International human resource management lesson 02

LESSON PERSPECTIVES AND APPROACHES OF IHRM CONTENTS 2.0 Aims and Objectives 2.1 Introduction 2.2 International Human Resource Management Approaches 2.3 The Path to Global Status 2.3.1 Export 2.4 Initial Division Structure (Early Stages of Internationalization) 2.5 International Division 2.6 Global Product/Area Division 2.6.1 Global Product Division 2.6.2 Global Area Division 2.6.3 Global Matrix Structure 2.7 New Types of Multinational Structures 2.7.1 Heterarchy 2.7.2 Transnational 2.7.3 Networked Firm 2.7.4 Keiretsu 2.7.5 Control and Coordination 2.8 Role of Human Resource 2.9 Strategies for International Organisations 2.9.1 Perlmutter’s Model 2.9.2 Bartlett and Ghoshal’s Model 2.10 Implications for Human Resource Management Policy 2.11 An Integrated Strategic Framework 2.12 Flexible Organisation: The EU Model 2.13 Context of Management and Organizations in Europe 2.14 Let us Sum up 2.15 Lesson End Activity 2.16 Keywords 2.17 Questions for Discussion 2.18 Suggested Readings 22 International Human Resource Management 2.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to: Distinguish between four types of international management approaches Describe mode of operation used in the various foreign markets Appreciate the strategic importance of the overseas operations 2.1 INTRODUCTION The Human Resource (HR) functions not operate in a vacuum As with other areas of the organisation, the shift from a domestic to a global focus affects the HR activities As a consequence, HR activities are determined by, and influence, various organizational factors, such as: Stage of internationalization; Mode of operation used in the various foreign markets; Method of control and coordination; and Strategic importance of the overseas operations to total corporate profitability To a certain extent, how the internationalizing firm copes with the HR demands of its various foreign operations determines its ability to execute its chosen expansion strategies Indeed, personnel policies should lead rather than follow international operation decisions (Svard, 1982) yet one could argue that most companies take the opposite approach— that is, follow market-driven strategies 2.2 INTERNATIONAL HUMAN RESOURCE MANAGEMENT APPROACHES The HRM uses four terms to describe Multi-National Corporations (MNCs) approaches to managing and staffing their subsidiaries: ethnocentric, polycentric, regiocentric, and geocentric These terms are derived from the work of Perlmutter (1969) who claimed that It was possible to identify among international executive three primary attitudes—ethnocentric, polycentric, and geocentric—toward building a multinational enterprise, based on top management assumptions upon which key product, functional, an geographical decisions were made To demonstrate these three attitudes, Perlmutter (1969) used aspects of organizational design, such as decision-making, evaluation and control, information flows, and complexity of organization He also included perpetuation, which he defined as “recruiting, staffing, development.” A fourth attitude—regiocentric— was added later (Heanan and Perlmutter, 1979) It is important to briefly outline them here, since they have a bearing on our discussion of the organizational structure and control mechanisms that are typically adopted by firms as their internationalization progresses The four approaches are: Ethnocentric: Few foreign subsidiaries have any autonomy; strategic decisions are made at headquarters Key positions at the domestic and foreign operations are held by management personnel of headquarters In other words, subsidiaries are managed by expatriates from the home country (PCNs) Polycentric: The MNC treats each subsidiary as a distinct national entity with some decision-making autonomy Subsidiaries are usually managed by local nationals (HCNs) who are seldom promoted to positions at headquarters Likewise, ‘PNCs’ are rarely transferred to foreign subsidiary operations Geocentric: Here, the MNC takes a worldwide approach to its operations, recognizing that each part (subsidiaries and headquarters) makes a unique contribution with its unique competence It is accompanied by a worldwide integrated business, and nationality is ignored in favour of ability For example, the chief executive officer of the Swedish Multinational Electrolux claims that within this global company there is no tradition to hire managing directors from Sweden, or locally, but to find the person best suited for the job, that is, the colour of one’s passport does not matter when it comes to rewards, promotion, and development PCNs, HCNs, and TCNs can be found in key positions anywhere, including those at the senior management level at headquarters and on the board of directors Regiocentric: Reflects the geographic strategy and structure of the multinational Like the geocentric approach, it utilizes a wider pool of managers but in a limited way Personnel may move outside their countries but only within the particular geographic region Regional managers may not be promoted to headquarter positions but enjoy a degree of regional autonomy in decision-making It may be seen as a precursory step towards geocentrism It should be stressed that the above categories refer to managerial attitudes that reflect the socio-cultural environment in which the internationalizing firm is embedded These attitudes also may reflect a general top management attitude However, the nature of international business often forces adaptation upon implementation For instance, a firm may adopt an ethnocentric approach to all its foreign operations, but a particular host government may require the appointment of its own people in the key subsidiary positions; so, for that market, a polycentric approach is mandatory, making a uniform approach unachievable Likewise, businesses active in Russia found that Western companies tended to maintain an ethnocentric approach to staffing despite attempts to “Russify” the local operations (Thornhill, 1996) Also, the strategic importance of the foreign market, the maturity of the operation, and the degree of cultural distance between the parent and host country, influence the manner in which the firm approaches a particular staffing decision In some cases, an MNC may use a combination of approaches—for example, it may operate its European interests in a regiocentric manner and its Southeast Asian interests in an ethnocentric way until there is greater confidence in operating in that region of the world Because of these operating realities, it is sometimes difficult to equate precisely managerial attitudes towards international operations with the structural forms The environmental contingencies facing the particular internationalizing firm influence its strategic position, managerial mindset, organizational structure, and staffing approaches The four typologies– international, global, multidomestic, and transnational–are useful illustrations of these linkages Check Your Progress Distinguish between ethnocentric and polycentric approaches of international management 2.3 THE PATH TO GLOBAL STATUS In addition to the strategic imperatives, mindsets, and staffing approaches outlined above, IHRM is affected by the way the internationalization process itself is managed Most 23 Perspectives and Approaches of IHRM 24 International Human Resource Management firms pass through several stages of organizational development as the nature and size of their international activities grow As they go through these evolutionary stages, their organizational structures change, typically due to the strain imposed by growth and geographical spread, the need for improved coordination and control across business units, and the constraints imposed by host-government regulations on ownership and equity Multinationals are not born overnight; the evolution from a domestic to a truly global organization may involve a long and somewhat tortuous process with many and diverse steps, as illustrated in Figure 2.1 Some firms may use licensing, subcontracting, or other operation modes, instead of establishing their own foreign production or service facilities Some firms are able to accelerate the process through acquisitions, thus leapfrogging over intermediate steps (i.e., move directly into foreign production through the purchase of a foreign rather than initial exporting, followed by sales subsidiary Some firms