International human resource management lesson 02

2.2 International Human Resource Management Approaches2.3 The Path to Global Status 2.3.1 Export 2.4 Initial Division Structure Early Stages of Internationalization 2.5 International Div

2.2 International Human Resource Management Approaches

2.3 The Path to Global Status

2.3.1 Export

2.4 Initial Division Structure (Early Stages of Internationalization)

2.5 International Division

2.6 Global Product/Area Division

2.6.1 Global Product Division

2.6.2 Global Area Division

2.6.3 Global Matrix Structure

2.7 New Types of Multinational Structures

2.7.1 Heterarchy

2.7.2 Transnational

2.7.3 Networked Firm

2.7.4 Keiretsu

2.7.5 Control and Coordination

2.8 Role of Human Resource

2.9 Strategies for International Organisations

2.9.1 Perlmutter’s Model

2.9.2 Bartlett and Ghoshal’s Model

2.10 Implications for Human Resource Management Policy

2.11 An Integrated Strategic Framework

2.12 Flexible Organisation: The EU Model

2.13 Context of Management and Organizations in Europe

International Human

Resource Management

2.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

 Distinguish between four types of international management approaches

 Describe mode of operation used in the various foreign markets

 Appreciate the strategic importance of the overseas operations

2.1 INTRODUCTION

The Human Resource (HR) functions do not operate in a vacuum As with other areas

of the organisation, the shift from a domestic to a global focus affects the HR activities

As a consequence, HR activities are determined by, and influence, various organizationalfactors, such as:

 Stage of internationalization;

 Mode of operation used in the various foreign markets;

 Method of control and coordination; and

 Strategic importance of the overseas operations to total corporate profitability

To a certain extent, how the internationalizing firm copes with the HR demands of itsvarious foreign operations determines its ability to execute its chosen expansion strategies.Indeed, personnel policies should lead rather than follow international operation decisions(Svard, 1982) yet one could argue that most companies take the opposite approach—that is, follow market-driven strategies

2.2 INTERNATIONAL HUMAN RESOURCE MANAGEMENT APPROACHES

The HRM uses four terms to describe Multi-National Corporations (MNCs) approaches

to managing and staffing their subsidiaries: ethnocentric, polycentric, regiocentric, and geocentric These terms are derived from the work of Perlmutter (1969) who

claimed that It was possible to identify among international executive three primaryattitudes—ethnocentric, polycentric, and geocentric—toward building a multinationalenterprise, based on top management assumptions upon which key product, functional,

an geographical decisions were made To demonstrate these three attitudes, Perlmutter(1969) used aspects of organizational design, such as decision-making, evaluation and

control, information flows, and complexity of organization He also included perpetuation, which he defined as “recruiting, staffing, development.” A fourth attitude—regiocentric—

was added later (Heanan and Perlmutter, 1979)

It is important to briefly outline them here, since they have a bearing on our discussion ofthe organizational structure and control mechanisms that are typically adopted by firms

as their internationalization progresses The four approaches are:

1 Ethnocentric: Few foreign subsidiaries have any autonomy; strategic decisions

are made at headquarters Key positions at the domestic and foreign operationsare held by management personnel of headquarters In other words, subsidiariesare managed by expatriates from the home country (PCNs)

2 Polycentric: The MNC treats each subsidiary as a distinct national entity with

some decision-making autonomy Subsidiaries are usually managed by local nationals(HCNs) who are seldom promoted to positions at headquarters Likewise, ‘PNCs’are rarely transferred to foreign subsidiary operations

