CONTROL SYSTEMS, INCENTIVES AND STRATEGY IN INTERNATIONAL BUSINESS PDF

Preview

Summary

It contains topics of control issues, maintenance of organizational culture and negotiation strategies....

Description

CONTROL SYSTEMS, INCENTIVES AND STRATEGY IN INTERNATIONAL BUSINESS The key to understanding the relationship between international strategy, control and incentive systems is the concept of performance ambiguity. Ambiguous performance Ambiguous performance exists when the causes of poor subunit performance are unclear. This is not uncommon when the performance of a subunit depends, in part, on other subunits; that is, when there is a high degree of interdependence between subunits in the organization. Consider the case of the French subsidiary of a U.S. company whose sales process depends on another subsidiary, a plant established in Italy. The French subsidiary does not achieve its objectives, so the parent company requires an explanation. The French subsidiary argues that it receives poor quality goods from its Italian counterpart. Therefore, the matrix asks the Italian administrators what the problem is. They answer that their quality is excellent (the best in the industry) and that the French simply do not know how to sell a good product. Who's right, the French or the Italians? Without more information, senior executives don't know. Because they depend on the Italians to sell their product, the French have a good excuse for their underperformance. The matrix needs more information to determine who is right. Collecting it will cost time and money and divert attention from other problems. In other words, the degree of ambiguous performance raises control costs. Consider the difference if the French operation were autonomous, with its own manufacturing, marketing and research and development plants. In this case it would lack a suitable alibi to justify its poor performance; their administrators would triumph or fall on their own merits. They couldn't blame the Italians for the low sales level. Therefore, the degree of performance ambiguity is a function of the interdependence of an organization's subunits.

Strategy, interdependence and ambiguity Now let's consider the relationship between strategy, interdependence and ambiguous performance. In companies that have implemented a localization strategy, each national plant is an autonomous entity and can be judged on its own merits; its degree of performance ambiguity is low. In an international company, the degree of interdependence is somehow higher. Integration is necessary to facilitate the transfer of key skills and competencies. Because the success of a foreign operation depends in part on the quality of the competition transferred from the country of origin, there may be performance ambiguity.

In companies that intend to adopt a global standardization strategy, the situation is even more complex. In a pure global enterprise, the search for economies of location and experience curve involves the development of a global network of value-creating activities. Many of a company's activities of this type are interdependent. The ability of a French subsidiary to sell a product depends on the efficiency with which plants located in other countries carry out their value creation activities. Therefore, levels of interdependence and performance ambiguity are high in global enterprises. The degree of performance ambiguity is higher in transnational companies, which suffer from the same performance ambiguity problems as global companies. In addition, due to the multidirectional transfer of key competencies, they also suffer problems typical of companies adopting an international strategy. The high degree of integration of transnational companies involves making many decisions together, and the resulting interdependencies create countless alibis to justify poor performance. The context of transnational companies is ideal for "pointing to the culprit". Control implications and incentives Control costs, which are defined as the time senior executives spend monitoring and evaluating subunit performance. This amount will be higher when the ambiguous performance level is higher. When ambiguity is low, management can use performance controls and a management system by exception; when it is elevated, they do not have such luxury. Production controls do not provide clear signals about the efficiency of the subunit if its performance depends on that of another subunit in the organization. Therefore, management should spend time solving problems that arise from ambiguous performance, with the corresponding increase in control costs. A transnational strategy is desirable because it gives the company more opportunities to take advantage of international expansion than those offered by multinational, international and global strategies. But we now see that, because of the higher level of interdependence, the control costs of transnational corporations are higher than those of companies that adopt other strategies. Unless these costs are reduced, the higher profitability associated with the transnational strategy can be nullified. The same point, albeit to a lesser extent, counts for global companies adopting a global standardization strategy. While companies adopting a global standardization strategy can reap cost benefits from location economies and experience curves, they must deal with a higher level of ambiguous performance, which raises control costs (in compared to companies adopting an international or multinational strategy). This is where control and incentive systems come in. When we look at the control systems with which corporations control their subunits, we observe that, regardless of their strategy, multinational companies use performance and

