Organizational configuration

Today’s companies are faced with strategic tasks emerging from the international operating environment. The ability to respond to those tasks is usually constrained by their internal capabilities, which are shaped by the company’s administrative heritage.^[1] The administrative heritage can be defined as “the path by which it developed- its organizational history- and the values, norms, and practices of its management- its management culture.” ^[2] Every company is influenced by these. It consists of many aspects of a company’s past such as home-country culture, history, and the influence of specific individuals. “Collectively, these factors constitute a company’s administrative heritage.” ^[3] The administrative heritage has not only an influence on the strategic business unit and its multinational, global and transnational characteristics but also on the organizational form of a company.^[4] It affects the present abilities to respond to the forces driving worldwide competition.^[5]

Organizational configurations

Administrative Heritage

Due to national differences between the worldwide operating companies and the period, in which the companies expanded abroad, a company’s administrative heritage is unique. This uniqueness has led to different business approaches and built very different organization types around distinctive strategies. Three basic types of organizational configuration models have been observed in the past, each characterized by distinct structural configurations, administrative processes, and management mentalities. These are the decentralized federation, the coordinated federation and the centralized hub.^[6] The decentralized federation counts to the most widespread types, adopted by many European companies, which expanded in the 1920s and 1930s. “Economic, political and social forces encouraged the companies to decentralize their organizational assets and capabilities to allow foreign operations to respond to the differences that distinguished national markets” ^[7] even though at that period the barriers among national markets were high. These circumstances resulted in an internationalization which was characterized by self-sufficient national operations. Each national operation was focused on being sensitive and responsive to the particular national environment.

In the early postwar decades the coordinated federation became predominant. Contrary to the European companies and American companies applied this organization structure and process.^[8] “Companies which internationalized in this period faced less pressure to be responsive to national differences due to the fact that the international trading environment had become less restrictive, reducing the need for automous local operations, and massive troop movements and the postwar shortages had a homogenizing effect on local preferences. An even more powerful influence was the companies’ recognition that they could capitalize on knowledge developed in the home market, by managing its transfer to less advanced overseas environments”.^[9] The centralized hub allegorizes the third basic type of the organizational configuration models, which were adopted by globally operating companies such as Japanese companies in the era of the 1970s and early 1980s. Those companies faced “a greatly altered external environment and operated with very different internal norms and values”.^[10] The centralized hub is characterized by a centralization of assets, resources, and responsibilities. In addition to that “overseas operations are used to reach foreign markets in order to build global scale”.^[11]

Centralized Hub

Centralized hub organizational model emphasizes that cost advantages and quality assurance, demanding tight control over product development, procurement, and manufacturing.^[12] Also, Centralized hub organizational model focuses on the objective of global efficiency rather than local responsiveness, which means companies increase its output as much as possible, lower the value of its inputs, or achieving both. However, that also means that company may not choose to match the well-established local marketing capabilities,^[13] and neglect the localization such as local taste and culture. Moreover, in order to achieve centralized and global scale, centralized hub organizational model encourage MNCs to centralize most key assets and resources, and to operate subsidiaries by centralizing decision making; also, to treat subsidiaries as delivery pipelines to the global market. Furthermore, centralized hub work well with global strategy, which pursues cost reduction, but local involvement minimum. In doing that, MNCs are able to reduce its risks and costs when they enter strange foreign markets.

Advantages of Centralized Hub

Via centralizing decision making, and controlling operation, multinational corporations (MNCs) are able to maintain communication-fluency between headquarter and subsidiaries, and subsidiaries and subsidiaries. Also, spread of information from headquarter to subsidiaries will be rapid; also it will make subsidiaries more interdependent. Moreover, centralized hub is good at reducing costs and risks. Simple way to express the strengths of centralized characteristics^[14]:

• Philosophy / emphasis on: top-down control, leadership, vision, strategy.
• Decision-making: strong, authoritarian, visionary, charismatic.
• Organizational change: shaped by top, vision of leader.
• Execution: decisive, fast, coordinated. Able to respond quickly to major issues and changes.
• Uniformity: Low risk of dissent or conflicts between parts of the organization.

