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 international division. Subsequently, some companies expanded their sales abroad without significantly increasing foreign product diversity; they typically adopted an area structure. Companies facing substantial increases in foreign product diversity tended to adopt the worldwide product division structure. Finally, when both foreign sales and foreign product diversity were high, companies resorted to the global matrix.
Over the two decades since Stopford and Wells presented this simple, descriptive model, academic research on MNCs has developed a far more elaborate understanding of MNC organizations. It is increasingly clear, for example, that the formal macrostructure described in the stages model is only a partial representation of a worldwide organization. To use a biological metaphor suggested by Christopher Bartlett, organizations have an anatomy (formal structure), but they also have a physiology (core management processes) and a psychology (the mind-sets of their managers). To analyze the organizational capabilities a company needs, one must look not only to the anatomy but also to the physiology and psychology.
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.