay. lrcertives are usually closely
tieJ to tle performarce metrics useJ for output cortrols. lor example, settir, tar,ets
lirkeJ to profitability mi,lt be useJ to measure tle performarce of a suburit, sucl as a
,lobal proJuct Jivisior. 1o create positive ircertives for employees to work larJ to ex-
ceeJ tlose tar,ets, tley may be ,iver a slare of ary profits above tlose tar,eteJ. lf a sub-
urit las set a ,oal of attairir, a 15 percert returr or irvestmert arJ it actually attairs
a 2O percert returr, urit employees may be ,iver a slare ir tle profits ,ererateJ ir ex-
cess of tle 15 percert tar,et ir tle form of borus pay. We slall returr to tle topic of ir-
certive systems ir Clapter 18 wler we Jiscuss lumar resource strate,y ir tle
multiratioral firm. lor row, lowever, several importart poirts reeJ to be maJe. lirst,
tle type of ircertive useJ ofter varies JeperJir, or tle employees arJ tleir tasks. lr-
certives for employees workir, or tle factory floor may be very Jifferert from tle ir-
certives useJ for serior mara,ers. 1le ircertives useJ must be matcleJ to tle type of
work beir, performeJ. 1le employees or tle factory floor of a marufacturir, plart may
be broker irto teams of 2O to 3O irJiviJuals, arJ tley may lave tleir borus pay tieJ to
tle ability of tleir team to lit or exceeJ tar,ets for output arJ proJuct quality. lr cor-
trast, tle serior mara,ers of tle plart may be rewarJeJ accorJir, to metrics lirkeJ to
tle output of tle ertire operatior. 1le basic prirciple is to make sure tle ircertive
scleme for ar irJiviJual employee is lirkeJ to ar output tar,et tlat le or sle las some
cortrol over arJ car irfluerce. 1le irJiviJual employees or tle factory floor may rot
be able to exercise mucl irfluerce over tle performarce of tle ertire operatior, but
tley car irfluerce tle performarce of tleir team, so ircertive pay is tieJ to output at
tlis level.
SecorJ, tle successful executior of strate,y ir tle multiratioral firm ofter requires
si,rificart cooperatior betweer mara,ers ir Jifferert suburits. lor example, as roteJ
earlier, some multiratioral firms operate witl matrix structures wlere a courtry sub-
siJiary mi,lt be resporsible for marketir, arJ sales ir a ratior, wlile a ,lobal proJ-
uct Jivisior mi,lt be resporsible for marufacturir, arJ proJuct Jevelopmert. 1le
mara,ers of tlese Jifferert urits reeJ to cooperate closely witl eacl otler if tle firm
is to be successful. re way of ercoura,ir, tle mara,ers to cooperate is to lirk ir-
certives to performarce at a li,ler level ir tle or,arizatior. 1lus, tle serior mar-
a,ers of tle courtry subsiJiaries arJ ,lobal proJuct Jivisiors mi,lt be rewarJeJ
accorJir, to tle profitability of tle ertire firm. 1le tlirkir, lere is tlat boostir, tle
profitability of tle ertire firm requires mara,ers ir tle courtry subsiJiaries arJ proJ-
uct Jivisiors to cooperate witl eacl otler or strate,y implemertatior, arJ lirkir,
ircertive systems to tle rext level up ir tle lierarcly ercoura,es tlis. Most firms use
a formula for ircertives tlat lirks a portior of ircertive pay to tle performarce of tle
suburit ir wlicl a mara,er or employee works arJ a portior to tle performarce of
tle ertire firm, or some otler li,ler-level or,arizatioral urit. 1le ,oal is to ercour-
a,e employees to improve tle efficiercy of tleir urit arJ to cooperate witl otler urits
ir tle or,arizatior.
1lirJ, tle ircertive systems useJ witlir a multiratioral erterprise ofter lave to be
aJjusteJ to accourt for ratioral Jiffererces ir irstitutiors arJ culture. lrcertive systems
tlat work ir tle LriteJ States mi,lt rot work, or ever be alloweJ, ir otler courtries.
lor example, Lircolr Llectric, a leaJer ir tle marufacture of arc welJir, equipmert, las
useJ ar ircertive system for its employees baseJ or piecework rates ir its Americar fac-
tories (urJer a piecework system, employees are paiJ accorJir, to tle amourt tley pro-
Juce). Wlile tlis system las workeJ very well ir tle LriteJ States, Lircolr las fourJ
tlat tle system is Jifficult to irtroJuce ir otler courtries. lr some courtries, sucl as Cer-
mary, piecework systems are ille,al, wlile ir otlers tle prevailir, ratioral culture is ar-
ta,oristic to a system wlere performarce is so closely tieJ to irJiviJual effort. lor furtler
Jetails, see tle accomparyir, Mara,emert locus.
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rgaoitatiooaI 6uIture aod Ioceotives at LiocoIo EIectric
work hard and lo generale innovalions lhal boosl pro
duclivily, lor doing so inlluences lheir level ol pay. Lin
colns laclory workers have been able lo earn a base pay
lhal ollen exceeds lhe average nanulacluring wage in
lhe area by nore lhan 50 percenl and receive a bonus on
lop ol lhis lhal in good years could double lheir base pay.
Despile high enployee conpensalion, lhe workers are
so produclive lhal Lincoln has a lower cosl slruclure lhan
ils conpelilors.
vhile lhis organizalional cullure and sel ol incenlives
works well in lhe Uniled Slales, where il is conpalible
wilh lhe individualislic cullure ol lhe counlry, il did nol
lranslale easily inlo loreign operalions. n lhe !930s and
early !990s, Lincoln expanded aggressively inlo Europe
and Lalin Anerica, acquiring a nunber ol local arc welding
nanulaclurers. Lincoln lell local nanagers in place, be
lieving lhal lhey knew local condilions beller lhan Aneri
cans. However, lhe local nanagers had lillle working
knowledge ol Lincolns slrong organizalional cullure and
were unable or unwilling lo inpose lhal cullure on lheir
unils, which had lheir own longeslablished organizalional
cullures. everlheless, Lincoln lold local nanagers lo in
lroduce ils incenlive syslens in acquired conpanies. They
lrequenlly ran inlo legal and cullural roadblocks.
n nany counlries, piecework is viewed as an ex
ploilive conpensalion syslen lhal lorces enployees lo
work ever harder. n Cernany, where Lincoln nade an
acquisilion, il is illegal. n Brazil, a bonus paid lor nore
lhan lwo years becones a legal enlillenenl! n nany
olher counlries, bolh nanagers and workers were op
posed lo lhe idea ol piecework. Lincoln lound lhal nany
European workers valued exlra leisure nore highly lhan
exlra incone and were nol prepared lo work as hard as
lheir Anerican counlerparls. any ol lhe acquired con
panies were also unionized, and lhe local unions vigor
ously opposed lhe inlroduclion ol piecework. As a resull,
Lincoln was nol able lo replicale lhe high level ol en
ployee produclivily lhal il had achieved in lhe Uniled
Slales, and ils expansion pulled down lhe perlornance
ol lhe enlire conpany.
Sources: J. OConnell, Lincoln Eleclric: Venluring Abroad, Har
vard Business School Case o. 9393095, April !993, and www.
lincolneleclric.con.
Lincoln
Eleclric is
one ol lhe leading conpanies in lhe global narkel lor arc
welding equipnenl. Lincolns success has been
based on exlrenely high levels ol enployee pro
duclivily. The conpany allribules ils produclivily
lo a slrong organizalional cullure and an incen
live schene based on piecework. Lincolns or
ganizalional cullure dales back lo Janes
Lincoln, who in !907 joined lhe conpany lhal
his brolher had eslablished a lew years earlier.
Lincoln had a slrong respecl lor lhe abilily ol lhe
individual and believed lhal, correclly nolivaled, or
dinary people could achieve exlraordinary perlornance.
He enphasized lhal Lincoln should be a nerilocracy
where people were rewarded lor lheir individual ellorl.
Slrongly egalilarian, Lincoln renoved barriers lo connu
nicalion belween workers and nanagers, praclicing
an opendoor policy. He nade sure lhal all who worked
lor lhe conpany were lrealed equally, lor exanple,
everyone ale in lhe sane caleleria, lhere were no re
served parking places lor nanagers, and so on. Lincoln
also believed lhal any gains in produclivily should be
shared wilh consuners in lhe lorn ol lower prices, wilh
enployees in lhe lorn ol higher pay, and wilh sharehold
ers in lhe lorn ol higher dividends.
The organizalional cullure lhal grew oul ol Janes Lin
colns beliels was reinlorced by lhe conpanys incenlive
syslen. Produclion workers receive no base salary bul
are paid according lo lhe nunber ol pieces lhey produce.
The piecework rales al lhe conpany enable an enployee
working al a nornal pace lo earn an incone equivalenl lo
lhe average wage lor nanulacluring workers in lhe area
where a laclory is based. vorkers have responsibilily lor
lhe qualily ol lheir oulpul and nusl repair any delecls
spolled by qualily inspeclors belore lhe pieces are in
cluded in lhe piecework calculalion. Since !934, produc
lion workers have been awarded a seniannual bonus
based on neril ralings. These ralings are based on ob
jeclive crileria (such as an enployees level and qualily ol
oulpul and subjeclive crileria (such as an enployees al
liludes loward cooperalion and his or her dependabilily.
These syslens give Lincolns enployees an incenlive lo
MANAGEMENT FOCUS
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lirally, it is importart for mara,ers to reco,rize tlat ircertive systems car lave ur-
irterJeJ corsequerces. Mara,ers reeJ to carefully tlirk tlrou,l exactly wlat belavior
certair ircertives ercoura,e. lor example, if employees ir a factory are rewarJeJ solely
or tle basis of low mary urits of output tley proJuce, witl ro attertior paiJ to tle qual-
ity of tlat output, tley may proJuce as mary urits as possible to boost tleir ircertive pay,
but tle quality of tlose urits may be poor.
CONTROL SYSTEMS, INCENTIVES, AND STRATEGY
IN THE INTERNATIONAL BUSINESS
1le key to urJerstarJir, tle relatiorslip betweer irterratioral strate,y, cortrol sys-
tems, arJ ircertive systems is tle corcept of performarce ambi,uity.
