Organization structures used by MNCs
There are several organizational structures applied by multinational corporations, the most common ones being the decentralized federation model, the coordinated federation model, the centralized hub model, and the integrated network model. The decentralized federation model provides a company with a multinational strategy. It is used mostly by European companies expanding in other countries. Since they face local competition, they build local production facilities known as national units that become independent. These national units have strategic freedoms and operating independence from the headquarters, and are managed more as offshore investment portfolios as opposed to single international businesses (Deresky, 2008). In the coordinated federation model, the headquarters provides formal systems controls that like planning, administration, and budgeting. Subsidiaries mainly provide the flow of knowledge back to the headquarters in technology processes, products, and systems. It came into use after the Second World War, whereby companies leveraged on the strengths in technology, sheer size and financing of the United States of America (Deresky, 2008). The centralized hub is a centrally controlled structure where an export-based internationalization strategy is applied. Group-oriented management practices come into play. The model is people independent and communications intensive. This structure involves a global strategy that focuses on exports for the multinational cooperation involved, with the headquarters maintaining an unassuming but tight controls in key strategic decisions, and the subsidiaries mainly managing goods flow (Deresky, 2008). The integrated network model makes and legitimizes numerous internal perspectives with the ability to sense complex environmental opportunities and demands. In this structure, the company’s management capabilities and physical assets are distributed internally, but they retain their independence. It has a flexible, robust, and internal integrative process (Deresky, 2008).
Decentralized versus Coordinated Federation
The decentralized federation model is made up of three main features. First, a majority of key assets and resources is decentralized and has loose personal controls. Second, its financial flow is such that capital goes out and dividends come in. Third, the company’s corporate management treats all subsidiaries as independent businesses (O’Sullivan, 2008). On the other hand, the coordinated federation model not only gives the subsidiaries the autonomy to do business in local markets, but also has strong ties with the central company, thus facilitating significant feedback on how to improve efficiency within the subsidiaries.
The decentralized federation structure tends to support the idea of giving strategic freedom and operating independence to subsidiaries abroad. This is because the company engages in matching the local market needs that are widely different (Deresky, 2008).
The coordinated federation model works well with many companies applying the international orientation since this structure puts emphasis on centralizing the sources of core competencies. Both foreign and domestic operations are formal, system-based, tight, and controlled systematically. This connection provides a continuous information flow that the central staff can obtain and analyze (O’Sullivan, 2008).
Another key strategy in the decentralized federation model comes into play whenever host countries raise discriminatory legislations and tariffs. When this happens, MNCs can build local production facilities to form effective competition with local companies (O’Sullivan, 2008).
The Coordinated federation at the Volkswagen Group
The Volkswagen Group is an excellent example of a company applying the coordinated federation organizational structure. Volkswagen is a manufacturer of automobiles and operates numerous subsidiaries such as Audi, Bugati Automobiles, Bentley Motors, Automobili Lamborghini, Scania, Skoda Auto, and SEAT. While most skills and technologies are provided by the parent company, they are slightly modified by the subsidiary companies. In the Volkswagen case, the gearbox and platform are shared by the Audi A3 hatchback and the VW Golf. Additionally, the engine of the Bugatti Veyron shares numerous components with the modular engine family of Volkswagen. Moreover, Volkswagen’s Jozef Kaban designed the Bugatti Veyron interior instead of the in-house designers of the Bugatti (Deresky, 2008).
How the Volkswagen Group coordinates useful information
The Volkswagen Group is able to satisfy growing demands on flexibility, processes, costs and quality by viewing the dynamic change of processes as permanent challenges. It encourages active communication between subsidiaries through independent participation of all staff members. The groups’ CEOs, together with the high management, regularly meet to discuss the way forward (O’Sullivan, 2008).
Why the coordinated structure is suitable for Volkswagen Group
The organizational structure is well suited for a company with subsidiaries abroad, which is the case for the Volkswagen Group.
The company’s head offices are located in the USA, providing it with the strength in technology and the financial might required for such an organization structure. The group has numerous subsidiaries all over the world and, therefore, needs an organization structure that can coordinate all of them. The company has a wide network of communication between its subsidiaries, making it suitable for the coordinated federation structure.
References
Deresky, H. (2008). International management: Managing across borders and cultures. New York, NY: Pearson Prentice Hall.
O’Sullivan, K. (2008). Strategic Knowledge Management in Multinational Organizations. New York, NY: Idea Group Inc.