bureaucratic controls. However, in companies that adopt a global or transnational strategy, the usefulness of performance controls is limited by substantial performance ambiguities. As a result, these companies attach greater importance to cultural controls. Cultural control by encouraging administrators to assume the organization's standards and value systems gives administrators of interdependent subunits an incentive to solve the problems that arise between them. The result is the reduction of accusations and, therefore, control costs. The development of cultural controls can be a precondition for the success of the adoption of a transnational strategy, and perhaps also a comprehensive strategy. About incentives, the newly analyzed material suggests that the conflict between the different subunits is reduced, and the potential for cooperation increases, if systems are somehow linked to a high degree in the hierarchical structure. When ambiguous performance makes it difficult to judge the performance of subunits as autonomous units, the payment of incentives from administrators to the entity to which they belong is linked and this reduces the resulting problems. Processes We define processes as the way to make decisions and to carry out the work of the organization. Processes are present at various organizational levels. There are processes to formulate strategies, to allocate resources, to evaluate ideas of new products, to manage requests for information and customer complaints, to improve product quality, to evaluate employee performance, etc. Often, a company's core competencies or valuable capabilities are integrated into these processes. Efficient and efficient processes lower value creation costs and add additional value to the product. For example, the global success of many Japanese companies in the 1980s was based in part on their early adoption of processes to improve product quality and operational efficiency, such as total quality management and fair inventory systems at Time. Today, General Electric's competitive success is attributable to the processes widely fostered in the company. These include the Six Sigma process for quality improvement, "digitization" (with intranet and corporate internet to automate activities and reduce operating costs), and the idea generation process, known in the "search for solutions," whereby administrators and employees meet in intense sessions over several days to identify and execute ideas that increase productivity. The processes in an organization are summarized using a flowchart that shows the different steps and the decisive points in performing a job. Many processes take the shortest path in functions or divisions and require cooperation between individuals of the different subunits. For example, processes for new product development require R&D, manufacturing, and marketing employees to work together to ensure that new products address market needs and design are not very expensive. Because they cross organizational boundaries, executing processes more effectively often requires formal integration mechanisms and incentives for inter-unit cooperation. A detailed analysis of the nature and strategies of the improvement and reengineering processes is beyond the scope of this book. However, it is important

to make two basic observations on administrative processes, especially in the context of an international business. The first is that, in a multinational company, many processes affect not only the organizational boundaries because they cover different subunits, but also the national borders. The design of a new product may require the cooperation of California research and development staff, production, Taiwan, and marketing, from Europe, the United States and Asia. The likelihood of achieving this coordination is greatly enriched if the processes are embedded in the organizational culture that promotes cooperation between individuals in the different subunits and countries, if the incentive systems of the explicitly reward such cooperation, and whether formal and informal integration mechanisms facilitate coordination between subunits. Second, it is particularly important for a multinational company to recognize that the valuable innovative processes that could involve a competitive advantage are developed anywhere within the organization's operational global network. The subsidiary can develop the new processes in response to the conditions of its market. Such processes can then be useful in other parts of the multinational company. For example, in response to competition in Japan and local obsession with product quality, Japanese companies were at the forefront of Total Quality Management (TQM) processes in the 1970s. Because few U.S. companies had Japanese subsidiaries at the time, they did not know about this trend until the following decade, when high-quality Japanese products began selling in the United States. An exception to the above was Hewlett-Packard, which had a successful company in Japan, Yokogwa HewlettPackard (YHP). YHP pioneered the total quality management process in Japan and won the prestigious Deming Award for improving product quality. Through YHP, Hewlett-Packard learned about the movement towards quality before many of its fellow Americans and was one of the first Western companies to introduce the process of managing total quality into their operations World. Not only did the Japanese operation of Hewlett-Packard give the company access to valuable processes, but it was able to transfer its knowledge within its global operational network, which elevated the performance of the entire company. Therefore, the ability to create valuable processes is not enough, it is also important to promote them. This requires both formal and informal integration mechanisms, as well as knowledge networks. Organizational culture Culture is a social term typical of societies and organizations. Therefore, we prefer to talk about organizational culture and subculture. The basic definition of culture is still the same, whether we apply it to a large society of a state or to a small one such as an organization or one of its subunits. Culture refers to a system of values and norms that people share. Values are abstract ideas about what a group considers good, correct, and desirable. Standards mean social rules and guidelines that prescribe appropriate behavior situations. Values and standards express the patterns of behavior or style of the organization with which employees

