Advances In Management Vol. 7(2) February (2014) Evolving Relationship between the Parent and Subsidiaries in Multinational Companies Miroshnik Victoria1* and Basu Dipak 2 1. School of Business Administration, T okyo International University, JAPAN 2. School of International Economics, Faculty of Economics, Nagasaki University, JAPAN *vmiroshnik1969@gmail.com Abstract There are some specific espoused values in every important multinational company which form their organizational cultures and create values which in turn may form commitment of its employees. These commitments are the indicator of successful performance of a company because creation of commitment leads to success of the company. We can call this interrelationship between culture and commitment as company citizenship. This company citizenship can be transmitted from one part of the globe to another by a multinational company through the transmission of its organizational culture, as a part of the company‟s strategic management process. There are some specific espoused values in every important multinational company which form their organizational cultures and create values which in turn may form commitment of its employees. The transmission of organizational culture from the headquarters to subsidiaries appears to be a core of the mechanism of managing overseas subsidiaries in multinational companies. The problem of setting up operations in a foreign country with a very dif ferent culture has its transaction cost. The thrust of the argument regarding the transaction cost is that companies design their managerial control to promote the reductions of these transaction costs. Both political and cultural problems reinforce the transaction cost arguments. The central question in the literature on MNCs is the extent to which their various foreign affiliates (or subsidiaries) act and behave as local firms versus the extent to which their practices resemble those of the parent corporation or some other global standard. Formation of this company citizenship based on firm‟s organizational culture creates unique competitive advantage of a multinational company as the part of its international strategy. A company citizenship can be formed even in a country with a very different national culture because the strong organizational culture of a multinational company which gave rise to the values of corporate management and operations management, can override difference in national culture between the home and the host countries of multinational companies. Keywords: Multinational Companies, Strategy, Cultural Control, Parent Subsidiary Relationship. This paper is trying to evaluate the above concept in modern business world that the multinational companies, not countries, are establishing their own cultures over the globe. The corporate cultures of leading multinational companies are forming their own company citizenships within their borders and spreading their way of doing things globally. As there are different multinational companies with different organizational culture, there would be different company citizenships for different multinational companies rather than just one AngloAmerican „jet-set Global‟ culture124 . Introduction A multinational company (MNC) today is becoming the central agent promoting globalization. Operating across products and markets, nations and cultures, MNCs face diverse problems and complex situations and therefore, create the most complex form of organization in existence. The transmission of organizational culture from the headquarters to subsidiaries appears to be a core of the mechanism of managing overseas subsidiaries in multinational companies 6,100. During the process of transmitting culture, a parent unit of a company should successfully transfer the set of the core values that compose its organizational culture from their parent unit to the subsidiaries worldwide. The „Jet-Set‟ culture emphasizes individualism, selfreliance, competition, uniqueness, hedonism and emotional detachment within a group. Vertical individualistic culture (US corporate culture) values competitiveness. Horizontal individualistic culture (Australia, Sweden) de-emphasizes 128 hierarchical differentiations . In this paper, we have tried to formulate a theory from the transmission of organizational culture and tried to evaluate it in the context of the literature on multinational companies. Effect of Globalization according to this concept is the creation of a „Jet-Set Culture‟ who belongs to an emergent global culture which promotes primarily the vertical individualistic US corporate culture irrespective of national boundaries 44 . This global culture consists of people who are attached to other members of this global culture through a process of self-selection. Core values of global managers * Author for Correspondence 1 Advances In Management Vol. 7(2) February (2014) 4 are not derived from ethnic group, national origin but from 38 a cultural cross-pollination . autonomy in relation to the HQs-subsidiary relationship are becoming extremely important. Some successful multinational companies are developing a common pattern of drivers of business practices through the formation of the „company citizenship‟ by transmitting the parent‟s organizational culture to the subsidiaries as the strategic cultural control of the subsidiaries to enhance performances. Parent-Subsidiary Relationship Multinational Companies Company Citizenship Advantage as a in the Analys is of the related literature revealed that the research on the multinational companies evolved into some critical directions over the last few decades. There was a shift in emphasis towards the multinational subsidiary as a unit of analys is. That approach created a good understanding of 6,33,84 the various strategic roles of the subsidiaries . Competitive Multinational companies are always interested to reduce the risk and uncertainty in overseas business operations 21. The problem of setting up operations in a foreign country with a very different culture has its transaction cost. The thrust of the argument regarding the transaction cost is that companies design their managerial control to promote the reductions of these transaction costs. Both political and cultural problems reinforce the transaction cost arguments. The continuous growth of a company is needed for the preservation of the values of organizational culture. Continuous progress and respect that can be gained to be associated with a company with continuous growth is the end objective of the employees. A deep religious value to perpetuate growth is also the objective of the corporate growth. Employees think and operate with their outlook for the long-term prospect of the organization and harmony with the work place and broad social environment. There are two types of analysis to reduce transaction costs through the increased efficiency of the subsidiaries. Many scholars in the domain of international business put emphasis on entrepreneurship or the autonomy of the subsidiaries as the major issue which would create resources like innovations, efficiency on supply of factors of production, technology of production and cost efficiency of distributions 116 . There are others who emphasize the adaptation of parent company‟s organizational culture and control of subsidiaries through culture to create „resources‟ in the subsidiaries to outwit their rival MNCs 10,95,96,120 . These feelings lead them to develop a family feeling within the work place and responsibility towards the fellow employees and the community at large. They believe they have a responsibility towards the organization and the local and global societies as a multinational company is a global organization. O‟Reilly, Chatman and Caldwell99 have identified certain dimensions of values of organizational culture. Shingo122 has defined values at the core of the operations management system of Toyota. These values are innovation, stability, respect for people, outcome orientation, detail orientation, team orientation and determination. These values are closely related to what Triandis 124 has described as „collectivist‟ values which should give way to the „individualistic‟ values in a fully „globalized‟ value system according to the supporter of the „Jet-Set Culture‟. The way in which the headquarters implement its international strategy across the globe can influence the