Performance Ambiguity
Performance ambiguity exists wler tle causes of a suburit's poor performarce are rot
clear. 1lis is rot urcommor wler a suburit's performarce is partly JeperJert or tle
performarce of otler suburits; tlat is, wler tlere is a li,l Je,ree of irterJeperJerce
betweer suburits witlir tle or,arizatior. CorsiJer tle case of a lrercl subsiJiary of a
L.S. firm tlat JeperJs or arotler subsiJiary, a marufacturer baseJ ir ltaly, for tle proJ-
ucts it sells. 1le lrercl subsiJiary is failir, to aclieve its sales ,oals, arJ tle L.S. mar-
a,emert asks tle mara,ers to explair. 1ley reply tlat tley are receivir, poor-quality
,ooJs from tle ltaliar subsiJiary. 1le L.S. mara,emert asks tle mara,ers of tle ltaliar
operatior wlat tle problem is. 1ley reply tlat tleir proJuct quality is excellert-tle
best ir tle irJustry, ir fact-arJ tlat tle lrercl simply Jor't krow low to sell a ,ooJ
proJuct. Wlo is ri,lt, tle lrercl or tle ltaliars` Witlout more irformatior, top mar-
a,emert carrot tell. Lecause tley are JeperJert or tle ltaliars for tleir proJuct, tle
lrercl lave ar alibi for poor performarce. L.S. mara,emert reeJs to lave more irfor-
matior to Jetermire wlo is correct. Collectir, tlis irformatior is expersive arJ time
corsumir, arJ will Jivert attertior away from otler issues. lr otler worJs, performarce
ambi,uity raises tle costs of cortrol.
CorsiJer low Jifferert tlir,s woulJ be if tle lrercl operatior were self-cortaireJ, witl
its owr marufacturir,, marketir,, arJ l&D facilities. 1le lrercl operatior woulJ lack a
corveriert alibi for its poor performarce; tle lrercl mara,ers woulJ starJ or fall or tleir
owr merits. 1ley coulJ rot blame tle ltaliars for tleir poor sales. 1le level of performarce
ambi,uity, tlerefore, is a furctior of tle irterJeperJerce of suburits ir ar or,arizatior.
Strategy, Interdependence, and Ambiguity
Now let us corsiJer tle relatiorslips betweer strate,y, irterJeperJerce, arJ perfor-
marce ambi,uity. lr firms pursuir, a localizatior strate,y, eacl ratioral operatior is a
starJ-alore ertity arJ car be juJ,eJ or its owr merits. 1le level of performarce ambi-
,uity is low. lr ar irterratioral firm, tle level of irterJeperJerce is somewlat li,ler.
lrte,ratior is requireJ to facilitate tle trarsfer of core competercies arJ skills. Sirce tle
success of a forei,r operatior is partly JeperJert or tle quality of tle competercy trars-
ferreJ from tle lome courtry, performarce ambi,uity car exist.
lr firms pursuir, a ,lobal starJarJizatior strate,y, tle situatior is still more complex.
lecall tlat ir a pure ,lobal firm tle pursuit of locatior arJ experierce curve ecoromies
leaJs to tle Jevelopmert of a ,lobal web of value creatior activities. Mary of tle activ-
ities ir a ,lobal firm are irterJeperJert. A lrercl subsiJiary's ability to sell a proJuct
Joes JeperJ or low well otler operatiors ir otler courtries perform tleir value creatior
activities. 1lus, tle levels of irterJeperJerce arJ performarce ambi,uity are li,l ir
,lobal comparies.
1le level of performarce ambi,uity is li,lest of all ir trarsratioral firms. 1rarsra-
tioral firms suffer from tle same performarce ambi,uity problems tlat ,lobal firms Jo. lr
aJJitior, sirce tley emplasize tle multiJirectioral trarsfer of core competercies, tley
also suffer from tle problems claracteristic of firms pursuir, ar irterratioral strate,y.
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1le extremely li,l level of irte,ratior witlir trarsratioral firms implies a li,l Je,ree
of joirt Jecisior makir,, arJ tle resultir, irterJeperJercies create plerty of alibis for
poor performarce. 1lere is lots of room for fir,er-poirtir, ir trarsratioral firms.
ImpIications for ControI and Incentives
1le ar,umerts of tle previous sectior, alor, witl tle implicatiors for tle costs of cor-
trol, are summarizeJ ir 1able 13.1. 1le costs of cortrol car be JefireJ as tle amourt of
time top mara,emert must Jevote to moritorir, arJ evaluatir, suburits' performarce.
1lis is ,reater wler tle amourt of performarce ambi,uity is ,reater. Wler performarce
ambi,uity is low, mara,emert car use output cortrols arJ a system of mara,emert by
exceptior; wler it is li,l, mara,ers lave ro sucl luxury. utput cortrols Jo rot pro-
viJe totally urambi,uous si,rals of a suburit's efficiercy wler tle performarce of tlat
suburit is JeperJert or tle performarce of arotler suburit witlir tle or,arizatior.
1lus, mara,emert must Jevote time to resolvir, tle problems tlat arise from perfor-
marce ambi,uity, witl a corresporJir, rise ir tle costs of cortrol.
1able 13.1 reveals a paraJox. We saw ir Clapter 12 tlat a trarsratioral strate,y is Je-
sirable because it ,ives a firm more ways to profit from irterratioral exparsior tlar Jo
localizatior, irterratioral, arJ ,lobal starJarJizatior strate,ies. Lut row we see tlat Jue
to tle li,l level of irterJeperJerce, tle costs of cortrollir, trarsratioral firms are
li,ler tlar tle costs of cortrollir, firms tlat pursue otler strate,ies. Lrless tlere is
some way of reJucir, tlese costs, tle li,ler profitability associateJ witl a trarsratioral
strate,y coulJ be carceleJ out by tle li,ler costs of cortrol. 1le same poirt, altlou,l
to a lesser extert, car be maJe witl re,arJ to firms pursuir, a ,lobal starJarJizatior strat-
e,y. Altlou,l firms pursuir, a ,lobal starJarJizatior strate,y car reap tle cost berefits
of locatior arJ experierce curve ecoromies, tley must cope witl a li,ler level of per-
formarce ambi,uity, arJ tlis raises tle costs of cortrol (ir comparisor witl firms pursu-
ir, ar irterratioral or localizatior strate,y).
1lis is wlere cortrol systems arJ ircertives come ir. Wler we survey tle systems
tlat corporatiors use to cortrol tleir suburits, we firJ tlat irrespective of tleir strate,y,
multiratioral firms all use output arJ bureaucratic cortrols. However, ir firms pursuir,
eitler ,lobal or trarsratioral strate,ies, tle usefulress of output cortrols is limiteJ by
substartial performarce ambi,uities. As a result, tlese firms place ,reater emplasis or
cultural cortrols. Cultural cortrol-by ercoura,ir, mara,ers to wart to assume tle or-
,arizatior's rorms arJ value systems-,ives mara,ers of irterJeperJert suburits ar ir-
certive to look for ways to work out problems tlat arise betweer tlem. 1le result is a
reJuctior ir fir,er-poirtir, arJ, accorJir,ly, ir tle costs of cortrol. 1le Jevelopmert
of cultural cortrols may be a precorJitior for tle successful pursuit of a trarsratioral
strate,y arJ perlaps of a ,lobal strate,y as well.
22
As for ircertives, tle material JiscusseJ
earlier su,,ests tlat tle corflict betweer Jifferert suburits car be reJuceJ arJ tle po-
tertial for cooperatior erlarceJ, if ircertive systems are tieJ ir some way to a li,ler
level ir tle lierarcly. Wler performarce ambi,uity makes it Jifficult to juJ,e tle per-
formarce of suburits as starJ-alore ertities, lirkir, tle ircertive pay of serior mara,ers
to tle ertity to wlicl botl suburits belor, car reJuce tle resultir, problems.
TABLE 13. 1
nlerdependence,
Perlornance Anbiguily,
and lhe Cosls ol
Conlrol lor lhe Four
nlernalional Business
Slralegies
Performance
Strategy Interdependence Ambiguity Costs of ControI
Localizalion Low Low Low
nlernalional oderale oderale oderale
Clobal High High High
Transnalional Very High Very High Very High
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We JefireJ processes as tle marrer ir wlicl Jecisiors are maJe arJ work is performeJ
witlir tle or,arizatior.
23
lrocesses car be fourJ at mary Jifferert levels witlir ar or-
,arizatior. 1lere are processes for formulatir, strate,y, processes for allocatir, resources,
processes for evaluatir, rew-proJuct iJeas, processes for larJlir, customer irquiries arJ
complairts, processes for improvir, proJuct quality, processes for evaluatir, employee
performarce, arJ so or. fter, tle core competercies or valuable skills of a firm are em-
beJJeJ ir its processes. Lfficiert arJ effective processes car lower tle costs of value cre-
atior arJ aJJ aJJitioral value to a proJuct. lor example, tle ,lobal success of mary
Japarese marufacturir, erterprises ir tle 198Os was baseJ ir part or tleir early aJop-
tior of processes for improvir, proJuct quality arJ operatir, efficiercy, ircluJir, total
quality mara,emert arJ just-ir-time irvertory systems. 1oJay, tle competitive success
of Cereral Llectric car ir part be attributeJ to a rumber of processes tlat lave beer
wiJely promoteJ witlir tle compary. 1lese ircluJe tle compary's Six Si,ma process for
quality improvemert, its process for Ji,italizatior" of busiress (usir, corporate irtrarets
arJ tle lrterret to automate activities arJ reJuce operatir, costs), arJ its process for
iJea ,ereratior, referreJ to witlir tle compary as workouts," wlere mara,ers arJ em-
ployees ,et to,etler for irtersive sessiors over several Jays to iJertify arJ commit to
iJeas for improvir, proJuctivity.
Ar or,arizatior's processes car be summarizeJ by mears of a flow clart, wlicl illus-
trates tle various steps arJ Jecisior poirts irvolveJ ir performir, work. Mary processes
cut across furctiors, or Jivisiors, arJ require cooperatior betweer irJiviJuals ir Jiffer-
ert suburits. lor example, proJuct Jevelopmert processes require employees from l&D,
marufacturir,, arJ marketir, to work to,etler ir a cooperative marrer to make sure
rew proJucts are JevelopeJ witl market reeJs ir mirJ arJ Jesi,reJ ir sucl a way tlat
tley car be marufactureJ at a low cost. Lecause tley cut across or,arizatioral bourJ-
aries, performir, processes effectively ofter requires tle establislmert of formal irte-
,ratir, meclarisms arJ ircertives for cross-urit cooperatior (see above).
A JetaileJ corsiJeratior of tle rature of processes arJ strate,ies for process improve-
mert arJ reer,ireerir, is beyorJ tle scope of tlis book. However, it is importart to
make two basic remarks about mara,ir, processes, particularly ir tle cortext of ar ir-
terratioral busiress.
2+
1le first is tlat ir a multiratioral erterprise, mary processes cut
rot orly across or,arizatioral bourJaries, embracir, several Jifferert suburits, but also
across ratioral bourJaries. Desi,rir, a rew proJuct may require tle cooperatior of
l&D persorrel locateJ ir Califorria, proJuctior people locateJ ir 1aiwar, arJ mar-
ketir, locateJ ir Lurope, America, arJ Asia. 1le clarces of pullir, tlis off are ,reatly
erlarceJ if tle processes are embeJJeJ ir ar or,arizatioral culture tlat promotes co-
operatior betweer irJiviJuals from Jifferert suburits arJ ratiors, if tle ircertive sys-
tems of tle or,arizatior explicitly rewarJ sucl cooperatior, arJ if formal arJ irformal
irte,ratir, meclarisms are useJ to facilitate coorJiratior betweer suburits.
