Organizational equilibrium and organizational change

Journal of International Management 5 (1999) 15–33

Organizational equilibrium and organizational change: two different perspectives of the multinational enterprise William G. Egelhoff * Graduate School of Business, Fordham University, 113 W. 60th Street, New York, NY 10023, USA

Abstract This article contrasts traditional models of MNE organizational design against newer models, represented by transnationalism and heterarchy. The important characteristics are fundamentally different. Traditional models tend to be models of equilibrium, while the newer models are largely models of change. With the intent of reconciling the two theories, it is argued that the new change-oriented models are most applicable at the micro levels of MNEs, while traditional equilibrium models are more applicable at the macro levels. © 1999 Elsevier Science Inc. All rights reserved. Keywords: Multinational organizational design; Strategy and structure; Transnationalism; Heterarchy; Equilibrium and change

1. Introduction In recent years, there has been much change in both the strategies and organizational designs of many multinational enterprises (MNEs). This has been accompanied by significant change in the conceptual frameworks used to understand and design MNEs. In general, this change reflects a shift away from traditional contingency theories of MNE organizational design toward a variety of new theories about organizational design. These include theories about transnationalism (Bartlett and Ghoshal, 1989), heterarchy (Hedlund, 1986), paradigm S (Perlmutter and Trist, 1986), and the horizontal organization (White and Poynter, 1990). The purpose of this article is to evaluate the implications of this shift and attempt to reconcile the traditional and new theories of MNE organizational design. One might wonder why new theories of MNE organizational design have arisen in the first place. The overall argument is that traditional contingency theory views of strategy and

* Phone: (11) 212-636-6206; Fax: (11) 212-765-5573; E-mail: wegelhoff.mary.fordham.edu. 1075-4253/99 $–see front matter © 1999 Elsevier Science Inc. All rights reserved. PII: S1075-4253(99)00006-X

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organizational design are too limiting. More specifically, they don’t adequately address the kinds of strategic complexity and levels of change that MNEs already are dealing with: Our transnational model, unlike traditional organizational forms, is designed and developed specifically to respond to complexity and change (Bartlett and Ghoshal, 1989:197). Established theories of the multinational corporation (MNC) and its management, in our view, suffer from a neglect of aspects of innovation, renewal and change. . . . they share a preoccupation with the exploitation of given advantages and assets and only marginally deal with the creation of new sources of competitiveness (Hedlund and Ridderstrale, 1997: 329). Thus, traditional models of the MNE are too narrowly focused on the existing, the routine—and these are not going to be the sources of future competitive advantage. Underlying such criticism may be the feeling that traditional contingency theory models are so specified that they rule out some of the most interesting actions that MNEs can take to gain competitive advantage. A second argument is that these traditional models overemphasize the role of structure and other traditional mechanisms of coordination, while MNEs are increasingly using different mechanisms (like informal relationships): For many years, the primacy of the first factor—formal organization structure—went unquestioned (e.g., Stopford and Wells, 1972; Galbraith and Nathanson, 1978; Egelhoff, 1982). Recently, students of the MNC have questioned this primacy (e.g., Hedlund, 1986; Bartlett and Ghoshal, 1989), arguing that the second factor—informal relationships between managers—has become of increasing importance in managing the modern multinational (Ghoshal et al., 1994:98). While some may see this as an attempt to add informal relationships to the organizational model of the MNE, I will subsequently argue that this is really a substitution of informal relationships for formal structure and design. As such, it is perhaps the most salient distinction between the new transnational and heterarchical models of the MNE and the traditional models. As a result of these deficiencies in the traditional models, the new theories generally argue that they represent a different and superior approach to the strategic management of MNEs: We believe that the management of ABB, and of a number of other companies we studied, is premised on a set of basic assumptions on the part of its managers regarding organization structure, decision making processes and, ultimately, human behavior, that are significantly different from those that underlie the economic and behavioral theories that currently dominate academic analysis of business organizations. As a result, these theories are of limited usefulness for analyzing the behaviors of and within such companies (Bartlett and Ghoshal, 1993:25). A number of authors have suggested models—some positive and some normative—of the MNC going some way in addressing the problems of innovation and systems connectedness. Although by no means identical and based on different kinds of empirical

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and conceptual research strategies, they all tend to emphasize similar matters. Representative of this research stream are the concepts of the “heterarchy” (Hedlund, 1986, 1993), the “transnational” (Bartlett, 1986; Bartlett and Ghoshal, 1989), the “multifocal MNC” (Doz, 1986), and the “horizontal MNC” (White and Poynter, 1990; Hedlund and Ridderstrale, 1997:333–334). It is important to realize that the new models always have been presented as alternative theory rather than as a modification or extension of traditional theory. As a result, there has never been much systematic effort to compare and reconcile the two approaches. This article is motivated by the belief that scholarship demands critical comparison and argument between conceptual frameworks that claim the same turf, and that lacking such comparison, there is a natural bias on the part of authors to embrace the new and forget the old. The next section discusses traditional models of MNE design and concludes that they are equilibrium oriented. This is followed by a section that seeks to define and critically compare the new change-oriented models with the traditional equilibrium-oriented models. Subsequent sections discuss the implications of moving the emphasis from equilibrium to change for both MNE theory and practice and tentatively suggest a way to reconcile the two perspectives.