structure of the HQ-subsidiary relationship. That leads to the issue of the transmission of organizational culture to the 3,107,138 subsidiaries as an international competitive strategy . Thus, the coordination and control mechanism is a basic issue of discussion in the related literature5,12,61 . The classic question is what Barney has raised14-17 in relation to Porter‟s theory108,110 of the competitive advantage of a firm whether culture can be a source of competitive advantage and therefore can be regarded as a strategic resource of a company. Organizational culture is an important resource of an MNC because organizational culture is unique and hard to imitate or competitors and which in case it is successfully transmitted to the subsidiaries, may influence the overall performance of the company53,83,84 . The subsidiary initiative is promoted by high level of distinctive subsidiary capabilities and is suppressed by a high level of decision centralization, a low level of subsidiary credibility and a low level of corporatesubsidiary communication. Subsidiary initiative leads to an enhancement of credibility, head office openness, corporate-subsidiary communication and distinctive 41,106 capabilities . Mechanisms of coordination are many which can be 83 divided into two main forms: formal and informal . Formal system has explicit rules and regulations. Informal system depends on a process of socialization and communications to inject the values of the organizations to individual members 89. The main research contributions on formal mechanisms came from Harvard Multinational Enterprise Project and from the Stockholm School60,61. Managers of multinational companies are expected to coordinate these subsidiaries so as to integrate them into a proper strategy to create unique resources against their rival companies. However, the most difficult part is to find a roadmap to implement such a strategy. Thus, the issues regarding globalization/localization19,21 and centralization/ 2 Advances In Management Vol. 7(2) February (2014) 93 mature, the subsidiaries started behaving in a „polycentric‟ way. The recent tendency of the subsidiaries is to follow 1 19 the „global standard‟. Adler and Bartlett and Ghoshal described the management practices of the MNC in terms of an overall orientation and evolution. A number of variables are important to classify the MNCs: “1) Environment/Industry; 2) Corporate level strategy; 3) Corporate level organizational design; 4) Subsidiary strategy/role; 5) Subsidiary structure; 6) Control 58 mechanism; 7) Human resource practices” . International comparative studies also mentioned informal cultural coordination through human resources management policies. Analys is of the internal structures, such as culture, is the key to understand the management of the multinational firms, particularly the coordination mechanism between HQs and subsidiaries. In a classical bureaucratic model of organization, coordination relies on the use of explicit formal rules and regulations. An organization with informal cultural coordination relies on an implicit organizationwide culture to influence the members of that organization. Mainly Japanese and Scandinavian companies follow this type of coordination through culture12,13,60,61,98 . Historically mainly the British multinational companies during the days of the British Empire and subsequently during the 1950s and 1960s used to employ management agents in their overseas subsidiaries, giving them a lot of freedom to manage those units. In the initial period of the global firms, from 1920 to 1950, European multinational firms used to have a decentralized country-centered strategy for control where subsidiaries were practically independent national entities focused primarily on their local market. Controls of the subsidiaries were in terms of long training of the host executives in the parent‟s countries and the extensive usage of executives of the home 83 country . Types of Multinational Companies and ParentSubsidiary Relationship Multinational companies are not homogeneous. The central question in the literature on MNCs is the extent to which their various foreign affiliates (or subsidiaries) act and behave as local firms versus the extent to which their practices resemble to those of the parent corporation or some other global standard48 . Peterson and Brock106 divided the development of the literature on multinational companies into four eras: the International Era (60s), the Global Era (70-80s), the Transnational Era (1990-2000s) and the Internal Era (2000 and future research). Older MNCs may enjoy the positive „influence‟ of age. They are likely to control more resources than younger firms because the accumulation of resources and capabilities may take 34 place over time . Affiliates of MNCs are traditionally viewed as mere instruments of their parents 33 . However, MNCs‟ affiliates evolve in both scale and scope over time and the interplay of affiliate level entrepreneurship and the affiliate‟s competitive environment could substantially impact on the overall performance of the MNC. Foreign affiliates learn from the host country environment and contribute substantially to their parent‟s stock of resources which in turn strengthen the MNC as a whole. These mechanisms became insufficient for managing subsidiaries characterized by high levels of intra-firm international interdependence, the management of which is 83,84 critical to many of today's complex global firms . In the next period, between 1950 and 1980, global firms tended to have a centralized hub with a global strategy where the subsidiaries had to implement functional strategies decided at the headquarters. The decision making process was highly centralized at headquarters. The subsequent period, started in the late 1970s, saw a strategy of „reciprocal interdependence‟ where managers tried to integrate multinational production centers with flows of materials, components, technology, financial resources, creative ideas and people. In this complex organizational structure, new informal mechanisms have to be added to the existing structural and formal managerial 4,6,106 devices . There are different types of MNCs depending upon their different management system and their different parentsubsidiary relationships. For example according to Perlmutter 105 , there are three types of MNCs: ethnocentric, polycentric and global. According to this typology, the management practices in foreign affiliates of MNCs could resemble those of the MNC's home country (ethnocentric), could conform to local practices of the affiliate's host country (polycentric) or could adhere to a worldwide standard (global). Examples of ethnocentric MNCs are the older American MNCs and recent Japanese MNCs. Examples of polycentric firms are normally older European MNCs. Examples of global firms are recent American and European MNCs where Japanese MNCs have not yet accepted this „global‟ standard38,42,51 . The headquarters-subsidiary relationship depends on the centralization or decentralisation of the decision making process 54 . However, a number of American multinational companies still prefer strictly controlled subsidiary units 83-85 using bureaucratic controls whereas some Japanese multinational companies are using organizational culture as control mechanisms for the subsidiary units 27 . International business literature also mentioned the area of network-based system where a subsidiary‟s position within its various networks can give it influence over the strategic decision making process of the MNC5 . It was suggested that a transition is taking place towards new modes of organizing transnational corporations' innovative activities. In the early days, subsidiaries of the MNCs observed „ethnocentric’ behaviour and when they became more 3 Advances In Management Vol. 7(2) February (2014) First, different units of multinational firms, including foreign-based subsidiaries, are increasingly involved in the generation, use and transmission of knowledge. Secondly, multinationals are developing external networks of relationships with local counterparts, through which foreign affiliates gain access to external knowledge sources and application abilities. As a result of this evolutionary process, multinationals' organization is subject to both centripetal and centrifugal forces. The summary of related literature is shown in