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2.3 Relation ship Between Headquarters and Local Entities

So far we have examined global business strategy from the perspective of corporate activities. We continue our discussion by focusing on organizational aspects. Corporations establish local subsidiaries in various countries, and delegate operations to them as a means of actively pursuing businesses on a global scale. An important issue to consider is the extent to which headquarters should control these local entities.

To examine this issue, we present the I-R (integration responsiveness) grid shown in Fig. 2.6. Integration implies a strong central organizational structure with high control by the headquarters (i.e., global integration), while responsiveness implies a decentralized organizational structure with highly autonomous local entities (i.e., local responsiveness). The I-R grid was created by international business academics, Prahalad and Doz (1987); this framework has been used extensively in the field of international business.

Ghemawat's AAA framework is closely tied to the I-R grid, in which aggregation corresponds to type I, in which firms are controlled by the headquarters (global integration), while adaptation corresponds to type R, in which voluntary responses of local subsidiaries are welcomed (local responsiveness). For example, consumer electronics can be largely classified into two major groups: AV equipment such as televisions, and white-goods products such as washers and refrigerators. As previously mentioned, the former group has standard functions independent of country or region, enabling companies to provide universally standardized products

Fig. 2.6 I-R Grid

(via aggregation), while the latter group is intimately tied to local lifestyles and must be localized according to market needs (via adaptation). The former has a type I organizational structure, while the latter has a type R one. Arbitrage, the final “A” of the AAA framework, takes advantage of the differences between the domestic country and local markets. Overseas production leveraging wage differences takes a type I structure, with the home country playing a central role, while product development that uses local ideas takes a type R structure.

Bartlett and Ghoshal used the I-R grid to make a comparative analysis of 30 global corporations in Japan, the US, and Europe, and examine them by industry and country (Bartlett and Ghoshal 1989). The results of this comparison showed certain industry characteristics, similar to the differences in types of consumer electronics, but more importantly, showed differences in positions within the I-R grid between countries. The locations of every Japanese, US, and European company are shown in the I-R grid (Fig. 2.7), with organizational structures of these companies classified as global, international, or multi-national. “Global” companies refer to those companies with a high level of global integration, with headquarters taking the lead and operations being uniform throughout the world. Japanese companies typically fit this pattern. On the other hand, “multi-national” companies have local entities with a high degree of autonomy and an overall corporate organization formed by groups of companies from multiple countries. Many European companies fit this pattern. “International” companies are somewhere in between, and many US companies fit this pattern.

Many of Japan's global corporations flourished along with high post-war economic growth. The Japanese domestic market grew alongside the growth in income levels, and durable goods such as consumer electronics and automobiles became

Fig. 2.7 Comparison of corporations in Japan, the US, and Europe in I-R grid

common. Companies became competitive with import substitutions under the control of foreign companies, followed by growing corporate internationalization with a stronger export mindset. In doing so, companies entered the overseas markets by exporting global products to Europe and the US. In addition, personnel management structures in Japanese companies are based on long-term, stable relationships, with the tendency to emphasize implicit knowledge such as culture and context. Accordingly, even while globally active, local entities were controlled by what were mere extensions of management structures in Japan.

On the other hand, Europe is an amalgamation of countries, each with its own language and lifestyles. Individually, each country is smaller than Japan, but Europe as a whole is a market several times the size of Japan. Having a single currency, economic equality among European nations has increased with the liberalization of the flow of people and goods within the region. However, culture-specific differences exist among these nations and a multi-national approach becomes a prerequisite from the outset of targeting the entire European market. US corporations are somewhere in between their Japanese and European counterparts. The US makes up an enormous market by itself, making a US-centric, centralized management style most effective. However, the US is a diverse country, originally comprising immigrants from Europe; this is different from the homogenous nature of the Japanese culture and its people. Corporate management structures are based on a flexible labor market, and US-based organizations are highly fluid because of M&A activities. Thus, management in local entities takes on a variety of structures.

By comparing Panasonic and Philips, two of the world's leading consumer electronics manufacturers, we examine the differences in global management organizations between Japanese and European companies (this discussion is based on Bartlett (2009)). Philips is headquartered in the Netherlands and has a decentralized management structure; marketing of its products are conducted by autonomous sales entities in each country. Philips has made considerable efforts to increase the control from its headquarters and make sales entities in each region follow a consistent, company-wide policy. However, Philips has not been very successful in doing so. On the other hand, Panasonic follows a centralized management system that consolidates the sales entities of each region under a marketing division in Japan. They have set up training and personnel systems for local employees to enable a monolithic operating structure which folds local entities into the Panasonic group.

While multinational corporations have to consider nationality-based differences in the management of local entities, their positioning on the I-R grid changes according to their international business expansion. Figure 2.7 presents trans-national organizational structures that balance global integration and local responsiveness. Global companies from Japan, the US, and Europe are moving in this direction. When Panasonic had a global sales center in Japan and centrally managed overseas branches, each branch manager was required to visit the Osaka headquarters several times a year, and as often as every month (Bartlett 2009). However, the internet has enabled the use of economical video conferencing systems, which has significantly reduced the time and money spent on international meetings. The flattening of the world brought about by advances in telecommunication has enabled the management of local entities using a headquarter-led global integration model.

On the other hand, many global companies have overseas revenues that exceed domestic revenues, making local autonomy in operating a business critical. In addition, the primary battlegrounds for global businesses are shifting from developed to developing nations. The circumstances faced by local entities are often different from those faced by headquarters, making it reasonable to give more weight to local responsiveness. Furthermore, giving decision-making authority to local entities and improving local employee morale is critical to utilizing excellent local personnel. Balancing uniform company-wide activities and local entity autonomy requires a seamless organizational operation at a global level by doing away with company borders. For example, Panasonic has standardized internal rankings for management posts in domestic and overseas operations, and promotes local personnel to increase the fluidity of management at the global level. Many companies in the US and Europe have achieved a flat world environment with no apparent borders, operating as trans-national organizations. Japanese companies are working toward the creation of organizational structures that balance headquarters' control and local entity responsiveness.

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