2. Traditional equilibrium models of the MNE There is an extensive body of research and theory that describes the MNE in various states of equilibrium—equilibrium with its strategy and environment and equilibrium within itself. 2.1. Strategy-structure models Perhaps the most familiar of these models are the strategy-structure models of the MNE. Inspired by the work of Chandler (1962), numerous studies of strategy and structure in the MNE have occurred (Stopford and Wells, 1972; Franko, 1976; Hulbert and Brandt, 1980; Egelhoff, 1982, 1988a; Daniels et al., 1984). These traditional studies of the MNE saw it in a variety of different but relatively stable environments (which were associated with a variety of relatively stable strategies). These strategies and environments varied in terms of the size of foreign operations, the degree of foreign product diversity, the size of foreign manufacturing, the extent of local product modification differences, and the level of technological change and uncertainty. The primary task of research and theory was to understand and model a series of fits or equilibrium between MNE structure and these strategic and environmental conditions. For example, the Stopford and Wells (1972) study found that an international division structure tended to fit conditions of relatively small foreign operations and low foreign product diversity. If foreign operations increased in size, they lost fit with the international division structure and gained fit with a geographical region structure. If foreign product diversity increased, it lost fit with the international division structure and gained fit with a worldwide product division structure. If both foreign operations and foreign product diversity increased, these conditions gained fit with a matrix structure. Thus, the Stopford and Wells model iden-

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tifies structural equilibrium for a variety of different strategic conditions. As the strategic and environmental conditions facing an MNE change, the firm needs to change its structure as it moves from one state of equilibrium to another state of equilibrium. Subsequent studies have extended and elaborated this model, but the basic notion of MNEs being in some kind of structural equilibrium with their strategies and environments has remained the same. Franko (1976) shows that European MNEs tend to use a direct reporting or mother-daughter structure when foreign operations are relatively small and not tightly integrated. This modifies the international division part of the Stopford and Wells model (which was derived from U.S. MNEs). When the foreign operations of European MNEs become large and more tightly integrated, however, they tend to confirm the same structural equlibrium found in the Stopford and Wells model. In most of these models, equilibrium between strategy and structure is empirically specified. Egelhoff (1982) developed a more conceptual equilibrium logic between MNE strategy and structure, based on information-processing theory (Galbraith, 1973; Tushman and Nadler, 1978). Here, good organizational performance requires equilibrium between certain defined information-processing requirements associated with a firm’s strategy and similarly defined information-processing capacities provided by a firm’s structure. This model identifies four different dimensions or types of information processing in MNEs (e.g., strategic information processing for product matters). Equilibrium is specified within each of the four dimensions (e.g., the requirements for strategic information processing for product matters inherent in a firm’s strategy must be satisfied by the capacity for this type of information processing provided by the firm’s structure). If strategy changes, information-processing requirements change, and structure also must change to maintain equilibrium between information-processing capacities and requirements. Thus, whether it is empirically or conceptually specified, equilibrium between strategy and structure is the defining characteristic of these traditional models. 2.2. Organizational processes and life cycle models Another traditional stream of research has studied organizational processes in MNEs, and often these studies have produced equilibrium models with various strategic and environmental conditions or with other features of organizational design. Commonly studied processes include the centralization/decentralization of decision making (Picard, 1977; Doz and Prahalad, 1981; Hedlund, 1981; Garnier, 1982; Gates and Egelhoff, 1986), the staffing of foreign subsidiaries (Edstrom and Galbraith, 1979; Jaeger, 1983; Toyne and Kuehne, 1983; Baliga and Jaeger, 1984), and control processes (Youssef, 1975; Brandt and Hulbert, 1976). While empirical research on centralization in MNEs has produced mixed results, nearly all of the studies have attempted to identify some kind of equilibrium between degree of centralization and certain strategic and environmental contingency variables. Research shows that MNEs tend to decentralize decision making as the size of its foreign operations increase (Gates and Egelhoff, 1986) and as the complexity of its international strategy and environment increase (Picard, 1977; Garnier, 1982). As increased size and complexity threaten to disrupt the equilibrium between the limited information-processing capacities of the MNE HQ and the growing information-processing requirements facing the HQ (i.e., size and com-

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plexity increase these information-processing requirements), decentralization reduces the information-processing requirements facing the HQ and maintains the equilibrium between information-processing capacities and requirements. The MNE literature also provides support for a kind of internal equilibrium between elements of an MNE’s organizational design. For example, Hulbert and Brandt (1980) found that U.S. MNEs used more formal control (with an emphasis on planning, frequent reporting, and personal visitation) than European and Japanese MNEs. As a result, the U.S. firms were able to use fewer expatriates in their subsidiary managements than the European or Japanese firms (which had less formal control) and still retain adequate control over a subsidiary. In a later study, Egelhoff (1984) found similar results for U.S. and European MNEs. Such studies suggest a kind of internal equilibrium within an MNE’s organizational design for providing adequate parent-subsidiary coordination and control. The notion of equilibrium is also very apparent in life cycle models of the MNE and research on the stages of development that an MNE passes through (Stopford and Wells, 1972; Franko, 1976). According to such theory, MNEs need to change their strategies and organizational designs as they evolve, so that at each stage of development they retain some balance or equilibrium between the MNE’s organizational design and its strategy and environment. Thus, much traditional research and theorizing about the MNE’s organizational design (structure and processes) helps to specify equilibrium conditions for the ongoing operation and sustainable performance of the MNE. 2.3. The traditional models and organization theory Viewed within the wider context of organization theory, traditional equilibrium models of the MNE are consistent with the model of organizational stability and incremental change within conditions of equilibrium postulated by Thompson (1967). They are also consistent with punctuated equilibrium theories of organizational change (Miller and Friesen, 1982; Gersick, 1991; Romanelli and Tushman, 1994). Here organizations mostly face periods of stability and equilibrium, which are infrequently punctuated by relatively short periods of radical transformation. Theory and empirical evidence support the view that organizations don’t abandon states of equilibrium unless they can no longer cope successfully with their environments (Romanelli and Tushman, 1994). At this point, it might be useful to see how traditional equilibrium models actually can be used to understand an MNE. 2.4. An applied example The transformation of Brown Boveri into Asea Brown Boveri (ABB) is a familar story that illustrates many of the most important issues confronting MNEs (Bartlett and Ghoshal, 1993). A traditional model undoubtedly would focus on the change in strategy and structure that accompanied the transformation. Brown Boveri originally had a multidomestic strategy that called for great sensitivity to local markets, with little interdependency between countries. In terms of structure, a few large subsidiaries had a direct reporting relationship to the parent, while the remaining subsidiaries reported in to a kind of international division structure. Medium-sized subsidiaries (those with manufacturing) reported in to one international