table 1. normative integration and information exchange can enhance the salience of the convergent interests and in this situation local resources and autonomy may lead to more vigorous participation of the subsidiary in the tasks of creating, adopting and diffusing innovations that benefit the company as a whole.” Shared vision and creation of similar values for managerial philosophy can be more effective21 . Subsidiaries in turn can 106 have their own networks and strategies in local markets . Interestingly, that localization issue is getting increasingly important despite of the media advertisement for globalization. The relationship between the HQs and the subsidiaries may be different over time as a result. A combination of integration and national initiatives within a multifocal strategy has already gained importance112. Strategy-Structure Regarding the parent-subsidiary relationship, early literature on MNCs emphasizes the relationship between structure and strategy with an implicit assumption that structure would change in response to strategy19,105. Bartlett 19 and Ghoshal have mentioned three main types of MNCs from the perspective of the used dominant strategies such as global, multi-domestic and transnational. Global companies have centralised strategic plans with bureaucratic control (for Japanese companies with cultural control) with very low level of independence for the subsidiaries. Multi-domestic companies have low level of bureaucratic control but with average level of social and cultural influences. Transnational companies may have subsidiaries as strategic centres in certain cases. Subsidiaries are interdependent centres to develop products but their knowledge is shared. There is a low level of bureaucratic control from the HQs but a high level of cultural control from the HQs with continuous flow of people moving around between the HQs and the subsidiaries. Globalization/localization issues According to Bartlett and Ghoshal‟s 19,21 typology, an MNC is a portfolio of differentiated but interdependent subsidiaries based on the strategic importance of the local environment and the competencies held by the local organization58 . Based on these, four generic roles of national subsidiaries can be imagined: the strategic leader (strong locational advantages and competencies), the implementer (weak locational advantages and competencies); contributor (weak location with strong competencies) and the „black hole‟ (strong locational advantages and weak competencies). Bouquet and Birkinshaw 39 have mentioned that the recent advances in information technology may have changed this structure a little where the HQ may subdivide activities among the subsidiaries to perform different roles. Japanese subsidiaries in the USA are largely „contributors‟ rather than „strategic leaders‟ for production. They benefit from the transfer of competencies developed in Japan; they operate in the USA in an environment with relative 133 locational disadvantages . Thus, there is a close link between the strategy and structure of MNCs of different types. Harzing58 also supported Bartlett and Ghoshal‟s 19 theory and found that global companies with centralized control are opposite to multi-domestic companies with fairly autonomous subsidiaries. However, the transnational companies combine the characteristics of both global and multidomestic companies. Role of Subsidiary Subsidiaries may have different roles given according to their unique resources. As the subsidiaries may face different problems and situations than other subsidiaries and the HQ they may receive a different administrative 136 system . That has provoked some authors to accept subsidiaries as units of analysis to analyze the strategic roles of the subsidiaries which are different for different 84 countries . That has a close relationship with the „World Product Mandate‟ concept where a subsidiary may receive reinvestments from the local government and may have superior resources as a result33 . High or low levels of pressure to globalize may classify subsidiaries into different categories. So called „Integration-Responsiveness‟ (IR), can be a strategy for the subsidiaries 131 . This leads to the concept of „centre of excellence‟ for a subsidiary where a subsidiary in a specific location can be selected by the 5 HQ as the centre of excellence . The relationship between the HQs and the subsidiaries depends on the issue of centralization and the integration of 54 the subsidiaries in the decis ion making process . The issue 106 here, according to Peterson and Brock is: “… how to integrate portfolio of subsidiaries to maximize their 21 usefulness to headquarter”. Bartlett and Ghoshal observed that there may be a positive relationship between the innovation achievements of a subsidiary and its close integration with the overall strategy of the HQ of a multinational company. The control methods of the HQ depend on this relationship21,22 . There may be positive relationship between centralization and global product standardization and a negative 54 relationship between centralization and local modification . 21 According to Bartlett and Ghoshal , “High levels of 4 Advances In Management Vol. 7(2) February (2014) Centratralization vs. autonomy issues from a formal structure of management to a network and a change of focus from the HQ to the subsidiary. The dominant role of the HQ may be replaced by a period of increasing heterarchical behaviour of the subsidiaries 58 . Centralization is important in mainly American MNCs, in new subsidiary developments rather than in an already established company purchased by an MNC, in large subsidiaries and major MNCs with a large international organization. The age of a subsidiary is also important132 . A multi-domestic MNC is a group of quasi-autonomous 112 entities . An MNC with a globally integrated strategy requires a more complex system of subsidiary management. A more globalized MNC has more centralized controls. Hierarchical vs. Heterarchical approaches Transnational structure is more heterarchical than the traditional multinational structure. Formal control of the subsidiaries gave away to cultural control in some c ases111. Autonomy is considered to be beneficial not only for the subsidiary but also for the HQ. MNCs of Swedish origin 60 display more „heterarchical‟ structure which may create more knowledge, ideas and opportunity for both the subsidiaries and the HQ. These subsidiaries focus on the local environment and the HQ begins to lose its centrality in this view of organization106 . A subsidiary with a close relationship with the local firms has a lower level of HQs control5 . A subsidiary of a company with a higher level of corporate relationship with the HQs has more central control while subsidiaries in high technology areas have a higher degree of independence. A subsidiary with extraordinary resources and a specialist in products normally has a higher degree of autonomy136. A subsidiary with higher technological ability normally has a higher degree of independence but a firm in a knowledge industry, for example, may have a higher degree of central 19 control . That leads to the discussion between two types of development regarding the HQs-subsidiary relationship. Centralized organizations are hierarchical whereas decentralized organizations are heterarchical60 . Acquired subsidiaries have a greater degree of autonomy than Greenfield operations. Industries in the newer fields like information technology may have a higher degree of autonomy but large manufacturing industries like automobiles or heavy industries may have a lower level of 61 autonomy and a higher degree of integration . Subsidiaries start with market seeking ventures but as they grow older, they develop their own resources and build some unique capabilities. There are external and internal environments of a subsidiary. Subsidiaries engage in entrepreneurial activities to enhance their competitiveness given their capabilities. Alte rnative Relationship Models of 136 According to White and Poynter there are three types of subsidiaries: (1) World Product Mandate subsidiaries (WPMs) that are allowed to have autonomy to develop a new product to be distributed worldwide in different subsidiaries, (2) Subsidiaries that have specialised productions and as a result a higher degree of autonomy and finally (3) Subsidiaries that are operating within