can be driven by external factors such as host-government action (e.g., forced into a joint venture) or an offer to buy a company Others are formed expressly with the international market in mind In other words, the number of steps, or stages, along the path to multinational status varies from firm to firm, as does the timeframe involved The following section examines the typical path from domestic to global organization and draws out key HRM implications Foreign Production Network of Subsidiaries Sales Subsidiary Exporting Licensing Subcontracting Source: Dowling et al (2001) International Resource Management (p 34) Figure 2.1: Stages of Internationalization 2.3.1 Export Exporting is typically the initial stage for firms entering international operations As such, it rarely involves much organizational response until the level of export sales reaches a critical point Of course, simple exporting may be difficult for service companies (such as legal firms) so that they may be forced to make an early step into foreign direct investment operations (via a branch office, or joint venture) (Erramilli, 1997) Exporting often tends to be handled by an intermediary (e.g., an export agent or foreign distributor – usually a HCN, as local market knowledge is deemed critical) As exports sales increase, an export manager may be appointed to control foreign sales and actively seek new markets This person is commonly from the domestic operations – that is, a PCN Further growth in exporting may lead to the establishment of an export department at the same level as the domestic sales department as the firm becomes more committed to, or more dependent on, its foreign export sales as Figure 2.2 shows 25 Perspectives and Approaches of IHRM Managing Director Production Manager Marketing/ Sales Manager Finance Manager Domestic Sales HR Manager Export Sales ? Figure 2.2: Export Department At this stage, exporting is controlled from the domestic-based home office, through a designated export manager The role of the HR department is unclear, as indicated by the dotted arrow between these two functional areas in Figure 2.2 Though there are HR activities involved (such as the selection of export staff), and perhaps training of the foreign agency staff, these activities are handled by the marketing department, or exporting staff, the HR department has little, if any, involvement with the development of policies and procedures surrounding the HR aspects of the firm’s early international activities (Welch, etc., 1997) 2.4 INITIAL DIVISION STRUCTURE (EARLY STAGES OF INTERNATIONALIZATION) As the firm develops expertise in foreign markets, agents and distributors are replaced by direct sales with the establishment of branch offices in the foreign market countries At this stage, the company creates an export division or function at the corporate home office and the export division head directly reports to the CEO As international sales increase further, local governments exert pressure on these growing markets for setting up on-site manufacturing facilities This prompts the company to set up a subsidiary and a branch office in the concerned foreign countries for economic reasons, as well as to demonstrate to the local government that it wants to be a good local citizen This new structural arrangement is shown in Figure 2.3 Each subsidiary is responsible for operations within its own geographic area, and the subsidiary manager reports directly to the export division head at the corporate office This arrangements is useful because it takes a great deal of burden off the CEO for monitoring and supporting the different subsidiaries in different foreign markets (Gupta, 2006) In the beginning, PCNs are usually posted to important positions because the firm has more confidence in them to implement proven home office human resource policies and practices This is known as the ethnocentric approach The decision to use PCNs leads into exportation of management issues and activities At this point the HR department becomes actively involved in the personnel aspects of the firm’s international operations 26 International Human Resource Management Chief Executive Officer Home office departments Production Marketing Finance Personnel V.P International operations Overseas subsidiaries France Japan Egypt Australia Argentina Source: International HRM (2006) S.C Gupta (p 136) Figure 2.3: Use of Subsidiaries during the Early Stages of Internationalization 2.5 INTERNATIONAL DIVISION For some firms, it is a short step from the establishment of a sales subsidiary to foreign production or service facility This step may be considered small if the firm already is assembling the product abroad to take advantage of cheap labour or to save shipping costs or tariffs For some firms, though, the transition to foreign investment is a large, sometimes prohibitive, step For example, an Australian firm that was successfully exporting mining equipment to Canada began to experience problems with after-sales servicing and delivery schedules The establishment of its own production facility was considered too great a step, so the firm entered into a licensing agreement with a Canadian manufacturer Having made the decision to produce overseas, the firm may establish its own foreign production facilities, or enter into a joint venture with a local firm, or buy a local firm Regardless of the method of establishment, foreign production/service operations tend to trigger the creation of a separate international division in which all international activities are grouped, as Figure 2.4 illustrates (Thornhill, 1996) With the spread of international activities, the firm establishes what has been referred to as “miniature replicas” (the foreign subsidiaries are structured to mirror that of the domestic organization) The subsidiary managers report to the head of the international division, and there may be some informal reporting directly to the various functional heads For example, as shown in Figure 2.4, there may be contact regarding staffing issues between the HR managers in the two subsidiaries and the HR manager at corporate headquarters 27 Perspectives and Approaches of IHRM Managing Director Production Domestic Division (Paint) Marketing Domestic Division (Tools) Production International Division Subsidiary Japan Subsidiary Italy Marketing Human Resource Finance Subsidiary Australia Finance Human Resources Source: Dowling et al (2001 International Resource Management p 38) Figure 2.4: International Division Many firms at this stage of internationalization are concerned about maintaining control of the newly established subsidiary, and will place PCNs in all key position in the subsidiary However, some firms decide that local employment conditions require local handling and place an HCN in charge of the subsidiary HR function, thus making an exception to the overall ethnocentric approach; others may place HCNs in several key positions, including HRM, to comply with host-government directives The role of corporate HR staff is primarily concerned with expatriate management though there will be some monitoring of the subsidiary HR function—formally through the head of the International Division Pucik (1985) suggests that initially, corporate HR activities are confined to supervising the selection of staff for the new international division Expatriate managers perform a major role: identifying employees who can direct the daily operations of the foreign subsidiaries, supervising transfer of managerial and technical know-how, communicating corporate policies, and keeping corporate HQ informed As the firm expands its foreign production or service facilities into other countries, increasing the size of its foreign workforce, accompanied by a growth in the number of expatriates, more formal HR policies become necessary Welch and Welch (1997) argue that the capacity of corporate HR staff to design appropriate policies may depend on how institutionalized existing approaches to expatriate management concerns have become, especially policies for compensation and predeparture training, and that the 28 International Human Resource Management more isolated the corporate HR function has been from the preceding international activities, the more difficult the task is likely to be An additional difficulty for the HRM department, when attempting to play a more proactive role, is that it may well lack credibility