The Organizational Context

HRM460 / INB404: International Human Resource Management Section: 01, Spring 2013
Farzana Chowdhury School of Business Independent University Bangladesh
1-1

Chapter objectives
In this chapter, we examine how international growth places demands on management, and the factors that impact on how managers of internationalizing firms responds to these challenges. We start with the premise that the human resource (HR) function does not operate in a vacuum, and that HR activities are determined by, and influence, organisational factors. We cover the following areas:
structural responses to international growth control and coordination mechanisms mode of operation used in various international markets effect of responses on human resource management approaches and activities. It builds upon material covered in Chapter 1 to provide a meaningful global and organizational context for drawing out the international dimension of human resource management the central theme of this book.

1/2

Management demands of international growth

Before looking at how domestic to global orientation affects the HR function and the HR management consequences involved, we first need to understand the ways in which internationalizing firms have responded to the challenges of international growth. Figure 2-1 illustrates the major elements encountered as a result of international growth that places demands on management. These various elements are not mutually exclusive. For example; geographical dispersion affects firms size, creating pressure upon control mechanisms, that in turn will influence structural change.
1/3

Figure 2-1: Management demands of international growth

1/4

Management demands of international growth

The purpose of this chapter is to explore some of the managerial responses to these influences that concern HRM. Focus is on the connection between organizational factors, management decisions and HR consequences how the internationalizing firm copes with HR demands of its various foreign operations determines its ability to execute its chosen expansion strategies.

1/5

The path to global status

Most firms pass through several stages of organizational development as the nature and size of their international activity grows. As firms go through these evolutionary stages, these structures changes, typically due to: Strain imposed by growth and geographical spread Need for improved coordination and control across business units The constraints imposed by host-government regulations on ownership and equity Research reveals, the evolution path common but not normative i.e. not exactly the same for all firms.
1/6

Figure 2-2: Stages of internationalization

1/7

Stages of internationalization
Some firms may use licensing, subcontracting or other operation modes i/o establishing their own foreign production or service facilities. Some firms may go through the various steps rapidly whereas others evolve slowly over many years. Firms also dont follow the same sequences of stages as they internationalize some may be driven by external factors such as host-government action (e.g. Forced into a joint venture). Some are formed with the international market in mind often referred to as born globals. However, the concept of an evolutionary process helps to illustrate the organizational adjustments required of a firm moving along the path to multinational status.

1/8

Stages of internationalization: Exporting

Typically the initial stage of international operations
Usually handled by an intermediary (foreign agent or distributor) An export manager may be appointed to control foreign sales and actively seek new markets this person is commonly from the domestic operations. Further growth in export may lead to establishment of a separate export department. Role of HR department unclear at this stage Selection of export staff and perhaps training of foreign agency is usually handled by the marketing department.
1/9

Figure 2-3: Export department

Stages of internationalization: Sales subsidiary

As firms develop expertise in foreign markets, they replace foreign agents/distributors with own sales or branch offices/subsidiaries May be prompted by: Problems with foreign agents More confidence in international activities Desire for greater control Give greater support to exporting activities The export manager may be given the same authority as other functional managers If the firm wishes to maintain direct control over subsidiaries, PCNs may be selected from HQ in key sales positions, and other positions by HCNs leading to some HR involvement. Decision to use PCN leads to expatriate management issues.

1/11

Figure 2-4: Sales subsidiary

Stages of internationalization: International division

For some firms, it is a short step from the establishment of a sales subsidiary to foreign production or service facility. This step may be considered small if the firm is already assembling the product abroad to take advantage of cheap labor or to save shipping costs or tariffs. For some firms, however, the transition top foreign direct investment is a large step. However, having made the decision to produce overseas, the firm may have to for one of the following options:
Establish its own foreign production facilities Enter into a joint venture Buy a local firm

1/13

Regardless of the method, foreign production/service operations tend to trigger the creation of a separate international division in which all international activities are grouped.