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division HQ, and small-sized subsidiaries (those without local manufacturing) reported in to another international division HQ. By using the conceptual framework discussed above, this structure doesn’t provide much information-procesing capacity between a foreign subsidiary and other parts of the company (Egelhoff, 1988b). Thus, there is equilibrium or fit between the low information-processing requirements inherent in the multidomestic strategy and the low capacity provided by the structure. In the 1980s, the company attempted to change its strategy to capture more global economies of scale. This required more standardization and coordination across subsidiaries and significantly increased requirements for information processing. While some global product committees were created (providing only modest information-processing across subsidiaries), the organizational structure remained unchanged. The lack of equilibrium or fit between strategy and structure frustrated implementation of the new strategy. In 1987, Brown Boveri merged with Asea to form ABB. The new company adopted a transnational strategy (calling for a joint emphasis on local sensitivity and global economies of scale). This time, the company changed its formal structure to a worldwide product division X geographical region matrix structure. The product division dimension provided the kind of information-processing capacities required to capture global economies of scale, while the geographical region dimension provided the information-processing capacities required to provide local sensitivities. Equilibrium between strategy and structure (here defined in conceptual terms by using information-processing theory) was restored and the company successfully implemented the strategy. This is an overly simplified but representative example of the insight provided by traditional equilibrium models. 3. New change models of the MNE The new change models of the MNE differ significantly from the traditional equilibrium models described above. To address the subject with sufficient specificity, this article focuses on two of the new theories of MNE organizational design: transnationalism as developed by Bartlett and Ghoshal (1989, 1993) and heterarchy as developed by Hedlund (1986, 1993) and Hedlund and Ridderstrale (1997). 3.1. Transnational models of organizational design The basic definition of a transnational strategy is one that simultaneously attempts to realize global efficiency, local responsiveness, and worldwide learning across a company’s worldwide operations (Bartlett and Ghoshal, 1989). Traditional notions of MNE strategy generally contained these same elements, but usually with more of a trade-off. This trade-off was based on the belief that available MNE organizational designs could not implement strategies that called for high levels of all three elements. The most sophisticated organizational design, a matrix design, could simultaneously implement some of these elements, but it too was limited and often regarded as too complex and costly for many MNEs to use. The transnational model of organizational design gets around contingency theory’s problem by relying more on nonstructural and informal means of coordination in MNEs. From clinical research and case studies, Bartlett and Ghoshal (1989) observed that MNEs sometimes ignored structure and used more informal and personal means of coordination to de-

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velop and implement new ideas that otherwise lay outside of the dominant strategy and were therefore not supported by the formal structure and organizational design. If this kind of activity can be sufficiently increased in a firm, it would allow the firm to successfully implement a more complex, multidimensional strategy—a transnational strategy. While Bartlett and Ghoshal did not actually observe any fully developed transnational designs in operation, they believed that some firms were moving in this direction and that a high level of this kind of activity could be attained and sustained in a firm. The primary characteristics of a transnational organizational design are that it is less symetrical, more specialized, and more flexibly coordinated than traditional designs. As a result, the organization is much more willing than a traditional organization to change its strategy, organizational design, and behavior. In fact, it is through innovation and change that such an organization seeks to gain competitive advantage. There is a higher level of interdependency among subsidiaries and a greater exchange of knowledge. In addition to using more informal coordinating mechanisms, transnational designs use socialization to build high levels of shared vision (Bartlett and Ghoshal, 1989). At this point, it is interesting to reconsider the previous applied example (the transformation of Brown Boveri into ABB) and see how Bartlett and Ghoshal (1993) apply a transnational model to this case. They describe the improvement at ABB in terms of three major processes. First, an entrepreneural process, which involves “radical decentralization” and makes frontline managers the primary entrepreneurs in the organization. Second, a horizontal integration process, which involves intensive informal communication and is primarily implemented by middle management. And third, a learning and renewal process, which shapes and embeds corporate purpose throughout the organization and is primarily driven by top management. This model provides a different insight into the transformation at ABB from that provided by the traditional model. It emphasizes greater creativity at the front line level and more connectedness through shared vision and informal communication. According to this model, these are the primary attributes that allow ABB to successfully implement its strategy. They differ significantly from the explanation provided by the traditional model, which attributed a much greater role to formal structure and the way it shapes information processing in the firm. 3.2. Heterarchical models of organizational design While different, Hedlund’s (Hedlund, 1986, 1993) conceptualization of the organization as a heterarchy is largely consistent with the transnational model of organizational design. He sees the MNE confronting numerous interdependencies that are constantly changing and can not be prespecified. As a result, organizational design needs to be less hierarchical (and more heterarchical), with shifting positions and relationships, much more lateral sharing of knowledge, the development of shared vision across the organization, and more consensual forms of decision making. “A heterarchy is by definition a more ambiguous creature than the hierarchy.” (Hedlund, 1993:229). Real understanding requires a careful reading of Hedlund (1986, 1993) and Hedlund and Ridderstrale (1997). For those seeking an alternative, I think it is instructive to define “heterarchy” by starting with “hierarchy,” a simpler and more familar concept, and sequentially relaxing its constraints. Heterarchy implies multiple hierarchies across a