and the competencies to handle international personnel demands may be seen as residing outside its current domain 2.6 GLOBAL PRODUCT/AREA DIVISION Over a time, the firm moves from the early foreign production stage into a phase of growth through production (or service), standardization, and diversification Consequently, the strain of sheer size may create problems, and the international division becomes overstretched making effective communication and efficiency of operation difficult In some cases, corporate top managers may become concerned that the international division has enjoyed too much autonomy, acting so independently from the domestic operations to the extent that it operates as a separate unit—a situation that cannot be tolerated as the firm’s international activities become strategically more important Typically, tensions will emerge between the parent company (headquarters) and its subsidiaries, stemming from the need for national responsiveness at the subsidiary unit and global integration imperatives at the parent headquarters The demand for national responsiveness at the subsidiary unit develops because of factors such as differences in market structures, distribution channels, customer needs, local culture, and pressure from the host government The need for more centralized global integration by the headquarters comes from having multinational customers, global competitors, and the increasingly rapid flow of information and technology—and from the quest for large volume for economies of scale (Dowling et al., 2001) As a result of these various forces for change, the multinational confronts two major issues of structure: The extent to which key decisions are to be made at parent headquarter or at the subsidiary units (centralization vs decentralization), and The type of control exerted by the parent over the subsidiary unit (bureaucratic control vs normative) The structural response, at this stage of internationalization, can be either a product - or service-based global structure or an area-based structure As part of the process of accommodating subsidiary concerns through decentralization, the MNC strives to adapt its HRM activities to each host-country’s specific requirements This naturally impacts on the corporate HRM function There is an increasing devolution of responsibility for local employee decisions to each subsidiary, with corporate HR staff performing a monitoring role, intervening in local affairs only in extreme circumstances For example, in the late-1980s, Ford Australia had a ceiling on its HRM decisions, and any decision that involved an amount above that ceiling (such as promotions above a certain salary grade) had to be referred to its regional HQR for corporate approval Expatriate management remained the responsibility of corporate HR staff This HRM monitoring role reflects management’s desire for central control of strategic planning—formulating, implementing, and coordinating strategies for its worldwide markets The growth in foreign exposure combined with changes in the organizational structure of international operations results in an increase in the number of employees needed to oversee the activities between the parent firm and its foreign affiliates Within the human resource function, the development of managers able to operate in international environments becomes a new imperative (Puick, 1985) 2.6.1 Global Product Division In this structure, the company treats each of its major products as distinct Strategic Business Units (SBUs) Divisions/functions at the corporate office are given worldwide responsibility for production, finance, marketing and management of supply chain for each product or product line These product divisions also have internal functional support The structure is shown in Figure 2.5 Chief Executive Officer Headquarters Production Marketing Corporate Product Division Human Resource Finance Operating Divisions Product A South America Product B Europe Africa Product C Product D Australia Product E Far East Great Britain France Germany Netherland Production Marketing Finance Personnel Source: Gupta S.C., International HRM (2006) p 138 Figure 2.5: Global Product Division This structure has certain advantages If the firm is very diverse, the need to customise the product to the specific demands of the buyer becomes important This structure also helps to integrate marketing, production and finance globally on the product basis Further, the firms are able to strategise shift of products from one market to another as they reach different life cycle stages, according to acceptability and scope The disadvantage of this structure is duplication of personnel within each division, making it expensive A second is that product managers may pursue currently attractive markets and neglect other areas with better long-range potential A third is that many divisional managers spend too much time tapping their local markets rather than international markets, because it is more convenient and easier, and because they are more experienced in domestic operations 2.6.2 Global Area Division In this arrangement, a multinational prefers to divisionalise its foreign operations on the basis of geographical unit rather than on product basis The corporate structure at the HQ remains as in case of product-based divisionalisation (See Figure 2.6) This signifies a major change in the thinking of the company, because now the international operations are put on the same level as domestic operations 29 Perspectives and Approaches of IHRM 30 International Human Resource Management Chief Executive Officer Head Quarters departments Production Marketing Human Resource Finance Operating divisions South America Africa Europe Australia Far East Production Marketing Human Resource Figure 2.6: A Global Area Division Structure This structure is useful when the product range is not too broad and therefore common resources in a country can be shared and support all operations The HQ is responsible for transferring excess resources from one country to another as required and to establish coordination between different countries to provide synergy and overall goal achievement 2.6.3 Global Matrix Structure When a multinational is trying to integrate its operations in more than one dimension, like product as well as area, or customers and technology, it resorts to the matrix structure As shown in Figure 2.7, both product division and area division share joint responsibility This means both executives jointly decide allocation of resources and other important matters, but the matrix manager is responsible for the results In this structure, there is pressures from horizontal matrix managers for equal allocation of resources; however, the vertical managers are supposed to balance this by taking into account the relative importance of products or projects based on organisational priorities and other long-term considerations However, there are several shortcomings associated with the Matrix As the design complexity increases, coordinating the personnel and getting everyone to work towards a common goals often becomes difficult Second, some employees experience dual authority, which is frustrating and confusing Managers, therefore need excellent interpersonal and conflict-resolution skills The most successful multinationals today focus less on searching for the ideal structure, and more on developing the abilities, behaviour and performance of individual managers This creates a matrix in the minds of managers’ where individual capabilities are captured and the entire firm is motivated to respond cooperatively to a complicated dynamic environment 2.7.2 Transnational The term transnational has been coined to describe a new organizational form that is characterized by an interdependence of resources and responsibilities across all business units regardless of national boundaries The transnational tries to cope with the large flows of components, products, resources, people, and information among its subsidiaries, while simultaneously recognizing the distributed specialized resources and capabilities As such, it demands a complex process of coordination and cooperation involving strong cross-unit integrating devices, a strong corporate identity, and a well-developed worldwide management perspective Developing transnational managers or global leaders who can think and act across national and subsidiary boundaries