SecorJ, it is particularly importart for a multiratioral erterprise to reco,rize tlat
valuable rew processes tlat mi,lt leaJ to a competitive aJvarta,e car be JevelopeJ ary-
wlere witlir tle or,arizatior's ,lobal retwork of operatiors.
25
New processes may be Je-
velopeJ by a local operatir, subsiJiary ir resporse to corJitiors pertairir, to its market.
1lose processes mi,lt tler lave value to otler parts of tle multiratioral erterprise. lor
example, ir resporse to competitior ir Japar arJ a local obsessior witl proJuct quality,
Japarese firms were at tle leaJir, eJ,e of Jevelopir, processes for total quality mara,e-
mert (1QM) ir tle 197Os. Lecause few Americar firms laJ Japarese subsiJiaries at tle
time, tley were relatively i,rorart of tle trerJ urtil tle 198Os wler li,l-quality Japar-
ese proJucts be,ar to make bi, irroaJs irto tle LriteJ States. Ar exceptior to tlis ,er-
eralizatior was Hewlett-lackarJ, wlicl laJ a very successful operatir, compary ir
Japar, Yoko,wa Hewlett-lackarJ (YHl). YHl was a pioreer of tle total quality mar-
a,emert process ir Japar arJ wor tle presti,ious Demir, lrize for its aclievemerts ir
improvir, proJuct quality. 1lrou,l YHl, Hewlett-lackarJ learreJ about tle quality
Processes
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movemert aleaJ of mary of its L.S. peers arJ was ore of tle first Westerr comparies to
irtroJuce 1QM processes irto its worlJwiJe operatiors. Not orly JiJ Hewlett-lackarJ's
Japarese operatior ,ive tle compary access to a valuable process, but tle compary also
trarsferreJ tlis krowleJ,e witlir its ,lobal retwork of operatiors, raisir, tle perfor-
marce of tle ertire compary. 1le ability to create valuable processes matters, but it is
also importart to levera,e tlose processes. 1lis requires botl formal arJ irformal irte-
,ratir, meclarisms sucl as krowleJ,e retworks.
Clapter 3 applieJ tle corcept of culture to ratior-states. Culture, lowever, is a social
corstruct ascribeJ to societies, ircluJir, or,arizatiors.
26
1lus, we car speak of or,ari-
zatioral culture arJ or,arizatioral subculture. 1le basic Jefiritior of culture remairs tle
same, wletler we are applyir, it to a lar,e society sucl as a ratior-state or a small soci-
ety sucl as ar or,arizatior or ore of its suburits. Culture refers to a system of values arJ
rorms tlat are slareJ amor, people. \alues are abstract iJeas about wlat a ,roup be-
lieves to be ,ooJ, ri,lt, arJ Jesirable. Norms mear tle social rules arJ ,uiJelires tlat
prescribe appropriate belavior ir particular situatiors. \alues arJ rorms express tlem-
selves as tle belavior patterrs or style of ar or,arizatior tlat rew employees are auto-
matically ercoura,eJ to follow by tleir fellow employees. Altlou,l ar or,arizatior's
culture is rarely static, it terJs to clar,e relatively slowly.
CREATING AND MAINTAINING
ORGANIZATIONAL CULTURE
Ar or,arizatior's culture comes from several sources. lirst, tlere seems to be wiJe a,ree-
mert tlat fourJers or importart leaJers car lave a profourJ impact or ar or,arizatior's
culture, ofter imprirtir, tleir owr values or tle culture.
27
1lis was certairly tle case
witl Lircolr Llectric wlere tle values of James Lircolr became tle core values of Lir-
colr Llectric (see tle Mara,emert locus). Arotler famous example of a stror, fourJer
effect corcerrs tle Japarese firm Matsuslita. lorosuke Matsuslita's almost zer-like
persoral busiress plilosoply was coJifieJ ir tle Sever Spiritual \alues" of Matsuslita
tlat all rew employees still learr toJay. 1lese values are (1) ratioral service tlrou,l ir-
Justry, (2) fairress, (3) larmory arJ cooperatior, (+) stru,,le for bettermert, (5) cour-
tesy arJ lumility, (6) aJjustmert arJ assimilatior, arJ (7) ,ratituJe. A leaJer Joes rot
lave to be tle fourJer to lave a profourJ irfluerce or or,arizatioral culture. Jack
Welcl is wiJely creJiteJ witl lavir, clar,eJ tle culture of CL, primarily by emplasiz-
ir, wler le first became CL a courtercultural set of values, sucl as risk takir,, ertre-
prereurslip, stewarJslip, arJ bourJaryless belavior. lt is more Jifficult for a leaJer,
lowever forceful, to clar,e ar establisleJ or,arizatioral culture tlar it is to create ore
from scratcl ir a rew verture.
Arotler importart irfluerce or or,arizatioral culture is tle broaJer social culture of
tle ratior wlere tle firm was fourJeJ. lr tle LriteJ States, for example, tle competi-
tive etlic of irJiviJualism looms lar,e arJ tlere is erormous social stress or proJucir,
wirrers. Mary Americar firms firJ ways of rewarJir, arJ motivatir, irJiviJuals so tlat
tley see tlemselves as wirrers.
28
1le values of Americar firms ofter reflect tle values
of Americar culture. Similarly, tle cooperative values fourJ ir mary Japarese firms lave
beer ar,ueJ to reflect tle values of traJitioral Japarese society, witl its emplasis or
,roup cooperatior, reciprocal obli,atiors, arJ larmory.
29
1lus, altlou,l it may be a
,ereralizatior, tlere may be sometlir, to tle ar,umert tlat or,arizatioral culture is ir-
fluerceJ by ratioral culture.
A tlirJ irfluerce or or,arizatioral culture is tle listory of tle erterprise, wlicl
over time may come to slape tle values of tle or,arizatior. lr tle lar,ua,e of listori-
ars, or,arizatioral culture is tle patl-JeperJert proJuct of wlere tle or,arizatior las
Organizational Culture
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beer tlrou,l time. lor example, llilips N\, tle Dutcl multiratioral, lor, op-
erateJ witl a culture tlat placeJ a li,l value or tle irJeperJerce of ratioral
operatir, comparies. 1lis culture was slapeJ by tle listory of tle compary.
Durir, WorlJ War ll, HollarJ was occupieJ by tle Cermars. Witl tle
leaJ office ir occupieJ territories, power was JevolveJ by Jefault to var-
ious forei,r operatir, comparies, sucl as llilips subsiJiaries ir tle
LriteJ States arJ Creat Lritair. After tle war erJeJ, tlese sub-
siJiaries cortirueJ to operate ir a li,lly autoromous faslior. A
belief tlat tlis was tle ri,lt tlir, to Jo became a core value of tle
compary.
Decisiors tlat subsequertly result ir li,l performarce terJ to
become irstitutioralizeJ ir tle values of a firm. lr tle 192Os, 3M was prima-
rily a marufacturer of sarJpaper. liclarJ Drew, wlo was a your, laboratory assistart
at tle time, came up witl wlat le tlou,lt woulJ be a ,reat rew proJuct-a ,lue-covereJ
strip of paper, wlicl le calleJ sticky tape." Drew saw applicatiors for tle proJuct ir tle
automobile irJustry, wlere it coulJ be useJ to mask parts of a velicle Jurir, pairtir,.
He preserteJ tle iJea to tle compary's presiJert, William Mclri,lt. Ar urimpresseJ
Mclri,lt su,,esteJ tlat Drew Jrop tle researcl. Drew JiJr't; irsteaJ le JevelopeJ tle
sticky tape" arJ tler wert out arJ ,ot erJorsemerts from potertial customers ir tle
auto irJustry. ArmeJ witl tlis irformatior, le approacleJ Mclri,lt a,air. A clas-
tereJ Mclri,lt reverseJ lis positior arJ ,ave Drew tle ,o-aleaJ to start Jevelopir,
wlat was to become ore of 3M's mair proJuct lires-sticky tape-a busiress it Jomi-
rates to tlis Jay.
3O
lrom tler or, Mclri,lt emplasizeJ tle importarce of ,ivir, re-
searclers at 3M free reir to explore tleir owr iJeas arJ experimert witl proJuct
offerir,s. 1lis soor became a core value at 3M arJ was erslrireJ ir tle compary's fa-
mous 15 percert rule," wlicl stateJ tlat researclers coulJ sperJ 15 percert of tle com-
pary time workir, or iJeas of tleir owr cloosir,. 1oJay, rew employees are ofter tolJ
tle Drew story, wlicl is useJ to illustrate tle value of allowir, irJiviJuals to explore
tleir owr iJeas.
Culture is mairtaireJ by a variety of meclarisms. 1lese ircluJe: (1) lirir, arJ pro-
motioral practices of tle or,arizatior, (2) rewarJ strate,ies, (3) socializatior processes,
arJ (+) commuricatior strate,y. 1le ,oal is to recruit people wlose values are corsis-
tert witl tlose of tle compary. Lircolr Llectric, for example, lires irJiviJuals wlo are
very self-reliart, wlicl is recessary ir tle compary's irJiviJualistic culture. 1o furtler
reirforce values, a compary may promote irJiviJuals wlose belavior is corsistert witl
tle core values of tle or,arizatior. Merit review processes may also be lirkeJ to a com-
pary's values, wlicl furtler reirforces cultural rorms. 1lus, at Lircolr Llectric, tle
merit review process rewarJs people for belavior tlat is corsistert witl tle attairmert
of li,l proJuctivity.
Socializatior car be formal, sucl as trairir, pro,rams for employees tlat eJucate
tlem ir tle core values of tle or,arizatior. lrformal socializatior may be frierJly aJvice
from peers or bosses or may be implicit ir tle actiors of peers arJ superiors towarJ rew
employees. As for commuricatior strate,y, mary comparies witl stror, cultures Jevote
a lot of attertior to framir, tleir key values ir corporate missior statemerts, commuri-
catir, tlem ofter to employees, arJ usir, tlem to ,uiJe Jifficult Jecisiors. Stories arJ
symbols are ofter useJ to reirforce importart values (e.,., tle Drew arJ Mclri,lt story
at 3M).
ORGANIZATIONAL CULTURE AND PERFORMANCE
IN THE INTERNATIONAL BUSINESS
Mara,emert autlors ofter talk about stror, cultures."
31
lr a stror, culture, almost all
mara,ers slare a relatively corsistert set of values arJ rorms tlat lave a clear impact
or tle way work is performeJ. New employees aJopt tlese values very quickly, arJ em-
ployees tlat Jo rot fit ir witl tle core values terJ to leave. lr sucl a culture, a rew ex-
3s lanous Poslil nole
was an idea lhal sluck. n
novalion conlinues lo be a
hallnark ol lhe conpany lo
lhis day.