the local specialised market and exercising relative independence. Certain subsidiaries may have the role of COE (Centre of Excellence) to capitalize on unique 18 resources of location for the MNC as a whole . There may be a relationship between the size and the autonomy of the subsidiaries but the conclusions are not definite132 . HQs-Subsidiary The HQs-Subsidiary relationship is mainly concerned with the control of subsidiaries and maximising their potentials for headquarters 106 . The nature of these controls moved from formal restrictions of autonomy to a flexible cultural control120. The key findings are that internal products flows are lower in the WPM system than in other systems of subsidiaries. In general, lower autonomy implies higher intra-network goods‟ transfer60,61 . The level of performance can be lower 36 in the subsidiaries producing specialised products . Subsidiaries require resources, regarding finance, technology, management and information; autonomy alone cannot improve performance. Among the range of models of the MNC subsidiary-HQ relationships, Bartlett and Ghoshal‟s 21 typography has indicated a number of different types of subsidiaries from the perspective of the ability to carry out the different innovation tasks such as creation, adoption and diffusion. A three-fold typology of subsidiary roles such as world product mandates (WPM), specialized contributor and local implementer proposed in the related literature was confirmed by the empirical study by Birkinshaw et al36 . In another study Birkinshaw et al35 described several factors that can change the role of a subsidiary such as local environment, changes in global environment, competition from other countries and subsidiary‟s desire to have autonomy. Subsidiaries may create entrepreneurial activities as a result of limited resources, improve the utilization of resources or lend out resources in unique ways. Thus, two significant changes emerged in the MNC literature shift from hierarchy to „heterarchy‟ structure i.e. Considerable efforts are then necessary to use for innovation of the coordination procedures and mechanisms in order to enhance the generation, circulation and use of knowledge106,138. Intra-company transfers become ever more important with the increased interdependence of subsidiaries: a significant share of the enormous contribution of MNCs to world trade and investment comes from intra-firm trade that involves dispersed sourcing of raw materials, manufacturing of components and use of 5 Advances In Management Vol. 7(2) February (2014) transnational distribution channels. These exchanges are accompanied by interpersonal interaction among managers in different organizational units i.e. headquarters and subsidiaries. Such interactions across borders are the channel for achieving coordination on a global scale. Interactions across distance are critical because they ensure the MNC's integration and existence as a single entity. Recent theoretical developments have led to the conceptualization of interactions across subsidiaries as a network when the MNC structure has evolved into a complex differentiated system22,58 . MNCs respond to complex global competitive environments by increasing internal structural complexity. new problems for the managers to apply a strategy 111 worldwide. Indeed, according to Prahalad and Doz , 21 58 Bartlett and Ghoshal and Harzing formal control in the HQs-subsidiary relationship may not necessarily be more effective than cultural control. Ouchi95,96 and Jaeger71 were among the first authors who attempted to differentiate the multinational companies into two main categories: American style organizations and Japanese style organizations. In the American style organization the characteristics are (a) short term employment; (b) individual decision-making process; (c) individual responsibility; (d) rapid evaluation and promotion; (e) explicit formalized control; (f) specialized career path; (g) segmented attitude. In the Japanese style organization the characteristics are (a) long term employment; (b) consensual decision-making process; (c) collective responsibility; (d) slow evaluation and promotion; (e) implicit informal control; (f) non specialized career path and (g) holistic attitude. The need to disperse activities throughout the world due to political, technological and even sheer size-related considerations forced managers to partly forego potential economies of scale that would accrue from concentration of activities. However, at the same time, the competitive pressures that impel coordination of the widespread activities of the multinational corporation grow constantly. This dual tendency puts the organizational abilities of MNC managers to the test to coordinate even more closely operations that tend to be farther apart, not only geographically, but also technologically. That leads us to the typology of Ouchi95,96 . According to Ouchi95 , there are three types of multinational organizations: Type A, Type J and Type Z. Type A refers to the typical American organizational style of management of MNCs whereas type J refers to the typical Japanese organizational style and type Z refers to the emerging „ideal‟ organizational style. In a Japanese company (Type J), coordination is based on a broad organizational culture which is different from the American style of organization (Type A) and the emerging Western or global ideal style (Type Z). The MNC has two competitive focuses: external competitive area outside the MNC and internal competitive area within the MNC; each of these poses threats and opportunities for the subsidiaries. A subsidiary more focused on external competition may have more autonomy; a subsidiary focused mainly on the internal area is more integrated and has less autonomy. If a subsidiary is embedded within corporate relationships there will be more control by the HQ on the subsidiary. A product-specialist 37 subsidiary is controlled more intens ively by the HQ . A high degree of autonomy of a subsidiary is important for local and global market initiatives but a low degree of autonomy is associated with internal market and hybrid initiatives. Type A (American organizations) has explic it formalized coordination over subsidiaries. Type J (Japanese organizations) with collective responsibility has implicit informal coordination. Type Z (emerging global organizations) has implicit informal coordination with explicit formalized measures. This type of company has values which are shared by the members of the organization as well as a model code of conduct for the members. Type A subsidiary would have a reasonable flexibility to adapt to the local laws and customs. In both type A and type Z, responsibility depends upon the individuals and thus the type J and type Z may not allow these flexibilities 95,96 . However, viewing multinationals in terms of an overall orientation obscures the internal differentiation of management practices within an MNC19 . An MNC should be properly viewed as a nexus of differentiated practices. According to this view, MNC affiliates are composed of many separate practices, ranging from manufacturing to finance and human resources, each of which faces distinct pressures for global efficiency and for local responsiveness. Subsidiary initiatives can be of many types depending on the target-market, local, global, internal or hybrid. A high degree of internal communications promotes the internal market where a lower degree of communication may promote the local market. Ouchi‟s analysis is criticized as too idealistic, as in reality not all American, Japanese, or Western companies have the 25,119 same characteristics . For example, a number of Scandinavian companies appear to have some features similar to the above mentioned Japanese (Type J) styles organizations 60,61 . However, analysis of the literature reveals the fact that an individualistic culture fits with American style organizations (Type A) and a collectivist culture fits with Japanese style organizations (Type J)98. Thus, the question is whether the Japanese style organizational culture can be transmitted to a subsidiary in Role of Culture in MNCs Culture plays a big role in this integration of strategy, goals and values. However, at the same time culture may create 6 Advances In Management Vol. 7(2) February (2014) a country where the national culture is dissimilar to that of