emerges is an important task for top management introducing these complex organizational forms Staff transfers play a critical role in integration and coordination The role of human resources is once again very critical and similar as in matrix or heterarchy Unilever, for example, is more like a transnational organisation today Bartlett and Ghoshal (1990) define transnationals in the following words: Among the companies we studied, there were several that were in the process of developing such organisational capabilities They had surpassed the classic capabilities of the multinational company that operates as decentralized federations of units able to sense and respond to diverse international needs and opportunities; and had evolved beyond the abilities of the global company with its facility for managing operations on a tightly controlled — worldwide basis through its centralized hub structure They had developed what we termed transnational — capabilities — the ability to manage across national boundaries, retaining local flexibility while achieving global integration More than anything, this involved the ability to link local operations to each other and to the centre in a flexible way, and in doing so, to leverage those local and central capabilities 2.7.3 Networked Firm U Anderson, M Forsgren, C Pahalberg, and P Thilenius (1990), suggest viewing certain large and mature international firms as a network, in situations where: Subsidiaries have developed into significant centres for investments, activities and influence, and cannot be regarded as being at the periphery Interaction between headquarters and each subsidiary is likely to be dyadic, taking place between various actors at many different organisational levels and covering different exchanges, the outcome of which is important for effective global performance Such multinationals are loosely coupled political systems rather than tightly bonded homogeneous, hierarchical systems This runs counter to the traditional structure where linkages are described formally via the organisation’s structure and standardised procedures, and informally through interpersonal contact and socialisation One subsidiary may act as a nodal unit linking a cluster of satellite organisations Thus, one centre can assume responsibility for other units in its country or region The management of a multi-centered networked organization is complex Apart from the intra-organizational network (comprising of headquarters and the numerous subsidiaries), each subsidiary also has a range of external relationships (involving local suppliers, customers, competitors, host governments, and alliance partners The management of both the intra-organizational and inter-organizational spheres, and of the total integrated network, is crucial to global corporate performance It involves what has 33 Perspectives and Approaches of IHRM 34 International Human Resource Management been termed a less-hierarchical structure, featuring five dimensions: delegation of decisionmaking authority to appropriate units and levels; geographical dispersal of key functions across units in different countries; de-layering of organizational levels; de-bureaucratization of formal procedures; and differentiation of work, responsibility, and authority across the networked subsidiaries (Marschan, 1997) 2.7.4 Keiretsu Still another type of newly emerging organisational arrangement is the keiretsu, which is a large, often vertically integrated group of companies that cooperate and work closely with each other A good example is the Mitsubishi group, shown in Figure 2.9 This keiretsu consists of 28 core members who are bound together by cross ownership, longterm business dealings, interlocking directorates, and social ties Many are three flagship firms in the group; Mitsubishi Corporation, which is a trading company; Mitsubishi Bank, which finances the keiretsu’s operations; and Mitsubishi Heavy Industries, which is a leading worldwide manufacturer MITSUBISHI CORP 32% M PAPER MILLS 32% NIPPON CORP 27% M MOTORS 55% M KASEI 23% M PLASTIC INDUS 57% M PETRO CHEMICAL 37% MITSUBISHI BANK 26% MITSUBISHI HEAVY INDUSTRIES 20% M KAKOKI 37% M ELECTRIC 17% KIRIN BREWERY 19% M GAS CHEMICAL 24% M OIL 1% M STEEL MANU 38% M WAREHOUSE & TRANS 40% M M ASAHI ESTATE GLASS 25% 28% M CONSTRUCTION 100% M CABLE INDUST 46% M METAL 21% M MINING & CEMENT 37% M RAYON 25% TOKIO MARINE & PIRE INSU 24% NIPPON YUSSEN 25% M TRUST & BANKING 33% MEJI MUTUAL LIFE INS 0% M ALUMINIUM 100% Source: Gupta, International HRM (2006), p 144 Figure 2.9: The Mitsubishi Keiretsu This form of organisation has been cited by some international analysis as the reason why Japanese multinationals are so successful However, the Japanese are not the only ones using this organisational arrangement The Birla group can also be thought of as an Indian keiretsu Reliance Industries was developing on the line of becoming on Indian Keiretsu and that is the reason why demerger of the company into two separate entities between Mukesh and Anil Ambani, had become so difficult Even large American multinationals are creating their own type of keiretsu (see Box 2.1) Ghoshal and Bartlett (1990) argue that a new way of structuring is not the issue– it is more the emerging management philosophy, with its focus on management processes: The actual configuration of the process themselves, and the structural shell within which they are embedded, can be very different depending on the business and heritages of each company Box 2.1: Ford Motors Creates its Own Form of Keiretsu Ford Motors is now focusing its attention only on automotive and financial services, and has divested itself of most other businesses In the process of reorganising, Ford has created a giant keiretsu-like arrangement that includes research and development, parts production, vehicle assembly, financial services, and marketing For example, in R&D, Ford belongs to eight consortia that conduct research in areas such as improved engineering techniques, materials and electric-car batteries In parts production, Ford has equity stakes in Cummins (engines), Excel Industries (windows), and Decoma International (body parts, wheels) and relies on these firms as major suppliers In vehicle assembly, Ford has ownership interests in Europe South America and Asia, and uses these arrangements to both manufacture and sell autos in these parts of the world In financial services, Ford has seven wholly owned units that cover a wide gamut from consumer credit to commercial lending In the marketing area, Ford owns 49% in Hertz and uses this company and other rental car agencies as an outlet for its production Source: Business Week, 24 Sept.,1990 (p 198) Ghoshal and Bartlett (1990) have expanded their concept of the transnational to define the MNC as an inter-organizational system which is comprised of a network of exchange relationships among different organizational units, including headquarters and national subsidiaries, as well as external organizations, such as host governments, customers, suppliers, and competitors, with which the different units of the multinational must interact Ghoshal and Bartlett cite GE, ABB, and Toyota as prime examples of companies involved in developing such processes, with Intel and Corning, Philips and Alcatel, Matsushita and Toshiba regarded as companies embarking upon a network-type configuration Likewise, the Ford Motor Company abandoned its regional structure in 1993, and adopted a multidisciplinary product team approach, networking plants across regions (Financial Times, 1997) 2.7.5 Control and Coordination Human resource management plays a key role in control and coordination process, particularly where less-hierarchical structures we discussed above are concerned: Ghoshal and Bartlett (1995) the key means for vital knowledge generation and diffusion is through personal contact This means that networked organizations need processes to facilitate contacts Training and development programmes, held in regional centres or at headquarters, become an important forum for the development of personnel networks that foster informal communication channels, as well as for building corporate culture Network relationships are built and maintained through personal contact Therefore, staffing decisions are crucial to the effective management of the linkages that the various subsidiaries have established (Welch & Welch, 1999) As with the