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A strong head office makes a strong company
225
A Strong Head Of®ce Makes a Strong Company Toyohiro Kono
T
HIS ARTICLE ARGUES AGAINST THE current belief that: the reduction of overhead cost is essential to raise pro®ts; cutting staff in central departments is necessary for survival; the productivity of white-collar workers is declining; computerization can replace white-collar or clerical jobs, and that the middle management will disappear. We have found that successful Japanese companies have large head of®ces employing high level experts, and the head of®ces of successful companies function as the research laboratories for management. The product divisions of these companies are not self-suf®cient, because important functions are centralized in the head of®ce. Also the operating units structure tends to have two types of pro®t centers, for example, product divisions and customer or area divisions.
The Functions of Company Headquarters The headquarters is the top organizational structure of the company, and it is usually located in the head of®ce building. The headquarters has three main functions. These functions are described below and in the Appendix. (1) The formulation of corporate strategy. This means the formulation of the goals of the company and the product-market strategy. Other functions include integration of division strategies and control of them. These functions are carried out by the top management, the planning department, the research management department and the budget department. Pergamon
PII: S0024-6301(99)00021-7
This article is based on a survey of major Japanese manufacturing corporations. The author argues that the headquarters of a corporation has three functions: (a) formulating corporate strategy, (b) building core competencies, and (c) providing expert services. In simple terms, the headquarters is a research laboratory for management. Successful Japanese companies have about 8% of personnel in their head offices. The author also suggests that the interface between the headquarters and operating units is crucial for strategic leadership. This is particularly important where the product mix is technologyrelated or marketing-related. # 1999 Elsevier Science Ltd. All rights reserved
(2) Expert functional staff departments identify and develop the company's core competences. The personnel, production technology, and marketing departments are examples of departments which accumulate knowledge and help the line departments to develop competitive expertise in marketing and production, and to create the knowledge base for these capabilities by investing in resources such as personnel, ®xed assets and information systems. (3) Providing central services, such as procurement, ®nance and information systems. These departments develop specialized expertise and actually carry out these activities. The last two (2 and 3) types of head of®ce departments try to create and develop strong knowledge assets and core competencies. Long Range Planning, Vol. 32, No. 2, pp. 225 to 236, 1999 # 1999 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024±6301/99 $ - see front matter
226 The units which are not included in this discusion are product division headquarters, research laboratories and sales of®ces, in other words, the departments which implement research and pro®tmaking activities.
Strong Headquarters Creates Strong Competitiveness The results of our survey of the headquarters of Japanese manufacturing companies are set out in Table 1. There is a high ratio of personnel in the headquarters to total company personnel, particularly in the specialized companies and over the last ten years the percentage has increased. Corporations which have related diversi®cation tend to have larger headquarters than those with unrelated diversi®cation, because their core competencies, such as research and development capabilities are common to many products. So Research and Development and the search for new products tends to be centralized. On the other hand, companies with unrelated diversi®cation do not need to centralize the search for new products, particularly when diversi®cation is not carried out by internal development. If the diversi®cation is carried out by acquisition of other companies and by divestment of unpro®table businesses, the headquarters can be small. If the integration of suppliers and vendors concerns several departments, these relationships need to be dealt with by a central purchasing department or the marketing department in the head of®ce. Internal development also requires a strong core competence in the research laboratories under the head of®ce. Vertical integration and internal development strategies tend to produce larger headquarters. Specialized companies also have large head of®ces, because of their functional organizational structures. But why is it that Japanese companies tend to have large head of®ces? (a) They have technology-related or marketing-related diversi®cation structures, so there are common
competencies among their product groups. (b) They use quasi-vertical integration and strategic alliances extensively, which also require strong centers. (c) They diversify by internal development, and rarely acquire other companies. The functions which are performed by the headquarters of successful Japanese companies are listed in the Appendix. This table was derived by analyzing the activities of successful companies such as Sony, Canon, Hitachi and Yukijirushi (dairy products).
Centralization Of Decision-making
Before we discuss this problem, let us consider the principles which underlie centralization in decision making. 1. One principle is the division of labor. The authority to take decisions should be given to the people who have information and the capability. The upper levels have information on the external long-term environment and the capability for making decisions on the selection of new domains, thus strategic decisions are centralized. The lower levels can make better decisions on operational issues. Thus the more innovative the company is, the larger the headquarters and strategic planning departments. Whilst smaller headquarters are appropriate for less innovative companies. 2. The coordination of activities of various lower departments requires not only rules and policies, but also coordinating activities from higher levels. Comprehensive planning and budgeting at higher levels are an important means of doing this. The mobilization of key resources for important strategic projects is another key success factor for innovation. 3. There are limits to the amounts of information that can be handled. The head of®ce cannot handle too much information, so they must delegate authority. This also explains the limitations of the centralized economic systems of communist countries. 4. The delegation of authority is also necessary for employee motivation. Centralization of authority tends to demotivate staff at lower-levels.1,2 Successful companies tend to have larger head
TABLE 1. Headquarter's staff in large Japanese manufacturing companies (personnel in the head office as a percentage of the total number of employees)a Year
1982
Specialized companies
(17 Co.)
Diversified companies
(27 Co.)
1995 8.9% (4.6%) 9.1% (5.1%)
(33 Co.) (64 Co.)
14% (12%) 8% (4%)
8% (5%) 6% 6%
a The samples are large manufacturing companies. 44 companies in 1982 and 97 companies in 1995. Numbers in parentheses are standard deviations. For the Mail questionnaire survey the response was 49%.
A Strong Head Office Makes a Strong Company
227 of®ces. As a result of visiting the head of®ces and observing their activities, the author concluded that these companies have both large head of®ces and outstanding performances: Matsushita, Sony, Canon, Toyota, Marks & Spencer, Shell and 3M. However, some companies have large head of®ces and poor performance (for example, Westinghouse and the former Japan National Railways) and some other companies with small head of®ces have outstanding performance (for example, ICI, GE). However, these companies with small-head-of®ces tend to have large of®ces at the division levels, so they have tall organizational structures.
The Advantages of Large Headquarters
(1) The company can take innovative action to capitalize on business opportunities, by mobilizing corporate resources. The concentration of massive resources into the semi-conductor business by Toshiba, NEC and Hitachi are examples of this. Sony was able to triple its sales in ten years by putting resources into electronics components, computer related products (for example, displays), and the expansion of AV products. The concentration of resources into these growth products would not have been possible under a decentralized product division structure. The company can also bring together project teams to plan and implement risky new ventures by accommodating them in the incubator department of the head of®ce. A large head of®ce can also take aggressive action in expanding world-wide operations, by establishing production centers around the world. There are two kinds of information, data and knowledge. Data is collected and stored at the head of®ce. The future opportunities and threat on the domain, which are not the responsibility of the product divisions or which cover the ®elds of more than two divisions, are collected and utilized by the head of®ce. Knowledge is collected and stored at the lower level. How to improve the present product, how to improve the quality, how to increase productivityÐthis sort of information is collected and utilized at the lower levels, but it has to be diffused to other departments with help of headquarters. Delegation of authority is not always the best approach. The problem is what sort of information should be collected where, and how to generate successful new ideas. (2) Strong staff support is available for every functional area. The staff departments can accumulate knowledge from external and internal sources, and they are therefore able to create and develop the company's core competencies. This concept is described in Fig. 1. The company's personnel management system,
the quality assurance system, the production control technology, and the marketing system are analyzed and developed at the head of®ce. Also both tacit knowledge and formal knowledge are accumulated and distributed to the line departments. This makes it possible for a company to become `a learning organization'. If the company has decentralized product groups with a weak head of®ce, the company may be like a collection of separate small trees, and it cannot develop an infrustructure of strong core competencies. A strong head of®ce also makes it possible to discontinue certain departments and to change competencies. A product division cannot make decisions on the abandonment of its own competencies. The head of®ce can change there competencies. This is an important trait of learning organizations. Hitachi and Toshiba were able to change their capabilities from heavy electrical and mechanical engineering and expand into electronics, then to systems and software. A strong head of®ce also makes it possible for a company to maintain a good collaboration between product groups. At Canon a number of committees help to coordinate and control the activities of product divisions and foreign subsidiaries: the global operations committee, the global research activity committee, the global production committee, the global marketing committee, the trade balance problem committee, and the environmental protections committee. (3) A strong head of®ce also enables a company to ¯atten its organizational structure. With a competent head of®ce it is possible to make the of®ces of the divisions simpler and this shortens the distance between the top management and the front-line people. The author studied the organization structure of a large chemical company with a small head of®ce and I also visited the of®ce of a division, and found that the local of®ce had a large staff. A company which has a small head of®ce does not necessarily have small overhead cost. (4) A large head of®ce can also provide a pool of competent talent. The head of®ce of a reputable company can attract competent people from outside and from inside, because of the prestige of the of®ce and the quality of its jobs. This reserve of excellent human resources can be mobilized for the internal development of new businesses, and for establishing operations overseas.