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relationship (e.g., one for engineering knowledge, another for sales knowledge, a third for setting compensation, and so forth). While these hierarchies contain the same interdependent subunits and individuals, their orderings tend to vary (position in one hierarchy does not predict position in another hierarchy). The orderings of these hierarchies are themselves temporary and change frequently (even from task to task). And finally, some of these hierarchies aren’t really hierarchies, because they lack transitivity. For example, an individual might start out at the top of the engineering knowledge hierarchy, providing crucial decision making for a project. As the project proceeds and decision making rests on a narrower knowledge base, this individual may become subordinated to the superior knowledge of some junior engineer (i.e., the ordering is not always transitive, as in a true hierarchy, but can be circular). As with transnationalism, this is a change-oriented design. While not a complete definition, this simple heuristic defines the attributes of heterarchy that are of primary concern for this paper. “Practical examples of heterarchical social systems are democratic political systems, employee share ownership, and many kinds of project councils and R&D boards in companies.” (Hedlund, 1993: 231). In a later article on the N-form (where “N” stands for novelty), Hedlund and Ridderstrale (1997) contrast knowledge exploitation and knowledge creation in MNEs. They argue that heterarchical models of the MNE are better able to represent it as a knowledge creating organization, while traditional models largely represent it as a knowledge exploiting organization. While few will disagree with the organizational characteristics Hedlund would like to see in the new heterarchical design, it is the suggestion that these characteristics can largely replace the more traditional features of organizing (like structure and hierarchy) that is most disturbing to traditional theorists. 3.3. Understanding the new models through comparison While transnational and heterarchical models of MNE organizational design tend to be less defined than the traditional models, a direct comparison of key attributes should help to further specify the new models and define their differences from the traditional equilibrium models. A summary of this comparison is shown in Table 1. The two models differ sharply in their respective stances toward equilibrium and change. Traditional equilibrium models all use a contingency theory approach. This assumes some degree of variability and change in firm strategies and environmental conditions, but it also assumes that this variability will follow certain patterns so that firms can organizationally adjust to or fit these conditions in a consistent manner. In other words, there is an orderliness to strategic and environmental variation, and contingency models seek to discover this order and specify organizational fit or equilibrium with it. The new models do not use a contingency theory approach. While they recognize strategic and environmental variation, transnational and heterarchical designs do not vary in any prespecified way as a result of such variation. Instead, all organizational adjustment to strategic and environmental variation is handled within the same general transnational or heterarchical design, so there is no attempt to further specify or make design contingent on variation in strategy or environment. Adjustment to the environment will occur within a single broadly defined transnational or heterarchical design, as opposed to between more tightly specified alternative designs under contingency theory.

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As Table 1 indicates, the two models also differ in their stance toward change—strategic, environmental, and organizational change. Traditional equilibrium models assume (1) that significant changes in strategy and organizational design are infrequent, and (2) that most strategic and environmental change is predictable. Consistent with these assumptions, equilibrium models emphasize organizational change and adaptation occurring within conditions of equilibrium. If fit or equilibrium between organizational design and a firm’s strategy and environment is lost, this is regarded as bad and hopefully will be of short duration. Ideally, strategy and organizational design change from one state of equilibrium to another state of equilibrium, with minimal loss of fit during the transition. The orderliness of strategies and environments, the predictability of change, and the modest levels of change all contribute to the view that most organizational change can occur within conditions of equilibrium. Transnational and heterarchical models make very different assumptions about change. They assume (1) that significant changes in strategy and organizational design are frequent or continuous, and (2) that most strategic and environmental change is not predictable. Given these assumptions, it is unrealistic to believe that most organizational change can occur within conditions of equilibrium (i.e., that organizations can know a series of fits or equilibrium points between strategy and organizational design and generally guide the organization’s path of change along this trajectory). As a result, transnational and heterarchical models emphasize changes in organizational design and organizational behavior that are largely unfettered by any specified or predefined notions of equilibrium. Yet, transnational and heterarchical changes in organizational design and behavior are not random events from the perspective of the firm’s strategy and environment. They are intended to be effective managerial and economic responses to both. But the responses are not so much generated from any existing models of equilibrium, as from a more unstructured, innovative learning process. Thus, transnational and heterarchical learning and response largely seem to occur outside conditions of equilibrium.

Table 1 Comparison of salient attributes of equilibrium models with those of transnational and heterarchical models Equilibrium models

Transnational and heterarchical models

Equilibrium

Contingency therory approach; specifies equilibrium and fit between structure, process and a variety of strategic and environmental conditions

No contingency theory approach; no explicit specifying of any equilibrium conditions

Change

Assumes: (1) significant environmental change is infrequent; (2) most change is predictable

Assumes: (1) significant environmental change is frequent or continuous (2) most change is unpredictable

Emphasizes adaptive organizational change within conditions of equilibrium

Emphasizes radical organizational change outside conditions of equilibrium

Coordinating mechanisms

Formal structures; formal organizational processes (centralization of decision making, planning, controlling, and staffing