23 Perspectives and Approaches of IHRM

3 Geocentric: Here, the MNC takes a worldwide approach to its operations,

recognizing that each part (subsidiaries and headquarters) makes a unique

contribution with its unique competence It is accompanied by a worldwide integrated

business, and nationality is ignored in favour of ability For example, the chief

executive officer of the Swedish Multinational Electrolux claims that within this

global company there is no tradition to hire managing directors from Sweden, or

locally, but to find the person best suited for the job, that is, the colour of one’s

passport does not matter when it comes to rewards, promotion, and development

PCNs, HCNs, and TCNs can be found in key positions anywhere, including those

at the senior management level at headquarters and on the board of directors

4 Regiocentric: Reflects the geographic strategy and structure of the multinational.

Like the geocentric approach, it utilizes a wider pool of managers but in a limited

way Personnel may move outside their countries but only within the particular

geographic region Regional managers may not be promoted to headquarter positions

but enjoy a degree of regional autonomy in decision-making It may be seen as a

precursory step towards geocentrism

It should be stressed that the above categories refer to managerial attitudes that reflect

the socio-cultural environment in which the internationalizing firm is embedded These

attitudes also may reflect a general top management attitude However, the nature of

international business often forces adaptation upon implementation For instance, a firm

may adopt an ethnocentric approach to all its foreign operations, but a particular host

government may require the appointment of its own people in the key subsidiary positions;

so, for that market, a polycentric approach is mandatory, making a uniform approach

unachievable Likewise, businesses active in Russia found that Western companies tended

to maintain an ethnocentric approach to staffing despite attempts to “Russify” the local

operations (Thornhill, 1996) Also, the strategic importance of the foreign market, the

maturity of the operation, and the degree of cultural distance between the parent and

host country, influence the manner in which the firm approaches a particular staffing

decision In some cases, an MNC may use a combination of approaches—for example,

it may operate its European interests in a regiocentric manner and its Southeast Asian

interests in an ethnocentric way until there is greater confidence in operating in that

region of the world

Because of these operating realities, it is sometimes difficult to equate precisely managerial

attitudes towards international operations with the structural forms The environmental

contingencies facing the particular internationalizing firm influence its strategic position,

managerial mindset, organizational structure, and staffing approaches The four typologies–

international, global, multidomestic, and transnational–are useful illustrations of these

linkages

Check Your Progress 1

Distinguish between ethnocentric and polycentric approaches of international

management

2.3 THE PATH TO GLOBAL STATUS

In addition to the strategic imperatives, mindsets, and staffing approaches outlined above,

IHRM is affected by the way the internationalization process itself is managed Most

International Human

Resource Management

firms pass through several stages of organizational development as the nature and size

of their international activities grow As they go through these evolutionary stages, theirorganizational structures change, typically due to the strain imposed by growth andgeographical spread, the need for improved coordination and control across businessunits, and the constraints imposed by host-government regulations on ownership andequity Multinationals are not born overnight; the evolution from a domestic to a trulyglobal organization may involve a long and somewhat tortuous process with many anddiverse steps, as illustrated in Figure 2.1 Some firms may use licensing, subcontracting,

or other operation modes, instead of establishing their own foreign production or servicefacilities

Some firms are able to accelerate the process through acquisitions, thus leapfroggingover intermediate steps (i.e., move directly into foreign production through the purchase

of a foreign rather than initial exporting, followed by sales subsidiary Some firms can bedriven by external factors such as host-government action (e.g., forced into a joint venture)

or an offer to buy a company Others are formed expressly with the internationalmarket in mind In other words, the number of steps, or stages, along the path tomultinational status varies from firm to firm, as does the timeframe involved The followingsection examines the typical path from domestic to global organization and draws outkey HRM implications

Source: Dowling et al (2001) International Resource Management (p 34)

Figure 2.1: Stages of Internationalization2.3.1 Export

Exporting is typically the initial stage for firms entering international operations As such,

it rarely involves much organizational response until the level of export sales reaches acritical point Of course, simple exporting may be difficult for service companies (such

as legal firms) so that they may be forced to make an early step into foreign directinvestment operations (via a branch office, or joint venture) (Erramilli, 1997)