automatically motivate their new colleagues. Although an organization's culture is rarely static, it tends to change relatively slowly. Creating and Maintaining Organizational Culture Organizational culture has diverse backgrounds. First, there is extensive agreement that founders or important leaders have a profound effect on the culture of the organization, and often leave their own values in it. A famous example of a founder is the Japanese company Matsushita. Konosuke Matsushita's zen-style personal philosophy was coded in Matsushita's "seven spiritual values," which all new employees learn to this day: 1) national service within industry, 2) justice, 3) harmony and cooperation, 4) struggle for improvement, 5) courtesy and humility, 6) adjustment and assimilation, and 7) gratitude. A leader does not have to be the founder to exert a profound influence on organizational culture. Jack Welch is credited with GE's culture change, first, for highlighting, when it became its CEO, a set of countercultural values, such as risk acceptance, entrepreneurial ability, leadership and borderless conduct. For a leader it is more difficult, however, mandatory, to change an established organizational culture than to create a new one in the company. Another important influence on organizational culture is the broad social culture of the country where the company was founded. In the United States, for example, the competitive ethics of individualism are important, and there is enormous social stress to create winners. Many U.S. companies come up with creative ways to reward and motivate individuals to see the self as winners. American companies' values often reflect those of their country's culture. Similarly, it is stated that the values of cooperation in many Japanese companies reflect the values of traditional Japanese society, emphasizing group cooperation, reciprocal obligations and harmony. Thus, in general, the argument that organizational culture is influenced by the national culture can have a little sustenance. A third influence on organizational culture is the history of the company, which over time can shape the values of the organization. In the language of historians, organizational culture depends on the path of organization over time. For example, Philips NV, a Dutch multinational company, has long operated with a culture that places high value on the independence of national operating companies. This culture is a product of the company's history. During World War II, the Germans occupied Holland. With the headquarters in occupied territories, several foreign operating companies, such as subsidiaries established in the United States and Britain, were given more powers. After the war, they maintained a very autonomous operation. The belief that this was the right thing became a key value of the company. High-performance decisions tend to be institutionalized in a company's values. In the 1920s, 3M was mostly a sandpaper manufacturer. Richard Drew, a young lab assistant, proposed what he considered a new product, a piece of adhesive-coated paper, which he called "sticky tape." Drew saw the application of the product in the automotive industry, where it would serve to cover some parts of a vehicle during the application of paint.

He presented the idea to the company's president, William McKnight, an unimpressed person, who asked Drew to abandon the investigation, but he did not. Instead, he developed the "sticky tape" and then went looking for potential customers in the automotive industry. With this information, he approached again McKnight, who, more calmly, changed his mind and authorized him to develop what would be one of 3M's main, dominant 3M product lines so far. Since then, McKnight emphasizes the importance of giving 3M researchers free rein to explore their own ideas and experiment with product offerings. This attitude soon became a basic value in 3M and was honored with the company's famous "15% rule", under which researchers have 15% of their working time to work on the ideas of their choice. Today, new employees are told drew's story to illustrate the value of allowing individuals to explore their own ideas.

A culture is supported by various mechanisms, such as: 1) recruitment and promotion practices of the organization. 2) Reward strategies 3) socialization processes 4) Communication strategies. The goal is to select people whose values are consistent with those of the company. To further reinforce values, a company can promote individuals whose behavior is consistent with the fundamental values of the organization. Merit review processes can also be tied to company values, reinforcing cultural norms. Socialization can be formal, as training programs, to teach employees the basic values of the organization. Informal socialization can be friendly advice from colleagues or bosses, or implicit in the attitudes of peers and superiors toward new employees. When it comes to communication strategy, many companies with a strong organizational culture devote much of their attention to embeding their core values into the corporate mission, often communicating them to employees to guide them in difficult decisions. Stories and symbols often reinforce important values (for example, Drew and McKnight's story in 3M). Organizational culture AND performance in international business Often, authors of administration-related concepts talk about "strong cultures." In a culture with this feature almost all administrators share a set of very consistent values and standards that have a clear effect on the way the work is done. New employees adopt these values very quickly, and those who don't adapt tend to retire. In such a culture it is possible that a new executive may be corrected by his subordinates or his superiors if he violates the values and norms of organizational culture. Usually, a company with a strong culture is perceived from the outside as an organization possessing a certain style or way of doing things. Lincoln Electric, which we presented in the next "Administrative Overview" section,

is an example of a company with a strong culture. However, "solid" doesn't necessarily mean "good." A culture can be solid but bad. Nazi culture in Germany was certainly solid, but it was not good; also, a strong culture does not always imply high performance. One study revealed that, in the 1980s, General Motors had a "solid culture", but discouraged low-level employees from demonstrating initiative and taking risks, which was dysfunctional and underperforming GM. A strong culture can be beneficial at one point if it encourages high performance, but inappropriate at another. The qualities of a culture depend on context. In the 1980s, when IBM's performance was very good, several authors related to administrative issues praised its strong culture, which among other things greatly valued decision-making by common accord. These authors argue that such a decision-making process was appropriate because of IBM's substantial investments in new technology. However, this process proved to be a weakness in the growing computer industry in the late 1980s and the next. Joint decisionmaking was slow, bureaucratic and did not lead to corporate risk-taking. While this worked in the 1970s, IBM needed to make quick decisions and entrepreneurial risk-taking in the 1990s, but its culture discouraged such behavior. At the time, the company was overtaken by small businesses, such as Microsoft. An academic study concluded that companies that show high performance over an extended period tend to have a strong but adaptable culture. According to this study, in an adaptable culture most managers are interested in customers, shareholders and employees, and value them in a remarkable way, as well as the people and processes that generate useful changes in the company. This attitude is interesting, but it reduces the subject to a high level of abstraction; after all, which company would you say you don't care about your customers, shareholders and employees? A different perspective is to argue that the company's culture must match the rest of its structure, strategy and demands for a competitive environment...