heterarchy, the management processes in a networked multinational rely heavily on the ability of key staff to integrate operations to provide the internal company environment that fosters the required level of cooperation, commitment, and communication flows between functions and subsidiary units 35 Perspectives and Approaches of IHRM 36 International Human Resource Management Staff transfers are also an important part of the required management processes, particularly that of control Multinationals continue to rely on the movement of key staff to assist in coordination and control (Welch et al., 1994) Expatriates are used to instill a sense of corporate identity in subsidiary operations, and to assist in the transfer of corporate norms and values as part of corporate cultural (or normative) control Thus, proponents of less-hierarchical configurations argue there is greater reliance on informal control mechanisms than on the formal, bureaucratic control mechanisms that accompanied the traditional hierarchy As seen from the above list, the informal control mechanisms highlighted in Figure 2.10 are assisted by HR practices Control Mechanisms Informal Informal Structure Reporting Systems Budgets Performance Targets Personal Relationships Corporate Culture Source: International Business Review 1996 (5.2) p 137 Figure 2.10: Control Mechanisms in the Network MNE It is also important to remember that international growth affects the firm’s approach to HRM and the HRM implications at each stage of internationalization Firms vary from one another as they go through the stages of international development, and react in different ways to the circumstances they encounter in the various foreign markets Therefore, we find a wide variety of matches between IHRM approaches, organizational structure, and stage of internationalization (Dowling, 1989) Check Your Progress Define transnational organisations What is global matrix structure? 2.8 ROLE OF HUMAN RESOURCE These less-hierarchical and networked structures that are evolving, require coordination and human resource processes of high-level involvement, taking into account cultural variables of each unit and national culture Human resource management plays a key role in control and coordination processes: Ghoshal and Bartlett (1995) argues that the key means for vital knowledge generation and diffusion is through personal contact This means that networked organisations need processes to facilitate contacts Training and development programmes held in regional centres or at headquarters become an important forum for the development of personal networks Network relationships are built and maintained through personal contacts Therefore, staffing decisions are crucial to the effective management of the linkages that the various subsidiaries have established The management processes in a networked multinational rely heavily on the ability of key staff to integrate operations to provide on environment and culture that fosters the required level of cooperation, commitment and communication flows between functions and subsidiary units Staff transfers are also an important part of the required management processes, particularly that of control The case of GE in Hungary (see case at end of chapter) is a good example of how staff transfers were quite an important part of GE’s attempts to integrated its new acquisition into its “global family” Expatriates are used to instil a sense of corporate identity in subsidiary operations, and to assist in the transfer of corporate norms and values as part of corporate cultural control The visit of the CEO to different countries also helps in integrating relationships and developing, strategic focus 2.9 STRATEGIES FOR INTERNATIONAL ORGANISATIONS A great deal has been written on the need to develop new and more adaptive forms of organizations as a result of increased internationalization Within multinational companies, there is a need to balance international strategy with local conditions and needs; and move towards new organizational structures One of the key aspects of the strategic management of modern organizations is the balance between differentiation and integration (Lawrance, Lorsch, 1967) While flexibility is required in the way business is conducted differently in different locations, there is a need to integrate activity and coordinate not only business activity, but the way people are developed and deployed within the international organization The level of strategic control needed in an international operation is depicted along three axes: the type of subsidiary operating in each country; the type of international business strategy employed; and the type of ownership Table 2.1: Perlmutter’s Model of International Strategies Prevailing organi zational culture Finance Strategy Ethnocentric Home country Polycentric Host country Regiocentric Regional Geocentric Global Repatriation of profits to home country Global integration Retention of profits in host country National responsiveness Redistribution within region Redistribution globally Regional integration and national responsiveness Global integration national responsiveness Contd 37 Perspectives and Approaches of IHRM 38 International Human Resource Management Marketing Personnel practices P roduct development determined mostly by needs of home country custo mers P eople of home country developed for key positions everywhere in the world Loc al product development based on local needs People of local nationality developed for key positions in their own country Standardized within region, but not across regions Global products with local variation Regional people developed for key positions anywhere in the region Best people everywhere developed for key positions everywhere in the world Source: Adapted from Chakravarthy and Perlmutter, 1985 2.9.1 Perlmutter’s Model In the late 1960s Perlmutter (1969) suggested different internationalizing strategies that organizations tend to fit, which influence personnel practices within the global context The ethnocentric approach is probably closest to Doz and Prahalad’s (1986) global organization, where control is tight from the centre, with subsidiaries having little autonomy, and where key positions are held by home-country nations and there is a high degree of management by expatriates The polycentric approach sees each subsidiary as a separate entity Although subsidiaries are managed by locals, these same local managers are unlikely to have a career in the international group or at headquarters The ‘ideal’ approach is seen as the geocentric organization (see Table 2.1) 2.9.2 Bartlett and Ghoshal’s Model In 1989, Bartlett and Ghoshal offered the ‘transnational’ as the ideal type They distinguish: multinational organizations; global organizations; international organizations; and, transnational organizations Multinational This type of organization responds to the need to exploit national diversity and recognize that, for example, consumer tastes and needs of technology may be based on local conditions and national culture This type of organization will therefore have a strong national presence and can respond to national diversity There is very little direct influence from the parent company, and interpersonal communication among representatives from the different cultures may be quite limited An example is the American ITT, which needs to respond on a local basis to specific regulations, requirements and formats in the telecommunications switching industry Global Here the organization exploits the cost advantages of centralized global scale operations based on knowledge development that is retained at the centre, and on the implementation of the parent company’s strategies It responds to the trends of growing globalization of tastes, fashions and consumer demand generally An example is the Japanese Matsushita which exploits and promotes the globalization of taste in consumer electrics, being exportbased with research and development, manufacturing and branding concentrated at the centre International This type of organisation is an ideal type (Bartlett and Ghoshal, 1989) and is put forward as some thing towards which many cross border companies ought to be striving Here, the organization exploits the parent company’s knowledge and adapts it worldwide Sources of core competences are centralized, but other competences may be decentralized The role of overseas