Exporting often tends to be handled by an intermediary (e.g., an export agent or foreigndistributor – usually a HCN, as local market knowledge is deemed critical) As exportssales increase, an export manager may be appointed to control foreign sales and activelyseek new markets This person is commonly from the domestic operations – that is, aPCN Further growth in exporting may lead to the establishment of an export department

at the same level as the domestic sales department as the firm becomes more committed

to, or more dependent on, its foreign export sales as Figure 2.2 shows

Exporting

Sales Subsidiary

Foreign Production

Network of Subsidiaries

Licensing Subcontracting

25 Perspectives and Approaches of IHRM

Figure 2.2: Export Department

At this stage, exporting is controlled from the domestic-based home office, through a

designated export manager The role of the HR department is unclear, as indicated by

the dotted arrow between these two functional areas in Figure 2.2 Though there are

HR activities involved (such as the selection of export staff), and perhaps training of the

foreign agency staff, these activities are handled by the marketing department, or

exporting staff, the HR department has little, if any, involvement with the development of

policies and procedures surrounding the HR aspects of the firm’s early international

activities (Welch, etc., 1997)

2.4 INITIAL DIVISION STRUCTURE (EARLY STAGES OF

INTERNATIONALIZATION)

As the firm develops expertise in foreign markets, agents and distributors are replaced

by direct sales with the establishment of branch offices in the foreign market countries

At this stage, the company creates an export division or function at the corporate home

office and the export division head directly reports to the CEO

As international sales increase further, local governments exert pressure on these growing

markets for setting up on-site manufacturing facilities This prompts the company to set

up a subsidiary and a branch office in the concerned foreign countries for economic

reasons, as well as to demonstrate to the local government that it wants to be a good

local citizen This new structural arrangement is shown in Figure 2.3 Each subsidiary is

responsible for operations within its own geographic area, and the subsidiary manager

reports directly to the export division head at the corporate office This arrangements is

useful because it takes a great deal of burden off the CEO for monitoring and supporting

the different subsidiaries in different foreign markets (Gupta, 2006)

In the beginning, PCNs are usually posted to important positions because the firm has

more confidence in them to implement proven home office human resource policies and

practices This is known as the ethnocentric approach The decision to use PCNs leads

into exportation of management issues and activities At this point the HR department

becomes actively involved in the personnel aspects of the firm’s international operations

Managing Director

Production

Manager

Finance Manager

Marketing/

Sales Manager

HR Manager

Domestic Sales

Export Sales ?

International Human

Resource Management

Source: International HRM (2006) S.C Gupta (p 136)

Figure 2.3: Use of Subsidiaries during the Early Stages of Internationalization2.5 INTERNATIONAL DIVISION

For some firms, it is a short step from the establishment of a sales subsidiary to foreignproduction or service facility This step may be considered small if the firm already isassembling the product abroad to take advantage of cheap labour or to save shippingcosts or tariffs For some firms, though, the transition to foreign investment is a large,sometimes prohibitive, step For example, an Australian firm that was successfullyexporting mining equipment to Canada began to experience problems with after-salesservicing and delivery schedules The establishment of its own production facility wasconsidered too great a step, so the firm entered into a licensing agreement with a Canadianmanufacturer

Having made the decision to produce overseas, the firm may establish its own foreignproduction facilities, or enter into a joint venture with a local firm, or buy a local firm.Regardless of the method of establishment, foreign production/service operations tend

to trigger the creation of a separate international division in which all international activitiesare grouped, as Figure 2.4 illustrates (Thornhill, 1996)

With the spread of international activities, the firm establishes what has been referred to

as “miniature replicas” (the foreign subsidiaries are structured to mirror that of the domesticorganization) The subsidiary managers report to the head of the international division,and there may be some informal reporting directly to the various functional heads Forexample, as shown in Figure 2.4, there may be contact regarding staffing issues betweenthe HR managers in the two subsidiaries and the HR manager at corporate headquarters

Chief Executive Officer

V.P International operations Production Marketing Finance Personnel

Egypt Japan Australia

Home office departments

Overseas subsidiaries

27 Perspectives and Approaches of IHRM

Source: Dowling et al (2001 International Resource Management p 38)

