MIT Sloan Management Review

Corporate Strategy, International Business

Horses for Courses: Organizational Forms for Multinational Corporations

By Sumantra Ghoshal and Nitin Nohria

January 15, 1993

ONE OF THE MOST ENDURING IDEAS OF ORGANIZATION THEORY IS THAT AN ORGANIZATION’S STRUCTURE AND MANAGEMENT PROCESS MUST “PIT” 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 fit 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.

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About two decades ago, business academics told managers that when it came to organization design, one size did not fit all. Different companies, facing different business demands, needed different kinds of organizations. More complex and turbulent environments called for more complex organizational approaches, and the nature and extent of organizational complexity had to match the firm’s strategic complexity. In its initial formulation, before the hedge that “it all depends” made it too complicated to mean anything at all, this contingency theory of organizations provided managers with some simple guidelines to help them decide on the kind of organization they should adopt.1

For multinational corporations (MNCs), such guidelines were available in the “stages model” proposed by Stopford and Wells2 (see Figure 1). This model defined the strategic complexity faced by an MNC in terms of two dimensions: the number of products sold internationally (“foreign product diversity;” shown on the figure’s vertical axis) and the importance of international sales to the company (“foreign sales as a percentage of total sales,” shown on the horizontal axis). Stopford and Wells suggested that at the early stage of foreign expansion, when both foreign sales and the diversity of products sold abroad were limited, worldwide companies typically managed their international operations through an... To read the complete article, login or sign-up using the form below.

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