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ecutive is just as likely to be correcteJ by lis suborJirates as by lis superiors if le violates
tle values arJ rorms of tle or,arizatioral culture. lirms witl a stror, culture are ror-
mally seer by outsiJers as lavir, a certair style or way of Joir, tlir,s. Lircolr Llectric,
profileJ ir tle Mara,emert locus, is ar example of a firm witl a stror, culture. Lircolr's
or,arizatioral culture places a li,l value or irJiviJual aclievemerts, meritocracy, arJ
e,alitariar belavior. Lrilever, profileJ ir tle operir, case, is arotler example of a firm
witl a stror, culture. Lrilever places a li,l value or sociability, cooperatior, arJ
corsersus-builJir, belavior amor, its employees.
Stror, Joes rot recessarily mear ,ooJ. A culture car be stror, but baJ. 1le culture
of tle Nazi larty ir Cermary was certairly stror,, but it was most Jefiritely rot ,ooJ.
Nor Joes it follow tlat a stror, culture leaJs to li,l performarce. re stuJy fourJ tlat
ir tle 198Os Cereral Motors laJ a stror, culture," but it was a stror, culture tlat Jis-
coura,eJ lower-level employees from Jemorstratir, iritiative arJ takir, risks, wlicl tle
autlors ar,ueJ was Jysfurctioral arJ leJ to low performarce at CM.
32
Also, a stror, cul-
ture mi,lt be bereficial at ore poirt, leaJir, to li,l performarce, but irappropriate at
arotler time. 1le appropriateress of tle culture JeperJs or tle cortext. lr tle 198Os,
wler lLM was performir, very well, several mara,emert autlors sar, tle praises of its
stror, culture, wlicl amor, otler tlir,s placeJ a li,l value or corsersus-baseJ Jeci-
sior makir,.
33
1lese autlors ar,ueJ tlat sucl a Jecisior-makir, process was appropri-
ate ,iver tle substartial firarcial irvestmerts tlat lLM routirely maJe ir rew
teclrolo,y. However, tlis process turreJ out to be a weakress ir tle fast-movir, com-
puter irJustry of tle late 198Os arJ 199Os. Corsersus-baseJ Jecisior makir, was slow,
bureaucratic, arJ rot particularly corJucive to corporate risk takir,. Wlile tlis was fire
ir tle 197Os, lLM reeJeJ rapiJ Jecisior makir, arJ ertreprereurial risk takir, ir tle
199Os, but its culture Jiscoura,eJ sucl belavior. lLM fourJ itself outflarkeJ by tler-
small erterprises sucl as Microsoft.
re acaJemic stuJy corcluJeJ tlat firms tlat exlibiteJ li,l performarce over a
prolor,eJ perioJ terJeJ to lave stror, but aJaptive cultures. AccorJir, to tlis stuJy,
ir ar aJaptive culture most mara,ers care Jeeply about arJ value customers, stock-
lolJers, arJ employees. 1ley also stror,ly value people arJ processes tlat create use-
ful clar,e ir a firm.
3+
Wlile tlis is irterestir,, it Joes reJuce tle issue to a very li,l
level of abstractior; after all, wlat compary woulJ say tlat it Joesr't care Jeeply about
customers, stocklolJers, arJ employees` A somewlat Jifferert perspective is to ar,ue
tlat tle culture of tle firm must matcl tle rest of tle arclitecture of tle or,arizatior,
tle firm's strate,y, arJ tle JemarJs of tle competitive ervirormert, for superior per-
formarce to be attaireJ. All tlese elemerts must be corsistert witl eacl otler. Lircolr
Llectric proviJes arotler useful example. Lircolr competes ir a busiress tlat is very
competitive, wlere cost mirimizatior is a key source of competitive aJvarta,e. Lir-
colr's culture arJ ircertive systems botl ercoura,e employees to strive for li,l levels
of proJuctivity, wlicl trarslates irto tle low costs tlat are critical for Lircolr's success.
1le Lircolr example also Jemorstrates arotler importart poirt for irterratioral busi-
resses: A culture tlat leaJs to li,l performarce ir tle firm's lome ratior may rot be
easy to impose or forei,r subsiJiaries' Lircolr's culture las clearly lelpeJ tle firm to
aclieve superior performarce ir tle L.S. market, but tlis same culture is very Ameri-
car" ir its form arJ Jifficult to implemert ir otler courtries. 1le mara,ers arJ em-
ployees of several of Lircolr's Luropear subsiJiaries fourJ tle culture to be alier to tleir
owr values arJ were reluctart to aJopt it. 1le result was tlat Lircolr fourJ it very Jif-
ficult to replicate ir forei,r markets tle success it las laJ ir tle LriteJ States. Lircolr
compourJeJ tle problem by acquirir, establisleJ erterprises tlat alreaJy laJ tleir
owr or,arizatioral culture. 1lus, ir tryir, to impose its culture or forei,r operatir,
subsiJiaries, Lircolr laJ to Jeal witl two problems: low to clar,e tle establisleJ or-
,arizatioral culture of tlose urits, arJ low to irtroJuce ar or,arizatioral culture
wlose key values mi,lt be alier to tle values lelJ by members of tlat society. 1lese
problems are rot urique to Lircolr; mary irterratioral busiresses lave to Jeal witl ex-
actly tle same problems.
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1le solutior Lircolr las aJopteJ is to establisl rew subsiJiaries, ratler tlar acquir-
ir, arJ tryir, to trarsform ar erterprise witl its owr culture. lt is mucl easier to estab-
lisl a set of values ir a rew erterprise tlar it is to clar,e tle values of ar establisleJ
erterprise. A secorJ solutior is to Jevote a lot of time arJ attertior to trarsmittir, tle
firm's or,arizatioral culture to its forei,r operatiors. 1lis was sometlir, Lircolr ori,i-
rally omitteJ. tler firms make tlis ar importart part of tleir strate,y for irterratior-
alizatior. Wler M1\ Networks opers ar operatior ir a rew courtry, it iritially staffs
tlat operatior witl several expatriates. 1le job of tlese expatriates is to lire local em-
ployees wlose values are corsistert witl tle M1\ culture arJ to socialize tlose irJi-
viJuals irto values arJ rorms tlat urJerpir M1\'s urique way of Joir, tlir,s. rce
tlis las beer aclieveJ, tle expatriates move or to tleir rext assi,rmert, arJ local em-
ployees rur tle operatior. A tlirJ solutior is to reco,rize tlat it may be recessary to
clar,e some aspects of a firm's culture so tlat it better fits tle culture of tle lost ratior.
lor example, mary Japarese firms use symbolic belavior, sucl as compary sor,s arJ
morrir, ,roup exercise sessiors, to reirforce cooperative values arJ rorms. However,
sucl symbolic belavior is seer as oJJ ir Westerr cultures, so mary Japarese firms lave
rot useJ sucl practices ir Westerr subsiJiaries.
1le reeJ for a commor or,arizatioral culture tlat is tle same across a multiratioral's
,lobal retwork of subsiJiaries probably varies witl tle strate,y of tle firm. SlareJ rorms
arJ values car facilitate coorJiratior arJ cooperatior betweer irJiviJuals from Jiffer-
ert suburits.
35
A stror, commor culture may leaJ to ,oal cor,ruerce arJ car atteruate
tle problems tlat arise from irterJeperJerce, performarce ambi,uities, arJ corflict
amor, mara,ers from Jifferert subsiJiaries. As roteJ earlier, a slareJ culture may lelp
irformal irte,ratir, meclarisms sucl as krowleJ,e retworks to operate more effec-
tively. As sucl, a commor culture may be of ,reater value ir a multiratioral tlat is pur-
suir, a strate,y tlat requires cooperatior arJ coorJiratior betweer ,lobally JisperseJ
subsiJiaries. 1lis su,,ests tlat it is more importart to lave a commor culture ir firms
employir, a trarsratioral strate,y tlar a localizatior strate,y, witl ,lobal arJ irterra-
tioral strate,ies fallir, betweer tlese two extremes.
lr Clapter 12, we iJertifieJ four basic strate,ies tlat multiratioral firms pursue: local-
izatior, irterratioral, ,lobal, arJ trarsratioral. So far ir tlis clapter we lave lookeJ at
several aspects of or,arizatior arclitecture, arJ we lave JiscusseJ tle irterrelatiorslips
betweer tlese Jimersiors arJ strate,ies. Now it is time to syrtlesize tlis material.
LOCALIZATION STRATEGY
lirms pursuir, a localizatior strate,y focus or local resporsiveress. 1able 13.2 slows tlat
sucl firms terJ to operate witl worlJwiJe area structures, witlir wlicl operatir, Jeci-
siors are JecertralizeJ to furctiorally self-cortaireJ courtry subsiJiaries. 1le reeJ for
coorJiratior betweer suburits (areas arJ courtry subsiJiaries) is low. 1lis su,,ests tlat
firms pursuir, a localizatior strate,y Jo rot lave a li,l reeJ for irte,ratir, meclarisms,
eitler formal or irformal, to krit to,etler Jifferert ratioral operatiors. 1le lack of ir-
terJeperJerce implies tlat tle level of performarce ambi,uity ir sucl erterprises is low,
as (by extersior) are tle costs of cortrol. 1lus, leaJquarters car mara,e forei,r opera-
tiors by relyir, primarily or output arJ bureaucratic cortrols arJ a policy of mara,e-
mert by exceptior. lrcertives car be lirkeJ to performarce metrics at tle level of
courtry subsiJiaries. Sirce tle reeJ for irte,ratior arJ coorJiratior is low, tle reeJ for
commor processes arJ or,arizatior culture is also quite low. Were it rot for tle fact tlat
tlese firms are urable to profit from tle realizatior of locatior arJ experierce curve
ecoromies, or from tle trarsfer of core competercies, tleir or,arizatioral simplicity
woulJ make tlis ar attractive strate,y.
Syntbesis: Strategy and Arcbitecture
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INTERNATIONAL STRATEGY
lirms pursuir, ar irterratioral strate,y attempt to create value by trarsferrir, core com-
petercies from lome to forei,r subsiJiaries. lf tley are Jiverse, as most of tlem are, tlese
firms operate witl a worlJwiJe proJuct Jivisior structure. HeaJquarters typically mair-
tairs certralizeJ cortrol over tle source of tle firm's core competercy, wlicl is most typ-
ically fourJ ir tle l&D arJ/or marketir, furctiors of tle firm. All otler operatir,
Jecisiors are JecertralizeJ witlir tle firm to subsiJiary operatiors ir eacl courtry
(wlicl ir Jiverse firms report to worlJwiJe proJuct Jivisiors).