operations is to adapt the parent company’s competences to the local environment Knowledge is developed at the centre and then transferred to the overseas subsidiaries Procter and Gamble is a good example of an international organization Transnational It seeks to integrate the separate forces operating in the international marketplace, which each of the three organizational forms addresses only partially These three forces are: Global integration: The trend towards greater integration of global tastes Product trends such as Coca-Cola and McDonald’s are examples Local differentiation: The demand of local and national tastes, and of protectionism from national governments tend towards multinational organizational structures Worldwide innovation: The cost of innovation is great and it is more cost-effective usually, if research and development are centralized, and such products emanating from the centre are marketed globally, or are adapted internationally in local centres around the world 2.10 IMPLICATIONS FOR HUMAN RESOURCE MANAGEMENT POLICY Adler and Ghadar (1990) provide an account of the implications of different phases of internationalization for human resource management Their framework and typology are similar in concept to previous ones They view organizational forms as representative of stages in the development of international enterprises The four phases identified are: domestic, with a focus on home markets and export; international, with a focus on local responsiveness and the transfer of learning Multinational, with a focus on global strategy and price competition And global with a focus on both local responsiveness and global integration Adler and Ghadar’s (1990) model particularly looks at the relationship of culture and responses within human resource management In the first phase, domestic, there is a denying or ignoring of other cultural contexts with foreigners simply being offered a product developed in the home country In the second phase, international, it is important to take the cultural component consideration, as firms are moving into foreign markets in which they need to operate more fully and take account of local conditions The third phase, multinational, is characterized by a globalization of products and services in order to compete on price, and therefore culture is not such a major factor, but because of necessity there is a recognition of cultural differences among the countries of operation In the fourth phase, global, there is a more complete adaptation to local markets of global products, and cultural sensitivity rather than an attitude of inconvenience, and the international human resource function attempts to provide managers from anywhere with opportunities to develop in order to develop the organization itself 2.11 AN INTEGRATED STRATEGIC FRAMEWORK Schuler, Dowling and De Cieri (1993) suggest the need for an integrated framework of strategic international human resource management that brings together a number of the 39 Perspectives and Approaches of IHRM 40 International Human Resource Management aspects already discussed above They propose that there are two major multinational enterprise components that impact on strategic international HRM issues: the inter-unit linkages and internal operations (Figure 2.11) The former involves the organization’s mechanisms for managing the differentiation and integration of its operating units; the latter involves the need for each operating unit (e.g subsidiary) to function effectively within its own (national or market environment) The strategic international human resource issues in their framework are concerned with these two components and with the need to manage the international organization by balancing differentiation and integration and balancing the autonomy of local units against the need to coordinate and control them Some companies have large centralized human resource functions for selecting many functions and repatriating expatriate staff, training and compensation Others devolve many functions to the subsidiaries either as well as this central function or instead of it If general guidelines are formulated by the centre that refer only to the need to develop a system for rewarding individual performance, subsidiaries may then be free to develop their own incentive schemes Functions and policies are aimed ultimately at meeting the concerns and goals of the multinational organization These include global competitiveness, efficiency, local responsiveness, flexibility, and organizational learning and transfer of information Exogenous factors - industrial characteristics - country/regional - characteristics Strategic MNC components Strategic IHRM issues inter-unit linkages internal operations Inter-unit linkagescontrol/variety SIHRM functions orientation resources location SIHRM policies/ practices staffing internal operations appraising local sensitivity compensation strategic fit developing MNC concerns and goals competitiveness efficiency local responsiveness flexibility learning and transfer Endogenous factors structure of international operations headquarters’ international orientation competitive strategy experience in managing international operations Source: Schuler, Dowling and De Cieri’s (1993) Figure 2.11: Integrated Strategic Framework These concerns vary from company to company (Schwer et al., 1993) By an examination of the various centripetal factors which are pressing hard for international integration against those centrifugal factors which point towards local differentiation, it is possible to discuss an optimum stance for appropriately managing people in subsidiary operations This should be achievable not only by charting a course through these two opposing forces, but also by drawing on the contributions that can be made from the parent and the different subsidiaries This requires consideration of the strategic factors that should be addressed to provide the optimum balance between integration and differentiation, a consideration of cultural differences that exist among the different national operations and the relative contributions which can be made by people in the different national organizations to the global operation Schuler, Dowling and De Cieris (1993) integrated strategic framework captures some of the aspects, but provides little information on the optimization of appropriate people management policies and practices within these often contradictory forces Some of these optimizing factors are captured in Figure 2.12 2.12 FLEXIBLE ORGANISATION: THE EU MODEL Browster, Hegewisch and Holden (1992) allude the need for organisational flexibility and state that: HRM in Europe is complex There is no other region in the world where so many different histories, cultures and languages exist in such a relatively small space Each European country has its own approach to the employment of people; its own laws, institutions, trade unions, education and training provisions, and managerial culture In many European countries these approaches operate at a number of geographical levels Overlapping this complicated picture, there is now the unique supranational legislation of the European Community New work practices are evolving to meet the combined needs of more effective and competitive organizations, and to respond to requirements to humanize work in line with the developing needs of people in organizations: whether this be from a perspective of making best use of human resources in the face of downward trends in the working population, or as a contribution to ‘valuing humanity’ Yet, in Europe, the lateral dimension is probably more prominent than in other regions Much thought has been given to the types of models that have been developed in Europe to meet this special perspective: the management of people and change across national boundaries to provide synergies by capitalizing on cultural differences A good example of this is seen in the management education approach developed since 1973 by EAP (now ESCP-EAP following a merger with another Paris-based school) European School of Management, a graduate management school of the Paris Chamber of Commerce and Industry with integrated campuses in Paris, Oxford, Madrid and Berlin Its core programme has been a pre-experience three-year, three-country, three-language master’s Students are drawn from all over the European Union and beyond Students spend a year in each of