Chapter 7 Managing Multinational PDF

CHAPTER 7 :Managing Multinational Write an optional subtitle here © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Managing...

CHAPTER 7 :Managing Multinational Write an optional subtitle here © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Managing Multinational The challenge of distance The challenges posed by distance meant that building such effective cross-border organizations was not easy. They needed to be effective in different political, legal and cultural environments separated by geographical distance. There needed to be cohesion in overall corporate strategy, yet a firm needed to be responsive to its local environment The potential benefits of operating across borders had to be translated into commercial realities. People from different languages and cultures had to be managed. The difficulties of limiting opportunism were made more difficult because bounded rationality and asymmetric information were magnified by distance and culture. Organizational design had also to fit the prevailing environment, including the state of technology and the political context, and also change as that environment evolves. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Managing Multinational Study by Bartlett and Ghoshal (1989) Bartlett and Ghoshal argued that argued that the organization of a multinational needed to ‘fit’ the dominant strategic requirements of an industry in terms of: The relative importance of these characteristics for competitive success varied by INDUSTRY Efficiency Responsiveness to local Transfer of knowledge Competencies condition The authors illustrated their argument by examining nine companies in three industries branded packaged goods, which traditionally demanded a high degree of national responsiveness; consumer electronics, where there was a need for global efficiency; telecommunications switching, where the ability to develop innovations and transfer them around the world was essential © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Bartlett and Ghoshal identified three types of organizational form which ‘fitted’ these strategic requirements International Global model model Multinational model based on scale Companies managed a portfolio of a coordinated federation in economies in which most national entities which had which a parent company transferred decisions were centralized. This considerable autonomy. knowledge and expertise to foreign produced a high level of global affiliates, and exercised quite tight efficiency control. This provided a high level of local Matsushita, NEC and Kao responsiveness General Electric, P&G, and Ericsson Philips in electronics, Unilever in packaged goods, and ITT in telecommunications, simultaneously achieve responsiveness, Transnational efficiency and innovation, integrated form network of interdependent subsidiaries © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Hierarchies, clans, and business groups in the first global economy Free Standing Company This organizational form worked well for the industries in which predominated, including mining, plantations, trade- related services including banking and shipping, and utilities. They needed to transfer abroad start-up capital, a number of skilled personnel and knowledge about mining or banking, but not complex technologies. There were lots of efficient markets in resources so extensive vertical integration was not a requirement. Most of their industries did not have large economies of scale compared to mechanical processes in manufacturing. In most cases, subsidiaries were established in only one geographical region. The tiny head offices the primary functions Characteristic of free- raising finances, standing distributing dividends and monitoring foreign operations companies © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The problem of distance and the unpredictable and non-routine nature of many tasks, meant that managerial hierarchies and large bureaucracy were not the most efficient way of regulating effort. Instead these firms controlled managers at distant offices by creating strong corporate culture based Managers were always nationals of the home recruitment of a homogenous managerial country, except in countries settled by European corps colonists, such as Australia and Canada Typically, they belonged to particular social groups In the British case, they were normally the products of that country's fee-paying ‘public’ school Head offices devoted great attention to the recruitment of staff with the right character and background, who would be trusted to function honestly and in accordance with overall corporate norms without close bureaucratic supervision. Head offices retained a monitoring role by deciding on matters such as individual salary levels, awarding or denying permission to marry, vetting prospective wives, and congratulating or admonishing individual performancee. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Clan method The ‘clan’—whose members are heavily socialized and share common goals and understandings—offered a superior organizational form in situations in which there are considerable problems of measurement, and too great uncertainty existed for prices or rule systems to be able to function well The clan form has less need for formalized and sophisticated flows of information, because common ideas, beliefs and values function as information carriers and provide sufficient guidance for management action Managers on the spot Creation of ‘moral’ cultures rather than This type of organization needed to be given bureaucratic monitoring which at best could worked well where autonomy in day-to-day be particular critical. Trading activities mining companies were operations because which involved involved numerous non- searching for minerals close monitoring was routine transactions, the