Japan. effectiveness 10,27 . Indeed, the type J multinational companies rely on informal, implicit mechanisms for control based on the organizational culture and tend to export that kind of cultural coordination to their foreign subsidiaries 6,11 . Moreover, the type J organizations use managers as bearers of organizational norms and values in a subtle and complex coordination system100 . In those organizations the internal organizational culture of the foreign subsidiary is expected to resemble that of the home operation. Coordination of the subsidiaries through organizational culture rather than bureaucratic structure is only possible if the values of the organizational culture of the parent unit can be transmitted to the overseas subsidiaries 10 . When a number of key or pivotal values concerning organizational related behaviors and state of affairs are shared across units and levels by members of an organization a central value system may emerge57. To characterize an organization‟s culture in terms of its central values require first to identify these values and to measure the importance the members of the organization normally attach to these values. Managers in MNCs form a social network that stretches across continents. That can lead to cultural changes in the subsidiaries. Indeed, to achieve integration without destroying subsidiary autonomy, administrative means of coordination are increasingly complemented by normative ones that are based on enhanced socialization to instill espoused corporate values and increased reliance on lateral linkages 97 . Organizational culture is the glue that binds different geographically dispersed units of an MNC. If the employees are attached to these central values of the organization, performance of the organization increases because of the increased commitment of the members of the employees 2 . In order to examine this hypothesis, it is essential to explore: whether the employees have similar values to those espoused by the organization and whether the values of the organizational commitment are related to the values of the organizational culture. A multinational company can have a strategic advantage over its rivals as the values of the organizational culture cannot be replicated easily in a different type of organization and thus, these values of the organizational culture create distinct competitive advantages for this multinational 14,15,17,108-110 company . The purpose of „coordination through organizational culture‟ is effective only when this coordination creates competitive advantages for the subsidiaries by creating commitments among the employees of the subsidiary units by making the values of the employees of different national cultures similar to the espoused values of the parent organization113,134,135 . Control of subsidiaries through organizational culture to reduce transaction costs means transmission of the parent organizational culture as a part of the strategic planning process of the multinational company so as to mold the foreign employees psychologically in order to carry forward the original organizational purpose of the parent 25,27 company . This transmission of organizational culture may reduce transaction cost by reducing uncertainty regarding the motives and behaviour of the foreign employees 10,104 . Transplantations of organizational culture of the parent operation to its overseas subsidiaries create certainty regarding the behaviour of the employees of host national origins 5,23,113 . Transmission of Culture from the HQs to the Subsidiaries in Multinational Companies Development of a strong organizational culture that includes a deep knowledge of the company‟s policies and objectives and a strong share of organizational values and beliefs, now involves a process of corporate acculturation and socialization involving all employees at both subsidiaries and in the headquarters 120. Procedural justice enhances subsidiary- managers' compliance directly and indirectly through the attitudes of commitment, trust and outcome satisfaction. These effects were more powerful for managers of subsidiaries operating in global industries 35,48,62 . Indeed, strong organizational culture is now critical for MNCs in the age of global competition. Corporate values that care for the employees as individuals and promote the meaning and purpose of the organization are critical for the success of the company32,76,123 . Interactions among the employees and senior managers can affect the outcomes of participations. Multinational companies can create unique resources for competitive advantages in their overseas subsidiaries if they transfer successfully the values of their organizational culture to these subsidiaries and can create similar organizational commitments among the employees 102,118 in overseas . Direct monitoring, reporting and evaluations of performances are called „first order coordination mechanisms‟ whereas creation of shared values of a strong organizational culture and indirect internalization of a set of values common in the HQS to guide the behaviors of the employees is called „second order coordination 120 mechanisms‟ . Japanese multinational companies, the Type J multinational companies, usually rely on the „second order coordination mechanism‟ in HQssubsidiaries relationship to enhance organizational This type of organization is called „Type Z‟ organization with long-term employment, consensual decision-making, individual responsibility, slow evaluation and promotion, moderately specialized career paths and holistic concern including the family80,81 . Such organizations rely upon informal, implicit mechanisms for coordination based on the organizational culture and try to export their own 7 Advances In Management Vol. 7(2) February (2014) national character to their foreign operations. of such activities are low employee turnover and a greater control. However, the disadvantages are possible conflict with local culture and therefore, less flexibility for subsidiary management. Normative integration is possible there through a typically strong organizational culture which they try to export to their subsidiaries 52 . This strategy is implemented using extensive personal contacts, training and socialization to transplant the original value system of the parent company to their overseas subsidiaries. Social coordination as used by the Japanese multinational companies using organizational culture increases the ability of the company to influence the local subsidiaries to behave according to the company‟s ultimate purpose to create commitment97 . From the perspective of the operations of the management systems, Japanese subsidiaries outside Japan have three distinctive types : transplants, hybrids and branch-plants. It is the result of gradual evolution of the transmission mechanism of the Japanese management system to the subsidiary51 . During the 1980s and 1990s Japanese headquarters used to transplant Japanese management and production techniques directly from home to the overseas subsidiary117 . Through rotations of different functional areas, the employee comes across the corporate ideology and the values of the organization as a whole. It works through the human resource management system of the company whose duty is to familiarize the employees to the organizational culture of the company. For example, the trust can be created through frequent interactions between the members and the consensual decision making process 88. Stability and harmony in relationship are the core elements of this organizational culture. Since the 1990s onwards a hybrid system of home and host management systems influenced different production and organizational relations 1 . In its weakest version, some specific best practices were implemented in the subsidiary leaving other elements incompatible with the local cultural characteristics and business practices as local as possible94 . The third approach is the branch-plant where the subsidiary plays a subordinate role and acts as a site within a wider international division of operations, playing a specific 5 selective role in a wider context . Thus, transplant of organizational culture was evolutionary but it was a strategy to start with for the Japanese MNCs. For example, in Japanese multinational companies the human resources management division or „Jinjibu‟ creates international, interpersonal verbal