Disadvantages of Large Head Of®ces
Here are some typical problems of large head of®ces. (1) Overcontrol of divisions and departments. A strong head of®ce may concentrate authority and discourage initiatives of the product divisions. Also Long Range Planning Vol. 32
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228
A company with strong competencies A company with weak competencies Operating units
Operating units
Weak headquarters Strong headquarters Laboratories Research laboratories
FIGURE 1. The head office as a source of core competencies.
the division heads may tend to look up to and request help from the head of®ce. Under a life-time employment system, a company cannot easily discharge an unsuccessful division manager, and this may result in less delegation of authority to the division, which in turn will cause the divisions to rely even more on the central of®ce for decisions. (2) `White gloves'. The elite members at the head of®ce may not understand the real situation in the front line, and as a consequence they may impose unrealistic control on the divisions. These faults can be avoided by better communications and frequent visits to the front line wearing the same uniform, and job rotation.
A Hybrid Organizational Structure Is Simpler and More Flexible Companies with related-product diversi®cation tend to have hybrid organizational structures. Survey results of the organizational structures of manufacturing companies is shown in Table 2. The survey showed that half of the diversi®ed companies have a product-division or M-form structure. The other half have hybrid structures. However detailed observation of the organizational structures of Japanese corporations shows that most of the `product divisions' are not mixed or fully ¯edged
TABLE 2. Divisional organizational structuresa Product mix
Specialized
Diversified
Total companies
1. Product divisions integrating marketing and promotion 2. Hybrid, with two profit centers 3. Area divisions 4.1. Functional, partly product divisions for minor products 4.2. Functional divisions 5. Others Total companies
7 5 2 6 12 1 33
36 13 0 7 7 1 64
43 18 2 13 19 2 97
a Survey in 1995 by T. Kono, by mail questionnaire and by reference to organization charts. The total sample is 97 manufacturing companies. Specialized companies have more than 70% of sales from one product line.
A Strong Head Office Makes a Strong Company
229 TABLE 3. The hybrid product division
1 Product divisions with a few departments under a strong head office (e.g. Hitachi, Matsushita Electric, NEC, Sony, Canon Top management
HQ
R & D Production technology & planning quality assurance
Marketing staff
A product
B product
development production Laboratories production marketing HQ = Headquarters 2 Product divisions with two profit centers (e.g. Sumitomo Electric, Nippon Sanso) Top management
HQ
R & D Marketing Production planning staff staff
A product B prod. A prod. B product marketing marketing production production
3 Product divisions and customer divisions (e.g. Yukijirushi Dairy Products, Mitsumi Electric, Toto, Fujita) Top management
HQ
R & D Marketing Production planning staff staff
Product Product X Area Y Area (or customer) (or customer) B A
4 Matrix Organisation Top management
HQ
R & D Marketing Production planning staff staff
A product B product division division
M production center N production center X Sales office Y Sales office
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230 divisions; they lack one of the three key functions, and have a strong headquarters.
Product Divisions with a Few Functional Departments
This kind of company employs a product division structure, but with strong head of®ce support. The concept of this structure is shown in Table 3. The majority of the product division structures in Japan (that is, about half of the sample manufacturing companies) belong to this type. The head of®ce is strong. Research and development, production technology, quality assurance and marketing planning are centralized and in the product divisions the research function or the marketing function are missing. Matsushita, Hitachi, Mitsubishi Electric and Sony have this type of organization structure. One advantage of this structure is that the company can develop core competencies in research, production technology and marketing. Where there is related diversi®cation of products, this centralization of functions enables the company to maintain a strong competitive edge. So the advantages of this structure are: . strong central functions, . good collaboration between the functions in the product divisions, and . ¯atter organizational structure. A possible disadvantage in this structure is that it may discourage strategic initiatives in the product division. However, this problem can be solved, if the guidelines for a new strategy is shown to the product division, and this vision is used to stimulate new initiatives. Many new ideas come from inventors in centralized research laboratories. Mr Toshio Ikeda at Fujitsu invented a new computer system in about 1970 and this system laid the foundation for Fujitsu to become one of the largest computer manufacturers in the world. He was supported by top management, not by his division manager who tended to be more interested in short-term pro®ts.
The Hybrid Structure with Two Pro®t Centers for Each Product
In this type of organization, each product has two pro®t centers, one in the marketing department and one in the production department. The advantages of this structure are as follows: { It has bene®t of both functional specialization and of integration. For example, Sumitomo Electric Company produces a variety of producers' electrical goods selling to a number of industries. The production and sales are carried out at different locations, needing different A Strong Head Office Makes a Strong Company
skills. However, when the products are mutually related, the departments can develop functional core competencies. { The product pro®t center system enables the departments to meet market competition. { This system is similar to a functional departmentation, but it is more ¯exible, and the mobilization of resources to a project team or other strategic projects tends to be easier, because pro®t responsibility is not so strict. Transfer of personnel is easier, compared with the strict product division system. One problem with this organizational structure, however, is how to decide upon transfer prices.
Product divisions and area or customer divisions. This structure is typically seen in the
construction business and in dairy product companies. One grouping is by the products and another grouping is by area or by customers. The merits of this structure are as follows: (a) Each output group has a different expertise, different decision styles and meets different customer needs. For example, the production and marketing of milk and ice-cream is different from dry dairy products. However, the local sales of®ces combine these products and sell them to the same customers. Another example is the construction company. The technology for civil engineering is very different from the technology for the construction of houses and interior design. However, the customer needs a combination of these resources. The area of®ce has to investigate the needs of customers and de®ne them. Also the local sales of®ce takes into consideration the location's speci®c features. (b) When the products are related in production technology or marketing, this type can have either production synergy effects or marketing synergy effects. (c) This system is more ¯exible than the product divisions, and easier to mobilize for new projects
The matrix organization. A matrix organization is used where many products are produced, and when integration by products is essential, whilst production is scattered and sales are scattered. For example, Shiseido sells cosmetics and toiletry goods to a variety of consumers. Likewise Toto produces a number of sanitary goods for households and of®ces. The product managers take full responsibility for the marketing and production of each product, they control the production centers and sales of®ces. The product manager is the only pro®t center, and the production plants and sales of®ces are cost centers. This type is also seen in the operation of subsidiaries of foreign companies. The local companies
231 have pro®t responsibility, but the product divisions in the home country have authority over production technology and the personnel management of the technical staff. Canon says it has a product division structure and also has a matrix structure. It has a number of committees which have authority to make decisions in several areas. The merits of a matrix organization are: (a) it can provide the integration and also specialization; (b) new projects are easily organized, and (c) it can avoid the duplication of staff. A major problem is that it requires employees to have two bosses, which may cause con¯ict.
Factors Determining Organizational Structure
(1) Organizational structure is mostly determined by two factors. One is product or technological diversity, and the other is market diversity. By using these two dimensions, we can establish a typology for line organizational structures. { The pure product division is appropriate for unrelated diversi®cation, with a small head of®ce. { When the product is diversi®ed, but the technology or marketing are mutually related, then the product division with the large head of®ce, is appropriate. { When the products are diversi®ed, but related, and when the customers or areas are diversi®ed and responsiveness is required, then the two pro®t center product divisions or matrix organizations are used. { When the company's product is specialized, and the customer or market is concentrated the functional organization is appropriate.
(2) These principles ignore the development of an organization, the accumulation of core competencies and the mobilization of resources to meet the needs of customers. They do not describe the functions of the head of®ce, nor do they describe the relationship between the line departments and the head of®ce. The relationship between strategy and organizational structure is described in Table 4.
The Arguments It is frequently suggested that a large head of®ce imposes high labor costs and reduces a company's ®nancial performance. However, in Japanese manufacturing companies, the percentage of average labor cost over sales is between 10 and 15%. The 8% of total manpower in head of®ces may account for only 1% of sales, so the personnel cost of the head of®ce is not a serious burden to these companies. How is the size of the head of®ce related to ®nancial performance? Diversi®ed companies can be classi®ed into four groups according to whether the size of the head of®ce is large or small, and whether their ®nancial performances is high or low (see Table 5). Some companies have large head of®ces and a good performance. NEC, Hitachi, Sony and Canon belong to this group. These companies have the following features: (a) Their Research and Development expenditure is high, their products are mostly high technology products, or their advertising expenditure is large (like Shiseido) and their products are differentiated. (b) The level of diversi®cation is high, but their products are related in terms of technology or marketing.
