Leadership & Management

Power Diffuses in Global Corporations, New Book Suggests

Today's global corporations are evolving towards networks of related affiliates, says Bruce McKern, faculty director of the Sloan Master's Program.

June 15, 2011

| by Stanford GSB Staff

A look at the structures of Taiwan’s Acer Corp., Germany’s Hoechst, and the United States’ Emerson Electric suggests that today’s global corporations are evolving towards networks of related affiliates, rather than the hierarchical structures which have been commonplace over the last decades, says Bruce McKern, a faculty member and director of the Business School’s Sloan Program.

“The environment of global business is today far more complex and competitive than it has been in the past, and this has forced global firms to be more flexible and faster on their feet,” McKern says. They have devolved more responsibility (and accountability) to managers of business units, and leaders of these units have adopted more lateral management processes which emphasize individual responsibility at all levels.

The editor of a new book, Managing the Global Network Corporation, published this year by Routledge, McKern brings together field studies and theoretical work on such companies conducted by a group of researchers over the past decade. Prompted by an explosion in cross-border strategic alliances, joint ventures, and mergers in the ’80s and ’90s, the research was commissioned by McKern during his tenure as president of the Carnegie Bosch Institute. The book deals with the strategies of global network corporations, their organizational evolution, and their operating processes.

In a project conducted with John Naman of the National Science Foundation, (Chapter 12) McKern focused on the changing relationships between corporate headquarters and subsidiary business units (SBUs). They considered key arenas of responsibility over which headquarters or business units could exercise control. One of these is the marketing function, which none of the eight companies studied had centralized.

“Our conclusion is that top management should devolve to subsidiary business units those arenas of responsibility where market forces are likely to promote efficiency. These are predominantly in customer and supplier relations, relations with local governments, the community and local stakeholders, and internal transfers of components, products or services,” they write. “In these arenas, there are sufficient competitive pressures from markets to force business unit leaders to operate efficiently, and a centralized headquarters can add little value”.

Take, for example, the electronics company Acer Corp. of Taiwan. Chairman Stan Shih has greatly limited the role of the headquarters. He describes it as a holding company that provides strategic direction, performance evaluation, legal and other services to subsidiaries in return for payment of its costs. “Because the Acer headquarters group was small (about 80 people) the ‘tax’ on the subsidiaries was not excessive, and the SBUs benefited from its services” McKern and Naman write.

However, where the SBU is exposed to “market failure”, such as being shielded from direct stock market pressure by the corporate structure, the headquarters performs a vital function with its requirement for strategic planning and performance evaluation. In the case of Hoechst (now Aventis) and Emerson Electric, also technology companies with diversified businesses, the authors found: “headquarters did not formulate strategy proposals but subjected them to a rigorous discipline of evaluation and review similar to that provided by a venture capital firm or an investment bank, effectively substituting for [the] market pressure” that the managers of an independent company would be subjected to by the stock market and a board of directors.

The headquarters should exercise control over functions where the market pressures on business units fail to promote efficiency. These “market failures,” the authors say, arise when the SBU is shielded or when it fails to react to weak market signals. For example, headquarters in the sample companies sometimes funded research and development projects (typically under 10 percent of the total), when the subsidiaries were likely to under-invest in activities with a long payoff time or when the benefits might not be gained solely by one subsidiary. McKern cites the example of Sulzer of Switzerland, in which basic research on fluid flow was funded centrally because the benefits spanned several business units. Sulzer had also established a China marketing service for the SBUs because individual subsidiary business units had not appreciated the growing significance of the Chinese market for their products.

The book also covers research on innovation and knowledge transfer, integrative processes and socialization, adaptation of strategy and firm evolution, and the roles and competencies need by managers in networked global companies. Now that the competitive advantages of firms have come to be based far more than in the past on competencies, captured in organization structure and culture, operating routines and knowledge, McKern says he agrees with Bartlett and Ghoshal (in Chapter 13) who say that the “organization man” view of the international manager is being replaced with the “individualized corporation” view, in which managers are relatively autonomous actors sharing a common vision of the corporation’s future.

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