Informal interpersonal communication; organizational culture and shared values

Level of analysis

Total corporation; parent-subsidiary relationship

Work group; individual

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Table 1 also shows that there are significant differences between the two models in terms of the coordinating mechanisms that each relies on to coordinate the interdependencies that MNEs face. Traditional equilibrium models stress attributes of formal organizational structure and important processes like the centralization/decentralization of decision making, planning, controlling, and staffing. These are defined at a macro level of analysis, either for the total corporation or sometimes for specific parent-subsidiary relationships. Transnational and heterarchical models, on the other hand, stress informal interpersonal communication and strong organizational cultures and shared values. The latter provide the knowledge and trust required for informal communication to be effective. It is important to notice that this kind of coordinating mechanism (values and attitudes, intensive interpersonal communication) tends to exist at the level of individuals and work groups. This kind of coordination is supposed to be more flexible (Bartlett and Ghoshal, 1989) and more suited to learning and innovation (Hedlund and Ridderstrale, 1997), than the formal macro level mechanisms featured in traditional equilibrium models. It is important to realize that transnational and heterarchical models embrace two different kinds of change. First, they call for MNEs to cope with more frequent and continuous strategic and environmental change than the traditional models provide for. Some of this increased change stems from attempting to individually and flexibly deal with more of the diversity and complexity in a firm’s environment with unique or innovative responses (i.e., local responsiveness at a more micro level). In other words, a more micro level perspective and set of coordinating mechanisms are going to sense a higher level of change in an environment than a more macro level perspective and set of coordinating mechanisms. Second, transnational and heterarchical models call for major organizational change, on the part of most MNEs, so that they can deal with this heightened strategic and environmental change. This new design emphasizes: continuous reorganizing of communication and coordination patterns, low dependence on hierarchical and formal mechanisms for coordination and control, high levels of lateral coordination and shared vision, and an emphasis on experimentation and the development of new knowledge rather than the exploitation of existing knowledge (Bartlett and Ghoshal, 1989; Hedlund and Ridderstrale, 1997). In many ways, this design facilitates disrupting the existing equilibrium with a firm’s strategy and environment. 3.4. Viewing the new models as self-organizing systems Since they deal with organizational change outside of equilibrium, it would appear that transnational and heterarchical models of the MNE can be usefully related to self-organizing theory (Jantsch, 1980; Gemmill and Smith, 1985; Scott, 1987; Leifer, 1989). First applied to fields such as physics and biochemistry, self-organizing theory has more recently been used to explain certain kinds of change in organizations—typically radical, innovative change that occurs when traditional responses can no longer cope with a hypercompetitive environment (Leifer, 1989). These are very similar to the conditions that appear to be driving MNEs toward transnational and heterarchical designs and behaviors. The defining characteristics of self-organizing systems are: (1) organizational change occurs as a result of an organization’s adaptive or equilibrium mechanisms being overwhelmed by environmental turbulence and/or a lack of available resources; (2) there exists a bifurcation point, where the limits of an orga-

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nization’s adaptive mechanisms are just exceeded; (3) beyond this point organizations that persist in using normal adaptive mechanisms to reduce change and reestablish equilibrium will become increasingly misaligned with their environments; (4) instead, successfully coping with the environment requires a radical strategy of transformation, which involves such actions as developing a new vision and experimenting with new organizational forms. In this out-of-equilibrium manner, the organization dissapates entropy, imports new sources of energy from the environment, renews itself, and copes with its environment (Leifer, 1989). To a great extent, transnational and heterarchical models of the MNE seem to have similar purposes and processes as the more general self-organizing systems model. They both deal with contexts that aren’t amenable to traditional responses, they try to innovate something new rather than identify and exploit something old, and organizationally and procedurally they both do this in ways that are not very specified but usually involve decentralization, low formalization, and high levels of information exchange. Thus, transnational and heterarchical designs embrace high levels of self-organizing behavior with little notion of equilibrium. Even if they were developed independently from the more general concepts of self-organizing theory, it is conceptually useful to view both as self-organizing models of the MNE. They largely represent the MNE as a self-organizing system, in contrast to the traditional contingency theory view of the MNE as an equilibrium system.

4. Implications of the shift from traditional equilibrium to new change models of the MNE The shift from traditional equilibrium models of the MNE to the new change models has been most noticeable in the presentation and publication of research, with a more lagging shift occurring in textbooks and teaching. It is less clear how much shift has actually occurred in MNEs, but public statements by companies indicate a widespread interest in appearing more transnational and heterarchical and less traditional. This section discusses a number of important issues that are associated with this shift in interest from traditional to the new change models of the MNE. 4.1. A significant amount of knowledge based on traditional equilibrium models is in danger of being ignored and lost The reason for this is the transnational and heterarchical models really are discontinuous with the traditional models, and the field has been slow to grasp this or to understand its implications. As the previous sections have shown, transnational and heterarchical models largely reject, rather than complement, traditional organization theory approaches to MNE design. While this conceptual discontinuity is apparent in a careful reading of the literature, it is not widely appreciated by international scholars and practitioners. Many seem to assume that the new models somehow contain or continue to embrace useful parts of the traditional models. Much of this confusion stems from the fact that a suitable interface between the two approaches has not been attempted. Transnational and heterarchical theorists have criticized certain characteristics of traditional theory and ignored others but have not sought to recon-

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cile or define separate domains for the two models. Traditional theorists by and large have not responded to the criticism or critiqued the new models, so no reconciling of models or defining of domains has come from this quarter either. It appears that the new models were initially developed to address deficiencies in traditional theory and not to replace traditional theory. Bartlett and Ghoshal (1989) address the issue as follows: Is the transnational organizational form appropriate for all companies with worldwide operations? In a sense, the question is misleading, since the transnational is less a structural classification than a broad organizational concept or philosophy, manifested in organizational capability and management mentality (p. 209). The implication is that if MNEs are still going to use structures and other formal coordinating mechanisms, these will largely have to be understood with traditional models. Transnational theory advocates deemphasizing such formal mechanisms but provides no guidance for understanding and employing them. In a similar vein, Hedlund and Ridderstrale (1997) state: Whereas the formal hierarchical structure is the key to integration in the exploiter, informal process is the most important vehicle for coordination in the creator (p. 340) The implication here is that if a firm largely derives its competitive advantages through the exploitation of existing knowledge, it should primarily be guided by traditional theory. If, on the other hand, it seeks competitive advantage through the development of new knowledge, concepts of heterarchy are more relevant. Firms that engage in both exploitation and creation presumably need to somehow be guided by both models. Thus, while there appears to be an ongoing need for the knowledge content of traditional theory, the failure to define domains and interfaces between traditional and new theory has contributed to the general shift in interest. This shift from a traditional to a transnational or heterarchical model of the MNE can lead to the loss of a lot of cumulative learning that is probably still useful for understanding multinational organizations. As an example, consider the extremely difficult organizational problem of reconciling global coordination and local responsiveness. This problem represents a real trade-off and dilemma for traditional organization theory. By using a transnational or heterarchical model, local responsiveness is addressed by (1) decentralizing (an organization theory response that favors local responsiveness and hinders global coordination), and (2) relying on shared vision and informal lateral relations between individuals to provide a high level of global coordination. The latter is not an organization theory response, but a social psychology and group dynamics response to the problem of attaining global coordination. Traditional equilibrium models would tend to reject this as a viable solution, since there is little empirical evidence that the aggregation of individual and small group coordinating mechanisms can effectively substitute for more macro level organizational coordinating mechanisms. In this particular instance, a transnational or heterarchical perspective of an MNE loses much of the rich dialectical understanding that equilibrium models provide of the local responsiveness/global coordination problem. It would appear that this problem is still very evident in most MNEs.