TABLE 4. Fitting the organization structure to the corporate strategy
Direction of movement
Quality of movement Low technology or conservative culture
High technology or innovative culture
Specialization
.Small head office .Functional (sugar, cement)
Diversification .Little movement .Large movement Acquisition and divestment
.Small head office .Product division
.Large head office .Strong strategic planning department .Functional services (Honda, Toyota, Marks & Spencer)
Internal development
.Small head office .Product division .Large head office .Strong strategic planning department .Hybrid line organizational structure (Sony, Matsushita) Long Range Planning Vol. 32
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232 TABLE 5. Size of head office and financial performancea
Financial performances High Low
Large
Size of headquarters
Mitsui Chemical, Konica, Asahi Glass, Hitachi, NEC, Matsushita Electric, Sony, Olympus, Nikon, Canon Fuji Confectionery, Morinaga Dairy, Kanebo, Yokohama Rubber, Ebara, IHI
Small
Teijin, Toray, Asahi Chemical, Toshiba, Fuji Film, Komatsu Honshu Paper NKK, Sumitomo Metal, Kobe Steel, Nihon Plate Glass, Furukawa Electric, Niigata Machinery, Sanyo Electric, Mitsui Ship Building
a The dividing line between large and small HQ is 5%, measured by the number of personnel in the head of®ce divided by the number of total employees, in 1995. The dividing line between high and low ®nancial performance is 6% ROI or higher, low performance is 5% ROI or lower, measured as a ten year average from 1983 to 1993.
Some companies have a large head of®ce, but the average ROI for the last ten years was low (less than 5%). These companies (a) have low Research and Development ratios, and have low levels of product differentiation, and (b) have a lower level of diversi®cation and are in low growth industries. Their head of®ces did not pursue an aggressive strategy. Other companies have a relatively small head of®ce, but their performance is better. These companies (a) have a high Research and Development ratio, (b) have a higher share of the market, and (c) have a lower degree of diversi®cation. Probably because of the low level of diversi®cation, they can manage without a large head of®ce. Finally, there are companies which have small head of®ces and a low ROI. There are many such companies. These companies have (a) a low Research and Development ratio, (b) a low degree of product differentiation, (c) a low level of diversi®cation, and (d) little change of product mix during the past ten years. These features are due to a small head of®ce which has made little effort to explore new business opportunities. The computer has decreased the hours employed in repetitive manual work and computation, but it is not clear whether it has decreased the number of people in the head of®ce and in other indirect departments. Table 1 suggests that in Japanese companies, the number of people employed in headquarters has actually increased. Centralized economic planning and control systems in communist countries have failed because of the over-centralization of authority. Is the same problem likely to arise in a strong headquarters system? There are many differences between the two systems. (a) The central planning of®ce in a communist country is incapable of dealing with huge amounts of information about operating decisions. The of®ce tries to do a job beyond its span of control. But in the headquarters of successful private corporations, the management selects the decisions to be actioned A Strong Head Office Makes a Strong Company
in the head of®ce, and the majority of operating decisions are delegated to the operating departments. (b) Also there is little drive to innovate and raise productivity in the center of communist governments and they operate much like a monopoly. The headquarters staff of successful private corporations are motivated by the intrinsic and extrinsic rewards which they achieve through successful competition. Knowledge is produced through feedback from experience and through experimentation, so knowledge is accumulated through interaction with customers, and through experience in production. So how can the head of®ce which is remote from the front line, produce new knowledge in a vacuum? However, there are many kinds of information, for example, data, meaning, theory, know-how, ideas and wisdom. We understand knowledge to mean these elements. Knowledge about strategy is produced not only at the front, but also in the research laboratory, in the planning department, by the marketing staff, through experiment, collecting information and through reading books and cases. Knowledge about strategy is obtained and accumulated at higher levels in the hierarchy, whilst knowledge about operational improvements is obtained in the front line. Head of®ce people are often short of information about the real situation at the front and they may suggest ideas which are theoretical or out of date. For example, the personnel department of many Japanese corporations introduced the Americanstyle wage system after the war, trying to introduce the principle `pay for the job', job evaluation and classi®cation of jobs. However it did not work because it was not in line with the traditional Japanese value that paying for skill is fair, and that pay should re¯ect the length of service and the cost of living. The pay system was later changed to the one which integrates `pay for skill' and length of service. This was also implemented by the personnel department at the head of®ce.
233 Another case is new product development. Asahi Breweries introduced a new beer named `Gold Beer' in about 1970, which failed, because the research laboratory thought that they knew what was the best beer, and they invented a pure tasting beer decreasing the bitterness. This was due to the lack of cooperation between the marketing department and the production department. This is a case where the research department did not know consumers' mind. However, later in 1987, the new president, at the suggestion of the Customer Information committee at the head of®ce, and with the cooperation of these three departments, and intensive marketing research, launched a successful new product `Super Dry', which market share from 9% to about 30%. The head of®ce was successful in changing the corporate culture.3 Head of®ce staff tend to be conservative because they are specialists, they stay within a comfortable building, they have prestige, and they tend to overuse their power. This criticism ignores the fact that the head of®ce is a research laboratory on management. Head of®ce staff do have this sort of tendency. But there are some ways to avoid these kinds of problems. (a) Job rotation. Staff in the head of®ce are usually required to have experience of working at the front lines, so they can obtain knowledge of actual operations, and can understand the feelings of the employees on the front line. They are also recruited from the line departments and will be rotated to other departments. (b) External orientation. The staff of the head of®ce can visit the front line to make observations and collect external information through formal networks or informal networks. Benchmarking is used to investigate the best practice of other companies. Thus, `management by walking around' and an externally-oriented culture are developed. (c) Service orientations. The power wielding behavior of the head of®ce is a frequent subject of research.4 The head of®ce is required to be a service department. Some authors believe that the head of®ce should provide service only when requested from the line departments. This policy, however, does not produce proactive strategy for the company. The head of®ces of successful companies play the role of strategist and act as a management research laboratory for top management. Employee participation in small groups is essential for the creativity and success of the ®rm, but a large head of®ce tends to create bureaucratic systems and bureaucratic people. The head of®ce has three functions: to create new strategies, to provide expert services, and to concentrate service expertise in one place. It is important that the attitude of the head of®ce should be innovative and creative in searching for new systems. This is the opposite of a bureaucratic attitude, and many
successful companies like Honda, Sony and Canon with large head of®ces have carried out continuous innovation. The participation of employees in decision-making is possible within the head of®ce, in the research laboratory, and in lower-level departments. Participative management is still possible in a centralized organizational structure. The leadership and vision of top management are more important than the bureaucratic headquarters staff. However, successful top management consists not only of a powerful top management team, but also making full use of the staff in the head of®ce. Konosuke Matsushita of Matsushita Electric, Mitarai and Kaku of Canon constructed powerful research laboratories and strong head of®ces and they listened to the information and ideas of their subordinates. They made decisions based on the information provided by their staff and made use of the long range planning system over the years. Their leadership and vision were based on the support of the staff at the head of®ce. External communication is changing the boundaries of the organization. As the number of strategic alliances increase, communication with other companies expands in order to cooperate and to integrate activities. Many employees have to go to foreign countries to visit af®liated companies and they must communicate with other domestic partners. However, this kind of integration needs people whose authority extends across the boundaries of the organization. Also the interface between departments within the organization becomes more important. This integrating activity can be carried out at the divisional level, but to a large extent it should be carried out at the head of®ce level, because the activity covers many areas. Many Japanese companies place their marketing departments at the head of®ce, because they need to coordinate the activities of suppliers and distributors in alliances which deal with products from several product divisions. Also the production technology department at the head of®ce negotiates with suppliers and transfers quality control systems and JIT (just-in-time) systems to these partners. This is not to say that all activities for external customer-supplier partnership are carried out by the head of®ce, but head of®ces play a signi®cant role in these activities. At the Bridgestone Rubber and Tire Company each plant has been linked to a foreign plant formerly owned by Firestone, and is responsible for improving the production system and exchanging information. However, strategic decisions on multinational management are taken at the head of®ce level Interfaces between departments become more imLong Range Planning Vol. 32
April 1999
234 portant when the products contain a variety of high technology. This is carried out by the use of project teams and rotation of personnel. This is easier under the life-time employment where employment is assured. Also it is made easier by the use of a hybrid division structure. Network and project teams are more effective than formal hierarchies. The group system has several features. The groups change from time to time, depending on the changing needs of the organizations. One person may belong to more than one group, so the ¯exibility increases, and the organization can be ¯atter, because posts such as assistant to department head, section managers and subsection managers (Kakaricho) are eliminated. Experience in Toyota and Nippon Steel has demonstrated the advantages of ¯exible groups. New assignments and the status ladder system can mitigate the problem of a decrease of promotion posts. Use of groups can decrease the number of employees in the headof®ce and increase its ¯exibility.
total number of the company employees, and this has not changed for twelve years (see Table 2). (3) A large head of®ce brings many advantages:
{ Developing new strategies and helping top management, for example, through the planning department and the new product development department. A strong head of®ce can help a company to produce an aggressive product-market strategy. { Accumulating specialized expertise and helping the line departments, for example, through the personnel, production technology and marketing departments. Strong expert staff can strengthen the core competence of a company. { Concentrating specialized activities. This occurs in the ®nance, procurement, patents and information processing departments. These departments can also build core competences.