1le reeJ for coorJiratior is moJerate ir sucl firms, reflectir, tle reeJ to trarsfer
core competercies. 1lus, altlou,l sucl firms operate witl some irte,ratir, mecla-
risms, tley are rot tlat extersive. 1le relatively low level of irterJeperJerce tlat re-
sults trarslates irto a relatively low level of performarce ambi,uity. 1lese firms car
,ererally ,et by witl output arJ bureaucratic cortrols arJ witl ircertives tlat are fo-
cuseJ or performarce metrics at tle level of courtry subsiJiaries. 1le reeJ for a com-
mor or,arizatioral culture arJ commor processes is rot tlat ,reat. Ar importart
exceptior to tlis is wler tle core skills or competercies of tle firm are embeJJeJ ir
processes arJ culture, ir wlicl case tle firm reeJs to pay close attertior to trarsferrir,
tlose processes arJ associateJ culture from tle corporate certer to courtry subsiJiaries.
verall, altlou,l tle or,arizatior requireJ for ar irterratioral strate,y is more complex
tlar tlat of firms pursuir, a localizatior strate,y, tle ircrease ir tle level of complexity
is rot tlat ,reat.
GLOBAL STANDARDIZATION STRATEGY
lirms pursuir, a ,lobal starJarJizatior strate,y focus or tle realizatior of locatior arJ
experierce curve ecoromies. lf tley are JiversifieJ, as mary of tlem are, tlese firms op-
erate witl a worlJwiJe proJuct Jivisior structure. 1o coorJirate tle firm's ,lobally Jis-
perseJ web of value creatior activities, leaJquarters typically mairtairs ultimate cortrol
TABLE 13. 2
A Synlhesis ol Slralegy, Slruclure, and Conlrol Syslens
Strategy
Structure and GIobaI
ControIs LocaIization InternationaI Standardization TransnationaI
Verlical Decenlralized Core conpelency Sone cenlralizalion ixed cenlralizalion and
Dillerenlialion nore cenlralized, decenlralizalion
Fesl decenlralized
Horizonlal vorldwide area vorldwide producl vorldwide producl nlornal nalrix
Dillerenlialion slruclure divisions divisions
eed lor Low oderale High Very high
Coordinalion
nlegraling one Few any Very nany
echanisns
Perlornance Low oderale High Very high
Anbiguily
eed lor Cullural Low oderale High Very high
Conlrols
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over most operatir, Jecisiors. lr ,ereral, sucl firms are more certralizeJ tlar erter-
prises pursuir, a localizatior or irterratioral strate,y. leflectir, tle reeJ for coorJira-
tior of tle various sta,es of tle firms' ,lobally JisperseJ value clairs, tle reeJ for
irte,ratior ir tlese firms also is li,l. 1lus, tlese firms terJ to operate witl ar array of
formal arJ irformal irte,ratir, meclarisms. 1le resultir, irterJeperJercies car leaJ
to si,rificart performarce ambi,uities. As a result, ir aJJitior to output arJ bureaucratic
cortrols, firms pursuir, a ,lobal starJarJizatior strate,y terJ to stress tle reeJ to builJ
a stror, or,arizatioral culture tlat car facilitate coorJiratior arJ cooperatior. 1ley
also terJ to use ircertive systems tlat are lirkeJ to performarce metrics at tle corporate
level, ,ivir, tle mara,ers of Jifferert operatiors a stror, ircertive to cooperate witl
eacl otler to ircrease tle performarce of tle ertire corporatior. r avera,e, tle or-
,arizatior of sucl firms is more complex tlar tlat of firms pursuir, a localizatior or ir-
terratioral strate,y.
TRANSNATIONAL STRATEGY
lirms pursuir, a trarsratioral strate,y focus or tle simultareous attairmert of locatior
arJ experierce curve ecoromies, local resporsiveress, arJ ,lobal learrir, (tle multiJi-
rectioral trarsfer of core competercies or skills). 1lese firms may operate witl matrix-
type structures ir wlicl botl proJuct Jivisiors arJ ,eo,raplic areas lave si,rificart
irfluerce. 1le reeJ to coorJirate a ,lobally JisperseJ value clair arJ to trarsfer core
competercies creates pressures for certralizir, some operatir, Jecisiors (particularly
proJuctior arJ l&D). At tle same time, tle reeJ to be locally resporsive creates pres-
sures for Jecertralizir, otler operatir, Jecisiors to ratioral operatiors (particularly
marketir,). Corsequertly, tlese firms terJ to mix relatively li,l Je,rees of certraliza-
tior for some operatir, Jecisiors witl relative li,l Je,rees of Jecertralizatior for otler
operatir, Jecisiors.
1le reeJ for coorJiratior is li,l ir trarsratioral firms. 1lis is reflecteJ ir tle use of
ar array of formal arJ irformal irte,ratir, meclarisms, ircluJir, formal matrix struc-
tures arJ irformal mara,emert retworks. 1le li,l level of irterJeperJerce of suburits
implieJ by sucl irte,ratior car result ir si,rificart performarce ambi,uities, wlicl raise
tle costs of cortrol. 1o reJuce tlese, ir aJJitior to output arJ bureaucratic cortrols,
firms pursuir, a trarsratioral strate,y reeJ to cultivate a stror, culture arJ to establisl
ircertives tlat promote cooperatior betweer suburits.
ENVIRONMENT, STRATEGY, ARCHITECTURE,
AND PERFORMANCE
LrJerlyir, tle scleme outlireJ ir 1able 13.2 is tle rotior tlat a fit" betweer strate,y
arJ arclitecture is recessary for a firm to aclieve li,l performarce. lor a firm to suc-
ceeJ, two corJitiors must be fulfilleJ. lirst, tle firm's strate,y must be corsistert witl
tle ervirormert ir wlicl tle firm operates. We JiscusseJ tlis issue ir Clapter 12 arJ
roteJ tlat ir some irJustries a ,lobal starJarJizatior strate,y is most viable, ir otlers ar
irterratioral or trarsratioral strate,y may be most viable, arJ ir still otlers a localiza-
tior strate,y may be most viable. SecorJ, tle firm's or,arizatior arclitecture must be
corsistert witl its strate,y.
lf tle strate,y Joes rot fit tle ervirormert, tle firm is likely to experierce si,rifi-
cart performarce problems. lf tle arclitecture Joes rot fit tle strate,y, tle firm is also
likely to experierce performarce problems. 1lerefore, to survive, a firm must strive to
aclieve a fit of its ervirormert, its strate,y, arJ its or,arizatioral arclitecture. You will
recall tlat we saw tle importarce of tlis corcept ir tle operir, case. llilips N\, tle
Dutcl electrorics firm, proviJes arotler illustratior of tle reeJ for tlis fit. lor reasors
rooteJ ir tle listory of tle firm, llilips operateJ urtil recertly witl ar or,arizatior
typical of ar erterprise pursuir, localizatior; operatir, Jecisiors were JecertralizeJ to
lar,ely autoromous forei,r subsiJiaries. Historically, electrorics markets were se,-
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merteJ from eacl otler by li,l traJe barriers, so ar or,arizatior corsistert witl a lo-
calizatior strate,y maJe serse. However, by tle miJ-198Os, tle irJustry ir wlicl
llilips competeJ laJ beer revolutiorizeJ by Jeclirir, traJe barriers, teclrolo,ical
clar,e, arJ tle emer,erce of low-cost Japarese competitors tlat utilizeJ a ,lobal strat-
e,y. 1o survive, llilips reeJeJ to aJopt a ,lobal starJarJizatior strate,y itself. 1le firm
reco,rizeJ tlis arJ trieJ to aJopt a ,lobal posture, but it JiJ little to clar,e its or,ari-
zatioral arclitecture. 1le firm romirally aJopteJ a matrix structure baseJ or worlJ-
wiJe proJuct Jivisiors arJ ratioral areas. lr reality, lowever, tle ratioral areas
cortirueJ to Jomirate tle or,arizatior, arJ tle proJuct Jivisiors laJ little more tlar
ar aJvisory role. As a result, llilips' arclitecture JiJ rot fit tle strate,y, arJ by tle early
199Os llilips was losir, morey. lt was orly after four years of wrerclir, clar,e arJ
lar,e losses tlat llilips was firally able to tilt tle balarce of power ir its matrix towarJ
tle proJuct Jivisiors. Ly tle miJ-199Os, tle fruits of tlis effort to reali,r tle compary's
strate,y arJ arclitecture witl tle JemarJs of its operatir, ervirormert were be,irrir,
to slow up ir improveJ firarcial performarce.
36
Multiratioral firms perioJically lave to alter tleir arclitecture so tlat it corforms to tle
clar,es ir tle ervirormert ir wlicl tley are competir, arJ tle strate,y tley are pur-
suir,. 1o be profitable, llilips N\ laJ to alter its strate,y arJ arclitecture ir tle 199Os
so tlat botl matcleJ tle JemarJs of tle competitive ervirormert ir tle electrorics ir-
Justry, wlicl laJ slifteJ from localizatior arJ towarJ a ,lobal irJustry. Wlile a JetaileJ
corsiJeratior of or,arizatioral clar,e is beyorJ tle scope of tlis book, a few commerts
are warrarteJ re,arJir, tle sources of or,arizatior irertia arJ tle strate,ies arJ tactics
for implemertir, or,arizatioral clar,e.
ORGANIZATIONAL INERTIA
r,arizatiors are Jifficult to clar,e. Witlir most or,arizatiors are stror, irertia forces.
1lese forces come from a rumber of sources. re source of irertia is tle existir, Jistri-
butior of power arJ irfluerce witlir ar or,arizatior.
37
1le power arJ irfluerce er-
joyeJ by irJiviJual mara,ers is ir part a furctior of tleir role ir tle or,arizatioral
lierarcly, as JefireJ by structural positior. Ly Jefiritior, most substartive clar,es ir ar
or,arizatior require a clar,e ir structure arJ, by extersior, a clar,e ir tle Jistributior
of power arJ irfluerce witlir tle or,arizatior. Some irJiviJuals will see tleir power
arJ irfluerce ircrease as a result of or,arizatioral clar,e, arJ some will see tle cor-
verse. lor example, ir tle 199Os, llilips N\ ircreaseJ tle roles arJ resporsibilities of its
,lobal proJuct Jivisiors arJ JecreaseJ tle roles arJ resporsibilities of its forei,r sub-
siJiary comparies. 1lis meart tle mara,ers rurrir, tle ,lobal proJuct Jivisiors saw
tleir power arJ irfluerce ircrease, wlile tle mara,ers rurrir, tle forei,r subsiJiary
comparies saw tleir power arJ irfluerce Jeclire. As mi,lt be expecteJ, some mara,ers
of forei,r subsiJiary comparies JiJ rot like tlis clar,e arJ resisteJ it, wlicl sloweJ tle
pace of clar,e. 1lose wlose power arJ irfluerce are reJuceJ as a corsequerce of or,a-
rizatioral clar,e car be expecteJ to resist it, primarily by ar,uir, tlat tle clar,e mi,lt
rot work. 1o tle extert tlat tley are successful, tlis corstitutes a source of or,arizatioral
irertia tlat mi,lt slow or stop clar,e.
