Firms Structure and Control

by meziesblog.com, posted in Articles

The global firm wins in terms of cost, timing, learning and arbitrage benefits.

The local firm wins in terms of flexibility, proximity and quick response time à customer-orientated benefits.

So, the firm is shaped by both the forces of globalization and localization. The theory of integration-responsiveness is one of understanding industries, where both the pressures for global integration and local responsiveness are evaluated and lead to three types of competitive situations: full globalization, full localization and a mix of both. When combining this with cost pressure, a matrix of strategies arises:

  • International Strategy with low pressure of costs and low pressure for local responsiveness.
  • Global Strategy with high pressure of costs and low pressure for local responsiveness
  • Multidomestic Strategy with low pressure of costs and high pressure for local responsiveness
  • Transnational Strategy with high pressure of costs and high pressure for local responsiveness

An implication of this theory, is that there is always an optimal strategy, given the forces from that industry. So, in an industry with equal forces, all firms should have the same structure and strategy.

The next topic is then on accompanying Organizational Structure of the firm.

Transaction Cost Economics (TCE) are a great determinant of the type of organizational structure. Several internal organizational forms exist: partnerships, peer groups, simple hierarchies, U-form firms and M-form firms. When internationalizing, difference can be made between Home and Host country, headquarters and subsidiary respectively. Each type of internal organization can be transformed into an multinational form. M-form and U-form firms can easily be modified by moving parts of the internal operations abroad.

Additionally, organizations can adapt a structure based on the number of business units and the international responsiveness forces:

  • The Global Function Model is centralized in decision-making. Subsidiaries are local legal entities of the firm. E.g. Apple.
  • The Geographic Model, is decentralized in decision-making. Subsidiaries act as independent units. E.g. ISS
  • The Single Matrix Model is in between the previous two, with shared executive power. Subsidiaries should think global, act local. E.g. Citigroup
  • The Multi-Business Global Product Division Model, where the firms is divided into business divisions, with a CEO on top, where divisions act independently. E.g. 3M
  • The Multi-Business Geographic Model, where each country is responsible for its own divisions and operations. The countries act autonomously. E.g. SAB Miller
  • The Multi-Business Matrix Model is between the previous two with dual responsibility, which is shared between divisions and geographical units. E.g. BASF The Chemical Company.

Another topic in this lecture is Top Management Teams.

There are a number of types of managers: global business managers, who are strategists; country managers, who should deal with local opportunities and threats; functional managers, who are specialists and deal with transferring best practices; and corporate managers, who are overall leaders of the organizations. Management specialization can be a cost benefit as it increases efficiencies, but additional management levels may also be very costly: costs of implementation and agency costs. In order to decrease the second, corporate governance is an solution. Corporate governance is the system in which businesses are controlled in rights and responsibilities, by providing rules and procedures. Furthermore, objectives are set and performance is monitored.

In corporate governance, some concrete managerial actions can be found to decrease the principal-agent problem: cash bonuses, share plans, stock options or temporary contracts. Furthermore, agents can be monitored internally by shareholders, non-executive directors or via a two-tier board system, externally by an auditing firm, stock analysts or debt providers, and competition based monitoring in the product, managerial labor or stock market, and in the market for corporate control.