Managing the multinational enterprise: Organization of the firm and ownership of the subsidiaries by John .M. Stopford and Louis .T. Wells (Jr) published by Longman publications, London (1972).

Introduction:

This book has been produced as part of Harvard’s Multinational Enterprise project, a large scale study which was started in 1965. This is the second of the four book series which would present the project’s main results. This book deals with the organization of the firm and the issues of ownership of its subsidiaries.

About the authors:

John.M.Stopford is currently professor of international business at the London business school and is a visiting professor of economics and international business at MIT, INSEAD, and Harvard business school. He did his masters from MIT and completed his doctorate from Harvard business school. The subject of this book was part of his doctoral dissertation.

Professor Louis .T. Wells is currently professor of international management at the Harvard business school. He did his masters and doctorate from the Harvard business school.

The structure of the book:

The book is divided into four parts apart from an introduction to the subject under study.

  1. Part 1: deals with the organizational structure of multinationals and the strategies they follow.
  2. Part 2: deals with strategy of the multinationals and its influence on their ownership policies.
  3. Part 3 : deals with the prospect for the future
  4. An appendix to the book explains the methodology used in the study.

Introduction to the subject:

The Harvard study covered only American based multinationals. at the time of the study , the American multinationals had shown rapid growth ,both in terms of numbers and size, creating problems for managers of these enterprises and the countries in which they did business.

Managing the multinationals required a through understanding of how these organizations behave. From the point of view of the multinationals, they had to find ways of organizing that enabled them control and coordination of units as they expanded their business domains. Since the multinationals differed dramatically in their ability to move products, money, technology and managers around the world, the governments of the host countries needed to understand their impact on their economies and their sovereignty as a whole.

The aim of this part of the study was to understand the ways in which multinationals had altered their organizational structures as they developed strategies with passage of time.

Part 1 of this part of the study looked at how the organizational structure changed with changes in strategy. The focus was on:

  1. allocation of duties of senior officers
  2. where the decisions were made
  3. how the communication flowed in the organization

These factors are determined by the organizational structure which enables the manager to carry out his actions while it acts as a challenge to host country sovereignty of the host country.

Part 2 of this part of this study deals with the inclusion of local partners in the foreign operations of the multinationals (joint ventures). The issue brings into focus the trade offs made by the multinationals between control on operations and need for resources, while the host governments battled trade offs between increasing local control and hence retention of sovereignty and the need for economic development.

Raymond Vernon revisited (sovereignty at bay, 1971):

This book, which was the first of the books depicting the results of the Harvard study, defined multinationals as:

  1. having a parent company controlling a cluster of corporations of various nationalities
  2. company having access to a common pool of human and financial resources
  3. responsive to elements of a common strategy
  4. Size of the company such that each company had a minimum of 100million$ as total sales.
  5. have a geographical spread
  6. the relevance of the nature of groups activities outside its home country

Multinationals represent strength and flexibility due to the fact that they are a cluster of corporations of different nationalities and their assets are spread out.

The attributes of a multinational are:

  1. Are endowed with rights- the right to own, use, enjoy, dispose and redeploy.
  2. these rights are not constrained by use
  3. are not bound by a single identity and can change identity at will
  4. ability to acquire different nationalities
  5. Stand along with political and social institutions as centers of power.

The question of power and influence of the multinationals have relevance only to the extent that the constituent parts of such enterprises respond to common strategy and draw on common pool of resources. Therefore the central issue is one of power represented as size of the organization and its ability to control resources.

Chapter 1: developing an organization:

Multinationals have followed a variety of strategic routes to grow, using a diverse variety of organizational structures. The strategy of any firm can be specified in terms of a number of variables while organizational structure can be described at various levels.

Strategy has been defined as the determination of long term goals and objectives of an enterprise and adoption of courses of action and the allocation of resources necessary for achieving these goals (chandler 1962).

This definition lays focus on the facts that

  1. the goals are beyond profit maximization,
  2. there is a need to plan ahead
  3. the utility of visible goals in eliciting cooperation at all levels in the organization
  4. and the need to influence the environment

The dimensions of the strategy cover:

  1. volume of activities
  2. geographical dispersion of effort
  3. research and development
  4. product diversification

All of which are primary concerns of senior managers

Structure is considered as the design of the organization through which the enterprise is administered. Three aspects are covered, namely:

  1. authority and responsibility
  2. kinds information that flow among executives
  3. Procedures established for canalizing and processing this information.

This study:

  1. limits structure to level of senior managers who report directly to the presidents office
  2. ignores legal structure and statutory factors as it seldom reflects the way the enterprise is managed
  3. Structure is assumed to evolve as a series of stages. Each stage is modification or adaptation over the structure of structure in previous stages. Attention is focused on the association between strategy and structure and not on the process by which such associations are formed.
  4. Patterns of structural developments generally follow patterns followed at home that accompany growth and diversification.
  5. Assumption that most firms follow whatever they have implemented at home.
  6. Regarding the choice of structures it is assumed that all business enterprises have some form of hierarchy of authority and responsibility. Regardless of the geographical location, structural development follows common choices.
  7. two types of organizations are explored:

·  functional which are used by firms with a single product line in a single country

·  quasi autonomous : seen where firms begin to add new products or new national markets

Development of organizational structure in organizations

The functional structure develops in three stages:

  1. In stage 1 the enterprise is small and is managed by the owner manager and its success depends on the personality of the owner manger. There is no delegation of tasks.