Figure 2-5: International division

Stages of internationalization: International division

The foreign establishments resembles miniature replica of domestic organization Subsidiary managers report to head of international division. There may be some informal reporting to the heads of various functional heads directly. At this stage the concern is on maintaining control of the newly established subsidiary and will place PCNs in all key positions local employment condition or compliance to host-government directives HCN may be placed in charge of HR function. Role of corporate HR staff is concerned with expatriate management. HR activities are confined to supervising the selection of staff for the new international division. As the firm expands its foreign operations, more formal HR policies become necessary.

1/15

Stages of internationalization: Global product/area division

Overtime, firm moves from the early foreign production stage into a phase of growth through production, or service standardization and diversification. Typically tensions will emerge between the parent company (HQ) and subsidiaries, stemming from the need for national responsiveness vs. global integration imperatives at HQ Strain of sheer size may prompt structural change to either of these global approaches Choice typically influenced by:
The extent to which key decisions are to be made at the parent country headquarters or at the subsidiary units (centralization versus decentralization) Type or form of control exerted by parent over subsidiary
1/16

Stages of internationalization: Global product/area division

The structural response, at this stage of internationalization, can be either product/service based (if growth strategy is through product) (fig.2-6a) or area based (if growth strategy is through geographical expansion) (fig.2-6b). MNE strives to adapt its HRM activities to each host countries specification this naturally impacts on corporate HRM function corporate HR staff perform a monitoring role, intervening in local affairs only in extreme circumstances. Within the HR function, the development of managers able to operate in international environments becomes a new imperative.
1/17

Figure 2-6a: Global product division

Figure 2-6b: Global area division

Stages of internationalization: The matrix

In the matrix structure, the multinational is attempting to integrate its operation across more than one dimension. As shown on Fig.2-7, the intl or geographical division and product division share joint authority violating Fayols principle of unity of command. Advocates of this structure supports the dual authority as it bring out the conflicts of interest in the open each issue with priority in decision making has an executive champion to ensure it is not neglected. The matrix is considered to bring into the management system a philosophy of matching the structure to the decision-making process
1/20

Figure 2-7: The matrix

Stages of internationalization: The matrix

In practice, firms that have adopted the matrix structure have met with mixed success. Reason being, it is expensive and requires careful implementation and commitment from the part of top management. Fig.2-7, Area managers are responsible for performance of all three products within various countries that comprise their regions, and product managers are responsible for sales of their specific product ranges across areas. There is a similar dual reporting line for functional staff (eg. HR) - Country HR managers reports to the Country manager and also to the Regional HR manager.
1/22

Problems with the Matrix Bartlett and Ghoshal

Dual reporting Proliferation of Leads to conflict and confusion

communication channels
Overlapping

Creates informational logjams

Produce turf battles and loss of

responsibilities
Barriers of distance,

accountability
Make it virtually impossible to

language, time and culture

1/23

resolve conflicts and clarify confusion

Stages of internationalization: The matrix

Bartlett and Ghoshal conclude that the most successful multinationals today focus less on searching for the ideal structure and more on developing the abilities, behavior and performance of individual managers. Therefore, if the multinational opts for a matrix structure, particular care must be taken with staffing.

1/24

Beyond the matrix

Early studies of HQ subsidiary relationships stressed on resources and information flow from HQ to subsidiary. In large, mature multinationals, these flows are multidirectional - HQ to subsidiary, from subsidiary to HQ and between subsidiaries. The result can be a complex network of interrelated activities and relationships. The multinational management literature identifies three descriptions of organizational structures which are less hierarchical:
Heterarchy Transnational Networked firm
1/25

Beyond the matrix

Less hierarchical structural forms Heterarchy: Structural form proposed by Hedlund recognizes MNEs may have a number of centers. Competitive advantage does not necessarily reside in any one country. Each subsidiary center may be simultaneously a center and a global coordinator of separate activities performing a strategic role not just for itself, but for MNE as a whole. From an HR perspective the success of the heterarchy depends solely on the ability of the multinational to formulate, implement and reinforce the required human resource elements.
1/26

