One of the most enduring ideas of organization theory is that an organization’s structure and management process must “fit” its environment, in the same way that a particular horse might be more suited to one course than another. Ghoshal and Nohria show the continued relevance of this classic insight for the organization of multinational corporations. They offer a simple scheme to classify the environment and structure of MNCs. Then, based on data on forty-one large MNCs, they show how some combinations of environment and structure fir better than others. What drives fit is the principle of requisite complexity — the complexity of a firm’s structure must match the complexity of its environment. Though developed for MNCs, their argument can also apply to multidivisional firms that operate in different markets or business segments.
1. This contingency theory had two separate roots. Lawrence and Lersch stated it as a set of environment-organization contingencies, as did Thompson. See:
P.R. Lawrence and J.W. Lorsch, Organization and Environment (Boston: Graduate School of Business Administration, Harvard University, 1967); and
J.D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967).
Alfred Chandler, on the other hand, suggested the need for a match between strategy and organization as he described the rationale for and process of evolution of the multidivisional organization in corporate America. See:
A. Chandler, Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, Massachusetts: MIT Press, 1962). The subsequent literature on contingency theory adopted one or both sets of views, building in this process a model of environment-strategy-organization linkages.
2. See J. Stopford and L.T. Wells, Jr., Managing the Multinational Enterprise (New York: Basic Books, 1972). This research followed the work of Chandler, focusing on strategy-organization contingencies.
3. See C.A. Bartlett, “Building and Managing the Transnational: The New Organizational Challenge,” Competition in Global Industries, ed. M.E. Porter (Boston: Harvard Business School Press, 1986).
4. See Bartlett (1986); and:
C.A. Bartlett and S. Ghoshal, Managing across Borders: The Transnational Solution (Boston: Harvard Business School Press, 1989).
5. See Bartlett and Ghoshal (1989).
6. This interpretation is manifest, for example, in:
W.G. Egelhoff: “Exploring the Limits of Transnationalism” (Paper presented at the annual meeting, Academy of International Business, Toronto, 11–14 October 1990).
7. For a comprehensive review and a spirited defense of the concept of fit and the contingency perspective that underlies it, see:
L. Donaldson, In Defense of Organization Theory (Cambridge: Cambridge University Press, 1985).
8. This database was developed in the course of the first author’s doctoral dissertation work and is fully described in his unpublished thesis:
“The Innovative Multinational: A Differentiated Network of Roles and Relationships” (Boston: Harvard Business School, 1986).Parts of the database relevant to the analysis presented in this paper have also been described in:
S. Ghoshal and N. Nohria, “Internal Differentiation within Multinational Corporations,” Strategic Management Journal10 (1989): 323–337.
9. The 438 companies in the database are those that responded to the questionnaire we sent to the 438 North American and European MNCs listed in:
J. Stopford, World Directory of Multinational Enterprises (Detroit, New Jersey: Galo Research Company, 1983).
While we are not aware of any specific bias in the sample that would a priori invalidate any of our findings, the generalizability of our conclusions remains constrained because of the small size and potential non-representativeness of the sample. For a detailed description of the sample and of the reliability and validity of our measures, see: Ghoshal and Nohria (1989).
10. See C.K. Prahalad and Y.L. Doz, The Multinational Mission: Balancing Local Demands and Global Vision (New York: The Free Press, 1987).
11. See S.J. Kobrin, “An Empirical Analysis of the Determinants of Global Integration,” Special Issue, Strategic Management Journal 12 (1991): 17–31.
12. Steers describes some of the different performance measures and their relevance and implications. See:
R.M. Steers, “Problems in the Measurement of Organizational Effectiveness,” Administrative Science Quarterly20 (1975): 546–558. Venkatraman argues for the appropriateness of the measures we adopt. See:
N. Venkatraman, “A Concept of Fit in Strategy Research: Toward Verbal and Statistical Correspondence,” Academy of Management Review 14 (1989): 423-444.
13. See Prahalad and Doz (1987).
14. For one of the earliest descriptions of MNC environments in these terms, see:
J. Fayerweather, International Business Strategy and Administration (Cambridge, Massachusetts: Ballinger Press, 1978). For one of the most recent and comprehensive elaborations, see: Prahalad and Doz (1987).
For a discussion of the factors that drive the needs for global integration and national responsiveness, see:
G.S. Yip, “Global Strategy. . . In a World of Nations?” Sloan Management Review, Fall 1989, pp. 29-41.
15. Our characterization and terminology need some clarifications. Bartlett and Ghoshal (1989) considered three sets of environmental forces: those of global integration, national responsiveness, and worldwide learning. Strong demands along each of these dimensions were characterized as “global,” “multinational,” and “international” industries, respectively, whereas “transnational” industries were defined as those facing strong demands simultaneously along all three dimensions. In this paper, we use the relatively simpler two dimensional conceptualization proposed by Prahalad and Doz (1987). In our framework, global and multinational industries are defined the same way as in Bartlett and Ghoshal (1989), but international and transnational industries are defined as those facing weak-weak and strong-strong combinations of the forces of global integration and national responsiveness. This characterization is consistent with the use of the terminology in Bartlett (1986), except that he did not define the “international” industry environment explicitly in that paper.
16. There is well-established support for these mechanisms in organization theory. Since the landmark studies of the Aston Group, centralization and formalization have been central constructs in analyzing the structure of complex organizations. See:
D.S. Pugh, D.J. Hickson, C.R. Hinings, and C. Turner, “The Dimensions of Organization Structure,” Administrative Science Quarterly 13 (1968): 65-105.
Van Maanen and Schein have since argued that normative integration should be considered as another primary element in the structure of organizational relations. See:
J. Van Maanen and E.H. Schein, “Toward a Theory of Organizational Socialization” in Research in Organizational Behavior, ed. B.M. Staw (Greenwich, Connecticut: JAI Press, 1979).
17. For a recent review of the evidence and arguments for internal differentiation in headquarters-subsidiary relationships, see:
A.K. Gupta and V. Govindarajan, “Knowledge Flows and the Structure of Control within Multinational Corporations,” Academy of Management Review 16 (1991): 768–792.
18. See Ghoshal and Nohria (1989).
For alternative conceptualizations of subsidiary context, see:
T.A. Poynter and A.M. Rugman, “World Product Mandates: How Will Multinationals Respond?” Business Quarterly 47 (1982): 54–61; and:
Gupta and Govindarajan (1991).
19. See Ghoshal and Nohria (1989).
20. It is interesting to observe that there is one null set in this analysis: none of the companies combines high levels of centralization and socialization while lacking formalized systems. Perhaps this is merely an artifact of the sample or a reflection of measurement error. Or perhaps this combination is administratively infeasible. At this stage we can only speculate on this issue, but it may be a starting point for an interesting future study.
21. For the most provocative and articulate statement of this view, see: G. Hedlund, “The Hypermodern MNC: A Helterarchy?” Human Resource Managemen 25 (1986): 9–35.
22. See N. Tichy and R. Charan, “Speed, Simplicity, and Self-Confidence: An Interview with Jack Welch,” Harvard Business Review, September-October 1989, pp. 112–120.