MIBO articles

Part 1

Part 1, Article 1,

‘The relative impact of Country of Origin and Univerisal Contingencies on Internationalization Strategies and Corporate Control in MNC’s’

Authors: Harzing & Sorge

Although multinationals are highly internationalized by definition, our study shows their organizational control practices at the international level to be more than anything else explained by their country of origin.

Introduction:What happens to organizational practices as enterprises are increasingly exposed tointernationalizing influences. Such influences can be divided into two main parts:

- activities are internationalized through exposure to customers, suppliers or alliances outside a society or domestic economy of origin.

- Also non MNCs are subject to competive pressurer and regulatory norms. There is an international search for good of best organizational practices.

Convergence & Divergence

Convergence‘The subject of organizational convergence is concerned with how far organizations in different countries have travelled along a path to global convergence in operations and management, and conversely how far the influence of specific cultural factors must be understood and planned for if the manager is to be effective in cross-cultural situations’ (Pugh and Hickson)

Convergence implies a relative degree of disembeddedness of practices or structures, overriding more regionally or nationally specific institutions or behavioural predispositions.

Convergence may also be a response to institutional harmonization through, for example, supranational government and rule-making.

DivergenceDivergence is coterminous with the embeddedness of organizations and other actors in regionally or nationally different societies or in any other locally more idiosyncratic arrangements

And divergence may result from divergent contextual developments, in line with some specialization of economies and societies; contingency theory then predicts responses that are ‘congruent’ with, or ‘fit’, the context

Concepts, Findings and Open Questions

ConceptsMultinational companies (MNCs) by definition operate across the borders ofnation states and societies. They are therefore distinguished from otherenterprises by having two major sets of business and management phenomenathat other organizations do not have:

- They have internationalization strategies as overall concepts and patterns of extending operations from a domestic base to other countries

- They have practices of corporate control geared to facing the specific problem that their subsidiaries in different societies are embedded in different societal contexts and, in the case of acquisitions or mergers, in different enterprise traditions.

Mueller (1994) distinguished three separate effects on organizational structures and processes: the societal effect, the organizational effect and the globalization effect. The organizational effect focuses on convergence through learning across borders in multinational enterprises, and the globalization effect features convergence across borders through the globalization of the world economy.

Hypotheses and RQ

1 The internationalization of activities reduces the salience of embeddedness in countries of origin, relative to globalization and organization effects. Multinationals will therefore be more influenced by factors that are not embedded in societies or national economic orders.

2 The internationalization of activities evokes the reproduction of specific institutions and cultural habits at the international level. Multinationals will therefore be strongly influenced by institutions and predispositions arising in the country of origin, even at the international level.

At the world level, we will investigate the relative weight of embeddedness in the country of origin (its institutional order, cultural repertoire and industrial structures) compared with task contingencies that are perceived as universalistic, i.e. as variables characterizing supranational markets and other segments of the task environment.

1 What weight does the country-of-origin effect carry compared with more universalistic factors?2 Do European multinationals exhibit any institutional or cultural isomorphism and concomitant convergence that allow them to be treated as a more homogeneous group?

Discussion and conclusionCountry-of-origin effects are mostly explained by industrial structures it is possible to say that universal patterns appear to work with respect to internationalization strategy. However, this is different from the notion of convergence as it is commonly used.

The emergence of supranational government and rule-making has not led to a convergence within Europe that is more significant than that at a world level.

Divergence between multinationals from different countries of origin appears to be stronger than suggested, and it may be rooted both in industrial structure and in a nexus of factors interacting in the country of origin.

There is poor support for ‘net’ convergence on the basis of responses to universal contingencies converging. Country of origin comes forward as one of the most important predictors of multinationals’ organizational practices at international level.

We would add that convergence may be a realistic prospect only within enterprise-specific templates that differ, rather than on a universal template. The overall picture would thus be one of ‘net’ divergence remaining between societies — not remaining against convergence but being spurred on by its occurrence. The divergence of, for example, European business systems emerged through the very different adoption, application and further development of a potentially and originally more convergent force.

Part 1, Article 2

‘ A perspective on regional and global strategies of multinational enterprises’

Authors: Rugman & Verbeke

The triad, in Ohmae’s work, was a geographic space consisting of the United States,the EU and Japan. This geographic space, according to Ohmae, shares a number of commonalities: low macroeconomic growth; a similar technological infrastructure; the presence of large, both capital and knowledge-intensive, firms in most industries; a relative homogenization of demand and protectionist pressures.

Ohmae introduces the concept of global impasse to describe the problems faced byeven the largest companies to repeat their home triad base market share performance in the two other triad markets. Coca-cola and IBM have succeeded in becoming a triad power. A triad power is defined as a company that has:

- equal penetration and exploitation capabilities,- no blind spots, in each of the triad regions

Hamel and Prahalad (1985), who defined a global company as a firm with distribution systems in key foreign markets that permit cross-subsidization, international retaliation, and world-scale volume.

Finally, Ohmae (1985) contains one last important insight, namely that MNEs from each triadregion should identify a fourth region, where it should be easy, relative to the rest of the world, to earn an important market share.The present paper tests whether the world’s largest firms have been capable of implementing Kenichi Ohmae’s visionary strategy and becoming (broad) triad powers during the two decades after his path-breaking book.

Empirical evidence of triad powerA relative sales dominance in a specific regional market, rather than a very wide and evenly

distributed spread of sales, reflects five underlying issues critical to the MNE’s functioning. - - First, if most MNEs’ sales are unevenly distributed across the globe, and usually concentrated in just one geographic market, this means that the firms’ products are not really equally accessible and/or attractive to consumers all around the world.

- Second, the lack of global market success,although based on aggregate company-level data, could be interpreted as a reflection of the limits to the non-location-bound nature of the MNEs’ knowledge base – that is, their firm-specific advantages (FSAs).

- Third, the observed lack of market performance across regions may also point to a relative inabilityto access and deploy the required location-bound FSAs, which would lead to benefits of regional and national responsiveness.

- Fourth, if the MNE’s market position is very different in the various regions of the world this indicates the need for very different competitive strategies Unfortunately, there appears to be little empirical evidence that this approach has permitted host region market penetration levels similar to those obtained in the home region.

- Fifth, The presence of multiple environmental circumstances may also be critical here (powerful foreign rivals in other triad regions; government shelter of domestic industries

Regionalization should be viewed as an expression of semi-globalization (Ghemawat, 2003). Semi-globalization implies that we observe neither extreme geographical fragmentation of the world in national markets nor complete integration.

Empirical evidence and meaning of regional StrategiesThe majority of the world’s largest 500 companies (the Fortune 500) are MNEs: that is, they produce and/or distribute products and/or services across national borders. Yet, very few MNEs have the ability to sell standardized products and services around the world,

For 365 of the 380 firms included in our study, data were available that permitted a further decomposition of their foreign sales.

(1) Home region oriented: In all, 320 firms have at least 50% of their sales in their home region of the triad2) Bi-regional: In all, 25 MNEs are bi-regional, defined as firms with at least 20% of their sales in each of two regions, but less than 50% in any one region.3) Host region oriented: In all, 11 firms have more than 50% of their sales in a triad market other than their home region.4) Global: Only nine of the MNEs included are global, defined as having sales of 20% or more in each of the three parts of the triad, but less than 50% in any one region of the triad

While it could be argued that there is much more to globalization than sales dispersion – for example, foreign assets and foreign employment have sometimes been used together with foreign sales to compose a transnationality index – it should be recognized that only sales dispersion constitutes a true performance measure at the output level .

Implications for emerging research themesIn this section, some of the implications of the lack of empirical evidence for globalization are considered across the field of IB research. Five research areas of particular relevance are selected. The first two areas deal with the foundations of MNE competitive advantage, namely FSAs and location advantages, respectively. The next three areas are related to MNE strategy, structure and performance.

Implications for the relevance of theinternalization and internationalization models ofinternational expansionThe internalization model of foreign expansion has been the dominant conceptual model in IB research during the past two decades. It suggests that firms will establish foreign affiliates in the case of strong ownership advantages, location advantages, and internalization advantages (Dunning, 1981). The model assumes that MNEs systematically engage in a cost–benefit calculus of all possible entry modes, namely exports, licensing, and FDI.

In contrast, the internationalization model of the Scandinavian school argues that firms will incrementally build foreign operations, starting with low resource commitments in culturally proximate countries, and then expanding these commitments and geographic scope Little integration has occurred between the two schools, which have largely flourished on their own without much cross fertilizationThe internalization school focuses at the outset on market imperfections involving business/usage specificity, whereas the internationalization school starts from imperfections arising from location specificity,

Implications for research on the diamond ofinternational competitivenessPorter (1990) has suggested that international competitiveness at the level of specific industries depends critically on a favorable configuration of home country diamond conditions. Here, four determinants have been viewed as critical: factor conditions (with a focus on created and advanced production factors); demand conditions (with a focus on total demand and sophistication of demand, based on precursor status); related and supporting industries (with a focus on the presence of world-class firms with which cluster type linkages exist); and strategy, structure and rivalry

Porter’s perspective has led to several follow-up Studies, Rugman and Verbeke, 1993.The data in this paper suggest two important extensions of research building upon the diamond concept. - First, the diamond may be useful primarily to expand internationally in the home triad region

- Second, a limited geographic scope of the national diamond’s significance for internationalcompetitiveness has asymmetric implications for large economies such as the United States, Japan, and Germany, and small open economies such as Canada, Belgium, and Singapore

Implications for research adopting a resourcebasedperspective on the integration/nationalresponsiveness frameworkMost important implications of the empirical data on triad-based MNE activities are for research adopting a resource-based approach to MNE functioning. The integration/national

responsiveness framework, an application to the IB context of the differentiation–integration approach in organization theory (Lawrence and Lorsch, 1967), was developed by Prahalad (1975)

The latter authors have argued that benefits of integration, in the form of scale economies, scope economies, and benefits of exploiting national differences, require non-location- bound FSAs. In contrast, benefits of national responsiveness require location-bound FSAs

Hence regional integration creates both a threat and an opportunity for MNEs as they need to complement the conventional bundles of non-location-bound FSAs and location-bound FSAs with a set of region-bound FSAs. The data in this paper suggest that many of the world’s largest and most international MNEs have been quite successful in doing so

In contrast, few of these firms appear capable of developing and deploying the required set of region-bound FSAs in host regions

Many large MNEs do have a strong geographical dispersion of their sourcing and production, both in resource industries and in manufacturing, but appear incapable (or unwilling) of capitalizing on this position to achieve global sales penetration.

Implications for research on MNE structureA large body of work has been written on the need for a fit between strategy and structure in MNEs, as a precondition for survival, profitability and growth

Implications for research on the performanceeffects of geographical diversificationMuch of the literature on geographical diversification has attempted to evaluate the impact ofdiversification on profit performance Recent research has established the importance of the home country environment – that is, the locus of origin of geographic diversification efforts – for the scope and financial performance effects of geographic diversification

The mixed results in past research on the profit impact of geographical diversification, maybe partly explained by (1) a lack of investigation of the locus of destination

(2) the fact that market share success in non-home triad markets may be at the expense of profit performance.

Recent work by Vermeulen and Barkema (2002) correctly points out that some benefits of international expansion (such as tax benefits, common purchasing, and improved access to inexpensive labor) are easier to realize than other benefits, which require learning.

ConclusionsOnly nine firms among the largest 500 companies are unambiguously global. What are the normative implications of this observation? It could be argued that these few examples of global corporate success should be viewed as best practices and benchmarks, to be carefully studied, and emulated by other large MNEs.

The observed weak market position in host regions, as compared with the home triad market, may also be interpreted as the outcome of a rational preference for regionally based activities,

it could be argued, from a coevolutionary perspective, that regional strategies ofMNEs are embedded in – and co-evolve with – the broader competitive, organizational and institutional contexts at the regional level.

The triad perspective developed in this paper should therefore be viewed as a starting point for future empirical analyses, recognizing that regionalization is openended over time.

This paper has uncovered two fundamental paradoxes of IB that so far have eluded most, if not all, scholars in the field.

- First, at the downstream end, national responsiveness and localized adaptation are almost universally advocated as a panacea for penetrating international markets, but in reality most MNEs attempt to add value primarily by capitalizing on similarities across markets.

- Second, at the upstream end (including FDI-driven foreign manufacturing), opportunities for scale and scope are usually considered abundant. Yet, in reality, MNEs add value primarily through arbitrage – that is, exploiting differences across nations and regions. Successful integration thus reflects locational specificities, and entails a process of internalization arbitrage: it refers essentially to the combination of the MNE’s upstream FSAs, deployed in host countries, with these countries’ location advantages

Part 1, Article 3,

The Transnational Solution’

Authors: Bartlett &Ghoshal

Companies nowadays are adopting more and more complex strategies to deal with ever-changing multidimensional demands in the international business environment.

Our transnational model, unlike traditional organizational forms, is designed and developed specifically to respond to complexity and change.

The transnational organization There are two broad trends that will make the ‘transnational solution’ a relevant model for companies that are different from the large worldwide organizations we studied. - First, the continuing and accelerating changes in the international business environment, which are drawing more and more companies beyond their national borders.- Second, the growing complexity of interorganizational relationships between companies and their stockholders.

New demands on Focussed companiesThe lessons learned by the companies managing across borders also have great relevance for companies facing another kind of organizational complexity- managing across corporate boundaries.

In a world undergoing technological revolution, companies that once defined themselves as being in the telephone business must now build strategies in telecommunication and

information processing. The huge investment and diverse capabilities required to make this transformation have forced many companies to form strategic partnerships, coalitions, and alliances.

Management implicationsMany companies respond to the growing complexity of their environment by installing increasingly complex organizational forms, which led to the development of the global matrix.

The matrix structure appeared simple and rational the organizational process created in an international setting proved to be practically unmanageable. The dualreporting, led to confusion and conflict, formal channels led to logjams, overlapping responsibilities resulted in turf battles etc. Gradually managers recognized that they may have been defining their objectives in the wrong terms. Many saw the task more than simply seeking structural fit. The real task was to build the organizational capability to deal w/ the emerging environment, and no simple static, structural solution could create that fit.

So the real challenge was not to find the structure that provided the best fit, but to build and manage the appropriate decision process- one that could sense and respond to multiple changing environmental demands.

The definition of a worldwide company’s organization structure is one of the most important decisions managers must make. However this macro structural tool has important limitations – it tends to define processes in unidimensional, symmetrical, and static terms.

To develop more transnational characteristics managers were making greater use of mechanisms that might be called microstuctural tools. Tasks forces, committees, and project teams.

Major advances in international telecommunications and transportation, particularly in the ‘70s made is feasible to replace formal systems and reports w/ more direct personal communications.For the first time many worldwide companies began to regard personal contracts, not formal systems, as their primary means of communication.

The process: Two contrasting modelsMany managers have assumed that the organization change process was driven and dominated by changes in the formal structure. This belief was particularly strong in American based companies. This was not the best solution, this management mentality resulted in high cost.

We notice a somewhat different attitude towards the organizational change process in most European and Japanese companies. Some of these companies used assignments and transfers to forge interpersonal links, build organizational cohesion, and develop policy consistency. Organizational change often seemed driven by intensive education programs than by reconfiguration of structure or systems,. The first objective of the EU and Japanese companies seeking major change was often to influence the understanding and perception of individuals, especially those in key positions.

The two models reflect historical bias, those differences seem to be eroding.

The transnational organization; What it is and isn’t The transnational org is build up in a much more gradual and differential way (than the global matrix). Rather than assign joint responsibility for everything, as the classic matrix suggest, top management in the transnational retains the clarity of line authority, but pays a great deal of attention to the allocation in responsibilities.

In effect these companies are creating a series of mini-matrix organizations to encourage shared decisions making and coordinated joint action.

The transnational appears to be a complex org, w./ roles and responsibilities differentiated by business, by function and even by task. But at least they are clearly defined , not subject to the constant overlapping and shared responsibility that create so much tension and confusion in the global matrix.

The transnational is less a structural classification than a broad org concept or philosophy, manifested in org capability and management mentality. Developing such a characteristics is high, and the complex processes that are created demand managers w/ superior administrative and interpersonal skills, particularly at top levels of the org. Some companies are simply unwilling or unable to develop such sophisticated capabilities, and choose to retain one of the more traditional global international, or multinational forms.

How does a company decide if it should develop a transnational organization?Three important areas of management responsibility should be reviewed:- To review nature and strength of the forces shaping the industry structure and competitive environment in which the company is operating. - The next step is to evaluate the org administrative heritage, this will suggest whether the company can develop the response capability to fit the emerging external demands, more ambitiously, to shape and influence the forces of change.- After anaylzing the external need for change and assessing the internal capacity to manage it, to management has one more task: assessing the implementation of change. The task is not to build a sophisticated matrix structure but to create a matrix in the minds of managers,

Part 1, Article 4, ..........

Part 1, Article 5,

‘Building Theories from case study research’

Authors: K.M Eisenhardt

This paper attempts to make two contributions to the literature. The first is a roadmap for building theories from case study research. The second is positioning theory building form case studies into the larger context of social science research

Case study approach:

- Case studies can involve either single or multiple cases. - Case studies employ an embedded design (multiple levels of analysis within a single country)- Typically combine data collection methods such as archives, interviews, questionnaires, and observations. - The evidence may be quantitative, qualitative or both.- Case studies cam be used to accomplish various aims: to provide description, test theory, or generate theory.

Building theory from case study:Getting started:- Research focus is important.- Prior specification of constructs can also help to shape the initial design.- Investigators should formulate a research problem and specify some possible variables. However they should avoid thinking about specific relationships between variables and theories as much as possible.

Selecting cases:Goal of theory sampling is to choose the cases w./ are likely to replicate or extend the emergent theory.

Crafting instruments and protocols- Theory building researchers typically combine multiple data collection methods.- They combine qualitative and quantitative data.- Use of multiple investigators have two key advantages: - They enhance the creative potential of the study. – The convergence of observations from multiple investigators enhances confidence in the findings.

Entering the field- Striking feature of research to building theory from case studies is the frequent overlap of data analysis w/ data collection.- Field notes are important means of accomplishing this overlap.- Key feature of theory-building case research is the freedom to make adjustments during the data collection process.

Analyzing Within-Case data- Analyzing data is the hart of building theory, but it is both the most difficult and the least codified part of the process.- The overall idea is to become intimately familiar w/ each cases as a stand alone entity.

Searching for Cross-Case patterns. - The danger is that investigators reach premature and even false conclusions as a result of these information-processing biases. - The key to good cross-case comparison is counteracting these tendencies by looking at data in many different ways. – Select categories or dimensions, and then look for within-group similarities coupled w/ intergroup differences. – Select pairs of cases and then list the similarities and differences between each pair. – Divide the data by data source.

Shaping Hypotheses- One step in shaping hypotheses is the sharpening of constructs. A two part process: 1- Refining the definition of the constructs. 2- Building evidence which measures the constructs in each case. In effect, the researcher is attempting to establish constructs validity.- Second step , verifying that the emergent relationships between constructs fit w/ the evidence in each case. - Overall the shaping of hypotheses involves measuring constructs and verifying relationships. Processes are similar to traditional hypothesis-testing research.

Enfolding literature- An essential feature of theory building is comparison of the emergent concepts, theory of hypotheses w/ the extant literature. - Examining literature which conflicts w/ the emergent theory is important for two reasons: 1- if researchers ignore conflicting findings then confidence in the findings is reduced. 2- conflicting literature represents an opportunity. The juxtaposition of conflicting results forces researchers into more creative, framebreaking mode of thinking than they might otherwise be able to achieve.

Research closureTwo issues are important:- Researchers should stop adding cases when theoretical saturation is reached. - When to stop interating between theory and data? saturation is the key idea.

Discussion

Strengths of - Likelihood of generating novel theory.- Emergent theory is likely to be testable w/ constructs that can be readily measured and hypotheses that can be proven false. - The resultant theory is likely to be empirically valid.

Weaknesses of- The intensive use of empirical evidence can yield theory which is overly complex.- May result in narrow and idiosyncratic theory.

Conclusion- Theory developed form … is likely to have important strengths like novelty, testability and empirical vadality. - It is particularly well-suited to new research areas or areas for which existing theory seems inadequate.

Part 2

Article 1,

‘The multinational enterprise as an organization’

Authors: Westney and Zaheer

The MNC must adapt to and operate within multiple societies. Their central management in confronted w/ the challenge of designing systems that retain sufficient unity and coherence to operate as a common enterprise and, at the same time, to allow sufficient latitude and flexibility to adapt to greatly varying circumstances.

13.2 Evolutionary theories Change over time has been a central feature of models of the MNE b/ internalization is a incremental process. Evolutionary theories of organizations are in the broadest sence theories about patterned change over time, where change driven by selection pressures that move organizations in a direction common to other organizations in a direction common to other organizations that share the same trajectory or environment. Internal selection pressures, arise from increasing scale, growing complexity and internal diversity, and intensifying coordination requirements that accompany international expansion. External pressures, rooted in the environment, can be attributed to two different levels of analysis.

13.3 Early work: Internal selection mechanismsThe early work on MNE organizations include three distinct approaches:- 1. Focused on the paths by which MNE organizational structure evolved (Structural evolution approach).

Most notable work done in this area is by ‘Fouraker & Stopford. They defined different stages through which MNE organizations evolved. - Starting from ‘Chandlers’ three stage model of evolution of domestic firms, from enterprise run by individual entrepreneur to a functional organization to a divisional structure. -‘Stopford & Wells’ portray beginning firms as beginning their international expansion by putting foreign activities into a separate international division, followed by either are organization or worldwide production or some hybrid of the two. Most advantaged structure is the matrix.

-2. Second approach, paid little attention to formal organizational structure and focussed instead on the evolution of MNE activities in terms of value adding activities, mode of operation, and location.The force moving a firm across these stages was what we would now call the enhancement of capabilities: the incremental development of managerial skills and knowledge and of organizational routines and processes that enable a firm to diversify geographically.

3. The third approach focused on the evolution of managerial mindsets. Gives serious weight to the way executives think about doing business around the world. ‘Perlemutter’ Three primary attitudes towards building MNE:- Ethnocentric (home country oriented)- Polycentric (host-country oriented, and geographic or world-oriented.

13.4 The 1980’s: External selection mechanisms

The early 1980;s saw the development of a highly influential framework that brought the environment to the force as a selection mechanism for MNE evolution, and shifted the analysis of organization design from formal structure to managerial processes.

By identifying two orthogonal sets of environmental forces: the integration responsiveness framework made it possible to map industries into a more complex conceptual space and allowed greater scope for managerial choice than did a single continuum from domestic to global.

Over course of the 80’s, the power and politics elements of the organizational analysis of the MNE diminished somewhat, as the proponents of the new model looked to organization design and cultural aspects of the organization for tools to manage the political problems that it entailed. Not until later half of 80’s that this emerging organizational model had a name. Transnational (‘Barlet’) or the multi-focus firm (‘Prahalad & Dos’)

Alternative term for the multinational of the future was proposed at the same time by ‘Hedlund’, the heterarchy (drivers of change were portrayed as internal rather tan environmental).

A more radical reconceptualization of the emerging organizational forms of the MNE, centered not on decision making processes but on innovation and learning. The heteracy model shared w/ the ‘transnational model’ the importance of multiple centers integrated by cross-unit ties unmediated by head quarters, the importance of integration through normative control and shared experience and internal variety.

One more framework during the mid-1980’s, the configuration/ coordination framework by ‘Porter’. Main contribution of ‘Porter’ was to reinforce the increasingly widespread perception of convergence on a single dominant model of the MNE.

13.5 The 1990s’: Differentiated theories and richness to rigor.

Research in the 1990s tended to focus on ever more narrowly-defined and specialized activities within the multinational such as R&D, innovation or human resource management.

The 1990’s were dominant by three streams of research:

- 1. Extended and deepened the analysis of the transnational model.-.2 Focused on organizational theory (institutional theory and network theory)-.3 Focused on emering theories in the field of strategy (the resource-based view of the firm and the dynamic capabilities model).

In the 1990s, much of the literature on MNE used the MNE as a venue for testing and expanding paradigms in organizational theory and in strategy, rather than in addressing primarily the challenges of management.

13.6 Challenges for the futureThe emergence of the new information and communication technologies of the internet era promises to increase the variety of options for MNE organizations and for the form of the MNE itself. Among these changes are the growing possibilities for the desegregation of value chains across locations, the emergence of virtual MNE’s and the potential for small and medium enterprises to extend their activities across borders.

Appendix.

See article!!

Article 2,

‘Managing the international enterprise’

Authors: Stopford & Wells

The strategy of an enterprise = the determination of long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. The crucial dimensions of strategy are the volume of activities, the geographic dispersion of the effort, research and product diversification.

Structure can be considered as the design of the organization through which the enterprise is administered. The design has three major aspects: - The authority and responsibility of each executive- The kinds of information that flow along lines of communication among executives.- Third the procedures established for channelling and processing the information.

Choice of structure

Only two types of organizations are explored here:- Functional departments (normally used by companies w/ single product line in a single country)- Quasi-autonomous divisions (generally established by firms as they begin to add new product lines or to enter new national markets).

Functional structure

Some see development and expansion of any business organization as occurring in three stages.- Stage 1, enterprise usually small enough to be administered by a single man, typically the owner and founder.

- Stage 2, single owner cannot cope w/ increasing demands. The response is the establishment of functional departments , such as sales, production and finance, each headed a company officer reporting directly to the president. Developing a hierarchy also increases the capacity of the system to absorb shock. Advantages of a hierarchy are achieved at the cost of imposing some barriers to the communication flows across the boundaries separating the specialized activities.Other costs, - Communications have to be relayed by coordinators at each level. But each coordinators introduces delays and distortions in the message handled. - Inappropriate responses to change are another source of cost of a hiereachy.

The cost of delays and distortion in communication and of suboptimization can be reduced by reducing the number of levels in the hierarchy.

Firms in stage 2 often have only a single line of products, and maintain to some degree the stability of the activities.

The divisional structure

The functional departments are unable to absorb all the shock of learning how to manage the new activities and they throw the burden onto the shoulders of the president. The president is forced to institute fundamental changes in the structure to manage the new complexities of the system. This new structure is dubbed, Stage 3.

The challenge is to find the new structure that is capable of “decoubling”some of the communication and coordination linkages. Decoupling may be achieved by building subsystems composed of units that have strong interactions and by reducing the number of links needed to connect such subsystem (they appear in form of product or area divisions, each headed by a general manager who performs most of the duties of the president at stage 2 structure).

Elimination of all the linkages between the subsystems provide independence for the subsystem at the cost of fragmentation and loss of control.

Most diversified firms, however, have some interactions among the divisions.

The difference between the Stage 3 structure and the stage 2:- Each division in stage 3 resembles the functional hierarchy of stage 2, except that

finance is removed from the divisional system and administered in the central office.- Each division is a profit center, so that its economic performance may be evaluated

separately from that of the enterprise as a whole. - The role of the president in stage 3 is more that of determining strategy and of

achieving a balance among the various divisions and less that of day-to-day coordination of functional departments

- The boundaries of the activities of each division are drawn on the basis of product difference, whereas prime determinants of the subsystem boundaries in stage 2, are functional differences.

- The stage 3 includes staff groups that simply channel information, monitor the interactions among the divisions and provide advice.

The divisional subsystem and the central office of the stage 3 are linked together by three major processes. These linkages provide both constraints on the actions of the divisional general managers and controls necessary to avoid an undesirable fragmentation of the overall system.

- Most important linkage is the control function. Is acts to monitor the performance of each division and to signal the need for corrective action if targets are not met.

- The planning process forges another type of linkage among the divisions. Strategic plans for the enterprise as a whole are transmitted to the divisions w/ the purpose of making the organization behave as coordinated system.

- Other staff group in the central office provide still another type of linkage between the divisions. They coordinate the direct interactions between the divisions.

Expansion abroad and structural change.

Expansion abroad adds complexities to the management task that are similar in some respects to the complexities introduced by the decision to enter a new product line. In both cases:

- Organization must learn new skills and develop new procedures before it can successful merge the new activities into the overall system.

Differences:- Entry into foreign markets does not lead directly to the development of a Stage 3

structure. Instead firms generally go through an initial period when all their new foreign subsidiaries , are tied to the parent firm by loose financial links.

- 1st Face: This initial period of autonomy for the foreign subsidiaries.- 2nd Face: Is a period of organisational consolidation when an international division is

developed. - 3rd Face: Strategic planning is carried out on a consistent and worldwide basis and

structure of the foreign activities is altered to provide closer links w/ the rest of the structure.

Autonomous subsidiaries.The early investment in foreign manufacturing made by most firms were defensive reactions against the threat of losing markets that in the first place had been required almost accidentally.

The autonomy initially accorded to each manager of foreign subsidiaries is the result of a combination of factors. The first few foreign investments are small and not critical to the success of the enterprise.

Forming the international division.When the international division is formed, the initial effect on the activities of the subsidiaries is likely to be small.

One task of the international division is to coordinate the activities of the subsidiaries. The coordination is directed towards raising the overall performance above the level that would be possible if each subsidiary behaved autonomously.

Central control can:- Designate those facilities that are to produce for exports.- They can move products and services around in subsidiaries to create a tax cut.- Raising capital for the overseas subsidiaries in another activity.

The ability of the division to go far toward centralization is severely constrained. The variety of local conditions in different foreign countries is so vast that information covering the subject cannot readily be processed by the division.

Pressure for and against centralization within the international division vary among firms. They also vary over time in any one division.

The international division does not have the same degree of autonomy as do the domestic product divisions, and depends more on the cooperation and assistance of the product divisions than they typically depend upon each other.

Developing a global structureAs the international division increases in size, the same forces that led to its creation act to cause its dissolution. Managers may become aware that there are gains to be realized by coordinating production on a worldwide basis.

The really decisive point in transition to global enterprise occurs when top managers recognize that strategic planning and major policy decisions must be made in the central offices so that a worldwide perspective on the interests of the total enterprise can be maintained.

Three major types of global structures emerged during the 1960’s to replace the international division of many firms:

- Some, based their structure on product considerations and assigned worldwide responsibilities to the erstwhile domestic product divisions.

- Others, divided their organization into area divisions, each responsible for one geographical region of the world market.

- Still others, chose a combination of both products and are assignments in a mixed structure: Some product lines were managed on a worldwide basis, and others were managed by several area divisions.

Decisions about which global structure a firm should adopt involve difficult choices. The shortage of adequate management is a major problem for firms undertaking the transition to a global structure.

Part 2, Article 3,

Requisite complexity

Authors: Nohria & Ghoshal

One of the most enduring ideas of organization theory is that an organization’s structure and management processes must fit its environment.

To be effective in an environment that requires simultaneous emphasis on local responsiveness and global integration, the MNC must adopt a differentiated network structure .The differentiated network us the new ideal toward which we see MNC’s envolving, this new structure is more complex than traditional structures. The structure is most worthwhile it the environment requires both local responsiveness and global integration.

The complexity of the firm’s structure must match the complexity of its environment. The article demonstrates that organizational fit is positively correlated w/ multinational performance.

Classifying the environment of MNC’sThe MNC;s must respond to the different contingencies presented by each of the multiple environments in which it operates.

The different local environments in which the MNC operates may also be linked for a number of reasons:

- common customer preferences across countries- economics of scale, scope, and national comparative advantage- knowledge developed in one environment that is transferable or adaptable.- Transnational customers, suppliers, competitors and regulatory agencies.

These linkages across national boundaries pressure the subsidiaries to coordinate their activities (forces for global integration).

The two forces: national responsiveness and global integration.The environmental contingencies faced by the MNC as a whole can be conceived as the extent to which it must respond to strong and unique national environments and the linkage across these national environments. On the basis of these two contigencies, we can distinquis four environmental coditions that MNC’s face:

- Global environment - Multinational environment- Transnational environment- International environment

Ways of measuring the forces of global integration (1) and national responsiveness(2):1- ratio of total intrafirm trade to the total international sales of the MNC in an industry. 2- Advertising to sales ratio & average of values received on questionnaire on local

regulation.

FIG 9.1 The environment of MNC’s Classification of Businesses.

Classifying the structure of MNC’s The main criticism of models that define MNC structure in terms of function, geography, product division, or a matrix has been that the formal organizational chart is a poor representation of how a organization actually functions.

To understand, describe or categorize organizations, one must focus on the pattern of relationships (between individuals, groups, units, national subsidiaries and HQ).

Using Lawrence & Lorsch dimensions of differentiation, MNC’s structures are seen as exhibiting four patterns.

- Structural uniformity (little variance in how the different subsidiaries are managed, a common way is adopted for the governance of all HQ-subsidiaries relationships).

- Differentiated fit, (represent companies that adopt different governance modes to fit each subsidiary’s local context.)

- Ad hoc variation (there is neither a dominant integrative mechanism nor an explicit pattern of differentiation to match local contexts)

- Differentiated networks (adopts the logic of differentiated fit but overlays the distinctively structured relationship w/ a dominant overall integrative mechanism).

Organizational- Environmental fitFor effective performance the MNC’s organization structure should fit is overall environmental contingencies. The authors hypothesize that:

- Structural uniformity best suits Global environment(b/c in global env cross-national linkages create forces for firmwide coordination)

- Differentiated best suits Multinational environment(In multinational env. MNC must respond to the local environments to be competitive)

- Differentiated networks best suits transnational environment(Important for MNC to be responsice not only to local contingencies but also to cross-national linkages, needs structure of requisite differentiation, overlaid w/ strong companywide intergrative mechanism).

- Ad hoc variety best suits international environments (Placid international env. Have neither strong forces of differentiation nor strong forces of integration)

ConclusionOne the one hand, influential academics and consultants have urged them to abandon simplistic structures and processes and to build multidimensional network organizations w/ distributed management roles and tasks, overlapping responsibilities and relationships, and build-in ambiguity and redundancy. On the other hand, strong voices have argued that the performance problems faced by many large MNC’s are attributed to the complexities of their organizations and that managers must re-establish organizational simplicity by reverting to direct decision making and unambiguous accountability.

Part 2, Article 4

Matrix management: Not a structure, a frame of mind

Authors: C.A Bartlett and Ghoshal

Top-level managers in many of todays leading corporations are losing control of their companies. The problem is that companies are organizationally incapable of carrying out the sophisticated strategies they have developed.

As companies struggled with the changing environmental realities, many fell into one of two traps- one strategic, one structural.

The strategic trap was to implement simple, static solutions to complex and dynamic problems. Yet the reality for most companies was that both their business and their environment really were more complex , while the proposed solutions were often simple, even simplistic.

In recent years, more and more managers recognized oversimplification as a strategic trap, they began to accept the need to manage complexity rather than seek to minimize it.

The obvious organizational solution to strategies that required multiple, simultaneous management capabilities was the matrix structure. In practice however, the matrix proved all but manageable – especially in an international context. Dual reporting led to conflict and confusion, the proliferation of channels created informational logjams, overlapping responsibilities produced turf battles and a loss of accountability.

In hindsight, the strategic en strategic traps seem simple enough to avoid, but still so many experienced general mangers fell into them. Why?Much of the answer lies in the way we have traditionally thought about the general manger (as chief strategic guru and principal organizational architect). It is hard for one person alone to succeed in that great visionary role.

The critical strategic requirement is not devise the most ingenious and well coordinated plan but to build the most viable and flexible strategic process.

Building an OrganizationThe companies that fell into the organizational trap assumed that changing their formal structure would force change in interpersonal relationships and decision processes, which in turn would reshape the individual attitude and actions of managers. A new structure, can take months and often years to envolve into effective knowledge generating and decision making relationships. Companies that are the most successful at developing multidimensional organizations begin at the far end of the autonomy-physiology- psychology sequence. The first objective is to alter the organizational psychology – the broad corporate beliefs and norms that shape managers perceptions and actions. Only later do they consolidate and confirm their progress by realigning organizational anatomy through changes in the formal structure.

Three principle characteristics common to those that manage the task of changing the organizational psychology the most effectively:- The development and communication of a clear and consistent corporate vision.- The effective management of human resource tools to broaden individual perspectives and develop identification w/ corporate goals.- The integration of individual thinking and activities into the broad corporate agenda by means of a process we call co-option.

Building a shared believeA company’s vision must be crafted and articulated w/ - Clarity (There are three keys to clarity; - simplicity (makes it more powerful), - relevance (linking broad objectives to concrete agendas) and – clarity (continual reinforcement, elaboration etc of the core vision). - Continuity (despite shifts in leadership and continual adjustments in short-term business priorities, companies must remain committed to the same core set of strategic objectives)- Consistency (to ensure that everyone in the company shares the same vision)Most inconsistencies involve difference between what managers of different operating units see as the company’s key objectives.

Developing Human ResourcesIf there is one key to regaining control of an organization that operates in a fast changing environment, it is the ability of top management to turn the perceptions, capabilities and relationships of individual managers into the building blocks of the organization Top managers inside and outside the human resource function must be leaders in the recruitment, development and assignment of the companys ability to capitalize on its worldwide pools of management skill and biases its decision-making processes. Training and development; the most successful development effort have three aims:- to inculcate a common vision and shared values- To broaden management perspectives and capabilities- To develop contacts and shape management relationships.

Co-opting management effortsAs organizational complexity grows, managers and management groups tend to become so specialized and isolated and to focus so intently on their own immediate operating responsibilities that they are apt to respond parochially to intrusions n their organizational turf, even when overall corporate interest is at stake.

Matrix in the managers mind Corporations now commonly design strategies that seem impossible to implement, for the simple reason that no one can effectively implement third generation strategies through second-generation organizations run by first generation managers.Successful companies are those that recognize the need to manage the new environmental and competitive demand by focusing on the quest for an ideal structure an more on developing the abilities, behavior and performance of individual managers.

Part 3, Article 1

‘The tortuous evolution of the Multinational Corporation’

Author: H.W Perlmutter

While a claim to multinationality, based on their years of experience and the significance proportion of sales generated overseas, is justified in each of these four companies, a more penetrating analysis changes the image.

Why quibble about how multinational a firm is?It is natural that these senior executive would want to justify the multinationality of their enterprise, even if they use different yardsticks: ownership criteria, organizational structure, nationality of senior executives, percent of investment overseas etc.

The first hypotheses is that the degree of multionality is positively related to the firm’s long term viability.

The second hypotheses stems form the proposition that the multinational corporation is a new kind of institution (particularly suitable for the latter kind of the twentieth century).

State of mindPart of the difficulty in defining the degree of multinationality comes from the variety of parameters along which a firm doing business overseas can be described. The examples from the four companies argue that:

- no single criterion of multinationality such as ownership or the number of nationals overseas is insufficient

- External and quantifiable measures such as the percentage of investment overseas or the distribution of equity by nationality are useful but not enough.

Three primary attitudes among international executives toward building a multinational enterprise are identifiable.

- Ethnocentric (home-country oriented).- Polycentric (host-country oriented)- Geocentric (world-oriented)

Home country attitudesEthnocentric organizations, will be willing to build facilities in other countries as long as they accept their inherent superiority and accept our methods and conditions for doing the job. The performance criteria for men and product are ‘home-made’. Ethnocentric attitudes are revealed in the communication process where ‘advice counsel’ and directives flow from HQ to the subsidiary in a steady stream, bearing the message: ‘This works at home; therefore, it must work in your country’.

Host country orientationPolycentric firms, begin with the assumption that host-country cultures are different and that foreigners are difficult to understand. Local people know what is best for them, and that part of the firm that is located in the host country should be a ‘local’ in identity as possible.

“We really don’t understand what is going on there, but we have to have confidence in them. As long as they earn a profit, we want to remain in the background’Local factors are given greater weight. One consequence of polycentrism is a virulent ethnocentrism among the country managers.

A world-oriented conceptThe senior executives attempt to build an organization in which the subsidiary is not only a good citizen of the host nation but is a leading exporter from this nation in the international community and contributes such benefits as:

- increasing supply of hard currency- new skills- knowledge of advanced technology

The ultimate goal of geocentrism is a worldwide approach in both HQ and subsidiaries.

Geocentrism requires a reward system for subsidiary managers which motivates them to work for worldwide objectives, not just to defend country objectives.

The EPG profile Executives can draw their firm’profile in ethnocentric (E), Polycentric (P) and geocentric (G) dimensions. They are called EPG profiles. The degree of EPG by product, function and geography can be established.

- R&D turns out to be more G and less E than finance.- The marketing function is more P, particularly in advanced economies.- P attitudes developed in consumer goods division, - E appears to be greater in industrial product divisions.

Forces toward and againstWhat are the forces that determine the EPG mix of a firm? From the external environment side, the growing world market, the increase in availability of managerial and technological know-how in different countries, global competition and international customers, advances in telecommunications, regional political and economic communities are positive factors.

In different firms, senior executives see in various degree these positive factors towards geocentrism:

- top management increasing desire to use human and material resources optimally, - the observed lowering of moral after decades of ethnocentric practices, - the evidence of waste and duplication under polycentric thinking.- Top management own commitment to building a geocentric firm as evidence in

policies, practices and procedures.

The obstacles toward geocentrism form the environment stem largely from;- the rising political and economic nationalism in the world today, - - the suspicions of political leaders (towards increasing power of multinationals.

And on the internal side:- Managers inexperience in overseas markets- Mutual distrust between home country people and foreign executives- The resistance of participation by foreigners in the power structure at HQ.

A world of rising nationalism is hardly a pre-condition for geocentrism: and overcoming distrust of foreigners even within one’s own firm is not accomplished in a short span of time. The route to pervasive geocentric thinking is long and tortuous.

Cost risk and payoffThe cost and risk of Ethnocentrism are seen to out-balance the payoff in the long run. The cost of E are:

- ineffective planning b/c of a lack of good-feedback- the departure of the best men in the subsidiaries, fewer innovation, and an inability to

build a high calibre local organization. The risk are political and social repercussions and a less flexible response to local changes. Polycentric cost are waste due to duplication, and to inefficient use of home country experience. The risk include:

- Excessive regard for local traditions- Local growth at the expense of global growth

The main advantages are:- Intensive exploitation of local markets - Better sales, since local managers are often better informed.- More local initiatives for new products- More host government support- Good local managers with high morale.

Geocentrism’s cost are largely related to:- Communication and travel expenses- Educational cost at all levels- Time spent in decision making , an international HQ bureaucracy.

Risk include:- those due to too wide a distribution of power- Personnel problems and those of re-entry of international executives.

The payoff:- More powerful total company throughout- Better quality of product and service- World wide utilization of best resources- Improvement of local company management- A greater sense of commitment to worldwide objectives- More profit

Window dressing In the rush towards appearing geocentric, many US firms, have found it necessary to emphasize progress by appointing one or two non-nationals to senior post. The foreigner is often effectively counteracted by the number of nationals around him, and his influence is really small (= Tokenism?)

Window dressing is also a temptation. Here an attempt is made to demonstrate influence by appointing a number of incompetent ‘foreigners’ to key positions.

Part 3, Article 2

‘The diversity of management systems’

Authors: R. Calori

Contrasting the US and the Japanese system of management

According to Pascal & Athos the best firms are characterized by a fit between seven elements- the famous 7Ss: Strategy, structure, skills, style, staff, and shared super ordinate goals:The Americans are similar to the Japanese in the way they manage ‘hard’ components of the 7Ss: strategy, structure and systems. The Japanese are different from the Americans in the way they heed and manage the soft components: skill, style, staff and especially shard super ordinate goals. Their culture helps them to value interdependence as a mode of relationship, whereas the Americans value interdependence.

The individualistic orientation of Americans and the group orientation of Japanese have several managerial consequences: for instance, there is greater loyalty to the firm in Japan. Similar, the strongly shared group values allow decisions to follow bottom-up processes in Japan compared to top-down processes in US.

American firms show tendency to segment their operations into ‘strategic business units’ whereas J firms show more horizontal integration around core competences.

Abbleglen & Stalk Argue that market strategy and man-power strategy, not management style made the Japanese world pace-setters. They have a growth bias. In this perspective priority is given to the creation and ruthless exploitation of competitive advantage by creating value for the customer and superior quality.

Hamel & Prahalad defined strategic intent: building layers of competitive advantages in order to achieve global market leadership in the long term.

Thurow (’91) Confirms the crucial difference in business logic: for the Americans the ultimate goal is profit, whereas for the Japanese profit is means to build an empire and strengthen their company and Japan inc. The US society is oriented towards consumption and the welfare of shareholders, whereas Japanese society is oriented towards savings and investments. He also pointed out differences between the roles of the governments: The American system is characterised by pure liberalism. The Japanese government has always participated in the elaboration of national industrial strategies, indirectly protecting some domestic industries, selecting priority sectors to develop in the long term, and funding research and development related to these domains.

Lodge & Albert (’91) according to them. The UK and the US share the same paradigm: liberalism, profit orientation, short-termism, domination of finance over industry, a shareholder orientation supported by an active stock market, individualism and high mobility of personnel.

Germany and Japan share the same paradigms: organized competition, long-term orientation, a stakeholder orientation, high investment, stable capital structure, a sense of community , and loyalty to the firm. There are also some differences; The German manager is a specialist, while the Japanese manager is a generalist.

The diversity of management systems within Western EuropeLaurent considers two opposite clusters of countries: France, Belgium and Italy where managers view the organizations as political systems governed by hierarchical relationships and authority.And a cluster of northern countries where managers view the organization as a network.

Simonet identifies four models within Europe: The German, the Latin (without France),the France, and the Anglo-Saxon. He diffentiates by considering only two dimensions: the degree of formalization and the degree of centralization.

Hofstede suggest the existence of four clusters; Scandinavia, the British, a Germanic group, and group Latin counties including Belgium.

Todd, argues that even national boundaries are too broad and that deep regional differences exist within countries in a patchwork Europe.

While considering nation-states as the unit of analysis is a simplification, it is a an acceptable simplification b/c laws and education systems are designed at the level of nation-states.

Organizational structures have also been compared: Horovitz (’78) studied French, British and German firms. The British prefer a flexible decentralized structure, w/ few HQ staff, and a holding form of organization. IN Germany the organization is more specialized (by function), the operational units have less autonomy, decisions are made by an executive committee, and coordination is achieved through numerous HQ staff and planning. In France organizational structures are less formal than in Germany, but specialization by function and strong roles for HQ staff are also preferred.

Hofstede(’80) his study of 53 subisiaries of IBM, came up with 4 dimensions which demonstrates between national cultures in the work place:

- Power distance (degree to which power differences are expected, and preferred by society, high score = beliefs well-defined order, low score = equal rights).

- Uncertainty Avoidance (the degree to which the society willingly accepts ambiguity and risk, high score= risk adverse, low score = risk-taking).

- Individualism (degree to which society emphasizes the role of the individual over the role of the group).

- Masculinity (degree to which a society holds traditional male values, such as competitiveness assertiveness, ambition and the acquisition of money and other material possessions).

From this study four clusters emerge:- A Germanic group (Germany, Austria, Switserland) high masculinity, low power

distance.- A Scandinavian group (+ Netherlands), mainly characterised by high individualism,

low masculinity and low power distance.

- Anglo-Saxon group (Britain and Ireland) characterized by high individualism and masculinity, and low power distance and uncertainty avoidance.

- Latin group (Fr, Sp, Port, Greece, Bel) was mainly characterized by high uncertainty avoidance and high power distance)

Top managers view: the diversity of management across EuropeWhen top managers talk about the differences in Europe and delineate geographical zones, the resulting maps are even more diverse than those produced by researchers.A first connection is absolutely striking: the correlation between this segmentation and geography. Four levels of segmentation are considered. - The UK is an island separated from the rest of Europe.- The north/ south dichotomy of the European continent is mainly based on four dimensions:South: more state intervention, more protectionism, more hierarchy, more intuitive management.North: less state intervention, more liberalism, more participation in firm, more organized management. - France is differentiated from other Latin countries, mainly b/c it combines intuition and organization.- The German system

From this perspective, we will consider the following three types of management in Europe.1- Anglo-Saxon2- Latin3- Northern Europe.

The UK is an exception in Europe. Management has the following characteristics in common w/ the US management:

- Short term orientation, - Shareholder orientation, - Orientation towards trading and finance, - greater liberalism towards foreigners.

They differ with the US on the following points:- Adversarial relationships w/ labour, - the tradition of the manager as gifted amateur (in

US professional) the influence of the class difference in the firm.

Latin way of doing business, is has the following specificities:- More state intervention, -protectionism, -hierarchy, -intuitive management, -family

business., and more reliance on elite.

The German model, based on three cultural and structural characteristics:- Strong link between banks and industry- Balance between a sense of national collectivity and the Länder system- The system of training and development of managers.

The system can be described as having the following five components:1- System of co-determination w/ workers representatives present on the board.2- Loyalty of managers 3- The collective orientation of the work-force4- The long term orientation, which appears in planning, stability of supplier-client

relationship, and priority of industrial goals over short-term financial objectives. 5- The reliability and stability of shareholders

Some similarities exist between the German and the Japanese models of management: loyalty of managers based on in-house training. The long-term orientation is common. However there are also some important differences: Stability of financial resources is common, but it is based on different structures:- Involvement of bank industry (germany)- Keiretsu structure (Japan)

The participation of workers is common:- Based on negotiation (Germany)- Based on natural consensus (Japan)

ConclusionSmaller counties may well be the best source of inspiration for building distinctive managerial skills in the integrated Europe of the future.

Part 4, Article 1

Barriers to ‘US style’ lean retailing: the case of Wal-Mart’s failure in Germany

Author: S Christopherson

Wal-Mart’s exit from the German market is of interest not only because of thecompany’s size and the global reach of its supply chain, but because it contributes aninteresting case to the small but expanding literature on ‘failure’ in internationalinvestment.

How does the market environment in the country in which the retail TNC originates affect the international disinvestment process?

1. Wal-Mart’s strategic advantage In this literature, strategy typically refers to firm responses to external factors, such as market conditions and the degree and nature of competition, while resources refer to the internal managerial capabilities and organizational and technical assets that the firm brings to the market

Wal-Mart’s organizational resources are twofold:1- Hard control over factor inputs, including labor and supplier firms, which allowsWal-Mart to reduce product cost, time-to-market and inventory storage costs—anetwork domination resource. 2- The ability to move rapidly and autonomously inresponse to changes in market conditions—an autonomous action resource.

Wal-Mart’s international investment strategies:Wal-Mart’s ability to assume a cost leadership position depends on control of supplier firms in national markets as well as in international supply chains. It also depends on autonomy of action vis-a` -vis the government of the host country (regulatory control), the labor force and its competitor retailers.

Market concentration is a feature of many economies, however, so it has to be considered in conjunction with Wal-Mart’s other key resource, firm autonomy. The ability of a corporation to act independently, as an individual, makes for easier investment and disinvestment decisions but also for disassociation from the social costs of those decisions.In the case of Wal-Mart’s operations in the USA, the firm has been able to shed the costs of continual experimentation (in geographic location and labor allocation) to increase profits, and, in the long-term, the scale of its operations. These costs do not disappear but are redistributed, including to the public sector. In the USA, the regulatory environment supports and even tacitly encourages this cost shifting. In Germany, by contrast, the regulatory environment makes the redistribution of social costs associated with experimentation to increase profits (and expansion) difficultand expensive

A more probing examination of Wal-Mart’s difficulties in the German market, however, suggests the need for a more political and contextualized approach to analyzing foreign direct investment. In the case of distribution-based TNCs, this approach needs to address national differences in how markets are regulated and the consequences of distribution-based TNCs existing ‘in nested relationship with consumers and regulators.

2. A resource-based conception of firm strategies in global markets Penrose (1995) and Wernerfelt(1984), recognized that particular resource positions constrain firm choices as well as providing firms with capacities relative to markets. (f.e. the maintenance of a skilled workforce in the firm gives it capacities for process innovation and high productivity through, for example, multi-tasking, but also entails costs).

What has been recognized in the management literature is path dependency—theconcept that firm resources and competencies evolve over time.

Industry characteristics are so important that they have been portrayed as trumping other sources of differentiation. What this misses, however, is the way in which industry specific requirements (as well as the learning associated with path dependency) are intermediated by territorially based incentive structures.

3. The US lean retailing model The US lean retailing model is based in two key resources and their realization in the market. The first resource is network power. The ‘everyday low price model’ (which comes from this power), in which customers shop at one retailer for a wide range of consumer goods requires a regulatory environment that encourages concentration and returns to scale. The regulatory environment in the USA exemplifies such an environment.

4. The case: Wal-Mart confronts Germany In its international expansions, the discount retailer has used the same strategies that have allowed it to dominate the US market. The corporation has undertaken strategies to move to scale in order to dominate supply chains and negotiate low prices in order to drive up profits even with low margins.

In order to enter the market Wal-Mart was forced to purchase two relatively weakchains, Interspar and Wertkauf, which included stores of various sizes.

Reasons for failing:

1- Wal-Mart’s inability to ‘get to scale’ and exercise its network power made it difficult to transfer the Anglo-American Wal-Mart model of lean retailing to Germany.

2- Wal-Mart’s difficulties with supplier networks emerged because it was unable to dominate the retail distribution system and its suppliers.

3- The German consumers like comparative shopping, in small local stores. The Wal-Mart alternative—traveling miles to a big box store to buy everything, doesn’t allow for comparison shopping, is less satisfying and doesn’t produce appreciably lower overall prices for necessities.

4- Wal-Mart also underestimated the impact of social norms on their autonomy of action as well as consumer choices of where to shop.

5- The company rejected the cooperative and consultative nature of German labor and management policies and in doing so, violated basic social norms.

6- The most significant problem Wal-Mart faced, however, came from within its owngovernance structure, that of publicly traded companies owned by shareholders, such aspension funds, with short-term goals. Wal-Mart’s shareholders began to lose patiencethat the firm’s investment in Germany would produce a profit

5. Lean retailing in the German context German firms bring resources of highly skilled labor, including in technical logistics applications, and complex network coordination. By contrast with the USA, Germany is an exporting economy with a strong, sophisticated manufacturing base.

In general, coordinated economies, such as Germany, have been slower to utilize the logistics applications focused on cutting costs through subcontracting. In these economies, there is greater relative emphasis on using logistics applications to: - Assure flow relative to demand- Assure input quality

6. What does Wal-Mart’s failure in Germany imply for the ‘globalization’ project?

When Wal-Mart market entry fails, in Korea and Indonesia, as well as in Germany, the explanations almost always reside in the characteristics of the market not those of the context in which the corporation developed its strategies.

The case bears on two questions of particular import: - Whether lean production and lean retailing models can be abstracted as best practice

from the regulatory regimes in which they emerge and with which they reflexively interact and

- Whether adaptation problems are learning problems or whether they are the consequence of political decisions about societal governance, particularly about how to distribute risks.

6.1. Lean production and distribution as ‘ideologies of best practice’

These analyses shed light on how Wal-Mart’s strategy compares with those of other international retailers and on the potential contradictions between the Wal-Mart model and the requirements for success across global markets. Alexander and Myers (2000), for example, have described Wal-Mart as an ‘ethnocentric’ retailer

Wal-Mart style logistics and information processing as best practice suggests that the types of applications considered and adopted will differ depending on the significance of:

- Reduction of input cost through competitive bidding - Assurance of input quality; - Continuous flow relative to demand - Ability to respond rapidly to unexpected market shifts - The need for complex coordination of inputs in conjunction with projects or virtual

firms.

Even within its own terms, this description of best practice evinces contradictions, for example, emphasizing information sharing and cooperation with subcontractors as a mark of success in some instances, while pointing to centralization of control in the lead firm as critical to success in others. In the case of Wal-Mart, however, the origins of its success in a vertically oriented command and control process are quite clear. This rigidity of the Wal-Mart (and generally, of the US corporate model) is one of the factors that make adaptation to a multiplicity of international market situations problematic

The comparison of the retail sectors of the USA and Germany tells us that the globalization of technology and via multinational firms is neither easy nor straightforward.

Particular choices of what to do and how to do it are influenced, if not determined, bythe rules that define what constitutes success (e.g. rapidly increasing shareholder value or return on investment versus capturing market share over time). They are also influenced by regulation in areas such as labor market policy, competition and intellectual property, and by the capacity of the state or states to set standards which enable effective integration of production, transport and distribution.