Beyond the matrix

Less hierarchical structural forms
Transnational: organizational form that is characterized by an interdependence of resources and responsibilities across all business units regardless of national boundaries. The term describes a particular type of multinational that tries to cope with the large flows of components, products, resources, people and information among subsidiaries, while simultaneously recognizing distributed specialized resources and capabilities. In fact, the matrix, heterarchy and the transnational share a common theme regarding human resource factor thus, developing transnational managers, or global leaders who can think and act across national and subsidiary boundaries, emerges as an important task for top mgt.

1/27

Beyond the matrix

Less hierarchical structural forms
Networked firm: Some scholars are advocating viewing certain large, mature internationalized firms as a network, in situations where: Subsidiaries have developed into significant centers for investment, activities and influence, and can no longer be regarded as periphery (side-line). Eg. GEs center for excellence in Hungary for R&D in its lighting division. Relationship is likely to be dyadic with communication taking place at different organizational level covering different exchanges outcome important for effective global performance. Such MNEs are loosely couples political systems, rather than tightly bonded, homogenous, hierarchically controlled systems.
1/28

Figure 2-8: The networked organization

Beyond the matrix

Less hierarchical structural forms
Networked firm (contd): Fig. 2-8 attempts to show such an intricate criss-crossing of relationships. One subsidiary may act as a nodal unit linked to a cluster of satellite organizations. Thus one center can assume responsibility for other units in its country or region. Based on this, Ghoshal & Bartlett have expanded their concept of the transnational to define the MNE as interorganizational system. (Eg. Pg.44) The management of a multi-centered network organization is complex. Apart from intra-organizational network (HQSub), each subsidiary also has a range of external relationships (involving local supplier, customer, competitors, host government and alliance partners).

1/30

Beyond the matrix

Less hierarchical structural forms
Networked firm (contd): The management of both and of the total network is crucial to global corporate performance. It involves a less hierarchical structure featuring five dimensions: 1. Delegation of decision making authority to appropriate units and levels. 2. Geographical dispersion of key functions across units in different countries. 3. Delayering of organizational levels. 4. Debureaucratization of formal procedures. 5. Differentiation of work, responsibility and authority across the networked subsidiaries.

1/31

The place of HR functions in structural forms

There has been little direct investigation on how HR function develops in response to structural changes as a consequence of international growth. An exception is a study on changing role of the corporate HR functions in 30 UK firms The authors, Scullion and Starkey, found three distinct groups: Centralized HR companies Decentralized HR companies Transition companies Scullion and Starkey note that varied roles within these groups impacted on the way in which HR activities such as training, performance appraisal were handled.
1/32

The place of HR functions in structural forms

Centralized HR companies:
Large well resourced HR dept., responsible for a large number of functions Key role of Corporate HR is to establish and maintain control over world-wide top-level management positions, such as divisional and subsidiary manager strategic staffing under central control Companies in this groups operated within product-based or matrix structures.

1/33

The place of HR functions in structural forms

Decentralized HR companies:
Characterized by devolving the HR responsibilities to a small group who confined their role to senior management at corporate HQ Consistent with the decentralized approach to other functions Companies within this group operated within product or regional based structures.

Transition companies
Characterized by medium-sized corporate HR departments staffed by relatively small group at corporate HQ. Operated in a decentralized, product-based structure.
1/34

Different countries take different paths

We have seen the generalist view of the growth of internationalizing firm through various stages and the corresponding structures. It is also important to note the cultural elements.
European firms moved directly from mother-daughter structure to a global structure with worldwide product or area division or to a matrix organization w/o the transitional stage of an international division US firms have experimented with the matrix and appear to have met with limited success Japanese multinationals are evolving along similar lines to their US counterparts Export divisions become international divisions, but the rate of change is slower
1/35

