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Organizational DesignOrganizational DesignAnd ControlAnd Control

International Businessby Ball, McCulloch, Frantz,

Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

This chapter covers:

•Design of organizational structures

•Organizational dimensions

•Organizational forms

•The virtual corporation

•Decision making in an IC

•Control of a joint venture

•Reports needed by an IC

Chapter ObjectivesChapter Objectives

Explain why the design of organizational structure is important to international companies

Understand the organizational dimensions that must be considered when selecting organizational structures

Discuss the various organizational formsUnderstand the concept of the virtual corporation Explain why decisions are made where they are among

parent and subsidiary units of an international companyUnderstand how an IC can maintain control of a joint

venture List the types of information an IC needs to have

reported to it by its units around the world

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Organizational StructureOrganizational Structure Organizational structure

The way organization arranges its various domestic and international units and activities

The relationships among these components

Determines where formal power and authority will be located

Presented in an organization chart

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Organization DesignOrganization Design

Organization design deals with how an international business should be organized in order to ensure its worldwide business activities are able to be integrated in an efficient and effective manner Structures and systems must be consistent

with each other and with the environmental context

Size and complexity of the organization must be considered in design

Structure must be able to evolve over time in order to respond to change

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Design ConcernsDesign Concerns

Organizational Design ConcernsTwo concerns that management faces in

designing the organizational structureFinding the most effective way to

departmentalize to take advantage of the efficiencies gained from specialization of labor

Coordinating the activities of those departments to enable the firm to meet its overall objectives

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Design DimensionsDesign Dimensions

Product and technical expertise regarding the businesses

Geographic expertise regarding the countries and regions

Customer expertise regarding the client groups, industries, market segments, or population groups

Functional expertise regarding the value chain activities18-6

Evolution of the International CompanyEvolution of the International Company

International DivisionA division in the

organization that is at the same level as the domestic division and is responsible for all non-home country activities

Organization on a regional or geographic basis

As overseas operations grow global structures are formed

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Management changes to global product or global geographic form to Be more capable of

developing competitive strategies

Obtain lower production costs

Enhance technology transfer and the allocation of resources

Global Corporate FormGlobal Corporate Form Product

Product divisions responsible for the worldwide operations such as marketing and production of products

Each division generally has regional experts Eliminates duplication of product experts Creates a duplication of area experts

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Global Corporate FormGlobal Corporate Form

Geographical RegionsResponsibilities for all

activities under area managers who report directly to the CEO

This kind of organization simplifies the task of directing worldwide operations Every country is

clearly under the control of someone who is in contact with headquarters

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Global Corporate FormGlobal Corporate Form

Geographical Regions Used for both multinational and global

companies Used by

Companies that manufacture products with a low or stable technological content that require strong marketing ability

Firms with diverse products Producers of consumer products

Creates duplication of product and functional specialists

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Global Corporate FormGlobal Corporate Form

Function Few firms are

organized by function at the top level Senior executives

responsible for each functional area report to CEO

Users of the functional form are those with a narrow and highly integrated product mix

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Hybrid Forms A mixture of the

organizational forms is used at the top level and may or may not be present at the lower

Often result of regionally organized company introducing new and different product line or

Firm selling to sizable, homogeneous class of customers

Global Corporate FormGlobal Corporate Form

Matrix Organization Organization based on one or two

dimensions superimposed on organization based on another dimension

Evolved from attempt to mesh product, regional, and functional expertise

Requires multiple managers to agree on decision

Matrix overlay attempts to correct this problem

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Strategic Business UnitsStrategic Business Units

An organizational form in which product divisions

have been defined as though they were distinct, independent businesses

Most SBUs are based on product lines18-13

Changes in Organizational FormChanges in Organizational Form

Pressure to act more quickly, reduce costs and improve quality have created new forms

Reengineering to reduce levels of middle management restructure work processes reduce fragmenting across departments empower employees improve communication respond more quickly become more innovative