information networks 26 throughout the company worldwide . It emphasizes conflict avoidance, respect and concern for people, importance of long lasting relationships with others, harmony, uniformity, group orientations and consensus orientations. The end-result is very high level of loyalty for the company77 . Besser31 analyzed successful Toyota plants in the USA and found out they have almost identical personnel management system as in the Japanese Toyota‟s plants. Basu et al26 found similar characteristics in Japanese automobile plants in Britain. Basu et al25 considered this characteristic of Japanese MNCs as their global strategy. Although there are high risks of failure to take into account of the local environment, the success can yield a substantial competitive advantage in terms of both productivity and quality of the final products. Even in the hybrid version where the subsidiary can have substantial freedom, the basic elements of the Japanese management system are implemented in all plants of major Japanese MNCs 51 abroad . Cultural influence is the outcome of transfer of organizational culture from home to host countries of a 63,64 multinational company . It gives rises to a new model of MNCs. A high ratio of expatriate managers and the tendency of the subsidiary to leave much of the strategic and business decision-making in the hands of the HQs are the characteristics of these type of MNCs 70. Japanese multinational companies are typical examples. HQs-Subsidiary Manage ment Multinational Companies in Japanese The principal challenge of top management is to create an environment in which people can exploit information more effectively; in this regard, networking is the key concept. Networking based on personal relationships is effective in communicating complex information, sensing subtle 73,76 signals and transferring knowledge . „Keiretsu‟ or extensive networking is the core characteristic of HQssubsidiary management in Japanese corporations and it is extended to most Japanese multinational companies. „Keiretsu‟ is an effective instrument for the transmission mechanism of organizational culture of Japanese multinational companies who are using these networks to 91,92 create that coordination at all levels . The HQs-subsidiary management in recent years has seen three major types such as type A (American system) and type J (Japanese system) and type Z (emerging global system) associated with the matching overall organizational 95,96,119 style of the multinational company . In both type J and type Z companies through constant personal interactions with headquarters, members remain in close contact with the rest of the world and usually the firm of this type tries to transfer its organizational culture to its overseas subsidiary12 . These activities are accomplished by an emphasis on the use of expatriates, extensive training and socialization and a high frequency of personal contacts between headquarters and the subsidiary119 . The advantages 8 Advances In Management Vol. 7(2) February (2014) As each phase is autonomous yet loosely linked, interaction between phases is induced and an abundant sharing of information is promoted in the innovation generation process. The same Keiretsu system provides competitive advantages for the Japanese firms worldwide by having a division of labor and production within a vast geographical area depending on the relative facilities for each country in that region. Japanese firms through the Keiretsu system embrace their partners in host countries and integrate their 28,69,87,92,131 production and distribution activities . Competitive advantages come from the community of firms rather than from a firm. involved in the corporate ideology and, therefore, accept 10. the values of the organization Indeed, the acculturation process works through the human resource management system of the company whose duty is to familiarize the employees from overseas subsidiaries to the values of the organizational culture of the parent unit of a multinational company117 . Conclusion The concept „Company Citizenship‟ has a fundamental ideal. It suggests that the central purpose of management is to facilitate communication across all of the organization‟s boundaries so that the entire company works together to address given business challenges. With efficient dissemination of culture, the company‟s ability to make decisions increases dramatically because individuals throughout the firm can gain access to important strategic ideas. This should be considered as unique hard-to-imitate resources, a very important factor for the international strategy of the MNC. This improves the firm‟s ability to make rapid decisions and execute them. This organizational culture to stimulate in-group responsibilities creates a culture of trust that enhances corporate performance of the firms within the Keiretsu 52,121 system . „Collectivism‟ of organizational culture along with the sense of interdependence promotes that corporate performance. Harmony of the firm, network and culture creates this competitive advantage by creating organizational commitment. If an organization has a „strong culture‟ with „well integrated and effective‟ set of values, beliefs and behavior, it normally demonstrates high level of 10 corporate performance . Some of the characteristics of organizations mentioned above may have relationship with successful administrative practices, positive attitudes of the 88 workers and as a result, higher levels of productivity . The key is to create an environment of understanding the core goal of the organization and the set of values associated with them which form the organizational culture of the company. The leaders of the organization must take the reins in galvanizing and maintaining a persistent effort towards creating and then promoting these valuecomponents of organizational culture throughout entire organization through the purposeful managerial activities. That would create resources both in the HQ and in the subsidiaries to outwit the rival firms. Thus organizational culture can be utilized as a „resource‟ in the international strategy of an MNC. Similarity of organizational culture creates the similar attachment for the employees in the subsidiaries as in the home operations of the Japanese multinational companies. Values, through efficient communications and socialization practices, promoted by the human resources management departments, can unite the multinational company globally. Prior research has demonstrated that a cultural change that results from continuous contact between two or more distinct cultural groups in their employment, commonly known as acculturation process 114 is possible. This process changes in individual‟s overt and covert traits when the individual‟s cultural group is experiencing acculturation collectively25,63,120 . As a result of such acculturation, the cultural, physical, psychological and social change in an 29,30 organization may occur . Many companies fear that a localization policy may weaken their connections with their foreign subsidiaries, weakening control over employees 75 . Cultural distance between the home operation and the foreign subsidiary operations can be reduced by transmitting organizational culture from the HQs to the subsidiaries. In that case, the transfer of responsibility from the parent to local subsidiaries would be less of an obstacle to organizational efficiency than expected. This acculturation process takes place through the cultivation of an appropriate organizational culture to create unique resource for the MNC as its international strategy. Indeed, the influence of organizational culture is the most important feature in the Japanese companies 12,23,69. All the organizational members are being acculturated and socialized towards a common set of organizational 95,96 values . Cultural influence emerges from these organizational values in a very implicit and informal way. The frequent interaction of the organizational members through the consensual decision-making process intensifies this influence23,27 . Physical as well as the mental proximity are indispensable for the success of this type of 20,67,95 influences . The non-specialized career paths using multi-functional teams bring the employee closer to the 74 overall organizational philosophy . Through rotation to different functional areas, the employees are led to be Creation and sustenance of organizational culture in a Japanese multinational company is the responsibility of the human resources division or ‘Jinjibu‟ in Japanese. This Jinjibu divis ion is the heart of the organizational culture where either junior and senior employees, Japanese or foreigners, all are exposed to the acculturation process while they receive various trainings in the HQs over the entire life of their employment. The core responsibility of the HRM divis ion in this type of organization is the 9 Advances In Management Vol. 7(2) February (2014) eds., Subsidiary –headquarter relationship in international business networks, Uppsala: Department of Business Studies, 107-127 (1996) creation, development and transmission of values that form the organizational culture of this company throughout the entire organization whether it is a home operation or an overseas operation. 