best defence on distant frontier implausiblele against opportunism in the form of speculative or unauthorized dealing © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Clan method The use of clan methods of control rested in part on nation-specific characteristic Free-standing companies operated in The British preference for socialization strategies rested many countries where local on that country's homogeneous culture, as well as organizational and technological Victorian cultural norms including notions of service capabilities were low. and imperial mission. There were regional dimensions also. British-owned enterprises in Asia were often managed by Scots, and As a result, they possessed far better Queen Victoria sometimes headquartered in Scotland. Jardine managerial competences than almost reign 20 Jun Matheson for several generations recruited managers any local firm in Latin America, Asia, 1837 until 22 almost entirely from Scotland, and largely from one Jannuary region, the county of Dumfriesshire and Africa. They often secured first 1901(upon her mover advantages in the shape of death) mining concessions or customer franchises which were hard to overcome © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Clan method Japanese companies later also made The heterogeneous nature of the United States, extensive use of socialization methods even in the nineteenth century, helps to explain of control, again made possible by a that country's greater preference for homogeneous culture. bureaucratic methods © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Business Group These business groups organized around British trading companies grew to a considerable size and geographical spread. Balfour Williamson Jardine Matheson James Finlay had extensive trading, land, employed over 110 000 which had extensive investment, oil production and workers in China in the plantation and refining, and flour milling interwar years. manufacturing operations businesses along the West in India, as well as tea Coast of the Americas plantations in East Africa stretching from the states of and cotton textile Washington and Oregon in the manufacturing in United States to Chile and Peru Scotland, employed around 16000 in 1945 © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Business Group Business Group also served as The location of much venture capitalists in countries performed a wide range of decision-making at the market intermediation where capital markets were highly level of the affiliated functions in the face of an undeveloped, identifying company facilitated a high equally wide range of market degree of local opportunities, financing them, and imperfections responsiveness. ultimately bringing them to market. They recruited the parent company provided management for all the strong strategic direction for affiliated companies, and the group as a whole, and Regarded as predecessor of the facilitated the international coordinated the business. marketing of products transnational organizational form. Eg :Rothschild banking family There was considerable invested in various industry and diffusion of information and knowledge within groups country however it was monitor closes by the family member and few trusted advisers © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Family firm ownership Small Dutch family firms have also been shown to Family ownership and management, have competed successfully in international markets. albeit combined with the use of In margarine and other foods, a leading sector for professional managers, also Dutch firms, characterized many of Germany's largest multinationals before 1914, including Jewish firms of Van den Bergh, Van Zwanenberg, Siemens, Bayer, and Stollwerck, the and Hartog settled close relatives in London to chocolate manufacturer. It take advantage of the much larger British market, creating Dutch and British branches of the family. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The growth of local autonomy During the interwar years there was a growth of large companies in many advanced economies as firms engaged in horizontal and vertical integration and expanded in new products and countries. As these giant industrial enterprises came to dominate their home markets, they sought to penetrate foreign markets either through trade or FDI Unlike the free-standing firms, they transferred to their subsidiaries both technological capabilities and marketing knowledge. This involved more capital, and the knowledge needed constant updating. A number of large US (and German) firms pioneered the development of the multidivisional structure (or M-form)which offered a solution to diseconomies of scale by decentralizing decision- making to product or geographical operating divisions. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Creating AND Leveraging knowledge Knowledge creation ❑central organizational challenge for multinationals was to create and transfer knowledge ❑From the nineteenth century the world's largest multinationals included its largest innovators. In the capital-intensive manufacturing industries, US, European and later other corporations drove innovation through the establishment of their own research laboratories. ❑Multinationals were initially seen as vehicles for transferring the knowledge of the parent companies to subsidiaries in the ‘hub and spoke’ mode. Bartlett and Ghoshal's (1989) international organization seemed particularly effectively in arranging this transfer © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Creating AND Leveraging knowledge Knowledge creation However quite early on affiliates began developing their own innovatory capabilities. By the interwar years customer demand for locally adjusted products and rapid service led firms to develop research and development in affiliates. The larger foreign-owned