three different countries They share their experiences gained in all the countries Although classes provide some national input in the different management and business disciplines, there is an emphasis on international, cross-border, and crosscultural approaches Much of the training is experiential Teamwork encourages flexibility of approach and working across different countries and cultures, rather than instilling 41 Perspectives and Approaches of IHRM 42 International Human Resource Management country-specific knowledge Graduates typically obtain well-paid international positions anywhere in Europe, and often outside Europe This unique model differs significantly from the ‘sojourn’ model that is often typical of American international management education, where students spend a semester in a foreign country Parent International strategy Multi-domestic Global Respond to and encourage local differentiation Responsible to and encourage global integration Mediated by Cultural differences Regulatory and legislative factors Economic power ideological hegemony Nature of industry Resource dependencies Strategic choice Prevalence of local HRM practices Flows Communication, resources and know-how Prevalence of HQ HRM practices Required interaction low Acquisition Greenfield investment Local dependencies High presence of Unionization Regulatory pressures high between subsidiaries expatriates Local embededness Subsidiaries Source: International Journal of Human Resource Management (4), 1993 Figure 2.12: Strategy Optimising Factors in Developing Appropriate People Management Policies This section examines the need for both geographical (lateral) and temporal flexibility in work and organisational practices as a result of requirements to respond to cultural differences as well as rapid changes in technology and wider societal changes The real cross-cultural context in the European Union and particularly the way that Digital Equipment Corporation (an American company) has changed its working practices to meet the contingencies of operating in Europe (see Box 2.2) Box 2.2: Digital Equipment Corporation Digital Equipment Corporation’s (DEC’s) manufacturing plant in Ayr, Scotland, at the end of the 1980s had to respond to the need to adapt the American organization to the commercial requirements of the European market in computer technology DEC’s Ayr plant was opened in 1976, and by 1979 employed over 1,200 people Its initial production concept was based on the traditional role of American branch plants in Europe: to configure, assemble and test systems for the European customers, adding little value to products that were made in American plants Cross-functionality was introduced at the plant level to achieve a higher level of flexibility in order to respond to change and variation in the European market for computers throughout Europe and to introduce horizontal linkages across its European operations in the UK, France, the Netherlands, Ireland, Germany and Switzerland (with its European headquarters situated in Geneva), to develop innovative solutions to operational issues However, this role did not meet the needs of a highly competitive market The need to be adaptable and flexible to meet customers’ needs, and political pressure to increase its local sourcing of components meant that the company had to rethink the way production was organized (McCalman, 1989) DEC adopted the approach of ‘high-performance work design’ in order to meet the requirements for new product development from the Ayr plant, the pressures of typically a three-year product cycle, and a volatility of the market from the early 1980s which made forecasting from one- quarter to the next very precarious Apart from securing extra funding to evolve from final assembly to test, to complete manufacture, they had to find a production process which was flexible enough to handle variation in demand as well as attaining the objectives of meeting unit costs which were competitive with other DEC plants, particularly with those in the Far East Employees were retrained and autonomous work groups were set up to respond to the need for flexibility and skills acquisition, to meet product and market changes Management styles were rethought, as the situation demanded a supportive rather than a directive style There was a turning away from the concept of mass production towards a belief that change was a holistic process that could be managed by means of a flexible workforce and production organization Through this new organization of autonomous work groups, the management in Digital identified key characteristics that facilitated high performance, namely: a willingness to change; speed of communication; employee ‘ownership’ of product and process; multifunction career patterns; and better business awareness and priority-setting which enhanced flexibility 2.13 CONTEXT OF MANAGEMENT AND ORGANIZATIONS IN EUROPE There is a need to develop the appropriate management skills to meet the needs of the individual; a need to develop not just the ‘how’ of management skills, but also the ‘why’ of management action; and the need to develop attitudes and flexibility towards managing change, and managing across cultures Thurely and Widenius (1989) characterize these differences between Japanese and American management theory and practice as: work security versus individual freedom; organizational loyalty versus job competence; consultation and involvement versus 43 Perspectives and Approaches of IHRM 44 International Human Resource Management management authority; and work group innovation versus specialist know-how They are concerned about developing a ‘functional’ model of management in the European context that reflects the different cultural values and legal institutional practices in Europe They therefore present European management as: emerging, and not yet existing except in limited circumstances; being broadly linked to the ideal of European integration, which is continuously encompassing more and different countries; reflecting key values including pluralism and tolerance, although not consciously developed from those values; being associated with a balanced stakeholder philosophy and the concept of social partners It is possible to summarize the European context of management and organizations (Jackson, 1993c) as follows: There is no national identity across the European Community as there is in Japan and the USA; for example there is no equivalent of the ‘American Dream’ There is no common language or culture Change is more complex than in American or Japan, particularly with the further integration of Eastern and Central European countries, and this is in some ways artificial in creation: manufactured by the architects and politicians of the Single European Market, signifying the higher level of creativity needed to manage in this environment There is increasing cross-border activity through mergers and acquisitions, joint ventures and direct investment situations requiring approaches to management such as project management and networking There is increasing emphasis on the use of technology as a means of competing (such as e-commerce opportunities and communicating (such as extensive use of Intranet systems) There is continuing demand for linguistic skills, in addition to more traditional management skills In sum, there is a need to manage increasing diversity (between cultures rather than trying to create a uniform culture), ambiguity and complexity, and an increasing need to create more flexible organizations and methods of working in order to cope with both diversity and change Within this context the management of people may be rather more complex than in American models of human resource management, and a higher level of flexibility may be required compared with Japanese approaches Box 2.3: Implications for Managers: Revisiting DEC (Europe) It is possible to deduce from the discussion on European model of People Management that horizontal linkages and lateral hierarchies (Galbraith, 1994) and communication are becoming particularly important in regions such as Europe, where there is a need to develop flexibility and innovative processes This is in keeping with the necessity to facilitate the transfer of information and to share and generate new knowledge within the concept of the learning organization McCalman (1996) describes the specific example of the setting up and