Decentralized Decision Making in MNEs

Where does the decision making power in Multinational Enterprises (MNEs) rests? Is the decision power vested with the parent’s headquarters or with the subsidiary? Decisions made at the foreign-subsidiary level may be considered decentralized, while those made above the foreign-subsidiary level, that is the parent level, are considered centralized. The location of decision making power may vary within the same company over time as well as by product, function, and country. In addition, actual decision making is seldom as one-sided as it may appear. A manager who has decision-making authority may consult other managers before exercising that authority.

Centralized decision making is a global strategy while decentralized decision making is a multi-domestic strategy. A combination of the two is called a transnational strategy. The reason for choosing one over the other is partly a function of companies’ attitudes. For example, an ethnocentric attitude would influence a company to develop competencies, such as knowledge and technology, in its home country and control how they are transferred aboard. A polycentric attitude would cause the company to delegate decisions to foreign subsidiaries because headquarters personnel believe only people on the spot know best what to do. Multi-domestic attitude encourages this. A region-centric attitude would permit more openness to capabilities either at home or abroad and be conducive to a transnational strategy. A geocentric attitude would be conducive to a global strategy where core decisions lie with the headquarters.

Pressure for global integration leads to centralized decision structure and pressure for responsiveness to local conditions leads to decentralized decision making. The factors that influence are: Resource transference, Standardization, Systematic dealings with stakeholders, Transnational strategy and Ad-hoc strategy. These are dealt now.

1. Resource Transference

Resource transference decisions are centralized. A company may want to move its resources-capital, personnel, or technology-from its facilities in one country to its facilities in another where the projected return is higher and consequently improving the MNE’s global or overall performance. This saves cost, biases and time in decision making. A centralized info-pool with the parent saves cost. Decision away from the subsidiaries avoids biases. Timely decisions are possible as vested interests aren’t buying time to push through their hidden agenda. Royal Dutch/Shell centralized financial control of U.S. operations that were once handled autonomously by its subsidiary, Shell Oil, in the United States for the reason of biases by the subsidiary to retain the control with itself. If a subsidiary is not part of a company’s integrated operation, because it operates in a highly protected market, there is little need for centralized control. Another centralized decision in resource transference may concern jurisdiction over exports. If a company has manufacturing facilities in the United States and Germany, which facility will export to South America? A centralized decision avoids costly price competition between the subsidiaries and considers other vital factors like production costs, transportation costs, tax rates, foreign-exchange controls, production capacity and so on.

2. Standardization

Variety costs high for mundane activities, while uniformity reduces cost. Worldwide uniformity of an MNE’s products, purchases, methods, and policies reduces its global costs substantially. If an MNE standardizes machinery in its production process, cost saving arises from quantity discounts on purchases, consolidation of mechanics training, maintenance of manuals, and carrying of spare parts inventories. Product uniformity gives a company greater R&D thrust, flexibility in filling orders when supply problems arise, advertising and so on. But there are situations where standardization is not needed like GE’s jet engines require no local adaptation. There are situations where adaptation is needed like food products of Nestle or McDonalds. Problems arise only when wanted adaptation/ standardization could not be provided or when unwanted adaptation/standardization is thrust upon.

3. Systematic Dealings with Stakeholders

Stakeholders abound these days for businesses. Companies deal with government officials, employees, suppliers, consumers, environmentalists, consumer activists and the general public. Favoring one group is disliked by others if the same or similar favor is not extended to them also. Similarly companies may face a dilemma if they can’t afford concessions in one country offered offering the same in other country. Thanks to increased mobility of people. A good or bad experience with a product in one country may eventually affect sales elsewhere. Even pricing and product decisions in one country can affect demand in other countries. If prices differ substantially among countries, consumers may even find that they can import more cheaply than they can buy locally. Centralized decision making is necessary to ensure that operations in different countries operate toward achieving global objectives. Global competition also leads to centralized decision. A user MNE recommends its subsidiaries to place orders with particular supplier with whom deals are superior. Thus centralized decision making happens. However, in some cases the subsidiary may be the best place to make decisions about the customer or competitor. When IBM’s top management feared that its eroding Japanese market share would spill into other markets because Japanese competitors would have resources and confidence to fight IBM elsewhere, it gave its Japanese subsidiary decision-making power. The subsidiary increased its manufacturing capacity substantially, and it developed new products specific to the Japanese market.

4. Transnational Strategy

The pharmaceutical companies have a strong need for integration- that is centralization, because they depend on the sale of undifferentiated products for which scale of production is important to cover the high cost of product development. This is their geo-centric form. But, nevertheless, companies need high local responsiveness due to different purchase and distribution regulatory scenario in different countries. Companies have established various practices to improve the flow of information. ABB has a sophisticated information retrieval system that disseminates information about 1,300 entities in its federation of companies to each of these entities. At 3M’s European operations the company has given incentives for country subsidiaries to work together on key accounts. Ford is linking its design groups in North America and Europe through videoconferencing and computer networks in the development of new automobile designs. These are centralized decisions with regional flavor.

5. Ad Hoc Strategy

Companies that gain little from global integration, and also have little need to adapt to local conditions may either centralize or decentralize, depending on such factors as the experience and competency of the personnel at headquarters compared to subsidiaries.

Credit: International Business Environment-MGU MBA

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