Emergence of New Structural Designs of MNE’s

As companies grow in size, product lines, and dependence on foreign operations, complications of communication, responsibility and control become more complex. So, new structures continue to evolve to deal with this complexity. Proctor & Gamble (P&G) restructured its operations in 1999. P&G formed a unique concept of ‘Global business Product Units’ (GBUs) and 5 such units were established. With the 5 GBUs P&G wants to build its global brand equity as part of its ‘global strategic thinking’. At the same time 7 Market Development Organizations along the lines of major regions of the world were made to facilitate flexibility in the sphere of local actions. Thus it ‘thinks global, acts local’. There are numerous cases like this. But few general forms are alone dealt here.

Network Organizations

Network-based organization models have been characterized as reflecting an integrated worldwide strategy through globally distributed but interdependent resources and activities.

The world is made up of interdependence unlimited. In such a world we all build a network alliances or relationships. MNEs must decide what products, functions, and geographic areas they want to handle themselves and what they wish to outsource. As to tasks handled by them the MNEs can have clear superior-subordinate relationships, known as hierarchies. In dealings with others the superior-subordinate line is not clear. Instead of line relationship a network relationship emanates. The location of control in a network alliance is ambiguous and is known as a ‘heterarchy’. When shared ownership/responsibility exists such as in a joint venture or strategic alliance, there is usually a hierarchical relationship.

Corning Incorporated, a global corporation with manufacturing facilities around the world, is reliant upon a vast network of suppliers. It values these relationships as these are critical to its success. Corning ensures that every aspect of its operations is conducted with respect for the laws, customs and cultures of the regions we serve. Thus Corningis a good example of a heterarchy. Further half of its earnings come from alliances, particularly joint ventures. Corning management cannot dictate what its alliance partners must do. Instead, it serves as a broker, conflict negotiator, and facilitator for them.

Many Japanese companies are known for their net-works or what is called in their vernacular as keiretsus. A keiretsu is a common feature of Japanese corporate governance and refers to a collaborative group of integrated companies with extensive share Cross holdings, Personnel swaps and Strategic co-operation.

Mitsubishi Group of Companies, or Mitsubishi Companies is a Japanese conglomerate consisting of a range of autonomous businesses which share the Mitsubishi brand, trademark and legacy. The Mitsubishi group of companies forms a loose entity, the Mitsubishi Keiretsu. The top 25 companies are also members of the Mitsubishi Kin’yMkai, or “Friday Club”, and meet monthly. Mitsubishi Mitsubishi Corporation, Kirin Brewery, Mitsubishi Electric, Mitsubishi Fuso, Mitsubishi Motors, Nippon Yusen, Nippon Oil, Tokio Marine and Fire Insurance, Nikon, Hino Motors networks in which each company owns a small percentage of other companies in the network. There are long-term strong personal relationships among high-level managers in the different companies, and the same directors often serve on more than one board. Sometimes keiretsus are vertical, such as that between Toyota and its parts suppliers. Sometimes they are horizontal. Managers can exchange information that is useful to more than one company, underwrite each other’s financing, and gain more clout when lobbying for governmental legislation.

Spin-Off Organizations

A spin-off (or spinoff) is a new organization or entity formed by a split from a larger one. In a pure spin-off, a parent company distributes 100% of its ownership interests in a subsidiary operation as a dividend to its existing shareholders. Carved out or partial spin-off is one where the parent corporation sells to the public an interest of less than 20% in the new subsidiary in a registered initial public offering for cash proceeds. Often, an IPO in which the parent company retains a majority interest in the new company may be a prelude to a spin-off of the remaining interests to existing shareholders. Companies utilize a partial spin-off strategy for a number of reasons.