chemical, pharmaceutical and petroleum firms engaged in R & D in the United States during the interwar years Eg : ❑ Swiss-owned Hoffmann-LaRoche confined itself to pharmaceuticals, where it undertook substantial research by the end of the 1930s, but its counterparts Ciba, Sandoz, and Geigy developed broader research interests and were more broadly engaged (Wilkins 2004). ❑ Shell probably had the greatest research capacity of any foreign-owned company in the United States at this time. In 1927 Shell established a special affiliate near Berkeley in California designed to undertake fundamental research. Shell's chemical company also undertook research in the United States, and Shell refineries conducted applied research. During World War II Shell Oil became the center of innovation within the Group, pioneering new types of aviation fuel and synthetic rubber © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Creating AND Leveraging knowledge Knowledge creation ❑Foreign firms invested in R & D in other developed countries also. In 1935 over 30 of the 300 foreign-owned manufacturing companies in Britain were engaged in research. This was particularly found in the chemicals and electrical engineering industries. Most of this research was adaptive or development-related rather than basic. It often originated as technical support for manufacturing or marketing. ❑There is aggregate evidence from patent data that the internationalization of technological activity by large manufacturing firms was quite extensive by the interwar years. It is likely that protectionist policies encouraged the building of technological capabilities in local markets. ❑large share of the foreign R & D undertaken between the 1950s and the 1970s was adaptive or development oriented. In consumer products, such research was essential because of variations in local tastes and national legislation. Foreign research affiliates were often granted considerable responsibility for new product research(Behrman and Fischer 1980) © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Creating And Leveraging knowledge Knowledge transfer ❑In internalization theory, the existence of multinationals is explained by their ability to transfer knowledge across borders more efficiently than markets. However, the efficient transfer of knowledge within the borders of a firm has never been automatic. Tacit knowledge or ‘know-how’ is complex, difficult to codify, and ‘sticky’ (Kogut and Zander1992; von Hippel 1994). ❑As a result, as Bartlett and Ghoshal stressed, the transfer of knowledge within multinationals posed a major organizational challenge ❑Knowledge transfer featured widely in the growth of multinationals during the first global economy Utility companies transferred across borders the knowledge about manufacturing and generating gas and electricity banks transferred the skills needed to lend and take deposits; mining companies transferred the capabilities to search for and exploit minerals As chemicals, pharmaceuticals, cotton thread and other companies-built factories in foreign countries they patented inventions, and registered trademarks, in the United States and elsewhere (Wilkins 1989) © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Creating AND Leveraging knowledge Knowledge transfer Although there were numerous engineering manuals and texts which codified existing technologies in the nineteenth century, tacit knowledge or ‘know-how’ was transferred physically by people. Furthermore, as multinationals grew in size and complexity, so did the organizational obstacles to knowledge diffusion The role of people in transferring tacit knowledge remained crucial as multinational organizations grew in size. Despite the availability of instantaneous communications, multinationals continued to use expatriates not only to control foreign affiliates, but also to transfer tacit knowledge (Bonache and Brewster 2001) As innovative knowledge was held by individuals, mobility both between firms and within firms is essential for knowledge transfer It became a matter of negotiation between the multiple actors within firms, and it faced problems arising from Incongruent incentives within organizations. The knowledge possessed by an affiliate represented bargaining power. The extent and effectiveness of intrafirm knowledge transfer depended on the nature and efficiency of transmission channels within firms, including the willingness of head office to coerce, and also the nature of the knowledge, especially the extent to which it was tacit or ambiguous © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  International Marketing As firms invested abroad, they faced multiple marketing challenges. This include: establishing how far products, brands, and prices needed 2. After World War II, consumer products to be different in different markets multinationals faced increasing challenges how to create distribution channels or access existing as retailers grew in bargaining-However, channels abroad; companies faced very different situations how far to adjust to local circumstances advertising, in different markets. European retailing promotions, packaging and services. became concentrated earlier than American, and private labels became 1.AfterWorld War II multinationals faced worldwide changes to much more important both advertising medium and distribution channels, but their Large European retailers increasingly nature varied considerably between countrie promoted their own brands as part of Television advertising became a crucial component of their corporate image, andemployed marketing strategies (Tedlow 1993). Commercial television increasingly sophisticated advertising spread more slowly elsewhere. and promotions and favored in-store merchandizing to support their brands © 2019, University of Cyberjaya. 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