Figure 2.4: International Division

Many firms at this stage of internationalization are concerned about maintaining control

of the newly established subsidiary, and will place PCNs in all key position in the subsidiary

However, some firms decide that local employment conditions require local handling and

place an HCN in charge of the subsidiary HR function, thus making an exception to the

overall ethnocentric approach; others may place HCNs in several key positions, including

HRM, to comply with host-government directives

The role of corporate HR staff is primarily concerned with expatriate management

though there will be some monitoring of the subsidiary HR function—formally through

the head of the International Division Pucik (1985) suggests that initially, corporate HR

activities are confined to supervising the selection of staff for the new international

division Expatriate managers perform a major role: identifying employees who can direct

the daily operations of the foreign subsidiaries, supervising transfer of managerial and

technical know-how, communicating corporate policies, and keeping corporate HQ

informed

As the firm expands its foreign production or service facilities into other countries,

increasing the size of its foreign workforce, accompanied by a growth in the number of

expatriates, more formal HR policies become necessary Welch and Welch (1997) argue

that the capacity of corporate HR staff to design appropriate policies may depend on

how institutionalized existing approaches to expatriate management concerns have

become, especially policies for compensation and predeparture training, and that the

Managing Director

Production Marketing Finance Human

International Division

Subsidiary Italy

Subsidiary Japan

Subsidiary Australia

as residing outside its current domain.

2.6 GLOBAL PRODUCT/AREA DIVISION

Over a time, the firm moves from the early foreign production stage into a phase ofgrowth through production (or service), standardization, and diversification Consequently,the strain of sheer size may create problems, and the international division becomesoverstretched making effective communication and efficiency of operation difficult Insome cases, corporate top managers may become concerned that the international divisionhas enjoyed too much autonomy, acting so independently from the domestic operations

to the extent that it operates as a separate unit—a situation that cannot be tolerated asthe firm’s international activities become strategically more important

Typically, tensions will emerge between the parent company (headquarters) and itssubsidiaries, stemming from the need for national responsiveness at the subsidiary unitand global integration imperatives at the parent headquarters The demand for nationalresponsiveness at the subsidiary unit develops because of factors such as differences inmarket structures, distribution channels, customer needs, local culture, and pressure fromthe host government The need for more centralized global integration by the headquarterscomes from having multinational customers, global competitors, and the increasinglyrapid flow of information and technology—and from the quest for large volume for

economies of scale (Dowling et al., 2001) As a result of these various forces for change,

the multinational confronts two major issues of structure:

1 The extent to which key decisions are to be made at parent headquarter or at thesubsidiary units (centralization vs decentralization), and

2 The type of control exerted by the parent over the subsidiary unit (bureaucraticcontrol vs normative)

The structural response, at this stage of internationalization, can be either a product - orservice-based global structure or an area-based structure

As part of the process of accommodating subsidiary concerns through decentralization,the MNC strives to adapt its HRM activities to each host-country’s specific requirements.This naturally impacts on the corporate HRM function There is an increasing devolution

of responsibility for local employee decisions to each subsidiary, with corporate HR staffperforming a monitoring role, intervening in local affairs only in extreme circumstances.For example, in the late-1980s, Ford Australia had a ceiling on its HRM decisions, andany decision that involved an amount above that ceiling (such as promotions above acertain salary grade) had to be referred to its regional HQR for corporate approval.Expatriate management remained the responsibility of corporate HR staff

This HRM monitoring role reflects management’s desire for central control of strategicplanning—formulating, implementing, and coordinating strategies for its worldwidemarkets The growth in foreign exposure combined with changes in the organizationalstructure of international operations results in an increase in the number of employeesneeded to oversee the activities between the parent firm and its foreign affiliates Withinthe human resource function, the development of managers able to operate in internationalenvironments becomes a new imperative (Puick, 1985)

29 Perspectives and Approaches of IHRM

2.6.1 Global Product Division

In this structure, the company treats each of its major products as distinct Strategic

Business Units (SBUs) Divisions/functions at the corporate office are given worldwide

responsibility for production, finance, marketing and management of supply chain for

each product or product line These product divisions also have internal functional support