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4.2. Transnational and heterarchical models tend to support radical rather than incremental organizational change in MNEs The danger here is that transnational and heterarchical models, with so much emphasis on change and experimentation (and so little on equilibrium), might contribute to destabilizing organizations more than is necessary to accomodate environmental change. Transnational and heterarchical models see their environments as constantly changing, and often this change is unpredictable (Hedlund, 1993). They generally assume the bifucation point (from self-organizing theory) already has been passed. There is no attempt to define an equilibrium with such an environment. Instead, there is the notion of constantly changing organizations, breaking down rigidity, decentralizing, reducing hierarchy. If environments are in flux, organizational design must also be in flux. But this is a rather crude notion of equilibrium, and it does not help to further specify any particular type of organizational design. The counter argument to this viewpoint is that there are many elements of stability even in changing environments, and models of organizational design need to recognize this. Much change probably occurs as adaptive change within conditions of equilibrium. And, some radical change that occurs outside of equilibrium probably can proceed from one stable environment through a period of transition (during which equilibrium is lost) to another stable environment (rather than cycle into a state of continuous flux). Work by Gersick (1991) and Romanelli and Tushman (1994) using punctuated equilibrium theory tends to support this view that periods of large-scale change outside of equilibrium tend to be of relatively short duration. Thus, equilibrium models encourage one view of change, while transnational and heterarchical models encourage another. The danger is that too much focus is being put on models of radical change. While at times, firms and industries may face turbulent environments that require large-scale radical change, most firms and industries also require the ability to conceptualize and conduct change within conditions of equilibrium. 4.3. Transnational and heterarchical models ignore equilibrium with other social institutions Organizations (including MNEs) are social institutions, that operate within the wider context of other social institutions, such as family, community, and national or ethnic groups. The demands of the MNE need to be balanced and in equilibrium with the demands of the other institutions in this wider social context. With respect to this, it would appear that the social and behavioral demands of the new organizational forms are more severe than those of traditional forms of organization. Traditional forms of international organization leave most managers and professional level employees free to live and operate in their own national cultures and local community environments. There is substantial latitude for values and behavioral styles to vary within the MNE, with relatively few individuals required to share values or engage in intensive interpersonal interactions across cultures. Few, if any, require a geocentric mind-set (Perlmutter and Trist, 1986; Kobrin, 1994). Interdependency between different cultures is purposely minimized, and coordination is largely achieved with more formal and bureaucratic features of organizational design (such as formal planning and control systems and an explicit hierar-

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chy of authority for approving different kinds of decisions). These traditional features of organizational design don’t require much shared vision or a deep understanding of each other’s thinking and behavior to effect coordination. What gets exchanged across cultures tends to be explicit, rather than tacit knowledge and information. Transnational and heterarchical organizations, on the other hand, embrace many more interdependencies across cultures. There is no deliberate attempt to minimize this. Often these interdependencies occur between deeply embedded and local core elements (e.g., two manufacturing units), rather than between a limited number of boundary-spanning elements, as is the case in traditional organizations (Thompson, 1967; Allen, 1977). As a result, many more individuals are required to be boundary spanners across cultures. Much more emphasis is put on informal individual and small group interaction to achieve coordination, with less use of formal and bureaucratic features of organizational design. While the former facilitate the exchange of tacit knowledge and information (Hedlund and Nonaka, 1993), they require a high level of shared vision and a deep understanding of each other’s thinking and behavior. This is usually associated with a more geocentric (and, I think often, a “company-centric”) mind-set. The latter is quite a contradiction to local community and national-oriented mind-sets. It is the much greater prevalence of this geocentric and company-centric mind-set in foreign subsidiaries that raises serious questions about what kind of equilibrium this kind of organizational change can establish with the demands of local communities and national or ethnic groups. The lack of an equilibrium perspective in the new theories make them relatively blind to such issues. Traditional models of the MNE generally force the reconciling of local views and global views to take place at a macro level, usually between different levels of a hierarchy (e.g., a subsidiary manager and a global HQ manager) or different subunits (e.g., sales groups and an R&D group). The organization is required to have both local and global viewpoints, but these are usually represented by different individuals or different subunits. The new models of the MNE move more of this reconciling into the mind of an individual. Using the above example, we can see that both the subsidiary manager and the global HQ manager will have more of a geocentric mind-set, which means each tends to take both a local and a global view of the situation. To the extent that the two possess shared vision regarding the issues, each will start to reconcile the local and global views of the situation in a similar manner. This first round of reconciliation will take place in the minds of individuals (some of the reconciliation will probably be subconscious). The second round of reconciliation, between two geocentric individuals, will undoubtedly be much easier than the traditional single round between two individuals with different mind-sets. This is why the traditional models attempt to minimize the amount of such reconciling, while the new models fearlessly call for a lot of such reconciling of local and global viewpoints. Thus, moving from a traditional to a transnational or heterarchical model significantly changes the way local interests are represented and reconciled within an MNE. The point of reconciliation moves from the macro level, where it is usually visible and contentious, to the micro level, where it is more hidden and less contentious. While the efficiency of reconciling local and global differences increases dramatically (it occurs at many more points in the organization and involves less organizational conflict), skeptics will question whether local interests and institutions are adequately represented in the new reconciliation process. Many

