Managing the Global Network Corporation

Bruce McKern

• Publisher: Routledge
• Year: 2003
• Topic: Business
• eBook ISBN:
  9781134433124
• Subtopic: Business General
• Index: Business

As barriers to international trade and investment have fallen worldwide, multinational enterprises have become the leading engines of economic integration and growth, deploying global strategies to expand their reach. To implement such strategies in an increasingly complex environment, corporations are adopting network forms of organization. This b

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ORGANIZATIONAL INNOVATION IN MULTINATIONAL CORPORATIONS

Bruce McKern

Introduction¹

In the early years of the post-war development of the modern international corporation, organizational structures evolved slowly in response to geographical and market diversity. It was possible for corporate management to change organization structure incrementally, beginning with an international division to handle the international activities of the company, shifting over time to a product-based or geographic divisional structure. The important determining variables were the importance of international business relative to the company’s total business, on the one hand, and the diversity of products sold abroad, on the other (Stopford and Wells, 1972). However, today it is clear that the adoption of global strategies by many corporations has been accompanied by a significant increase in environmental complexity. In response, organization structures are changing more rapidly and there is a heightened degree of experimentation with innovative structures and processes.

Given the fluidity of organization structures and management processes within multinational corporations, the Carnegie Bosch Institute decided in 1994 to commission studies on international “network” corporations. These were viewed as international corporations in which there was an emphasis on the autonomy of subsidiaries, lateral communication flows and the cross-border generation and transmission of knowledge.

The intentions of the project were to understand the theoretical and operational factors that contribute to superior business performance. The intention was to focus on firms whose structures were close to that described by Nohria and Ghoshal (1997) as a “differentiated network.” In this chapter I summarize briefly their view of these structures, then outline the main themes that emerged from the CBI research program, which are presented in the chapters of this book. As it turned out, not every research project focused exclusively on corporations that fitted the network definition. In many cases, the research was broader in scope and the coverage broader than firms with such specific attributes. Nevertheless, we believe the findings have application to most corporations operating internationally.

Nohria and Ghoshal view the modern international corporation as evolving toward a network of related affiliates, rather than a hierarchical structure. They take a contingency perspective, emphasizing the importance of fit between the structure of the corporation, its strategy and the environmental forces it faces.

Fit between the environmental demands and the choice of corporate structure should have a strong impact on firm performance. This is a complex question, because the typical multinational corporation operates in a variety of industries and business environments, in addition to the diversity of its geographic spread. The traditional view of the international environments in which MNCs operate is based on the opposing forces of national responsiveness and global integration. This leads to four potential environments, which have been characterized as:

• international (in which neither force is particularly strong, as for example in the metals, machinery, paper, and textiles industries);

• multinational (in which the forces for responsiveness are strong and the integration forces weak, as in packaged goods, household appliances, and beverages);

• global (strong integration forces, weak responsiveness, as in chemicals, construction equipment, and credit card services);

• transnational (in which both forces are strong, such as pharmaceuticals, computers, and automobiles).

Corporations respond to their environments by adjusting the relative weight given to “differentiation” and “integration,” as described by Lawrence and Lorsch (1967). The complexity of the environment of multi-business corporations implies that organization structures and processes need to respond to the special circumstances of each business and region. This imperative suggests an organizational response that is highly differentiated across the corporation’s disparate activities. On the other hand, the need for control and economies of scale requires a degree of integration across those activities. In attempting to reconcile these contradictory demands, modern corporations have adopted a variety of approaches.

In describing the structure of multinational corporations, Nohria and Ghoshal (1997) discerned four forms, based on the degree of integration and differentiation of subsidiary roles:

• structural uniformity (in which there is high integration and low differentiation of subsidiary roles);

• a differentiated network (high integration with high differentiation);

• differentiated fit (low integration and high differentiation); and

• ad hoc variation (low integration and low differentiation).

Many of today’s multinational corporations face considerable diversity of businesses, yet are driven by competitive pressures to achieve system-wide economies and control. The particular structural form identified as the differentiated network is an emerging response to this complex environment.

In the view of Nohria and Ghoshal, the appropriateness of the fit in a differentiated network needs to be considered in terms of four major features. First, there is a differentiated distribution of resources and roles among the various subsidiaries in the network. Subsidiaries differ considerably in size, internal structure, and managerial competencies.

Second, there are different forms of relationship between the headquarters and the subsidiaries (a relationship studied in depth by McKern and Naman in Chapter 12). It is important to consider the full range of responsibilities controlled by all parties, and the allocation of these responsibilities differs systematically among subsidiaries and corporations.

