Headquarters–Foreign Subsidiary Control Relationships

This chapter of the text discusses (1)centralized and decentralized control HSRs; (2) the factors that affect the decision of centralized or decentralized relationships; (3) centralization, formalization, and normative integration relationships; (4) the cultural and situational factors that influence the use of the three relationships; (5) how a balanced relationship is accomplished.

In order to maintain proper control systems, it is crucial to have an appropriate organizational structure. HSRs are in charge of making the decision as to whether a centralized or decentralized structure is appropriate. In a centralized system, most of the important decisions come from the top or at headquarters. These decisions are relative to the local matters at hand. In a decentralized system, managers at the subsidiary are given the autonomy to make most of the important decisions relative to local matters.

The There are advantages and disadvantages of both. The book talks about how a manager in France may have difficulty determining appropriate benefits for workers out of Rio de Janerio, Brazil. Another example is that foreign markets are rapidly changing, and local managers will do a better job of making decisions due to their proximity to the local markets. These examples can apply to many different situations in which a manager needs to make a decision. Also, in these examples it is evident that a decentralized structure would be advantageous. On the other hand, when decision making is decentralized, judgements made by local managers may sometimes have negative consequences for other subsidiaries and may not be in the firm's best interest. An example would be giving the Rio de Janeiro workers generous benefits that may anger other subsidiaries that find their benefits unfair. This would be a disadvantage of a decentralized structure.

With these examples, it is clear that choosing the appropriate structure may not be that easy at all. Headquarters managers are now forced to decide which structure is most efficient. Should they let local managers make decisions, or should the headquarters managers take control. As this is a problem, there are ways to combat this. When headquarters adopts a decentralized or centralized structure, it does not always adhere to it rigidly. Things like environmental changes can lead headquarters to change from a decentralized structure to a centralized one in order to preserve progress. This also shows local managers and workers that headquarters does have a presence. Another form of structure is split control, which is a mix of the two headquarters' structures.

In order to choose the most effective structure, top management uses the following determinants: Industry, type of subsidiary, function, range of subsidiaries, number and size of subsidiaries in market, ownership structure, date of acquisition, headquarters' interest and expertise, distance, environment, corporate goals, ownership, headquarters' confidence in subsidiaries and management, success of subsidiary, intersubsidiary transactions, importance of foreign market, foreign laws, and individuals. All of these aspects are vital to address before implementing either a centralized or decentralized structure. Without addressing these determinants, failure is a major possibility.

There are three basic HSR's: centralization, formalization, and normative integration. Centralization concerns the role of formal authority and hierarchical mechanisms in the company's decision-making process. The formalization relationship represents decision making through bureaucratic mechanisms such as formal systems, established rules, and prescribed procedures. Normative integration relies neither on direct headquarters involvement nor on impersonal rules but on socialization of managers into a set of shared goals, values, and beliefs that then shape their perspectives and behavior. There are two schemes to identify factors to help determine the right HSR. The two schemes are the national culture scheme and the situational scheme.

The national scheme relies heavily on cross-cultural researcher Geert Hofstede's four national cultural dimensions. These dimensions include power distance, individualism, uncertainty avoidance, and masculinity. There also was a fifth one added later by Hofstede, Confucianism. These all help to indicate whether HSR with subsidiaries located in these cultures lean toward low or high centralization. The situational scheme does not depend on generalizations like the national scheme. The situational scheme is compiled up of many different aspects including: subsidiary's local context, size of organization, organizations under crisis conditions, management's preference, and government involvement.

Some things that go into engineering organizational structures are information technology and communication costs. The text discusses that technologies such as the Internet and video conferencing are reducing costs for communicating. There now is a preferred way to make decisions involving three stages. In the first stage with communication costs low, the best way to make decisions is via independent decentralized decision makers. As costs fall, it becomes more feasible in many decision-making situations to bring information from remote areas to the hub, where centralized decision makers can have a broad perspective of the whole organization, therefore making better decisions. As costs continue to fall, decentralized managers make the decisions.

All in all, there are pros and cons to all structures. One important part of deciding is for international managers to consider both schemes. With proper balance and nurturing success is possible.