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Current Organizational TrendsCurrent Organizational Trends

Virtual Corporation Coordinates activity

to deliver value to customers using resources outside traditional boundaries

Relies to a great extent on third parties to conduct its business

Also called a network corporation

Advanced by technology

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Advantages Permits greater

flexibility Forms a network of

dynamic relationships taking advantage of the competencies of other organizations

Disadvantage Potential to reduce

management’s control over the corporation’s activities

Current Organizational TrendsCurrent Organizational Trends

Horizontal CorporationGives flexibility to

respond quickly “antiorganzation”

removes constraints of conventional structures

Employees worldwide create, build, and market the company’s products through a carefully cultivated system of interrelationships

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ControlControl

Where Are Decisions Made?All at IC headquartersAll at subsidiary levelCombination

Variables determining the location of decision making

Product and EquipmentCompetence of subsidiary managementSize of the international company and how

long it has been oneDetriment of a subsidiary for the benefit of

the enterpriseSubsidiary frustration

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ControlControl Product and Equipment

Standardized product affiliates have to follow company policy

Without global product policy, still attempt to standardize as much as possible

If profit potential greater when subsidiary customizes, subsidiary can proceed with parent approval

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Competence of Subsidiary Management depends on How well do executives

know one another How well do they know

company policies Understanding of host

country conditions Distances between

home and host countries

Size and age of parent company

ControlControl

Greater reliance on subsidiary management if Executives are moved

around between headquarters and subsidiaries

HQ less familiar with host country

Greater distance Smaller company lacks

internationally experienced managers and cannot afford to hire them18-19

ControlControl

Benefiting the Enterprise to the Detriment of a Subsidiary IC can source raw

materials and components, locate factories, allocate orders and govern intrafirm pricing that may benefit the IC but be a detriment to the subsidiary

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Moving Production Factors Cost, labor, taxes,

market, currency, political stability

Which Subsidiary Gets the Order Transportation,

production, tariffs, currency, backlogs

Multicountry Production Economies of scale

Which Subsidiary Books the Profits Taxes, currency controls,

labor relations, political climate, social unrest

ControlControl

Subsidiary Frustration Management of subsidiaries must be

motivated and loyal If all decisions made at HQ they can lose

incentive and prestige or face with their employees and the community

They may become hostile and disloyal HQ management should delegate as much

as reasonably possible Subsidiary managers should be kept

informed18-21

Joint Ventures and Subsidiaries Joint Ventures and Subsidiaries Less than 100 Percent OwnedLess than 100 Percent Owned

A joint venture may be A corporate entity

between an IC and local owners

A corporate entity between two or more companies that are foreign to the area where the joint venture is located

One company working on a project of limited duration in cooperation with one or more other companies

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Joint Ventures and Subsidiaries Joint Ventures and Subsidiaries Less than 100 Percent OwnedLess than 100 Percent Owned

Loss of freedom and flexibility because shareholders can block HQ efforts to Move production

factors Fill an order from

another affiliate or subsidiary

Shareholders may bring legal pressures Political pressures

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Methods HQ can use to maintain control include A management

contract Control of the finances Control of the

technology Putting people from

the IC in important executive positions Joint venture partner

will want their own or host government personnel in executive positions

ControlControl

For controls to be effective all operating units of an international

company must provide headquarters with timely, accurate, and complete reports

Types of reporting required Financial Technological Market opportunity Political and economic

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De-JobbingDe-Jobbing

Mass production and large organizations are disappearing

New computer and communication technologies are “de-jobbing” the workplace

Fixed jobs are being replaced with tasks performed by evolving teams18-25

De-JobbingDe-Jobbing

Traits of Companies with De-Jobbed WorkersThey encourage employees to make

operating decisions that used to be reserved for managers

They give employees the information they need to make such decisions

They give employees lots of training to create an understanding of business and financial issues that used to concern only an owner or executive

They give employees a stake in the fruits of their labor--a share of the profits

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