{ A strong head of®ce can initiate better strategies. . The head of®ce can determine and initiate strategies with long lead times, which the product divisions cannot contemplate because they do not produce immediate pro®t. . The head of®ce can commission projects which require a large investment of resources, like the development of semi-conductors. . The head of®ce can initiate projects which require the knowledge of two or more divisions, such as a combination of software and hardware, or electronics and mechanics. These projects may be carried out by mobilizing laboratories directly under the head of®ce, establishing new project teams in the head of®ce or in a new ventures department, or mobilizing or reorganizing several product divisions. { A head of®ce is like a large laboratory in management, which accumulates knowledge on personnel management, production systems, quality control and marketing systems. So it is in a position to help the product divisions and other operating units. It is like trees which develop strong roots and trunks to produce competitive products. The strength of Hitachi, Matsushita, Sony and Canon is derived from such strong trunks and roots. If the product divisions are separated and the head of®ce is weak, this weakens the entire organization. { A strong head of®ce can sustain a ¯at organizational structure. Detailed analysis of the organization structures of companies with small head of®ces such as ICI shows that the head of®ces at division level are very large. { A large head of®ce can be a pool of competent personnel, who can be mobilized to support foreign investment and new projects. To innovate, companies need to have personnel and resources available.
(2) A headquarters which has strength in size and capabilities can create competitive advantages for the company. Generally speaking, the need for size and capability are determined by the following factors: (a) products using high level technology, (b) diversi®ed products which are related by technology or by marketing, (c) where growth and diversi®cation are achieved by internal development, not by acquisition (d) where there is extensive use of vertical integration, and (e) where there is a high level of foreign direct investment (see Table 3) Japanese corporations tend to have large head of®ces which represent about eight percent of the
(4) The majority of product division structures are supported by a strong head of®ce. The product divisions do not have research laboratories, they have no control of sales channels, and they rely heavily on the head of®ce for personnel management, procurement, production control and marketing. We call this an imperfect product structure. The hybrid organization structure referrs to divisions with pro®t centers. These imperfect product divisions and hybrid product divisions have a good ®t with technologyrelated diversi®cation or marketing-related diversi®cation, which are popular among Japanese
Summary and Conclusions (1) The head of®ce has three main functions:
A Strong Head Office Makes a Strong Company
235 corporations. They tend to be ¯exible and to build strong core competencies.
Appendix The functions of the head of®ce in successful Japanese companies I. The development of corporate strategy 1. Planning . promoting strategic thinking . collecting strategic information . presentation of new strategies . integration of strategies across divisions and functions 2. Research and development management . technology forecasting, long-term and shortterm . planning research which is beyond the scope of divisions, which is of longer horizon . organizing research activities, acquiring resources and allocating them . bringing up the project teams, establishing incubator departments 3. Development of new products and new businesses . improving the product development process . evaluation of development plan . improving interface between development, production and marketing . promotion of new product development . as an incubator department, bringing up many infant projects 4. Environmental protection . promoting environmental protection programs 5. Supervision of subsidiaries . determining the mission of subsidiaries . Planning the supporting activities of the head of®ce, including personnel management . integration of activities across subsidiaries 6. Multinational management . evaluating new business opportunities . integration of regional activities . integration of marketing . coordination of personnel management 7. Financial control . budgetary control and capital budgeting . developing new accounting systems
II. Expert staff assistance to develop strong core competencies 1. Personnel department . centralized recruitment of university graduates . establishing the personnel management system . coordination of personnel management 2. Production technology and quality assurance . development of production system, such as JIT . promotion of quality control 3. Marketing . research into marketing and customer service . marketing research and competitive benchmarking . Developing new marketing channels, for example, marketing on the internet
III. Centralized services to produce strong competencies 1. Personnel services . planning employee training . welfare system 2. Finance . ®nancing-raising funds . ®nancial control . relations with ®nancial institutions 3. Legal . corporate legal issues . patents and copyrights 4. Procurement and logistics . purchasing (in domestic markets and in international markets) . logistic systems 5. Management of capital investment . planning capital investment . construction management . maintenance . property management 6. Information system . development of information system . operation of centralized information systems 7. Corporate communications . public relations . advertisement and sales promotion . government relations 8. Marketing department and production department under the functional organizational structure
References 1. J. G. March and H. A. Simon, Organizations, Wiley, New York (1958). 2. R. Hall, Intangible resources, Strategic Management Journal, Nov. (1993).
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236 3. T. Kono, Strategic Management in Japanese Companies, Pergamon Press, Oxford (1992). 4. P. Drucker, The Practice of Management, Harper & Row, New York (1973).
Additional reading In Japanese T. Chokki, Gendai no Keieisoshiki (Business Organizations), Yuhikaku, Tokyo (1993). T. Kono, Gendai no Keieisenryaku (Corporate Strategy), Diamond Sha, Tokyo (1985). T. Kono, Shinseihin Kaihatsu Senryaku (New Product Development), Diamond Sha, Tokyo (1987). M. Morimoto, Kieisoshiki (Business Organization), Chuokeizai, Tokyo (1986). Y. Okamoto, Gendai no Keieisoshiki (Modern Organizations), Nihonkeizai, Tokyo (1986). In English H. I. Ansoff, Corporate Strategy, McGraw-Hill, NY (1969). R. Amit and P. H. Schoemaker, Strategic assets and organizational assets, Strategic Management Journal, January (1993). T. Burns and G. M. Stalker, The Management of Innovation, Tavistock, London (1961). N. Campbell, M. Goold and K. Kase, The Role of Centre in Large Diversified Companies in Japan, Working Paper, Manchester Business School, Manchester, U.K. (1990). A. C. Chandler, Strategy and Structure, MIT Press, Boston (1962). S. M. Davies and P. R. Lawrence, Matrix Organization, Addison-Wesley, Reading, MA (1977). J. R. Galbraith, Organization Design, Addison-Wesley, Reading, MA (1977). D. A. Garvin, Building a learning organization, Harvard Business Review, M.±A. (1993). S. Ghoshal and N. Nohria, Horses for courses, in J. Drew (ed.), Readings in International Enterprise, p. 49, Routledge, London (1995). S. Ghoshal and C. A. Bartlett, Changing the role of top management, Harvard Business Review, J.±F. (1995). T. Goss, R. Pascale and A. Athos, Reinventing roller coaster, Harvard Business Review, N.±D. (1993). M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Creating Value in Multibusiness Company, John Wiley & Sons, NY (1994). R. H. Hall, Organizations, Structure and Process, Prentice-Hall, Englewood Cliffs, NJ (1982). G. Hamel and C. K. Prahalad, Strategic intent, Harvard Business Review, M.±J. (1989). C. Hill and R. Horkinson, Strategy and structure in the multiproduct firm, Academy of Management Review 12, 625±644 (1987). B. J. Hodge, W. P. Anthony and L. M. Gales, Organization Theory, A Strategic Approach, Prentice-Hall, NJ (1996). R. Hoskisson, Multidivisional structure and performance, Academy of Management Journal 30, 625±644 (1987). G. Mallory, T. Clark and D. Pugh, Organizational Structure, Strategy and Structural Change in European Manufacturing Organizations, Paper presented to the SMS Conference in Paris (1994). H. Mintzberg, The Structuring of Organization, Prentice-Hall, Englewood Cliffs, NJ (1979). C. K. Prahalad and G. Hamel, The core competence of the corporation, Harvard Business Review, M.±J. (1990). C. Perrow (ed.), Complex Organizations, McGraw-Hill, NY (1985). C. K. Prahalad and G. Hamel, Strategy as a field of study, Strategic Management Journal, Summer (1994). G. Stajk, P. Evans and L. E. Shulman, Competing on capabilities, Harvard Business Review, M.±A. (1992). O. Williamson, Markets and Hierarchies, Free Press, NY (1975).