5. Andersson U. and Forsgren M., Subsidiary embeddedness and control in the multinational corporation, International Business Rreview, 5(5), 487-508 (1996) Control of the subsidiaries through organizational culture rather than bureaucratic structure is possible only if the values of the organizational culture of the parent unit can be transmitted to the overseas subsidiaries. When a number of key or pivotal values concerning organizational related behaviors and state of affairs are shared across units and levels by members of an organization, a central value system may emerge. To characterize an organization‟s culture in terms of its central values, it requires first to identify these values and to measure the importance of the members of the organization normally attached to these values. If the employees are attached to these central values of a multinational company, performance of the company may increase because of the increased commitment of the members of the employees. 6. Andersson U., Forsgren M. and Holm U., The strategic impact of external networks: subsidiary performances and competence development in the multinational corporation, Strategic Management Journal, 23, 979-996 (2002) 7. Andersson U., Managing the transfer of capabilities within multinational corporations: the dual role of the subsidiary, Scandinavian Journal of Management, 19(4), 425-442 (2003) 8. Aoki M., Information, incentives and bargaining in the Japanese economy, Cambridge, Cambridge University Press (1988) 9. Aoki M., Towards an economic model of the Japanese firm, Journal of Economic Literature, 28, 1-27 (1990) These controls create competitive advantages for the subsidiaries by creating commitments among the employees of the subsidiary units by making the values of the employees of different national cultures similar to the espoused values of the parent organization. To achieve integration without destroying subsidiary autonomy, administrative means of coordination and control are increasingly complemented by normative ones that are based on enhanced socialization to install espoused corporate values and increased reliance on lateral linkages to maintain them. 10. Aoki K., Transferring Japanese Kaizen activities to overseas plants in China, International Journal of Operations & Production Management, 28 (6), 518 – 539 (2008) 11. Avolio B. J., Weichun Z., William K. and Bhatia P., Transformational leadership and organizational commitment: mediating role of psychological empowerment and moderating role of structural distance, Journal of Organizational Behavior, 25(8), 951 – 968 (2004) 12. Baliga B. R. and Jaeger A. M., Control systems and strategic adaptation: lessons from the Japanese experience, Strategic Management Journal, 6, 115–134 (1985) From the above discussion we can conclude that the hypothesis of „Company citizenship‟ is an evolving concept increasingly adopted by the multinational companies but its solid applications are in the Japanese and Scandinavian multinational companies so far. Multinational companies from other countries are slowing adopting some features of this evolving concept but they have not embraced this concept wholeheartedly yet. Thus the hypothesis is partially satisfied. 13. Baliga B. and Jaeger A., Multinational corporations: control system and delegation issues, Journal of International Business Studies, 25-40 (1984) 14. Barney J. B., Organizational culture: Can it be source of sustained competitive advantage? Academy of Management Review, 11, 656-665 (1986) 15. Barney J., Firm resources and sustained competitive advantage, Journal of Management, 17(1), 99–120 (1991) References 1. Adler P. S., Hybridization: human resources management in two Toyota transplants, In: Liker J. K., Fruin W. M. and Adler P. S., eds., Remade in America: Transplanting and Transforming Japanese Management Systems, Oxford, OUP (1999) 16. Barney J. B., Is the Resource-based View a useful perspective for strategic management research? 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Whole Conceptual As a methodological review, this paper delineates 6 configuration approaches to researching cross-cultural management issues: parochial, ethnocentric, polycentric, comparative, geocentric and synergistic. Specific Conceptual Typology based on pressure of globalizations and global subsidiaries subsidiary mandate or world product mandate on subsidiaries 1 Perlmutter 2 Ouchi95,96 3 Rugman and 115 Bennet 4 Adler 5 White and Poynter 136 6 Baliga and Jaegar12 Porter108 Specific Subsidiaries Whole configuration Empirical 8 Gates and 54 Egelhoff Specific subsidiaries Empirical 9 Prahalad and Doz112 Bartlett and Ghosal19 Jarillo and 85 Martinez Whole Organization Specific subsidiaries Specific Subsidiaries Spain Specific Subsidiaries Swedish companies in Europe Subsidiaries Empirical HQ & Subsidiaries Empirical HQ and Subsidiaries Empirical Subsidiaries HQ and Subsidiaries Specific Subsidiaries (Britain) Specific Subsidiaries (Thailand) Empirical Empirical 7 10 11 1 12 Hedlund61 13 Birkinshaw et al36 14 Selmer and De Leon120 Andersson and Forsgren5 15 131 16 17 Taggart 58 Harzing 18 Doeringer, Lorenz and Terka48 Onishi98 19 Comparative analys is of American bureaucratic control and Japanese cultural control of subsidiaries Typology based on country centered strategy, global strategy and complex global strategy of subsidiaries in relation to the HQ. The influence of company-wide conditions on centralization is much more than the influence of subsidiary-level conditions. Typology based on Multi-focal strategy, integrated product strategy and locally responsive strategy Typology based on strategic leader, contributor and local implementers, subsidiaries in relation to the HQ. Typology based on receptive subsidiary, autonomous subsidiary and active subsidiary Conceptual Empirical Empirical Empirical Characteristics of the Swedish model of HQ-subsidiary relationship have a new tendency of a slightly more formal control. Empirical High autonomy subsidiary and development Cultural control of the subsidiaries. independent product Bus iness embeddedness and technical embeddedness with the HQ have influences on the subsidiary's market performance. Measures of subsidiary autonomy A three-fold typology of multinational companies: global, multidomestic and transnational is developed. 