Disadvantages of Centralized Hub

When a company’s decision-making process and organizational capabilities are concentrated at the center as they are in the global organization’s centralized hub configuration, it is often difficult to respond appropriately to diverse worldwide demands. Being distant from the front-line opportunities and threats, the central group’s ability to act in an effective and timely manner is constrained by its reliance on complex and intensive international communications.^[15] Furthermore, the volume and diversity of demands made on the central group often result in central capabilities being overloaded, particularly where scarce technological or managerial resources are involved.

Successful cases

Japanese companies prefer to utilize this organizational model on doing international business. For example, Toyota succeeded by developing products and manufacturing the, in centralized, globally scaled facilities in Japan.^[16] This approach also is suitable for emerging MNCs from other Asian countries because most of Asian countries are High-context cultures, which is collectivist and centralization.^[17] They are more willing to centralize decision-making and do not like to empower to its subsidiaries. Also, most of MNCs of developing countries lack of experience on doing international business, as well they do not have a strong financial capital, compared to MNCs from developed countries. Therefore, centralized hub may fit developing and emerging MNCs better than those in advanced countries, in term of costs and risks reduce.

Decentralized Federation

Definition

“The management style of decentralized federation reinforces companies’ willingness to delegate more operating independence and strategic freedom to their subsidiaries.” ^[18] Separating three forms of decentralization as detailing the different intensity of level^[19]:

• Deconcentration: The weakest form of decentralization. Decision making authority is redistributed to lower or regional levels of the same central organization.
• Delegation: A more extensive form of decentralization. Through delegation the responsibility for decision-making is transferred to semi-autonomous organizations not wholly controlled by the central organization, but ultimately accountable to it.
• Devolution: A third type of decentralization is devolution. The authority for decision-making is transferred completely to autonomous organizational units.

Main features

Decentralized federation has three main features: Most key assets and resources decentralized; loose, personal controls. Financial flows: capital out, dividends back; corporate management treats subsidiaries as independent national business.^[20] Decentralized federation tends to reinforce companies’ willingness to delegated more operating independence and strategic freedom to their foreign subsidiaries ^[21] because companies engager in matching widely different local market needs. Also, when host countries raise tariffs and discriminatory legislations, companies can use decentralized federation strategy, in order to build local production facilities to compete effectively with local competitors. Moreover, decentralized federation works well with companies which are using multinational strategy, because multinational strategy emphasizes decentralized and nationally self-sufficient, and exploiting local opportunities.

The benefits of decentralized federation

Decentralized federation is able to offer both economic and non-economic benefits because foreign subsidiaries can get more operating independence and strategic freedom. Also, subsidiaries are able to react and make decision faster when they encounter local issues. Different market factors in different countries can help companies to determine cost of production and price of product. The quick and correct decision made according to the local situations by foreign subsidiaries can greatly reduce the opportunity cost. Furthermore, decentralized federation not only can offer benefits to organizational outsourcing but also offer benefits to employees. Decentralized structure is where "power, ownership, and initiative are distributed throughout a whole market".^[22] Decentralized federation always provides employees a freedom and loose working environment to learn things and develop capabilities. Under such an atmosphere, employees will be more focusing on their own business by getting more power and ownership from organizations. Also, the increase of control and sense of ownership gives employees more motivation on their jobs. The pressure caused by the direct competition from other companies with providing the same products or service leads to increased innovation and levels of specialization.^[23] Furthermore, under some certain circumstances, decentralized federation can avoid the emergence of some trouble caused by differences of geopolitical locations. “For example, overseas outsourcing in multiple time zones offers the potential for a 24-hour workday without having to pay for overtime. And even a less global distribution can provide reduced impact from regionally specific problems such as a natural disaster or a local system outage.” ^[24] The decentralized federation are usually used by European companies because there are a lot of transportation and communication barriers in European market. Those barriers limit headquarters to manage the foreign subsidiaries all over the world. “European companies, particularly those from United Kingdom, the Netherlands, and France, developed the configuration of decentralized federation to modify their products and marketing strategies to meet widely different needs of local market”.^[25]

The costs of decentralized federation

Lower level managers have more ownership and power to make decisions according to the local situation. which could cause them ignoring the “big picture” built by the central company. It is possible that managers in different foreign subsidiaries have different objectives that are different from the objectives of the entire organization. They have to be trained to make decisions based on the best interests of the whole organization.

