Decisions related to control and coordination of subsidiaries are fundamental to the success of internationalised firms. When companies expand beyond national borders, they must adapt to economic, political, cultural, and institutional differences in host countries while managing operations across geographical distances.
Management Control (MC) plays a vital role in aligning employee decisions and actions with organizational objectives (Chow et al., 1999). As firms become more international, transferring management control systems across borders becomes increasingly complex.
Multinational companies (MNCs) rely on a combination of planning, standardized procedures, training, and cultural mechanisms to manage and control foreign subsidiaries.
Need for Control and Coordination in MNCs
MNCs operate in diverse environments with varying:
- Legal frameworks
- Cultural norms
- Market conditions
- Technological capabilities
Therefore, they must consider both internal and external influencing factors when designing management control systems (MCS).
Global expansion is often driven by:
- Technological advancements
- Increased foreign demand
- Saturation or decline in domestic markets
However, competing globally requires strong coordination capabilities to control dispersed operations effectively.
Bartlett and Ghoshal’s Perspective
Bartlett and Ghoshal emphasized that to succeed in global competition, firms must adapt and develop organizational structures and functions capable of responding to the complexity and uncertainty of foreign markets.
This highlights the importance of effective coordination between headquarters and subsidiaries.
Coordination Mechanisms in Internationalised Firms
Coordination mechanisms govern the relationship between headquarters and subsidiaries. These mechanisms are broadly classified into:
- Formal (Structural) Mechanisms
- Informal Mechanisms
Formal (Structural) Coordination Mechanisms
Formal mechanisms consist of explicit rules, policies, and procedures, usually documented and enforced across the organization.
According to Martinez and Jarillo (1989), formal coordination mechanisms include:
1. Departmentalization
Departmentalization refers to grouping organizational activities into units.
- Home-based model: Core functions like R&D, strategy, and innovation are centralized at headquarters.
- Heterarchical model: Different functions are distributed across countries (e.g., R&D in one country, production in another).
2. Centralization vs Decentralization of Decision-Making
- Centralization: Decision-making authority is concentrated at headquarters.
- Decentralization: Subsidiaries have autonomy over local operations.
Types of MNCs Based on Control Orientation
Ethnocentric MNCs
- Centralized decision-making
- One-way communication from HQ to subsidiaries
Polycentric MNCs
- Decentralized control
- Subsidiaries make local decisions
- Example: Xerox with diversified global operations
Geocentric MNCs
- Hybrid global–multidomestic approach
- Shared strategic roles across subsidiaries
- Heterarchical structure
Regiocentric MNCs
- Managers selected from within a geographic region
- Regional coordination rather than global or local
3. Formalization and Standardization
This involves establishing rules, policies, values, and procedures to create consistent routines.
Westney and Ghoshal explain this using institutional theory, which includes three pillars:
- Cognitive: Shared understanding of “what is right”
- Normative: Values, norms, and legitimacy
- Regulative: Laws, rules, and government policies
These pillars guide organizational behavior across borders.
4. Planning
Planning includes:
- Strategy formulation
- Budgeting
- Goal setting
- Timetables
In home-based models, strategic planning is centralized, while subsidiaries focus on local execution. In heterarchical models, subsidiaries may also perform strategic roles and coordinate directly with each other.
5. Output and Behavioral Control
Output Control
- Based on performance indicators
- Rewards linked to profitability and results
- Also known as bureaucratic or performance control
Behavioral Control
- Based on direct supervision and observation
- Influenced by cognitive, normative, and regulative controls
- Focuses on employee behavior rather than outcomes
Informal Coordination Mechanisms
Informal mechanisms govern day-to-day interactions and relationships and include:
1. Lateral Relations
Managers from different departments or units share experiences and solve problems collaboratively.
2. Informal Communication
Unofficial personal contacts across departments and subsidiaries.
3. Organizational Culture
Shared values, beliefs, and norms promoted by headquarters across subsidiaries.
These informal mechanisms often complement formal controls and enhance coordination effectiveness.
Limitations of Coordination Mechanisms
Mentzer (1991) identified several limitations in coordinating multinational operations:
1. Limits of Hierarchy
- Excessive layers reduce flexibility
- Slow decision-making
2. Limits of Matrix Structure
- Dual or multiple reporting lines
- Conflicts between managers
3. Limits of Corporate Culture
- Cultural strategies may not transfer effectively
- Strongest in headquarters country
4. Limits of Loose Coupling
- Excessive autonomy may weaken coordination
- Common in highly decentralized firms
5. Limits of Personnel Rotation
- Costly and disruptive
- Difficult for managers with families
- Though useful for knowledge transfer
Importance of Control and Coordination in Global Firms
Effective control and coordination systems help internationalised firms:
- Align global strategy with local execution
- Balance autonomy and control
- Reduce uncertainty and risk
- Improve global performance
No single coordination mechanism is sufficient on its own. Successful MNCs use a combination of formal and informal controls, adapted to their international context.
FAQs
What is control and coordination in internationalised firms?
It refers to mechanisms used by MNCs to align subsidiary operations with corporate goals.
Why is coordination difficult in MNCs?
Due to geographic distance, cultural differences, and regulatory diversity.
What are formal coordination mechanisms?
Rules, structures, planning, standardization, and performance controls.
What are informal coordination mechanisms?
Culture, communication, socialization, and interpersonal relationships.
Can MNCs rely only on formal controls?
No, effective coordination requires a balance of formal and informal mechanisms.
To understand how organizational structures support coordination, read:
