REPORTS
Need for Reports
Headquarters needs timely reports from all operating units of an international finn so that management can allocate resources properly, correct plans, and reward personnel. First, the decisions on the use of capital, personnel, and
technology are almost continuous; consequently, reports must be frequent and must show recent situations so that these resources are put to best use. Second, plans need to be updated in order to be realistic and to assure that there is a high probability of meeting desired objectives. Feedback on both results and conditions that might affect results are essential so that corrective action, whether in the form of new strategies to meet objectives or in the form of altered objectives, may be undertaken. Finally, reports are needed in order to evaluate the performance of personnel in the various operating units of the company. Not only will comparison of performance aid in determining who will receive the rewards of monetary compensation and advancement, but it also will help stimulate personnel to improve their own areas of weakness.
The use of written reports is more important in an international than in a domestic setting because subsidiary managers have much less personal and oral contact with line and staff personnel above them. Thus corporate managers miss out on much of the informal communication that can tell them about the performance of the foreign operations.
Types of Systems
Most international firms use reporting systems for foreign operations that are similar to those they use domestically.29 There are several reasons for this. If tne systems have been effective domestically, management often believes that they will be effective internationally as well—particularly if home-country
management considers its know-how superior to that of its subsidiaries abroad. Next, there are economies through carrying over the same types of reports—the need to establish new types of reporting mechanisms is eliminated, and corporate management is already familiar with the system. Finally, like reports presumably allow management to compare one operation against another and consolidate the reports without as much fear that they have added "apples to oranges."
The main purpose of MNEs' reporting systems is to assure adequate profitability by identifying deviations from plans that would indicate possible problem areas. This focus may be on short-term performance or on longer-term indicators that match the strategic thrust of the organization. The emphasis is on the evaluation of the subsidiary rather than the evaluation of the subsidiary manager, although the profitability of the foreign unit is one of the important ingredients in the managerial evaluation.30
Not all information exchange is by formalized reports. Within many MNEs, certain members of the corporate staff travel much of their time in order to visit with subsidiaries. Although this may do much to alleviate misunderstandings, there are some inherent dangers if visits are not done properly. If, on one hand, corporate personnel visit the tropical subsidiaries only when there are blizzards at home, the personnel abroad may perceive the trips as mere boondoggles. If, on the other hand, subsidiary managers offer too many social activities and not enough analysis of operations, the corporate staff members may consider the trips a waste of time. Also, if visitors come only when the corporate level is upset about foreign operations, the overseas managers may always be overly defensive.
Reporting Problems
Management Versus Subsidiary Performance There is general agreement that subsidiaries should be evaluated separately from the management within subsidiaries. This is so that managers are not penalized for conditions and occurrences outside their control. Beyond this agreement, however, there is a good deal of difference among firms in what they do and do not include in the managerial performance evaluation. For instance, some firms hold managers abroad responsible for gains or losses in currency translation whereas others do not. Most firms deduct interest expenses before measuring the profitability of foreign operations whereas many do not.31 These are examples of environmental factors that some, but not all, companies consider to be outside the control of the local managers.
Another area of noncontrollables is when centralized decisions are made that will optimize the performance of the total corporation. A particular subsidiary may not do as well as if it had been left to operate independently. In fact, the normal profit center records may well obscure the importance that the subsidiary plays within the total corporate entity.
Cost and Accounting Comparability Different affiliate cost structures may prevent a meaningful comparison of operating results. For example, the percentage of direct labor to sales in one country may reasonably be much higher than in a subsidiary in another country if the former has low labor and high capital costs in relation to the latter. Different accounting practices can also create problems. Most international firms keep one set of books that are consistent with parent principles and another set to meet local reporting requirements.