Third, network organizations employ a variety of socialization mechanisms designed to ensure a degree of normative integration. In addition to the intellectual capital of individual managers, each possesses social capital, which can be directed toward integration by the incentives and human resource practices of the company.

Finally, communication flows between and within subsidiaries, between them and the headquarters, and outside the corporation, are a critical feature of the modern international firm. Managers are much more concerned today with communications laterally, across functions and across national boundaries, than with the vertical flows associated with the traditional hierarchy. Managers have to deal with far greater complexity in the management of the business than in the past, arising from the more rapid pace of change, the density of communication linkages and greater diversity in business lines, geography, personnel, and business partners.

For most industries and for most firms, it is no longer possible to depend on a competitive position arising from monopoly, location, protection or privileged access to resources or markets. This is not to imply that companies can ignore strategy or strategic positioning, which constitute the plan of campaign for the firm in its struggle for supremacy against competitors, an important goal of which is to gain a preferred position. The point is that competitive positions that are not supported by the core competences of a company are likely to be transitory. As is commonly argued, it is intellectual capital that is now the basis of enduring competitive advantage. Intellectual capital is an intangible resource residing primarily within the minds of the firm’s people. It is intimately linked to the organization’s internal culture, management processes and incentives, and its nurturing is a critical leadership task.

Developing structures and processes that stimulate individual responsibility and innovation has long been a concern for the top managements of international companies. Innovation in multinational enterprises in the past has followed a variety of patterns, paralleling the historical development of international strategies. Innovation can be center-for-global, in which innovation is created at the center and implemented by subsidiaries worldwide; local-for-local, in which a national subsidiary innovates for its own market; local-for-global, where a national subsidiary provides innovations to the firm’s global market; and global-for-global, where many of the subsidiaries provide innovations for the firm which are exploited worldwide (Nohria and Ghoshal, 1997).

In a network form of organization, the distributed resources and competences of managers make it increasingly less efficient to focus solely on global-for-local forms of innovation. Capitalizing on the distributed knowledge of the firm worldwide requires matching the patterns of innovation to all the environmental opportunities, be they local or global. In promoting worldwide innovation in a differentiated network, firms need to pay attention not only to the distribution of resources and the headquarters–subsidiary relationships, but also to patterns of socialization and communication between and among subsidiaries and headquarters. Success in integrating across the network will depend at least as much on these processes as on the structure and resource distribution.

The chapters that follow explore the organization structure and processes of multinational corporations, with emphasis on the differentiated network form. The process of innovation and the transfer of knowledge across international networks is the first theme. Four chapters consider the dynamics of knowledge transfer, the management of international innovation projects, international joint ventures, and the globalization of R&D.

As noted earlier, a variety of integrative processes is employed by firms to develop a common understanding of strategy and to align employee behavior and business functions toward corporate goals. Most international corporations, and the differentiated network in particular, rely on processes of socialization to a greater or lesser degree to help achieve integration. This is the theme of the second section of the book, in which we first explore mechanisms for developing a common perception of strategic reality through the use of cognitive mapping. We then look specifically at a key force in environmental complexity, the pace of change, and its impact on the strategic possibilities or management styles open to the firm, which are strong integrating mechanisms.

Remuneration systems are also an important mechanism for integration and differentiation in global corporations. Even in highly integrated corporations, remuneration systems differ according to the degree of structural differentiation in branches and subsidiaries. By comparing two different international structures, which Nohria and Ghoshal would characterize as structural uniformity, on the one hand, and differentiated networks, on the other, Chapter 8 provides an explanation for patterns of remuneration that are designed to fit differing environmental contexts. The final chapter in this section takes a broader view of organizational processes within international companies, focusing on the failures of business process re-engineering. This chapter demonstrates that effective transformation in an international corporation must be undertaken at the deep level of organizational processes, rather than at the more superficial level of structure or rules.

A key characteristic of global competition, as discussed earlier, is the rapid evolution of organizational forms and managerial roles. This constitutes the third theme of the book, which deals with structural evolution, the devolution of responsibilities between the center and the business units, and changes in the roles and personal competences needed by managers in the international network corporation.

We now consider each of these three themes in more detail, as an introduction to the subsequent chapters.