The structure is shown in Figure 2.5

Source: Gupta S.C., International HRM (2006) p 138

Figure 2.5: Global Product Division

This structure has certain advantages If the firm is very diverse, the need to customise

the product to the specific demands of the buyer becomes important This structure also

helps to integrate marketing, production and finance globally on the product basis Further,

the firms are able to strategise shift of products from one market to another as they

reach different life cycle stages, according to acceptability and scope

The disadvantage of this structure is duplication of personnel within each division, making

it expensive A second is that product managers may pursue currently attractive markets

and neglect other areas with better long-range potential A third is that many divisional

managers spend too much time tapping their local markets rather than international markets,

because it is more convenient and easier, and because they are more experienced in

domestic operations

2.6.2 Global Area Division

In this arrangement, a multinational prefers to divisionalise its foreign operations on the

basis of geographical unit rather than on product basis The corporate structure at the

HQ remains as in case of product-based divisionalisation (See Figure 2.6) This signifies

a major change in the thinking of the company, because now the international operations

are put on the same level as domestic operations

Headquarters

Chief Executive Officer

Production Marketing

Corporate Product Division

Finance ResourceHumanOperating

Divisions

Great Britain France Germany Netherland Production Marketing Finance Personnel

South

America Africa Europe Australia Far East

Product A Product B Product C Product D Product E

International Human

Resource Management

Head Quarters departments

Operating divisions

Chief Executive Officer

Production Marketing Finance Human

Resource

Europe Far East South

America Africa Australia

Production Marketing Human

Resource

Figure 2.6: A Global Area Division Structure

This structure is useful when the product range is not too broad and therefore commonresources in a country can be shared and support all operations The HQ is responsiblefor transferring excess resources from one country to another as required and to establishcoordination between different countries to provide synergy and overall goal achievement

2.6.3 Global Matrix Structure

When a multinational is trying to integrate its operations in more than one dimension, likeproduct as well as area, or customers and technology, it resorts to the matrix structure

As shown in Figure 2.7, both product division and area division share joint responsibility.This means both executives jointly decide allocation of resources and other importantmatters, but the matrix manager is responsible for the results

In this structure, there is pressures from horizontal matrix managers for equal allocation

of resources; however, the vertical managers are supposed to balance this by taking intoaccount the relative importance of products or projects based on organisational prioritiesand other long-term considerations

However, there are several shortcomings associated with the Matrix As the designcomplexity increases, coordinating the personnel and getting everyone to work towards

a common goals often becomes difficult Second, some employees experience dualauthority, which is frustrating and confusing Managers, therefore need excellentinterpersonal and conflict-resolution skills

The most successful multinationals today focus less on searching for the ideal structure,and more on developing the abilities, behaviour and performance of individual managers.This creates a matrix in the minds of managers’ where individual capabilities are capturedand the entire firm is motivated to respond cooperatively to a complicated dynamicenvironment

31 Perspectives and Approaches of IHRM

Source: Dowling et al (2001) International Resource Management (p 43)

Figure 2.7: The Matrix2.7 NEW TYPES OF MULTINATIONAL STRUCTURES

In large, mature multinationals, these flows are multinational: from headquarters to

subsidiary and from subsidiary to other subsidiaries and also from subsidiary to

headquarters See Figure 2.8 – the result can be a complex network of interrelated

activities and relationships

Production Marketing Finance Human

Resources

Chief Executive Officer

Vice-President Global Products

Vice-President International

Pacific Europe Americas

International Human

Resource Management

Source: Dowling; International HRM (p 47)

Figure 2.8: Beyond the Matrix - A Networked Firm

It is possible to identify three main approaches from the multinational managementliterature — the heterarchy, the transnational, and the network firm Although they havebeen given different terms, each form recognises that the concept of a superior structurethat neatly fits the corporate strategy becomes inappropriate As Marschan (1996) explainsreconsidering the long-standing principle that “the parent knows best” requires a radicalchange in the way the entire multinational is managed, turning it from an organisationalpyramid into an integrated network These new forms and their IHRM implications areoutlined below Mergers, takeovers, joint ventures strategic alliances also give way tonewer variations in organisational structure design These can be considered under four

types: the heterarchy, the transnational, the network firm and the Keiretsu.