Arotler source of or,arizatioral irertia is tle existir, culture, as expresseJ ir rorms
arJ value systems. \alue systems reflect Jeeply lelJ beliefs, arJ as sucl, tley car be very
larJ to clar,e. lf tle formal arJ irformal socializatior meclarisms witlir ar or,ariza-
tior lave beer emplasizir, a corsistert set of values for a prolor,eJ perioJ, arJ if lir-
ir,, promotior, arJ ircertive systems lave all reirforceJ tlese values, tler suJJerly
arrourcir, tlat tlose values are ro lor,er appropriate arJ reeJ to be clar,eJ car pro-
Juce resistarce arJ Jissorarce amor, employees. lor example, llilips N\ listorically
Organizational Cbange
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placeJ a very li,l value or local autoromy. 1le clar,es of tle 199Os implieJ a reJuc-
tior ir tle autoromy erjoyeJ by forei,r subsiJiaries, wlicl was courter to tle estab-
lisleJ values of tle compary arJ tlus resisteJ.
r,arizatioral irertia mi,lt also Jerive from serior mara,ers' precorceptiors about
tle appropriate busiress moJel or paraJi,m. Wler a ,iver paraJi,m las workeJ well ir
tle past, mara,ers mi,lt lave trouble acceptir, tlat it is ro lor,er appropriate. At
llilips, ,rartir, corsiJerable autoromy to forei,r subsiJiaries laJ workeJ very well ir
tle past, allowir, local mara,ers to tailor proJuct arJ busiress strate,y to tle corJi-
tiors prevailir, ir a ,iver courtry. Sirce tlis paraJi,m laJ workeJ so well, it was Jif-
ficult for mary mara,ers to urJerstarJ wly it ro lor,er applieJ. Corsequertly, tley
laJ Jifficulty acceptir, a rew busiress moJel arJ terJeJ to fall back or tleir estab-
lisleJ paraJi,m arJ ways of Joir, tlir,s. 1lis clar,e requireJ mara,ers to let ,o of
lor,-lelJ assumptiors about wlat workeJ arJ wlat JiJr't work, wlicl was sometlir,
mary of tlem coulJr't Jo.
lrstitutioral corstrairts mi,lt also act as a source of irertia. Natioral re,ulatiors
ircluJir, local cortert rules arJ policies pertairir, to layoffs mi,lt make it Jifficult
for a multiratioral to alter its ,lobal value clair. As witl Lrilever (see tle operir,
case), a multiratioral mi,lt wisl to take cortrol for marufacturir, away from local
subsiJiaries, trarsfer tlat cortrol to ,lobal proJuct Jivisiors, arJ corsoliJate maru-
facturir, at a few cloice locatiors. However, if local cortert rules (see Clapter 5) re-
quire some Je,ree of local proJuctior arJ if re,ulatiors re,arJir, layoffs make it
Jifficult or expersive for a multiratioral to close operatiors ir a courtry, a multira-
tioral may firJ tlat tlese corstrairts make it very Jifficult to aJopt tle most effective
strate,y arJ arclitecture.
IMPLEMENTING ORGANIZATIONAL CHANGE
Altlou,l all or,arizatiors suffer from irertia, tle complexity arJ ,lobal spreaJ of mary
multiratiorals mi,lt make it particularly Jifficult for tlem to clar,e tleir strate,y arJ
arclitecture to matcl rew or,arizatioral realities. Yet at tle same time, tle trerJ towarJ
,lobalizatior ir mary irJustries las maJe it more critical tlar ever tlat mary multira-
tiorals Jo just tlat. lr irJustry after irJustry, Jeclirir, barriers to cross-borJer traJe arJ
irvestmert lave leJ to a clar,e ir tle rature of tle competitive ervirormert. Cost
pressures lave ircreaseJ, requirir, multiratiorals to resporJ by streamlirir, tleir oper-
atiors to realize ecoromic berefits associateJ witl locatior arJ experierce curve
ecoromies arJ witl tle trarsfer of competercies arJ skills witlir tle or,arizatior. At
tle same time, local resporsiveress remairs ar importart source of Jifferertiatior. 1o
survive ir tlis emer,ir, competitive ervirormert, multiratiorals must clar,e rot orly
tleir strate,y but also tleir arclitecture so tlat it matcles strate,y ir Jiscrimiratir,
ways. 1le basic prirciples for successful or,arizatioral clar,e car be summarizeJ as fol-
lows: (1) urfreeze tle or,arizatior tlrou,l slock tlerapy, (2) move tle or,arizatior to
a rew state tlrou,l proactive clar,e ir tle arclitecture, arJ (3) refreeze tle or,ariza-
tior ir its rew state.
Unfreezing the Organization
Lecause of irertia forces, ircremertal clar,e is ofter ro clar,e. 1lose wlose power is
tlreatereJ by clar,e car too easily resist ircremertal clar,e. 1lis leaJs to tle bi, bar,
tleory of clar,e, wlicl mairtairs tlat effective clar,e requires takir, bolJ actior early
to urfreeze" tle establisleJ culture of ar or,arizatior arJ to clar,e tle Jistributior of
power arJ irfluerce. Slock tlerapy to urfreeze tle or,arizatior mi,lt ircluJe tle clo-
sure of plarts JeemeJ urecoromic or tle arrourcemert of a Jramatic structural reor-
,arizatior. lt is also importart to realize tlat clar,e will rot occur urless serior
mara,ers are committeJ to it. Serior mara,ers must clearly articulate tle reeJ for
clar,e so employees urJerstarJ botl wly it is beir, pursueJ arJ tle berefits tlat will
flow from successful clar,e. Serior mara,ers must also practice wlat tley preacl arJ
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take tle recessary bolJ steps. lf employees see serior mara,ers preaclir, tle
reeJ for clar,e but rot clar,ir, tleir owr belavior or makir, substartive
clar,es ir tle or,arizatior, tley will soor lose faitl ir tle clar,e effort, wlicl
tler will flourJer.
Moving to the New State
rce ar or,arizatior las beer urfrozer, it must be moveJ to its rew state.
Movemert requires takir, actior-closir, operatiors; reor,arizir, tle struc-
ture; reassi,rir, resporsibilities; clar,ir, cortrol, ircertive, arJ rewarJ sys-
tems; reJesi,rir, processes; arJ lettir, people ,o wlo are seer as ar
impeJimert to clar,e. lr otler worJs, movemert requires a substartial clar,e
ir tle form of a multiratioral's or,arizatior arclitecture so tlat it matcles tle
JesireJ rew strate,ic posture. lor movemert to be successful, it must be Jore
witl sufficiert speeJ. lrvolvir, employees ir tle clar,e effort is ar excellert
way to ,et tlem to appreciate arJ buy irto tle reeJs for clar,e arJ to lelp
witl rapiJ movemert. lor example, a firm mi,lt Jele,ate substartial resporsi-
bility for Jesi,rir, operatir, processes to lower-level employees. lf erou,l of
tleir recommerJatiors are tler acteJ or, tle employees will see tle corse-
querces of tleir efforts arJ corsequertly buy irto tle rotior tlat clar,e is re-
ally occurrir,.
Refreezing the Organization
lefreezir, tle or,arizatior takes lor,er. lt may require tlat a rew culture be establisleJ,
wlile tle olJ ore is beir, JismartleJ. 1lus, refreezir, requires tlat employees be so-
cializeJ irto tle rew way of Joir, tlir,s. Comparies will ofter use mara,emert eJuca-
tior pro,rams to aclieve tlis. At Cereral Llectric, wlere lor,time CL Jack Welcl
irstituteJ a major clar,e ir tle culture of tle compary, mara,emert eJucatior pro-
,rams were useJ as a proactive tool to commuricate rew values to or,arizatior members.
r tleir owr, lowever, mara,emert eJucatior pro,rams are rot erou,l. Hirir, poli-
cies must be clar,eJ to reflect tle rew realities, witl ar emplasis or lirir, irJiviJuals
wlose owr values are corsistert witl tlat of tle rew culture tle firm is tryir, to builJ.
Similarly, cortrol arJ ircertive systems must be corsistert witl tle rew realities of tle
or,arizatior, or clar,e will rever take. Serior mara,emert must reco,rize tlat clar,-
ir, culture takes a lor, time. Ary letup ir tle pressure to clar,e may allow tle olJ cul-
ture to reemer,e as employees fall back irto familiar ways of Joir, tlir,s. 1le
commuricatior task facir, serior mara,ers, tlerefore, is a lor,-term erJeavor tlat re-
quires mara,ers to be relertless arJ persistert ir tleir pursuit of clar,e. re strikir,
feature of Jack Welcl's two-JecaJe terure at CL, for example, is tlat le rever stoppeJ
puslir, lis clar,e a,erJa. lt was a corsistert tleme of lis terure. He was always tlirk-
ir, up rew pro,rams arJ iritiatives to keep puslir, tle culture of tle or,arizatior alor,
tle JesireJ trajectory.
Jack velch, Ceneral Elec
lrics legendary lorner CEO,
is an individual who sel a
benchnark lor enbracing
change.
Cbapter Summary
1lis clapter iJertifieJ tle or,arizatioral arclitecture
tlat car be useJ by multiratioral erterprises to mara,e
arJ Jirect tleir ,lobal operatiors. A certral tleme of tle
clapter was tlat Jifferert strate,ies require Jifferert ar-
clitectures; strate,y is implemerteJ tlrou,l arclitec-
ture. 1o succeeJ, a firm must matcl its arclitecture to its
strate,y ir Jiscrimiratir, ways. lirms wlose arclitecture
Joes rot fit tleir strate,ic requiremerts will experierce
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performarce problems. lt is also recessary for tle Jiffer-
ert comporerts of arclitecture to be corsistert witl
eacl otler. 1le clapter maJe tle followir, poirts:
1. r,arizatioral arclitecture refers to tle totality
of a firm's or,arizatior, ircluJir, formal or,ari-
zatioral structure, cortrol systems arJ ircertives,
processes, or,arizatioral culture, arJ people.
2. Superior erterprise profitability requires tlree
corJitiors to be fulfilleJ: tle Jifferert elemerts
of a firm's or,arizatioral arclitecture must be ir-
terrally corsistert, tle or,arizatioral arclitec-
ture must fit tle strate,y of tle firm, arJ tle
strate,y arJ arclitecture of tle firm must be
corsistert witl competitive corJitiors prevail-
ir, ir tle firm's markets.
3. r,arizatioral structure mears tlree tlir,s: tle
formal Jivisior of tle or,arizatior irto suburits
(lorizortal Jifferertiatior), tle locatior of
Jecisior-makir, resporsibilities witlir tlat
structure (vertical Jifferertiatior), arJ tle es-
tablislmert of irte,ratir, meclarisms.