operation of a cross-functional and cross-cultural project team tasked with developing a Europe-wide customer order delivery system that guaranteed delivery to the customer within 10 days What was a complex logistic planning process was to be devised laterally by this management group, which would meet regularly at different European locations In establishing the project team, a major consideration was that the task had to involve a lot of people across Europe, in order to fully understand the process that required one supply Contd base and delivery to a number of countries In each country, differences had to be understood, which was unique or common enough to make an impact on the process The project manager therefore had to select the team based on his understanding of the company and where he thought the skills lay within it Through networking, it was possible to establish this where the manager did not know Little attention was paid to hierarchical level and who was responsible for what, and more emphasis was placed on who had the skills energy to make the changes Individuals were approached, and if they were interested, then their boss was approached The team finally consisted of 10 members with three from the manufacturing plant in Ayr, two from the other UK operations, two from Switzerland, and one each from Germany, France and the Netherlands However, at the same time the project team also had to continue to work on their own functional responsibilities within their subsidiary Case Study GE’s Acquisition in Hungry I n January 1990, the U.S multinational, General Electric (GE), invested in Tungsram, a Hungarian lighting company, as part of its European market expansion strategy By 1994, its equity had risen to 99.6% The Hungarian operation had 13 existing factories employing 17,600 workers GE initially appointed a Hungarian-born U.S expatriate employing as its top manager, though he was later replaced when Tungsram was brought under the direct control of GE Lighting Europe in 1993 Staff transfers played an important role in training and developing the Hungarian staff Key executives were brought over from the United States for varying lengths of time (three to six months) to assist in knowledge and skills transfer Management training also involved sending Tungsram staff to the United States, giving selected Hungarians exposure to GE’s working environment, and American life in general In order to improve Tungsram’s competitiveness, GE reduced staff levels by almost half and closed five plants, despite the unionized environment; it also invested heavily in training (quality programmes) to improve production workers’ output During this period, its European market share increased from 5% in 1989 to 15% in 1994 QUESTIONS How did G.E choose to execute its expansion strategies? Did GE’s top manager anticipate the HR investment that the Tungsram acquisition would entail prior to its decision to purchase the Hungarian firm? Was it proper to GE to replace the Hungarian-born U.S expatriate as its top manager of Tungsram when it came under direct control of GE lighting Europe? What steps did GE take to improve the competitiveness of Tungsram company? 45 Perspectives and Approaches of IHRM 46 International Human Resource Management 2.14 LET US SUM UP The HRM uses four terms to describe Multi-National Corporations (MNCs) approaches to managing and staffing their subsidiaries: ethnocentric, polycentric, regiocentric, and geocentric It should be stressed that the above categories refer to managerial attitudes that reflect the socio-cultural environment in which the internationalizing firm is embedded In addition to the strategic imperatives, mindsets, and staffing approaches outlined above, IHRM is affected by the way the internationalization process itself is managed In the beginning, PCNs are usually posted to important positions because the firm has more confidence in them to implement proven home office human resource policies and practices Having made the decision to produce overseas, the firm may establish its own foreign production facilities, or enter into a joint venture with a local firm, or buy a local firm Many firms at this stage of internationalization are concerned about maintaining control of the newly established subsidiary, and will place PCNs in all key position in the subsidiary However, some firms decide that local employment conditions require local handling and place an HCN in charge of the subsidiary HR function Over a time, the firm moves from the early foreign production stage into a phase of growth through production (or service), standardization, and diversification From an HRM perspective, the heterarchy is interesting in that its success appears to rest solely on the ability of the multinational to formulate, implement, and reinforce the required human resource elements The heterarchy demands skillful and experienced personnel as well as sophisticated reward and punishment systems in order to develop the normative control mechanisms necessary for effective performance 2.15 LESSON END ACTIVITY “Human Resource Management plays a key role in control and coordination processes, in less–hierarchical structures” Comment with suitable examples 2.16 KEYWORDS Ethnocentric: Key positions at the domestic and foreign operations are held by HQ as management personnel Subsidiaries are managed by expatriates Polycentric: The MNC treats each subsidiary as a distinct national entity with some decision-making autonomy Subsidiaries are usually managed by local nationals Regiocentric: MNC utilises a wider pool of managers but in a limited geographic region Geocentric: The MNC is taking a worldwide approach to its operations recognising that both subsidiaries and HQs make a unique contribution with its unique competence: PCN, HCN and TCNs can be found in key positions anywhere including those at the senior management level at headquarters Global Product Division: In this structure, the company treats each of its major products as distinct strategic business units 2.17 QUESTIONS FOR DISCUSSION What are the four attitudes of MNCs towards building a multinational enterprise? Outline them in detail What is the internationalisation process towards the path to global states? What are the main similarities and difference between domestic and international HRM? What are the various factors that need to be addressed for developing international HR strategies? What are the stages of structural evolution of multinationals? What are the new types of multinational structures? Check Your Progress: Model Answers CYP Difference between Ethnocentric and Polycentric Approach: A person who assumes that his or her home country is superior compared to the rest of the world is said to have an ethnocentric approach, whereas the polycentric approach describes management is belief that each country in which a company does business is unique and subsidiaries are usually managed by local nations CYP Transnational Organisation: The term transnational has been coined to describe a new organisational form that is characterised by an interdependence of resources and responsibilities across all business units regardless of national boundaries Global Matrix Structure: When a multinational is trying to integrate its operations in more than one dimension, like product as well as area, or customers and technology, its resorts to the matrix structure 2.18 SUGGESTED READINGS P.L Rao, International Human Resource Management, Excel Books, New Delhi, 2008 Briscoi, Schuler and Claus, International Human Resource Management, Routledge, 2008 Breuester, Sparrow and Vernon, International Human Resource Management (3rd edition) P.J Dowling and D.E Welch, International Human Resource Management, Thomson, London, 2004 47 Perspectives and Approaches of IHRM ... Rao, International Human Resource Management, Excel Books, New Delhi, 2008 Briscoi, Schuler and Claus, International Human Resource Management, Routledge, 2008 Breuester, Sparrow and Vernon, International. .. framework of strategic international human resource management that brings together a number of the 39 Perspectives and Approaches of IHRM 40 International Human Resource Management aspects already... Production International Division Subsidiary Japan Subsidiary Italy Marketing Human Resource Finance Subsidiary Australia Finance Human Resources Source: Dowling et al (2001 International Resource Management