Innovation and knowledge transfer

The pioneering work of Nonaka and Takeuchi (1995) provided a view of corporate innovation as involving the alternation of knowledge between tacit and explicit forms. In the virtuous circle of knowledge creation proposed by them, the tacit knowledge possessed by individual managers or product developers needs to take explicit form before it can be properly incorporated into innovation. Likewise, explicit knowledge is built on by individuals and becomes tacit in the process of further development. While this circle of knowledge creation is helpful to understanding the innovation process within a particular business unit, the relationships and roles of business units within a corporate structure are equally important in promoting innovation worldwide. The roles of subsidiaries within a differentiated network in relation to innovation are three-fold: adoption of innovations created at the center; creation of innovations suited to the local environment; and diffusion of their innovations to the headquarters and other business units (Nohria and Ghoshal, 1997). Their abilities to fulfill these roles are a function of the availability of “slack” resources in the unit, the degree of local autonomy, communication patterns within the network, and the extent of normative integration across the network.

Trust and internal markets for innovation

According to Anil Gupta and Manuel Becerra (Chapter 2), knowledge transfer can be either centrally managed by the corporate hierarchy or through an internal market for knowledge. Under a hierarchical approach, it is the center’s role to identify the knowledge to be transferred and to make the transfer happen. The internal market approach, which is consonant with our view of the differentiated network, depends on choices for knowledge acquisition or transfer made by individual managers across the network. Gupta and Becerra argue that an internal market is able to foster a much greater transfer of knowledge because of its multiple connections, and there is less likelihood of knowledge loss. It is also much more likely to produce serendipitous innovations than a hierarchically controlled process, due to stronger motivation coupled with diffused resources and opportunities. This conclusion is consistent with that of Nohria and Ghoshal (1997).

Gupta and Becerra argue that the effectiveness of an internal market for innovation depends on creating the impetus among units to learn from each other; a willingness to share knowledge; mechanisms for subsidiaries to learn about and contact each other; and mechanisms for the actual transfer of knowledge. Success in this endeavor depends primarily on trust.

In their view, trust is the most important variable, apart from the distribution of knowledge across the corporation, in facilitating the knowledge flow process. What determines a high level of trust? Since trust is based on judgments about others, Gupta and Becerra argue that socialization is the most important influence. Managers who know each other well, or come from similar backgrounds, are more likely to trust each other and to share knowledge across the corporation.

By studying knowledge flows in a multinational enterprise structured to include both strategic business units and geographical marketing units, they conclude that the level of trust is influenced by the strategic context, managerial systems and policies, and the social context. It can be improved through a number of managerial actions. First, a more cooperative relationship can be created between autonomous units by reducing the degree of overlap between them, thus decreasing the degree of competition. Managerial policies that can have a positive influence on trust include regular meetings, transfer pricing policies, incentive payments, and rotation of employment. Finally, the social context can be modified by providing extensive opportunities for informal personal contact, by leaders whose behavior demonstrates a culture that values trust, and by attention to coaching of individual managers.

Effective international innovation teams

One of the most common means of developing new knowledge in a corporation is the use of project teams. Such teams are frequently composed of individuals from different cultural backgrounds and there is evidence from work on cultural difference that diversity enhances the productivity of a team.

As the late Gunnar Hedlund and Jonas Ridderstråle argue in their study of international innovation projects (Chapter 3), such projects can result in the development of products or services of high quality and performance. They can also contribute to their acceptance within the international network and promote opportunities for learning across national boundaries. However, there are detractions in terms of the time and cost of managing projects across borders. In their study, based on intensive research in ABB and Electrolux, together with surveys of 12 other Swedish multinational companies, they found a number of impediments to successful international research projects. Interestingly, most of these had little to do with the international nature of the teams or the companies; rather, they were problems that are encountered more generally in project management.

One of the most serious (and surprising) problems observed in their study was lack of integration between the R&D projects and the strategy of the firm. This was due to lack of communication of the strategy across the corporate network, perhaps because of the lack of a common culture, which was exacerbated as a result of acquisitions. This finding reinforces the often-expressed desirability of sharing the corporate vision widely and ensuring that strategic actions are fully understood and accepted.

Other problems faced in many international innovation projects include insufficient resources (in terms of money and people), lack of full commitment at critical phases of the project, and lack of integration between the various functions. Again, this is a surprising finding given the wealth of evidence on the importance o...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Notes on contributors
• Foreword
• Preface
• 1 Organizational innovation in multinational corporations
• PART 1 Innovation and knowledge transfer in international networks
• PART 2 Strategy, integrative processes, and differentiation
• PART 3 Structural evolution, management roles, and competences
• Index