New product development through spin-off:

One objective of spin-off company formation is ‘new product’ development. New product champions endeavor to develop new products or services. These new products or services normally do not fit in the existing competencies. Parent companies create ‘spin off’ companies exclusively to exploit the potentials of these new products or services holding substantial, if not whole ownership. At the same time new learning emanating from the spin-off s gets percolated into the MNEs as such. Johnson & Johnson, Raychem, and Thermo Electron have spun off companies that subsequently have operated almost independently. The spin-offs differ from product structures, because they are independent and have to satisfy their stockholders, including the parent MNEs. Japanese MNEs have historically used spin-offs. Note that the Toyota Motors is actually a spin-off of the Toyoda Automatic Loom Works.

New company development through spin-off:

Industrial Technology Research Institute (ITRI) of Taiwan since 1979 until 2000 created a number of spin-off companies. R&D programs at ITRI that have grown into sizable businesses are spun off as independent companies. The first such spin-off company, United Microelectronics Corporation, was created in 1979 to seed the growth of IC industry in Taiwan. Since then, five other companies have been spun off from ITRI: Taiwan Semiconductor Manufacturing Company, Evergreen Super Alloy Corporation, Taiwan Mask Corporation, Vanguard International Semiconductor Corporation, and New Faith Technology Corporation. The spin- off program is an efficient way for ITRI to transfer research results to the industrial sector for production and services. Typical cases in which a spin-off company may be founded are described below. Occasionally ITRI develops technologies with the potential to generate significant growth in domestic production, but which cannot be transferred to the private sector, for either the relevant industry does not exist or existing manufacturers are unable to apply the technologies efficiently and profitably. In such cases, ITRI will spin off an independent company to utilize the new technologies. The objective of spin-off companies is to generate new domestic industries. These businesses require massive infusions of capital and manpower, most of which are supplied by ITRI with support from outside investors. Spin-off companies are created only when they are unlikely to monopolize an important technology or impede other firms’ application of the technology.

Growing commercial research and intellectual property through spin-off:

In UK spin off companies seek to establish link with educational institutions to harness virgin knowledge. Links between spin-off companies and higher education are flourishing. The number of spin-off companies with links to higher education institutions (HEIs) is on the rise, with growing commercial research and intellectual property income underscoring higher education’s key role in the economy.

Lead Subsidiary Organizations

A subsidiary’s capability could be its skill in developing and manufacturing a product line better than a headquarters’ division. Such a subsidiary is referred to as Lead Subsidiary. Subsidiaries that take on a more demanding leadership role in a region, and in the parent’s global network, can add considerably more value to the parent firm worldwide. An MNC’s leading subsidiaries can make this happen. Leading subsidiaries can take on global and regional responsibilities for R&D, manufacturing, product management, and key marketing functions. Certain companies have moved the headquarters of certain divisions to foreign countries, because they felt that competency for cutting edge innovations and products could as well originate from subsidiaries.

Pratt & Whitney is a pioneer in flight and in technology which made it possible to fly around the world in wide-bodied comfort. Over the years, it has patented hundreds of innovations, from heat-resistant coatings to aerodynamic blades – technologies that make air travel more cost effective, more comfortable and more dependable. Today, Pratt & Whitney engines power nearly half of the world’s commercial fleet. Every few seconds – more than 20,000 times a day – a Pratt & Whitney-powered airliner takes flight somewhere in the world. Headquartered in East Hartford,Connecticut,USA Pratt & Whitney created a lead subsidiary, Pratt & Whitney Canada which manages a critical line of engines for P&W worldwide. Similarly AT&T moved its corded telephone division from the United States to France, Siemens moved its air-traffic management division from Germany to the United Kingdom, Hyundai shifted its personal computer division from Korea to the United States, Panasonic in Spain handles key aspects of pan-European strategy and the Finnish company Nokia built its capabilities for a telecommunications product in the United Kingdom. Although these divisional headquarters are still accountable to corporate headquarters, other global operations, including those in the home country, must report to them.

Credit: International Business Management-AU

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: francisabey@gmail.com
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