2.7.1 Heterarchy

The heterarchy is a structural form proposed by Hedlund (1986) that recognizes amultinational may have a number of different kinds of centres apart from the traditionalcentre referred to as “headquarters” Each subsidiary centre may be simultaneously acentre and a global coordinator of discrete activities, thus performing a strategic role notjust for itself, but for the MNC as a whole For example, some multinationals maycentralize research and development in a particular subsidiary In a heterarchical MNC,control is less realist on the top-bottom mechanisms of previous hierarchical modes andmore reliant on normative mechanisms, such as the corporate culture and a widely sharedawareness of central goals and strategies

From an HRM perspective, the heterarchy is interesting in that its success appears torest solely on the ability of the multinational to formulate, implement, and reinforce therequired human resource elements The heterarchy demands skillful and experiencedpersonnel as well as sophisticated reward and punishment systems in order to developthe normative control mechanisms necessary for effective performance The use ofstaff as an informal control mechanism is important

Centre

Corporate Headquarters

Nodal Unit

33 Perspectives and Approaches of IHRM

2.7.2 Transnational

The term transnational has been coined to describe a new organizational form that is

characterized by an interdependence of resources and responsibilities across all business

units regardless of national boundaries The transnational tries to cope with the large

flows of components, products, resources, people, and information among its subsidiaries,

while simultaneously recognizing the distributed specialized resources and capabilities

As such, it demands a complex process of coordination and cooperation involving strong

cross-unit integrating devices, a strong corporate identity, and a well-developed worldwide

management perspective Developing transnational managers or global leaders who can

think and act across national and subsidiary boundaries emerges is an important task for

top management introducing these complex organizational forms Staff transfers play a

critical role in integration and coordination The role of human resources is once again

very critical and similar as in matrix or heterarchy Unilever, for example, is more like a

transnational organisation today

Bartlett and Ghoshal (1990) define transnationals in the following words:

Among the companies we studied, there were several that were in the process of

developing such organisational capabilities They had surpassed the classic capabilities

of the multinational company that operates as decentralized federations of units able to

sense and respond to diverse international needs and opportunities; and had evolved

beyond the abilities of the global company with its facility for managing operations on a

tightly controlled — worldwide basis through its centralized hub structure They had

developed what we termed transnational — capabilities — the ability to manage across

national boundaries, retaining local flexibility while achieving global integration More

than anything, this involved the ability to link local operations to each other and to the

centre in a flexible way, and in doing so, to leverage those local and central capabilities

2.7.3 Networked Firm

U Anderson, M Forsgren, C Pahalberg, and P Thilenius (1990), suggest viewing certain

large and mature international firms as a network, in situations where:

 Subsidiaries have developed into significant centres for investments, activities and

influence, and cannot be regarded as being at the periphery

 Interaction between headquarters and each subsidiary is likely to be dyadic, taking

place between various actors at many different organisational levels and covering

different exchanges, the outcome of which is important for effective global

performance

 Such multinationals are loosely coupled political systems rather than tightly bonded

homogeneous, hierarchical systems This runs counter to the traditional structure

where linkages are described formally via the organisation’s structure and

standardised procedures, and informally through interpersonal contact and

socialisation

 One subsidiary may act as a nodal unit linking a cluster of satellite organisations

Thus, one centre can assume responsibility for other units in its country or region

The management of a multi-centered networked organization is complex Apart from

the intra-organizational network (comprising of headquarters and the numerous

subsidiaries), each subsidiary also has a range of external relationships (involving local

suppliers, customers, competitors, host governments, and alliance partners The

management of both the intra-organizational and inter-organizational spheres, and of the

total integrated network, is crucial to global corporate performance It involves what has