Country Risk When evaluating foreign investment possibilities, most com-panjes set a higher minimum return to invest in high-risk countries. Having
done this, firms logically would expect the performance within the high-risk
countries to reflect the expected higher return. Most companies agree that such an analysis would be useful; however, they also agree that they know of no reasonable means of incorporating country risk into the performance evaluation. They feel that the incorporation would penalize managers in risky countries and make them responsible for something outside their control.32
Evaluative Measurements
Multiple Measurements Every evaluation measurement has shortcomings wnen applied internationally. Consequently, a system that relies on a number
of different indicators may be preferable to one that relies too heavily on one measurement. Financial criteria tend to dominate the evaluation of foreign operations and their managers. Although many different criteria are used, the most important ones for evaluating the operations are budget compared with profit, budget compared with sales, and return on investment. The most common financial criteria for management appraisal are budget compared to profit, budget compared to sales, and return on sales. Many nonfinancial criteria also are employed. The only one commonly given much weight in subsidiary evaluation is market-share increase. Several nonfinancial criteria are important for evaluating the managers, though. These include market-share increase, quality control, and relationship with the host government.33
Budget Concept One way of overcoming the problems of evaluating per-formance is by looking at the budget, which can help the MNE differentiate between the worth of the subsidiary and the performance of subsidiary management. The budget should include the goals for each subsidiary that will help the MNE achieve an overall objective. As long as the subsidiary manager is working toward a budgeted goal rather than a measure such as return on investment, there will be fewer problems in dealing with inflation, exchange-rate changes, and transfer prices.
Planning Information Acquisitions
Thus far the discussion has centered on information needed to evaluate sub-sidiary and subsidiary management performance. Although this information
is crucial, corporate management requires additional data. The information needs may be categorized as follows:
1. information generated for centralized coordination, such as subsidiary cash balances and needs;
2. information relating to external conditions, such as analyses of local political and economic conditions;
3. information for feedback from parent to local subsidiaries, such as R&D breakthroughs;
4. lateral information between related subsidiaries; and
5. external reporting needs.34
Since information needs are so broad, two problems for firms are (1) the cost of information relative to its value and (2) "information glut," which refers to redundancy. One technique used by some firms is Planned Information Acquisition Analysis (PIAA), which involves a periodic reevaluation of each new document or service the firm uses.35 By comparing the number of times sources have been retrieved and found relevant, the firm may limit acquisition to those items most valuable to the firm.
Compatibility Another problem is the compatibility of information needed Dy tne subsidiary and by corporate management. Even when different subsid-
lanes are trying to solve similar problems, their information needs may differ
vastly. Consequently, corporate management may be faced with the dilemma of comparing unlike data or requiring different or additional data, which may be expensive. An approach that has been instituted by some firms is to allow diversity but to send copies and analyses to centralized data banks. For many corporate needs, standardization is not necessary, but standardization of coding is so that centralized personnel may compare the performance of subsidiary projects and suggest more refined models for local use.
Aside from the problem of data or coding uniformity, a major obstacle to the on-time retrieval of comparable information is the diversity from country to country in a company's approach to data processing, especially in terms of equipment and software packages. Uniformity of approach is hampered by substantial cost differences in personnel, hardware, and data communications.36
Information Centers With the expansion of multinational telecommuni-cations and computer linkages, managers throughout the world now can
share information almost instantaneously. On the one hand, this may permit
more centralization, since truly global implications of policies may be examined. On the other hand, managers in foreign locations may become more autonomous because of the greater amount of information at their disposal.
Restrictions on Data Flows Many countries have passed or are considering
legislation that directly or indirectly affects the flow of data internationally.
These laws have been enacted for three primary reasons. First, there is con-
cern about individual privacy, particularly that the development and trans-mission of personnel data might give the company an undue advantage over
• Because of strategic im- the individual. The second concern is economic; for example, local jobs will plications 5e iost jf (jata processing and analysis are done abroad, and resource trans-
mission will occur without payment to the country that created the resource. The third concern is that corporate networks may be used to pirate military and commercial data to be sent abroad.37 Although most MNEs consider data flow restrictions to be more of a potential than a present problem, certain regulations already create barriers for them.38 Such restrictions make it more difficult for the international company to maintain centralized personnel records, which assist in making international transfers. For example, Burroughs was unable to transfer its personnel records from Germany to other locations. Some legislation requires local purchases (such as for data-processing equipment, materials, or services), and other that the local subsidiary maintain copies of and monitor anything transmitted. Companies are concerned about additional costs and the possibility that proprietary information may fall into the hands of competitors.
Headquarters needs timely reports from all operating units of an international finn so that management can allocate resources properly, correct plans, and reward personnel. First, the decisions on the use of capital, personnel, and
technology are almost continuous; consequently, reports must be frequent and must show recent situations so that these resources are put to best use. Second, plans need to be updated in order to be realistic and to assure that there is a high probability of meeting desired objectives. Feedback on both results and conditions that might affect results are essential so that corrective action, whether in the form of new strategies to meet objectives or in the form of altered objectives, may be undertaken. Finally, reports are needed in order to evaluate the performance of personnel in the various operating units of the company. Not only will comparison of performance aid in determining who will receive the rewards of monetary compensation and advancement, but it also will help stimulate personnel to improve their own areas of weakness.
The use of written reports is more important in an international than in a domestic setting because subsidiary managers have much less personal and oral contact with line and staff personnel above them. Thus corporate managers miss out on much of the informal communication that can tell them about the performance of the foreign operations.
Types of Systems
Most international firms use reporting systems for foreign operations that are similar to those they use domestically.29 There are several reasons for this. If tne systems have been effective domestically, management often believes that they will be effective internationally as well—particularly if home-country
management considers its know-how superior to that of its subsidiaries abroad. Next, there are economies through carrying over the same types of reports—the need to establish new types of reporting mechanisms is eliminated, and corporate management is already familiar with the system. Finally, like reports presumably allow management to compare one operation against another and consolidate the reports without as much fear that they have added "apples to oranges."
The main purpose of MNEs' reporting systems is to assure adequate profitability by identifying deviations from plans that would indicate possible problem areas. This focus may be on short-term performance or on longer-term indicators that match the strategic thrust of the organization. The emphasis is on the evaluation of the subsidiary rather than the evaluation of the subsidiary manager, although the profitability of the foreign unit is one of the important ingredients in the managerial evaluation.30
Not all information exchange is by formalized reports. Within many MNEs, certain members of the corporate staff travel much of their time in order to visit with subsidiaries. Although this may do much to alleviate misunderstandings, there are some inherent dangers if visits are not done properly. If, on one hand, corporate personnel visit the tropical subsidiaries only when there are blizzards at home, the personnel abroad may perceive the trips as mere boondoggles. If, on the other hand, subsidiary managers offer too many social activities and not enough analysis of operations, the corporate staff members may consider the trips a waste of time. Also, if visitors come only when the corporate level is upset about foreign operations, the overseas managers may always be overly defensive.
Reporting Problems
Management Versus Subsidiary Performance There is general agreement that subsidiaries should be evaluated separately from the management within subsidiaries. This is so that managers are not penalized for conditions and occurrences outside their control. Beyond this agreement, however, there is a good deal of difference among firms in what they do and do not include in the managerial performance evaluation. For instance, some firms hold managers abroad responsible for gains or losses in currency translation whereas others do not. Most firms deduct interest expenses before measuring the profitability of foreign operations whereas many do not.31 These are examples of environmental factors that some, but not all, companies consider to be outside the control of the local managers.
Another area of noncontrollables is when centralized decisions are made that will optimize the performance of the total corporation. A particular subsidiary may not do as well as if it had been left to operate independently. In fact, the normal profit center records may well obscure the importance that the subsidiary plays within the total corporate entity.
Cost and Accounting Comparability Different affiliate cost structures may prevent a meaningful comparison of operating results. For example, the percentage of direct labor to sales in one country may reasonably be much higher than in a subsidiary in another country if the former has low labor and high capital costs in relation to the latter. Different accounting practices can also create problems. Most international firms keep one set of books that are consistent with parent principles and another set to meet local reporting requirements.