A Strong Head Office Makes a Strong Company
Dr Toyohiro Kono is Emeritus Professor of Business Administration at Gakushuin University, Tokyo, Japan. Until the end of 1998 he was Japan and South-East Asia Editor for Long Range Planning. Tel: +81-33312-4487; Fax: +81-33312-7170
A Strong Head Of®ce Makes a Strong Company Toyohiro Kono
T
HIS ARTICLE ARGUES AGAINST THE current belief that: the reduction of overhead cost is essential to raise pro®ts; cutting staff in central departments is necessary for survival; the productivity of white-collar workers is declining; computerization can replace white-collar or clerical jobs, and that the middle management will disappear. We have found that successful Japanese companies have large head of®ces employing high level experts, and the head of®ces of successful companies function as the research laboratories for management. The product divisions of these companies are not self-suf®cient, because important functions are centralized in the head of®ce. Also the operating units structure tends to have two types of pro®t centers, for example, product divisions and customer or area divisions.
The Functions of Company Headquarters The headquarters is the top organizational structure of the company, and it is usually located in the head of®ce building. The headquarters has three main functions. These functions are described below and in the Appendix. (1) The formulation of corporate strategy. This means the formulation of the goals of the company and the product-market strategy. Other functions include integration of division strategies and control of them. These functions are carried out by the top management, the planning department, the research management department and the budget department. Pergamon
PII: S0024-6301(99)00021-7
This article is based on a survey of major Japanese manufacturing corporations. The author argues that the headquarters of a corporation has three functions: (a) formulating corporate strategy, (b) building core competencies, and (c) providing expert services. In simple terms, the headquarters is a research laboratory for management. Successful Japanese companies have about 8% of personnel in their head offices. The author also suggests that the interface between the headquarters and operating units is crucial for strategic leadership. This is particularly important where the product mix is technologyrelated or marketing-related. # 1999 Elsevier Science Ltd. All rights reserved
(2) Expert functional staff departments identify and develop the company's core competences. The personnel, production technology, and marketing departments are examples of departments which accumulate knowledge and help the line departments to develop competitive expertise in marketing and production, and to create the knowledge base for these capabilities by investing in resources such as personnel, ®xed assets and information systems. (3) Providing central services, such as procurement, ®nance and information systems. These departments develop specialized expertise and actually carry out these activities. The last two (2 and 3) types of head of®ce departments try to create and develop strong knowledge assets and core competencies. Long Range Planning, Vol. 32, No. 2, pp. 225 to 236, 1999 # 1999 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024±6301/99 $ - see front matter
226 The units which are not included in this discusion are product division headquarters, research laboratories and sales of®ces, in other words, the departments which implement research and pro®tmaking activities.
Strong Headquarters Creates Strong Competitiveness The results of our survey of the headquarters of Japanese manufacturing companies are set out in Table 1. There is a high ratio of personnel in the headquarters to total company personnel, particularly in the specialized companies and over the last ten years the percentage has increased. Corporations which have related diversi®cation tend to have larger headquarters than those with unrelated diversi®cation, because their core competencies, such as research and development capabilities are common to many products. So Research and Development and the search for new products tends to be centralized. On the other hand, companies with unrelated diversi®cation do not need to centralize the search for new products, particularly when diversi®cation is not carried out by internal development. If the diversi®cation is carried out by acquisition of other companies and by divestment of unpro®table businesses, the headquarters can be small. If the integration of suppliers and vendors concerns several departments, these relationships need to be dealt with by a central purchasing department or the marketing department in the head of®ce. Internal development also requires a strong core competence in the research laboratories under the head of®ce. Vertical integration and internal development strategies tend to produce larger headquarters. Specialized companies also have large head of®ces, because of their functional organizational structures. But why is it that Japanese companies tend to have large head of®ces? (a) They have technology-related or marketing-related diversi®cation structures, so there are common
competencies among their product groups. (b) They use quasi-vertical integration and strategic alliances extensively, which also require strong centers. (c) They diversify by internal development, and rarely acquire other companies. The functions which are performed by the headquarters of successful Japanese companies are listed in the Appendix. This table was derived by analyzing the activities of successful companies such as Sony, Canon, Hitachi and Yukijirushi (dairy products).
Centralization Of Decision-making
Before we discuss this problem, let us consider the principles which underlie centralization in decision making. 1. One principle is the division of labor. The authority to take decisions should be given to the people who have information and the capability. The upper levels have information on the external long-term environment and the capability for making decisions on the selection of new domains, thus strategic decisions are centralized. The lower levels can make better decisions on operational issues. Thus the more innovative the company is, the larger the headquarters and strategic planning departments. Whilst smaller headquarters are appropriate for less innovative companies. 2. The coordination of activities of various lower departments requires not only rules and policies, but also coordinating activities from higher levels. Comprehensive planning and budgeting at higher levels are an important means of doing this. The mobilization of key resources for important strategic projects is another key success factor for innovation. 3. There are limits to the amounts of information that can be handled. The head of®ce cannot handle too much information, so they must delegate authority. This also explains the limitations of the centralized economic systems of communist countries. 4. The delegation of authority is also necessary for employee motivation. Centralization of authority tends to demotivate staff at lower-levels.1,2 Successful companies tend to have larger head
TABLE 1. Headquarter's staff in large Japanese manufacturing companies (personnel in the head office as a percentage of the total number of employees)a Year
1982
Specialized companies
(17 Co.)
Diversified companies
(27 Co.)
1995 8.9% (4.6%) 9.1% (5.1%)
(33 Co.) (64 Co.)
14% (12%) 8% (4%)
8% (5%) 6% 6%
a The samples are large manufacturing companies. 44 companies in 1982 and 97 companies in 1995. Numbers in parentheses are standard deviations. For the Mail questionnaire survey the response was 49%.
A Strong Head Office Makes a Strong Company
227 of®ces. As a result of visiting the head of®ces and observing their activities, the author concluded that these companies have both large head of®ces and outstanding performances: Matsushita, Sony, Canon, Toyota, Marks & Spencer, Shell and 3M. However, some companies have large head of®ces and poor performance (for example, Westinghouse and the former Japan National Railways) and some other companies with small head of®ces have outstanding performance (for example, ICI, GE). However, these companies with small-head-of®ces tend to have large of®ces at the division levels, so they have tall organizational structures.
The Advantages of Large Headquarters
(1) The company can take innovative action to capitalize on business opportunities, by mobilizing corporate resources. The concentration of massive resources into the semi-conductor business by Toshiba, NEC and Hitachi are examples of this. Sony was able to triple its sales in ten years by putting resources into electronics components, computer related products (for example, displays), and the expansion of AV products. The concentration of resources into these growth products would not have been possible under a decentralized product division structure. The company can also bring together project teams to plan and implement risky new ventures by accommodating them in the incubator department of the head of®ce. A large head of®ce can also take aggressive action in expanding world-wide operations, by establishing production centers around the world. There are two kinds of information, data and knowledge. Data is collected and stored at the head of®ce. The future opportunities and threat on the domain, which are not the responsibility of the product divisions or which cover the ®elds of more than two divisions, are collected and utilized by the head of®ce. Knowledge is collected and stored at the lower level. How to improve the present product, how to improve the quality, how to increase productivityÐthis sort of information is collected and utilized at the lower levels, but it has to be diffused to other departments with help of headquarters. Delegation of authority is not always the best approach. The problem is what sort of information should be collected where, and how to generate successful new ideas. (2) Strong staff support is available for every functional area. The staff departments can accumulate knowledge from external and internal sources, and they are therefore able to create and develop the company's core competencies. This concept is described in Fig. 1. The company's personnel management system,
the quality assurance system, the production control technology, and the marketing system are analyzed and developed at the head of®ce. Also both tacit knowledge and formal knowledge are accumulated and distributed to the line departments. This makes it possible for a company to become `a learning organization'. If the company has decentralized product groups with a weak head of®ce, the company may be like a collection of separate small trees, and it cannot develop an infrustructure of strong core competencies. A strong head of®ce also makes it possible to discontinue certain departments and to change competencies. A product division cannot make decisions on the abandonment of its own competencies. The head of®ce can change there competencies. This is an important trait of learning organizations. Hitachi and Toshiba were able to change their capabilities from heavy electrical and mechanical engineering and expand into electronics, then to systems and software. A strong head of®ce also makes it possible for a company to maintain a good collaboration between product groups. At Canon a number of committees help to coordinate and control the activities of product divisions and foreign subsidiaries: the global operations committee, the global research activity committee, the global production committee, the global marketing committee, the trade balance problem committee, and the environmental protections committee. (3) A strong head of®ce also enables a company to ¯atten its organizational structure. With a competent head of®ce it is possible to make the of®ces of the divisions simpler and this shortens the distance between the top management and the front-line people. The author studied the organization structure of a large chemical company with a small head of®ce and I also visited the of®ce of a division, and found that the local of®ce had a large staff. A company which has a small head of®ce does not necessarily have small overhead cost. (4) A large head of®ce can also provide a pool of competent talent. The head of®ce of a reputable company can attract competent people from outside and from inside, because of the prestige of the of®ce and the quality of its jobs. This reserve of excellent human resources can be mobilized for the internal development of new businesses, and for establishing operations overseas.