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Tjosvold D., Employee involvement in support of corporate values in successful organizations: groups, cooperative interaction and influence, International Journal of Value-Based Management, 11, 35–46 (1998) (Received 10 2014) 15 th th December 2013, accepted 05 January Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Meyer, P. (2018, September 08). Starbucks Coffees Organizational Structure & Its Characteristics. Retrieved from http://panmore.com/starbucks-coffee-company-organizational-structure BUSINESS, MANAGEMENT Starbucks Coffee’s Organizational Structure & Its Characteristics UPDATED ONUPDATED ON SEPTEMBER 8, 2018 BY PAULINE MEYER A Starbucks café at the Shinbashi Yurikamome train station in Tokyo. Starbucks Corporation’s (Starbucks Coffee Company) organizational structure evolves to support business growth in the global coffee and coffeehouse industry. (Photo: Public Domain) Starbucks Corporation (Starbucks Coffee Company) uses its organizational structure to facilitate business development in the global coffee industry. As the largest coffeehouse chain in the world, the company maintains its industry leadership partly through the appropriateness of its corporate structure. A company’s organizational or corporate structure influences all areas of the business, including management and leadership, communication, change strategies and management, and other variables critical to business success. Starbucks evolves to ensure that its organizational structure matches current business needs. For example, the company adjusted its corporate structure upon expanding its business through the acquisition of other firms, such as Ethos Water and Seattle’s Best Coffee. Such adjustment makes Starbucks Corporation’s organizational structure specific to the needs of the business. This structure fits within conventional typologies of organizational structures. Similar to the case of other multinational organizations, the company employs its structural characteristics to ensure that its operations are streamlined and properly managed. Starbucks Coffee Company supports its competitive advantages through the characteristics of its corporate structure. These competitive advantages are essential in interacting with the industry environment, which involves the strong force of competition shown in the Porter’s Five Forces analysis of Starbucks Corporation. The company competes against large and small coffeehouse businesses, as well as food service firms like McDonald’s, Dunkin’ Donuts, Wendy’s, and Burger King. Through the effective design and development of its organizational structure, Starbucks Corporation keeps growing despite competitive pressure from these firms in the international market. Starbucks Corporation’s Organizational Structure Type and Characteristics Starbucks has a matrix organizational structure, which is a hybrid mixture of different features from the basic types of organizational structure. In this case, the structural design involves intersections among various components of the business. For example, the company’s product-based divisions intersect with functional groups and geographic divisions, which in turn intersect with other parts of the organization. The following are the main features of Starbucks Coffee’s corporate structure: 1. 2. 3. 4. Functional hierarchy Geographic divisions Product-based divisions Teams Functional Hierarchy. The functional hierarchy feature of Starbucks Coffee’s organizational structure refers to grouping based on business function. For example, the company has an HR department, a finance department and a marketing department. These departments are most pronounced at the top levels of Starbucks’s corporate structure, such as at the corporate headquarters. This characteristic is hierarchical. For example, the corporate HR department implements policies applicable to all of the company’s cafés. The functional hierarchy of the corporate structure facilitates top-down monitoring and control, with the CEO at the top. Functional groups are responsible for the organization-wide development and implementation of Starbucks Corporation’s generic competitive strategy and intensive growth strategies. Geographic Divisions. Starbucks Coffee’s corporate structure involves geographic divisions, which are based on physical location of operations. The company has three regional divisions for the global market: (1) Americas, (2) China and Asia-Pacific, (3) Europe, Middle East, and Africa. Also, in the U.S. market, Starbucks Coffee’s organizational structure involves further geographic divisions: (a) Western, (b) Northwest, (c) Southeast, and (d) Northeast. Each geographic division has a senior executive. In this way, each local manager reports to at least two superiors: the geographic head (e.g. President of Europe, Middle East, and Africa Operations) and the functional head (e.g. Corporate HR Manager). This feature of Starbucks’s corporate structure enables closer managerial support for geographic needs. Each division head is given flexibility in adjusting strategies and policies to suit specific market conditions. Product-based Divisions. Starbucks has product-based divisions in its organizational structure. These divisions address product lines. For example, the company has a division for coffee and related products, another division for baked goods, and another division for merchandise like mugs. This feature of the corporate structure enables Starbucks to focus on product development. In this way, the company develops and innovates its products with support through its organizational structure. Such development provides competitiveness that the business needs, especially in considering the threats identified in the SWOT analysis of Starbucks Corporation. Teams. Teams are used in different parts of Starbucks Coffee’s organizational structure. However, teams are most visible at the lowest organizational levels, particularly at the coffeehouses. For example, in each café, the company has teams organized to deliver goods and service to customers. This feature of Starbucks’s corporate structure enables the business to provide effective and efficient service to consumers. Team effectiveness is a major determinant of the financial performance of franchised locations and company-owned coffeehouses. Starbucks’s corporate culture influences how such team effectiveness is achieved. The company’s development depends on team-based factors and associated human resource management strategies. Starbucks Corporation’s organizational structure has many characteristics. However, the ones enumerated above are the most significant in shaping strategic management decisions in the business. Also, different levels of the organization are responsible for maintaining the integrity of the corporate structure. The structural characteristics identified are the ones that matter most at the corporate level, involving Starbucks’s headquarters and executive direction. Starbucks Coffee’s Corporate Structure Development Starbucks Corporation reforms its organizational structure over time. By 2007, the company was expanding rapidly, such that it shifted focus away from customers and toward strategic global expansion. However, the business experienced significant decline in sales in that year. This decline was worsened because of the lack of focus on customer experience. When Howard Schultz resumed the CEO position in 2008, he changed Starbucks Coffee’s corporate structure to bring focus back onto customer experience. New regional divisions were created and teams at the company’s cafés were given better training. The current corporate structure of Starbucks is a result of reform to improve customer experience and business financial performance. The company recognizes the importance of strategic alignment involving various facets of the business. In this case, for example, aligning the corporate structure with trends in the coffee and coffeehouse industries stabilizes Starbucks’s market presence and market share. It is expected that the company’s future organizational structure will involve additional product-based divisions to account for further diversification. Its development history suggests that the company will continue acquiring more firms in the future to support its growth strategies. 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Corporate structure, ownership and the likelihood of innovation. Applied Economics, 28(6), 737-746. Sakhartov, A. V. (2016). Selecting Corporate Structure for Diversified Firms. In Academy of Management Proceedings (Vol. 2016, No. 1, p. 11521). Briarcliff Manor, NY 10510: Academy of Management. Smith, M. D. (1996). The empire filters back: Consumption, production, and the politics of Starbucks Coffee. Urban Geography, 17(6), 502-525. Starbucks Corporation – Form 10-K. Starbucks Corporation – Corporate Governance. COPYRIGHT NOTICE:This article may not be reproduced, distributed, or mirrored without written permission from Panmore Institute and its author/s.Copyright by Panmore Institute All rights reserved.Educators, Researchers, and Students:You are permitted to quote or paraphrase parts of this article (not the entire article) for educational or research purposes, as long as the article is properly cited and referenced together with its URL/link. Meyer, P. (2018, September 08). Starbucks Coffees Organizational Structure & Its Characteristics. Retrieved from http://panmore.com/starbucks-coffee-company-organizational-structure
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