Country Risk When evaluating foreign investment possibilities, most com-panjes set a higher minimum return to invest in high-risk countries. Having
done this, firms logically would expect the performance within the high-risk
countries to reflect the expected higher return. Most companies agree that such an analysis would be useful; however, they also agree that they know of no reasonable means of incorporating country risk into the performance evaluation. They feel that the incorporation would penalize managers in risky countries and make them responsible for something outside their control.32
Evaluative Measurements
Multiple Measurements Every evaluation measurement has shortcomings wnen applied internationally. Consequently, a system that relies on a number
of different indicators may be preferable to one that relies too heavily on one measurement. Financial criteria tend to dominate the evaluation of foreign operations and their managers. Although many different criteria are used, the most important ones for evaluating the operations are budget compared with profit, budget compared with sales, and return on investment. The most common financial criteria for management appraisal are budget compared to profit, budget compared to sales, and return on sales. Many nonfinancial criteria also are employed. The only one commonly given much weight in subsidiary evaluation is market-share increase. Several nonfinancial criteria are important for evaluating the managers, though. These include market-share increase, quality control, and relationship with the host government.33
Budget Concept One way of overcoming the problems of evaluating per-formance is by looking at the budget, which can help the MNE differentiate between the worth of the subsidiary and the performance of subsidiary management. The budget should include the goals for each subsidiary that will help the MNE achieve an overall objective. As long as the subsidiary manager is working toward a budgeted goal rather than a measure such as return on investment, there will be fewer problems in dealing with inflation, exchange-rate changes, and transfer prices.
Planning Information Acquisitions
Thus far the discussion has centered on information needed to evaluate sub-sidiary and subsidiary management performance. Although this information
is crucial, corporate management requires additional data. The information needs may be categorized as follows:
1. information generated for centralized coordination, such as subsidiary cash balances and needs;
2. information relating to external conditions, such as analyses of local political and economic conditions;
3. information for feedback from parent to local subsidiaries, such as R&D breakthroughs;
4. lateral information between related subsidiaries; and
5. external reporting needs.34
Since information needs are so broad, two problems for firms are (1) the cost of information relative to its value and (2) "information glut," which refers to redundancy. One technique used by some firms is Planned Information Acquisition Analysis (PIAA), which involves a periodic reevaluation of each new document or service the firm uses.35 By comparing the number of times sources have been retrieved and found relevant, the firm may limit acquisition to those items most valuable to the firm.
Compatibility Another problem is the compatibility of information needed Dy tne subsidiary and by corporate management. Even when different subsid-
lanes are trying to solve similar problems, their information needs may differ
vastly. Consequently, corporate management may be faced with the dilemma of comparing unlike data or requiring different or additional data, which may be expensive. An approach that has been instituted by some firms is to allow diversity but to send copies and analyses to centralized data banks. For many corporate needs, standardization is not necessary, but standardization of coding is so that centralized personnel may compare the performance of subsidiary projects and suggest more refined models for local use.
Aside from the problem of data or coding uniformity, a major obstacle to the on-time retrieval of comparable information is the diversity from country to country in a company's approach to data processing, especially in terms of equipment and software packages. Uniformity of approach is hampered by substantial cost differences in personnel, hardware, and data communications.36
Information Centers With the expansion of multinational telecommuni-cations and computer linkages, managers throughout the world now can
share information almost instantaneously. On the one hand, this may permit
more centralization, since truly global implications of policies may be examined. On the other hand, managers in foreign locations may become more autonomous because of the greater amount of information at their disposal.
Restrictions on Data Flows Many countries have passed or are considering
legislation that directly or indirectly affects the flow of data internationally.
These laws have been enacted for three primary reasons. First, there is con-
cern about individual privacy, particularly that the development and trans-mission of personnel data might give the company an undue advantage over
• Because of strategic im- the individual. The second concern is economic; for example, local jobs will plications 5e iost jf (jata processing and analysis are done abroad, and resource trans-
mission will occur without payment to the country that created the resource. The third concern is that corporate networks may be used to pirate military and commercial data to be sent abroad.37 Although most MNEs consider data flow restrictions to be more of a potential than a present problem, certain regulations already create barriers for them.38 Such restrictions make it more difficult for the international company to maintain centralized personnel records, which assist in making international transfers. For example, Burroughs was unable to transfer its personnel records from Germany to other locations. Some legislation requires local purchases (such as for data-processing equipment, materials, or services), and other that the local subsidiary maintain copies of and monitor anything transmitted. Companies are concerned about additional costs and the possibility that proprietary information may fall into the hands of competitors.
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