Disadvantages of Large Head Of®ces
Here are some typical problems of large head of®ces. (1) Overcontrol of divisions and departments. A strong head of®ce may concentrate authority and discourage initiatives of the product divisions. Also Long Range Planning Vol. 32
April 1999
228
A company with strong competencies A company with weak competencies Operating units
Operating units
Weak headquarters Strong headquarters Laboratories Research laboratories
FIGURE 1. The head office as a source of core competencies.
the division heads may tend to look up to and request help from the head of®ce. Under a life-time employment system, a company cannot easily discharge an unsuccessful division manager, and this may result in less delegation of authority to the division, which in turn will cause the divisions to rely even more on the central of®ce for decisions. (2) `White gloves'. The elite members at the head of®ce may not understand the real situation in the front line, and as a consequence they may impose unrealistic control on the divisions. These faults can be avoided by better communications and frequent visits to the front line wearing the same uniform, and job rotation.
A Hybrid Organizational Structure Is Simpler and More Flexible Companies with related-product diversi®cation tend to have hybrid organizational structures. Survey results of the organizational structures of manufacturing companies is shown in Table 2. The survey showed that half of the diversi®ed companies have a product-division or M-form structure. The other half have hybrid structures. However detailed observation of the organizational structures of Japanese corporations shows that most of the `product divisions' are not mixed or fully ¯edged
TABLE 2. Divisional organizational structuresa Product mix
Specialized
Diversified
Total companies
1. Product divisions integrating marketing and promotion 2. Hybrid, with two profit centers 3. Area divisions 4.1. Functional, partly product divisions for minor products 4.2. Functional divisions 5. Others Total companies
7 5 2 6 12 1 33
36 13 0 7 7 1 64
43 18 2 13 19 2 97
a Survey in 1995 by T. Kono, by mail questionnaire and by reference to organization charts. The total sample is 97 manufacturing companies. Specialized companies have more than 70% of sales from one product line.
A Strong Head Office Makes a Strong Company
229 TABLE 3. The hybrid product division
1 Product divisions with a few departments under a strong head office (e.g. Hitachi, Matsushita Electric, NEC, Sony, Canon Top management
HQ
R & D Production technology & planning quality assurance
Marketing staff
A product
B product
development production Laboratories production marketing HQ = Headquarters 2 Product divisions with two profit centers (e.g. Sumitomo Electric, Nippon Sanso) Top management
HQ
R & D Marketing Production planning staff staff
A product B prod. A prod. B product marketing marketing production production
3 Product divisions and customer divisions (e.g. Yukijirushi Dairy Products, Mitsumi Electric, Toto, Fujita) Top management
HQ
R & D Marketing Production planning staff staff
Product Product X Area Y Area (or customer) (or customer) B A
4 Matrix Organisation Top management
HQ
R & D Marketing Production planning staff staff
A product B product division division
M production center N production center X Sales office Y Sales office
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230 divisions; they lack one of the three key functions, and have a strong headquarters.
Product Divisions with a Few Functional Departments
This kind of company employs a product division structure, but with strong head of®ce support. The concept of this structure is shown in Table 3. The majority of the product division structures in Japan (that is, about half of the sample manufacturing companies) belong to this type. The head of®ce is strong. Research and development, production technology, quality assurance and marketing planning are centralized and in the product divisions the research function or the marketing function are missing. Matsushita, Hitachi, Mitsubishi Electric and Sony have this type of organization structure. One advantage of this structure is that the company can develop core competencies in research, production technology and marketing. Where there is related diversi®cation of products, this centralization of functions enables the company to maintain a strong competitive edge. So the advantages of this structure are: . strong central functions, . good collaboration between the functions in the product divisions, and . ¯atter organizational structure. A possible disadvantage in this structure is that it may discourage strategic initiatives in the product division. However, this problem can be solved, if the guidelines for a new strategy is shown to the product division, and this vision is used to stimulate new initiatives. Many new ideas come from inventors in centralized research laboratories. Mr Toshio Ikeda at Fujitsu invented a new computer system in about 1970 and this system laid the foundation for Fujitsu to become one of the largest computer manufacturers in the world. He was supported by top management, not by his division manager who tended to be more interested in short-term pro®ts.
The Hybrid Structure with Two Pro®t Centers for Each Product
In this type of organization, each product has two pro®t centers, one in the marketing department and one in the production department. The advantages of this structure are as follows: { It has bene®t of both functional specialization and of integration. For example, Sumitomo Electric Company produces a variety of producers' electrical goods selling to a number of industries. The production and sales are carried out at different locations, needing different A Strong Head Office Makes a Strong Company
skills. However, when the products are mutually related, the departments can develop functional core competencies. { The product pro®t center system enables the departments to meet market competition. { This system is similar to a functional departmentation, but it is more ¯exible, and the mobilization of resources to a project team or other strategic projects tends to be easier, because pro®t responsibility is not so strict. Transfer of personnel is easier, compared with the strict product division system. One problem with this organizational structure, however, is how to decide upon transfer prices.
Product divisions and area or customer divisions. This structure is typically seen in the
construction business and in dairy product companies. One grouping is by the products and another grouping is by area or by customers. The merits of this structure are as follows: (a) Each output group has a different expertise, different decision styles and meets different customer needs. For example, the production and marketing of milk and ice-cream is different from dry dairy products. However, the local sales of®ces combine these products and sell them to the same customers. Another example is the construction company. The technology for civil engineering is very different from the technology for the construction of houses and interior design. However, the customer needs a combination of these resources. The area of®ce has to investigate the needs of customers and de®ne them. Also the local sales of®ce takes into consideration the location's speci®c features. (b) When the products are related in production technology or marketing, this type can have either production synergy effects or marketing synergy effects. (c) This system is more ¯exible than the product divisions, and easier to mobilize for new projects
The matrix organization. A matrix organization is used where many products are produced, and when integration by products is essential, whilst production is scattered and sales are scattered. For example, Shiseido sells cosmetics and toiletry goods to a variety of consumers. Likewise Toto produces a number of sanitary goods for households and of®ces. The product managers take full responsibility for the marketing and production of each product, they control the production centers and sales of®ces. The product manager is the only pro®t center, and the production plants and sales of®ces are cost centers. This type is also seen in the operation of subsidiaries of foreign companies. The local companies
231 have pro®t responsibility, but the product divisions in the home country have authority over production technology and the personnel management of the technical staff. Canon says it has a product division structure and also has a matrix structure. It has a number of committees which have authority to make decisions in several areas. The merits of a matrix organization are: (a) it can provide the integration and also specialization; (b) new projects are easily organized, and (c) it can avoid the duplication of staff. A major problem is that it requires employees to have two bosses, which may cause con¯ict.
Factors Determining Organizational Structure
(1) Organizational structure is mostly determined by two factors. One is product or technological diversity, and the other is market diversity. By using these two dimensions, we can establish a typology for line organizational structures. { The pure product division is appropriate for unrelated diversi®cation, with a small head of®ce. { When the product is diversi®ed, but the technology or marketing are mutually related, then the product division with the large head of®ce, is appropriate. { When the products are diversi®ed, but related, and when the customers or areas are diversi®ed and responsiveness is required, then the two pro®t center product divisions or matrix organizations are used. { When the company's product is specialized, and the customer or market is concentrated the functional organization is appropriate.
(2) These principles ignore the development of an organization, the accumulation of core competencies and the mobilization of resources to meet the needs of customers. They do not describe the functions of the head of®ce, nor do they describe the relationship between the line departments and the head of®ce. The relationship between strategy and organizational structure is described in Table 4.
The Arguments It is frequently suggested that a large head of®ce imposes high labor costs and reduces a company's ®nancial performance. However, in Japanese manufacturing companies, the percentage of average labor cost over sales is between 10 and 15%. The 8% of total manpower in head of®ces may account for only 1% of sales, so the personnel cost of the head of®ce is not a serious burden to these companies. How is the size of the head of®ce related to ®nancial performance? Diversi®ed companies can be classi®ed into four groups according to whether the size of the head of®ce is large or small, and whether their ®nancial performances is high or low (see Table 5). Some companies have large head of®ces and a good performance. NEC, Hitachi, Sony and Canon belong to this group. These companies have the following features: (a) Their Research and Development expenditure is high, their products are mostly high technology products, or their advertising expenditure is large (like Shiseido) and their products are differentiated. (b) The level of diversi®cation is high, but their products are related in terms of technology or marketing.