+. Cortrol systems are tle metrics useJ to measure
tle performarce of suburits arJ make juJ,-
merts about low well mara,ers are rurrir,
tlose suburits.
5. lrcertives refer to tle Jevices useJ to rewarJ ap-
propriate employee belavior. Mary employees
receive ircertives ir tle form of arrual borus
pay. lrcertives are usually closely tieJ to tle per-
formarce metrics useJ for output cortrols.
6. lrocesses refer to tle marrer ir wlicl Jecisiors
are maJe arJ work is performeJ witlir tle or-
,arizatior. lrocesses car be fourJ at mary Jif-
ferert levels witlir ar or,arizatior. 1le core
competercies or valuable skills of a firm are of-
ter embeJJeJ ir its processes. Lfficiert arJ ef-
fective processes car lelp to lower tle costs of
value creatior arJ to aJJ aJJitioral value to a
proJuct.
7. r,arizatioral culture refers to a system of val-
ues arJ rorms tlat is slareJ amor, employees.
\alues arJ rorms express tlemselves as tle be-
lavior patterrs or style of ar or,arizatior tlat
rew employees are automatically ercoura,eJ to
follow by tleir fellow employees.
8. lirms pursuir, Jifferert strate,ies must aJopt a
Jifferert arclitecture to implemert tlose strate-
,ies successfully. lirms pursuir, localizatior,
,lobal, irterratioral, arJ trarsratioral strate-
,ies all must aJopt ar or,arizatioral arclitec-
ture tlat matcles tleir strate,y.
9. Wlile all or,arizatiors suffer from irertia, tle
complexity arJ ,lobal spreaJ of mary multira-
tiorals mi,lt make it particularly Jifficult for
tlem to clar,e tleir strate,y arJ arclitecture
to matcl rew or,arizatioral realities. At tle
same time, tle trerJ towarJ ,lobalizatior ir
mary irJustries las maJe it more critical tlar
ever tlat mary multiratiorals Jo just tlat.
Cri tical Tbinking and Discussion Ouesti ons
1. 1le cloice of strate,y for a multiratioral firm
must JeperJ or a comparisor of tle berefits of
tlat strate,y (ir terms of value creatior) witl
tle costs of implemertir, it (as JefireJ by or,a-
rizatioral arclitecture recessary for implemer-
tatior). r tlis basis, it may be lo,ical for some
firms to pursue a localizatior strate,y, otlers a
,lobal or irterratioral strate,y, arJ still otlers a
trarsratioral strate,y." ls tlis statemert correct`
2. Discuss tlis statemert: Ar urJerstarJir, of
tle causes arJ corsequerces of performarce
ambi,uity is certral to tle issue of or,arizatioral
Jesi,r ir multiratioral firms."
3. Describe tle or,arizatioral arclitecture a
trarsratioral firm mi,lt aJopt to reJuce tle
costs of cortrol.
+. Wlat is tle most appropriate or,arizatioral ar-
clitecture for a firm tlat is competir, ir ar ir-
Justry wlere a ,lobal strate,y is most appropriate`
5. lf a firm is clar,ir, its strate,y from ar irterra-
tioral to a trarsratioral strate,y, wlat are tle
most importart claller,es it is likely to face ir
implemertir, tlis clar,e` How car tle firm
overcome tlese claller,es`
Researcb Task gl obal edge. msu. edu
Lse tle ,lobalLDCL' site to complete tle followir,
exercises:
1. 1le lirarcial 1imes rewspaper arJ tle auJit-
ir, firm lricewaterlouseCoopers corJuct ar
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arrual survey arJ publisl tle rarkir,s of
WorlJ's Most lespecteJ Comparies. lricewa-
terlouseCoopers proviJes tle wlole report
JowrloaJable as a lDl file. Locate tle most re-
cert rarkir, available arJ focus or tle irtro-
Juctory aralysis. lrepare ar executive summary
of tle strate,ic arJ or,arizatioral success fac-
tors tlat make a compary most respecteJ".
2. 1le ,lobalLDCL' preserts selecteJ articles
from tle busiress prirt meJia urJer its Know|-
eJe Room sectior. Locate tle SelecteJ Articles
sectior arJ firJ ar article tlat proviJes irsi,lts
about tle four key claller,es facir, firms ir tle
,lobalizatior process. lrepare a Jescriptior of
tlese claller,es arJ tle solutiors tlat tle au-
tlors recommerJ.
closeJ arJ tle compary corsoliJateJ proJuctior ir
fewer, more efficiert proJuctior facilities. 1lis process
was particularly eviJert ir Lurope, wlere Jifferert ra-
tioral operatir, comparies laJ traJitiorally laJ tleir
owr proJuctior facilities. As tle compary roteJ ir its
1985 arrual report, Clobalizatior remairs a key strate-
,ic objective. lr 1985, sourJ pro,ress was maJe ir Je-
si,rir, arJ marketir, proJucts for a worlJwiJe market,
ratler tlar just re,ioral ores. locuseJ Jesi,r certers
will ersure a ,reater rumber of ,lobal proJucts for tle fu-
ture. . . . Clobal purclasir, pro,rams lave beer estab-
lisleJ, arJ cost berefits are beir, realizeJ."
Durir, tlis perioJ, wlile tle compary mairtaireJ a
rumber of Jesi,r certers, it cut tle rumber of basic
l&D certers from ei,lt to just two. 1le autoromy of ir-
JiviJual factories also starteJ to Jecrease. 1le factories
tlat remaireJ after tle rourJ of closures laJ to compete
witl eacl otler for tle ri,lt to proJuce a proJuct for tle
worlJ market. Major Jecisiors about wlere to proJuce
proJucts to serve worlJ markets were row beir, maJe by
mara,ers at tle corporate leaJquarters. Lver so, ra-
tioral subsiJiaries still mairtaireJ a fair Je,ree of autor-
omy. lor example, if a ratioral subsiJiary JevelopeJ a
rew proJuct, it was still likely tlat it woulJ ,et tle mar-
Jate to proJuce tlat proJuct for tle worlJ market. Also,
if a ratioral subsiJiary performeJ well, it was likely to be
left alore by corporate mara,emert.
Ly tle 199Os, lowever, it was clear tlat tlis clar,e
laJ rot ,ore far erou,l. 1le rise of powerful retailers
sucl as Home Depot arJ Lowe's ir tle LriteJ States
laJ furtler pressureJ prices ir tle power tools market.
Llacker & Decker resporJeJ by lookir, for ways to ,ar-
rer aJJitioral marufacturir, efficiercies. Durir, tlis
perioJ, Llack & Decker slut Jowr several more factories
ir its lor,-establisleJ subsiJiaries arJ starteJ to slift
proJuctior to rew facilities tlat it opereJ ir Mexico
arJ Clira. As tlis process proceeJeJ, ary remairir, au-
toromy erjoyeJ by tle mara,ers of local factories was
virtually elimirateJ. Corporate mara,ers become mucl
more a,,ressive about allocatir, proJucts to Jifferert
8trategic aod rgaoitatioo 6haoge at Iack & ecker
lrowr primarily for its
power tools, Llack &
Decker is ore of tle worlJ's olJer multiratioral corpora-
tiors. 1le compary was fourJeJ ir Laltimore, Mary-
larJ, ir 191O, arJ by tle erJ of tle 192Os laJ become a
small multiratioral compary witl operatiors ir CaraJa
arJ Lritair. 1oJay tle compary las two well-krowr
brarJs, Llack & Decker corsumer power tools arJ its
DeWalt brarJ of professioral power tools. lt sells its
proJucts ir over 1OO ratiors, arJ las reverues ir excess
of $5 billior, more tlar lalf of wlicl are ,ererateJ out-
siJe of tle LriteJ States.
1le compary ,rew rapiJly Jurir, tle 195Os arJ
196Os Jue to its stror, brarJ rame arJ rear moropoly
slare of tle corsumer arJ professioral power tools mar-
kets. 1lis moropoly was baseJ or Llack & Decker's pi-
oreerir, Jevelopmert of larJlelJ power tools. lt was
Jurir, tlis perioJ tlat Llack & Decker exparJeJ rapiJly
ir irterratioral markets, typically by settir, up wlolly
owreJ subsiJiaries ir a ratior arJ ,ivir, tlem tle ri,lt
to Jevelop, marufacture, arJ market tle compary's
power tools. As a result, by tle early 198Os, tle compary
laJ 23 wlolly owreJ subsiJiaries ir forei,r ratiors arJ
two joirt vertures.
Durir, its perioJ of rapiJ irterratioral exparsior,
Llack & Decker operateJ witl a JecertralizeJ or,ariza-
tior. lr its 1979 arrual report, tle compary JescribeJ
low, lr orJer to be effective ir tle market place, Llack
& Decker follows a JecertralizeJ or,arizatioral ap-
proacl. All busiress furctiors (marketir,, er,ireerir,,
marufacturir,, etc.) are kept as close as possible to tle
market to be serveJ." lr effect, eacl wlolly owreJ sub-
siJiary was ,rarteJ corsiJerable autoromy to rur its owr
busiress.
Ly tle miJ-198Os, lowever, tlis structure was startir,
to become urterable. New competitors laJ emer,eJ ir
tle power tool busiress, ircluJir, Loscl, Makita, arJ
larasoric. As a result, Llack & Decker's moropoly po-
sitior laJ eroJeJ. 1lrou,lout tle 198Os, tle compary
pursueJ a strate,y of ratioralizatior. lactories were
CLOSI NG CASE
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factories baseJ or a corsiJeratior of operatir, costs. lr
effect, Llack & Decker's factories row laJ to compete
witl eacl otler for tle ri,lt to make proJucts, arJ tlose
factories tlat JiJ rot Jo well ir tlis process were slut
Jowr.
lr 2OO1, Llack & Decker arrourceJ yet arotler re-
structurir, iritiative. Amor, otler tlir,s, tle iritiative
irvolveJ reJucir, tle workforce by 7OO people, to +,5OO,
sluttir, lor,-establisleJ factories ir tle LriteJ States
arJ Lritair, arJ sliftir, proJuctior to low-cost facili-
ties. Ly 2OO+ tlis process reacleJ a lo,ical corclusior
wler tle compary reor,arizeJ its power tools busiress
irto two separate ,lobal Jivisiors-ore tlat was clar,eJ
witl tle ,lobal Jevelopmert, marufacture, arJ market-
ir, of Llack & Decker power tools, arJ arotler tlat was
clar,eJ witl tle same for tle compary's professioral
DeWalt brarJ. At tlis poirt, tle compary operateJ
some 36 marufacturir, facilities, 18 outsiJe of tle
LriteJ States ir Mexico, Clira, tle Czecl lepublic,
Cermary, ltaly, arJ Lritair. lt laJ sever Jesi,r certers,
arJ two basic l&D certers, ore ir tle LriteJ States
arJ ore ir Lritair. lrcreasir,ly, tle Jesi,r arJ l&D
certers ir tle LriteJ States arJ Lritair took or respor-
sibility for rew-proJuct Jevelopmert for tle ,lobal mar-
ket. 1lrou,lout tle early 2OOOs, successively lar,er
slares of proJuctior were allocateJ to factories ir just
tlree ratiors, Clira, Mexico, arJ tle Czecl lepublic,
arJ ir its 2OO+ arrual report, Llacker & Decker irJi-
cateJ tlat tlis process was likely to cortirue.
