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In today's business environment, there is sustained pressure for companies to maximize productivity in order to be competitive in the marketplace. Many businesses are moving a variety of activities, such as manufacturing and product development, to countries with low labour costs. They are also opening up sales channels in many new markets. The resulting global organizations need to structure themselves, so that they can effectively manage operations across numerous locations. This paper looks at how the organizational structure of a global company influences decision-making at the regional level, and how this can affect the business performance. This paper will:
- Consider whether centralized and decentralized business structures will make different business decisions depending on the cultural values in the region.
- Explore how a transition from an autonomous structure to a centralized structure affects regional performance.
- Examine how a global company can delineate decision-making responsibility that balances a corporate code of conduct with regional cultural differences to achieve optimal business results.
- Recommend steps that global organizations can take to optimize regional decision-making, and corresponding business results, across regions with different cultural backgrounds.
Large corporations have been attempting to find a balance between the traditional hierarchical structure and the flexible local entrepreneurial structure for many years. Increasing global competition has made it critical that multinational enterprises be both globally integrated and locally responsive at the same time (Bartlett & Ghoshal, 1988). Sohn & Paik (2004) describe the efforts of Toshiba to achieve a hybrid of centralized control and localized autonomy. Irrespective of the structure chosen, corporations can all be placed somewhere along the continuum between centralized and decentralized management. A centralized structure will be slower to respond to changing market conditions but provides stability and control. A decentralized structure provides autonomy for local businesses to make their own decisions quickly, ; however, the decisions may not align with the parent organizations' strategic objectives and ethics. Many business decisions involve conflict between making money and ethical treatment of employees, customers, and the environment. Centrally managed organizations are more likely to align decisions with a universal corporate code of conduct. Autonomous subsidiaries will make decisions that are reflective of the local cultural values. The risk to the parent organization is that some of these decisions may severely conflict with shareholder values. Treatment of women, children, and respect for the environment are some areas where regional differences exist.
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Global corporations assimilate smaller businesses on a regular basis. If they enforce a centralized organizational structure upon recently purchased businesses there can be some significant challenges. Taking away decision-making authority from people who are used to being empowered can result in conflict, loss of key employees, poor business decisions, and a rapid decline in business performance. Key employees, who remain, will struggle with the lack of empowerment and will be unsure of which decisions they can make and which the centralized management should make. This confusion can have a significant negative impact on business performance. In 1997, Honeywell assimilated the Measurex pulp and paper business. Many of the individuals who knew how to run the business left the company due to conflict with Honeywell executives. Subsequently, market share has dropped from over 50% to around 30% due to poor decisions made by executives with limited knowledge of the pulp and paper business.
With a centralized management structure, leadership is remote to most locations and the only contact between employees and leadership is through site-visits, webinars, or emails. Accompanying this lack of local leadership is a lack of empowerment for employees. According to Bavendam (2005), leadership, adequate authority, and opportunity all have a direct influence on employees' job satisfaction. In addition, Bavendam finds that bureaucracy and lack of teamwork among departments negatively influences customer satisfaction. A centralized organization is more bureaucratic and often, different functions report to different centralized chains of command. Without strong local leadership responsible for all functions, different departments spend as much time trying to work together as they do addressing customers' needs. This distraction has a negative impact on customer satisfaction and correspondingly on business results.
A company code of conduct is an important basis from which global corporations can drive ethical business practices and help to ensure that a company makes decisions that are consistent with shareholder values. A multinational company may enforce a code of conduct via a centralized hierarchical structure to ensure that all parts of the organization operate according to these values. Alternatively, a company may allow regional offices to make business decisions that are sensitive to local customs. Whether or not a company chooses to enforce a central code of conduct should be dependent on the degree of cultural difference between the parent company and its regional offices. Liouville & Nanopoulos state, "Local differentiation is advantageous when it is applied in countries with differing cultures, whereas globalization is necessary when the national cultures are similar." If a company spans regions with similar cultural values and customs, implementing a common set of ethical standards may be advantageous. There are established groupings of nationalities with similar cultural values: English speaking, Western European, Islamic, etc (Schwartz, Fig. 4). However, in today's global environment fewer and fewer companies operate solely within one of these groupings. These dispersed companies may find that a central ethics policy is detrimental to the business success of the company. If the culture of the country where the subsidiary is located is different from the culture of the country of the parent company, the autonomy given to the subsidiary limits conflicts and encourages performance improvement [Liouville & Nanopoulos, 1996/2 p 103; Ghoshal & Nohria 1989].
The success of transnational [hybrid] organizational structures that provide certain centralized control functions while delegating operational control to subsidiaries has been well documented (Bartlett & Ghoshal, 1988, 1992; Sohn & Paik, 2004; Yip, 1993). Hybrid organizational structures combine the benefits of centralized control and regional flexibility. Global companies would do well to modify their codes of conduct to a hybrid policy that recognizes regional differences. This hybrid organizational structure combined with a hybrid code of conduct will provide subsidiaries with the flexibility to make decisions, within an agreed strategic direction, while allowing the businesses to recognize regional cultural sensitivities. This structure will help to ensure that regional management makes decisions that will keep employees engaged, customers satisfied, and yield positive business results. "At the level of the organization of subsidiaries abroad, a style of management contrary to the culture of the local workforce should be avoided" [Liouville & Nanopoulos, 1996/2 p 115-116]. This hybrid code of conduct will identify cultural diversity within the company and help to create an environment where decision-making is consistent with a global ethics policy while prioritizing regional cultural differences where appropriate. This will avoid situations where the parent company's ethics policy supersedes local cultural values and will ensure that local employees and customers feel respected. A mismatch between local customs and managerial style could result in a de-motivated workforce, low employee retention rates, and a confused customer base. For this reason, local management must be extremely knowledgeable of the local culture. Several additional changes may also improve regional decision-making. Clearly defining a long-term strategic direction and clearly defining the roles and decision rights between headquarters and the local leadership [Olsen, Pinto and Virji (2005)] will help to delineate responsibility.
The organizational structure of a global company plays an important role in the success of decisions made at the regional level. Centralized business structures can often be too strict to allow culturally sensitive decisions to be made by local management. A careless transition from an autonomous structure to a centralized structure can cause problems between corporate and local business units and negatively influence business performance. A global company will succeed if it can maintain a balance between centralized control and autonomous regional control that will foster decision-making that takes into account cultural differences.
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