TABLE 4. Fitting the organization structure to the corporate strategy
Direction of movement
Quality of movement Low technology or conservative culture
High technology or innovative culture
Specialization
.Small head office .Functional (sugar, cement)
Diversification .Little movement .Large movement Acquisition and divestment
.Small head office .Product division
.Large head office .Strong strategic planning department .Functional services (Honda, Toyota, Marks & Spencer)
Internal development
.Small head office .Product division .Large head office .Strong strategic planning department .Hybrid line organizational structure (Sony, Matsushita) Long Range Planning Vol. 32
April 1999
232 TABLE 5. Size of head office and financial performancea
Financial performances High Low
Large
Size of headquarters
Mitsui Chemical, Konica, Asahi Glass, Hitachi, NEC, Matsushita Electric, Sony, Olympus, Nikon, Canon Fuji Confectionery, Morinaga Dairy, Kanebo, Yokohama Rubber, Ebara, IHI
Small
Teijin, Toray, Asahi Chemical, Toshiba, Fuji Film, Komatsu Honshu Paper NKK, Sumitomo Metal, Kobe Steel, Nihon Plate Glass, Furukawa Electric, Niigata Machinery, Sanyo Electric, Mitsui Ship Building
a The dividing line between large and small HQ is 5%, measured by the number of personnel in the head of®ce divided by the number of total employees, in 1995. The dividing line between high and low ®nancial performance is 6% ROI or higher, low performance is 5% ROI or lower, measured as a ten year average from 1983 to 1993.
Some companies have a large head of®ce, but the average ROI for the last ten years was low (less than 5%). These companies (a) have low Research and Development ratios, and have low levels of product differentiation, and (b) have a lower level of diversi®cation and are in low growth industries. Their head of®ces did not pursue an aggressive strategy. Other companies have a relatively small head of®ce, but their performance is better. These companies (a) have a high Research and Development ratio, (b) have a higher share of the market, and (c) have a lower degree of diversi®cation. Probably because of the low level of diversi®cation, they can manage without a large head of®ce. Finally, there are companies which have small head of®ces and a low ROI. There are many such companies. These companies have (a) a low Research and Development ratio, (b) a low degree of product differentiation, (c) a low level of diversi®cation, and (d) little change of product mix during the past ten years. These features are due to a small head of®ce which has made little effort to explore new business opportunities. The computer has decreased the hours employed in repetitive manual work and computation, but it is not clear whether it has decreased the number of people in the head of®ce and in other indirect departments. Table 1 suggests that in Japanese companies, the number of people employed in headquarters has actually increased. Centralized economic planning and control systems in communist countries have failed because of the over-centralization of authority. Is the same problem likely to arise in a strong headquarters system? There are many differences between the two systems. (a) The central planning of®ce in a communist country is incapable of dealing with huge amounts of information about operating decisions. The of®ce tries to do a job beyond its span of control. But in the headquarters of successful private corporations, the management selects the decisions to be actioned A Strong Head Office Makes a Strong Company
in the head of®ce, and the majority of operating decisions are delegated to the operating departments. (b) Also there is little drive to innovate and raise productivity in the center of communist governments and they operate much like a monopoly. The headquarters staff of successful private corporations are motivated by the intrinsic and extrinsic rewards which they achieve through successful competition. Knowledge is produced through feedback from experience and through experimentation, so knowledge is accumulated through interaction with customers, and through experience in production. So how can the head of®ce which is remote from the front line, produce new knowledge in a vacuum? However, there are many kinds of information, for example, data, meaning, theory, know-how, ideas and wisdom. We understand knowledge to mean these elements. Knowledge about strategy is produced not only at the front, but also in the research laboratory, in the planning department, by the marketing staff, through experiment, collecting information and through reading books and cases. Knowledge about strategy is obtained and accumulated at higher levels in the hierarchy, whilst knowledge about operational improvements is obtained in the front line. Head of®ce people are often short of information about the real situation at the front and they may suggest ideas which are theoretical or out of date. For example, the personnel department of many Japanese corporations introduced the Americanstyle wage system after the war, trying to introduce the principle `pay for the job', job evaluation and classi®cation of jobs. However it did not work because it was not in line with the traditional Japanese value that paying for skill is fair, and that pay should re¯ect the length of service and the cost of living. The pay system was later changed to the one which integrates `pay for skill' and length of service. This was also implemented by the personnel department at the head of®ce.
233 Another case is new product development. Asahi Breweries introduced a new beer named `Gold Beer' in about 1970, which failed, because the research laboratory thought that they knew what was the best beer, and they invented a pure tasting beer decreasing the bitterness. This was due to the lack of cooperation between the marketing department and the production department. This is a case where the research department did not know consumers' mind. However, later in 1987, the new president, at the suggestion of the Customer Information committee at the head of®ce, and with the cooperation of these three departments, and intensive marketing research, launched a successful new product `Super Dry', which market share from 9% to about 30%. The head of®ce was successful in changing the corporate culture.3 Head of®ce staff tend to be conservative because they are specialists, they stay within a comfortable building, they have prestige, and they tend to overuse their power. This criticism ignores the fact that the head of®ce is a research laboratory on management. Head of®ce staff do have this sort of tendency. But there are some ways to avoid these kinds of problems. (a) Job rotation. Staff in the head of®ce are usually required to have experience of working at the front lines, so they can obtain knowledge of actual operations, and can understand the feelings of the employees on the front line. They are also recruited from the line departments and will be rotated to other departments. (b) External orientation. The staff of the head of®ce can visit the front line to make observations and collect external information through formal networks or informal networks. Benchmarking is used to investigate the best practice of other companies. Thus, `management by walking around' and an externally-oriented culture are developed. (c) Service orientations. The power wielding behavior of the head of®ce is a frequent subject of research.4 The head of®ce is required to be a service department. Some authors believe that the head of®ce should provide service only when requested from the line departments. This policy, however, does not produce proactive strategy for the company. The head of®ces of successful companies play the role of strategist and act as a management research laboratory for top management. Employee participation in small groups is essential for the creativity and success of the ®rm, but a large head of®ce tends to create bureaucratic systems and bureaucratic people. The head of®ce has three functions: to create new strategies, to provide expert services, and to concentrate service expertise in one place. It is important that the attitude of the head of®ce should be innovative and creative in searching for new systems. This is the opposite of a bureaucratic attitude, and many
successful companies like Honda, Sony and Canon with large head of®ces have carried out continuous innovation. The participation of employees in decision-making is possible within the head of®ce, in the research laboratory, and in lower-level departments. Participative management is still possible in a centralized organizational structure. The leadership and vision of top management are more important than the bureaucratic headquarters staff. However, successful top management consists not only of a powerful top management team, but also making full use of the staff in the head of®ce. Konosuke Matsushita of Matsushita Electric, Mitarai and Kaku of Canon constructed powerful research laboratories and strong head of®ces and they listened to the information and ideas of their subordinates. They made decisions based on the information provided by their staff and made use of the long range planning system over the years. Their leadership and vision were based on the support of the staff at the head of®ce. External communication is changing the boundaries of the organization. As the number of strategic alliances increase, communication with other companies expands in order to cooperate and to integrate activities. Many employees have to go to foreign countries to visit af®liated companies and they must communicate with other domestic partners. However, this kind of integration needs people whose authority extends across the boundaries of the organization. Also the interface between departments within the organization becomes more important. This integrating activity can be carried out at the divisional level, but to a large extent it should be carried out at the head of®ce level, because the activity covers many areas. Many Japanese companies place their marketing departments at the head of®ce, because they need to coordinate the activities of suppliers and distributors in alliances which deal with products from several product divisions. Also the production technology department at the head of®ce negotiates with suppliers and transfers quality control systems and JIT (just-in-time) systems to these partners. This is not to say that all activities for external customer-supplier partnership are carried out by the head of®ce, but head of®ces play a signi®cant role in these activities. At the Bridgestone Rubber and Tire Company each plant has been linked to a foreign plant formerly owned by Firestone, and is responsible for improving the production system and exchanging information. However, strategic decisions on multinational management are taken at the head of®ce level Interfaces between departments become more imLong Range Planning Vol. 32
April 1999
234 portant when the products contain a variety of high technology. This is carried out by the use of project teams and rotation of personnel. This is easier under the life-time employment where employment is assured. Also it is made easier by the use of a hybrid division structure. Network and project teams are more effective than formal hierarchies. The group system has several features. The groups change from time to time, depending on the changing needs of the organizations. One person may belong to more than one group, so the ¯exibility increases, and the organization can be ¯atter, because posts such as assistant to department head, section managers and subsection managers (Kakaricho) are eliminated. Experience in Toyota and Nippon Steel has demonstrated the advantages of ¯exible groups. New assignments and the status ladder system can mitigate the problem of a decrease of promotion posts. Use of groups can decrease the number of employees in the headof®ce and increase its ¯exibility.
total number of the company employees, and this has not changed for twelve years (see Table 2). (3) A large head of®ce brings many advantages:
{ Developing new strategies and helping top management, for example, through the planning department and the new product development department. A strong head of®ce can help a company to produce an aggressive product-market strategy. { Accumulating specialized expertise and helping the line departments, for example, through the personnel, production technology and marketing departments. Strong expert staff can strengthen the core competence of a company. { Concentrating specialized activities. This occurs in the ®nance, procurement, patents and information processing departments. These departments can also build core competences.