Sources: N. A. llelps arJ l. Waley, Capital versus tle Districts: A
1ale of re Multiratioral Compary's Attempt to DisembeJ ltself,"
conom|c Ceorc|y 8O (2OO+), pp. 191-21+; 1. Waltor, 1le Llack
& Decker Corporatior," Des|n Mcncement nst|tute Ccse StuJy, c-
tober 1997; Llack & Decker leor,arizes lower 1ools arJ Acces-
sories Lusiress," Llack & Decker press release, Marcl 1, 2OO+; arJ
|cc| c Dec|er 10K Reort, 2OO3.
Case Discussion Ouestions
1. How woulJ you claracterize Llack & Decker's ir-
terratioral exparsior Jurir, tle 195Os arJ 196Os`
Wlat strate,y was tle compary pursuir,` Wlat
was tle key feature of tle irterratioral or,ariza-
tior structure tlat Llack & Decker operateJ witl at
tlis time` DiJ Llack & Decker's strate,y arJ struc-
ture make serse ,iver tle competitive erviror-
mert at tlat time`
2. How JiJ tle competitive ervirormert corfrortir,
Llack & Decker clar,e Jurir, tle 198Os arJ
199Os` Wlat clar,es JiJ Llack & Decker make ir
its (c) strate,y arJ (o) structure to compete more
effectively ir tlis rew ervirormert`
3. Ly tle 2OOOs, wlat strate,y was Llack & Decker
pursuir, ir tle ,lobal market place` How woulJ
you claracterize its structure` DiJ tle structure fit
tle strate,y arJ ervirormert`
+. Wly Jo you tlirk it took rearly two JecaJes for
Llack & Decker to effect a clar,e ir strate,y arJ
structure`
Notes
1. D. NaiJler, M. Cersteir, arJ l. Slaw, rcn|-
,ct|on -rc||tecture (Sar lrarcisco: Jossey-Lass,
1992).
2. C. Mor,ar, mces oj rcn|,ct|on (Leverly
Hills, CA: Sa,e lublicatiors, 1986).
3. Lrilever: A NetworkeJ r,arizatior," Hcr-
vcrJ us|ness Rev|ew, November-December
1996, p. 138.
+. 1le material ir tlis sectior Jraws or Jolr ClilJ,
rcn|,ct|ons (LorJor: Harper & low, 198+).
5. Allar Care, Microsoft leor,arizes to Meet
Market Claller,es," |ncnc|c| T|mes, Marcl 16,
199+, p. 1. lrterviews by Clarles Hill.
6. lor researcl eviJerce tlat is relateJ to tlis issue,
see J. Lirkirslaw, Lrtreprereurslip ir tle
Multiratioral Corporatior: 1le Claracteristics
of SubsiJiary lritiatives," Strcte|c Mcncement
ournc| 18 (1997), pp. 2O7-29; J. Lirkirslaw,
N. HooJ, arJ S. Jorssor, LuilJir, lirm Spe-
cific AJvarta,es ir Multiratioral Corpora-
tiors: 1le lole of SubsiJiary lritiatives," Strcte-
|c Mcncement ournc| 19 (1998), pp. 221-+1;
arJ l. Ljorkmar, W. Larrer-lasusser, arJ L. Li,
Mara,ir, lrowleJ,e 1rarsfer ir MNCs: 1le
lmpact of HeaJquarters Cortrol meclarisms,"
ournc| oj nternct|onc| us|ness 35 (2OO+),
pp. ++3-6O.
7. lor more Jetail, see S. M. Davis, Mara,ir, arJ
r,arizir, Multiratioral Corporatiors," ir
C. A. Lartlett arJ S. Closlal, Trcnsnct|onc|
Mcncement (HomewooJ, lL: liclarJ D. lrwir,
1992). Also see J. Wolf arJ W. C. L,elloff, A
leexamiratior arJ Lxtersior of lrterratioral
Strate,y-Structure 1leory," Strcte|c Mcnce-
ment ournc| 23 (2OO2), pp. 181-89.
8. A. D. ClarJler, Strctey cnJ Structure. C|cters
|n t|e H|story oj t|e nJustr|c| nterr|se (Cam-
briJ,e, MA: Ml1 lress, 1962).
9. Davis, Mara,ir, arJ r,arizir, Multira-
tioral Corporatiors."
hiII. IoteroatiooaI
Editioo
. Ihe 8trategy aod
usioess
228
Cuauories, Z00/
1O. J. M. StopforJ arJ L. 1. Wells, Strctey cnJ Struc-
ture oj t|e Mu|t|nct|onc| nterr|se (New York:
Lasic Looks, 1972).
11. C. A. Lartlett arJ S. Closlal, Mcnc|n ccross
orJers (Lostor: HarvarJ Lusiress Sclool lress,
1989).
12. See J. l. Calbraitl, Des|n|n Com|ex rcn|,c-
t|ons (leaJir,, MA: AJJisor-Wesley, 1977).
13. M. CoolJ arJ A. Campbell, StructureJ Net-
works: 1owarJs tle Well Desi,reJ Matrix,"
lon Rcne I|cnn|n, ctober 2OO3, pp. +27-6O.
1+. Lartlett arJ Closlal, Mcnc|n ccross orJers,
l. \. Cuterl, CooJbye, lJ Matrix," us|ness
Mont|, lebruary 1989, pp. 32-38; arJ Ljork-
mar, Larrer-lasusser, arJ Li, Mara,ir,
lrowleJ,e 1rarsfer ir MNCs".
15. M. S. Crarovetter, 1le Strer,tl of Weak
1ies," -mer|ccn ournc| oj Soc|o|oy 78 (1973),
pp. 136O-8O.
16. A. l. Cupta arJ \. J. CovirJarajar, lrowleJ,e
llows witlir Multiratioral Corporatiors,"
Strcte|c Mcncement ournc| 21, ro. + (2OOO),
pp. +73-96; \. J. CovirJarajar arJ A. l. Cupta,
T|e Quest jor C|ooc| Dom|ncnce. (Sar lrarcisco:
Jossey-Lass, 2OO1), arJ L. ArJerssor, M. lors-
,rer, arJ L. Holm, 1le Strate,ic lmpact of Lx-
terral Networks: SubsiJiary lerformarce arJ
Competerce Developmert ir tle Multiratioral
Corporatior," Strcte|c Mcncement ournc| 23
(2OO2), pp. 979-96.
17. lor examples, see W. H. DaviJow arJ
M. S. Malore, T|e \|rtuc| Cororct|on (New
York: HarperCollirs, 1992).
18. W. C. ucli, Markets, Lureaucracies, arJ
Clars," -Jm|n|strct|ve Sc|ence Qucrter|y 25
(198O), pp. 129-++.
19. lor some empirical work tlat aJJresses tlis is-
sue, see 1. l. Murtla, S. A. Lerway, arJ
l. l. La,ozzi, Clobal MirJ Sets arJ Co,ritive
Slift ir a Complex Multiratioral Corporatior,"
Strcte|c Mcncement ournc| 19 (1998),
pp. 97-11+.
2O. J. Welcl arJ J. Lyrre, cc|. Strc||t jrom t|e Cut
(Warrer Looks: New York, 2OO1).
21. C. W. L. Hill, M. L. Hitt, arJ l. L. Hoskissor,
Cooperative versus Competitive Structures ir
lelateJ arJ LrrelateJ DiversifieJ lirms," rc-
n|,ct|on Sc|ence 3 (1992), pp. 5O1-21.
22. Murtla, Lerway, arJ La,ozzi, Clobal MirJ
Sets."
23. M. Hammer arJ J. Clampy, Reen|neer|n t|e
Cororct|on (New York: Harper Lusiress, 1993).
2+. 1. lostova, 1rarsratioral 1rarsfer of Strate,ic
r,arizatioral lractices: A Cortextual ler-
spective," -ccJemy oj Mcncement Rev|ew 2+,
ro. 2 (1999), pp. 3O8-2+.
25. ArJerssor, lors,rer, arJ Holm, 1le Strate,ic
lmpact of Lxterral Networks: SubsiJiary lerfor-
marce arJ Competerce Developmert ir tle
Multiratioral Corporatior."
26. L. H. Scleir, Wlat ls Culture`" ir l. J. lrost et
al., Rejrcm|n rcn|,ct|onc| Cu|ture (Newbury
lark, CA: Sa,e, 1991).
27. L. H. Scleir, rcn|,ct|onc| Cu|ture cnJ lecJer-
s||, 2rJ eJ. (Sar lrarcisco: Jossey-Lass, 1992).
28. C. Mor,ar, mces oj rcn|,ct|on (Leverly
Hills, CA: Sa,e, 1986).
29. l. Dore, r|t|s| cctory, ccnese cctory (Lor-
Jor: Aller & Lrwir, 1973).
3O. M. Dicksor, Lack to tle luture," |ncnc|c|
T|mes, May 3O, 199+, p. 7.
31. See J. l. lotter arJ J. L. Heskett, Cororcte Cu|-
ture cnJ Ierjormcnce (New York: lree lress,
1992), arJ M. L. 1uslmar arJ C. A. 'leilly,
\|nn|n t|rou| nnovct|on (Lostor: HarvarJ
Lusiress Sclool lress, 1997).
32. lotter arJ Heskett, Cororcte Cu|ture cnJ Ier-
jormcnce.
33. 1le classic sor, of praise was proJuceJ by 1. le-
ters arJ l. H. Watermar, n Secrc| oj xce||ence
(New York: Harper & low, 1982). lrorically,
lLM's Jeclire be,ar slortly after leters arJ Wa-
termar's book was publisleJ.
3+. lotter arJ Heskett, Cororcte Cu|ture cnJ Ier-
jormcnce.
35. Lartlett arJ Closlal, Mcnc|n ccross orJers.
36. See l. J. A,uilar arJ M. Y. Yosliro, 1le llilips
Croup: 1987," HowarJ Lusiress Sclool Case
No. 388-O5O, 1987; llilips li,lts llab," T|e
conom|st, April 7, 199O, pp. 73-7+; arJ l. \ar
Je lrol, llilips Wirs Lack lJ lrierJs," |-
ncnc|c| T|mes, July 1+, 1995, p. 1+.
37. J. lfeffer, Mcnc|n w|t| Iower. Io||t|cs cnJ nj|u-
ence w|t||n rcn|,ct|ons (Lostor: HarvarJ Lusi-
ress Sclool lress, 1992).

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