Figure 2-9: US, European and Japanese structural changes

Control mechanisms
Globalization brings considerable challenges which are often under-estimated. Every morning when I wake I think about the challenges of coordinating our operations in many different countries Quote by Accor CEO

1/37

Control mechanisms
International operations place additional stresses on control mechanisms. With additional stress on firms ability to coordinate resources and activities. Fig. 2-10 illustrates the range of formal control mechanisms including organizational structure, reporting systems, budget and performance targets. However firms also rely on information control mechanism. There is a strong argument that organizations are tending to place more weight on the informal mechanisms to facilitate control and coordination.
1/38

Figure 2-10: Control mechanisms

Control mechanisms: Informal Control

Control through personal relationships:
Transnational and networked organizations need to promote vital knowledge generation and distribution through lateral communication. These relationships can be developed through the development of personal contacts. Training and development programs at regional centers and HQs become important forums for development of such informal communication channels. However, the success of such networks depends on the fluency on the common language
1/40

Control mechanisms: Informal Control

Control through corporate culture:
Advocates of more complex structural forms regard the use of cultural control as an effective informal control mechanism. Cultural control may be a debatable issue for some evidence of corporate culture superimposed upon national cultures in subsidiaries. The emphasis however is on developing voluntary adherence to corporate behavioral norms and expectations through a process of internalization of corporate values as beliefs.
1/41

Mode of operation and HRM

We will have a brief look at the forms of operation modes utilized by internationalizing firms and the managerial and HR issues involved. In the literature on structural adjustment, organizational forms illustrated are mainly focused on integrating subsidiary operations Internationalizing firms may also adopt contractual and cooperative modes in order to develop and enter foreign markets
contractual modes can be: Licensing, Franchising, Management contracts, Projects And/or cooperative modes such as joint ventures
1/42

Mode of operation and HRM

The modes are not mutually exclusive, a firm may have licensing arrangement with a foreign joint venture or have a general strategy for growth through international franchising, but combine this with a wholly owned subsidiary or joint venture in some markets. Well see how IHRM activities, such as staff placement, simultaneously link and influence the mode of operation utilized to support internationalization strategy Framework in Fig. 2-11. Welch and Welch explain
the many forms of operation may demand different skills and place varying stress on the resources of the company, particularly in its personnel. For example, licensing might involve a limited commitment of staff. Whereas the availability of key people becomes particularly critical for the success of a management contract in which the company is required to transfer a number of experienced managerial and technical staff to run a foreign facility.

1/43

Figure 2-11: Linking operation mode and HRM

Mode of operation and HRM

Decrying the scarcity of empirical evidence regarding the IHRM demands of contractual modes of operation, the authors suggest that HRM concerns affect and may even govern the choice of market entry mode. Use of management contracts, by its very nature, means that skilled, usually talented staff will be needed. Knowledge transfer is an important component, involving the training of HCN staff. One of the few International Business text identifies that the overall success of the contract operation, including the training aspect, depends on the quality of the staff transferred or appointed to the contract venture, and therefore the overall IHRM by the company. Similar lack of information of information associated with the IHRM demands of international project management.

1/45

Interfirm linkages
Alliance (strategic alliance, cooperative venture, collaborative venture or corporate linkage) a firm may enter into an alliance with an external party (competitor, a key supplier, affiliated firm) in order to compete effectively in the global market. A broad definition: A corporate alliance is a formal and mutually agreed commercial collaboration between companies. The partners pool, exchange, or integrate specified business resources for mutual gain. Yet partners remain separate businesses. There fore, it is a form of business relationship that:
Involves some measure on interfirm integration Stops short of a full merger or acquisition The venture that emerges is a function of the strategic importance of the venture and extent of control sought over resources allocated
1/46

HR factors
The various forms of interfirm linkages affect HRM in different ways, depending on the type of alliance involved. HR issues and activities that affect the successful functioning of international joint ventures include:
Assigning mangers to the joint venture Evaluating their performance Handling aspects pertaining to career path Compensation benefits

1/47