{ A strong head of®ce can initiate better strategies. . The head of®ce can determine and initiate strategies with long lead times, which the product divisions cannot contemplate because they do not produce immediate pro®t. . The head of®ce can commission projects which require a large investment of resources, like the development of semi-conductors. . The head of®ce can initiate projects which require the knowledge of two or more divisions, such as a combination of software and hardware, or electronics and mechanics. These projects may be carried out by mobilizing laboratories directly under the head of®ce, establishing new project teams in the head of®ce or in a new ventures department, or mobilizing or reorganizing several product divisions. { A head of®ce is like a large laboratory in management, which accumulates knowledge on personnel management, production systems, quality control and marketing systems. So it is in a position to help the product divisions and other operating units. It is like trees which develop strong roots and trunks to produce competitive products. The strength of Hitachi, Matsushita, Sony and Canon is derived from such strong trunks and roots. If the product divisions are separated and the head of®ce is weak, this weakens the entire organization. { A strong head of®ce can sustain a ¯at organizational structure. Detailed analysis of the organization structures of companies with small head of®ces such as ICI shows that the head of®ces at division level are very large. { A large head of®ce can be a pool of competent personnel, who can be mobilized to support foreign investment and new projects. To innovate, companies need to have personnel and resources available.
(2) A headquarters which has strength in size and capabilities can create competitive advantages for the company. Generally speaking, the need for size and capability are determined by the following factors: (a) products using high level technology, (b) diversi®ed products which are related by technology or by marketing, (c) where growth and diversi®cation are achieved by internal development, not by acquisition (d) where there is extensive use of vertical integration, and (e) where there is a high level of foreign direct investment (see Table 3) Japanese corporations tend to have large head of®ces which represent about eight percent of the
(4) The majority of product division structures are supported by a strong head of®ce. The product divisions do not have research laboratories, they have no control of sales channels, and they rely heavily on the head of®ce for personnel management, procurement, production control and marketing. We call this an imperfect product structure. The hybrid organization structure referrs to divisions with pro®t centers. These imperfect product divisions and hybrid product divisions have a good ®t with technologyrelated diversi®cation or marketing-related diversi®cation, which are popular among Japanese
Summary and Conclusions (1) The head of®ce has three main functions:
A Strong Head Office Makes a Strong Company
235 corporations. They tend to be ¯exible and to build strong core competencies.
Appendix The functions of the head of®ce in successful Japanese companies I. The development of corporate strategy 1. Planning . promoting strategic thinking . collecting strategic information . presentation of new strategies . integration of strategies across divisions and functions 2. Research and development management . technology forecasting, long-term and shortterm . planning research which is beyond the scope of divisions, which is of longer horizon . organizing research activities, acquiring resources and allocating them . bringing up the project teams, establishing incubator departments 3. Development of new products and new businesses . improving the product development process . evaluation of development plan . improving interface between development, production and marketing . promotion of new product development . as an incubator department, bringing up many infant projects 4. Environmental protection . promoting environmental protection programs 5. Supervision of subsidiaries . determining the mission of subsidiaries . Planning the supporting activities of the head of®ce, including personnel management . integration of activities across subsidiaries 6. Multinational management . evaluating new business opportunities . integration of regional activities . integration of marketing . coordination of personnel management 7. Financial control . budgetary control and capital budgeting . developing new accounting systems
II. Expert staff assistance to develop strong core competencies 1. Personnel department . centralized recruitment of university graduates . establishing the personnel management system . coordination of personnel management 2. Production technology and quality assurance . development of production system, such as JIT . promotion of quality control 3. Marketing . research into marketing and customer service . marketing research and competitive benchmarking . Developing new marketing channels, for example, marketing on the internet
III. Centralized services to produce strong competencies 1. Personnel services . planning employee training . welfare system 2. Finance . ®nancing-raising funds . ®nancial control . relations with ®nancial institutions 3. Legal . corporate legal issues . patents and copyrights 4. Procurement and logistics . purchasing (in domestic markets and in international markets) . logistic systems 5. Management of capital investment . planning capital investment . construction management . maintenance . property management 6. Information system . development of information system . operation of centralized information systems 7. Corporate communications . public relations . advertisement and sales promotion . government relations 8. Marketing department and production department under the functional organizational structure
References 1. J. G. March and H. A. Simon, Organizations, Wiley, New York (1958). 2. R. Hall, Intangible resources, Strategic Management Journal, Nov. (1993).
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236 3. T. Kono, Strategic Management in Japanese Companies, Pergamon Press, Oxford (1992). 4. P. Drucker, The Practice of Management, Harper & Row, New York (1973).
Additional reading In Japanese T. Chokki, Gendai no Keieisoshiki (Business Organizations), Yuhikaku, Tokyo (1993). T. Kono, Gendai no Keieisenryaku (Corporate Strategy), Diamond Sha, Tokyo (1985). T. Kono, Shinseihin Kaihatsu Senryaku (New Product Development), Diamond Sha, Tokyo (1987). M. Morimoto, Kieisoshiki (Business Organization), Chuokeizai, Tokyo (1986). Y. Okamoto, Gendai no Keieisoshiki (Modern Organizations), Nihonkeizai, Tokyo (1986). In English H. I. Ansoff, Corporate Strategy, McGraw-Hill, NY (1969). R. Amit and P. H. Schoemaker, Strategic assets and organizational assets, Strategic Management Journal, January (1993). T. Burns and G. M. Stalker, The Management of Innovation, Tavistock, London (1961). N. Campbell, M. Goold and K. Kase, The Role of Centre in Large Diversified Companies in Japan, Working Paper, Manchester Business School, Manchester, U.K. (1990). A. C. Chandler, Strategy and Structure, MIT Press, Boston (1962). S. M. Davies and P. R. Lawrence, Matrix Organization, Addison-Wesley, Reading, MA (1977). J. R. Galbraith, Organization Design, Addison-Wesley, Reading, MA (1977). D. A. Garvin, Building a learning organization, Harvard Business Review, M.±A. (1993). S. Ghoshal and N. Nohria, Horses for courses, in J. Drew (ed.), Readings in International Enterprise, p. 49, Routledge, London (1995). S. Ghoshal and C. A. Bartlett, Changing the role of top management, Harvard Business Review, J.±F. (1995). T. Goss, R. Pascale and A. Athos, Reinventing roller coaster, Harvard Business Review, N.±D. (1993). M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Creating Value in Multibusiness Company, John Wiley & Sons, NY (1994). R. H. Hall, Organizations, Structure and Process, Prentice-Hall, Englewood Cliffs, NJ (1982). G. Hamel and C. K. Prahalad, Strategic intent, Harvard Business Review, M.±J. (1989). C. Hill and R. Horkinson, Strategy and structure in the multiproduct firm, Academy of Management Review 12, 625±644 (1987). B. J. Hodge, W. P. Anthony and L. M. Gales, Organization Theory, A Strategic Approach, Prentice-Hall, NJ (1996). R. Hoskisson, Multidivisional structure and performance, Academy of Management Journal 30, 625±644 (1987). G. Mallory, T. Clark and D. Pugh, Organizational Structure, Strategy and Structural Change in European Manufacturing Organizations, Paper presented to the SMS Conference in Paris (1994). H. Mintzberg, The Structuring of Organization, Prentice-Hall, Englewood Cliffs, NJ (1979). C. K. Prahalad and G. Hamel, The core competence of the corporation, Harvard Business Review, M.±J. (1990). C. Perrow (ed.), Complex Organizations, McGraw-Hill, NY (1985). C. K. Prahalad and G. Hamel, Strategy as a field of study, Strategic Management Journal, Summer (1994). G. Stajk, P. Evans and L. E. Shulman, Competing on capabilities, Harvard Business Review, M.±A. (1992). O. Williamson, Markets and Hierarchies, Free Press, NY (1975).
A Strong Head Office Makes a Strong Company
Dr Toyohiro Kono is Emeritus Professor of Business Administration at Gakushuin University, Tokyo, Japan. Until the end of 1998 he was Japan and South-East Asia Editor for Long Range Planning. Tel: +81-33312-4487; Fax: +81-33312-7170