2.  Stage 2: Success and growth in the entrepreneur centered organization generates the need for delegation. This results in the establishment of functional departments, each headed by an officer reporting to the president. The growth is generally in a single product or a line of closely related products and the company operates at sub national or national level. The boundaries are drawn on the basis of functional differences. This structure accommodates growth as long as the product line or market does not change and is done by adding hierarchies. Coordination is done by the president’s office. The hierarchy allows a system of channeling flows of information and increases the capacity of system to absorb shock. However it imposes costs in form of barriers to communication across departments, increased costs of communication and increased delays, and by causing inappropriate responses to change.

Allocation of resources and coordination is done by the president’s office which concentrates on the strategic questions. Hence expansion is a function of trade offs between increased costs of control and coordination and benefits of growth.

The functional structure helps in avoiding the loading of decision making capability on the top management and is very efficient in the rational use of resources. Acquisition of resources through vertical integration does not disturb the existing structure. Its weaknesses are that it concentrates decision making in a few people and their effort can be disturbed by instability in the activities of the departments. It also requires a cadre of general mangers to effect coordination.

3.  Stage 3: When the organization adds new product lines or/ and new markets, there is disturbance of equilibrium with resultant loss of control and efficiency which is due to the multiplication of coordinating and communication linkages. This necessitates a change in structure. The aim is to decouple communication and coordination linkages.

The new structure called “the divisional structure” involves the trade off between coordination and control costs and independence. It attempts to build subsystems of units with strong interactions. The divisions are product divisions. Each division resembles the functional hierarchy in stage 2, is a profit center by itself, and the boundaries of each division are drawn on the basis of product differences.

The president’s office now has a role in determining strategy and achieving a balance among division. The most important linkage is control function which consists of resource allocation, performance monitoring and evaluation and increase communication flow. The role of regular coordination is delegated to divisions, while staffs at central location only channel information across divisions.

This structure permits integration on time zones, helps in management of innovation and research and development and allows coordination and control. However this structure requires highly skilled general managers. They can be developed in house or acquired.

Expansion abroad:

Expansion abroad adds complexities which are in similar to that seen in expansion within the country. The structural development following the multinationals venture to expand abroad follows three stages:

  1. A setting up of an autonomous subsidiary which is linked to the parent company by loose financial links.
  2. A second stage where an international division is established, which is considered an independent part of the enterprise.
  3. Third phase where the international activities get integrated wholly into the existing organizational structure.

Autonomous subsidiaries:

The reasons for setting autonomous subsidiaries abroad in manufacturing were as a reaction to:

  1. threat of loss of export markets
  2. non economic reasons—follow everybody
  3. To protect domestic markets from competitors bringing in cheaper imports.

Increased autonomy was granted, keeping only financial control as managers with such experience were scarce, and lack of knowledge about those markets in the organization. Hence they were called portfolio gambles. Control was introduced when subsidiary grew and accumulated resources.

Findings: in all multinationals (170 in number) under study, up to the setting up of fifth subsidiary, the enterprises had autonomous unit structure for its foreign subsidiaries. After the number of foreign subsidiaries had reached or crossed 5, 60% of them had developed international divisions. By 1966 all of them had gone out of the autonomous subsidiary phase.

International division:

This is an umbrella covering for all foreign subsidiaries. All report to one general manager who reports to the president. This division shows a great variety in activities which involves, coordination, raising of capital and control of exports. The problems faced are the variety in local conditions, delays in transmission of information and reactions and speed of reaction to changing local conditions. There is a set of control staff attached to this division which coordinates the need of this division to communicate with similar domestic product divisions. This structure can be seen with stage 2 or stage 3 of the domestic structure. Stage represents improvement in information processing systems and professional general management.

Findings: Expansion abroad occurred in nearly all cases when the domestic structure was in stage 2. Development of international division was delayed in majority of the firms under study till a domestic stage 3 organizational structure was in place. Only 38% of the firms established international divisions with stage 2 domestic structures and all of them moved to stage 3 immediately.

The international division acts as a training ground for managers and facilitates business development and integration. It has its draw backs of increasing inherent conflicts, and need for ensuring cross divisional communication.

Global structures:

When the enterprise continues to add new product lines and new markets, there occurs a growth in the size of the international division which necessitates the need for integration of strategic planning because there is a felt need for world wide perspective on the interests of the firm. The decision involves looking at the costs of integration and the benefits of it.

Three major types of global structures were observed:

  1. product based divisions
  2. area based divisions
  3. mixed type of divisions

The problems associated with such a structure are:

  1. finding the appropriate global structure
  2. finding managers to carry out the assignments
  3. barriers to communication

Findings and sequence of development of global structures:

Findings:

  1. the three phase pattern has been followed by most of the firms in the study
  2. the precise nature of structural changes depended on the timing of changes at home
  3. Two major sequences of structural change noticed for majority of firms-- stage2 domestic to stage 3 domestic and then add international division or stage 2 domestic—add international division and then move to stage 3 domestic.
  4. 49/57 of the firms which replaced their international divisions with global structures did after implementing stage 3 structure domestically.
  5. The firms which moved from stage 2 international division to stage 2 global structures were exceptions and all developed area divisions.
  6. 24 of the firms moved from autonomous divisions to straight global divisions. All of them expanded by acquisitions or mergers with international concerns.
  7. Six reversals of structure were seen due to failure of decentralized systems and need for greater control.

Propositions: