One of the classical ideas in business administration is the principle of requisite complexity, which states that “the complexity of a firm´s structure must match the complexity of its environment”. Easy to understand but hard to apply because firms became complex multinationals and local markets turned into global ones.
Initially, the “stages model” proposed by Stopford and Wells (Figure 1) explained how multidivisional companies are structured regarding two dimensions: the number of products sold internationally (“foreign products diversity”) and the importance of sales to the company (“foreign sales as a percentage of total sales”). According to this framework some companies facing substantial increases in foreign product diversity tend to adopt the worldwide product division structure (Pathway A), while companies that expanded their sales abroad without significantly increasing foreign product diversity typically adopted the area structure (Pathway B). In case both foreign sales and foreign product diversity were high, companies resorted to the global matrix.
Figure 1 –Stopford and Wells model (Stopford, Wells, 1972)
However, Stopford´s and Wells´ model does not explain how Multinational Corporations (MNC) respond to other forces e.g. adaptation to environments. As a consequence, two other frameworks are necessary: one to explain how multinationals adapt to the surrounding environment and another to explain how companies with global reach and many subsidiaries are structured.
Types of MNC Environments
Theory developed by Nitin Nohria (From Harvard Business School) and Sumantra Ghoshal (From MIT, deceased) shows that there are four distinct environments faced by multinationals: global environment (strong forces for global integration and weak forces for local responsiveness); multinational environment (strong forces for national responsiveness and weak forces for global integration); transnational environment (both contingencies are strong), and international environment (both contingencies are weak). Figure 2 shows how different industries are classified by according to global integration and local responsiveness:
Classification of structures and four patterns
The nature of headquarters-subsidiary relationship is key this classification. The authors explain that there are three basic governance mechanisms that underlie these relationships: centralization, formalization and normative integration, a special type of pattern which occurs when there is a set of shared goals, values, and beliefs that shape the perspective and behavior of managers. According to these dimensions there are four possible MNC structures:
- Structural uniformity: occurs when MNC shows little variance in how the subsidiaries are managed; there is a strong and uniform governance mechanism for the whole company. Overall integration is high and there is little attention to differentiation. There is a common “company way” for the governance of all headquarter-subsidiaries relationships.
- Differentiated fit: companies that adopt different governance modes to fit each subsidiary´s local context. When a company recognizes these differences, it can explicitly differentiate its headquarter-subsidiaries relationships to ensure that the management processes fit each local context.
- Integrated variety: This pattern occurs when a firm adopts the logic of differentiated fit but overlays the distinctly structured relationships with a dominant overall integrative mechanism — whether through strong centralization, formalization, or normative integration
- Ad Hoc Variation: This pattern exists when there is neither a dominant integrative mechanism nor an explicit pattern of differentiation to match local contexts.
The relationship between headquarters (HQ) and subsidiaries (SUBS) became a hot topic in International Business. Additional analysis developed by professors Christopher Bartlett (from Harvard Business School) and Sumantra Ghoshal identified four types of strategies pursued by MNC, each balancing the potential needs of global integration and global differentiation. According to the authors, MNCs should choose the strategic model that satisfies the needs of the environment in order to secure global competitiveness. The option for a specific strategic model should be made through an evaluation of forces towards global integration, global differentiation or both. The strategic choice must fit the pressures of the environment, where MNCs should try to build the strategic capabilities wanted by customers. Figure 3 presents the balance of forces between integration and differentiation, while the following paragraphs describe how the different corporate strategies are impacted by this balance.
Figure 3 – Typology for MNC (from Bartlett and Ghosal, 1989)
Multidomestic (low pressure for integration – high pressure for differentiation): This strategy is based on responsiveness to local market demands and this is exactly one of its strenghts. The structure of the MNC will be a portfolio of autonomous national companies containing their entire value chain. The main weakness of this model comes from the circumstance that innovation and knowledge developed at these national companies will most likely stay there.
International (low pressure for integration – low pressure for differentiation): This strategy is based on home country expertise. The majority of the value chain will be maintained at the headquarter. The control of technologies used for production and general management systems will be structured and developed at home. The development of knowledge and innovation will stream from the home organization to the subsidiaries.
Global (high pressure for integration – low pressure for differentiation): This strategy is heavily based on economies of scale. The subsidiaries of the MNC are rather weak and a full value chain will only exist at the HQ. The subsidiaries are tightly coupled to the home organization, and are heavily dependent on resources and know-how from the home organization. Innovation and development will be created at home, and later diffused to remaining subsidiaries.
Transnational (high pressure for integration – High pressure for differentiation): This strategy tries to maximize both responsiveness and integration, where knowledge and innovation is developed and dispersed within the entire network. The MNC is regarded as a network, and each subsidiary is given responsibility compared to its capabilities and strategic mission. Relocation of managers across the MNC is critical because it allows the mutual development and dispersion of innovation and knowledge.
For the aficionados of visual representation, Figure 4 presents the four types of strategic options that MNCs pursue.
Figure 4 – Four strategies for MNC (Martin, Lexy and Beaman, 2000)
Bartlett, C. A., and S. Ghoshal. Managing Across Borders: The Transnational Solution. Harvard Business School Press, 1989.
Ghoshal, S., and N. Nohria. “Horses for Courses: Organizational Forms for Multinational Corporations.” MIT Sloan Management Review 34, no. 2 (winter 1993): 23–35.
Martin, Lexy and Beaman. “Leveraging HR Technology: From Global Saving to Transnational Value. 2000.
Stopford, John M., and L. T. Wells Jr. Managing the Multinational Enterprise: Organization of the Firm and Ownership of the Subsidiary. NY: Basic Books, 1972, French ed.