Under the decentralized federation, it is possible to occur lack of coordination among different autonomous managers, which could be hard for different subsidiaries to make intercommunication effectively. That could also cause subsidiaries to lessen opportunities to share their valuable experience and innovative ideas gaining from operating in different markets.

Coordinated Federation

History

Since 1950s, many American companies have gained advantages in technology and have developed new management processes which help them leverage their new strengths in foreign countries.^[26] Thus, some people considered the coordinated federation as an American style because a coordinated federation was developed while American companies operated successfully.

Overall theory of Analysis

Of the three organizational configuration models, some people argue that the coordinated federation is the most effective one because it not only allows the subsidiaries autonomy to deal with local markets, but also because the strong ties to the central companies, facilitates substantial feedback for improved efficiency among the subsidiaries. Coordinated federation had been adapted by many of the U.S. based companies.^[27] Such a structure contains many assets and resources which are decentralized to the sub-companies but still somewhat controlled by the parent company. It is apparent that coordinated federation is working well with many companies which are using international orientation, because coordinated federation emphasizes sources of core competencies centralized, others decentralized, which fits to international companies.The systems-based control between domestic operations and foreign operations is tight, formal and systematically controlled. The connection provides a continuous flow of information and data which are obtained and analyzed by the central staff. Moreover, the central staff can use the information to manage and to coordinate its other sub-companies. Normally, the technology from parent companies is adapted to local needs. Although the subsidiaries are often free to adapt products or strategies for local needs, they still greatly depend on or need to be approved by the parent companies for new products, strategies, process, and ideas. For example, when a company wants to develop a new product or a new service, the company needs approval from the parent companies. In addition, the resulting strategies and promotions still need approvals from headquarters as well. The decisions and responsibilities are decentralized to the subsidiary companies. Therefore, if there are any glaring faults with the company, the responsible managers of the company might consider demotion, salary paring, bonus cancellations, etc., in order to punish those responsible for the faults.

Case approach

For example, Volkswagen Group is an example of coordinated federations. Volkswagen is an automobile manufacturer and operates many subsidies: such as Audi, Bentley Motors, Bugatti Automobiles, Automobili Lamborghini, SEAT, Skoda Auto, and Scania.^[28] Most technologies and skills are provided by the parent companies but are slightly modified by the sub companies. In the case of Volkswagen, the platform and gearbox were shared by VW Golf, and, the Audi A3 hatchback.^[29] This “parent” technology is shared with the sub company. Moreover, the engine of the fastest and most powerful production vehicle on earth, Bugatti Veyron, shares many components with Volkswagen’s modular engine family.^[30] Moreover, the Bugatti Veyron exterior was designed by Jozef Kaban of Volkswagen instead of the Bugatti in-house designers.^[31]

Integrated network model

Three basic organizational configurations: centralization, decentralization, and coordination have been common using between companies around the world. Centralized hub is focusing on the objective of global efficiency rather than local responsiveness and decision making is made by headquarter; the primary Japanese characteristic of business operating structure is centralized configuration. On the other hand, decentralized federation companies are willing to delegate more operating independence and strategic freedom to their subsidiaries. Decision making is decided by local subsidiaries to adapt general situations and satisfy regional consumers’ needs; most European firms prefer to function this model. In addition, coordinated federation is compromising these two hubs and creating a different idea to perform business; U.S style of companies is the basic idea of coordinated federation. The feature of this model is the subsidiaries autonomy to deal with local markets but strong ties to the central companies, facilitates substantial feedback for improving efficiency among the subsidiaries.