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local interests will not see a subsidiary manager with a geocentric or company-centric mindset as a creditable representative of their viewpoints. The above are some of the most important implications associated with shifting research and practice away from the traditional and toward the new models of MNE organizational design. The shift clearly introduces more change and flexibility into MNE design, but some important advantages associated with the traditional equilibrium models now seem to be lost. A history of carefully defined equilibrium between firms and environments is downplayed, and more emphasis is put on stimulating innovation and radical change. The research base underlying the new models is sparse compared with that supporting the traditional models, so shifting the emphasis in both research and practice is not without risk. Given this situation, how should MNE theory proceed? 5. Some tentative answers to the implications The above comparison argues against replacement of either model by the other, since each is unique and clearly relevant to MNE organizational design. Table 2 summarizes the primary advantages of the new change models and the traditional equilibrium models. The new change models increase the number of exceptions that an organization can accomodate. Traditional models tend to be relatively blind to situations that don’t fit the known set of contingency variables. They also tend to see and define new situations in terms of these known frames of reference. Since the new models lack these blinders, they are free to define a more heterogeneous organizational context that contains more exceptions. Closely related to this issue, the new models also increase the variety of organizational initiatives and responses that are available to the organization. With these models, organizational initiatives and responses are more informal and created to fit the immediate situation, rather than chosen from some model or known set of relationships. While prior knowledge can probably be deployed more quickly under conditions of equilibrium, the new change models increase the rapidity with which spontaneous change and innovation can occur. With these models, new knowledge and the adoption of new knowledge (change) can spread rapidly through informal networks, while traditional models require that new knowledge first becomes incorporated in formal decisions and routines before it can have a significant impact on the organization. Table 2 Primary advantages of the new and traditional models of the MNE New change models Increase the number of exceptions that can be accomodated Increase the variety of organizational initiatives and responses that are available Increase the rapidity with which spontaneous change and innovation can occur Increase the organization’s ability to respond and cope with extreme uncertainty Traditional equilibrium models Provide for consistent, predictable, organizational behavior Increase the efficient use of best practices and the leveraging of knowledge Facilitate compatiability and coordination between different parts of an organization Provide an explicit logic for understanding an organization

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More self-organizing behavior also increases the organization’s ability to respond or cope with extreme uncertainty, when conditions are far from equilibrium. This can be particularly important to firms or industries that face turbulent environments. An important advantage of traditional equilibrium models is that they provide for consistent, predictable organizational behavior. Following such models leads to other actors (customers, suppliers, investors, and competitors) seeing the organization’s behavior as rational and orderly. It prompts them to respond in a similar manner, which also leads to rationality at the higher level of an industry or economy. Traditional equilibrium models also increase the efficient use of best practices and the leveraging of knowledge across an MNE. They encourage the codifying and standardizing of organizational knowledge, which makes it more efficient to transfer and leverage. These models place a lot of emphasis on how to facilitate compatiability and coordination between different parts of the organization. Much of this is based on directly or indirectly understanding and taking into account the information-procesing limitations of large, complex organizations. In contrast to the new change models, the traditional models provide an explicit logic for understanding the organization and predicting its behavior. As a result, it is easier to understand and critique the traditional models than it is to understand and critique the new change models. The latter remain more tacit, underspecified, and mysterious. It is apparent from the above discussion of primary advantages that the new change models and traditional equilibrium models should not be competing to perform the same job. The current debate between the two, which is more implicit than explicit, is not properly defined. Criticizing the limitations of traditional equilibrium theories does not justify replacing them with theories of transnationalism and heterarchy, as appears to be occurring. This would suggest that MNE environments in general can be adequately characterized as turbulent, with little or no concern for stability and equilibrium. But MNEs need the capability to enact stability and adaptive change under conditions of equilibrium. At times, they also need the capability to enact more radical change and transformation outside conditions of equilibrium. But if the traditional equilibrium and new change models are discontinuous (involving assumptions, coordinating mechanisms, and behaviors that are inconsistent with each other), how can they coexist or be applied to the same organization? This is an important question that has largely gone unanswered. And the absence of an answer has caused doubt about the future relevance of traditional equilibrium models and a general shift away from such models toward the new change models of the MNE. One possible answer is that the models might apply to different firms—traditional equilibrium models to firms with stable environments and change models to firms with turbulent environments. But this is not a very satisfactory answer, since stability and turbulence frequently coexist in the same firm. Yet, if a firm needs to embrace both stability and turbulence, and use different models for dealing with them, one needs to define the respective domains of the two models and their interface point. A logical and useful way to begin specifying these domains seems to emerge from the preceding definition and comparison of the two models. Interestingly, the arguments for transformation and disequilibrium in MNEs (Bartlett and Ghoshal, 1993; Hedlund and Ridderstrale, 1997) appear more applicable at the micro than at the macro level of MNEs. The abandonment or disregard of formal structure (a primary component of equilibrium models) makes a lot more sense at the work group, project team, new business venture, or subsidiary level of an MNE than it does at the total company level of anal-