The final target of these three models is moving toward to an integrated network process. Combining three models and extracting the essence of managed structures are, centralization: escalation process allowing top management to intervene directly in key decision content, formalization: process in which management structures individual roles and administrative systems to influence specific decision, and socialization: top management’s role is to establish a broad culture and set of relationships that provide a supportive organizational contest for delegated decisions, in order to lead companies to have the perfect system to accomplish the needs of global coordination/integration and national differentiation/responsiveness.^[32] Thereupon, developing on the integration and responsiveness framework we appreciate, the management process must be able to change from product to product, from country to country, and even from decision to decision. As the whole process indicates, not only the relationship between headquarter and subsidiaries, but also the integrated network suggests subsidiaries and subsidiaries should have a strong connection as well. By sharing info, data, and research more effective and efficient among headquarter to subsidiaries, subsidiaries to subsidiaries, or subsidiary to other subsidiaries and parent company, a flexible integrative process is necessary to be achieved and accomplished.^[33]

See also

• International Business Entry Modes
• The four dimensions of distance
• Foreign Direct Investment
• Transnational management strategies

References

1. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p.39
2. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.342
3. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.342
4. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution
5. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p.309
6. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p.55
7. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p.55
8. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p56
9. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution,p.52
10. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.344
11. ^ Bartlett & Ghoshal, 1998, Managing across Borders-The Transnational Solution, p.58
12. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management
13. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management
14. ^ WikiAnswers-Advantages and disadvantages of centralization and decentralization?[internet] http://wiki.answers.com/Q/Advantages_and_disadvantages_of_centralization_and_decentralization
15. ^ King, William; Sethi-Vikram (Fall 2001). "Patterns in the Organization of Transnational Information Systems" (PDF). Information & management 38 (4): 201–215. http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1104&context=icis1998. 
16. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management
17. ^ Keegan, W.J.& Green, M.C.,2008, Global Marketing
18. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management, p.337
19. ^ WikiAnswers-Advantages and disadvantages of centralization and decentralization?[internet] http://wiki.answers.com/Q/Advantages_and_disadvantages_of_centralization_and_decentralization
20. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.338
21. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.337-338
22. ^ Considering knowledge management[internet] http://www.ischool.utexas.edu/~blewis/i385q/benefits.htm
23. ^ Considering knowledge management[internet] http://www.ischool.utexas.edu/~blewis/i385q/benefits.htm
24. ^ Considering knowledge management[internet] http://www.ischool.utexas.edu/~blewis/i385q/benefits.htm
25. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.337-338
26. ^ Bartlett, Ghoshal, Beamish, Christopher, Sumanta, Paul (2008). "Transnational Management: Text, Cases, and Readings in Cross-Broder Management". Volkswagen Group (McGraw-Hill Irwin): pp. P.337. 
27. ^ Bartlett, Ghoshal, Beamish, Christopher, Sumanta, Paul (2008). "Transnational Management: Text, Cases, and Readings in Cross-Broder Management". Volkswagen Group (McGraw-Hill Irwin): pp. P.336–340. 
28. ^ "The Volkswagen Group in Summary". Volkswagen Group. 2010. http://www.volkswagen.com/vwcms/master_public/virtualmaster/en2/unternehmen/konzern.html. Retrieved 2010-04-17. 
29. ^ Abuelsamid, S. (2009). "Review: 2010 Audi A3 TDI, diesel with a healthy dash of sport". Autoblog (Weblogs, Inc News). http://green.autoblog.com/2009/05/21/review-2010-audi-a3-tdi-diesel-with-a-healthy-dash-of-sport/. Retrieved 2010-04-17. 
30. ^ "Bentley looking at Veyron W16 for motivation". The Motor Report (The Motor Report). 2007. http://www.themotorreport.com.au/2473/bentley-looking-at-veyron-w16-for-motivation. Retrieved 2010-04-17. 
31. ^ Gallina, E. (2007). "Where: Jozef Kaban appointed Head of Škoda Auto Design". Car Design News (Car Design News Ltd). http://www.themotorreport.com.au/2473/bentley-looking-at-veyron-w16-for-motivation. Retrieved 2010-04-17. 
32. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.342
33. ^ Bartlett, Ghoshal & Beamish, 2008, Transitional Management-Text,Cases,and Readings in Cross Border Management,p.342-343