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ysis. At these more micro levels, shared vision and formal and informal lateral relations can more readily substitute for the coordination otherwise provided by structure and other macro level coordinating mechanisms. At the total firm level, shared vision in sufficient detail to be an effective coordinating mechanism becomes extremely problematic (it is costly to achieve, and can reduce desired differentiation). At this level, informal lateral relations are largely confined to preestablished networks and formal lateral relations tend to be expensive. Neither provides the comprehensive, reliable, low-cost coordination and information-processing capacities associated with formal structure and other macro level coordinating mechanisms. Disequilibrium is also more tolerable and less risky at the level of a project team or new business venture than at the level of the total company. Individual failures at this level do not imply failure of the organization. Most innovation and creativity in organizations probably occurs at this level of analysis, and therefore it makes most sense to organize for it at this level of analysis. Conversely, the arguments for stability, adaptive change, and equilibrium are most applicable at the macro level of MNEs. It is at this level that these models were empirically defined in the first place, which is why their emphasis has been on such macro level coordinating mechanisms as formal structure, centralization, and control. Similarly, equilibrium and the predictability it provides are generally desired at this level of analysis by most of an organization’s stakeholders. Radical change here is usually regarded as risky, since an individual failure can threaten the performance and security of the entire organization. As described above, transnational and heterarchical models do not represent a very complete organizational theory of the MNE. They are largely theories of organizational transformation, which can be an important aspect of organizational behavior and performance in changing environments or at levels of the organization where radical change is to be encouraged. But they are overly reliant on interpersonal modes of coordination and shared vision, and they lack an equilibrium perspective. In a similar way, one can also argue that traditional equilibrium models are not a very complete organizational theory of the MNE. While they represent a variety of macro level coordinating mechanisms and define important instances of stability and equilibrium, they are underdefined when it comes to representing an MNE’s potential for coping with change and disequilibrium. The argument here is that the MNE needs to be represented by both models of equilibrium and models of change, and that largely complementary domains for each can be defined at different levels of analysis. This argues not so much for a theory of punctuated equilibrium (where the total firm’s equilibrium is periodically altered) as for a theory of localized disequilibrium. In the latter, there are always local pockets of disequilibrium and radical change in an MNE, but such localized disequilibrium will tend to exist within an overall macro level equilibrium, between a firm and its environment (external equilibrium) and between major organizational subsystems (internal equilibrium).

6. Conclusion This article has sought to begin the long overdue task of reconciling and integrating the new and traditional theories of MNE organizational design. This was attempted by further

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conceptualizing and comparing both old and new theories along the well-established dimensions of equilibrium and change. Both theories provide rich insight into MNE organizational design—but substantially different insight. As a tentative answer, I have argued that these insights can be reconciled by using a framework that generally confines the flexible, changeoriented perspective of transnationalism and heterarchy to a micro level domain and the equilibrium-seeking perspective of structural contingency theory to a macro level domain. The location and nature of interface points between the perspectives needs to be further conceptualized and explored. Also, more open debate and comparison of theories, with an intent toward reconciliation, is an underlying theme of this article. New theory should confront and climb over the back of old theory, not bypass or ignore old theory. This increases the opportunities for cross-fertilization, combination, and the propagation of ever richer theory. Organizing the MNE is an increasingly complex task that can’t afford to lose any useful theory along the way. References Allen, T.J., 1977. Communications, technology transfer, and the role of the technical gatekeeper. R&D Manage 1, 14–21. Baliga, B.R., Jaeger, A.M., 1984. Multinational corporations: control systems and delegation issues. J Int Business Stud Fall, 25–40. Bartlett, C.A., 1986. Building and managing the transnational: the new organizational challenge. In: Porter, M.E. (Ed.), Competition in global industries. Harvard Business School Press, Boston, pp. 367–404. Bartlett, C.A., Ghoshal, S., 1989. Managing across borders: the transnational solution. Boston: Harvard Business School Press. Bartlett, C.A., Ghoshal, S., 1993. Beyond the M-form: toward a managerial theory of the firm. Strategic Manage J 14 (1), 23–46. Brandt, W.K., Hulbert, J.M., 1976. A empresa multinacional no Brasil: um estudo empirico. Zahar Editores, Rio de Janeiro. Chandler, A.D., 1962. Strategy and structure. M.I.T. Press, Cambridge, MA. Daniels, J.D., Pitts, R.A., Tretter, M.J., 1984. Strategy and structure of U.S. multinationals: an exploratory study. Acad Manage J 27 (2), 292–307. Doz, Y.L., 1986. Strategic management in multinational companies. Pergamon Press, Oxford. Doz, Y.L., Prahalad, C.K., 1981. Headquarter’s influence and strategic control in MNCs. Sloan Manage Rev Fall, 15–29. Edstrom, A., Galbraith, J.R., 1979. Transfer of managers as a coordination and control strategy in multinational organizations. Admin Sci Q 22, 248–263. Egelhoff, W.G., 1982. Strategy and structure in multinational corporations: an information-processing approach. Admin Sci Q 27 (3), 435–458. Egelhoff, W.G., 1984. Patterns of control in U.S., UK, and European multinational corporations. J Int Business Stud Fall, 73–83. Egelhoff, W.G., 1988a. Strategy and structure in multinational corporations: a revision of the Stopford and Wells model. Strategic Manage J Jan.-Feb, 1–14. Egelhoff, W.G., 1988b. Organizing the multinational enterprise: an information-processing perspective. Ballanger Publishing, Cambridge, MA. Franko, L.G., 1976. The European multinationals: a renewed challenge to American and British big business. Greylock Publishing, Stamford, CT. Galbraith, J.R., 1973. Designing complex organizations. Addison-Wesley, Reading, MA. Galbraith, J.R., Nathanson, D.A., 1978. Strategy implementation: the role of structure and process. West Publishing Company, St. Paul, MN.

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